================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2000.
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 000-25015
WORLDPORT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1127336
-------- ----------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 Weiland Road, Ste. 160
Buffalo Grove, Illinois 60089
-----------------------------
(Address of principal executive offices)
(847) 229-8200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 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 [ ]
As of November 9, 2000, the Registrant had 31,645,040 shares of Common Stock,
par value $0.0001, outstanding.
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<PAGE>
WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
Page
----
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999........... 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30,
2000 (unaudited) and 1999 (unaudited).......................... 4
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2000 (unaudited)
and 1999 (unaudited)........................................... 5
Notes to Condensed Consolidated Financial Statements
(unaudited).................................................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.................. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings.............................................. 14
Item 2. Changes in Securities.......................................... 14
Item 6. Exhibits and Reports on Form 8-K............................... 15
SIGNATURE ................................................................. 16
---------
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
---- ----
ASSETS (UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................................ $178,651 $1,149
Accounts receivable, net of allowance for doubtful accounts
of $812 and $359, respectively......................................... 893 1,126
Prepaid expenses and other current assets................................ 5,544 34
Net assets held for sale................................................. 1,350 101,302
-------- ------
Total current assets....................................... 186,438 103,611
PROPERTY AND EQUIPMENT, net.............................................. 43,151 145
GOODWILL, net of accumulated amortization of $148 in 2000................ 17,601 --
OTHER ASSETS............................................................. 3,574 532
-------- ------
TOTAL ASSETS.......................................... $250,764 $104,288
-------- ------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $12,763 $13,168
Accrued expenses........................................................ 4,106 1,056
Current portion of obligations under capital leases .................... 1,975 2,932
Note payable to related party........................................... -- 12,981
Income taxes payable.................................................... 28,540 --
Other current liabilities............................................... 12,961 6,071
Interim loan facility................................................... -- 147,541
-- -------
-------- ------
Total current liabilities................................ 60,345 183,749
Long-term obligations under capital leases, net of current portion...... 3,242 4,021
Other long-term liabilities............................................. 122 --
-------- ------
Total liabilities.................................... 63,709 187,770
-------- ------
STOCKHOLDERS' EQUITY (DEFICIT):
Undesignated preferred stock, $0.0001 par value, 4,800,000 shares
authorized, no shares issued and outstanding......................... -- --
Series A convertible preferred stock, $0.0001 par value, 750,000 shares
authorized, no shares issued and outstanding......................... -- --
Series B convertible preferred stock, $0.0001 par value, 3,000,000 shares
authorized, 965,642 shares issued and outstanding.................... -- --
Series C convertible preferred stock, $0.0001 par value, 1,450,000 shares
authorized, 1,416,030 shares issued and outstanding.................. -- --
Series D convertible preferred stock, $0.0001 par value, 650,000 shares
authorized, 316,921 shares issued and outstanding.................... -- --
Series E convertible preferred stock, $0.0001 par value, 145,000 shares
authorized, 141,603 shares issued and outstanding.................... -- --
Series G convertible preferred stock, $0.0001 par value, 1,000 shares
authorized, 1,000 shares issued and outstanding...................... -- --
Common stock, $0.0001 par value, 200,000,000 and 65,000,000 shares
authorized in 2000 and 1999, respectively, 31,645,040 and 28,210,280
shares issued and outstanding in 2000 and 1999, respectively......... 3 3
Warrants................................................................ 11,483 23,398
Additional paid-in capital.............................................. 165,917 149,824
Accumulated other comprehensive loss.................................... (2,511) (7,942)
Retained earnings (deficit)............................................. 12,163 (248,765)
-------- ------
Total stockholders' equity (deficit)..................... 187,055 (83,482)
-------- ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)..... $250,764 $104,288
======== ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
3
<PAGE>
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES.................................................... $ 1,365 $ 22,467 $ 7,502 $ 65,263
COST OF SERVICES............................................ 1,006 14,124 4,849 44,860
------- -------- ------- --------
Gross margin........................................... 359 8,343 2,653 20,403
------- -------- ------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses........... 5,241 15,836 16,797 41,459
Depreciation and amortization.......................... 697 6,096 1,600 17,127
Asset impairment....................................... -- 12,842 -- 12,842
------- -------- ------- --------
Operating loss......................................... (5,579) (26,431) (15,744) (51,025)
------- -------- ------- --------
OTHER EXPENSE:
Gain on sale of assets.................................. (6,162) -- 346,933 --
Interest income (expense), net......................... 3,299 (9,666) 9,700 (44,190)
Other income (expense), net............................ -- (230) 2,639 (1,286)
------- -------- ------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME TAXES.....
(8,442) (36,327) 343,528 (96,501)
MINORITY INTEREST........................................... -- -- -- 1,845
------- -------- ------- --------
INCOME (LOSS) BEFORE INCOME TAXES........................... (8,442) (36,327) 343,528 (94,656)
INCOME TAX PROVISION (BENEFIT).............................. (2,400) -- 82,600 --
NET INCOME (LOSS)........................................... $(6,042) $(36,327) $260,928 $(94,656)
======== ========= ======== =========
NET INCOME (LOSS) PER SHARE:
BASIC.................................................... $(0.20) $(1.51) $8.80 $(4.26)
======== ========= ======== =========
DILUTED.................................................. $(0.20) $(1.51) $4.76 $(4.26)
======== ========= ======== =========
SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION:
BASIC................................................... 30,857 24,039 29,657 22,237
CONVERTIBLE PREFERRED STOCK............................. -- -- 21,315 --
WARRANTS................................................ -- -- 2,305 --
OPTIONS................................................ -- -- 1,594 --
------- -------- ------- --------
DILUTED................................................. 30,857 24,039 54,871 22,237
======== ========= ======== =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
4
<PAGE>
<TABLE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .............................................................. $ (6,042) $ (36,327) $ 260,928 $ (94,656)
Adjustments to reconcile net income (loss) to net cash flows from operating
activities:
Depreciation and amortization ........................................ 549 6,096 1,452 17,127
Amortization of goodwill ............................................. 148 -- 148 --
Gain on sale of assets ............................................... 6,162 -- (346,933) --
Non-cash interest expense ............................................ -- 8,232 1,229 39,027
Non-cash compensation expense ........................................ 120 (143) 120 385
Asset impairment ..................................................... -- 12,842 -- 12,842
Minority interest .................................................... -- -- -- (1,845)
Change in accounts receivable, net ................................... (185) (5,976) 941 (6,385)
Change in prepaid expenses and other assets .......................... (5,744) (1,476) (6,174) (3,394)
Change in accounts payable, accrued expenses and other liabilities ... 16,639 (1,829) 5,948 95
Change in income taxes payable ....................................... (14,900) -- 28,500 --
Other ................................................................ -- 1,920 -- 1,925
--------- --------- --------- ---------
Net cash flows from operating activities ................... (3,253) (16,661) (53,841) (34,879)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................................. (39,652) -- (44,414) (16,228)
Sale of assets ....................................................... (6,162) -- 453,243 --
Purchase of subsidiaries ............................................. (17,735) -- (17,735) --
--------- --------- --------- ---------
Net cash flows from investing activities ................... (63,549) -- 391,094 (16,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Interim Loan Facility ....................................... -- -- (147,541) --
Repayment on note payable - related party ................................ -- -- (10,981) (150)
Repayment of notes payable ............................................... (404) -- (404) --
Proceeds from notes payable .............................................. 387 -- 387 --
Principal payments on short-term debt .................................... -- 10 -- (192)
Principal payments on obligations under capital leases ................... (288) (2,363) (813) (5,696)
Exercise of stock options ................................................ 283 -- 489 1,798
Proceeds from issuance of common stock, net of offering expenses ......... -- 6 -- 6
Proceeds from issuance of preferred stock, net of offering expenses ...... -- 15,000 -- 47,500
--------- --------- --------- ---------
Net cash flows from by financing activities ................ (22) 12,653 (158,863) 43,266
Effect of exchange rate changes on cash and cash equivalents ................... (885) 431 (888) 165
--------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................... (67,709) (3,577) 177,502 (7,676)
CASH AND CASH EQUIVALENTS, beginning of the period ............................. 246,360 4,916 1,149 9,015
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of the period ................................... $ 178,651 $ 1,339 $ 178,651 $ 1,339
========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INTEREST ....................................... $ 92 $ 754 $ 668 $ 2,263
========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES ................................... $ 12,500 $ -- $ 54,100 $ --
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Conversion of related party note payable to 1,000 shares of
Series G Preferred Stock ................................................ $ 2,000 $ -- $ 2,000 $ --
========= ========= ========= =========
Exercise of warrants for common stock ................................... $ (2,664) $ -- $ (13,144) $ (4,006)
========= ========= ========= =========
Acquisition of property and equipment under capital lease ............... $ -- $ 6,768 $ -- $ 38,241
========= ========= ========= =========
Issuance of warrants in connection with Interim Loan .................... $ -- $ 1,141 $ -- $ 4,797
========= ========= ========= =========
Conversion of obligation for 316,921 shares of Series D Preferred Stock .. $ -- $ 1,030 $ -- $ 1,030
========= ========= ========= =========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
</TABLE>
5
<PAGE>
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------------------
Organization
------------
WorldPort Communications, Inc. a Delaware corporation (together with
its subsidiaries, the "Company"), is pursuing a plan to become the
European leader of internet solutions. Until consummation of the sale
transactions described in Note 3, the Company was a facilities-based
global telecommunications carrier offering voice, data and other
telecommunications services to carriers, Internet service providers
("ISPs"), medium and large corporations and distributors and resellers.
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements have been
prepared by the Company without audit pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to
such rules and regulations; however, management believes that the
disclosures herein are adequate to make the information presented not
misleading. The financial statements and notes thereto included in this
Form 10-Q should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 1999.
In the opinion of the Company's management, the accompanying condensed
consolidated financial statements contain all adjustments necessary to
present fairly the Company's financial position as of September 30,
2000, and the results of operations and cash flows for the three and
nine months ended September 30, 2000 and 1999. The results of
operations for the nine months ended September 30, 2000 are not
necessarily indicative of the operating results for the full year.
Financial Condition
-------------------
In order to meet its obligations under its interim loan facility due
November 18, 1999 (the "Interim Loan Facility"), the Company sold
substantially all of its material assets during the first quarter of
2000 (see Note 3 below). The Company applied a portion of the net
proceeds realized from the sale to repay existing debt, including the
Interim Loan Facility, trade credit and other liabilities. The Company
is pursuing a plan to become the European leader of internet solutions.
The Company intends to use the remaining net proceeds from the sales to
fund potential future operating losses and capital expenditures in
pursuit of its new business plan. Additional requirements, if any, may
be funded through debt facilities and additional equity financing.
There can be no assurance that sufficient debt or equity financing will
be available in the future on terms acceptable to the Company. If such
financing is not obtained as needed, the Company will have to curtail
or alter its current business plan and/or seek alternative financing.
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.
6
<PAGE>
Accounts Receivable
-------------------
Accounts receivable includes unbilled amounts of $0.3 million at
September 30, 2000. This amount represents hours incurred by VIS-Able
employees on consulting engagements that have not yet been invoiced to
customers. The timing of invoicing is dependent on the contractual
arrangements made with the respective customers.
Foreign Currency
----------------
Gains and losses on translation of the accounts of the Company's
non-U.S. operations, including intercompany balances invested for the
foreseeable future, are accumulated and reported as a component of
accumulated other comprehensive income in shareholders' equity.
Earnings (Loss) per Share
-------------------------
The treasury stock method was used to calculate the weighted average
shares outstanding for warrants and options in 2000. For 1999 and for
the three months ended September 30, 2000, basic and diluted loss per
share are the same because all dilutive securities had an antidilutive
effect on loss per share.
New Accounting Pronouncements
-----------------------------
In June 1999, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 137 ("SFAS No. 137"),
Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement #133. SFAS #137 defers the
effective date of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, to fiscal years beginning after June 15, 2000.
SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and transactions involving hedge accounting. The
Company does not believe that this statement will have a material
effect on its consolidated financial statements.
(2) COMPREHENSIVE INCOME
--------------------
Total comprehensive income (loss) for the quarter and nine months ended
September 30, 2000 and 1999 was as follows:
<TABLE>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net earnings (loss) $(6,042) $(36,327) $260,928 $(94,656)
Foreign currency translation (2,508) (1,432) 5,431 1,920
------- ----------- ------- --------
Total comprehensive income (loss) $(8,550) $(37,759) $266,359 $(92,736)
======== ========= ======== =========
</TABLE>
(3) DISPOSITIONS
------------
On November 11, 1999, the Company entered into a series of definitive
agreements with Energis for the sale of its 85% shareholding in
WorldPort Communications Europe Holdings, B.V., the parent of EnerTel
N.V., and associated assets ("EnerTel") for $522 million. The sale was
consummated on January 14, 2000. The Company recorded a gain of
approximately $353.1 million in the first quarter of 2000. In the third
quarter of 2000, the gain decreased to $346.9 million, primarily as a
result of a $6.0 million refund of the purchase price made to Energis
in November 2000 upon resolution of certain sale contingencies. The
third quarter income tax benefit of $2.4 million primarily relates to
the tax impact of the $6.0 million reduction in sale price. The income
tax provision recorded in the first quarter of 2000 of $85.0 million
was based
7
<PAGE>
on a preliminary estimate of the tax due on the sale of EnerTel. This
estimate is still being evaluated and could materially change from
amounts previously recorded. Management believes that the final
calculation will result in a decrease to the income tax provision
recorded in the first quarter of 2000.
In August 1999, the Company announced that it was closing its U.S.
carrier operations and initiated the process of disposing of certain
assets and subsidiaries, including Telenational Communications, Inc.
("TNC") and International Interconnect, Inc. ("IIC"). On February 29,
2000, the Company sold IIC for $0.3 million. The Company is currently
considering the sale of TNC, but to date does not have a definitive
sale arrangement. During 1999, the Company took an asset impairment
charge of approximately $4.8 million, $6.1 million and $1.0 million in
connection with the proposed sales of TNC, IIC and other U.S. based
assets, respectively, to write the net investments down to their
anticipated net realizable value. Additionally, the balance sheet
accounts of EnerTel, TNC and IIC were collapsed in the Company's
December 31, 1999 financial statements, and are reflected as net assets
held for sale. Only the net assets of TNC remain as net assets held for
sale as of September 30, 2000. If these sales had taken place on
January 1, 1999, the Company would have had no material operating
results. Accordingly, separate pro-forma results are not presented.
(4) ACQUISITION
-----------
On September 15, 2000, the Company acquired all of the common stock of
Sweden based VIS-Able International AB and its affiliates ("VIS-Able"),
pursuant to a Stock Purchase Agreement dated September 15, 2000, for
approximately $17.7 million, net of liabilities assumed and including
the payment of certain fees and expenses. The payment of $2.7 million
of the purchase price was deferred for one year pending any claims
against the representations and warranties made in the Stock Purchase
Agreement. This amount is recorded on the Company's balance sheet in
Other Current Liabilities and is collateralized by a Letter of Credit,
which expires one year from the acquisition date.
The acquisition was recorded under the purchase method of accounting,
and accordingly, the results of operations of VIS-Able have been
included in the consolidated financial statements since the date of
acquisition. The purchase price has been preliminarily allocated to
assets acquired and liabilities assumed based on their fair market
value at the date of the acquisition as summarized below (in
thousands):
Current assets $727
Long-term assets 372
Goodwill 17,749
Current liabilities (994)
Long-term liabilities (119)
-----
Purchase price $17,735
=======
Goodwill of $17.7 million is being amortized on a straight-line basis
over five years.
(5) CHANGES IN EQUITY
-----------------
In July 2000, the stockholders approved an increase in the number of
authorized shares of the Company's common stock from 65,000,000 to
200,000,000.
On February 9, 2000, The Heico Companies, LLC elected to convert the
$2.0 million outstanding note into 1,000 shares of Series G Preferred
Stock. Negotiations were finalized and the preferred shares were issued
in August 2000. The Company has designated 1,000 shares of its
preferred stock to be Series G Convertible Preferred Stock ("Series G")
with a par value of $0.0001 per
8
<PAGE>
share and a stated value of $2,000 per share. The Series G is
non-cumulative and bears dividends at the rate of 7% per annum, payable
in cash at the option of the Company. The Series G is convertible at
any time at the option of the holder, and will be mandatorily converted
upon the occurrence of certain events, at a rate of 1,000 shares of
common stock for each share of preferred stock. Holders of the Series G
have voting rights equal to 1,000 votes per share on all matters
submitted to a vote of the stockholders of the Company. Both the
conversion rate and the number of votes per share may be adjusted from
time to time under the terms of the Series G.
During the nine months ended September 30, 2000, various holders of
warrants issued in connection with the Company's Interim Loan Facility
exercised their warrants for 2,995,751 shares of the Company's common
stock. At September 30, 2000, 2,989,855 warrants remained outstanding.
During the nine months ended September 30, 2000, 339,009 shares of
common stock were issued upon exercise of options. At September 30,
2000, 8,865,141 options were outstanding.
(6) CONTINGENCIES
-------------
On April 17, 1998, the Company was served with a summons and complaint
from MC Liquidating Corporation f/k/a MIDCOM Communications, Inc.
("MIDCOM"). Both the Company and TNC were named as defendants, as were
Telenational Communications, Limited Partnership, the former owner of
the TNC assets ("TCLP"), and Edmund Blankenau, a principal of TCLP and
a former director of the Company. In its complaint, filed on April 8,
1998 in the U.S. Bankruptcy Court for the Southern Division of the
Eastern District of Michigan (the "MIDCOM Lawsuit"), MIDCOM sought
payment of over $600,000 for services allegedly provided to TCLP and
the Company, together with other damages, attorney fees and costs. A
settlement of the MIDCOM Lawsuit was approved by the bankruptcy court
supervising MIDCOM's liquidation on November 3, 2000. Pursuant to the
settlement, the Company paid $200,000 in exchange for dismissal of the
MIDCOM Lawsuit with prejudice.
The Company is a defendant in litigation filed in the District Court of
The Hague, The Netherlands. The case, filed in February 1999 by Mr.
Bahman Zolfagharpour, allege that the Company breached agreements with
Mr. Zolfagharpour in connection with its purchase of MathComp B.V. from
Mr. Zolfagharpour. The litigation seeks damages in an amount exceeding
$20 million and the award of 2,350,000 shares of the Company's common
stock to Mr. Zolfagharpour. The Company believes that the litigation is
wholly without merit and intends to defend the case vigorously.
Since July 14, 1999, WorldPort and certain of its former officers have
been named as defendants in multiple shareholder class action lawsuits
filed in the United States District Court for the Northern District of
Georgia. On or about March 21, 2000, a Consolidated Complaint was filed
which adds The Heico Companies, LLC and Michael E. Heisley, Sr. as
defendants. The plaintiffs in these lawsuits seek to represent a class
of individuals who purchased or otherwise acquired the Company's common
stock from January 4, 1999 through June 28, 1999. Among other things,
the plaintiffs allege that the defendants spoke positively about the
Heico financing without disclosing the risk that non-compliance with
certain Nasdaq rules in connection with the financing might cause
WorldPort to be delisted from Nasdaq. The plaintiffs further allege the
subsequent disclosure that WorldPort might be delisted from Nasdaq
adversely affected the value of the Company's common stock. The
plaintiffs allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and seek unspecified compensatory
damages, interest, attorneys' fees and costs of litigation. These cases
are currently pending on defendants' motions to dismiss. WorldPort
intends to defend these lawsuits vigorously, but due to inherent
uncertainties of the litigation process and the judicial system,
WorldPort is unable to predict the outcome of this litigation.
In addition to the aforementioned claims, the Company is involved in
various lawsuits or claims
9
<PAGE>
arising in 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 position or results of operations of the
Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE ON "FORWARD-LOOKING" STATEMENTS
------------------------------------
The information set forth in Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") contains certain
"forward-looking statements" within the meaning of Section 27A of the
Securities Act of 1933, as amended, Section 21E of the Securities
Exchange 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 redirecting and
financing 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 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
necessary 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 and internet protocols,
(v) changes in the Company's business strategy or an inability to
execute its strategy due to unanticipated changes in the market, (vi)
various competitive factors that may prevent the Company from competing
successfully in the marketplace, and (vii) the Company's ability to
raise additional capital. 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.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto included
under Item 1 of this Form 10-Q. In addition, reference should be made
to the Financial Statements and Notes thereto and related Management's
Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the
year ended December 31, 1999.
OVERVIEW
--------
Until consummation of the sales transactions described below, the
Company was a facilities-based global telecommunications carrier
offering voice, data and other telecommunications services to carriers,
Internet service providers ("ISPs"), medium and large corporations and
distributors and resellers. On November 11, 1999, the Company entered
into a series of definitive agreements
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with Energis for the sale of its 85% shareholding in WorldPort
Communications Europe Holdings, B.V., the parent of EnerTel N.V., and
associated assets ("EnerTel") for $522 million. The sale was
consummated on January 14, 2000. The Company applied a portion of the
net proceeds realized from the sale to repay existing debt, including
debt incurred under the Interim Loan Facility, trade credit and other
liabilities. Additionally, the Company completed the sale of
International InterConnect, Inc. ("IIC") in February 2000.
In the second quarter of 2000, the Company announced a new business
strategy, focused on the delivery of Internet solutions for the
European marketplace. In addition to web-enabled application solutions,
the Company intends to provide a complete managed Web hosting service
portfolio - including network management, colocation services, internet
connectivity, ASP support services, backups and disaster recovery -
providing end-to-end service to corporations, as well as service
providers, enabling them to completely outsource their Internet
operations. The choice of this new business strategy was a result of
extensive investigation by the Company through its independent
consultants to assess growth opportunities in the telecommunications
and related industries and to identify high potential markets for these
industries. According to Forrester Research, in 1999 the European Web
hosting market generated approximately $500.0 million in revenues and
is expected to generate $18.0 billion in revenues by 2003. The Company
believes that the market is currently under-served by small companies
lacking the necessary scale, presence, resources and expertise required
to satisfy the demands of mid-to-large sized companies, and it believes
it has the management resources and market, product and service
expertise to become a leading provider in this market. In addition, the
Company believes that providing wireless access to the Internet also
offers an opportunity to enhance shareholder value and intends to focus
on such market as well.
The Company constructed a new internet solutions SuperCentre in Dublin,
Ireland, which became operational in early October and was designed to
meet the specific needs of its various services. The SuperCentre,
located in close proximity to redundant fiber routes from multiple
providers, is expected to serve as the flagship to the Company's
Internet Solution Centres, which the Company expects to locate in key
European cities. Under an agreement with Global Crossings, brokered by
the Irish government, WorldPort has gained access to bandwidth on the
trans-Atlantic and pan-European fiber optic networks, which connect
Ireland with the U.S., the U.K., and most of the leading markets in
Western Europe. The Company has successfully hired a new management
team with extensive experience in the telecommunications, web hosting,
and internet solutions markets to design, build and maintain the
SuperCentre and manage operations and sales throughout Europe. The
Company is also developing products and services to offer its customers
and negotiating with various strategic partners for the marketing and
selling of complementary products and services (although no assurances
can be given as to any successful development of a product or service
or the successful completion of any such negotiations).
On September 15, 2000, the Company acquired all of the common stock of
Sweden based VIS-Able International AB and its affiliates ("VIS-Able"),
pursuant to a Stock Purchase Agreement dated September 15, 2000, for
approximately $17.7 million, net of liabilities assumed and including
the payment of certain fees and expenses. The payment of $2.7 million
of the purchase price was deferred for one year pending any claims
against the representations and warranties made in the Stock Purchase
Agreement. This amount is collateralized by a Letter of Credit which
expires one year from the acquisition date. Vis-Able is a leading
professional services firm, specializing in complex systems
development, consulting, WAP integration and web hosting, with offices
in Sweden, Belgium, the U.S. and the U.K. The VIS-Able acquisition
gives the Company access to more than 3,500 customers, an additional
fully operational data center, Internet consulting and application
design and development expertise, and 61 skilled employees.
With the opening of the Dublin SuperCentre and the acquisition of
VIS-Able, the Company had 173 employees in five countries as of
September 30, 2000.
The Company intends to fund potential future operating losses and
capital expenditures required to pursue its new business plan out of
net proceeds remaining from the sales referred to above.
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Currently, the Company anticipates that approximately $30 million of
capital expenditures will be required during the fourth quarter of 2000
to pursue its business plan. The Company believes that its currently
available cash resources will be sufficient to fund these capital
expenditures as well as operating losses expected to be incurred during
that period. Additional requirements, if any, may be funded through
debt facilities and equity financings not yet arranged. However, there
can be no assurance that sufficient financing will be available on
terms acceptable to the Company. If such financing is not available,
the Company will have to curtail or alter its business plan and/or seek
alternative financing.
RESULTS OF OPERATIONS
---------------------
During the first quarter of 2000, the Company completed the disposition
of substantially all of its operating assets, and began execution of
the Company's new business plan. Accordingly, the historical results of
operations for prior periods in which the Company was operational and
the Interim Loan Facility was in place are not comparable to the
current period and are not representative of what future results will
be.
During the three months ended September 30, 2000, the Company had a net
loss of $6.0 million, compared to a net loss of $36.3 million during
the same period in 1999. Current quarter operating expenses of $5.9
million include approximately $5.1 million incurred primarily for
salaries, facility costs and professional services associated with the
execution of the new business plan. Also included in operating expenses
for the current quarter is $0.2 million of amortization expense on
goodwill from the acquisition of VIS-Able since September 15, 2000.
Goodwill is being amortizing over a five year period. The first quarter
gain on the sale of EnerTel was reduced in the current quarter
primarily to recognize a $6.0 million refund of the purchase price made
to Energis in November 2000 upon the resolution of certain sale
contingencies. Net interest income of $3.3 million represents $3.4
million of interest income on the Company's cash and cash equivalents,
offset by $0.1 million of interest expense on capital leases. The third
quarter income tax benefit of $2.4 million primarily relates to the tax
impact of the $6.0 million reduction in the sale price of EnerTel
discussed above.
During the nine months ended September 30, 2000, the Company had net
income of $260.9 million, compared to a net loss of $94.7 million
during the same period in 1999. Current year-to-date net income was
substantially comprised of a gain of $346.9 million upon the sale of
EnerTel, offset partially by a tax provision of $82.6 million. The
income tax provision recorded in the first quarter of 2000 of $85.0
million was based on a preliminary estimate of the tax due on the sale
of EnerTel. This estimate is still being evaluated and could materially
change from amounts previously recorded. Management believes that the
final calculation will result in a decrease to the income tax provision
recorded in the first quarter of 2000. The Company's operations
incurred pre-tax losses of $3.4 million for the nine months ended
September 30, 2000. Included in the losses incurred during the nine
months ended September 30, 1999 are the operating results of EnerTel
and IIC, as well as general expenses related to the Company's worldwide
business development and financing activities. Included in the results
of operations for the nine months ended September 30, 2000 are the
results of EnerTel and IIC through their dates of sale (January 14,
2000 and February 29, 2000, respectively).
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company had working capital of $126.1 million and ($80.1) million,
and cash of $178.7 million and $1.1 million, at September 30, 2000 and
December 31, 1999, respectively. The EnerTel sale transaction
contributed substantially all of the working capital increase to the
Company in 2000, offset partially by current year capital expenditures
and operating costs.
Operations used $3.3 million and $53.8 million during the three and
nine months ended September 30, 2000, due primarily to the payment of
income taxes related to the taxable gain on the EnerTel sale
transaction. Excluding the income tax payments, the operating costs of
the Company have been substantially funded by interest income on the
Company's cash balance.
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Investing activities used $63.5 million during the three months ended
September 30, 2000, which consisted of $39.7 million of construction
costs associated with the buildout of the Company's SuperCentre in
Ireland, $17.7 million for the acquisition of VIS-Able, and the $6
million refund of the purchase price made to Energis upon the
resolution of certain sale contingencies. Investing activities provided
$391.1 million during the nine months ended September 30, 2000,
primarily consisting of the proceeds from the EnerTel sale transaction
of $453.2 million, offset by year-to-date capital expenditures of $44.4
million and the acquisition of VIS-Able for $17.7 million.
Financing activities used $158.9 million during the nine months ended
September 30, 2000, and principally related to the repayment of the
Interim Loan and a related party note payable from the proceeds of the
EnerTel sale transaction.
The Company intends to fund potential future operating losses and
capital expenditures required to pursue its new business plan out of
net proceeds remaining from the sales referred to above. Currently, the
Company anticipates that approximately $30 million of capital
expenditures will be required during the fourth quarter of 2000 to
pursue its business plan. The Company believes that its currently
available cash resources will be sufficient to fund these capital
expenditures as well as operating losses expected to be incurred during
that period. Additional requirements, if any, may be funded through
debt facilities and equity financings not yet arranged. However, there
can be no assurance that sufficient financing will be available on
terms acceptable to the Company. If such financing is not available,
the Company will have to curtail or alter its current business plan
and/or seek alternative financing.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Management believes that the Company's exposure to market rate
fluctuations on its investments is nominal due to the short-term nature
of those investments.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 17, 1998, the Company was served with a summons and complaint
from MC Liquidating Corporation f/k/a MIDCOM Communications, Inc.
("MIDCOM"). Both the Company and TNC were named as defendants, as were
Telenational Communications, Limited Partnership, the former owner of
the TNC assets ("TCLP"), and Edmund Blankenau, a principal of TCLP and
a former director of the Company. In its complaint, filed on April 8,
1998 in the U.S. Bankruptcy Court for the Southern Division of the
Eastern District of Michigan (the "MIDCOM Lawsuit"), MIDCOM sought
payment of over $600,000 for services allegedly provided to TCLP and
the Company, together with other damages, attorney fees and costs. A
settlement of the MIDCOM Lawsuit was approved by the bankruptcy court
supervising MIDCOM's liquidation on November 3, 2000. Pursuant to the
settlement, the Company paid $200,000 in exchange for dismissal of the
MIDCOM Lawsuit with prejudice.
The Company is a defendant in litigation filed in the District Court of
The Hague, The Netherlands. The case, filed in February 1999 by Mr.
Bahman Zolfagharpour, allege that the Company breached agreements with
Mr. Zolfagharpour in connection with its purchase of MathComp B.V. from
Mr. Zolfagharpour. The litigation seeks damages in an amount exceeding
$20 million and the award of 2,350,000 shares of the Company's common
stock to Mr. Zolfagharpour. The Company believes that the litigation is
wholly without merit and intends to defend the case vigorously.
Since July 14, 1999, WorldPort and certain of its former officers have
been named as defendants in multiple shareholder class action lawsuits
filed in the United States District Court for the Northern District of
Georgia. On or about March 21, 2000, a Consolidated Complaint was filed
which adds The Heico Companies, LLC and Michael E. Heisley, Sr. as
defendants. The plaintiffs in these lawsuits seek to represent a class
of individuals who purchased or otherwise acquired the Company's common
stock from January 4, 1999 through June 28, 1999. Among other things,
the plaintiffs allege that the defendants spoke positively about the
Heico financing without disclosing the risk that non-compliance with
certain Nasdaq rules in connection with the financing might cause
WorldPort to be delisted from Nasdaq. The plaintiffs further allege the
subsequent disclosure that WorldPort might be delisted from Nasdaq
adversely affected the value of the Company's common stock. The
plaintiffs allege violations of Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934 and seek unspecified compensatory
damages, interest, attorneys' fees and costs of litigation. These cases
are currently pending on defendants' motions to dismiss. WorldPort
intends to defend these lawsuits vigorously, but due to inherent
uncertainties of the litigation process and the judicial system,
WorldPort is unable to predict the outcome of this litigation.
In addition to the aforementioned claims, the Company is involved in
various lawsuits or claims arising in 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 position or
results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
In July 2000, the stockholders approved an increase in the number of
authorized shares of the Company's common stock from 65,000,000 to
200,000,000.
On February 9, 2000, The Heico Companies, LLC elected to convert the
$2.0 million outstanding note into 1,000 shares of Series G Preferred
Stock. Negotiations were finalized and the preferred shares were issued
in August 2000. The Company has designated 1,000 shares of its
preferred
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stock to be Series G Convertible Preferred Stock ("Series G") with a
par value of $0.0001 per share and a stated value of $2,000 per share.
The Series G is non-cumulative and bears dividends at the rate of 7%
per annum, payable in cash at the option of the Company. The Series G
is convertible at any time at the option of the holder, and will be
mandatorily converted upon the occurrence of certain events, at a rate
of 1,000 shares of common stock for each share of preferred stock.
Holders of the Series G have voting rights equal to 1,000 votes per
share on all matters submitted to a vote of the stockholders of the
Company. Both the conversion rate and the number of votes per share may
be adjusted from time to time under the terms of the Series G.
During the quarter ended September 30, 2000, various holders of
warrants issued in connection with the Company's Interim Loan Facility
exercised their warrants for 693,734 shares of the Company's common
stock. Also during this quarter, 124,243 shares of common stock were
issued to various persons upon exercise of options not under a
registered plan. There was also an issuance of 100,000 shares of common
stock to a third party in lieu of payment for legal services.
The issuances of these shares were exempt from registration under
Section 4(2) of the Securities Act of 1933, as amended, as a
transaction by an issuer not involving any public offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule (for SEC use only)
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on August 24, 2000 to
announce the purchase by Michael E. Heisley, Sr. and The Heico
Companies L.L.C. of 1,636,743 shares of common stock, 922,361 shares of
Series B preferred stock and 316,921 shares of Series D preferred stock
from third parties.
The Company filed a Current Report on Form 8-K on September 15, 2000 to
announce the acquisition of all of the common stock of Sweden-based
VIS-Able International AB and its affiliates.
The Company filed a Current Report on Form 8-K on October 2, 2000 to
announce the opening of its SuperCentre in Dublin, Ireland on that date
and to discuss the Company's current business plan.
The Company filed a Current Report on Form 8-K on October 3, 2000 to
announce the promotion of James Martin from Chief Technology Officer to
President and Chief Operating Officer and the appointment of Emily
Heisley Stoeckel to fill a vacancy in the Board of Directors.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WORLDPORT COMMUNICATIONS, INC.
Date: November 14, 2000 By: /s/ John T. Hanson
------------------------------
John T. Hanson
Chief Financial Officer
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