SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
Annual Report Pursuant to Section 13
X or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year
ended December 31, 1997
or
Transition Report Pursuant to
Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from __________ to __________
Commission File Number 33-32341-D
WORLDPORT COMMUNICATIONS, INC.
(Name of Small Business Registrant as Specified in its Charter)
Delaware 84-1127336
(State or other jurisdiction of (IRS Employer ID Number)
incorporation of organization)
3610 Kennesaw North Industrial Parkway, 30144
Suite 200, Kennesaw, Georgia (Zip Code)
(Address of principal executive offices)
Registrant's telephone number: (770) 792-3774
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Name of each exchange on which registered
N/A
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES X NO
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B is not contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB [ X ]
The Registrant's revenues for its most recent fiscal year were
$2,777,575.
The approximate aggregate market value of common stock of the Registrant
held by non-affiliates of the Registrant is $68,459,181, computed on the
basis of $6 7/8 per share, average bid/ask price of the common stock on
the OTC Bulletin Board on March 30, 1998.
The number of shares of the Registrant's common stock, $0.0001 par value
per share, outstanding as of March 30, 1998 was 17,383,333.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format
(Check one):
Yes _______ No __X___
WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
Page
Item Number
PART I
1. Description of Business . . . . . . . . . . . . . . 1
2. Description of Properties . . . . . . . . . . . . . 10
3. Legal Proceedings . . . . . . . . . . . . . . . . . 11
4. Submission of Matters to a Vote of Security Holders 11
PART II
5. Market for Company's Common Equity and Related 11
Stockholder Matters . . . . . . . . . . .
6. Management's Discussion and Analysis of Operations . 12
7. Financial Statements . . . . . . . . . . . . . . . 19
8. Changes in and Disagreements with Accountants on 36
Accounting and Financial Disclosure . .
PART III
9. Directors, Executive Officers and Control Persons . 37
10. Executive Compensation . . . . . . . . . . . . . . . 40
11. Security Ownership of Certain Beneficial Owners and 44
Management . . . . . . . . . . . . .
12. Certain Relationships and Related Transactions . . 47
PART IV
13. Exhibits and Reports on Form 8-K . . . . . . . . . 50
PART I
NOTE ON "FORWARD-LOOKING" STATEMENTS
This Annual Report contains certain "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E
of the Securities Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, including, among others (i) expected changes
in the Company's revenues and profitability (ii) prospective business
opportunities and (iii) the Company's strategy for expanding its business.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as "believes", "anticipates", "intends" or
"expects". These forward-looking statements relate to the plans, objectives
and expectations of WorldPort Communications, Inc. (the "COMPANY") for future
operations. Although the Company believes that its expectations with respect
to the forward-looking statements are based upon reasonable assumptions
within the bounds of its knowledge of its business and operations, in light
of the risks and uncertainties inherent in all future projections, the
inclusion of forward-looking statements in this report should not be regarded
as a representation by the Company or any other person that the objectives or
plans of the Company will be achieved.
The Company's revenues and results of operations could differ materially from
those projected in the forward-looking statements as a result of numerous
factors, including, but not limited to, the following: (i) changes in
external competitive market factors, (ii) termination of certain operating
agreements or inability to enter into additional operating agreements, (iii)
inability to satisfy anticipated working capital or other cash requirements,
(iv) changes in or developments under domestic or foreign laws, regulations,
licensing requirements or telecommunications standards, (v) changes in the
availability of transmission facilities, (vi) changes in the Company's
business strategy or an inability to execute its strategy due to
unanticipated changes in the market, (vii) various competitive factors that
may prevent the Company from competing successfully in the marketplace,
(viii) the Company's lack of liquidity and its ability to raise additional
capital, (ix) loss of services of key executive officers and (x) loss of a
customer which provides significant revenues to the Company. In light of
these risks and uncertainties, there can be no assurance that actual results,
performance or achievements of the Company will not differ materially from
any future results, performance or achievements expressed or implied by such
forward-looking statements. The foregoing review of important factors should
not be construed as exhaustive. The Company undertakes no obligation to
release publicly the results of any future revisions it may make to forward-
looking statements to reflect events or circumstances after the date hereof
or to reflect the occurrence of unanticipated events.
ITEM 1. DESCRIPTION OF BUSINESS
Overview
The Company, a publicly held Delaware corporation, is a global, facilities-
based telecommunications services provider offering a full range of voice and
value-added services to carriers and corporate customers worldwide. The
Company is focusing on expanding its network infrastructure in the United
States and in major markets in Europe, Asia-Pacific and Latin America.
Together, these regions generate approximately 95% of all international long
distance traffic. According to Telegeography, Inc. ("TELEGEOGRAPHY"), an
independent research and publishing company, total revenues from
international long distance services worldwide were estimated at $60 billion
in 1996 and are estimated to exceed $80 billion by 2000.
The Company has targeted geographic regions where it believes privatization
and liberalization will enable it to gain early market entry and achieve
rapid growth. The Company is seeking to increase its global market share
through internal business development, acquisitions and international
strategic alliances. The Company is developing a comprehensive global sales
and service organization to market competitively priced, carrier-grade voice
and enhanced telecommunications services to major corporate and business
customers, telecommunications carriers and resellers, Internet providers and
other high-volume marketers of long distance services worldwide.
The Company is developing a global telecommunications network consisting of
(i) switches, enhanced services platforms, leased circuits and other
telecommunications equipment ("ON-NET") and (ii) carrier services agreements,
access and termination agreements, interconnection agreements and other
facilities-sharing agreements ("OFF-NET"). Together, these
telecommunications assets and agreements comprise the Company's global
network. The Company's customers utilize a combination of local access
numbers and codes and domestic and international toll-free numbers to access
the Company's network. The Company intends to continue to expand its network
through (i) the purchase and installation of equipment for existing and new
markets, (ii) additional interconnection, access and termination agreements
with other carriers and service providers in the U.S. and internationally and
(iii) additional acquisitions of international telecommunications assets,
operations and service providers.
The Company's global network strategy is to strategically deploy
international gateway switches and other network equipment in the United
States and in international markets, such as The Netherlands, with high
international traffic volumes, and physically link these switches, whenever
possible, via owned or leased circuits on undersea and other fiber optic
cables. With this global backbone of international gateway switches and
undersea fiber optic cables, the Company's strategy is to develop network
facilities within each of the countries where it operates. In order to
provide origination and termination services to and from customers in
targeted geographic markets, the Company enters into one or more
interconnection agreements in each country where it operates.
The Company's network also includes a switching center, calling card services
platform and multi-lingual operator services center located at its facility
in Omaha, Nebraska. From this facility, the Company provides a suite of
value-added telecommunications products and services to carriers, other
telecommunications services providers and to marketers and distributors of
international long distance services. The Company's customers worldwide
utilize a combination of local access and international toll-free numbers to
access the Company's calling card platform, which enables them to complete
higher quality, lower cost international calls. See "MANAGEMENT'S DISCUSSION
AND ANALYSIS OF OPERATIONS - ACQUISITIONS".
The Company has targeted Tier I and Tier II U.S. long distance carriers,
foreign PTTs, internationally focused long distance resellers and other high-
volume marketers of long distance services as its primary wholesale
customers. While most Tier I carriers and PTTs operate their own networks
and have operating agreements worldwide with other PTTs for the termination
of international calls, they can utilize the Company's network, either on a
dedicated circuit or switched circuit basis, for carrying overflow traffic
from their own networks or to take advantage of least cost routing to markets
where the Company has developed a distinct price or service quality
advantage.
In addition to carriers that operate their own international networks, the
Company intends to provide international long distance services to U.S. and
international switch-based and switchless resellers who will utilize the
Company's international long distance services to provide high quality
international services to their wholesale or retail customers. According to
Telegeography 1997/1998, the market share of U. S.-originated international
traffic carried directly by facilities-based Tier II U. S. carriers increased
by over 50% between 1995 and 1996 to nearly 700 million minutes. In
addition, switched-based resellers accounted for 34% of all U. S.-originated
outbound traffic, with the top 15 Tier II switched resellers carrying over 5
billion minutes in 1996. As a result of telecommunications deregulation in
Europe, there are now growing numbers of switched-based and switchless
resellers competing with incumbent PTTs, all of which are potential customers
for the Company. The Company's reseller and distributor customers typically
purchase the Company's services and then resell these long distance services
to their own wholesale or retail customers.
The Company is licensed to operate in the United States as a facilities-based
international carrier under a Section 214 license granted by the U.S. Federal
Communications Commission. Also, the Company, through its wholly-owned
operating subsidiaries, is in the process of acquiring or applying for
telecommunications licenses in the international markets where the Company
intends to operate.
Recent Developments
During the first quarter of 1998, the Company has:
o Signed an advisory agreement with a major Wall Street investment-banking
firm pursuant to which the investment banker intends to advise the Company
with regard to future financing options.
o Entered into an agreement to acquire an International Simple Resale ("ISR")
license in the United Kingdom which will permit the Company to deploy
network infrastructure and commence the marketing of international long
distance voice, data and multimedia services in the U. K. Additionally,
the Company plans to immediately apply for an International Facilities
License ("IFL") which will enable it to own international network
facilities such as trans-Atlantic fiber optic cable capacity that land in
the United Kingdom.
o Received proceeds of approximately $10.1 million in connection with the
sale of its Series B Convertible Preferred Stock. See "LIQUIDITY AND
CAPITAL RESOURCES" AND "SUBSEQUENT EVENTS".
o Commenced operations in The Netherlands through the acquisition of a local
company, the hiring of in-country management and the purchase and
installation of network equipment. See "SUBSEQUENT EVENTS".
o Through its wholly-owned subsidiary, WorldPort Communications Europe B.V.
("WORLDPORT EUROPE"), entered into an interconnection agreement with PTT
Telecom, the national telephone company of The Netherlands. This agreement
enables the Company to physically connect its network with the network of
PTT Telecom, and to originate and terminate traffic throughout The
Netherlands via the PTT Telecom network.
0 Entered into a service agreement with N.V. Casema ("CASEMA"), The
Netherlands' largest cable television network operator, pursuant to which
Casema will provide the Company with fiber optic capacity connecting the
Company's switching equipment in the cities of Amsterdam, The Hague,
Rotterdam and Utrecht. Casema operates a nationwide infrastructure of
fiber optic cables in The Netherlands for voice, multimedia and other
telecommunications services, with an active maximum network capacity of 2.4
Gb/s.
o Executed a definitive agreement to acquire the assets of InterContinental
Exchange, Inc. ("ICX"), a California-based provider of international long
distance services primarily to customers in the U.S., Asia-Pacific and
Latin America. See "SUBSEQUENT EVENTS".
o Committed to purchase an indefeasible right of use ("IRU") providing the
Company with STM-1 transmission capacity on Atlantic Crossing 1 ("AC-1"), a
state-of-the-art, trans-Atlantic fiber optic cable which is scheduled to
commence service in mid-1998. See "LIQUIDITY AND CAPITAL RESOURCES".
o Increased its existing lease financing facility with Forsythe McArthur
Associates, Inc. ("FORSYTHE") to an aggregate $13,000,000 to finance
additional infrastructure equipment. See "LIQUIDITY AND CAPITAL RESOURCES"
AND "SUBSEQUENT EVENTS".
o Expanded its executive management team in the following areas: (i) global
network development, (ii) network operations, (iii) sales and marketing and
(iv) finance and administration. See "DIRECTORS, EXECUTIVE OFFICERS, AND
CONTROL PERSONS".
Strategy
The Company's overall objective is to be a low-cost global provider of long
distance services in the expanding worldwide telecommunications marketplace,
with a focus on providing transmission, termination and value-added services
in newly deregulating markets where opportunities exist for early market
entry, rapid market penetration and significant gross margins. In all cases,
the Company will seek to be the lowest cost operator in a given market niche
by (i) carrying customer traffic over its own network facilities (On-Net)
whenever and wherever possible, (ii) leveraging its favorable network rate
structures with EQUANT Network Services Inc. ("EQUANT") and other service
providers to offer seamless, low-cost services on a global basis, (iii)
leveraging its global network expansion in emerging markets to negotiate, on
a reciprocal basis, low transmission, access and termination rates for the
use of the networks of other carriers (Off-Net) in areas where the Company
does not yet have its own facilities, (iv) identifying cost effective sales
agents, marketing partners and distribution channels in new markets and (v)
implementing a network design and technology strategy that blends the optimal
least cost routing capabilities of traditional circuit switching, frame
relay, asynchronous transfer mode ("ATM") and Internet Protocol ("IP").
The key elements of the Company's business strategy are as follows:
EXPAND THE COMPANY'S NETWORK FACILITIES IN ORDER TO INCREASE OPERATING
MARGINS The Company intends to continue to expand its network in the U.S.,
Europe, Latin America and Asia-Pacific in order to carry an ever increasing
portion of its traffic On-Net. The Company believes that carrying customer
traffic over its own network facilities enables it to control quality and to
achieve higher gross margins. The Company intends to continue to install
major international gateway switches in strategic sites around the world and
plans to deploy routers, network nodes, points of presence ("POPS") and other
equipment in key metropolitan areas in the countries where it operates. The
Company intends to link these globally-deployed switches and nodes via a
combination of owned capacity on undersea fiber optic cables (i.e. the
Company's ownership interest in an STM-1 circuit on the AC-1 trans-Atlantic
fiber optic cable), leased domestic fiber optic circuits (i.e. the Company's
access to a nationwide 34 megabit fiber optic loop in The Netherlands) and
other leased terrestrial and satellite-based circuits.
TARGET HIGH-VOLUME CUSTOMERS TO MAXIMIZE RETURN ON NETWORK INVESTMENTS - In
the United States, the Company intends to target Tier I and Tier II
facilities-based carriers and other resellers as its primary "carrier's
carrier" international long distance transmission and termination customers.
The Company also intends to target other high-volume customers in the United
States such as competitive local exchange carriers ("CLECS") and distributors
of telecommunications services. In international markets, the Company will
seek to target PTTs, emerging alternative carriers and long distance
resellers as its primary "wholesale" customers. In addition, the Company
plans to target high-volume corporate and business customers in selected
international markets. The Company intends to market its services to these
customers through its expanding organization of direct sales personnel,
distributors and agents. In each market that it enters, the Company strives
to select the combination of direct sales and distribution that most
effectively provides uniform service quality, maximum customer retention,
reduced market entry cost and local market expertise.
OFFER "VALUE-ADDED" PRODUCTS AND SERVICES FOR SELECTED NICHE MARKETS - In the
United States, the Company intends to develop value-added products such as
prepaid calling cards, targeted primarily at ethnic consumers. The Company
plans to utilize concentrations of international traffic to selected
international markets (i.e. Mexico, Dominican Republic) generated by these
domestic U.S. marketing programs to negotiate volume discounts to these
markets. Internationally, the Company intends to take advantage of early
market entry opportunities to develop products and services including prepaid
calling cards, debit cards and other international long distance services.
The Company plans to sell these products through distributors, sales agents
and other alternative sales channels that have demonstrated their ability to
(i) generate high sales volumes and (ii) implement rigorous loss prevention
controls. The Company also intends to develop certain "value-added" or
"premium" services for carriers and long distance resellers including
international private lines, international operator assistance and disaster
recovery services.
LEVERAGE STRATEGIC ALLIANCES AND BUSINESS RELATIONSHIPS TO EFFICIENTLY EXPAND
SCOPE OF NETWORK AND PRODUCTS - The Company plans to continue to develop
network access agreements, operating agreements, co-location agreements,
interconnect agreements, origination/termination agreements and other network
or facilities-sharing agreements in order (i) to extend its service reach to
markets and customer bases not yet directly served by the Company's On-Net
capabilities and (ii) to continually reduce the Company's operating costs for
Off-Net origination, transmission and termination. To date, the Company has
entered into (i) an International Strategic Agreement with EQUANT, operator
of one of the world's largest telecommunications networks and (ii) an
Interconnection Agreement with PTT Telecom, the national telephone company of
The Netherlands. These relationships provide the Company with lower cost
transport services in areas where it has not yet deployed its own network
infrastructure, the ability to physically interconnect the Company's network
to worldwide private and public switched networks and the ability to install
the Company's network equipment in close proximity to the network equipment
of other carriers. These business relationships may also enable the Company
to efficiently offer a complete, global service solution to carriers and
corporate customers with wide ranging service requirements.
DEVELOP NEW ROUTES TO AND FROM KEY MARKETS - The Company believes that one of
the most effective means to capture market share in the overall international
telecommunications marketplace is to develop proprietary routes to strategic
markets. These new routes can be based on either (i) proprietary circuits
and international private lines leased or otherwise contracted for by the
Company or (ii) strategic relationships with owners or operators of
proprietary circuits. The Company continues to negotiate with carriers and
with licensed local partners in key markets in order to achieve a combination
of low rates, consistent and cost effective local access and high quality
connectivity that will enable it to introduce an alternative least cost route
to and from a key market.
INCREASE OWNERSHIP IN UNDERSEA FIBER OPTIC CABLES - In order to better
control its operating costs and quality assurance for long distance services
between North America, Europe, Latin America and Asia-Pacific, the Company
intends to expand its capacity on undersea fiber optic cables. The Company
has committed to purchase STM-1 capacity on AC-1. The Company intends to
increase ownership on one or more trans-Pacific cables and on cables
providing connectivity between the United States and the Caribbean based on
(i) customer demand, (ii) market rates and (iii) current and projected
capacity constraints.
UTILIZE NEW TRANSMISSION TECHNOLOGIES SUCH AS IP TO REDUCE COSTS AND ENTER
NEW MARKETS Another of the Company's strategic objectives is to
aggressively develop a strong mix of network products and transport
capabilities utilizing the most efficient and highest quality mix of
traditional voice services and emerging digital voice technologies,
specifically voice over frame relay and voice over IP. Packet switched data
transmission technologies, (specifically frame relay, IP and ATM) are
increasingly utilized to transmit voice traffic at significantly lower cost
than traditional, circuit- switched analog networks. The Company's strategy
is to use these emerging technologies to (i) reduce its cost basis for
international voice transport, (ii) support the sale of traditional voice
services, (iii) lower its costs of access, (iv) generate additional revenue
streams and (v) enter new markets. The Company will seek to develop and
deploy emerging digital voice technologies in its network while maintaining a
core network of traditional voice transport capability.
Pursue Additional Strategic Acquisitions - The Company plans to continue to
identify and negotiate strategic acquisitions that provide the Company with
one or more of the following: (i) strategic network facilities or other
valuable telecommunications assets, (ii) licenses, interconnection
agreements, and/or operating agreements in key markets, (iii) proprietary
circuits or IRUs, (iv) large customer bases in key markets, (v) experienced
management personnel or (vi) business strategies or products that complement
those of the Company.
DESCRIPTION OF BUSINESS
The Company offers international long distance services over its own network
and over the networks of other carriers through interconnection agreements,
facilities-sharing agreements, carrier services agreements and strategic
agreements and alliances. Through its own network deployment and these
various network access and termination agreements, the Company has the
ability to provide seamless international long distance services at
competitive rates to nearly every country in the world. Whenever possible,
the Company transports its wholesale international traffic On Net over its
own network facilities or over other networks that provide the Company with a
similar On Net pricing structure.
Through strategic network deployment and international strategic agreements
(i.e. EQUANT), which provide the Company with a low cost structure for
international transport, the Company is developing highly competitive,
proprietary routes to a growing number of key international markets. In
other markets, the Company is able to achieve a competitive cost structure
(i) through volume discounts from other carriers or (ii) by exchanging
network and transmission capacity on an "at-cost" basis with other carriers
with cost advantages to markets where the Company has not yet developed its
own facilities.
The Company primarily provides international long distance services on a
"wholesale" basis to other carriers and telecommunications service providers
and to high-volume marketers of long distance services. In addition, the
Company provides "retail" international and domestic long distance services
in certain markets to corporations, businesses and individuals, marketed
through international distributors. The Company has also developed the
ability to offer a suite of enhanced, value-added services to carriers and
other marketers of long distance services including international calling
cards, operator services and international call reorigination.
During 1997 and the first three months of 1998, the Company, through its
wholly-owned operating subsidiaries in the U.S and Europe, has concentrated
its efforts on the following network development and business development
activities in its targeted markets:
United States - The Company's network infrastructure in the United States
has been developed to provide international gateway switches serving Europe,
Asia-Pacific and Latin America, and access and termination agreements that
provide the Company with cost effective origination and termination services
throughout the United States. The Company is deploying an international
gateway switch in New York. The Company may deploy one or more additional
international gateway switches in the United States if, by doing so, the
Company is able to significantly reduce its operating costs and thereby
increase margins on international traffic originated, terminated or transited
through the United States. The Company's U.S. network infrastructure also
includes a switching center, a calling card services platform and
international operator services center in Omaha, Nebraska (See "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF OPERATIONS TNC ACQUISITION"). The value-added
services provided by the Company from its enhanced services platform in Omaha
enable the Company to offer carriers, corporations and international
distributors a suite of products in addition to international transport or
termination. From its Omaha switching center, the Company is able to provide
U.S. dial tone for international callers, thus enabling international callers
to access lower cost, higher quality circuits than if the caller had used
direct dial services from their local carrier or national carrier.
Europe -The Company has commenced operations in Europe by entering The
Netherlands telecommunications market through the installation of an
international gateway switch and the deployment of Cisco/Stratacom ATM
network nodes in Amsterdam, Utrecht, The Hague and Rotterdam. The Company's
switches and ATM nodes are linked via a nationwide fiber optic network. In
addition, WorldPort Europe, the Company's wholly-owned operating subsidiary
in The Netherlands, has entered into an interconnection agreement with PTT
Telecom, the national telephone company of The Netherlands. This
interconnection agreement provides the Company with competitive origination
and termination throughout The Netherlands. In the United Kingdom, the
Company's wholly-owned operating subsidiary, WorldPort Communications, Ltd.
("WORLDPORT U.K.") has agreed to acquire an ISR and intends to file an
application for an IFL.
LATIN AMERICA AND CARIBBEAN - The Company has entered into carrier services
agreements that will enable it to provide long distance services to and from
the United States, Mexico and the Dominican Republic. These carrier
services agreements will provide the Company with an opportunity to provide
origination and termination services to carriers, resellers and to
distributors of calling cards and other enhanced services.
ASIA-PACIFIC - During the first quarter of 1998, the Company entered into a
definitive agreement to acquire the telecommunications assets and operations
of ICX, which, upon closing of the acquisition in early April, will extend
its network and sales reach to Asia-Pacific. ICX operates a trans-Pacific
leased circuit and a node located in a major Asian market. The Company
believes that this network will provide it with additional least cost routing
alternatives to points throughout Asia-Pacific. See "SUBSEQUENT EVENTS".
Trans-Atlantic Fiber Optic Capacity - The Company has committed to purchase
an IRU on a trans-Atlantic fiber optic cable. The Company will own STM-1
capacity on the AC-1 cable, which will link the U.S. and the United Kingdom
beginning in mid-1998. Extensions of the AC-1 cable to The Netherlands and
Germany are expected by 1999. By the year 2000, the Company expects to own
undersea fiber optic cable capacity linking North America, Europe, Latin
America and Asia-Pacific. The Company intends to (i) utilize this capacity
for its own On-Net traffic, (ii) market excess capacity to other carriers and
(iii) leverage the capacity into additional cost-based network reach through
its existing and future facilities-sharing agreements.
Interconnection, Termination, Network Services and Other Strategic Agreements
- The Company has entered into a number of interconnection, termination and
other network services agreements that broaden the Company's Off-Net reach in
markets where it has not yet deployed its own network facilities. The Company
plans to utilize the following major agreements to provide seamless
international long distance services in the United States and to nearly every
country in the world:
International Strategic Agreement with EQUANT Network Services, Inc.
In September 1997, the Company entered into an international strategic
agreement with EQUANT Network Services, Inc. EQUANT is the commercial
operator of one of the world's largest telecommunications networks, with
geographic reach into 225 countries worldwide.
Agreement with ProTel S.A. de C.V. (Mexico)
The Company has an agreement with ProTel, S.A. de C.V., one of the twelve
currently licensed Mexican long distance carriers, which provides the
Company with national and international long distance services for calls
originated within Mexico.
Agreement with All American Cables & Radio, Inc. (Dominican Republic)
The Company has an agreement with All American Cables & Radio, Inc., one of
the three international long distance network operators in the Dominican
Republic. This agreement provides the Company with competitively priced
termination of international long distance calls destined for the Dominican
Republic.
Agreement with Unisource (Netherlands and Other European Countries)
Through its subsidiary, WorldPort Europe (Netherlands), the Company has an
agreement with Unisource for the provision of virtual private network
services.
Agreement with N.V. Casema (Netherlands)
The Company has a fiber optic network transport agreement with N.V. Casema,
The Netherlands' national cable television operator. The Company utilizes
the Casema network to link its Netherlands switching and ATM network
equipment and to provide switching and high bandwidth services within The
Netherlands.
Interconnection Agreement with PTT Telecom (Netherlands)
The Company has an interconnection agreement with PTT Telecom, the national
telephone company of The Netherlands, which enables the Company to
originate and terminate calls on a competitive basis via PTT Telecom's
nationwide telecommunications infrastructure.
TARGET MARKETS AND CUSTOMERS
By focusing on selected markets in Western Europe, Latin America and Asia-
Pacific where it can install network facilities and establish proprietary
circuits, the Company believes that it is able to (i) better control its
operating costs, (ii) maintain consistent and high transmission qualities and
(iii) clearly establish the Company as a long-term participant in markets
that should continue to exhibit rapid growth. The Company has focused its
business development and acquisition strategies on the following target
markets:
o European-Originated Long Distance Traffic to the U.S. and Latin
America Based on statistics published by Telegeography 1997/1998,
the Company estimates that this market will reach a total of 2.9
billion minutes in 1998. The Company intends to generate revenues in
this market through carrier sales contracts and agreements entered
into with emerging alternative carriers and service providers in
deregulating European markets. The Company also intends to provide
calling card services to distributors within Europe. In addition, the
Company anticipates that it will generate revenues from Internet-
related traffic between Europe and the United States over its trans-
Atlantic fiber optic cable.
o Intra-European Long Distance Traffic - Based on statistics published
by Telegeography 1997/1998, the Company estimates that this market
will reach a total of 28 billion minutes in 1998. The Company
intends to generate revenues in this market through sales contracts
and agreements entered into with emerging alternative carriers and
service providers in deregulating European markets, including wireless
service providers, resellers and intra-European network operators. The
Company intends to also generate significant revenues in this market
through calling card services marketed within Europe through various
distribution channels.
o U.S. - Originated Long Distance Traffic to Western Europe, Mexico, the
Caribbean and other Latin American Destinations - Based on statistics
published by Telegeography 1997/1998, the Company estimates that this
market will reach a total of 11 billion minutes in 1998. The Company
will seek to generate revenues in this market through carrier sales
contracts and agreements entered into with long distance carriers,
local exchange carriers ("LECS"), CLECs, wireless services providers,
long distance resellers and other service providers.
o U.S.-to-Mexico, Intra-Mexico and Mexico-to-U.S. Long Distance Traffic
- Based on statistics published by Telegeography 1997/1998, the
Company estimates that this market will reach a combined total of over
14 billion minutes of long distance traffic in 1998. The Company will
seek to generate revenues in this market initially through calling
card services. The Company will provide calling card services to
distributors marketing proprietary prepaid calling cards in the U.S.
in areas with high concentrations of Hispanic-Americans. The Company
will also provide calling card services within Mexico through one or
more distribution agreements with marketing partners in Mexico.
o Enhanced and Value-Added Services Provided to Other Carriers,
Marketers and International Distributors The Company intends to
continue to provide calling card services and other value-added
services such as multi-lingual operator services to carriers, other
telecommunication service providers and to marketers and global
distributors of calling cards.
o Major Global Corporate Clients The Company, through its global
network facilities and its various agreements and global business
relationships, believes that it has the ability to provide
multinational corporations with an integrated solution to their
worldwide telecommunications requirements.
The Company has targeted Tier I and Tier II U.S. long distance carriers,
foreign PTTs, internationally focused long distance resellers and other high-
volume marketers of long distance services as its primary wholesale
customers. Other facilities-based carriers may utilize the Company's network
services for carrying overflow traffic from their own networks or to take
advantage of least cost routing to markets where the Company has developed a
distinct price or service quality advantage. In addition to carriers that
operate their own international networks, the Company plans to provide
international long distance services to U.S. and international switch-based
and switchless resellers who will utilize the Company's international long
distance services to provide high quality international services to their
wholesale or retail customers.
Through international distributors, the Company provides international and
domestic long distance services to end-user customers in the United States,
Europe, Latin America and Asia-Pacific. Calling card and other enhanced
services customers can access the Company's network for domestic or
international long distance services in a number of ways including (i)
dialing a local access number, (ii) utilizing an automated dialing device or
(iii) dialing a domestic or international toll-free number. In all cases, the
Company's network of switches and routers selects the most efficient, least
cost route and transports the call to a local service provider for
termination. The Company anticipates that during 1998, it will develop the
capability in the United States to provide its business and residential
retail customers with the ability to pre-select the Company as their primary
long distance service provider. The Company also intends to introduce this
service as soon as possible in international markets.
The Market Opportunity
In 1996, the international long distance market accounted for $61 billion in
revenues and 70 billion minutes of use according to Telegeography 1997/1998.
International long distance revenues are projected to exceed $80 billion by
the year 2000 based on an estimate of over 100 billion minutes of
international long distance traffic. According to the International
Telecommunications Union ("ITU"), the total global telecommunications
services market is expected to represent $900 billion in revenues in the year
2000.
The Company is aggressively entering the global long distance market to take
advantage of a tremendous growth opportunity created by the concurrence of
these major growth factors:
o DEREGULATION - Countries worldwide have recognized the rapid infrastructure
development and increased economic growth generated by telecommunications
market deregulation, and they are moving to open their markets, privatize
their national operators and create regulatory structures that enhance
competition. On January 1, 1998, two major multinational organizations,
the European Union and the World Trade Organization, enacted legislation
through which 69 of their members began deregulating their national
telecommunications markets, permitting free competition by new entrants in
formerly monopolized markets, allowing foreign investment in
telecommunications infrastructure and initiating legislation requiring
incumbent carriers to provide access to their national networks to all
carriers on an equal and competitive basis.
o WORLDWIDE SUBSCRIBER GROWTH - The number of wireline and wireless
subscriber lines is growing rapidly throughout the world. According to
Telegeography and the ITU, the number of fixed (wired) main lines worldwide
is expected to grow by over 100 million new lines between 1997 and 2000, to
over 900 million fixed main lines worldwide. Many of these new lines will
be installed in developing nations. In countries with extensive wired-
switched public networks, wireless technologies are increasing the number
of total lines on the public switched network. The ITU estimates that
mobile subscribers will more than double between 1996 and 2000, to over 325
million wireless lines worldwide. As an estimated 50% of the world's
population has never made a telephone call, this growth is expected to
increase well beyond 2000.
o NEW COMMUNICATION DEVICES - New telecommunications applications such as
Internet electronic mail, commerce, voice and video communication, as well
as the proliferation of calling services such as voice mail and automated
customer service, are forcing millions of people to make telecommunications
a part of their daily lives. Rapidly expanding software and computer chip
capabilities that create multimedia communications applications are also
dramatically increasing the amount of information that each person
transmits over the telecommunications infrastructure, thereby further
increasing the demand for bandwidth on the global telecommunications
network.
o THE INTERNET - The Internet is driving worldwide telecommunications growth
both as an end-user application (i.e. electronic mail, online services, the
World Wide Web, etc.) and through breakthroughs in the quality of voice
over IP technologies, as a viable low cost transmission alternative for
domestic and international long distance services.
o NEW INTERNATIONAL PRICING STRUCTURES The Company believes that the
emergence of "market" or "cost based" international rate structures between
certain international markets creates an opportunity for it to compete with
major incumbent carriers based on network efficiency and other competitive
factors due to the weakening, in many of these markets, of the so-called
"accounting rate" structure for determining the cost of an international
call based on semi-exclusive operating agreements among government-
sponsored (monopoly) PTTs and a small group of international carriers (i.e.
AT&T, MCI and Sprint).
o THE GLOBAL ECONOMY The Company believes that continued globalization and
integration of the world economy is creating demand for increased
telecommunications access and higher transmission quality in developing
economies in Eastern Europe, Latin America, Asia-Pacific and Africa.
o MULTIMEDIA APPLICATIONS INCREASE DEMAND FOR BANDWIDTH The Company also
believes that rapidly expanding bandwidth requirements for high capacity
"dedicated" and "on-demand" domestic and international circuits as a result
of the increased transmission of video, graphics, sound and other
multimedia communications creates additional growth opportunity in the
telecommunications market.
Above all, deregulation of telecommunications markets worldwide creates a
never before opportunity for an emerging carrier such as the Company to enter
and compete effectively in markets on a global basis. The experience of the
United States and other countries that have opened their telecommunications
markets to competition suggests that new market entrants such as the Company
have an opportunity to rapidly capture market share through competitive
pricing, high quality, customer focused operations and product
differentiation. In the United States, new entrant carriers including
MCI/WorldCom, Sprint and hundreds of smaller carriers have captured 50% of
the former dominant carrier, AT&T's, international market share. In the
U.K., British Telecom's market share of outbound international long distance
has declined to 60% in 1996 from 95% in 1988. In Chile, whose market opened
to competition in December 1994, new entrants now control over 60% of
outbound international long distance markets.
Competition
The international and national telecommunications markets in which the
Company operates are highly competitive. In the United States, the Company
competes against a wide variety of market participants ranging from dominant
Tier I carriers (AT&T, MCI/WorldCom, and Sprint), large Tier II facilities-
based carriers, switched and switchless resellers of long distance services
and hundreds of other marketers and distributors of long distance, calling
card and other telecommunications services. In foreign markets, the Company
will compete with dominant national telephone companies, former monopolies
and other major incumbent carriers. In addition, the Company will compete
with other U.S. and international carriers attempting to enter these markets
and with local resellers and marketers of long distance services.
In the U.S. and in every foreign market where it operates, the Company will
face competition from companies with resources greater than that of the
Company and with longer operating histories in the local market than the
Company. To compete effectively, the Company must do so on the basis of
factors such as: (i) network design and costs, (ii) effective utilization of
emerging technologies, (iii) competitive pricing and rates, (iv) quality of
service, (v) ease and convenience of access, (vi) customer service and
support, (vii) quality of local distributors and sales agents, (viii)
understanding of the marketplace, (ix) ability to attract and retain
qualified employees and (x) customer acquisition and retention.
Acquisitions
During 1997, the Company acquired substantially all of the telecommunications
assets and operations of Telenational Communications Limited Partnership
("TNC") and completed a merger of The Wallace Wade Company ("WWC") into a
wholly-owned subsidiary of the Company. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS ACQUISITIONS".
Organization
The Company, previously known as Sage Resources, Inc., was originally
organized as a Colorado corporation on January 6, 1989, to evaluate,
structure and complete a merger with, or acquisition of other entities. In
October 1996, the Company changed its domicile to Delaware and changed its
name to WorldPort Communications, Inc.
Employees
As of March 30, 1998, the Company had approximately 70 employees of which 55
were full time employees. None of the Company's employees is subject to a
collective bargaining agreement. The Company believes that its relationship
with its employees is satisfactory.
ITEM 2. DESCRIPTION OF PROPERTY
The Company's principal offices are located in approximately 6,000 square
feet of space in Houston, Texas leased pursuant to an agreement which expires
in April 2000. The Company also leases approximately 11,000 square feet in
Omaha, Nebraska for its operating center pursuant to an agreement which
expires in June 2001.
The Company owns telecommunications switching and peripheral equipment
located in various sites in the United States and Europe. Certain of the
property and equipment of the Company is subject to liens securing payment of
portions of its indebtedness. See Note 5 of Notes to Consolidated Financial
Statements for information with respect to lien and lease obligations on
these properties.
The Company believes that its property and equipment are well maintained and
adequate to support its current needs, although substantial investments are
expected to be made in additional property and equipment for expansion and in
connection with corporate development activities. See "OVERVIEW",
"STRATEGY", DESCRIPTION OF BUSINESS" AND "LIQUIDITY AND CAPITAL RESOURCES".
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company is involved in various lawsuits or claims
arising from the normal course of business. In the opinion of management,
none of these lawsuits or claims will have a material adverse effect on the
consolidated financial statements or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the year ended December
31,1997 to a vote of shareholders of the Company, through the solicitation of
proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information - The Company's common stock is traded on the OTC
Bulletin Board. Trading in the Company's common stock commenced on June
17, 1997. The table below sets forth by fiscal quarter, from the date
stock commenced trading through the end of the fiscal year ended
December 31, 1997, the high and low bid prices for the Company's common
stock on the OTC Bulletin Board, as reported by Prophet Information
Services, Inc. These prices reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
1997
High Low
<S> <C> <C>
Second Quarter (from June 17, 1997) $ 3-5/8 $ 2
Third Quarter $ 4-3/4 $ 3-1/4
Fourth Quarter $ 7-3/8 $ 4-1/2
</TABLE>
(b) Holders - The number of holders of record of the Company's common stock
as of March 30, 1998 was 107. This does not include shareholders who
hold stock in nominee or street name. As of March 30, 1998, 17,383,333
shares of the Company's common stock were issued and outstanding.
(c) Dividend Policy - The Company has not declared or paid cash dividends on
its common stock. The Company currently intends to retain any future
earnings to finance the growth and development of its business and
therefore does not anticipate paying cash dividends in the foreseeable
future. Any future determination to pay cash dividends will be made by
the Board of Directors in light of the Company's earnings, financial
position, capital requirements and such other factors as the Board of
Directors deems relevant. Payment of any dividends on the Company's
common stock is restricted until such time as all dividends associated
with the Company's Series A Preferred Stock and Series B Convertible
Preferred Stock have been paid.
The following securities have been issued or sold without registration under
the Securities Act of 1933, as amended, (the "SECURITIES ACT") during the
past three fiscal years. Each of the offers and sales or issuances described
below were to "accredited investors" as defined in Regulation D promulgated
under the Securities Act and were exempt under Section 4(2) of the Securities
Act:
On June 26, 1996 Maroon Bells Capital Partners, Inc. ("MBCP"), its principals
and certain non-affiliated investors entered into a stock purchase agreement
to purchase newly-issued shares of the Company's common stock representing
approximately 98.5% of the outstanding shares of the Company as of the date
of the Agreement for $110,000 in cash. See "CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS".
On October 15, 1996, the Company issued 1,000,000 shares of common stock to
two non-affiliated offshore entities in payment of a promissory note in the
amount of $80,000. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
On March 7, 1997, the Company issued 1,680,000 shares of common stock to MBCP
in payment of a promissory note in the amount of $420,000. See "CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS".
In March 1997, the Company closed a private placement offering of 3,333,333
shares of its common stock (the "OFFERING") at $0.75 per share pursuant to an
offering memorandum dated November 1, 1996. The Company received gross
proceeds of $2.5 million from the Offering, of which, approximately $2.4
million was received as of December 31, 1996. The Company paid approximately
$100,000 in offering costs related to the Offering.
In June 1997, the Company issued 3,750,000 shares of common stock in
connection with the acquisition of the assets and operations of TNC. See
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS - ACQUISITIONS".
In July 1997, the Company issued 1,400,000 shares of common stock in
connection with the acquisition of WWC. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS OF OPERATIONS - ACQUISITIONS".
In November 1997, the Company closed a private placement offering of its
Series A Preferred Stock (the "SERIES A PREFERRED STOCK OFFERING") at $2.25
per share pursuant to an offering memorandum dated May 8, 1997. The Company
received gross proceeds of approximately $1.1 million from the Series A
Preferred Stock Offering in exchange for 493,889 shares of Series A Preferred
Stock and paid approximately $114,000 in offering expenses in connection with
the offering. Holders of Series A Preferred Stock are entitled to receive
annual cumulative dividends of 8%, payable in cash or in shares of common
stock of the Company, at the Company's option, as and when such dividends are
declared by the Company's Board of Directors. The Series A Preferred Stock
is convertible into an equal number of shares of common stock at any time, at
the option of the holder, and is convertible by the Company upon the
occurrence of certain events. No public market exists for the Company's
Series A Preferred Stock and none is expected to develop as a result of the
Series A Preferred Stock Offering.
During the first quarter of 1998, the Company initiated a private placement
offering of its Series B Convertible Preferred Stock (the "SERIES B PREFERRED
STOCK OFFERING") at $5.36 per share. The Series B Convertible Preferred
Stock is convertible into shares of the Company's common stock at any time at
the option of the holder at a rate of 4 shares of common stock for each share
of preferred stock. Holders of Series B Convertible Preferred Stock have
voting rights equal to 40 votes per share on all matters submitted to a vote
of the stockholders of the Company. No public market exists for the
Company's Series B Convertible Preferred Stock and none is expected to
develop as a result of the Series B Preferred Stock Offering. As of March
30, 1998, the Company has received approximately $10.1 million in proceeds
from the sale of the Series B Convertible Preferred Stock and has converted
approximately $1.2 million of notes payable and accrued interest into the
Series B Convertible Preferred Stock in exchange for 2,112,106 shares of the
Company's Series B Convertible Preferred Stock. The Company is continuing to
offer its Series B Preferred Stock to accredited investors. See "SUBSEQUENT
EVENTS" AND "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
Overview
The Company is a global facilities-based telecommunications services provider
offering a full range of voice and value-added services to carriers and
corporate customers worldwide. The Company is focusing on expanding its
network infrastructure in targeted geographic regions where privatization and
liberalization enable it to gain early market entry and achieve rapid growth.
The Company is developing a global telecommunications network consisting of
(i) switches, enhanced services platforms, leased circuits and other
telecommunications equipment (On-Net) and (ii) carrier services agreements,
access and termination agreements, interconnection agreements and other
facilities-sharing agreements (Off-Net). Together, these telecommunications
assets and agreements comprise the Company's global network. The Company's
customers utilize a combination of local access numbers and codes and
domestic and international toll-free numbers to access the Company's network.
The Company is continuing to expand its network through (i) the purchase and
installation of equipment for existing and new markets, (ii) additional
interconnection, access and termination agreements with other carriers and
service providers in the U.S. and internationally and (iii) through
additional acquisitions of international telecommunications assets,
operations and service providers.
During 1997, the Company primarily provided calling card and other enhanced
services products from its facility in Omaha, Nebraska (see "TNC
ACQUISITION"). As the Company expands its global network and enters into new
international service agreements, the Company intends to provide long
distance services primarily to carriers, corporate customers and to
distributors, marketers and resellers of telecommunications services. For
products and services such as dedicated international circuits, the Company's
customers will typically pay a flat monthly fee based on the amount of
bandwidth purchased, the distance of the transport required and other
factors. Such services are typically invoiced on a monthly basis. For
switched domestic and international services, the Company will create
invoices based on detailed call records created by the Company's switches.
Switched minute customers are typically billed on a weekly, semi-monthly or
monthly basis. The Company also offers calling card and other long distance
services, which can be (i) prepaid in advance by the Company's customers,
(ii) invoiced to the customer for payment or (iii) paid for by regular debits
by the Company from the customer's credit card or bank draft accounts. In
some cases, the Company requires customers to post deposits, letters of
credit or other financial instruments in order to reduce the Company's
exposure to bad debts and non-payment. Similarly, the Company is billed
either on a flat fee basis or on a per-minute basis by its underlying carrier
vendors, based on the type of services required by the Company from the
particular vendor.
The Company operates through a number of wholly-owned operating subsidiaries
that its has established in the United States and Europe to acquire
telecommunications assets and operations. The acquisitions completed by the
Company during 1997 are described below.
Acquisitions
On June 20, 1997, the Company completed the acquisition of substantially all
of the telecommunications assets and operations of TNC (the "TNC
ACQUISITION") pursuant to an Asset Purchase Agreement dated April 23, 1997
(as amended by Amendment No. 1 to the Asset Purchase Agreement dated June 20,
1997, collectively the "ASSET PURCHASE AGREEMENT"). The results of
operations of TNC are included in the consolidated financial statements of
the Company from the date of acquisition, June 20, 1997.
The assets and operations of TNC were purchased in exchange for (i) 3,750,000
shares of the Company's common stock (of which 1,250,000 shares are being
held pursuant to an escrow agreement for a period of 18 months following the
closing subject to certain purchase price adjustments described below) and
(ii) the assumption by the Company of certain indebtedness of TNC up to a
maximum of $4.6 million. The purchased assets include telecommunications
switches and other network equipment, customer and vendor contracts, an FCC
section 214 common carrier license, an operator services center and other
assets sufficient to continue the ongoing business of TNC. The FCC section
214 common carrier license gives the Company the authority to resell both
international switched and private line services of authorized carriers. The
final purchase price is subject to adjustment if (i) liabilities in excess of
$4.6 million are assumed, (ii) the Company is required to invoke certain
indemnifications by TNC, (iii) there are certain expense overruns or (iv)
there are certain rejected contracts.
On July 3, 1997, the Company merged WWC into a wholly-owned subsidiary of the
Company pursuant to an Agreement and Plan of Merger dated April 20, 1997 (the
"WWC ACQUISITION"). WWC was a telecommunications marketing consulting firm
which produced and implemented marketing strategies for clients ranging from
small companies to large corporate clients. The Company's former President
and Chief Executive Officer was the sole shareholder of WWC.
In connection with the WWC Acquisition, the Company delivered (i) 1,400,000
shares of the Company's common stock, of which 200,000 shares are being held
pursuant to an escrow agreement subject to certain adjustments to the
purchase price based on the Company entering into business agreements that
WWC had negotiated, (ii) $75,000 in cash and (iii) a promissory note in the
amount of $175,000.
WWC's operating revenues and expenses did not have a material impact on the
operating revenues and expenses of the Company in fiscal 1997.
The Company valued the stock issued in connection with the TNC Acquisition
and the WWC Acquisition based on the price received by the Company in
connection with its private placement of common stock which closed in March
1997.
Results of Operations
Prior to its acquisition of the assets and ongoing operations of TNC, the
Company was a development stage company that had not generated revenues other
than interest income since inception. In 1997 the Company incurred losses of
$(3,492,767) compared to $(259,898) in 1996. Included in the losses incurred
during 1997 are the operating results of TNC and WWC subsequent to the
closing of the TNC Acquisition and the WWC Acquisition. Prior to the TNC
Acquisition, TNC had experienced a history of operating losses and cash flow
deficiencies. Subsequent to the closing of the TNC Acquisition, revenues
from the operations declined, primarily as a result of the Company's shift in
focus toward higher-margin product lines in new international markets.
To address and remedy these historical operating losses and to increase the
competitiveness, revenues and gross margins of the assets and operations
acquired in the TNC Acquisition, over the past six months, the Company has
sought to (i) institute new financial controls, (ii) enhance the technical
capabilities of its switching center, calling card platform and operator
services center in Omaha, (iii) negotiate more favorable carrier vendor
contracts, (iv) recruit additional qualified operational and technical
management for its Omaha facility, (v) develop new calling card distribution
channels in ethnic markets in the U.S. and in new international markets such
as Mexico and (vi) develop new products and services such as multi-lingual
operator services targeted at carrier customers. While the Company
believes these cost-reduction and revenue-enhancing initiatives will have a
positive impact on its future operating results, the Company anticipates that
it will continue to incur operating losses and cash flow deficiencies for the
foreseeable future. See "LIQUIDITY AND CAPITAL RESOURCES".
Revenues
Revenues increased to $2,777,575 from $0 for the years ended December 31,
1997 and 1996, respectively. The increase in revenues was due solely to the
inclusion of the results of operations of the TNC assets subsequent to the
closing of the TNC Acquisition on June 20, 1997.
Gross Margin
Gross margin increased to $171,599 from $0 for the years ended December 31,
1997 and 1996, respectively. The increase in gross margin was due solely to
the inclusion of the results of operations of the TNC assets subsequent to
the closing of the TNC Acquisition on June 20, 1997.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $2,723,577 from
$270,591 for the years ended December 31, 1997 and 1996, respectively. The
increase was due to primarily to (i) increased business development and
acquisition activity, (ii) the establishment and staffing of the Company's
corporate offices and (iii) the inclusion of the selling, general and
administrative expenses associated with the operation of the TNC assets
subsequent to the closing of the TNC Acquisition on June 20, 1997.
Depreciation and Amortization
Depreciation and amortization expense increased to $818,939 from $0 for the
years ended December 31, 1997 and 1996, respectively. The increase was due
to (i) depreciation on the assets acquired in connection with the TNC
Acquisition, (ii) amortization of goodwill and other intangible assets
associated with the TNC Acquisition and the WWC Acquisition and (iii)
depreciation on additional switching and peripheral equipment acquired during
1997.
Other Income (Expense)
Interest income increased to $65,028 from $34,399 for the years ended
December 31, 1997 and 1996, respectively. The increase was due to the
interest from (i) a note receivable from Global Star International, Inc. (the
"GSI NOTE") which was paid in full during 1997, (ii) a note receivable from
Com Tech International Corporation (the "COM TECH NOTE") which was paid in
full during 1997 and (iii) a note receivable from TNC prior to the TNC
Acquisition.
Interest expense increased to $192,722 from $23,706 for the years ended
December 31, 1997 and 1996, respectively. The increase in interest expense is
due to (i) the debt assumed by the Company in connection with the TNC
Acquisition, (ii) the acquisition of switching equipment subject to capital
lease and (iii) borrowings pursuant to certain short-term promissory notes
for working capital purposes. See "LIQUIDITY AND CAPITAL RESOURCES".
Liquidity and Capital Resources
The Company is an emerging international telecommunications service provider
which is executing a global business plan which requires substantial capital.
The Company currently has a working capital deficit and has operated at a
loss since its inception. Funding of the working capital deficit, current
and future operating losses and expansion of the Company will require
substantial continuing capital investment. The Company's strategy is to fund
these cash requirements through debt facilities or additional equity
financing. Although the Company has been able to arrange debt facilities and
equity financing to date, there can be no assurance that sufficient debt or
equity financing will continue to be available in the future or that it will
be available on terms acceptable to the Company. Substantial additional debt
or equity financing may be needed for the Company to achieve its short-term
and long-term business objectives. Failure to obtain sufficient capital
could materially affect the Company's acquisition and operating strategies.
The Company expects that future financing will include debt and/or equity
placements; however, no assurance can be given that the Company will be able
to obtain additional financing on reasonable terms, if at all. See
"SUBSEQUENT EVENTS". See Notes 5,7 and 10 of Notes to Consolidated Financial
Statements.
As of December 31, 1997, the Company has a working capital deficit of
$4,142,742 compared to a working capital surplus of $2,787,222 at December
31, 1996. The working capital deficit at December 31, 1997 is due to (i) the
assumption of liabilities in conjunction with the TNC Acquisition, the
majority of which were trade payables and short-term debt obligations, (ii)
the issuance of a note payable in connection with the WWC Acquisition, (iii)
the acquisition of additional switching and peripheral equipment, the
majority of which is being financed pursuant to a lease, (iv) borrowings
pursuant to certain short-term promissory notes and (v) the operating losses
of the Company. Trade receivables increased to $368,848 at December 31, 1997
from $0 at December 31, 1996 due to the TNC Acquisition.
Operations used $2,904,692 during 1997 compared to $196,359 in 1996 due
primarily to the (i) operating losses associated with the operation of the
TNC assets subsequent to the TNC Acquisition (ii) increased business
development and acquisition activity and (iii) the establishment and staffing
of the Company's corporate offices.
Investing activities used $700,715 during 1997 compared to $1,300,000 in
1996. Investing activities in 1997 consisted primarily of collection of the
GSI Note and the Com Tech Note offset by (i) cash advances to TNC to fund
working capital prior to the closing of the TNC Acquisition (ii) cash paid to
WWC in connection with the closing of the WWC Acquisition and (iii) increased
capital expenditures associated with the purchase of additional switching and
peripheral equipment. Investing activities in 1996 consisted of advances
pursuant to the GSI Note and the Com Tech Note.
Financing activities generated $2,231,849 during 1997 compared to $3,034,649
during 1996. Financing activities during 1997 consisted primarily of (i)
payments on short-term debt and capital lease obligations assumed in
connection with the TNC Acquisition, (ii) proceeds from the issuance of notes
payable to related parties and (iii) proceeds from the issuance of 493,889
shares of the Company's Series A Preferred Stock. Financing activities
during 1996 consisted of proceeds from the issuance of notes payable to
related parties and the issuance of common stock.
In addition to trade payables and vendor obligations assumed in connection
with the TNC Acquisition, the Company assumed a secured promissory note
payable to Value Partners, Ltd. ("VALUE PARTNERS") which is payable in
installments of $100,000 per month plus accrued interest at a rate of 14% per
annum beginning September 1, 1997. The note is secured by all of the assets
acquired by the Company in connection with the TNC Acquisition. The Company
has made none of the scheduled payments on this note and as of March 30,
1998, Value Partners has not demanded payment on the note. The Company is
currently negotiating with Value Partners to restructure this obligation on
more favorable terms to the Company; however, no assurance can be given that
the Company will be able to restructure these obligations.
In connection with the WWC Acquisition, the Company was obligated to pay
$75,000 cash at closing to its former President and Chief Executive Officer
of which $52,500 has been paid as of December 31, 1997. In addition to the
cash paid at closing, the Company issued a promissory note in the amount of
$175,000. The Company is currently negotiating with its former President and
Chief Executive Officer to restructure the remaining unpaid portion of the
cash due as well as the unpaid payments on the promissory note which were due
on October 1, 1997 and February 1, 1998. See "WWC ACQUISITION".
In September 1997, the Company entered into an arrangement with MBCP whereby
MBCP would arrange for the Company to borrow from MBCP and certain of its
affiliated entities pursuant to certain promissory notes (the "BRIDGE
NOTES"). The Bridge Notes bear interest at 10% per annum, mature on December
31, 1997 and are convertible into equity in the Company on terms to be
negotiated in good faith. As of December 31, 1997, the Company had
$1,556,250 in Bridge Notes outstanding. During the first quarter of 1998,
approximately $1.2 million of the Bridge Notes and accrued interest were
converted into equity in the Company. The remaining portion of the Bridge
Notes were repaid in cash. See "RELATED PARTY TRANSACTIONS" and "SUBSEQUENT
EVENTS".
In October 1997, the Company purchased approximately $3.6 million of network
and switching equipment to be installed in various cities in the United
States and Europe as part of its global network strategy. The equipment was
purchased pursuant to a lease financing facility with Forsythe. The lease
associated with this equipment calls for monthly payments in the amount of
$121,701 for a period of 36 months commencing on March 1, 1998. See
"SUBSEQUENT EVENTS".
On November 14, 1997, the Company closed a private placement offering of its
Series A Preferred Stock. The Company received total gross proceeds of
$1,111,250 in exchange for 493,889 shares of the Company's Series A Preferred
Stock. The Company paid $113,485 in offering costs in connection with the
Series A Preferred Stock Offering.
As described in "RECENT DEVELOPMENTS" and "DESCRIPTION OF BUSINESS", the
Company has entered into a number of agreements, contracts and other business
relationships which will require the Company to expend capital resources. In
the case of carrier services contracts and network access agreements, the
impact on the Company's requirements for working capital and capital
expenditures cannot be determined at this time, due to variables associated
with the scope and timing of implementation of these contracts and
agreements. In other cases, such as the Company's multi-million dollar
commitment to purchase STM-1 capacity on the AC-1 cable, the financial impact
on the Company cannot be determined until such time as the Company has
selected its method of financing for the purchase of the STM-1 on AC-1. These
financing options include (i) obtaining vendor financing, (ii) obtaining
third party financing or (iii) financing the purchase internally from the
proceeds of future offerings by the Company.
As described in "RECENT DEVELOPMENTS" and elsewhere herein, the Company has
received approximately $10.1 million in proceeds from the sale of its Series
B Convertible Preferred Stock. In addition, Forsythe has recently increased
the Company's lease financing facility to $13 million. These proceeds and
financial resources, while significant, may be insufficient to enable the
Company to meet its obligations pursuant to the business relationships as
described in "RECENT DEVELOPMENTS" and elsewhere herein. Further, the
Company does not currently generate positive cash flow and will not do so
until it has completed a significant portion of its global network
development and has implemented its sales and marketing strategy. As such,
the Company believes that it will be required to seek additional financing in
order to implement its business plan and to meet its obligations pursuant to
the business relationships as described in "RECENT DEVELOPMENTS" and
elsewhere herein. Accordingly, the Company has recently signed an advisory
agreement with a Wall Street investment-banking firm, pursuant to which the
investment banker intends to advise the Company with regard to future
financing options.
Year 2000 Issue
The Year 2000 issue exists because many computer systems and applications
currently use two-digit fields to designate a year. As the century date
change occurs, date-sensitive systems will recognize the year 2000 as 1900 or
not at all. The inability to recognize or properly treat the Year 2000 may
cause systems to process critical financial and operational information
incorrectly. The Company's management has assessed the impact of the Year
2000 issue on the Company's computer hardware and software systems. Based on
this assessment, management currently believes that the costs of resolving
the Year 2000 issues will not be material to the Company's results of
operations or financial condition.
Subsequent Events
During the first quarter of 1998, the Company initiated a private placement
offering of its Series B Convertible Preferred Stock (the "SERIES B PREFERRED
STOCK OFFERING") at $5.36 per share. The Series B Convertible Preferred
Stock is convertible into shares of the Company's common stock at any time at
the option of the holder at a rate of 4 shares of common stock for each share
of preferred stock. Holders of Series B Convertible Preferred Stock have
voting rights equal to 40 votes per share on all matters submitted to a vote
of the stockholders of the Company. As of March 30, 1998, the Company has
received approximately $10.1 million in proceeds from the sale of the Series
B Convertible Preferred Stock and has converted approximately $1.2 million of
notes payable and accrued interest into the Series B Convertible Preferred
Stock. See "CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS".
In February 1998, the Company commenced operations in The Netherlands through
the acquisition of all of the outstanding stock of MathComp B.V.
("MATHCOMP"). The Company changed the name of MathComp to WorldPort
Communications Europe, B. V. and commenced its operations in The Netherlands.
In connection with this acquisition, the Company issued 150,000 shares of the
Company's common stock and will pay $250,000 in cash, payable within 45 days
of the closing of the acquisition. The former shareholder of MathComp is
eligible to earn an additional 2,350,000 shares of the Company's common stock
contingent upon the attainment of certain future revenue and gross margin
requirements during the first and second quarters of 1999. In connection
with the acquisition, the Company entered into a three-year employment
agreement with the former shareholder of MathComp for an annual salary of
approximately $90,000.
In March 1998, the Company successfully negotiated an increase in its lease
financing facility with Forsythe increasing the aggregate facility to
$13,000,000. In connection with the increase in the lease financing
facility, the Company purchased additional switching equipment to be
installed in New York and The Netherlands.
On March 25, 1998, the Company entered into a definitive agreement for the
acquisition of the telecommunications assets and operations of ICX, a
licensed provider of international telecommunications services headquartered
in the San Francisco Bay area in exchange for 400,000 shares of the Company's
common stock (of which 200,000 shares will be held pursuant to an escrow
agreement for a period of eighteen months following the closing subject to
the attainment of certain future revenue requirements and to indemnify the
Company for certain representations and warranties). In addition, the
Company will enter into two-year employment agreements with three employees
of ICX providing for annual salaries of $84,000 and issue options to purchase
120,000 shares of common stock at exercise prices ranging from $7.00 to
$10.00 per share with a vesting period of one to two years. The ICX
acquisition is currently scheduled to close early in the second quarter of
1998.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of WorldPort Communications, Inc.:
We have audited the accompanying consolidated balance sheets of WorldPort
Communications, Inc. and subsidiaries (a Delaware corporation), as of
December 31, 1997 and 1996, and the related consolidated statements of
operations, stockholders' equity 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of WorldPort
Communications, Inc. and subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the years then
ended, in conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
more fully in Note 1 to the consolidated financial statements, the Company is
an emerging international telecommunications service provider which is
attempting to execute a global business plan which requires substantial
capital. During 1997, the Company's first year of operations as an
international telecommunications services provider, the Company incurred
losses of approximately $3.5 million, expects to continue to incur operating
losses in the near future, has an accumulated deficit of approximately $3.8
million and a working capital deficit of approximately $4.1 million at
December 31, 1997, all of which raises substantial doubt about the Company's
ability to continue as a going concern. Management's plans in regard to
these matters, which include raising additional capital, are also described
in Note 1. During the first quarter of 1998, the Company has raised
approximately $10.1 million in additional capital from the sale of its Series
B Convertible Preferred Stock and was successful in increasing its existing
lease financing facility to provide up to $13 million in infrastructure
financing. In addition, during the first quarter of 1998, the Company
retained the services of a major New York-based investment banker to advise
the Company with regard to future financing options. The consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts, including
goodwill, or the amount and classification of liabilities that might result
should the Company be unable to continue as a going concern.
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
ITEM 7. FINANCIAL STATEMENTS
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
December 31,
1997 1996
<S> <C> <C>
CURRENT ASSETS:
Cash $ 179,271 $ 1,552,829
Accounts receivable, net of allowance for doubtful accounts
of $14,610 and $0, respectively 368,848 -
Notes receivable - 1,300,000
Prepaid expenses and other current assets 67,438 34,135
Total current assets 615,557 2,886,964
PROPERTY AND EQUIPMENT, net 5,031,858 -
OTHER ASSETS:
Goodwill, net 6,292,411 -
Other assets, net 1,257,451 2,068
TOTAL ASSETS $13,197,277 $ 2,889,032
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $1,391,519 $ 99,742
Accrued expenses 1,292,261 -
Short-term note payable 500,000 -
Current portion of notes payable related parties 540,000 -
Current portion of obligations under capital leases 936,992 -
Other current liabilities 97,527 -
Total current liabilities 4,758,299 99,742
NOTES PAYABLE RELATED PARTIES, net of current portion 1,191,250 420,000
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES, net of current portion 3,005,894 -
OTHER LONG-TERM LIABILITIES 86,584 -
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Undesignated preferred stock, $0.0001 par value, 9,250,000 shares
authorized, no shares issued and outstanding - -
Series A preferred stock, $0.0001 par value, 750,000 shares
authorized, 493,889 and no shares issued and outstanding in
1997 and 1996, respectively 49 -
Common stock, $0.0001 par value, 65,000,000 shares authorized,
16,033,333 and 9,053,667 shares issued and outstanding, in
1997 and 1996, respectively 1,603 905
Additional paid-in capital 7,953,631 2,664,291
Accumulated deficit (3,800,033) (295,906)
Total stockholders' equity 4,155,250 2,369,290
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,197,277 $ 2,889,032
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
REVENUES $ 2,777,575 $ -
COST OF SERVICES 2,605,976 -
Gross margin 171,599 -
OPERATING EXPENSES:
Selling, general and
administrative expenses 2,723,577 270,591
Depreciation and amortization 818,939 -
Operating loss (3,370,917) (270,591)
OTHER INCOME (EXPENSE):
Interest income 65,028 34,399
Interest expense (192,722) (23,706)
Other 5,844 -
(121,850) 10,693
LOSS BEFORE PROVISION
FOR INCOME TAXES (3,492,767) (259,898)
PROVISION FOR INCOME TAXES - -
NET LOSS $ (3,492,767) $ (259,898)
NET LOSS PER SHARE,
BASIC AND DILUTED $ (0.26) $ (0.11)
SHARES USED IN NET LOSS PER SHARE
CALCULATION, BASIC AND DILUTED 13,244,681 2,358,334
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Additional Accumulated
Preferred Stock Common Stock Paid-in-Capital Deficit Total
Shares Amount Shares Amount
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 - $ - 60,000 $ 6 $ 50,541 $ (36,008) $ 14,539
Issuance of common stock - - 4,000,000 400 109,281 - 109,681
Issuance of common stock
in connection with exercise
of stock options - - 160,000 16 4,384 - 4,400
Issuance of common stock
for services - - 650,000 65 32,435 - 32,500
Issuance of common stock in
connection with conversion of
promissory note payable - - 1,000,000 100 79,900 - 80,000
Issuance of common stock - - 3,183,667 318 2,387,750 - 2,388,068
Net loss - - - - - (259,898) (259,898)
Balance, December 31, 1996 - - 9,053,667 905 2,664,291 (295,906) 2,369,290
Issuance of common stock,
net of offering costs - - 149,666 15 10,167 - 10,182
Issuance of common stock in
connection with conversion of
promissory note payable - - 1,680,000 168 419,832 - 420,000
Issuance of common stock in
connection with acquisitions - - 5,150,000 515 3,861,985 - 3,862,500
Issuance of Series A preferred
stock, net of offering costs 493,889 49 - - 997,356 - 997,405
Dividends on Series A
preferred stock - - - - - (11,360) (11,360)
Net loss - - - - - (3,492,767) (3,492,767)
Balance, December 31, 1997 493,889 $ 49 16,033,333 $ 1,603 $ 7,953,631 $(3,800,033) $ 4,155,250
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended
December 31,
1997 1996
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,492,767) $ (259,898)
Adjustments to reconcile net loss to net cash
used by operating activities -
Depreciation and amortization 818,939 -
Decrease in accounts receivable 185,325 -
Increase in prepaid expenses and other assets (624,106) (34,135)
Increase in accounts payable and accrued
expenses and other liabilities
207,917 97,674
Net cash used by operating activities (2,904,692) (196,359)
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash paid in connection with acquisitions (1,229,941) -
Change in notes receivable 1,300,000 (1,300,000)
Capital expenditures (770,774) -
Net cash used by investing activities (700,715) (1,300,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on short-term debt (262,278) -
Payments on obligations under capital leases (69,710) -
Proceeds from issuance of notes payable related parties 1,556,250 500,000
Proceeds from issuance of preferred stock, net of offering expenses 997,405 -
Proceeds from issuance of common stock, net of offering expenses
10,182 2,534,649
Net cash provided by financing activities 2,231,849 3,034,649
NET (DECREASE) INCREASE IN CASH (1,373,558) 1,538,290
CASH, beginning of the period 1,552,829 14,539
CASH, end of the period $ 179,271 $ 1,552,829
CASH PAID DURING THE PERIOD FOR INTEREST $ 73,006 $ -
CASH PAID DURING THE PERIOD FOR TAXES $ - $ -
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Conversion of note payable for 1,680,000 shares of common stock $ 420,000 $ -
Conversion of note payable for 1,000,000 shares of common stock $ - $ 80,000
Acquisition of property and equipment under capital lease $ 3,558,604 $ -
The accompanying notes are an integral part of these consolidated financial
statements.
</TABLE>
WORLDPORT COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
WorldPort Communications, Inc. and subsidiaries (the "COMPANY") is a
global, facilities-based telecommunications services provider offering a
full range of voice and value-added services to carriers and corporate
customers worldwide. The Company is focusing on expanding its network
infrastructure in the United States and in major markets in Europe,
Asia-Pacific and Latin America.
Prior to the closing of the acquisitions of Telenational Communications
Limited Partnership ("TNC") and The Wallace Wade Company ("WWC") in 1997
(see Note 2), the Company was a development stage enterprise and devoted
substantially all of its efforts to identifying and acquiring
businesses, developing a public market for its stock and raising
capital. With the closing of the acquisitions of TNC and WWC, the
Company is no longer a development stage enterprise and, accordingly,
the financial statement presentation and disclosures required for
development stage enterprises have been omitted.
Financial Condition
The Company is subject to various risks in connection with the operation
of its business including, among other things, (i) changes in external
competitive market factors, (ii) termination of certain operating
agreements or inability to enter into additional operating agreements,
(iii) inability to satisfy anticipated working capital or other cash
requirements, (iv) changes in or developments under domestic or foreign
laws, regulations, licensing requirements or telecommunications
standards, (v) changes in the availability of transmission facilities,
(vi) changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated changes in the market, (vii)
various competitive factors that may prevent the Company from competing
successfully in the marketplace, (viii) the Company's lack of liquidity
and its ability to raise additional capital, (ix) loss of services of
key executive officers and (x) loss of a customer which provides
significant revenues to the Company. During 1997, the Company's first
year of operations as an international telecommunications services
provider, the Company incurred losses of approximately $3.5 million and
expects to continue to incur operating losses in the near future and has
an accumulated deficit of approximately $3.8 million as of December 31,
1997 as well as a working capital deficit of approximately $4.1 million.
Funding of the Company's working capital deficit, current and future
operating losses and expansion of the Company will require substantial
continuing capital investment. As a result of the aforementioned
factors and related uncertainties, there is substantial doubt about the
Company's ability to continue as going concern. The Company's strategy
is to fund these cash requirements through debt facilities or additional
equity financing. Although the Company has been able to arrange debt
facilities or equity financing to date, there can be no assurance that
sufficient debt or equity financing will continue to be available in the
future or that it will be available on terms acceptable to the Company.
Failure to obtain sufficient capital could materially affect the
Company's acquisition and operating strategies. The Company expects that
future financings will include debt and/or equity placements; however,
no assurance can be given that the Company will be able to obtain
additional financing on reasonable terms, if at all. During the first
quarter of 1998, the Company has raised approximately $10.1 million in
connection with the sale of its Series B Convertible Preferred Stock
(see Note 10) and was successful in increasing its existing lease
financing facility to provide up to $13,000,000 in infrastructure
financing. The Company has also converted approximately $1.2 million
in notes payable to related parties into its Series B Convertible
Preferred Stock (see Note 5). In addition, during the first quarter of
1998, the Company retained the services of a major New York-based
investment banker to assist the Company in raising additional capital
through debt and/or equity offerings. The Company has currently made
none of its scheduled payments on its debt obligation to Value
Partners, Ltd. (see Note 5).
Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
Use of Estimates
The Company's financial statements are prepared in accordance with
generally accepted accounting principles ("GAAP"). Financial statements
prepared in accordance with GAAP require the use of management 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. Additionally, management estimates
affect the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Goodwill
Goodwill represents the total consideration the Company paid to acquire
TNC and WWC in excess of the fair market value of the net tangible and
identifiable assets acquired. Goodwill is being amortized on a
straight-line basis over 10 years, which represents management's
estimation of the related benefit to be derived from the acquired
businesses. The Company periodically evaluates whether events and
circumstances after the acquisition date indicate that the remaining
balance of goodwill may not be recoverable. If factors indicate that
goodwill should be evaluated for possible impairment, the Company would
compare estimated undiscounted future cash flow from the related
operations to the carrying amount of goodwill. If the carrying amount
of goodwill were greater than undiscounted future cash flow, an
impairment loss would be recognized. Any impairment loss would be
computed as the excess of the carrying amount of goodwill over the
estimated fair value of the goodwill (calculated based on discounting
estimated future cash flows). Accumulated amortization of goodwill was
$344,955 and $0 as of December 31, 1997 and 1996, respectively.
Realization of Long-Lived Assets
The Company reviews the realization of its long-lived assets pursuant to
Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed Of." SFAS No. 121 requires that long-lived assets
be probable of future recovery in their respective carrying amounts as
of each balance sheet date. Management believes its long-lived assets
are realizable and that no impairment allowance is necessary pursuant to
the provisions of SFAS No. 121.
Revenue Recognition
The Company records revenues from its telecommunications services when
customer calls are completed, based on minutes (or fractions thereof) of
customer usage. Payments received in advance for prepaid services are
recorded as deferred revenues until such related services are provided.
Concentration of Credit Risk
The Company is subject to significant concentrations of credit risk,
which consist primarily of trade accounts receivable. The Company sells
a significant portion of its services to other carriers and resellers
and, consequently, maintains significant receivable balances with
certain customers. If the financial condition and operations of these
customers deteriorate below critical levels, the Company's operating
results could be adversely affected. For the year ended December 31,
1997, three customers accounted for approximately 33%, 32% and 26%,
respectively, of total Company revenues. All revenues are from
unaffiliated customers.
Accounting for Stock-Based Compensation
In 1995, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 123, "Accounting for Stock-Based Compensation. SFAS No. 123 allows
the Company to adopt either of two methods for accounting for stock
options. The Company has elected to account for its stock-based
compensation plans under Accounting Principles Board, Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB NO. 25"). In
accordance with SFAS No. 123, certain pro forma disclosures are provided
in Note 7.
New Accounting Pronouncements
In March 1997, the FASB issued SFAS No. 128, "Earnings Per Share". SFAS
No. 128 replaces Accounting Principles Board Opinion 15, "Earnings Per
Share", and simplifies the computation of earnings (loss) per share
("EPS") by replacing the presentation of primary EPS with basic EPS,
which is computed by dividing income available to common stockholders by
the weighted-average number of common shares outstanding for the period.
SFAS No. 128 also requires dual presentation of basic and diluted EPS on
the face of the income statement for entities with complex capital
structures, and a reconciliation of the numerator and denominator used
in the basic EPS computation to the diluted EPS computation's numerator
and denominator. The Company adopted SFAS No. 128 in 1997 and all prior
years presented in the accompanying consolidated financial statements
have been restated in accordance with SFAS No. 128.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130 requires the presentation of comprehensive income
in an entity's financial statements. Comprehensive income represents
all changes in equity of an entity during the reporting period,
including net income and charges directly to equity which are excluded
from net income (such as additional minimum pension liability changes,
currency translation adjustments, unrealized gains and losses on
available for sale securities, etc.). The Company will adopt SFAS No.
130 during the year ended December 31, 1998 and has not yet determined
what additional disclosures may be required in connection with adopting
SFAS No. 130.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS No. 131 requires the
reporting of profit and loss, specific revenue and expense items and
assets for reportable segments. It also requires the reconciliation of
total segment revenues, total segment profit or loss, total segment
assets and other amounts disclosed for segments to the corresponding
amounts in the general purpose financial statements. The Company will
adopt SFAS No. 131 during the year ended December 31, 1998 and has not
yet determined what additional disclosures may be required in connection
with adopting SFAS No. 131.
Year 2000 Issue
The Year 2000 issue exists because many computer systems and
applications currently use two-digit fields to designate a year. As the
century date change occurs, date-sensitive systems will recognize the
year 2000 as 1900 or not at all. The inability to recognize or properly
treat the Year 2000 may cause systems to process critical financial and
operational information incorrectly. The Company's management has
assessed the impact of the Year 2000 issue on the Company's computer
hardware and software systems. Based on this assessment, management
currently believes that the costs of resolving the Year 2000 issues will
not be material to the Company's results of operations or financial
condition.
Certain Reclassifications
Certain reclassifications have been made to amounts previously reported
to conform to current period presentation.
(2) ACQUISITIONS
TNC Acquisition
On June 20, 1997, the Company completed the acquisition of substantially
all of the telecommunications assets and operations of TNC (the "TNC
ACQUISITION") in exchange for (i) 3,750,000 shares of the Company's
common stock (of which 1,250,000 shares are being held pursuant to an
escrow agreement for a period of 18 months following the closing subject
to certain purchase price adjustments described below) and (ii) the
assumption by the Company of certain working capital obligations and
indebtedness of TNC up to a maximum of $4.6 million. The purchased
assets include telecommunications switches and other network equipment,
customer and vendor contracts, an FCC section 214 common carrier
license, an operator services center and other assets sufficient to
continue the ongoing business of TNC. The FCC section 214 common
carrier license gives the Company the authority to resell both
international switched and private line services of authorized carriers.
The final purchase price is subject to adjustment if (i) liabilities in
excess of $4.6 million are assumed, (ii) the Company is required to
invoke certain indemnifications by TNC, (iii) there are certain expense
overruns or (iv) there are certain rejected contracts.
The results of operations of TNC are included in the consolidated
financial statements of the Company from the date of acquisition, June
20, 1997.
The TNC Acquisition was accounted for using the purchase method of
accounting and is subject to certain purchase price adjustments as
discussed above. The allocation of purchase price to the assets
acquired and liabilities assumed in the transaction has been initially
assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of
such assets and liabilities becomes available.
The fair value of assets acquired and liabilities assumed in connection
with the TNC Acquisition is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Current assets $ 540,000
Property and equipment 1,121,000
Other long-term assets 189,000
Goodwill 5,850,000
Assets acquired, net of cash 7,700,000
Less: Assumed liabilities and transaction costs 4,887,000
Common stock issued 2,813,000
Cash paid $ -
__
</TABLE>
Prior to the TNC Acquisition, the Company advanced $1,178,000 to TNC for
working capital purposes. This amount was included as part of the $4.6
million of liabilities assumed in connection with the transaction.
WWC Acquisition
On July 3, 1997, the Company acquired WWC (the "WWC ACQUISITION"). WWC
was a telecommunications marketing consulting firm that produced and
implemented marketing strategies for clients ranging from small
companies to large corporate clients. The results of operations of WWC
are included in the consolidated financial statements of the Company
from the date of acquisition, July 3, 1997. The Company's former
President and Chief Executive Officer was the sole shareholder of WWC
and sold WWC to the Company in exchange for: (i) 1,400,000 shares of the
Company's common stock, of which 200,000 shares are being held pursuant
to an escrow agreement subject to certain purchase price adjustments,
(ii) $75,000 cash of which $52,500 has been paid as of December 31, 1997
and (iii) a promissory note in the amount of $175,000 payable as
follows: one payment of $50,000 payable on October 1, 1997, and two
payments of $62,500 payable on February 1, 1998 and July 1, 1998. The
Company is currently negotiating with its former President and Chief
Executive Officer to restructure the remaining portion of the cash due
at closing as well as the payments on the promissory note which were due
on October 1, 1997 and February 1, 1998.
The WWC Acquisition was accounted for using the purchase method of
accounting and is subject to certain purchase price adjustments as
discussed above. The allocation of purchase price to the assets
acquired and liabilities assumed in the transaction has been initially
assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of
such assets and liabilities becomes available.
The fair value of assets acquired and liabilities assumed in connection
with the WWC Acquisition is summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
Property and equipment $ 3,000
Goodwill and other intangible assets 1,313,000
Assets acquired, net of cash 1,316,000
Less: Promissory note 175,000
Deferred cash payment 23,000
Assumed liabilities and transaction costs 15,000
Common stock issued 1,050,000
Cash paid $ 53,000
</TABLE>
The pro forma unaudited consolidated results of operations of the
Company, as though the TNC Acquisition and the WWC Acquisition took
place on January 1, 1996, are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Revenues $ 6,335,000 $12,548,000
Net loss $ (5,761,000) $ (2,629,000)
Diluted net loss per share $ (0.37) $ (0.35)
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(i) adjustment for pro forma goodwill amortization expense using a 10-
year estimated life; (ii) adjustment for pro forma contract amortization
expense using a 5-year life; (iii) adjustment for non-recurring
management fees payable to the General Partner of TNC and (iv)
adjustment for acquisition costs incurred and expensed by TNC in
connection with the TNC Acquisition.
(3) NOTES RECEIVABLE
The Company had notes receivable at December 31, 1997 and 1996
consisting of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Com Tech International Corporation,
interest at 12%, collected in full in $ - $ 500,000
1997
Global Star International, Inc.,
interest at 10%, collected in full in - 800,000
1997
$ - $1,300,000
</TABLE>
(4) PROPERTY AND EQUIPMENT
Property and equipment are carried at cost. Expenditures for additions,
improvements and renewals, which add significant value to the asset or
extend the life of the asset, are capitalized. Expenditures for
maintenance and repairs are charged to expense as incurred. The Company
provides for depreciation of property and equipment using the straight-
line method based on the estimated useful lives of the assets ranging
from three to seven years.
Following is a summary of property and equipment at December 31, 1997:
<TABLE>
<CAPTION>
<S> <C>
Switching equipment $ 4,841,305
Leasehold improvements 318,071
Office and computer equipment 159,320
Vehicles 8,500
Furniture and Fixtures 126,146
Total property and equipment 5,453,342
Less: accumulated depreciation and amortization (421,484)
Property and equipment, net $ 5,031,858
</TABLE>
Depreciation expense charged to operations was $421,484 and $0 for the
years ended December 31, 1997 and 1996, respectively.
(5) DEBT AND CAPITAL LEASE OBLIGATIONS
Notes Payable
The December 31, 1997 short-term note payable was assumed in connection
with the TNC Acquisition. The note is payable in installments of
$100,000 per month plus accrued interest at a rate of 14% per annum.
The note is secured by all of the assets acquired by the Company in
connection with the TNC Acquisition. As of December 31, 1997, the
Company has made none of the scheduled payments on this note. As of
March 30, 1998, the note holder has not demanded payment.
On July 1, 1996, Maroon Bells Capital Partners, Inc. ("MBCP") loaned the
Company $500,000 pursuant to a promissory note, collateralized by a
promissory note between the Company and Com Tech (see Note 3). In
October 1996, MBCP assigned $80,000 principal amount of the note to
certain non-affiliated entities, which in turn was converted into shares
of the Company's common stock resulting in the issuance of 1,000,000
shares of common stock. In March 1997, MBCP exchanged the $420,000
outstanding principal for 1,680,000 shares of the Company's common
stock.
Notes Payable Related Parties
Notes payable related parties at December 31, 1997 consists of the
following:
<TABLE>
<CAPTION>
<S> <C>
Bridge Notes $ 1,556,250
Note payable to officer (see Note 2) 175,000
$ 1,731,250
</TABLE>
In September 1997, the Company entered into an arrangement with MBCP
(see Note 8) whereby MBCP would arrange for the Company to borrow from
MBCP and certain of its affiliated entities under certain promissory
notes (the "BRIDGE NOTES"). The Bridge Notes bear interest at 10% per
annum. As of March 6, 1998, $1,191,250 of the Bridge Notes and accrued
interest were converted into 230,627 shares of the Company's Series B
Convertible Preferred Stock. The remaining Bridge Notes were repaid in
cash in March 1998. (see Note 10)
Capital Leases
In connection with the TNC Acquisition, the Company assumed capital
lease obligations relating to a switch and related network equipment
located in Omaha, Nebraska. The leases expire in March 2000 and July
2000, respectively, and call for monthly payments in the amount of
$14,097 and $2,129, respectively. Additionally, on October 31, 1997,
the Company entered into a lease agreement to purchase certain network
and switching equipment to be installed in various cities in the United
States and Europe. The lease calls for monthly payments in the amount
of $121,701 for a period of 36 months commencing on March 1, 1998. This
lease is accounted for as a capital lease and is capitalized using the
appropriate interest rate at the inception of the lease. Future minimum
annual lease payments applicable to assets held under capital lease
obligations for years subsequent to December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 1,411,721
1999 1,655,123
2000 1,517,606
2001 and thereafter 243,402
Total minimum lease obligations 4,827,852
Less interest (884,966)
Present value of future minimum
lease obligations $3,942,886
</TABLE>
Assets held under the capital leases aggregated $3,999,341 at December
31, 1997. The related accumulated depreciation was $254,401.
(6) COMMITMENTS AND CONTINGENCIES
Service Agreements
The Company is obligated under various service agreements with long
distance carriers to pay minimum usage charges of approximately
$13,088,000, $31,867,000, $20,069,000 and $1,400,000 for the twelve
months ending December 31, 1998, 1999, 2000 and 2001, respectively. The
Company anticipates exceeding the minimum usage volume with these
vendors. The Company's obligations under the service agreements
commence upon connectivity to the various vendors. The Company has not
yet incurred obligations under such contracts. Management believes
connectivity to the vendors will be completed during the second quarter
of 1998.
Operating Leases
The Company and its subsidiaries lease their office facilities under
various noncancelable operating lease agreements. Future minimum
commitments under the leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Year Ending
December 31,
<S> <C>
1998 $ 175,000
1999 183,000
2000 127,000
2001 and thereafter 54,000
Minimum future lease payments $ 539,000
</TABLE>
Total rental expense for operating leases for the years ended December
31, 1997 and 1996 was $90,474 and $0, respectively.
Employment Agreements
During 1997, the Company has entered into employment agreements with
various officers providing for employment terms of one to three years
for salaries of $82,000 to $156,000 with additional provisions for
discretionary bonuses based upon performance. Additionally, the Company
has granted options to purchase 320,000 shares of common stock to these
officers at exercise prices ranging from $0.75 to $2.00 per share. Such
options vest over a two-year period.
Consulting Agreement
In connection with the TNC Acquisition, the Company executed an
eighteen-month consulting agreement with the CEO of the General Partner
of TNC who is also a director of the Company. The agreement provides
for monthly compensation in the amount of $7,000 plus reasonable expense
reimbursement and incentive compensation for completed acquisitions and
business opportunities to be determined on a case-by-case basis. As of
December 31, 1997, the Company has paid $28,000 under this agreement.
Legal
From time to time, the Company is involved in various lawsuits or claims
arising from the normal course of business. In the opinion of
management, none of these lawsuits or claims will have a material
adverse effect on the consolidated financial statements or results of
operations of the Company.
(7) STOCKHOLDERS' EQUITY
Series A Preferred Stock
The Company has designated 750,000 shares of its preferred stock to be
Series A Preferred Stock. The Series A Preferred Stock is cumulative
and bears dividends at the rate of 8% per annum, payable in cash or
shares of the Company's common stock at the option of the Company. The
Series A Preferred Stock is convertible at any time, at the option of
the holder, and is convertible at the option of the Company upon the
occurrence of certain events, into an equal number of shares of the
Company's common stock and such holders have the same voting rights as
those of the common stock. In November 1997, the Company issued 493,889
shares of Series A Preferred Stock for total gross proceeds of
$1,111,250, and paid offering costs of $113,845. Accrued dividends at
December 31, 1997 were $11,360.
Common Stock
On June 26, 1996, MBCP, its principals and certain non-affiliated
investors entered into a stock purchase agreement to purchase newly-
issued shares of the Company's common stock representing approximately
98.5% of the outstanding shares of the Company as of the date of the
agreement for $110,000 in cash. Prior to the stock purchase agreement,
the Company had no operations and little or no assets or liabilities.
Effective upon this change of control, the Company adopted a business
strategy to enter the international telecommunications services
industry.
On March 13, 1997, the Company closed a private placement offering (the
"OFFERING") of 3,333,333 shares of common stock at $0.75 per share
pursuant to which the Company received gross proceeds of $2,500,000, of
which $2,387,750 was received in 1996. The Company incurred $102,068 in
offering costs in connection with the Offering. In connection with the
Offering, the Company paid an affiliated organization $100,000 for
services rendered in connection with the Offering pursuant to an
advisory agreement between the affiliate and the Company.
Long-term Incentive Plan
The Company adopted an incentive stock option plan for employees and
consultants in September 1996. The Company has reserved 2,000,000
shares of common stock for issuance pursuant to the plan. As of
December 31, 1997, there were 410,000 outstanding options under the plan
at exercise prices ranging from $0.08 to $2.00 per share which vest over
a period ranging from one to three years. In the first quarter of 1998,
the Company authorized an additional 20,000 stock options for an
employee with an exercise price of $3.50 per share and granted 1,200,000
shares of restricted stock to certain officers (See Note 10).
Other Stock Options
Additionally, the Company has issued stock options to certain employees,
consultants and directors pursuant to grants by the Board of Directors.
As of December 31, 1997, there were 515,000 outstanding options
resulting from grants by the Board of Directors with exercise prices
ranging from $0.08 to $2.25 per share. In March 1998, the Company
issued an additional 1,400,000 stock options to certain employees at
exercise prices ranging from $1.00 to $4.50 per share. At the time of
grant, the options will be recorded in accordance with APB No. 25 (see
Note 10).
Stock Options
A summary of the status of the Company's stock option plan and other
options at December 31, 1997 and 1996 and changes during the years then
ended is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997 1996
Weighted Weighted
Average Average
Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C>
Outstanding at beginning of year 75,000 $ 0.08 - $ -
Granted 1,100,000 1.74 75,000 0.08
Exercised - - - -
Forfeited (250,000) 1.25 - -
Expired - - - -
Outstanding at end of year 925,000 1.27 75,000 0.08
Exercisable at end of year 505,000 0.95 75,000 0.08
Weighted average fair value
of options granted $ 0.65 $0.72
</TABLE>
The options outstanding at December 31, 1997 have exercise prices
between $0.08 and $2.25, with a weighted average remaining contractual
life of 9.3 years.
Had compensation cost for stock options been determined under SFAS No.
123, the Company's net loss and net loss per share would have been the
following pro forma amounts:
<TABLE>
<CAPTION>
Year ended December 31,
1997 1996
<S> <C> <C>
Net loss
As reported $(3,492,767) $(259,898)
Pro forma (3,730,727) (313,523)
Net loss per share
As reported (0.26) (0.11)
Pro forma (0.28) (0.13)
</TABLE>
Under SFAS No. 123, the fair value of each option grant was estimated on
the date of grant using the Black-Scholes option pricing model. The
following weighted average assumptions were used for grants in 1997 and
1996, respectively: risk-free interest rates of 6.8% and 6.7%; dividend
rates of $0 and $0; expected lives of 10 and 10 years; expected
volatility of 58.1% since the Company's stock began trading in June
1997.
The Black-Scholes option pricing model and other existing models were
developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition,
option valuation models require the input of and are highly sensitive to
subjective assumptions including the expected stock price volatility.
The Company's employee stock options have characteristics significantly
different from those of traded options, and changes in the subjective
input assumptions can materially affect the fair value estimate.
(8) RELATED PARTY TRANSACTIONS
Advisory Agreements
On October 31, 1996, the Company entered into an advisory agreement with
an affiliate of MBCP. MBCP is a shareholder of the Company and certain
members of the Company's Board of Directors are principals or employees
of MBCP. The agreement provided among other things, that the affiliate
would assist the Company in the identification of potential merger or
acquisition candidates, and assist in the development and implementation
of a corporate financial strategy for which the Company would pay an
advisory fee of up to $360,000 for services provided, when and if such
services are completed in a manner satisfactory to the Company, payable
no later than June 30, 1997. On January 14, 1997, the Company paid the
affiliate $150,000 for actual services rendered. No other amounts are
owed under the advisory agreement at December 31, 1997.
On March 7, 1997, the Company and MBCP entered into a twelve (12) month
agreement (the "ADVISORY AGREEMENT") wherein MBCP agreed to provide
certain services to the Company in exchange for (i) a monthly retainer
of $10,000 and (ii) certain success fees payable when and if MBCP
successfully assists the Company in certain transactions including, but
not limited to, mergers and acquisitions. The fee includes a base plus
an additional amount based on a percentage of the value of the
transaction. As part of the Advisory Agreement, the Company agreed to
reimburse MBCP for certain travel and out-of-pocket expenses incurred by
MBCP on behalf of the Company. In connection with the TNC Acquisition,
MBCP earned a fee of $150,000. On November 17, 1997, MBCP converted the
unpaid balance of its fee related to the TNC Acquisition, totaling
$135,000, into a Bridge Note (see Note 5).
On February 4, 1998, the Company amended the Advisory Agreement with
MBCP to ensure the continuity of services during its expansion phase by
renewing the Advisory Agreement for an additional twenty-four months
with an expiration of March 7, 2000. Under terms of the amendment, the
Company agreed to grant MBCP five-year options to purchase 250,000
shares of the Company's common stock at an exercise price of $2.00 per
share. At the time of grant, the options will be valued in accordance
with SFAS No. 123.
As of December 31, 1997, there was approximately $182,000 of accrued
advisory fees and related expenses payable to MBCP under the Advisory
Agreement.
Consulting Agreements
In July 1996, the Company entered into consulting agreements with
certain principals and employees of MBCP. Pursuant to the consulting
agreements, a total of 650,000 shares of common stock were earned by the
consultants for services rendered to the Company. The 650,000 shares
were valued at $0.05 per share, which the Company deemed to be the fair
market value of the shares at the time of issuance.
Employment Agreements
During 1997 and 1996, two employees of MBCP each were paid $1,250 per
month for providing employment services to the Company. These
employment agreements expired in 1997. Additionally, each was granted
options to purchase 25,000 shares of the Company's common stock during
1996 at an exercise price of $0.08 per share, which approximated fair
market value at the date of grant.
Series B Convertible Preferred Stock Purchase
In March 1998, Anderlit, Ltd., a privately-owned investment fund
("ANDERLIT"), purchased 746,269 shares of the Company's Series B
Convertible Preferred Stock for an aggregate purchase price of
$4,000,000. Anderlit is an investment fund investing in a portfolio of
emerging telecommunications companies. MBCP is the majority investor in
Anderlit, votes all of its shares and manages the fund's investment
portfolio. From time to time, MBCP has advised other shareholders with
regards to investments in the Company.
Office Lease
In connection with the TNC Acquisition, the Company leases its
facilities in Omaha, Nebraska from a partnership, in which one of the
Company's directors is a partner. The four-year lease agreement,
commencing July 1, 1997, provides for monthly payments in the amount of
$8,992.
(9) TAXES
The Company has had losses since inception and, therefore, has not been
subject to federal income taxes. As of December 31, 1997, the Company
has net operating loss (NOL) carryforwards for income tax purposes,
subject to the limitations described below, expiring as follows:
<TABLE>
<CAPTION>
<S> <C>
Year Expires -
2005 $ 1,551
2006 4,398
2007 4,670
2008 5,281
2009 5,644
2010 7,432
2011 7,032
2012 259,898
2013 3,398,819
Total $ 3,694,725
</TABLE>
The Tax Reform Act of 1986 provided for a limitation on the use of NOL
carryforwards following certain ownership changes that could limit the
Company's ability to utilize the NOLs. Accordingly, the Company's
ability to utilize the above NOL carryforwards to reduce future taxable
income and tax liabilities may be limited. Additionally, because U.S.
tax laws limit the time during which NOL carryforwards may be applied
against future taxable income and tax liabilities, the Company may not
be able to take full advantage of its NOL carryforwards for federal
income tax purposes.
The Company accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." As the Company has incurred losses since
inception, and there is no certainty of future profitability, a deferred
tax asset has been recorded and reserved in full in the accompanying
consolidated financial statements for the Company's NOL carryforward.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1997
and 1996 are as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
<S> <C> <C>
Deferred tax assets and (liabilities) -
Net operating loss carryforwards $ 1,293,154 $ 103,657
Property & equipment and intangible assets (51,261) -
Accounts receivable 4,962 -
Accruals/expenses not currently -
deductible 44,625 -
Total deferred tax assets 1,291,480 103,657
Less: Valuation allowance (1,291,480) (103,657)
Net deferred tax asset $ - $ -
</TABLE>
(10) SUBSEQUENT EVENTS
Equipment Leases
In February 1998, the Company entered into two lease agreements through
which the Company has placed orders for switching and network equipment
to be installed in New York and The Netherlands. The leases call for
aggregate monthly payments of $93,330 for a period of 48 months
commencing upon installation of the equipment.
In March 1998, the Company successfully negotiated an increase in its
lease financing facility from $10,000,000 to $13,000,000. In connection
with the increase in the lease financing facility, the Company purchased
additional switching equipment to be installed in New York and The
Netherlands.
Series B Preferred Stock Offering
During the first quarter of 1998, the Company initiated a private
placement offering of its par value $0.0001 Series B Convertible
Preferred Stock (the "SERIES B PREFERRED STOCK OFFERING") at $5.36 per
share. The Series B Convertible Preferred Stock is convertible into
shares of the Company's common stock at any time at the option of the
holder at a rate of 4 shares of common stock for each share of preferred
stock. Holders of Series B Convertible Preferred Stock have voting
rights equal to 40 votes per share on all matters submitted to a vote of
the stockholders of the Company. As of March 30, 1998, the Company has
received approximately $10.1 million in proceeds from the sale of the
Series B Convertible Preferred Stock and has converted approximately
$1.2 million of Bridge Notes and accrued interest into the Series B
Convertible Preferred Stock in exchange for 2,112,106 shares of the
Company's Series B Convertible Preferred Stock.
Employment Agreements
During the first quarter of 1998, the Company entered into employment
agreements with seven executives of the Company providing for annual
salaries ranging from $125,000 to $300,000 with additional provisions
for discretionary bonuses based upon performance. In connection with
these agreements, the Company issued options to purchase 1,400,000
shares of common stock to these executives at exercise prices ranging
from $1.00 to $4.50 per share. Such options vest over a two to three
year period. At the time of grant, these options will be recorded in
accordance with APB No. 25. Additionally, the Company granted three
executives a total of 1,200,000 shares of common stock which will result
in a compensation charge of approximately $1.6 million in the first
quarter of 1998 based on the fair value of the 1,200,000 shares of stock
granted.
Acquisitions
In February 1998, the Company commenced operations in The Netherlands
through the acquisition of all of the outstanding stock of MathComp B.V.
("MATHCOMP"). The Company changed the name of MathComp to WorldPort
Communications Europe, B.V. ("WORLDPORT EUROPE"). In connection with
this acquisition, the Company issued 150,000 shares of the Company's
common stock and will pay $250,000 in cash, payable within 45 days of
the closing of the acquisition. The former shareholder of MathComp is
eligible to earn an additional 2,350,000 shares of the Company's common
stock contingent upon the attainment of certain future revenue and gross
margin requirements during the first and second quarters of 1999. In
connection with the acquisition, the Company entered into a three-year
employment agreement with the former shareholder of MathComp for an
annual salary of approximately $90,000.
On March 25, 1998, the Company entered into a definitive agreement for
the acquisition of the telecommunications assets and operations of
InterContinental Exchange, Inc. ("ICX"), a licensed provider of
international telecommunications services headquartered in the San
Francisco Bay area, in exchange for 400,000 shares of the Company's
common stock (of which 200,000 shares will be held pursuant to an escrow
agreement for a period of eighteen months following the closing subject
to the attainment of certain future revenue requirements and to
indemnify the Company for certain representations and warranties). In
addition, the Company will enter into two-year employment agreements
with three employees of ICX providing for annual salaries of $84,000 and
issue options to purchase 120,000 shares of common stock at exercise
prices ranging from $7.00 to $10.00 per share with a vesting period of
one to two years. The ICX acquisition is currently scheduled to close
early in the second quarter of 1998.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Upon recommendation of the Audit Committee of the Board of Directors of the
Company and upon approval of such recommendation by the Board of Directors,
the Company replaced Schumacher & Associates, Inc. ("SCHUMACHER") as its
independent public accounting firm on June 30, 1997. Effective July 1, 1997,
the Company engaged Arthur Andersen LLP as its independent public
accountants. The prior accountant's report of Schumacher on the financial
statements of the Company for the years ended December 31, 1996 and 1995,
respectively, and for the period from January 6, 1989 (date of inception) to
December 31, 1996 was not qualified or modified in any manner and contained
no disclaimer of opinion or adverse opinion.
No disagreements exist between the Company and Schumacher on any matter of
accounting principle or practice, financial statement disclosure or auditing
scope or procedure related to the financial statements of the Company for the
years ended December 31, 1996 and 1995, respectively, and for the period from
January 6, 1989 (date of inception) to December 31, 1996 or for the interim
period beginning January 1, 1997 through June 30, 1997, the date of
replacement.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS AND CONTROL PERSONS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position Tenure
<S> <C> <C> <C>
Paul A. Moore 42 Chairman of the Board of Directors January 1, 1998 to Present
and Chief Executive Officer
Daniel M. Wickersham 51 President and March 2, 1998 to Present
Chief Operating Officer
Phillip S. Magiera 43 Chief Financial Officer, February 10, 1997 to Present
Secretary and Director
John W. Dalton 50 President Diversified Services April 8, 1997 to Present
and Director
Daniel G. Lazarek 32 Vice President March 23, 1998 to Present
Global Sales and Marketing
Jim B. Hendrickson 45 Vice President of March 9, 1998 to Present
Technology & Strategic Planning
Donald C. Wright 36 Vice President of Finance March 9, 1998 to Present
Edmund H. Blankenau 66 Director October 2, 1997 to Present
Peter A. Howley 58 Director June 11, 1997 to Present
Edward P. Mooney 38 Director September 30, 1996 to Present
</TABLE>
Paul A. Moore - From 1993 to the present, Mr. Moore has been a Principal of
MBCP, an international merchant banking firm specializing in providing
corporate finance and advisory services to emerging companies in the
telecommunications industry. Mr. Moore has over 15 years experience in
mergers, acquisitions and investments in the telecommunications industry.
For eight years prior to co-founding MBCP, Mr. Moore was President of
Anderson Pacific, a private firm specializing in telecommunications industry
investments. Prior to that, Mr. Moore served as Director of Franchising and
Vice President of New Business Development for Centel.
Daniel M. Wickersham - From 1996 until joining the Company, Mr. Wickersham
served as Director of Enterprise Solutions for EQUANT Network Services, Inc.
where he was responsible for development of EQUANT's strategic relationships
and outsourcing of private global networks. Prior to EQUANT, Mr. Wickersham
served for one year on a special tour-of-duty in the U.S. Army where he
managed the engineering and development of distance learning and battle
simulation technology. From 1993 to 1995, as an executive at AT&T, Mr.
Wickersham was a member of the Account Strategy and Planning Team,
responsible for major corporate customers such as Citicorp. Prior to his
service at AT&T, Mr. Wickersham served from 1987 to 1993 as a Senior National
Accounts Manager and Area Business Development Manager for Sprint.
Phillip S. Magiera - Mr. Magiera has been a Principal of MBCP since 1995.
From 1990 until 1995, Mr. Magiera was the founder and President of Applied
Telecommunications Technologies, Inc. ("ATTI"). For ATTI, he managed funds
totaling $111 million of debt and equity which were invested in over 35
emerging telecommunications services providers and manufacturers involved in
technologies such as cellular service, competitive access and Internet
access. Prior to founding ATTI, Mr. Magiera served as Vice President of
Fidelity Ventures, Inc., a wholly-owned subsidiary of Fidelity Investments,
where he managed investments in telecommunications and financial service
companies. On January 1, 1998, Mr. Magiera joined the Company as its Chief
Financial Officer. Mr. Magiera has also served as a member of the Board of
Directors of the Company since February 10, 1997.
John W. Dalton - Mr. Dalton joined the Company as its President and Chief
Executive Officer on April 8, 1997. Concurrent with the recent executive
management changes, Mr. Dalton was appointed President Diversified
Services. From 1990 until joining the Company, Mr. Dalton served as President
of the Wallace Wade Company, a telecommunications marketing consulting firm
which produced and implemented marketing strategies for clients ranging from
small companies to large corporate clients. As President of WWC, Mr. Dalton
consulted on telecommunications network solutions involving virtual private
networks, international telecommunications services and data transmission.
Mr. Dalton is the former chief executive officer and a former director of
Global Star International, Inc.
Daniel G. Lazarek - From 1994 to 1998, Mr. Lazarek served as Vice President,
Sales and Service for Citizens Communications, where he was responsible for a
staff of over 2,000 people and $450 million in annual revenue. Mr. Lazarek
directed the development of a 200 member direct sales force, a 600 agent
marketing group and a 700 operator telemarketing team. From 1987 to 1994,
Mr. Lazarek served in various sales and management positions for Frontier
Corporation, a major long distance reseller. Most recently he served as
Marketing and Business Development Director - U.S. Telephone Operations. In
this position Mr. Lazarek was responsible for a $650 million annual revenue
account base including 37 telephone companies in 14 states.
Jim B. Hendrickson - From 1996 to 1998, Mr. Hendrickson served as Principal,
Enterprise Solutions for EQUANT Network Services, Inc. In this position Mr.
Hendrickson was responsible for the analysis and development of network
technologies and platforms and strategic account identification and
development. From 1994 to 1996, Mr. Hendrickson served as a National Account
Manager for AT&T. In that capacity he was responsible for a complex
international customer account including management of sales and technical
professionals, budgets, contracts and strategic planning.
Donald C. Wright - From 1997 to 1998, Mr. Wright served as Director,
Outsourcing Negotiations and Bid Management for EQUANT International, a
division of EQUANT Network Services, Inc., where he served as principal in
the development of numerous joint venture and global outsourcing
opportunities. Mr. Wright's professional career includes extensive project
management, capital investment analysis, transaction analysis, operating and
capital budget planning and cash management experience gained through
executive level positions with The Sabre Group where he served from 1991 to
1994 and Societe International de Telecommunications Aeronautiques ("SITA")
where he served from 1994 to 1997.
Edmund H. Blankenau - From 1989 through the present, Mr. Blankenau served as
the Chairman and CEO of the General Partner of TNC, the assets and operations
of which were acquired by the Company during 1997. Prior to founding TNC,
Mr. Blankenau founded MidAmerican Long Distance Company to compete with AT&T,
MCI and Sprint for newly opened long distance business. He sold MidAmerican
in 1988, with revenues of $85 million per year, to LDDS (now WorldCom).
Prior to founding MidAmerican, Mr. Blankenau, starting in 1975, purchased
and/or acquired franchises and started a group of cable television stations
serving military bases and small towns in 20 states. These were sold from
1986 to 1988. Mr. Blankenau attended Creighton University in Omaha,
Nebraska, and Johann Wolfgang Goethe University in Frankfurt, Germany.
Peter A. Howley - From 1994 to the present, Mr. Howley has been a private
investor and a member of various boards of directors. From 1985 until 1994,
Mr. Howley served as Chief Executive Officer of Centex Telemanagement, Inc.,
a U.S. company specializing in the outsourcing of telecommunications
management for small to medium-sized businesses. From 1976 until 1985 Mr.
Howley was Vice President and General Manager of the Arizona Telephone
Operations of Citizens Utilities Company. Prior to 1976, Mr. Howley served
in various capacities at both MCI and AT&T. Mr. Howley also currently serves
on the boards of FaxSAV, Inc. and DOS Communications. Mr. Howley has served
on the NASDAQ Corporate Advisory Board and the American Business Conference.
Previously, Mr. Howley served as an officer in the United States Air Force
and is a graduate of New York University.
Edward P. Mooney - From October 1996 to April 7, 1997, Mr. Mooney served as
the President, Chief Executive Officer and Director of the Company. Since
1993, Mr. Mooney has served as an Associate Director of MBCP. For MBCP, Mr.
Mooney specializes in strategic planning, corporate valuations, corporate
governance, and financial analysis. Mr. Mooney now serves as a Director of
the Company. From 1989 until 1992, Mr. Mooney served as Director of Research
for American Business Ventures, Inc., a business development and management
consulting firm that served publicly traded and privately-held companies.
From 1984 to 1989, Mr. Mooney was a research assistant for A.B. Laffer
Associates, an economic research and consulting firm. Mr. Mooney holds a
Bachelor of Arts degree in Geography from San Francisco State University and
a Master of Arts degree in Education from California State University, Long
Beach.
The Company's officers, directors and 10% beneficial owners are not required
to file reports pursuant to Section 16(a) of the Securities Exchange Act of
1934, as amended, (the "EXCHANGE ACT") since the Company has no equity
securities registered pursuant to Section 12 of the Exchange Act.
ITEM 10. EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following summary compensation table sets forth information concerning
cash and non-cash compensation paid by the Company during the fiscal years
ended December 31, 1995, 1996 and 1997 to each person who served as the
Company's Chief Executive Officer in 1997. No other executive officers of the
Company received compensation for services in all capacities to the Company
in excess of $100,000 in either year.
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
Long-Term Compensation
Annual Compensation Awards Payout
Other Securities
Annual Restricted Underlying All Other
Name and Compen Stock Options/ LTIP Compen-
Principal Position Year Salary ($) Bonus ($) sation ($) Award(s)($) SARs (#) Payouts sation ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Edward P. Mooney (1) 1997 $ 5,000 - - 65,000 - -
Chief Executive 1996 $ 2,500 $ 2,500 - - 50,000 - -
Officer (Former) 1995 - - - - - -
John W. Dalton (1) 1997 $104,451 - - - 265,000 - -
Chief Executive 1996 - - - - - - -
Officer 1995 - - - - - - -
___________________
(1) Mr. Mooney commenced his employment with the Company as
of October 7, 1996 and was replaced as President and Chief
Executive Officer on April 8, 1997 by Mr. Dalton. See
"Employment Agreements" and "Certain Relationships and
Related Transactions."
</TABLE>
The following table sets forth information concerning grants of stock options
during the fiscal year ended December 31, 1997 to each person who served as
the Company's Chief Executive Officer in 1997.
<TABLE>
<CAPTION>
Stock Options Granted in Fiscal 1997
Number of Securities % of Total Options/SARs
Underlying Options/SARs Granted to Employees in Exercise Price
Name Granted (#) Fiscal 1997 Per Share (3) Expiration Date
<S> <C> <C> <C> <C>
Edward P. Mooney 65,000 (1) 8.1% $0.75 March 2007
Chief Executive Officer
(Former)
John W. Dalton 65,000 (1) 8.1% $0.75 April 2007
Chief Executive Officer 200,000 (2) 24.8% $2.00 April 2007
___________________
(1) These options vested and became exercisable immediately
upon grant.
(2) These options vest and become exercisable 50% in April
1998 and 50% in April 1999.
(3) All options were granted at an exercise price equal to
or in excess of the fair market value of the Company's
common stock as determined by the Board of Directors of the
Company on the date of grant. The Company's common stock
was not publicly traded at the time of the option grants to
the officers.
</TABLE>
The following table sets forth information concerning the exercise of stock
options during the fiscal year ended December 31, 1997 and the aggregate
value of all unexercised stock options outstanding as of December 31, 1997
for each person who served as the Company's Chief Executive Officer in 1997.
<TABLE>
<CAPTION>
Aggregate Option/SAR Exercises in Fiscal 1997
and December 31, 1997 Option/SAR Values
Number of Securities Value of Unexercised
Shares Acquired Underlying Unexercised In-the-Money
Name on Exercise(#) Value Realized($) Options/SAR's (#) Options/SARs($)(1)
Exercisable Unexercisable Exercisable Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Edward P. Mooney - - 90,000 - $ 69,850 -
Chief Executive Officer
(Former)
John W. Dalton - - 65,000 200,000 $ 38,350 -
Chief Executive Officer
___________________
(1) Value is calculated by subtracting the exercise price
per share for each option from the fair market value of the
underlying common stock at December 31, 1997 and
multiplying by the number of shares subject to the option.
Fair market value is based on an independent valuation of
the Company's common stock as of December 31, 1997.
</TABLE>
Compensation of Directors
During 1997, all directors of the Company, including non-employee directors
and employee directors, received 50,000 stock options in their capacity as
directors and 15,000 stock options for each board committee upon which the
director served. These options vested and became exercisable immediately
upon grant. Options to purchase a total of 390,000 shares of stock were
issued to members of the Board of Directors with exercise prices ranging from
$0.75 to $1.50 per share.
Employment Agreements
Until April 7, 1997, the Company had an employment agreement with Edward P.
Mooney which was effective as of October 7, 1996. Pursuant to this
agreement, the Company paid $1,250 per month to Mr. Mooney, beginning
November 1, 1996. The Company also paid Mr. Mooney an initial bonus of
$2,500 upon execution of the employment agreement. Effective April 7, 1997,
Mr. Mooney resigned as President and Chief Executive Officer of the Company.
In April 1997, the Company entered into a three-year employment agreement
with Mr. John Dalton whereby Mr. Dalton agreed to serve as the Company's
President and Chief Executive Officer. Pursuant to the terms of his
employment agreement, Mr. Dalton will earn a base salary of $156,000 per
year, and will be eligible to earn performance incentive bonuses up to
$100,000 during the first 12 months of his employment based on certain
business development and growth criteria. In addition, Mr. Dalton was
granted an option to purchase 200,000 shares of the Company's common stock at
an exercise price of $2.00 per share, based on the following schedule:
100,000 options vested after one year of service to the Company and 100,000
options vested after two years of service to the Company.
In April 1997, the Company entered into a one-year employment agreement with
Mr. W. Dean Spies to serve as the Company's Chief Financial Officer and
Treasurer. Pursuant to the terms of his employment agreement, Mr. Spies will
earn a base salary of $82,000 per year and will be eligible to earn incentive
bonuses during the next 12 months of up to $20,500 based on criteria to be
established by the Board of Directors. In addition, Mr. Spies was granted an
option to purchase 120,000 shares of the Company's common stock at prices
ranging from $0.75 - $1.50 per share. These options vest based on the
following schedule: 40,000 as of April 7, 1997, 40,000 as of April 7, 1998
and 40,000 as of April 7, 1999. Mr. Spies is the nephew of Mr. Dalton.
In January 1998, the Company entered into a two-year employment agreement
with Mr. Paul A. Moore whereby Mr. Moore agreed to serve as the Company's
Chief Executive Officer. Pursuant to the terms of his employment agreement,
Mr. Moore will earn a base salary of $300,000 during the first year of his
employment agreement, increasing to $345,000 in the second year. Mr. Moore
will also be eligible to earn an annual bonus of up to 50% of his base salary
based on criteria to be established by the Board of Directors. Mr. Moore
received no cash payments of his salary during the first quarter of 1998. A
portion of Mr. Moore's salary is payable in the Company's Series B
Convertible Preferred Stock at a rate of $5.36 per share and will be deferred
until the end of Mr. Moore's employment agreement. In addition, Mr. Moore
was granted 500,000 restricted shares of the Company's common stock.
In January 1998, the Company entered into a two-year employment agreement
with Mr. Phillip S. Magiera whereby Mr. Magiera agreed to serve as the
Company's Chief Financial Officer. Pursuant to the terms of his employment
agreement, Mr. Magiera will earn a base salary of $240,000 during the first
year of his employment agreement, increasing to $276,000 in the second year.
Mr. Magiera will also be eligible to earn an annual bonus of up to 50% of his
base salary based on criteria to be established by the Board of Directors.
Mr. Magiera received no cash payments of his salary during the first quarter
of 1998. A portion of Mr. Magiera's salary is payable in the Company's
Series B Convertible Preferred Stock at a rate of $5.36 per share and will be
deferred until the end of Mr. Magiera's employment agreement. In addition,
Mr. Magiera was granted 500,000 restricted shares of the Company's common
stock.
In March 1998, the Company entered into employment agreements with the
following executives:
Mr. Daniel M. Wickersham has agreed to serve as the Company's President and
Chief Operating Officer commencing March 2, 1998. Pursuant to the terms of
his employment agreement, Mr. Wickersham received a signing bonus of $60,000,
will earn a base salary of $175,000 per year and will be eligible to earn
performance incentive bonuses up to 50% of his base salary during the first
12 months of his employment based on criteria to be established by the Board
of Directors. In addition, Mr. Wickersham was granted 200,000 restricted
shares of common stock and an option to purchase an additional 400,000 shares
of the Company's common stock at prices ranging from $1.75 - $4.50 per share.
These options vest based on the following schedule: 100,000 as of March 2,
1998, 150,000 as of March 2, 1999 and 150,000 as of March 2, 2000.
Mr. James M. Sever has agreed to serve as the Company's Senior Vice President
of Network Operations commencing on or before April 13, 1998. Pursuant to
the terms of his employment agreement, Mr. Sever received a signing bonus of
$50,000, will earn a base salary of $150,000 per year and will be eligible to
earn performance incentive bonuses up to 50% of his base salary during the
first 12 months of his employment based on criteria to be established by the
Board of Directors. In addition, Mr. Sever was granted an option to purchase
400,000 shares of the Company's common stock at prices ranging from $2.00 -
$3.50 per share. These options vest ratably over a three-year period
commencing on the first anniversary of employment.
Mr. Daniel G. Lazarek has agreed to serve as the Company's Vice President of
Global Sales and Marketing commencing March 23, 1998. Pursuant to the terms
of his employment agreement, Mr. Lazarek received a signing bonus of $25,000,
will earn a base salary of $150,000 per year and will be eligible to earn
performance incentive bonuses up to 50% of his base salary during the first
12 months of his employment based on criteria to be established by the Board
of Directors. In addition, Mr. Lazarek was granted an option to purchase
300,000 shares of the Company's common stock at prices ranging from $1.00 -
$2.25 per share. These options vest based on the following schedule: 75,000
as of March 23, 1998 and 225,000 ratably over a three-year period commencing
on the first anniversary of employment.
Mr. Jim B. Hendrickson has agreed to serve as the Company's Vice President of
Technology & Strategic Planning commencing on March 9, 1998. Pursuant to the
terms of his employment agreement, Mr. Hendrickson received a signing bonus
of $25,000, will earn a base salary of $125,000 per year and will be eligible
to earn performance incentive bonuses up to 50% of his base salary during the
first 12 months of his employment based on criteria to be established by the
Board of Directors. In addition, Mr. Hendrickson was granted an option to
purchase 150,000 shares of the Company's common stock at $3.50 per share.
These options vest ratably over a three-year period commencing on the first
anniversary of employment.
Mr. Donald C. Wright has agreed to serve as the Company's Vice President of
Finance commencing on March 9, 1998. Pursuant to the terms of his employment
agreement, Mr. Wright received a signing bonus of $25,000, will earn a base
salary of $125,000 per year and will be eligible to earn performance
incentive bonuses up to 50% of his base salary during the first 12 months of
his employment based on criteria to be established by the Board of Directors.
In addition, Mr. Wright was granted an option to purchase 150,000 shares of
the Company's common stock at $3.50 per share. These options vest ratably
over a three-year period commencing on the first anniversary of employment.
Long-Term Incentive Plan
In 1996, the Company adopted the WorldPort Communications, Inc. Long-Term
Incentive Plan (the "INCENTIVE PLAN") for employees and consultants of the
Company as a means to promote the success and enhance the value of the
Company through (i) linking the personal interests of its key employees and
consultants to those of the shareholders, (ii) providing employees with an
incentive for outstanding performance and (iii) providing the Company
flexibility in its ability to attract and retain the services of its
employees and contractors. During 1997, the Company granted stock options
under the Incentive Plan to acquire 610,000 shares of the Company's common
stock with exercise prices ranging from $0.75 to $2.00 per share. During
1997, options to acquire 250,000 shares of the Company's common stock were
forfeited. As of March 30, 1998, the Company had granted 1,200,000 shares of
restricted stock and options to acquire a total of 430,000 shares of common
stock with exercise prices ranging from $0.08 to $3.50 per share under the
Incentive Plan.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Common Stock
The following table sets forth all individuals known to beneficially own 5%
or more of the Company's common stock, and all officers and directors of the
Registrant, with the amount and percentage of stock beneficially owned as of
March 30, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER (1) OWNERSHIP OF CLASS
<S> <C> <C>
Phillip S. Magiera(2) 5,006,282 24.09%
Paul A. Moore(3) 4,953,354 23.90%
Theodore H. Swindells(4) 4,576,648 22.11%
Maroon Bells Capital Partners, Inc. (5) (6) 3,876,282 18.72%
Anderlit, Ltd.(6) 2,985,076 14.66%
Edmund H. Blankenau(8) 1,860,602 10.67%
WorldPort Partners, LLC(7) 1,882,628 9.77%
United Overseas Bank(9) 1,670,000 9.61%
John W. Dalton(10) 1,565,000 8.92%
Edward P. Mooney(11) 165,000 0.94%
Peter A. Howley(12) 139,628 0.80%
Robert L. McCann, Jr. - -
Officers and Directors as a Group (11 people) (2) (3) (8) (10) 10,268,584 47.76%
(11) (12) (13)
___________________
(1) Unless otherwise indicated, the address of the
stockholder is that of the Company.
(2) Includes (i) all shares beneficially owned by MBCP and
(ii) 80,000 shares which are subject to an option to
purchase such shares from the Company at $0.75 per
share. Mr. Magiera is a Principal of MBCP.
(3) Includes (i) all shares beneficially owned by MBCP and
(ii) 19,072 shares issuable upon conversion of the
4,768 shares of the Company's Series B Convertible
Preferred Stock held in the name of Moore Investments.
Mr. Moore is a Principal of MBCP and controlling
stockholder of Moore Investments.
(4) Includes all shares beneficially owned MBCP. Mr.
Swindells is a Principal of MBCP.
(5) Includes (i) all shares beneficially owned by Anderlit,
Ltd.; (ii) 250,000 shares which are subject to an
option to purchase shares from the Company at $2.00 per
share and (iii) 84,540 shares issuable upon conversion
of 21,135 shares of the Company's Series B Convertible
Preferred Stock held in the name of MBCP. MBCP is the
majority investor in Anderlit, Ltd. and votes all of
its shares. The stockholder's address is 100
California, Suite 1160, San Francisco, California
94111.
(6) Includes shares issuable upon conversion of 746,269
shares of the Company's Series B Convertible Preferred
Stock. The stockholder's address is Palm Chambers No.
3, P. O. Box 3152, Road Town, Tortola, British Virgin
Islands.
(7) Includes shares issuable upon conversion of 470,657
shares of the Company's Series B Convertible Preferred
Stock. The stockholder's address is 1999 Avenue of the
Stars, Suite 2340, Los Angeles, California 90067.
(8) Includes 1,000,000 shares held in the name of TNC held
in escrow in connection with the TNC Acquisition which
Mr. Blankenau, as controlling party of the General
Partner of TNC, controls and 50,000 shares which are
subject to an option to purchase such shares from the
Company at $0.75 per share.
(9) The stockholder's address is 11 Quai des Bergues, 1211
Geneve 1, Switzerland.
(10) Includes 200,000 shares of stock currently held in
escrow in connection with the Company's acquisition of
The Wallace Wade Company and 165,000 shares which are
subject to options to purchase such shares from the
Company at prices ranging from $0.75 to $2.00 per
share.
(11) Includes 90,000 shares which are subject to options to
purchase such shares from the Company at prices ranging
from $0.08 to $0.75 per share.
(12) Includes 65,000 shares which are subject to an option to
purchase such shares from the Company at $1.50 per share
and 74,628 shares issuable upon conversion of 18,657 shares
of the Company Series B Convertible Preferred Stock.
(13) Includes 225,000 shares which are subject to options to
purchase such shares from the Company at prices ranging
from $0.75 to $1.75 per share.
</TABLE>
Series A Preferred Stock
The following table sets forth all individuals known to beneficially own 5%
or more of the Company's Series A Preferred Stock, and all officers and
directors of the Registrant, with the amount and percentage of stock
beneficially owned as of March 30, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER OWNERSHIP OF CLASS
<S> <C> <C>
Caisse Centrale des Banques Populaires(1) 230,000 46.57%
Robert Hemm IRA(2) 100,000 20.25%
Boston International Partners, L. P.(3) 81,945 16.59%
Boston International Partners, L. P. II (3) 81,944 16.59%
Edmund H. Blankenau - -
John W. Dalton - -
Peter A. Howley - -
Phillip S. Magiera - -
Robert L. McCann, Jr. - -
Edward P. Mooney - -
</TABLE>
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Percent
Beneficial Owner Ownership of Class
<S> <C> <C>
Paul A. Moore - -
Officers and Directors as a Group (11 people) - -
___________________
(1) The stockholder's address is 10/12 Avenue Winston
Churchill, 94677 Charenton Le Pont CEDEX, France.
(2) The stockholder's address is c/o Morgan Stanley & Co.
Incorporated, 1221 Avenue of the Americas, New York, New
York 10020.
(3) The stockholder's address is 84 State Street, Boston,
Massachusetts 02109.
</TABLE>
Series B Preferred Stock
The following table sets forth all individuals known to beneficially own 5%
or more of the Company's Series B Convertible Preferred Stock, and all
officers and directors of the Registrant, with the amount and percentage of
stock beneficially owned as of March 30, 1998.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
NAME AND ADDRESS OF OF BENEFICIAL PERCENT
BENEFICIAL OWNER (1) OWNERSHIP OF CLASS
<S> <C> <C>
Paul A. Moore(2) 772,172 36.56%
Maroon Bells Capital Partners, Inc. (3) 767,404 36.33%
Phillip S. Magiera(4) 767,404 36.33%
Theodore H. Swindells(4) 767,404 36.33%
Anderlit, Ltd.(5) 746,269 35.33%
WorldPort Partners, LLC(6) 470,657 22.88%
Fourteen Hill Capital(7) 167,910 7.95%
Woodlands Limited (8) 143,912 6.81%
Peter A. Howley 18,657 0.88%
Edmund H. Blankenau - -
John W. Dalton - -
Robert L. McCann, Jr. - -
Edward P. Mooney - -
Officers and Directors as a Group (11 people) 790,829 37.44%
___________________
(1) Unless otherwise indicated, the address of the
stockholder is that of the Company.
(2) Includes (i) all shares beneficially owned by MBCP and
(ii) 4,768 shares held in the name of Moore Investments.
Mr. Moore is a Principal of MBCP and controlling
stockholder of Moore Investments.
(3) Includes all shares owned by Anderlit, Ltd. MBCP is the
majority investor in Anderlit, Ltd. and votes all of its
shares. The stockholder's address is 100 California, Suite
1160, San Francisco, California 94111.
(4) Includes all shares beneficially owned by MBCP.
(5) The stockholder's address is Palm Chambers No. 3, P. O.
Box 3152, Road Town, Tortola, British Virgin Islands.
(6) The stockholder's address is 1999 Avenue of the Stars,
Suite 2340, Los Angeles, California 90067.
(7) The stockholder's address is 1700 Montgomery Street,
Suite 250, San Francisco, California 94111.
(8) The stockholder's address is Africa House, Woodborne
Road, Douglas, Isle of Man, IM99-1AW, British Isles.
</TABLE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Three of the Company's directors and two of the Company's executive officers
are either employees or principals of MBCP. The Company and MBCP have been
parties to the transactions identified below.
Stock Purchase Agreement
On June 26, 1996 MBCP, its principals and certain non-affiliated investors
entered into a stock purchase agreement to purchase newly-issued shares of
the Company's common stock representing approximately 98.5% of the
outstanding shares of the Company as of the date of the Agreement for
$110,000 in cash. Prior to the stock purchase agreement, the Company had no
operations and little or no assets or liabilities. Effective upon this
change of control, the Company adopted a business strategy to enter the
international telecommunications services industry. Subsequent to its initial
investment in the Company, MBCP allocated substantial amounts of its own
internal corporate resources to the development and implementation of the
Company's overall operating strategy, including legal, travel and other
expenses and the contribution to the Company of certain business development
opportunities for which MBCP received no additional compensation from the
Company.
Consulting Agreements
In July 1996, the Company entered into consulting agreements with Paul Moore,
Theodore Swindells, Phillip Magiera, Edward Mooney and Jonathan Hicks (the
"CONSULTANTS"). Messrs. Moore, Swindells and Magiera are principals of MBCP
and Messrs. Hicks and Mooney are employees of MBCP. Pursuant to the
consulting agreements, a total of 650,000 shares of the Company's common
stock were earned by the Consultants for services rendered to the Company.
On February 8, 1997, the Company filed a form S-8 registration statement with
the Securities and Exchange Commission (Registration No. 333-21549) to
register these 650,000 shares.
Maroon Bells Capital Partners, Inc.'s Loan to the Company
On July 1, 1996, MBCP loaned to the Company $500,000 the ("MBCP LOAN"). The
MBCP Loan was collateralized by the Com Tech Note. On October 15, 1996,
$80,000 of the MBCP Loan, which had been assigned to two non-affiliated
offshore entities, was converted into shares of the Company's common stock,
resulting in the issuance of 1,000,000 shares of the Company's common stock.
The remaining $420,000 principal amount due to MBCP was due and payable on
November 1, 1996. MBCP subsequently agreed to an extension of the maturity
date of the MBCP Loan until April 1, 1997. As consideration for such an
extension, the Company agreed to pay to MBCP all accrued interest under the
MBCP Loan as of January 16, 1997.
On March 7, 1997, MBCP and the Company entered into a Stock Issuance and
Indemnification Agreement whereby MBCP agreed to (i) cancel the $420,000
outstanding principal and all accrued, but unpaid, interest as of that date
in exchange for 1,680,000 shares (the "INDEMNIFICATION SHARES") of the
Company's common stock, (ii) indemnify the Company for an amount up to
$460,000 (payable either in (a) cash, (b) the Indemnification Shares, (c) by
return of other Company shares (based on $0.25 per share) or (d) a
combination thereof, in the event that the Company is unsuccessful in
securing repayment from the Com Tech Loan) and (iii) divide equally with the
Company any proceeds, assets or other consideration in excess of $540,000
received by the Company as a result of the enforcement of the Com Tech Loan.
In September 1997, the Company entered into an arrangement with MBCP whereby
MBCP would arrange for the Company to borrow from MBCP and certain of its
affiliated entities pursuant to certain promissory notes (the "BRIDGE
NOTES"). The Bridge Notes bear interest at 10% per annum, mature on December
31, 1997 and are convertible into equity in the Company on terms to be
negotiated in good faith. As of December 31, 1997, the Company had
$1,556,250 in Bridge Notes outstanding. See "SUBSEQUENT EVENTS".
Advisory Agreements
On October 31, 1996, the Company entered into an advisory agreement with an
affiliate of MBCP. The agreement provided among other things, that the
affiliate would assist the Company in identification of potential merger or
acquisition candidates, and assist in the development and implementation of a
corporate financial strategy for which the Company would pay an advisory fee
of up to $360,000 for services provided, when and if such services are
completed in a manner satisfactory to the Company, payable no later than June
30, 1997. On January 14, 1997, the Company paid the affiliate $150,000 for
actual services rendered. No other amounts are owed under the advisory
agreement at December 31, 1997.
On March 7, 1997, the Company and MBCP entered into a twelve (12) month
agreement (the "ADVISORY AGREEMENT") wherein MBCP agreed to provide certain
services to the Company in exchange for (i) a monthly retainer of $10,000 and
(ii) certain success fees payable when and if MBCP successfully assists the
Company in certain transactions including, but not limited to, mergers and
acquisitions. As part of the Advisory Agreement, the Company agreed to
reimburse MBCP for certain travel and out-of-pocket expenses incurred by MBCP
on behalf of the Company. On February 4, 1998, the Company amended the
Advisory Agreement with MBCP to ensure the continuity of services during its
expansion phase by renewing the Advisory Agreement for an additional twenty-
four months with an expiration of March 7, 2000. Under terms of the
amendment, the Company agreed to grant MBCP five-year options to purchase
250,000 shares of the Company's common stock at an exercise price of $2.00
per share.
Series B Convertible Preferred Stock Purchase
In March 1998, Anderlit, Ltd., a privately-owned investment fund
("ANDERLIT"), purchased 746,269 shares of the Company's Series B Convertible
Preferred Stock for an aggregate purchase price of $4,000,000. Anderlit is
an investment fund investing in a portfolio of emerging telecommunications
companies. MBCP is the majority investor in Anderlit, votes all of its
shares and manages the fund's investment portfolio. From time to time, MBCP
has advised other shareholders with regards to investments in the Company.
Other Related Party Transactions
On July 3, 1997 the Company completed a merger of WWC into a wholly-owned
subsidiary of the Company. In connection with the WWC Acquisition, the
Company delivered to Mr. John W. Dalton, the former President and Chief
Executive Officer of the Company, who was the sole shareholder of WWC, (i)
1,400,000 shares of the Company's common stock, of which 200,000 shares are
being held pursuant to an escrow agreement subject to certain adjustments to
the purchase price based on the Company entering into business agreements
that WWC had negotiated, (ii) $75,000 and (iii) a promissory note in the
amount of $175,000.
In connection with the TNC Acquisition, the Company executed an eighteen-
month consulting agreement with Mr. Edmund H. Blankenau, the CEO of the
General Partner of TNC who is also a director of the Company. The agreement
provides for monthly compensation in the amount of $7,000 plus reasonable
expense reimbursement and incentive compensation for completed acquisitions
and business opportunities to be determined on a case-by-case basis.
The Company leases its facilities in Omaha, Nebraska from a partnership, in
which Mr. Edmund H. Blankenau, one of the Company's directors, is a partner.
The four-year lease agreement, which commenced July 1, 1997, provides for
monthly payments in the amount of $8,992.
Familial Relationships
Mr. Spies, the Company's Treasurer and Controller, is the nephew of Mr.
Dalton, the Company's former President and Chief Executive Officer.
PART IV
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
2.1 Agreement and Plan of Merger by and
among the Company, WorldPort
Acquisitions, Inc., The Wallace Wade
Company, and John W. Dalton, dated
April 20, 1997, previously filed with
Form 8-K dated July 7, 1997, and
incorporated herein by reference.
2.2 Asset Purchase Agreement by and
between the Company and Telenational
Communications Limited Partnership
dated April 23, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended March 31, 1997, and
incorporated herein by reference.
2.3 Amendment No. 1 to the Asset Purchase
Agreement by and between the Company
and Telenational Communications
Limited Partnership, dated June 20,
1997, previously filed with Form 8-K
dated July 7, 1997, and incorporated
herein by reference.
3.1 Certificate of Incorporation for the
Company previously filed with Form
10-QSB for the fiscal quarter ended
September 30, 1996, and incorporated
herein by reference.
3.2 Bylaws of the Company previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1996, and
incorporated herein by reference.
4.1 Certificate of Designation of Series
A Preferred Stock of the Company
dated November 12, 1997.
10.1 Financial Advisory Agreement between
the Company and Dinton Trader S.A.
dated October 31, 1996, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1996, and
incorporated herein by reference.
10.2 Loan Agreement between Com Tech
International Corporation and the
Company dated June 27, 1996,
previously filed with Form 10-QSB for
the fiscal quarter ended September
30, 1996, and incorporated herein by
reference.
10.3 Assignment, Pledge & Security
Agreement between Com Tech
International Corporation and the
Company dated June 27, 1996,
previously filed with Form 10-QSB for
the fiscal quarter ended September
30, 1996, and incorporated herein by
reference.
10.4 Convertible Secured Promissory Note
between the Company and Maroon Bells
Capital Partners, Inc. dated July 1,
1996, previously filed with Form 10-
QSB for the fiscal quarter ended
September 30, 1996, and incorporated
herein by reference.
Exhibit No. Description
10.5 Loan Agreement between the Company
and Maroon Bells Capital Partners,
Inc. dated July 1, 1996, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1996, and
incorporated herein by reference.
10.6 Assignment, Pledge & Security
Agreement between the Company and
Maroon Bells Capital Partners, Inc.
dated July 1, 1996, previously filed
with Form 10-QSB for the fiscal
quarter ended September 30, 1996, and
incorporated herein by reference.
10.7 Secured Promissory Note between the
Company and Com Tech International
Corporation dated June 27, 1996,
previously filed with Form 10-QSB for
the fiscal quarter ended September
30, 1996, and incorporated herein by
reference.
10.8 Maroon Bells Capital Partners, Inc.
Advisory Agreement for WorldPort
Communications, Inc. dated March 7,
1997, previously filed with Form 10-
KSB for the fiscal year ended
December 31, 1996, and incorporated
herein by reference.
10.9 Stock Issuance and Indemnification
Agreement by and between Maroon Bells
Capital Partners, Inc. and WorldPort
Communications, Inc. dated March 7,
1997, previously filed with Form 10-
KSB for the fiscal year ended
December 31, 1996, and incorporated
herein by reference.
10.10 Pledge Agreement, Secured Promissory
Note, and Guaranty between Edmund
Blankenau and the Company dated April
4, 1997, previously filed with Form
10-KSB for the fiscal year ended
December 31, 1996, and incorporated
herein by reference.
10.11 Employment Agreement by and between
John W. Dalton and the Company dated
April 8, 1997, previously filed with
Form 10-KSB for the fiscal year ended
December 31, 1996, and incorporated
herein by reference.
10.12 Lease by and between the Company and
Mission Life Insurance Company, dated
April 15, 1997, previously filed with
Form 10-QSB for the fiscal quarter
ended March 31, 1997, and
incorporated herein by reference.
10.13 Settlement Agreement by and between
Com Tech International Corporation
and WorldPort Communications, Inc.,
dated April 14, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended March 31, 1997, and
incorporated herein by reference.
Exhibit No. Description
10.14 Management Services Agreement by and
between WorldPort Communications,
Inc. and Telenational Communications
Limited Partnership, dated April 29,
1997, previously filed with Form 10-
QSB for the fiscal quarter ended
March 31, 1997, and incorporated
herein by reference.
10.15 Employment Agreement by and between
W. Dean Spies and the Company
effective April 7, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended March 31, 1997, and
incorporated herein by reference.
10.16 First Amended Loan Modification
Agreement by and between the Company,
Telenational Communications, Inc.,
Telenational Communications Limited
Partnership and Value Partners, Ltd.
dated June 20, 1997, previously filed
with Form 10-QSB for the fiscal
quarter ended June 30, 1997, and
incorporated herein by reference.
10.17 Second Amended and Restated Senior
Secured Promissory Note by and
between the Company, Telenational
Communications, Inc. and Value
Partners, Ltd. Dated June 20, 1997,
previously filed with Form 10-QSB for
the fiscal quarter ended June 30,
1997, and incorporated herein by
reference.
10.18 First Amended Pledge and Security
Agreement by and between Telenational
Communications, Inc. and Value
Partners, Ltd. dated June 20, 1997,
previously filed with Form 10-QSB for
the fiscal quarter ended June 30,
1997, and incorporated herein by
reference.
10.19 Notice and Certification of No Oral
Agreements by and between the
Company, Telenational Communications,
Inc., Telenational Communications
Limited Partnership and Value
Partners, Ltd. dated June 20, 1997,
previously filed with Form 10-QSB for
the fiscal quarter ended June 30,
1997, and incorporated herein by
reference.
10.20 Consulting Agreement by and between
Edmund Blankenau and the Company
dated June 20, 1997, previously filed
with Form 10-QSB for the fiscal
quarter ended June 30, 1997, and
incorporated herein by reference.
10.21 Employment Agreement by and between
Bruce Burton and the Company dated
June 20, 1997, previously filed with
Form 10-QSB for the fiscal quarter
ended June 30, 1997, and incorporated
herein by reference.
10.22 Lease by and between Telenational
Communications, Inc. and 7300
Woolworth Partnership dated July 1,
1997, previously filed with Form 10-
QSB for the fiscal quarter ended June
30, 1997, and incorporated herein by
reference.
10.23 Promissory Note by and between the
Company and Cablex Electronique, Ltd.
dated September 11, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1997, and
incorporated herein by reference.
Exhibit No. Description
10.24 Promissory Note by and between the
Company and Le Chevalier Noir, Ltd.
dated September 11, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1997, and
incorporated herein by reference.
10.25 Promissory Note by and between the
Company and Woodlands, Ltd. dated
October 1, 1997, previously filed
with Form 10-QSB for the fiscal
quarter ended September 30, 1997, and
incorporated herein by reference.
10.26 Promissory Note by and between the
Company and Maroon Bells Capital
Partners, Inc. dated October 9, 1997,
previously filed with Form 10-QSB for
the fiscal quarter ended September
30, 1997, and incorporated herein by
reference.
10.27 Agreement for the Provision of
Corporate Voice Communication
Services between EQUANT Network
Services, Inc. and the Company dated
September 4, 1997, previously filed
with Form 10-QSB for the fiscal
quarter ended September 30, 1997, and
incorporated herein by reference.
10.28 Master Equipment Lease Agreement by
and between the Company and
Forsythe/McArthur Associates, Inc.
dated October 31, 1997, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1997, and
incorporated herein by reference.
10.29 Lease Schedule A by and between the
Company and Forsythe/McArthur
Associates, Inc. dated October 30,
1997, previously filed with Form 10-
QSB for the fiscal quarter ended
September 30, 1997, and incorporated
herein by reference.
16.1 Letter of Schumacher & Associates,
Inc., Independent Certified Public
Accountant, previously filed with
Form 8-K dated July 7, 1997, and
incorporated herein by reference.
22.1 Notice of Annual and Special Meeting
of Shareholders and Proxy Statement
dated September 18, 1996, previously
filed with Form 10-QSB for the fiscal
quarter ended September 30, 1996, and
incorporated herein by reference.
23.1 Consent of Arthur Andersen LLP,
Independent Public Accountants.
27.1 Financial Data Schedule
(b) No Current Reports on Form 8-K were filed during the last quarter of the
period covered by this Report.
SIGNATURES
Pursuant to the requirements of Section 13 of 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated this 31st day of March, 1998
WORLDPORT COMMUNICATIONS, INC.
By /s/
Paul A. Moore
Chairman of the Board of Directors and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Signature Capacity Date
/s/ Paul A. Moore Chairman of the March 31, 1998
Paul A. Moore Board of Directors
and Chief Executive
Officer
(Principal Executive
Officer)
/s/ Phillip S. Magiera Chief Financial March 31, 1998
Phillip S. Magiera Officer, Secretary and
Director
(Principal Financial
Officer)
/s/ John W. Dalton President March 31, 1998
John W. Dalton Diversified Services
and Director
/s/ W. Dean Spies Treasurer and March 31, 1998
W. Dean Spies Controller
(Principal Accounting Officer)
/s/ Edmund H. Blankenau Director March 31, 1998
Edmund H. Blankenau
/s/ Peter A. Howley Director March 31, 1998
Peter A. Howley
/s/ Edward P. Mooney Director March 31, 1998
Edward P. Mooney
WORLDPORT COMMUNICATIONS, INC.
CERTIFICATE OF DESIGNATION
OF
SERIES A PREFERRED STOCK
By Resolution of
the Board of Directors
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
The undersigned, being the duly elected, qualified and acting Secretary,
WorldPort Communications, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by the
Certificate of Incorporation of the Corporation, (the "Certificate of
Incorporation") and under the provisions of Section 151 of the General
Corporation Law of the State of Delaware, on May 8, 1997 and July 24, 1997, the
Board of Directors adopted the following resolution fixing and determining the
rights, preferences, privileges and restrictions of a series of 750,000 shares
of Preferred Stock, $0.0001 par value ("Preferred Stock"), designated as Series
A Preferred Stock:
"RESOLVED that, pursuant to the authority vested in the Board of
Directors of the Corporation in accordance with the provisions of the
Corporation's Certificate of Incorporation, a series of Preferred Stock of
the Corporation be, and it hereby is, authorized and created, and that the
designation and amount thereof and the voting powers, preferences and
relative, participating, optional or other special rights of the shares of
such series, and the qualifications, limitations or restrictions thereof
are as follows:
I. Designation: Series, Amount and Ranking. The shares of the series of
Preferred Stock established hereby shall be designated "Series A Preferred
Stock" (such shares being hereafter called the "Series A Preferred Stock"),
and the number of shares constituting such series shall be 750,000 which
shares shall have a par value of $0.0001 and a stated value of $2.25 per
share (the "Stated Value"). The Series A Preferred Stock shall rank prior
to the Corporation's Common Stock (the "Common Stock") as to the payment of
dividends and distribution of assets upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary.
II. Dividends and Distributions.
(a) The holders of shares of Series A Preferred Stock shall be
entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available therefor, dividends in an
amount equal to 8% of the Stated Value per annum ("Series A Preferred
Dividends"). Series A Preferred Dividends may be paid in either cash
or shares of Common Stock and shall be payable in arrears on such date
established by the Board of Directors (each, a "Series A Dividend
Payment Date").
(b) Series A Preferred Dividends shall:
(i)be payable to holders of record as they appear on the books of
the Corporation or any transfer agent on a Series A Dividend
Payment Date;
(ii)be cumulative up to and including each Series A Dividend
Payment Date and shall be deemed to have accrued on shares of
Series A Preferred Stock from and after the date such shares are
issued (the "Original Issue Date");
(iii)accrue on a daily basis whether or not the Corporation shall
have earnings or surplus at the time;
(iv)be computed on the basis of a 360-day year comprised of
twelve 30-day months
(c) Series A Preferred Dividends, whether or not declared, will
cumulate (up to and including the date of payment thereof) until
declared and paid, which declaration and payment may be for all or
part of the then accumulated Series A Preferred Dividends. Accrued
but unpaid Series A Preferred Dividends shall not bear interest.
Series A Preferred Dividends shall cease to accrue in respect of
Series A Preferred Stock on the date the Series A Preferred Stock is
converted and upon the occurrence of a Liquidation (as defined
herein).
(d) So long as any shares of Series A Preferred Stock shall be
outstanding, no cash dividend shall be declared or paid or set apart
for payment on any other series of stock ranking on a parity with the
Series A Preferred Stock as to dividends ("Parity Stock"), unless
there shall also be or have been declared and paid or set apart for
payment on the Series A Preferred Stock, full cumulative Series A
Preferred Dividends for all the Series A Preferred Stock.
(e) In the event that full cumulative Series A Preferred Dividends
have not been declared and paid or set apart for payment, the
Corporation shall not declare or pay or set apart for payment any
dividends or make any other distributions on, or make any payment on
account of the purchase, redemption or other retirement of any other
class of stock or series thereof of the Corporation ranking, as to
dividends or as to distributions in the event of a liquidation,
dissolution or winding up of the Corporation, junior to the Series A
Preferred Stock ("Junior Stock") until full cumulative Series A
Preferred Dividends shall have been paid or declared and set apart for
payment; provided, however, that the foregoing shall not apply to (i)
any dividend payable solely in any shares of any Junior Stock; or (ii)
the acquisition of shares of any Junior Stock either (A) pursuant to
any employee incentive or benefit plan or arrangement (including any
employment agreement) of the Corporation or of any subsidiary of the
Corporation heretofore or hereafter adopted or (B) in exchange solely
for shares of any other Junior Stock. The Corporation shall not
permit any subsidiary of the Corporation to purchase or otherwise
acquire any shares of capital stock of the Corporation unless the
Corporation could, pursuant to this paragraph, purchase such shares at
such time and in such manner. The Series A Preferred Stock shall
share ratably (on an as-if-converted basis as of the record date for
such dividends) in any dividends or other distributions declared or
set aside on any Junior Stock.
III. Voting Rights.
(a) Each holder of record of Series A Preferred Stock shall be
entitled to vote on all matters submitted to a vote of the
stockholders of the Corporation, voting together with the holders of
Common Stock as a single class. Each holder of record of each share
of Series A Preferred Stock shall be entitled to that number of votes
as is equal to the number of shares of Common Stock into which such
share of Series A Preferred Stock could be converted on the record
date for determining the stockholders entitled to vote.
(b) At all times during which at least 76,614 shares of Series A
Preferred Stock are outstanding, the Corporation will not, without the
approval of holders of at least a majority of the shares of Series A
Preferred Stock then outstanding, voting together as a class, (A)
issue any Series A Preferred Stock (except as such may be issued in
payment of dividends on the Series A Preferred Stock) or any other
securities which will, with respect to dividend rights or rights on
liquidation, winding up and dissolution, rank senior to the Series A
Preferred Stock, or any obligation or security convertible into or
evidencing the right to purchase any securities senior to the Series A
Preferred Stock; (B) alter, amend or repeal any provision of the
Articles of Incorporation of the Corporation (including any such
alteration, amendment or repeal effected by any merger or
consolidation), if such amendment, alteration or repeal would alter or
change the powers, preferences or special rights with respect to the
shares of Series A Preferred Stock in a manner adverse to the holders
thereof; (C) merge, consolidate or sell all or substantially all of it
assets; or (D) alter, amend or modify this Section 3.
IV. Liquidation, Dissolution or Winding Up.
(a) Upon any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary (a "Liquidation"),
before any distribution or payment shall be made to the holders of any
Junior Stock, the holders of Series A Preferred Stock shall be
entitled to be paid out of the assets of the Corporation an amount per
share of Series A Preferred Stock equal to the sum of the Stated Value
plus all accrued but unpaid Series A Preferred Dividends (the
"Liquidation Preference").
(b) After the payment of the full Liquidation Preference as set
forth above, the remaining assets of the Corporation legally available
for distribution, if any, shall be distributed ratably to the holders
of the Series A Preferred Stock (on an as-if-converted basis as of the
date of Liquidation) and the holders of the Junior Stock.
(c) Neither the merger or consolidation of the Corporation with or
into any other corporation, nor the merger or consolidation of any
other corporation with or into the Corporation, nor the sale, lease,
exchange or other transfer of all of or any portion of the assets of
the Corporation, shall be deemed to be a Liquidation for purposes of
this Section 4.
V. Conversion.
(a) Optional Conversion. Subject to and in compliance with the
provisions of this Section 5, at any time, any shares of Series A
Preferred Stock may, at the option of the holder, without any payment
of consideration, be converted at any time into one (1) fully-paid and
nonassessable share of Common Stock, subject to adjustment as provided
in Section 5(d) below.
(b) Mandatory Conversion of Series A Preferred. Upon the earlier
to occur of (i) the closing trade price of the Common Stock having
averaged $7.00 or more for twenty (20) consecutive trading days on a
national exchange of the United States or on the NASDAQ National
Market System, if traded thereon, and (ii) the first date on which
sixty percent (60%) of the Series A Preferred Stock has been converted
into Common Stock, (each a "Conversion Event"), all shares of Series A
Preferred shall be convertible into Common Stock at the Series A
Preferred Stock Conversion Rate. All shares of Series A Preferred
Stock shall be deemed converted effective upon the occurrence of a
Conversion Event, without requirement of any other action on the part
of the Corporation or the holders of Series A Preferred Stock, and
thereafter each certificate for Series A Preferred Stock outstanding
shall be deemed to represent the number of shares of Common Stock into
which it has been converted. Nevertheless, each holder of Series A
Preferred Stock shall thereafter surrender its certificates for shares
of Series A Preferred Stock for conversion in accordance with
Section 5(c) below.
(c) Mechanics of Conversion. Each holder of Series A Preferred
Stock who desires to convert its Series A Preferred Stock into shares
of Common Stock shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or any
transfer agent for the Series A Preferred Stock, and shall give
written notice to the Corporation at such office that such holder
elects to convert the same. Such notice shall state the number of
shares of Series A Preferred Stock being converted. Thereupon, the
Corporation shall promptly issue and deliver at such office to such
holder a certificate or certificates for the number of shares of
Common Stock to which such holder is entitled and shall promptly pay
in cash or, at the option of the Board of Directors in Common Stock
(at the Common Stock's fair market value determined by the Board of
Directors as of the date of such conversion), any accrued but unpaid
Series A Preferred Dividends on the shares of Series A Preferred Stock
being converted. Such conversion shall be deemed to have been made at
the close of business on the date of such surrender of the
certificates representing the shares of Series A Preferred Stock to be
converted, and the person entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes
as the record holder of such shares of Common Stock on such date.
(d) Adjustments for Stock Splits and Dividends. In the event the
Corporation shall, at any time or from time to time while any of the
shares of Series A Preferred Stock are outstanding, (i) pay a dividend
or make a distribution with respect to Common Stock in shares of
Common Stock, (ii) subdivide or split its outstanding shares of Common
Stock into a larger number of shares, or (iii) combine its outstanding
shares of Common Stock into a smaller number of shares, in each case
whether by reclassification of shares, recapitalization of the
Corporation or otherwise, the Series A Preferred Stock Conversion
Ratio in effect immediately prior thereto shall be adjusted by
multiplying the Conversion Ratio by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately before
such event, and the denominator of which is the number of shares of
Common Stock outstanding immediately after such event. Such
adjustment shall become effective at the opening of business on the
business day next following the record date for determination of
stockholders entitled to receive such dividend or distribution in the
case of a dividend or distribution, and shall become effective
immediately after the effective date in case of a subdivision, split,
combination or reclassification; and any shares of Common Stock
issuable in payment of a dividend shall be deemed to have been issued
immediately prior to the close of business on the record date for such
dividend.
(e) Adjustments for Merger, etc. If there shall occur a merger or
consolidation of the Corporation with or into another entity, any
merger or consolidation of another entity into the Corporation (other
than a merger or consolidation that does not result in any conversion,
exchange or cancellation of outstanding shares of Common Stock), any
sale or transfer of all or substantially all of the assets of the
Corporation or any compulsory share exchange that results in the
conversion or exchange of the Common Stock into, or the right to
receive, other securities or other property (whether of the
Corporation or any other entity), then the Series A Preferred Stock
will thereafter no longer be convertible into shares of Common Stock,
but instead will be convertible into the kind and amount of securities
or other property which the holder of such shares of Series A
Preferred Stock would have owned immediately after such merger,
consolidation, sale or share exchange if such shares of Series A
Preferred Stock had been converted into shares of Common Stock
immediately before the effective time of such merger, consolidation,
sale or share exchange. If this paragraph (e) applies, then no
adjustment in respect of the same merger, consolidation, sale or share
exchange shall be made pursuant to the other provisions of this
Section 5. In the event that at any time, as a result of an
adjustment made pursuant to this paragraph (e), the Series A Preferred
Stock shall become subject to conversion into any securities other
than shares of Common Stock, thereafter the number of such other
securities so issuable upon conversion of the shares of Series A
Preferred Stock shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions contained in this Section 5.
(f) Fractional Shares. No fractional shares of Common Stock shall
be issued upon conversion of Series A Preferred Stock. All shares of
Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Series A Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion
would result in the issuance of any fractional share. If, after the
aforementioned aggregation, the conversion would result in the
issuance of any fractional share, the Corporation shall, in lieu of
issuing any fractional share, pay cash equal to the product of such
fraction multiplied by the Common Stock's fair market value (as
determined by the Board) on the date of conversion.
(g) Reservation of Stock Issuable Upon Conversion. The Corporation
shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of
effecting the conversion of the shares of the Series A Preferred
Stock, such number of its shares of Common Stock as shall from time to
time be sufficient to effect the conversion of all outstanding shares
of the Series A Preferred Stock. If at any time the number of
authorized by unissued shares of Common Stock shall not be sufficient
to effect the conversion of all then outstanding shares of the Series
A Preferred Stock, the Corporation will take such corporate action as
may, in the opinion of its counsel, be necessary to increase its
authorized but unissued shares of Common Stock to such number of
shares as shall be sufficient for such purpose.
(h) Notices. Any notice required by the provisions of this Section
5 shall be in writing and shall be deemed effectively given: (i) upon
personal delivery to the party to be notified, (ii) when sent by
confirmed telex or facsimile, (iii) seven (7) days after having been
sent by registered or certified mail, return receipt requested,
postage prepaid, or (iv) two (2) business day after deposit with a
nationally recognized overnight courier, specifying next day delivery,
with written verification of receipt. All notices shall be addressed
to the Corporation at its principle office and to each holder of
record at the address of such holder appearing on the books of the
Corporation.
(i) Payment of Taxes. The Corporation will pay all taxes (other
than taxes based upon income) and other governmental charges that may
be imposed with respect to the issue or delivery of shares of Common
Stock upon conversion of shares of Series A Preferred Stock, excluding
any tax or other charge imposed in connection with any transfer
involved in the issue and delivery of shares of Common Stock in a name
other than that in which the shares of Series A Preferred Stock so
converted were registered.
1.That the number of shares of Series A Preferred Stock shall be 750,000.
2.That none of the shares of Series A Preferred Stock has been issued.
* * *
The undersigned declares under penalty of perjury that the statements
contained in the foregoing certificate are true of his own knowledge and has
executed this certificate under the laws of the State of Delaware.
November 12, 1997
/s/ Jonathan Y. Hicks
Jonathan Y. Hicks
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-KSB into the Company's
previously filed Registration Statements on Form S-8, Reg. No. 333-10147 dated
August 14, 1996 and Reg. No. 333-21549 dated February 11, 1997.
ARTHUR ANDERSEN LLP
Houston, Texas
March 30, 1998
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 179,271
<SECURITIES> 0
<RECEIVABLES> 368,848
<ALLOWANCES> 14,610
<INVENTORY> 0
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<PP&E> 5,453,342
<DEPRECIATION> 421,484
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<CURRENT-LIABILITIES> 4,758,299
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0
49
<COMMON> 1,603
<OTHER-SE> 4,153,598
<TOTAL-LIABILITY-AND-EQUITY> 13,197,277
<SALES> 2,777,575
<TOTAL-REVENUES> 2,777,575
<CGS> 2,605,976
<TOTAL-COSTS> 6,148,492
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<INTEREST-EXPENSE> 192,722
<INCOME-PRETAX> (3,492,767)
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<NET-INCOME> (3,492,767)
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