<PAGE>
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 June 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 August 10, 2000, the Registrant had 30,855,338 shares of Common Stock par
value $0.0001 outstanding.
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WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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PART I - FINANCIAL INFORMATION
------------------------------
<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999............................................... 3
Condensed Consolidated Statements of Operations
for the Three and Six Months Ended June 30,
2000 and 1999 (unaudited)..................................................................... 4
Condensed Consolidated Statements of Cash Flows for the
Three and Six Months Ended June 30, 2000 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................................................. 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk.................................... 11
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings............................................................................. 12
Item 2. Changes in Securities......................................................................... 12
Item 6. Exhibits and Reports on Form 8-K.............................................................. 13
SIGNATURE...................................................................................................... 14
---------
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
---- ----
<S> <C> <C>
ASSETS (unaudited)
CURRENT ASSETS:
Cash and cash equivalents................................................ $246,360 $ 1,149
Accounts receivable, net of allowance for doubtful accounts
of $970 and $359, respectively........................................ -- 1,126
Prepaid expenses and other current assets................................ 850 34
Net assets held for sale................................................. 1,350 101,302
-------- ---------
Total current assets....................................... 248,560 103,611
PROPERTY AND EQUIPMENT, net.............................................. 4,834 145
OTHER ASSETS............................................................. 70 532
-------- ---------
TOTAL ASSETS.......................................... $253,464 $ 104,288
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................ $ 2,649 $ 13,168
Accrued expenses........................................................ 2,775 1,056
Current portion of obligations under capital leases..................... 1,958 2,932
Note payable to related party........................................... 2,000 12,981
Income taxes payable.................................................... 43,400 --
Other current liabilities............................................... 4,273 6,071
Interim loan facility................................................... -- 147,541
-------- ---------
Total current liabilities................................ 57,055 183,749
Long-term obligations under capital leases, net of current portion........... 3,547 4,021
-------- ---------
Total liabilities................................... 60,602 187,770
-------- ---------
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.................... -- --
Common stock, $0.0001 par value, 65,000,000 shares authorized,
30,559,017 and 28,210,280 shares issued and outstanding in 2000
and 1999, respectively................................................. 3 3
Warrants................................................................ 14,148 23,398
Additional paid-in capital.............................................. 160,509 149,824
Cumulative translation adjustment....................................... (3) (7,942)
Retained earnings (deficit)............................................. 18,205 (248,765)
-------- ---------
Total stockholders' equity (deficit)..................... 192,862 (83,482)
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)..... $253,464 $ 104,288
======== =========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2000 1999 2000 1999
---- ---- ---- ----
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES............................................. $ 1,044 $ 24,521 $ 6,137 $ 42,796
COST OF SERVICES..................................... 782 18,668 3,843 30,736
------- -------- -------- --------
Gross margin.................................... 262 5,853 2,294 12,060
------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses.... 3,338 12,974 11,556 25,623
Depreciation and amortization................... 454 5,759 903 11,031
------- -------- -------- --------
Operating loss.................................. (3,530) (12,880) (10,165) (24,594)
------- -------- -------- --------
OTHER EXPENSE:
Gain on sale of assets........................... -- -- 353,095 --
Interest income (expense), net.................. 1,935 (18,914) 6,401 (34,524)
Other income (expense), net..................... -- (176) 2,639 (1,056)
------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST AND INCOME
TAXES............................................... (1,595) (31,970) 351,970 (60,174)
MINORITY INTEREST.................................... -- 647 -- 1,850
------- -------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES.................... (1,595) (31,323) 351,970 (58,324)
INCOME TAX PROVISION................................. -- -- 85,000 --
------- -------- -------- --------
NET INCOME (LOSS).................................... $(1,595) $(31,323) $266,970 $(58,324)
======= ======== ======== ========
NET INCOME (LOSS) PER SHARE:
$(0.05) $(1.32) $9.20 $(2.73)
BASIC............................................. ======= ======== ======== ========
$(0.05) $(1.32) $5.07 $(2.73)
DILUTED........................................... ======= ======== ======== ========
SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION:
29,582 23,739 29,016 21,336
BASIC............................................ ======= ======== ======== ========
29,582 23,739 52,696 21,336
DILUTED.......................................... ======= ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
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WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------- -------
2000 1999 2000 1999
-------- -------- --------- --------
(unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................................. $ (1,595) $(31,323) $ 266,970 $(58,324)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
Depreciation and amortization................................. 454 5,759 903 11,031
Gain on sale of assets........................................ -- -- (353,095) --
Non-cash interest expense..................................... 1,229 16,272 1,229 30,795
Non-cash compensation expense................................. -- 271 -- 528
Minority interest............................................. -- (642) -- (1,845)
Change in accounts receivable, net............................ -- 1,281 1,126 (409)
Change in prepaid expenses and other assets................... (44) (227) (430) (1,918)
Change in accounts payable, accrued expenses and other
liabilities.................................................. (1,539) 16,849 (10,691) 1,924
Change in income taxes payable................................ (41,600) __ 43,400 --
-------- -------- --------- --------
Net cash flows from operating activities.................. (43,095) 8,240 (50,588) (18,218)
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of assets................................................ -- -- 459,405 --
Capital expenditures.......................................... (4,747) (8,217) (4,762) (16,228)
-------- -------- --------- --------
Net cash flows from investing activities.................. (4,747) (8,217) 454,643 (16,228)
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Interim Loan Facility............................ -- -- (147,541) --
Repayment on note payable - related party..................... -- -- (10,981) (150)
Borrowings under capital lease facilities..................... -- (8,892) -- --
Principal payments on short-term debt......................... -- -- -- (202)
Principal payments on obligations under capital leases........ (391) (204) (525) (3,333)
Exercise of stock options..................................... 123 1,568 206 1,798
Exercise of warrants.......................................... (4) -- -- --
Proceeds from issuance of preferred stock, net of offering
expenses..................................................... -- -- -- 32,500
-------- -------- --------- --------
Net cash flows from by financing activities............... (272) (9,328) (158,841) 30,613
Effect of exchange rate changes on cash and cash equivalents....... -- (181) (3) (266)
-------- -------- --------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............... (48,114) (9,486) 245,211 (4,099)
CASH AND CASH EQUIVALENTS, beginning of the period................. 294,474 14,402 1,149 9,015
-------- -------- --------- --------
CASH AND CASH EQUIVALENTS, end of the period....................... $246,360 $ 4,916 $ 246,360 $ 4,916
======== ======== ========= ========
CASH PAID DURING THE PERIOD FOR INTEREST........................... $ 166 $ 999 $ 576 $ 1,509
======== ======== ========= ========
CASH PAID DURING THE PERIOD FOR INCOME TAXES....................... $ 41,600 $ -- $ 41,600 $ --
======== ======== ========= ========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of property and equipment under capital lease..... $ -- $ 16,055 $ -- $ 31,473
======== ======== ========= ========
Issuance of warrants in connection with Interim Loan.......... $ -- $ -- $ -- $ 3,656
======== ======== ========= ========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
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 now pursuing a new strategic focus to
become a European provider of complex and custom web-hosting services.
Until consummation of the sale transactions described in Note 2, 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 June 30, 2000, and
the results of operations and cash flows for the three and six months ended
June 30, 2000 and 1999. The results of operations for the six months ended
June 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 2 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 now pursuing a
new strategic focus following this sale utilizing the remaining net
proceeds to become a European provider of complex and custom web-hosting
services. 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.
Earnings (Loss) per Share
-------------------------
The following table reconciles basic earnings (loss) per share to diluted
earnings (loss) per share.
6
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For 1999 and for the three months ended June 30, 2000, basic and diluted
loss per share are the same because any dilutive securities had an
antidilutive effect on loss per share.
<TABLE>
<CAPTION>
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Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net income (loss) available to common stockholders $(1,595) $(31,323) $266,970 $(58,324)
-----------------------------------------------------------------------------------------------------------------------
Weighted average shares outstanding:
Basic 29,582 23,739 29,016 21,336
Convertible preferred stock -- -- 21,103 --
Warrants -- -- 2,295 --
Options -- -- 282 --
------- -------- -------- --------
Diluted 29,582 23,739 52,696 21,336
-----------------------------------------------------------------------------------------------------------------------
Income (loss) per share:
Basic $ (0.05) $ (1.32) $ 9.20 $ (2.73)
Diluted $ (0.05) $ (1.32) $ 5.07 $ (2.73)
-----------------------------------------------------------------------------------------------------------------------
</TABLE>
(2) 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 net book gain of approximately
$268.1 million 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 June 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.
(3) CHANGES IN EQUITY - SUBSEQUENT EVENTS
-------------------------------------
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
100,000,000.
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 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
7
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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.
(4) 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 are named as defendants, as are 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 Eastern District of Michigan, Southern Division,
MIDCOM seeks payment of over $600,000 for services allegedly provided to
TCLP and the Company, together with other damages, attorney fees and costs.
The Company intends to vigorously defend against these claims.
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 other 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. 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)
8
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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 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.
The Company recently announced a new business strategy, focused on the
delivery of Internet solutions for the European marketplace. In addition to
web-enabled 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
9
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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 resources 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 is currently constructing a new internet solutions SuperCentre
in Dublin, Ireland which is expected to be operational by the end of the
third quarter. 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).
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 $100 million of capital expenditures will be
required during the second half 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 six months ended June 30, 2000, the Company had net income of
$267.0 million, compared to a net loss of $58.3 million during the same
period in 1999. Net income for the six months ended June 30, 2000 was
substantially comprised of a one-time after tax gain of $268.1 million
related to the sale of EnerTel. Included in the losses incurred during the
six months ended June 30, 1999 are the operating results of EnerTel and
IIC, including amortization of the purchase price premium and recording of
financing costs related to the Company's acquisition of EnerTel, as well as
general expenses related to the Company's worldwide business development
and financing activities. Included in the results of operations for the six
months ended June 30, 2000 are the results of EnerTel and IIC through their
dates of sale (January 14, 2000 and February 29, 2000, respectively).
During the three months ended June 30, 2000, the Company had a net loss of
$1.6 million, compared to a net loss of $31.3 million during the same
period in 1999. Current quarter operating expenses of $3.8 million includes
approximately $3.0 million incurred primarily for salaries, facility costs
and professional services associated with the execution of the new business
plan. Net interest income of $1.9 million represents $3.3 million of
interest income on the the Company's cash and cash equivalents, offset by
$1.4 million of interest expense, which includes $1.2 million
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of non-cash interest expense associated with additional warrants issued in
connection with the Interim Loan Facility.
Liquidity and Capital Resources
--------------------------------
As of December 31, 1999, the Company had a working capital deficit of $80.1
million and cash of $1.1 million. The EnerTel sale transaction contributed
substantially all of the working capital increase to the Company during the
six month period. As a result the Company had working capital of $191.5
million at June 30, 2000.
Operations used $43.1 million and $50.6 million during the three and six
months ended June 30, 2000, due primarily to the $41.6 million payment of
income taxes related to the taxable gain on the EnerTel sale transaction.
Investing activities used $4.7 million during the three months ended June
30, 2000, which consisted primarily of construction costs associated with
the buildout of the Company's web hosting SuperCentre in Ireland.
Investing activities provided $454.6 million during the six months ended
June 30, 2000, primarily consisting of the proceeds from the EnerTel sale
transaction of $459.4 million.
Financing activities used $158.8 million during the six months ended June
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. Financing activities used only $0.3 million for the three
months ended June 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. Currently, the Company
anticipates that approximately $100 million of capital expenditures will be
required during the second half 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.
New Accounting Pronouncements
-----------------------------
In June 1998, the FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS No. 133"), Accounting for Derivative Instruments and Hedging
Activities, which is effective for 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 has not yet determined the impact this statement will have on its
consolidated financial statements.
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 are named as defendants, as are 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 Eastern District of Michigan, Southern Division,
MIDCOM seeks payment of over $600,000 for services allegedly provided to
TCLP and the Company, together with other damages, attorney fees and costs.
The Company intends to vigorously defend against these claims.
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 other 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
During the quarter ended June 30, 2000, various holders of warrants issued
in connection with the Company's Interim Loan Facility exercised their
warrants for 1,898,740 shares of the Company's common stock. The issuance
of theses shares was exempt from the registration under Section 4 (2) of
the Securities Act of 1933, as amended, as a transaction by an issuer not
involving any public offering.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
4.1 Certificate of Designation, Preferences and Rights
of Series G Convertible Preferred Stock of the
Company, dated July 21, 2000
10.1 *Employment Agreement by and between James L.
Martin, Jr. and the Company, dated February 29,
2000
10.2 *Settlement Agreement by and between Carl Grivner
and the Company, dated June 14, 2000
10.3 *WorldPort Communications, Inc. 2000 Long-Term
Stock Incentive Plan
27.1 Financial Data Schedule (for SEC use only)
*Compensation Plan or Agreement
(b) Reports on Form 8-K
The Company filed a Current Report on Form 8-K on April12, 2000 to publicly
file the following press releases: (i) A press release issued on April 6,
2000 regarding the Company's plans to pursue its new business strategy and
(ii) a press release issued on April 10, 2000 regarding the Company's
appointment of James L. Martin as its Chief Technology Officer and Letitia
Bonthron as its Corporate Controller.
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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: August 14, 2000 By: __________________________
John T. Hanson
Chief Financial Officer
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