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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the fiscal year ended December 31, 1998
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.
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(Exact name of registrant as specified in its charter)
Delaware 84-1127336
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1825 Barrett Lakes Blvd., Suite 100, Kennesaw, Georgia 30144
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(Address of principal executive offices)
Registrant's telephone number, including area code: (770) 792-8735
Securities registered pursuant to Section 12(b) of the Act:
Names of each exchange
Title of Each Class on which registered
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None None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, $0.0001 Par Value
--------------------------------
(Title of class)
Indicate by check mark whether the Registrant (l) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 1, 1999, 18,930,365 shares of Registrant's Common Stock were
outstanding.
The aggregate market value of the Registrant's Common Stock held by
nonaffiliates on March 1, 1999 was approximately $158,569,660.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
WorldPort Communications, Inc. (together with its subsidiaries, "we,"
the "Company," and "WorldPort") is a rapidly growing 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. The core of our operations and the
source for a significant portion of our revenues is our EnerTel subsidiary, the
leading second network operator in the Netherlands. EnerTel's switch-based fiber
backbone network consists of three fiber optic rings extending over 1,200
kilometers linking most of the largest cities in the Netherlands, and together
with EnerTel's interconnection agreements, passing approximately 70% of the 5.5
million domestic households and substantially all the domestic and multinational
business community in the Netherlands. We are expanding and developing EnerTel's
network to enhance its capacity and reach within the Netherlands. In order to
leverage EnerTel's network as a European hub to access select markets, we have
obtained the right to purchase indefeasible rights of use ("IRUs") which will
provide interconnection to 18 cities in five Western European countries.
Additionally, we have acquired IRUs on AC-1, an undersea cable connecting North
America and Europe, to link EnerTel's switches in Amsterdam and Rotterdam and
our DMS GSP international gateway switch in London with our U.S. DMS GSP
international gateway switches in New York and Miami. As a result, we will have
a unified switch network that will allow us to provide On-Net services to our
clients in the Netherlands, our European hub, five other Western European
countries and the United States. For the three months ended December 31, 1998,
and, on a pro forma basis (giving effect to our acquisitions of EnerTel and
International InterConnect, Inc.), the year ended December 31, 1998, we had
revenues of $14.2 million and $40.6 million, respectively.
EnerTel was founded by nine regional electric utilities and N.V.
Casema, the Netherlands' largest cable television company, who collectively were
granted a national infrastructure license to build, own and operate a nationwide
telecommunications network. EnerTel's network is connected directly to KPN
Telecom (Netherlands), Deutsche Telekom (Germany), Belgacom (Belgium), Cable &
Wireless (UK) and Telecom Italia (Italy). In addition, EnerTel's network has
access to undersea cables connecting the Netherlands to North America. EnerTel's
network utilizes synchronous digital hierarchy ("SDH") technology and currently
includes two Siemens switching facilities, located in Amsterdam and Rotterdam,
as well as an IRU for capacity on UK-NETH 14, an undersea fiber optic cable
connecting the United Kingdom and the Netherlands. EnerTel commenced operations
in 1997 and currently serves 133 medium and large sized corporate customers, 45
of the Netherlands' ISPs (including 21 of the Netherlands' 35 national ISPs) and
10 carriers, distributors and resellers. We also have entered into contracts
with an additional 26 carriers, distributors and resellers, with service
expected to begin during the second quarter of 1999. For the three months ended
December 31, 1998, and the year ended December 31, 1998, EnerTel had revenues of
$10.3 million and $18.3 million, respectively.
The telecommunications services market in the Netherlands is
experiencing significant growth, with a market size of $8.4 billion in 1997
expected to grow to $9.1 billion by 2000 according to Espicom Business
Intelligence. This growth is being driven by (i) the rapid growth in demand for
broadband and data services, including the Internet and corporate intranets and
(ii) the emergence of the Netherlands as a major European telecommunications
hub. At the end of 1998 there were approximately 1.4 million Internet users in
the Netherlands. According to Datamonitor, an industry research group, the
number of Internet users in the Netherlands is expected to grow to 3.6 million
by 2003. We believe that EnerTel is positioned to capture a significant share of
the Netherlands' wholesale telecommunications market due to our scaleable
state-of-the-art fiber optic network, broad range of products and services,
competitive pricing, established customer relationships and experience in
serving the needs of data intensive customers. For the six months ended December
31, 1998, EnerTel carried approximately 496 million minutes of traffic,
including approximately 443 million minutes of Internet traffic in the
Netherlands.
In response to customer demand (principally from carriers and ISPs) for
telecommunication services
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beyond the Netherlands and for expanded product offerings, we are extending our
On-Net reach into Western Europe and the United States. In addition, we now
offer internationally our switched services, private lines, and 800/900 services
which we previously offered only in the Netherlands and have expanded our
product offerings to include colocation, switch partitioning and switchless
resale both in the Netherlands and throughout Europe and the United States.
In connection with our expansion into Europe, we have recently entered
an agreement which will allow us to purchase IRUs which will connect EnerTel's
Netherlands-based network with 18 cities, throughout five countries in Western
Europe, including Brussels, Frankfurt, London, Paris and Madrid and we have
developed direct connections and bilateral interconnection agreements that
provide On-Net termination services in Germany, Belgium, France, Italy and the
United Kingdom. We believe this expansion will position us to further penetrate
the European international long distance market, which is the largest in the
world, accounting for approximately 35 billion minutes or approximately 43% of
all worldwide minutes originated in 1997.
To provide our European customers with access to North America, we have
acquired IRUs for STM-1s of capacity, and committed to purchase IRUs for
additional STM-1s of capacity, on undersea fiber-optic cables which connect
EnerTel's network with North America and have installed international gateway
switches in London and New York and are in the process of installing one in
Miami. Through this network, we can provide our customers with connections
between Europe and North America, which together originate approximately 75% of
the world's international telecommunications traffic. We have contracts with
over 35 carrier customers for use of our international switches.
In addition to our EnerTel operations, we also provide, through our
non-European subsidiaries, international pre-paid calling cards, international
credit card billed calling cards, international call back/direct access, and
international operator services to carriers, business customers and resellers
and distributors in the United States, Europe, Latin America and Asia-Pacific.
For the three months ended December 31, 1998, and the year ended December 31,
1998, our revenues from these operations totaled $3.9 million and $10.3 million,
respectively.
For a summary of our operations according to our two separate
geographic regions, see Note 10 to our Consolidated Financial Statements
included elsewhere in this Report.
MILESTONES
Since acquiring EnerTel in June 1998, we have achieved the following:
- NETWORK DEVELOPMENTS
- Upgraded port capacity of our Amsterdam and Rotterdam
Siemens switches
- Expanded our Netherlands fiber optic network from
1,100 kilometers to over 1,200 kilometers and
upgraded capacity on approximately 58% of the network
with DWDM technology
- Sold the Bel 1600 division of EnerTel (which had
provided indirect access services to small and medium
size business and residential subscribers) as part of
our strategic repositioning of EnerTel to serve
carriers, ISPs and other high volume customers; we
retain on a wholesale basis the traffic minutes
generated by the residential subscribers
- DEVELOPMENT OF EUROPEAN HUB
- Obtained the right to purchase IRUs which can connect
EnerTel's network with 18 cities, throughout five
countries in Western Europe, including Brussels,
Frankfurt, London, Paris and Madrid
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- Installed international gateway switches in London,
New York and Miami
- Extended our EnerTel network to Beverwijk, the
Netherlands where we are connecting to AC-1 through
leased line capacity
- Developed a direct connection and bilateral
interconnect agreement that provides On-Net
termination services in Italy (Telecom Italia)
- CUSTOMER GROWTH
- Increased traffic on EnerTel's On-Net network from
approximately 42 million monthly minutes in May 1998
to approximately 113 million monthly minutes in
December 1998
- Increased EnerTel's monthly revenue by 114% from
approximately $2.1 million per month in May 1998 to
approximately $4.5 million per month in December 1998
- Signed new customer contracts including new contracts
with 15 carriers, 21 ISPs, and 103 corporate
customers
BUSINESS STRATEGY
Our strategy is to be a leading global provider of transmission and
termination services to carriers, ISPs, large multinational corporations and
distributors and resellers. We believe that this "carriers' carrier" approach
commands higher profits than providing retail services. The key elements of our
strategy are as follows:
- - ENHANCE POSITION AS PREMIER SECOND NETWORK OPERATOR IN THE NETHERLANDS.
We believe that EnerTel is positioned to capture a significant share of
the wholesale telecommunications market in the Netherlands due to its
scaleable state-of-the-art fiber optic network, broad range of products
and services, competitive pricing, established customer relationships,
and experience in serving the needs of data intensive customers. For
the six months ended December 31, 1998, EnerTel carried approximately
496 million minutes of traffic, including approximately 443 million
minutes of Internet traffic. To continue capturing market share, we are
enhancing our network's capabilities by installing in Amsterdam a
switch dedicated to international traffic and further upgrading
capacity using advancements in DWDM. We also plan to upgrade our
network operations center.
- - LEVERAGE "HUB AND SPOKE" FOOTPRINT VIA OUR NETHERLANDS EUROPEAN HUB. We
intend to continue to leverage the assets of EnerTel, further
developing EnerTel as a European gateway for international traffic. We
believe that the Netherlands has emerged as a major European hub, with
two key transatlantic cables, AC-1 and TAT-14, utilizing it as a
landing point for continental Europe. We believe that EnerTel's
existing network (which included over $85.2 million of property, plant
and equipment at December 31, 1998 and significant right of way
agreements) together with (i) the IRUs we have the right to purchase in
five countries in Western Europe, (ii) our direct connections and
bilateral interconnection agreements that provide On-Net termination
services in Germany, Belgium, France, Italy and the United Kingdom and
(iii) the IRUs which we have acquired or committed to acquire on
undersea fiber-optic cables which connect the Netherlands to North
America, provide us with a significant time-to-market advantage over
others desiring to replicate our "hub" approach.
- - DIFFERENTIATE THROUGH BROAD PORTFOLIO OF VALUE-ADDED PRODUCT AND
SERVICE OFFERINGS. We have developed a broad range of voice, data,
video and Internet products and services which we offer to customers
both within the Netherlands and throughout Western Europe. Such
services include our switched services, dedicated services, switch
partitioning, telehousing and colocation opportunities, and switchless
resale services that we offer carriers, ISPs and business customers. We
believe that this broad product portfolio differentiates us from
competitors, many of whom offer some, but not all, such products and
services. We intend to continue to enhance and develop our voice, data,
video and Internet products and services and will also continue to
offer customers additional services such as international calling
cards. Moreover, we are developing our network with advanced technology
to provide seamless transmission of voice and data across multiple
protocols such as
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IP, asynchronous transfer mode ("ATM") and frame relay. To advance our
IP capabilities, we are currently conducting one of the first
commercial trials of Lucent's PacketStar 6400 IP switches in both New
York and London. The Lucent PacketStar may enable us to be one of the
first carriers to offer, on a commercial scale, a fast, high-quality IP
transmission alternative to bypass highly congested segments of the
traditional Internet by routing a customer's traffic over our network.
- - CAPITALIZE ON POSITION AS A LOW COST PROVIDER. As a facilities-based
carrier, we believe that selectively expanding our On-Net reach and
continuing to develop our interconnection and bilateral agreements will
allow us to maintain a low cost structure for transmission and
termination services relative to our competitors. We operate our fiber
network in the Netherlands as well as switches in Amsterdam, Rotterdam,
London, New York and Miami, and have signed long term lease agreements
or IRUs with other carriers and bilateral interconnection agreements on
their networks. We believe that these assets, including our ability to
provide an alternative to the Netherlands' former national monopoly
telephone company ("PTT") and leverage our bilateral agreements, create
a unique On-Net network. In addition, we will utilize IP in selected
applications to reduce our cost basis for international voice transport
and lower our cost of access.
- - CONTINUE TO DEVELOP SALES FORCE AND DISTRIBUTION CHANNELS. We are
continuing to develop our global sales, marketing and support force.
Our sales force currently consists of 18 direct sales people and
approximately 190 wholesale resellers and 285 agents. Our direct sales
people have extensive experience in the telecommunications industry, at
entities which include Frontier, MCI WorldCom, Cable & Wireless, Qwest
Communications and Sprint. As we continue to develop our On-Net network
in Europe and with access to North America, our sales professionals are
increasingly able to sell our international portfolio of end-to-end
products and services to customers based in these markets.
- - PURSUE STRATEGIC ACQUISITIONS. We plan to continue to identify and
pursue strategic acquisitions that provide us with one or more of the
following: (i) network facilities that extend our On-Net reach, (ii)
public telecommunications operator ("PTO") and other licenses,
interconnection agreements, and/or operating agreements on key routes,
(iii) proprietary circuits or IRUs, (iv) large customer bases in
targeted markets and (v) complementary business strategies or products.
RECENT DEVELOPMENTS
- - Heico Equity Investment. In January 1999, The Heico Companies, LLC
("Heico"), a privately owned holding company, completed a $40 million
investment in our Series C Convertible Preferred Stock. We have also
granted to Heico an option to acquire additional shares of Series C
Convertible Preferred Stock for an aggregate purchase price of $10
million. By virtue of its stock purchase, and coupled with additional
voting rights which it received pursuant to a Shareholder Agreement,
Heico currently controls, with respect to certain matters, including
acquisitions, incurrence of debt and the issuance or sale of equity
securities, approximately 50.1% of our outstanding votes. In addition,
Heico's designees comprise one-half of the members of our Board of
Directors and we amended our Bylaws to provide that at least one of
Heico's designees and, except in certain limited situations, one of the
directors who was not designated by Heico, must approve any action put
before the Board of Directors in order for such to be properly approved
by the Board of Directors.
- - All America Cables & Radio. In May 1998, we entered into an agreement
for the acquisition of All America Cables & Radio ("AACR"), a
telecommunications services provider in the Dominican Republic. As a
result of damage caused to AACR's facilities and business by Hurricane
Georges in September 1998, the original agreement terminated. Although
we had subsequent discussions with AACR, we recently decided not to
pursue the acquisition. We will continue to sell our products and
services in Latin America through our network of distributors and
resellers.
- - Sale of European Capacity. On February 19, 1999, WorldPort signed an
agreement with a U.S. carrier for the sale of intra-European STM-1
IRUs, for total sale proceeds of $8 million to be recognized during
1999. In
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conjunction with the signing of the IRU sale agreement, WorldPort and
the carrier also executed a letter of intent regarding the sale,
exchange and lease of communications services and the expansion of the
reach of their networks (through possible interconnection, colocation
and switch partitioning arrangements). The aggregate value of the
transactions contemplated by the letter of intent will depend on
conditions but may range up to $55 million.
- - Purchase of European Capacity. In March 1999, pursuant to a capacity
purchase agreement with Esprit Telecom UK Limited which we entered into
in January 1999, we placed orders with Esprit for the purchase of IRUs
for 4 STM-1s of capacity on the Esprit network in Europe, providing
links between London, Paris, Frankfurt and Amsterdam.
NETWORK
ON-NET MECHANICS
A long distance telephone call generally consists of three segments:
origination, transport and termination.
We use the term "On-Net" to refer to the portion of a call that travels
over our network infrastructure and originates or terminates through either
local interconnects or bilateral agreements. Our gross margins increase to the
extent that we put a greater portion of the call minutes On-Net. In the
Netherlands, we are able to originate calls On-Net via either our own leased
lines or our local interconnect agreements, bypassing KPN, the incumbent
provider. We then terminate the call internationally from our Netherlands
switches either (i) via our own network to another country where we terminate
through a local interconnect agreement , (ii) through a bilateral carrier
agreement, or (iii) through a third party carrier. Generally, we are able to
obtain a higher margin when we terminate through a local interconnect agreement
rather than through a third-party carrier.
Origination
A typical international long distance call originates on a local
exchange network or private line and is carried to the international gateway
switch of a telecommunications provider. The call is then transported along a
fiber optic cable or a satellite connection to an international gateway switch
in the terminating country and finally to another local exchange network or
private line where the call is terminated. A domestic long distance call is
similar to an international long distance call, but typically involves only one
telecommunications provider, which transports the call on fiber, microwave radio
or via a satellite connection within the country of origination and termination.
Generally, only a small number of carriers are licensed to provide
telecommunications services in a foreign country and, in many countries, only
the PTT is licensed to provide certain services. Any carrier that desires to
transport switched calls to or from a particular country must, in addition to
obtaining a license or other permission (if required), enter into bilateral
agreements or other arrangements with the PTT or another international carrier
in that country or lease capacity from a carrier that already has such
arrangements.
Transport
The transport of telephone calls is accomplished via land-based cables
or undersea cables, which are usually fiber optic, or by microwave radios or
satellites. A carrier can obtain access on cable systems through IRUs or leases.
Any carrier may generally lease circuits on a cable from another carrier.
Satellite circuits are also obtained on a leased basis.
Traditionally, international telecommunications traffic is exchanged
under interconnection agreements between international carriers
("correspondents") which own IRUs or lease satellite or fiber capacity between
two countries. Interconnection agreements provide for the termination of traffic
in, and, if such agreements are bilaterial agreements, return of traffic to, the
carriers' respective countries at negotiated accounting rates. Bilateral
agreements typically provide that carriers will return to their correspondents a
percentage of the minutes received from such correspondents ("return traffic").
In addition, interconnection agreements provide for network
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coordination and accounting and settlement procedures between the carriers.
A carrier which does not have an interconnection agreement with a
carrier in a particular country is able to provide international service to that
country by reselling minutes from a carrier which does. Until recently, in many
foreign countries there was only one interconnection agreement in place between
that country's PTT and a foreign based international carrier as a result of
monopolies held by such PTTs. Interconnection agreements are expected to become
increasingly available as international markets deregulate and new carriers that
are seeking business partners emerge in countries previously subject to a PTT
monopoly or other limited competition market.
For a telecommunications provider without interconnection agreements or
its own international network, the profitability of originating international
traffic is a function of, among other things, the difference between its billing
rates and the rates it must pay another carrier to transport and terminate such
traffic.
For a company with bilateral agreements (which provide for return
traffic), the profitability of originating international traffic will be a
function of, among other things, the volume of its originating traffic and its
billing rates, as well as the relative volume of its originating and return
traffic minutes. Under the settlement process, a carrier which originates more
traffic then it receives, will, on a net basis, make payments to the
corresponding carrier, while a carrier which receives more traffic than it
originates will receive payments from the corresponding carrier. If the incoming
and outgoing flows of traffic are equal in the number of minutes transmitted,
there is no net settlement payment to either carrier. Therefore, in addition to
all of the other factors that can influence the profitability of a
telecommunications carrier, profitability can also be somewhat dependent on the
carrier's relative flows of incoming and outgoing traffic.
Return traffic can be more profitable than outgoing traffic when there
is a significant disparity in the cost of terminating traffic between the two
countries that are party to a bilateral agreement. The receipt of more
profitable return traffic reduces the aggregate cost to a carrier to transport
traffic pursuant to a bilateral agreement, and carriers with significant levels
of return traffic can price their international transport and termination
services at a discount to the settlement cost and recover the discount on the
return traffic.
Termination
The termination of an international call occurs after the call has been
transported to an international carrier in the destination country. The
international carrier then transports the call to a local exchange network where
it is then terminated by the PTT or an alternative to the PTT, such as EnerTel,
which then bypasses the PTT.
NETWORK ASSETS
The EnerTel backbone network in the Netherlands consists of three fiber
optic rings, complemented by interconnection agreements with the local access
networks of regional utility companies throughout the Netherlands, including
EnerTel's former shareholders. The network backbone links most of the
Netherlands' largest cities and, together with these regional utility company
interconnection agreements, passes approximately 70% of the 5.5 million Dutch
households and substantially all the Dutch and multinational business community.
EnerTel holds a 20-year lease expiring in 2016 for the backbone network with
each of its former shareholders. In February 1994 those shareholders, comprised
of nine Dutch regional utility companies and Casema N.V., the largest cable
television operator in the Netherlands, constructed the three fiber optic ring
network. Each route in this network consists of between 12 and 24 fibers.
Pursuant to the nine lease agreements between EnerTel and each of the former
shareholders, EnerTel has leased use of the fibers contained in those rings. In
addition, pursuant to the backbone lease agreements, EnerTel can add additional
fibers to the network when necessary. Each lease covers that portion of the
network owned by such former shareholder and provides that each of the former
shareholders is responsible for the maintenance and repair of the portion of the
network leased by them to EnerTel. EnerTel pays for such repair and maintenance
based on the cost thereof to the applicable owner. We believe that our existing
network, which included over $85.2 million of property, plant and equipment at
December 31, 1998 and significant right of way agreements, provides us with a
time-to-market advantage over new providers desiring to replicate our
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EnerTel network.
The EnerTel network utilizes SDH technology and, in addition to the
three fiber optic rings extending over 1,200 kilometers, includes two Siemens
switching facilities, located in Amsterdam and Rotterdam with over 1,400 port
facilities, as well as an IRU for 21 E-1s of capacity on UK-NETH 14, an undersea
fiber optic cable connecting the United Kingdom and the Netherlands. We have
recently completed the installation of DWDM technology on approximately 58% of
the EnerTel network in order to provide additional capacity for
intra-Netherlands and cross-border connectivity to Atlantic undersea cable
systems. We are also in the process of installing a DMS GSP international
gateway switch in Amsterdam.
In addition, in connection with the expansion of our network into
Europe, we have recently obtained the right to purchase IRUs which will connect
EnerTel's Netherlands-based network with 18 cities, throughout five countries in
Western Europe, including Brussels, Frankfurt, London, Paris and Madrid and we
have developed direct connections and bilateral interconnection agreements that
provide On-Net termination services in Germany, Belgium, France, Italy and the
United Kingdom.
Moreover, to provide our European customers with access to North
America, we have further expanded our network by (i) acquiring IRUs for STM-1s
on AC-1 which will provide EnerTel's network with access to North America and
(ii) installing DMS GSP international gateway switches in London, New York and
Miami. In addition, we are currently conducting one of the first commercial
trials of Lucent's PacketStar 6400 IP switches in both New York and London. The
Lucent PacketStar may enable us to be one of the first carriers to offer
"Internet by-pass" (a fast, high-quality transmission alternative to highly
congested segments of the traditional Internet) on a commercial scale by routing
a customer's traffic over our network.
In 1996, EnerTel was granted one of two licenses to install and
operate, as an alternative to the Netherlands' PTT, a public nation-wide fixed
telecommunications network. Under a new telecommunications law recently enacted
in the Netherlands, all telecommunications licenses, including EnerTel's public
nation-wide infrastructure license, were automatically converted into a
registration. At the time it received its nation-wide license, EnerTel was
subject to four statutory licensing conditions. The current network meets the
requirements of the first two of these conditions. The third license condition
required the EnerTel network, by November 20, 2000, to (i) cover all
municipalities of over 80,000 inhabitants, (ii) have at least one point of
presence in municipalities of over 25,000 inhabitants and (iii) have at least
one point of presence on industry premises of over 30 hectares. The fourth
license condition required EnerTel to have full infrastructure coverage in the
Netherlands for the purpose of providing leased lines to anyone in the
Netherlands by November 20, 2001. EnerTel believes that, as a result of the new
telecommunications law in the Netherlands, it is no longer subject to these
statutory licensing conditions or, alternatively, that such conditions are no
longer enforceable. While EnerTel believes that its conclusions in this regard
are well founded, there can be no assurance that the Netherlands' government may
not attempt to enforce the conditions in the future.
BILATERAL AND INTERCONNECTION AGREEMENTS
In order to complement our On-Net assets and broaden our reach in and
to markets, we have entered into or are negotiating interconnection agreements,
certain of which are bilateral agreements. The following table sets forth the
parties, countries of origination and termination, and brief descriptions of our
significant existing bilateral and interconnection relationships:
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BILATERAL AND INTERCONNECTION RELATIONSHIPS
PARTY COUNTRIES SERVED NATURE OF AGREEMENT
- ----- ---------------- -------------------
KPN Telecom The Netherlands Interconnection between the EnerTel network and KPN
Telecom providing origination and termination throughout
the Netherlands.
Regional utility The Netherlands Interconnection between the EnerTel network and the
companies networks of the regional utility companies providing
origination and termination.
Deutsche Telekom Germany/The Netherlands Interconnection between the EnerTel network and Deutsche
Telekom for switched services.
Belgacom Belgium/The Netherlands Bilateral agreement; interconnection between the EnerTel
network and Belgacom covering switched services (switch
termination, 800/900 and private lines).
Cable & Wireless United Kingdom/The Bilateral agreement; interconnection between the EnerTel
Netherlands network and Cable & Wireless covering switched services
(switch termination, 800/900 and private lines).
Telecom Italia Italy and Mediterranean Bilateral agreement; interconnection between the EnerTel
Basin network and Telecom Italia covering switched services
(switch termination, 800/900 and private lines).
NETWORK OPERATIONS AND INFORMATION SYSTEMS
We currently maintain a network operations center in Zwolle,
Netherlands (the "NOC") to oversee the EnerTel Network. The NOC provides network
element management, monitoring and maintenance, network registration and trouble
management, customer service (multilingual) and customer technical support
(multilingual). In conjunction with our European expansion, we expect to upgrade
this NOC during 1999 to provide these services to our network as it is developed
throughout Europe and to add the following functions:
- Umbrella Surveillance;
- C7 Management;
- Service Control Points ("SCPs") Database Management; and
- Remote Diagnostics.
In addition, Nortel provides first level project management and
maintenance support for our international gateway switches in London, New York
and Miami, pursuant to a turn-key installation and maintenance agreement. We
directly monitor and maintain all other components of our network.
We also utilize proprietary information systems to monitor and manage
our international distributors. These information systems provide us with call
records, network utilization and performance data, billing and invoicing
information, and customer provisioning and support functions. In some cases, our
international distributors also have access to a portion of these databases in
order to perform customer support at a local level for our worldwide customers.
We have also developed a web-based corporate intranet which we use for secure
internal communications and for coordinating all of our administrative,
financial, and operational management on a global basis.
BILLING SYSTEMS
Like all telecommunications carriers, we are dependent on effective
billing and management information systems to monitor and control cash flows and
network costs. EnerTel's switch mediation systems and provisioning systems are
provided by Comptel, and its inter-operator billing systems are provided by
Prospero. EnerTel utilizes a billing system supplied by Saville Systems. The
Saville system is a browser-based billing system that provides call
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rating, invoicing, fraud detection and security. We plan to expand the licenses
for the billing system to include our operations beyond the Netherlands.
Outside of the Netherlands, we use our proprietary information system
for general billing and invoicing, as well as for call rating and recording and
billing and invoicing information associated with our carrier expansion outside
the Netherlands. Billing for switched services is provided through a combination
of internal systems and outsourced services and billing for international
private lines, dedicated circuits and global enhanced services is performed
internally.
Our dedicated circuit customers typically pay a flat monthly fee based
on the amount of bandwidth purchased, the distance of the transport required and
other factors. Our calling card and other long distance services are either (i)
prepaid in advance, (ii) invoiced for payment or (iii) paid for by regular
debits that we make from the customer's credit card or bank draft accounts. In
some cases, we require customers to post deposits, letters of credit or other
financial instruments in order to reduce our exposure to bad debts and
non-payment.
SALES AND MARKETING
We have developed a global sales, marketing and service organization to
market our portfolio of telecommunications products to carriers and corporate
customers worldwide. In particular, in Europe and the United States we have
recruited proven sales professionals with well-developed business relationships
in the international long distance industry. Our global sales force currently
consists of 18 direct sales people, and approximately 190 wholesale resellers
and 285 agents. Our direct sales people have extensive experience in the
telecommunications industry, at entities which include Frontier, MCI WorldCom,
Cable & Wireless, Qwest Communications and Sprint. Our sales and marketing
strategy consists primarily of direct sales to carriers, ISPs, information
service providers, corporations, and systems integrators. We also use indirect
sales through various sales channels, including private branch exchange ("PBX")
manufacturers and resellers. For the medium sized corporate market, we primarily
rely on indirect sales through PBX and other resellers.
We utilize our independent sales agents and distributors to achieve
early market entry in international markets. We believe that the use of these
qualified local, third-party sales agents and distributors is a cost effective
means to establish or expand sales operations in new markets. To enhance our
sales and marketing efforts, we also are a member of various telecommunications
industry associations, including the European Competitive Telecommunications
Association (ECTA), the Telecommunications Reseller Association (TRA) and
CompTel. In addition, we are a corporate sponsor of Internet2, a project of the
University Corporation for Advanced Internet Development.
PRODUCTS
We offer a broad range of voice, data, video and Internet products and
services to customers both within the Netherlands and throughout Europe. Such
services include our switched services, dedicated services, switch partitioning,
virtual points of presence, telehousing and colocation opportunities, and
switchless resale services that we offer carriers, ISPs and business customers.
We believe that this broad product portfolio differentiates us from most
competitors who offer some, but not all, of such products and services. In
addition we offer these customers additional services such as international
calling cards and international operator services.
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The following is a summary of the products we currently offer in
Europe:
Target Market
-----------------------------------------
Carrier ISP Business
------- --- --------
Dedicated Services - Leased Lines X X X
Dedicated Services - IRU Sales X X X
Dedicated Services - Direct Access X
Colocation/Virtual Switching X X
Switched Voice Products X
Switched Voice - 800/900 X X X
VPOP X X X
Switchless Resales/Carrier Select Hosting X X
International Calling Cards X X
Callback Services X
ATM Services X
Voice/Fax Over IP (to be introduced in 1999) X X X
World IP Port (to be introduced in 1999) X X X
IP VPN (to be introduced in 1999) X X X
We also offer leased lines, IRU sales, colocation/virtual switching,
switched voice, international calling cards, callback services and voice over IP
products and services in the United States and plan to introduce fax over IP and
World IP Port products in the United States in 1999. In Latin America and Asia,
we offer international calling card, debit card and call back based products.
Dedicated Services
Our network design and network access agreements enable us to offer
leased or sold (IRU) bandwidth in most cities in Europe and the United States.
In addition, leased line services will include our planned offering of
tail-circuit services to trans-Atlantic undersea cable customers which will
provide connections between the landing point and the carrier's leased lines or
switches within the applicable country. We primarily provide dedicated
international bandwidth in increments such as DS-3 and E-1 between our major
points of presence in Europe and the United States, where we have installed
DMS-GSP switches and entered into capacity purchase agreements with other
network providers. In addition, EnerTel provides digital leased lines within the
Netherlands for carriers and corporations in increments of E-1 (2 Mbs), E-3 (34
Mbs) and STM-1 (55 Mbs). Each STM-1 of capacity on our network is the equivalent
of three DS-3s or 63 E-1s. As of December 31, 1998, we served 800 Mbs of
dedicated service capacity and had another 600 Mbs of capacity contracted for on
our network.
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EnerTel provides 30-channel digital trunk lines for large businesses,
which are based on Euro-ISDN specifications. ISDN-30 services enable customers
to access the EnerTel network directly from PBXs and other customer premises
equipment, thereby enabling EnerTel to compete with KPN Telecom for direct
access switched services. Through the PBX connection, EnerTel believes it can
capture a large portion of its business customers' national and international
long distance traffic. EnerTel utilizes its own network facilities,
interconnection agreements and international operating agreements to provide
domestic and international termination of customer calls on a least cost routing
basis.
Colocation/Virtual Switching
Our colocation, switch room leasing and management, and switch
partitioning products enable us to provide carrier customers with a turn-key
network service package at the same time that we generate additional
transmission traffic for our switched voice, dedicated and data services. We
provide these products and services at our international switching locations in
New York, Amsterdam and London. In addition, we expect to offer such services at
additional regional locations where we establish network points of presence.
Switched Voice Products
We offer carriers, resellers and corporate customers switched
termination services for voice and fax telecommunications traffic traveling to
points worldwide. Our network design enables us to offer international
transmission services on a switched basis worldwide. Through undersea cable
ownership, interconnection agreements, and network development in certain
European markets, we have developed a number of international routes where our
market pricing for switched termination services is expected to be highly
competitive. In December 1998 we switched approximately 143 million minutes, 24
million of which were international switched minutes (originating principally in
and around Western Europe). As of February 17, 1999, we had pre-sold or signed
contracts representing at least 39 million minutes per month (based on customer
estimates) in international long distance traffic.
Switched Voice - 800/900 Services
EnerTel offers toll-free and premium services for both third party
information service providers as well as for corporate, carrier and ISP
customers.
Virtual Point of Presence (VPOP)
EnerTel utilizes its nationwide network to offer virtual Internet
dial-in service for ISPs, large corporate customers and resellers. Customers
utilizing this service can access the Internet through an ISP via the EnerTel
network through a single access number that can be dialed from nearly every
local calling area in the Netherlands. VPOP services have grown substantially
for EnerTel over the past year as a result of the rapid growth in utilization of
the Internet. EnerTel now provides its VPOP service to 45 of the Netherlands'
ISPs (including 21 of the Netherlands' 35 national ISPs).
Switchless Resales/Carrier Select Hosting
EnerTel provides wholesale network transmission services for resellers
in the Netherlands who provide residential and small and medium sized business
customers with calling services via proprietary access codes. EnerTel initiated
this business to continue to provide the transmission services for the
residential distribution business which it sold in 1998. EnerTel plans to expand
this product line by offering it to additional carriers and resellers in the
Netherlands.
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International Calling Cards
Our international calling card products are marketed to carriers and to
business customers in Europe, the United States, Latin America and Asia,
primarily through international distributors and sales agents. We offer
international pre-paid calling cards, international credit card billed calling
cards, and international call back/direct access.
Our calling card customers access our network for domestic or
international long distance services by dialing a local access number or a
domestic or international toll-free number which connects the customer to our
network. The customer then dials an access code or personal identification
number (PIN) and, upon account verification, is able to dial a domestic or
international long distance call. In some cases customers utilize dialing
devices which automatically dial the accessed identification numbers.
Callback Services
Callback access enables a long distance customer to access a network
from locations where there are no in-country facilities or resale agreements.
The customer accesses the network from the customer's home or office by dialing
a long distance telephone number. The customer will receive a "call back" from
such number and can then use the network to connect to a desired location.
ATM Services
Our ATM products will enable corporate customers to interconnect their
offices for data and telecom traffic. Using ATM as an interconnection protocol,
a high capacity connection is delivered to the customer premises providing the
customer with bandwidth-on-demand. Compared to standard leased circuits, the
customer is able to better manage its network costs by purchasing on a usage,
rather than monthly, basis. We plan to introduce ATM services in 1999.
Voice/Fax Over IP
We are developing our network with advanced technology to provide
seamless transmission of voice and data across multiple protocols such as IP,
ATM and frame relay. To advance our IP capabilities, we are currently conducting
one of the first commercial trials of Lucent's PacketStar 6400 IP switches in
both New York and London. The Lucent PacketStar may enable us to be one of the
first carriers to offer, on a commercial scale, a fast, high-quality
transmission alternative to bypass the traditional Internet by routing a
customer's traffic over our network.
Based on the success of these IP switches, we intend to offer our Voice
Over IP and Fax Over IP products which will convert traditional circuit-switched
voice and fax transmissions into packets of data and route that data over an IP
network like the Internet or a private network. We will then convert that data
back to voice or fax on the other end for delivery to the called party. The
Voice Over IP product will be sold as a wholesale product that is complementary
to our switched voice services. We plan to introduce Voice and Fax Over IP
products in 1999.
World IP Port
World IP Port service is a new product which we intend to roll out in
1999. The product is an IP packet backbone transport service with full
connectivity to the global Internet. The product will be offered to ISPs and
carriers who wish to route traffic over our global multi-megabit backbone to the
networks with which we maintain direct connections. We believe that our
intercontinental network and direct peering agreements with other major backbone
network providers will provide customers with highly reliable, high speed
connectivity to major Internet hubs in the U.S. and Europe.
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IP VPN
We intend to provide corporate and carrier customers with Internet
Protocol Virtual Private Network (IP VAN) services that can be used to provide
reliable, secure connections between their offices and customers. These products
will be sold in connection increments ranging from 2MB to 155MB, on a flat fee
or volume usage basis. We intend to offer several levels of quality of service,
depending on customer requirements. This product is expected to be rolled-out in
1999.
CUSTOMERS
We currently serve 45 of the Netherlands' ISPs (including 21 of the
Netherlands' 35 national ISPs), 133 medium and large sized corporate customers
and 10 carriers, distributors and resellers. We have also entered into contracts
with an additional 26 carriers, distributors and resellers, with services
expected to commence during the second quarter of 1999.
We are subject to significant concentrations of credit risk, which
consist primarily of trade accounts receivable. We sell a significant portion of
our services to other carriers and resellers and, consequently, maintain
significant receivable balances with certain customers. If the financial
condition and operations of these customers deteriorate below critical levels,
our operating results could be adversely affected. For the year ended December
31, 1998, one customer, United TeleKabel Holding, N.V., accounted for
approximately 15% of our total revenues.
Carriers
We categorize our carrier customers as follows: (i) Tier I and Tier II
carriers, including United States-based long distance carriers, (ii) PTTs, and
(iii) emerging alternative carriers, such as competitive local exchange carriers
and PTOs. We expect the number of potential carrier customers to increase
significantly as deregulation permits the start-up of alternative carriers and
encourages traditional operators to expand their services beyond their national
borders. The carrier customers we target typically operate their own networks in
domestic markets, and operate some infrastructure on international routes. We
expect that carriers will use our global network on international routes where
they do not have their own network infrastructure, where they require additional
"overflow" network capacity and where we are able to offer pricing or service
advantages.
Internet Service Providers
We currently serve 45 ISPs in the Netherlands that provide us with
national Internet traffic volumes exceeding 115 million minutes per month. ISPs
generally require high capacity bandwidth transport from their markets back to
the major Internet backbones in the United States. We currently provide our
Netherlands ISP customers with such transport to the Internet exchange in
Amsterdam. We believe ISPs will require increasing bandwidth within their own
continental markets as the Internet further develops, and ISPs and Internet
backbone providers ("IBPs") are potential primary users of our international
leased line and international Internet access and termination products.
In addition, in January 1999, EnerTel entered into an agreement to
participate as one of a select number of carriers in the GTE Internetworking,
Inc. ("GTEI") Alliance Program for international distribution of Internet access
products. Under this agreement, we may, at our option, provide Internet backbone
and virtual point-of-presence services over the global GTEI network. This
alliance program extends the global reach of our VPOP and Internet access
products for ISPs and corporate customers.
Corporations, Other Businesses and Institutional Customers
Corporate and other business customers' demand for high bandwidth
international telecommunications services is growing rapidly as a result of
economic globalization and the increasing utilization of bandwidth intensive
communications applications such as the Internet, intranets, videoconferencing,
and other multimedia
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services. We believe that our services will appeal to large corporations because
of our responsiveness, competitive pricing, scalable bandwidth products, quality
of service and global network capability. Institutional customers are expected
to utilize us for direct network services, as well as domestic and international
long distance telecommunications services.
International Distributors and Resellers of Telecommunications Services
International distributors and resellers of telecommunications services
are just beginning to develop their operations in Europe in a process similar to
that which occurred in the United States in the years following the break-up of
AT&T in 1984. We believe our products will be attractive to distributors and
resellers who do not have their own international networks, or who only operate
switches in certain markets. We believe such distributors and resellers will
provide us with access to the large traffic volumes generated by retail customer
bases including small and medium businesses and residential customers.
COMPETITION
The international and national telecommunications markets in which we
operate are highly competitive. Until recently, telecommunications markets in
the Netherlands and throughout Europe have been dominated by the national PTTs.
Since the implementation of a series of European Community and World Trade
Organization directives beginning in 1990, the Netherlands and other western
European countries have started to liberalize their respective
telecommunications markets, thus permitting alternative telecommunications
providers to enter the market. Liberalization has coincided with technological
innovation to create an increasingly competitive market, characterized by
still-dominant PTTs as well as an increasing number of new market entrants. In
the Netherlands, we compete primarily with KPN Telecom. As the former monopolist
PTT provider of telecommunications services, KPN Telecom has an established
market presence, a fully-built network and financial and other resources that
are substantially greater than ours. In addition, various new providers of
telecommunications services have entered the market, targeting various segments.
Companies such as Telfort B.V. (a company which was formed by British Telecom
and Nederlandse Spoorwegen N.V., the Netherlands railroad company, and which
received the other nationwide telecommunications license which was issued in the
Netherlands) as well as Global One Communications, MCI WorldCom, Esprit Telecom
plc., COLT Telecom and VersaTel, compete with KPN Telecom and EnerTel in the
Netherlands for contracts with large multinational companies. Competition in the
Netherlands, as well as the European long distance telecommunications industry
in general, is driven by numerous factors, including price, customer service,
type and quality of services and customer relationships.
In other foreign markets, we compete with dominant national telephone
companies, and other major incumbent carriers. In addition, we compete with
other emerging U.S. and international carriers attempting to enter these markets
and with local resellers and marketers of long distance services. In the United
States, we compete against a wide variety of market participants ranging from
dominant Tier I carriers, large Tier II facilities-based carriers, switched and
switchless resellers of long distance services and hundreds of other marketers
and distributors of long distance, calling card and other telecommunications
services.
In the markets where we operate, we face competition from companies
with resources greater than ours and with longer operating histories in the
local market. To compete effectively, we must do so on the basis of factors such
as: (i) network design and costs, (ii) effective utilization of emerging
technologies such as IP, (iii) competitive pricing and rates, (iv) quality of
service, (v) ease and convenience of access, (vi) customer service and support,
(vii) quality of local distributors and sales agents, (viii) understanding of
the marketplace, (ix) ability to attract and retain qualified employees and (x)
customer acquisition and retention.
COMPANY BACKGROUND
WorldPort was originally organized as a Colorado corporation under the
name Sage Resources, Inc. in January 1989 to evaluate, structure and complete
mergers with, or acquisitions of, other companies. We remained inactive until
1996 when our domicile was changed to Delaware and our name was changed to
WorldPort
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Communications, Inc.
We primarily operate through a number of acquired subsidiaries that
operate in Europe, the United States, Latin America and Asia. In addition to our
acquisition of EnerTel, the significant acquisitions we have completed since our
formation are described below:
- - In June 1997, our wholly-owned subsidiary, Telenational
Communications, Inc. ("TNC") acquired substantially all of the
telecommunications assets and operations of Telenational
Communications Limited Partnership, a Nebraska limited partnership.
The purchased assets included telecommunications switches and other
network equipment, customer and vendor contracts, an FCC section 214
common carrier license and an operator services center. The FCC
section 214 common carrier license gives us the authority to resell
both international switched and private line services of authorized
carriers.
- - In April 1998, our wholly-owned subsidiary, WorldPort/ICX, Inc.
("ICX") acquired the telecommunications assets and operations of
Intercontinental Exchange, a licensed provider of international
telecommunications services headquartered in the San Francisco Bay
area.
- - In August 1998, we acquired the operations of International
InterConnect, Inc. ("IIC"), a Florida-based corporation specializing
in international long distance services which are marketed through
international distributors primarily in Latin America to multinational
corporations, foreign embassies, businesses and other high volume
customers. The telecommunications assets of IIC which we acquired
include network switching equipment, international private lines and
other leased circuits between the United States and countries in Latin
America, and other telecommunications equipment.
Through our non-European subsidiaries, we provide international
pre-paid and credit card billed calling card products and international call
back/direct access to carriers and business customers in the United States,
Europe, Latin America and Asia-Pacific. In particular, IIC specializes in
providing international long distance services, which are marketed through
international distributors primarily in Latin America. IIC's end-user customer
base consists primarily of multinational corporations, foreign embassies,
businesses, and other high volume customers. Through ICX, we operate a
trans-Pacific leased circuit and a network node located in Japan. ICX has a
customer base of international distributors serving customers in Japan
(including a U.S. military base), Singapore, Thailand, New Zealand and
Indonesia, as well as international distributors in Latin America, India, Africa
and Europe. TNC provides calling card and call back services, primarily to
customers in Europe, and its network (through its switching and operator
services center in Omaha, Nebraska) now switches the traffic generated by ICX.
For the three months ended December 31, 1998, and the year ended December 31,
1998, our revenues from these operations totaled $3.9 million and $10.3 million,
respectively.
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EMPLOYEES
As of January 31, 1999, we had 264 full-time employees and 18 part-time
employees in the following categories:
Management and
Technical Sales and Marketing Administration
--------- ------------------- --------------
Europe
Full-time employees 71 35 34
Part-time employees 6 3 3
United States
Full-time employees 33 27 64
Part-time employees -- -- 6
--- -- ---
Total .................. 110 65 107
We have never experienced a work stoppage, and none of our employees
are represented by a labor union or covered by a collective bargaining
agreement. We consider our employee relations to be excellent.
GOVERNMENT REGULATION
Our networks and telecommunications services are subject to significant
United States and foreign laws, regulations, treaties, agency actions and court
decisions. National and local laws and regulations governing the provision of
telecommunications services differ significantly among the countries in which we
currently operate and intend to operate. The interpretation and enforcement of
these laws and regulations can be unpredictable, is often subject to informal
views of government officials and ministries that regulate telecommunications in
each country and could limit our ability to provide certain telecommunications
services in certain markets. Future regulatory, judicial and legislative changes
could have a material adverse effect on our operations. In addition, domestic or
international regulators or third parties could raise material issues with
regard to our compliance or noncompliance with applicable laws and regulations,
possibly having a material adverse effect on our business, financial condition
and results of operation.
INTERNATIONAL REGULATION
GENERAL. In some countries where we operate or plan to operate, local
laws or regulations limit the ability of telecommunications companies to provide
basic international telecommunications services in competition with state-owned
or state-sanctioned monopoly carriers. Future regulatory, judicial, legislative
or political changes may not permit us to offer to residents of such countries
all or any of our services. Further, regulators or third parties could raise
material issues regarding our compliance with applicable laws or regulations,
possibly having a material adverse effect on our business, financial condition
and results of operations. If we are unable to provide the services that we
presently provide or intend to provide or to use our existing or contemplated
transmission methods due to our inability to obtain or retain the requisite
governmental approvals for such services or transmission methods, or for any
other reason related to regulatory compliance or lack thereof, such developments
could have a material adverse effect on our business, financial condition and
results of operations.
A summary discussion of the regulatory frameworks in certain countries
in which we operate or have targeted for penetration is set forth below. This
discussion is intended to provide a general outline of the more relevant
regulations and current regulatory postures of the various jurisdictions and is
not intended as a comprehensive discussion of such regulations or regulatory
postures. Local laws and regulations differ significantly among the
jurisdictions in which we operate, and, within such jurisdictions, the
interpretation and enforcement of such laws and regulations can be
unpredictable.
THE NETHERLANDS. Originally, under the former Netherlands
telecommunications legislation, KPN Telecom held an exclusive
concession to install and operate a nation-wide fixed
telecommunications infrastructure. On
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November 20, 1996 two other companies, EnerTel and Telfort (a joint
venture of British Telecom and Netherlands' Railways) pursuant to the
Cable Based Infrastructure Licensing Act, were each granted a license
to install and operate, as an alternative to KPN Telecom's
infrastructure, a public nation-wide fixed telecommunications network.
As public nation-wide infrastructure license holders, KPN Telecom,
EnerTel and Telfort were subject to four statutory licensing
conditions. EnerTel's current network meets the requirements of the
first two of these conditions. The third license condition required the
EnerTel network, by November 20, 2000, to (i) cover all municipalities
of over 80,000 inhabitants, (ii) have at least one point of presence in
municipalities of over 25,000 inhabitants and (iii) have at least one
point of presence on industry premises of over 30 hectares. The fourth
license condition required EnerTel to have full infrastructure coverage
in the Netherlands for the purpose of providing leased lines to anyone
in the Netherlands by November 20, 2001. EnerTel believes that, as a
result of the new telecommunications law in the Netherlands (described
below) it is no longer subject to these statutory licensing conditions
or, alternatively, that such conditions are no longer enforceable.
While EnerTel believes that its conclusions in this regard are well
founded, there can be no assurance that the Netherlands' government may
not attempt to enforce the conditions in the future.
The European Union's ("EU's") policy of full liberalization of
its telecommunications markets (including the Netherlands) became
effective on January 1, 1998. In order to fully comply with these EU
obligations a new Telecommunications Act entered into force in the
Netherlands on December 15, 1998. Under this new Telecommunications
Act, with the exception of the use of network frequencies, all
licensing requirements were abolished (including those pursuant to
which EnerTel obtained its license) and replaced by a registration
requirement. Registration requirements apply to the provision of public
telecommunications services, the installation or operation of leased
lines, the installation or operation of broadcasting networks, and the
provision of conditional access to these networks. Under the new law,
EnerTel's public nation-wide infrastructure license was automatically
converted into a registration.
The new law provides statutory rights of way and retention of
cable ownership for all operators of public telecommunications
networks. Also, this law provides for interconnection obligations for
all public telecommunications network operators, Netherlands and
foreign-based, that control access to end-users. Operators having
significant market power (i.e., over 25% market share) are required to
provide interconnection on a non-discriminatory basis and at
transparent, itemized, and cost-based prices. Similar obligations exist
for special access and leased lines.
The new Telecommunications Act further provides for the
determination of number plans by the Minister and number allocation to
registered parties, ONP-provisions, various forms of number
portability, designation of a universal service obligation, and
specific financing requirements.
Since August 1997, most of the supervisory, enforcement,
licensing, registration, and interconnection dispute settlement powers
are with Onafhankelijke Post en Telecommunicatie Autoriteit (OPTA), an
independent supervisory and regulatory body.
EUROPEAN UNION. The EU consists of the following member
states: Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain, Sweden
and the United Kingdom. EU member states are required to implement
directives issued by the European Commission ("EC") and the European
Council by passing national legislation. If an EU member state fails to
effect such directives with national or, as the case may be, regional
or local, legislation and/or fails to render the provisions of such
directives effective within its territory, the EC may take action
against the EU member state, including in proceedings before the
European Court of Justice, to enforce the directives. Private parties
may also, in certain cases, bring actions against EU member states for
failure to implement such legislation.
The EC and European Council have issued a number of key
directives establishing basic principles for the liberalization of the
EU telecommunications market. The general framework for this
liberalized environment has been set out in the EC's Services Directive
(the "Services Directive") and its subsequent amendments, including, in
particular, the Full Competition Directive, which was adopted in March
1996 (the "Full
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Competition Directive"). This basic framework has been advanced by a
series of harmonization directives, which include the so-called Open
Network Provision directives, as well as two additional directives
adopted in 1997, the Licensing Directive of April 1997 and the
Interconnection Directive of June 1997, which address the achievement
of universal service.
The Services Directive directed EU member nations to permit
the competitive provision of all telecommunications services with the
exception of the direct transport and switching of speech in real-time
between switched network termination points ("Voice Telephony") (and
not including value-added services and voice services within closed
user groups) and certain other services that have been gradually
liberalized through subsequent amendments to the Services Directive.
Historically, European countries have prohibited Voice Telephony by
foreign carriers. The EC has taken a narrow view of the services
classified as Voice Telephony, declaring that member states may not
maintain monopolies or special operating rights on voice services that
(i) confer new value-added benefits on users (e.g., alternative billing
methods); (ii) are provided through dedicated customer access (e.g.,
leased lines); or (iii) are limited to a group having legal, economic
or professional ties.
The Full Competition Directive amended the Services Directive
to set January 1, 1998 as the date by which all EU member countries
were required to remove all remaining restrictions on the provision of
telecommunications services and telecommunications infrastructure,
including Voice Telephony. Certain limited derogations from compliance
with this timetable have been granted.
The Licensing Directive sets forth rules for the procedures
associated with the granting of national authorizations for the
provision of telecommunications services and for the establishment and
operation of any infrastructure for the provision of telecommunications
services. It distinguishes between "general authorizations," which
should typically be easier to obtain because they do not require an
explicit decision by the national regulatory authority, and "individual
licenses." Individual licenses may only be imposed where the licensee
is to acquire access to scarce resources (for example, radio spectrum)
or is to be subject to particular obligations or benefits from
particular rights. Accordingly, EU member countries may impose
individual license requirements for the establishment of
facilities-based networks and for the provision of Voice Telephony,
among other things. Consequently, our development of a European network
may require that we be subject to an individual licensing system rather
than to a general authorization in the majority of EU member countries.
The Interconnection Directive sets forth the regulatory
framework for securing in the EU the interconnection of
telecommunications networks. The Interconnection Directive requires EU
member countries to remove restrictions preventing negotiation of
interconnection agreements, ensure that interconnection requirements
are non-discriminatory and transparent and ensure adequate and
efficient interconnection for public telecommunications networks and
publicly available telecommunications services. Numerous EU member
countries have chosen to apply the provisions of the Interconnection
Directive within their jurisdictions in such a way as to give more
favorable treatment to facilities-based providers and network operators
than to switch-based carriers and resellers.
The Interconnection Directive is due to be amended in the near
future to require EU member countries, except those for whom
derogations exist, to offer carrier pre-selection to their customers by
January 1, 2000, and to introduce number portability for subscribers on
the public switched telephone network by January 1, 2000. Carrier
pre-selection is required to be made available only by operators that
enjoy significant market power within the market for interconnection
over the fixed network.
Each EU member country in which we currently conduct our
business may apply these Directives in a different fashion and has a
different regulatory regime, and such differences are expected to
endure. The requirements for us to obtain necessary approvals for
operation vary considerably from country to country.
UNITED KINGDOM. The Telecommunications Act of 1984 (the "UK
Act") provides a licensing and
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regulatory framework for telecommunications activities in the United
Kingdom. The Secretary of State of Trade and Industry at the Department
of Trade and Industry (the "Secretary of Trade") is responsible for
granting licenses under the UK Act and for overseeing
telecommunications policy. At the same time, the Director General of
Telecommunications (the "Director General") is responsible for, among
other things, enforcing the terms of such licenses. The Director
General will recommend the grant of a license to operate a
telecommunications network to any applicant that the Director General
believes has a reasonable business plan, the necessary financial
resources and where there are no overriding considerations against the
grant of license.
Since 1992, the United Kingdom has permitted competition in
the provision of international services over leased lines where all
calls originate over the public switched telephone network ("PSTN") on
certain specified routes. The government revoked all ISR Licenses in
December 1997, and all holders were required to re-apply to the
Secretary of Trade to be registered under the new International Simple
Voice Resale License ("ISVR"), which authorizes the provision of
international simple voice resale. International voice calls that pass
over the PSTN at one end only can be provided under a
Telecommunications Class License. In addition, in December 1996, the
United Kingdom introduced the International Facilities License ("IFL"),
which authorizes holders to provider international telecommunications
services over their own international infrastructure.
UNITED STATES REGULATION
OVERVIEW. Our provision of international service to, from and through
the United States generally is subject to the provisions of the Communications
Act of 1934, as amended (the "Communications Act"), and the 1996
Telecommunications Act (the "1996 Act") and to regulation by the FCC. Section
214 of the Communications Act requires a company to make application to and
receive authorization from the FCC prior to leasing international capacity,
acquiring international facilities, purchasing switched minutes or providing
international service to the public. In this regard, we offer telecommunications
service pursuant to a FCC authorization under Section 214 ("Section 214
Authorization"). In addition, the FCC rules require prior Commission approval
before transferring control of or assigning FCC licenses and impose various
reporting and filing requirements upon companies providing international
services under an FCC authorization. We must file reports and contracts with the
FCC and must pay regulatory fees that are continually subject to change. We are
also subject to the specific FCC policies and rules discussed below. In
addition, by its own actions or in response to a third party's filing, the FCC
could determine that our services, termination agreements, agreements with
foreign carriers or reports do not or did not comply with the FCC rules. If this
were to occur, the FCC could order us to terminate non-compliant arrangements,
fine us or revoke our FCC authorizations. Any of these actions could have a
material adverse effect upon our business, operating results and financial
condition.
INTERNATIONAL TRAFFIC. Under the World Trade Organization Basic Telecom
Agreement (the "WTO Agreement"), concluded on February 15, 1997, sixty-nine
nations comprising 95% of the global market for basic telecommunications
services agreed to permit competition from foreign carriers. In addition,
fifty-nine of these countries have subscribed to specific procompetitive
regulatory principles. The WTO Agreement became effective on February 5, 1998
and is expected to be implemented by the signatory countries by 2002. We believe
that the WTO Agreement will increase opportunities for us and our competitors.
However, the precise scope and timing of the implementation of the WTO Agreement
remain uncertain and there can be no assurance that the WTO Agreement will
result in beneficial regulatory liberalization.
THE FCC'S POLICIES ON CALL-BACK SERVICE. We offer service by means of
call-reorigination or call-back pursuant to our FCC authorization under Section
214 and certain relevant FCC decisions. A small and diminishing percentage of
our revenues are generated in this way. Call-back service allows a customer in a
foreign country to use foreign facilities to dial a telephone number in the
United States and receive dial tone at a switch at the reseller's United States
location, which the customer can then use to place a call via an outbound
switched service of a United States carrier. The through calls are then billed
at the United States-tariffed rates. The FCC has determined that international
call-reorigination or call-back service using uncompleted call signaling does
not violate United States or international law. The FCC held, however, that
United States call-back providers are not authorized to provide service to
customers in countries that expressly have declared it to be illegal. Further,
United States companies
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providing such services must comply with the laws of the countries in which they
operate as a condition of their Section 214 authorizations. The FCC reserves the
right to condition, modify or revoke any Section 214 authorization and impose
fines for violations of the Communications Act or FCC regulations, rules or
policies promulgated thereunder or for violations of the clear and explicit
telecommunications laws of other countries that are unable to enforce their laws
against United States carriers. FCC policy provides that foreign governments
that satisfy certain conditions may request FCC assistance in enforcing their
laws. Thus, the FCC has stated that it would be prepared to receive
documentation from any government that seeks to put United States carriers on
notice that call-back using uncompleted call signaling has been declared
expressly illegal in its territory and that it would consider enforcement action
against companies based in the United States that provide international
call-back service using uncompleted call signaling. There can be no assurance
that the FCC will not take action to limit the provision of call-back services.
Enforcement action could include an order to cease providing call-back services
in certain countries, the imposition of one or more restrictions upon us,
monetary fines, or, ultimately, the revocation of our Section 214 authorization
and could have a material adverse effect upon our business, financial condition
and results of operation.
THE FCC'S PRIVATE LINE RESALE POLICY. The FCC's international private
line resale policy has traditionally limited the conditions under which a
carrier may connect international private lines ("IPL") to the PSTN at one or
both ends to provide switched services, commonly known as International Simple
Resale ("ISR"). The FCC historically has required that, when a carrier seeks to
reroute switched telephone traffic over IPLs interconnected to the PSTN at
either end, the carrier must obtain separate Section 214 authorization by
demonstrating that the destination country affords resale opportunities
"equivalent" to those available under United States law. In November 1997, the
FCC adopted a new order (the "Foreign Participation Order"), which became
effective in February 1998, eliminating the equivalency test with respect to
applications to provide switched resale services over private lines between the
United States and WTO member countries. Thus, pursuant to their Section 214
authorization, carriers are authorized to provide switched services to member
WTO countries over international private lines. A carrier's provision of
switched services over either facilities-based or resold IPLs, however, remains
subject to the conditions set forth in the FCC's International Settlements
Policy described below. Petitions for reconsideration of the Foreign
Participation Order are pending at the FCC.
THE FCC'S INTERNATIONAL SETTLEMENTS POLICY. We also are required to
conduct our international facilities-based and resale businesses in compliance
with the FCC's international settlements policy (the "ISP"). The ISP governs the
international settlement rates that United States carriers pay foreign carriers
to terminate international telecommunications traffic originating in the United
States. The FCC adopted new rules regarding ISP rates that became effective on
January 1, 1998 (the "International Settlement Rates Order"). The international
accounting rate system allows a United States facilities-based carrier to
negotiate an "accounting rate" with a foreign carrier for handling each minute
of international telephone service. Each carrier's portion of the accounting
rate (usually one half) is referred to as the settlement rate. The new
International Settlement Rates Order generally requires United States
facilities-based carriers to negotiate settlement rates with their foreign
correspondent at no greater than FCC established "benchmark" prices.
Historically, international settlement rates have vastly exceeded the costs of
carrying telecommunications traffic. In addition, the International Settlement
Rates Order imposes new conditions upon certain carriers. First, the FCC
conditioned facilities-based authorizations for service on a route on which a
carrier has a foreign affiliate upon the foreign affiliate offering all other
United States carriers a settlement at or below the relevant benchmark rate.
Second, the FCC conditioned any authorization to provide switched services over
either facilities-based or resold international private lines upon the condition
that at least fifty percent of the facilities-based international telephone
service traffic on the subject route is settled at or below the relevant
benchmark rate. This condition applies whether or not the licensee has a foreign
affiliate on the route in question. Under the Foreign Participation Order
described above, however, if the subject route does not comply with the
benchmark requirement, a carrier can receive authorization by demonstrating that
the foreign country provides "equivalent" resale opportunities. Accordingly, we
are permitted to resell private lines for the provision of switched services to
any country that either has been found by the FCC to comply with the benchmarks
or has been determined to be equivalent. The United States Court of Appeal for
the District of Columbia Circuit recently affirmed the International Settlement
Rates Order in all respects. The Order, however, could be appealed further, and
we cannot predict the outcome of an additional appeal or its possible impact on
our operations.
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THE FCC'S POLICIES ON TRANSIT AND REFILE. The FCC in 1995 was asked to
limit or prohibit the practice whereby a carrier routes, through its facilities
in a third country, traffic originating in one country and destined for another
country. The FCC has permitted third country calling where all countries
involved consent to the routing arrangements (referred to as "transiting").
Under certain arrangements referred to as "refiling," the carrier in the
destination country does not consent to receiving traffic from the originating
country and does not realize the traffic it receives from the third country is
actually originating from a different country. The 1995 petition to prohibit
refiling was withdrawn, and, accordingly, the FCC has never issued a ruling as
to whether refiling arrangements are inconsistent with federal law. It is
possible that the FCC could determine that refiling violates United States
and/or international law, which could have a material adverse effect on our
business, financial condition and results of operations.
THE FCC'S TARIFF REQUIREMENTS FOR INTERNATIONAL LONG DISTANCE SERVICES.
We are required to file with the FCC a tariff containing the rates, terms and
conditions applicable to its international telecommunications services. We also
are required to file with the FCC any agreements with customers containing
rates, terms and conditions for international telecommunications services if
those rates, terms and conditions are different than those contained in our
filed tariff. If we charge rates other than those set forth in or otherwise
violate our filed tariff or a filed customer agreement or fail to file with the
FCC carrier-to-carrier agreements, the FCC or a third party could bring an
action against us, which could result in a fine, a judgment or other penalties,
which could have a material adverse effect on our business, financial condition
and results of operations.
RECENT AND POTENTIAL FCC ACTIONS. Regulatory action that may be taken
in the future by the FCC may intensify competition, impose additional operating
costs, disrupt transmission arrangements or otherwise require us to modify our
operations. The FCC recently adopted certain changes in its rules designed to
permit alternative arrangements outside of its ISP as a means of encouraging
competition and achieving lower, cost-based accounting and collection rates as
more facilities-based competition is permitted in foreign markets. Specifically,
the FCC has decided to allow United States carriers, subject to certain
competitive safeguards, to propose methods to pay for international call
termination that deviate from traditional bilateral accounting rates and the
ISP. In addition, the International Settlement Rates Order established lower
benchmarks that United States carriers will pay foreign carriers for the
termination of international services. Although these rule changes may provide
us with more flexibility to respond more rapidly to changes in the global
telecommunications market, they also will provide the same flexibility to our
competitors.
ITEM 2. PROPERTIES
Our principal offices are located in the Atlanta, Georgia area and are
leased pursuant to an agreement which expires in June 2003. We also lease
approximately 11,000 square feet of office and operating space in Omaha,
Nebraska for our U.S. operating center pursuant to an agreement which expires in
June 2001 and approximately 69,000 square feet of office and operating space in
Rockledge, Florida pursuant to an agreement which expires in August 2008.
EnerTel leases office and operational space in Rotterdam and other cities in the
Netherlands, pursuant to leases expiring at various dates from 1999 to 2006.
We own telecommunications switching and peripheral equipment located in
various sites in Europe and the United States. Certain of our property and
equipment is subject to liens securing payment of portions of our indebtedness.
You should see Note 6 to the Consolidated Financial Statements included
elsewhere herein for information with respect to lease obligations on these
properties.
We believe that our property and equipment are well maintained and
adequate to support our current needs, although substantial investments are
expected to be made in additional property and equipment for expansion and in
connection with corporate development activities.
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ITEM 3. LEGAL PROCEEDINGS
On April 17, 1998, we were served with a summons and complaint from MC
Liquidating Corporation f/k/a MIDCOM Communications, Inc. ("MIDCOM"). Both we
and TNC, our wholly-owned subsidiary 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 one of our former
directors. 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 us, together with
other damages, attorney fees and costs. We believe the claims are without merit
and intend to vigorously defend against them.
On June 2, 1998 we initiated an arbitration proceeding against John W.
Dalton ("Dalton"), a former director, and our former President and Chief
Executive Officer. In that proceeding, we are seeking the rescission and
cancellation of 1.2 million shares of our Common Stock that were issued to
Dalton in connection with our acquisition of a company formerly owned by Dalton.
In the same proceeding, Dalton is asserting claims against us, Maroon Bells
Capital Partners, Inc. ("MBCP"), Paul A. Moore (our Chairman and Chief Executive
Officer), Phillip S. Magiera (a director and our Chief Financial Officer and
Secretary), Dan Wickersham (our former President and Chief Operating Officer)
and Theodore H. Swindells (a principal of MBCP). Dalton's employment was
terminated by notice dated April 6, 1998. Dalton alleges, among other things
that those parties engaged in breach of contract, tortious interference and
breach of fiduciary duty in connection with the termination of Dalton's
employment contract. Dalton had previously asserted these claims in a lawsuit he
filed in Texas state court. However, based on a motion we filed, that proceeding
was dismissed by the Texas court in favor of arbitration. We plan to prosecute
our claims against Dalton vigorously and to vigorously defend against the claims
asserted by Dalton.
We and WorldPort Communications Europe, B.V., one of our European
subsidiaries ("WorldPort Europe"), are defendants in litigation filed in the
Sub-District and District courts of The Hague, located in Rotterdam,
Netherlands. The cases, filed in January and February, 1999, by Mr. Bahman
Zolfagharpour, allege that we breached agreements with Mr. Zolfagharpour in
connection with our purchase of MathComp B.V. (now WorldPort Europe) from Mr.
Zolfagharpour, our subsequent purchase of EnerTel, and Mr. Zolfagharpour's
employment agreement with WorldPort Europe. The litigation seeks dissolution of
the employment agreement and the non-competition clause of the agreement,
damages in an amount exceeding $20 million, and the award of 2,500,000 shares of
our common stock to Mr. Zolfagharpour. We believe that the litigation is wholly
without merit and intend to defend the case vigorously.
From time to time, we are involved in various other lawsuits or claims
arising from the normal course of business. In the opinion of management, none
of such other lawsuits or claims will have a material adverse effect on our
financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Inapplicable
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our Common Stock has traded on the Nasdaq SmallCap Market under the
symbol "WRDP" since November 23, 1998. From June 17, 1997 until November 23,
1998, our Common Stock traded on the OTC Bulletin Board operated by The National
Association of Securities Dealers, Inc. Prior to June 17, 1997, there was no
public market for our Common Stock. The table below sets forth the high and low
sales prices for our Common Stock (as reported on the Nasdaq SmallCap Market
since November 23, 1998 and on the OTC from June 17, 1997 to November 23, 1998)
during the periods indicated. The OTC quotations reflect high and low bid
information and reflect inter-dealer prices, without retail mark-up, mark-down
or commission and may not necessarily represent actual transactions.
PRICE RANGE OF
COMMON STOCK
-----------------------
HIGH LOW
YEAR ENDED DECEMBER 31, 1997:
Second Quarter (from June 17, 1997) ...... $ 3.625 $ 2.000
Third Quarter ............................ 4.750 3.250
Fourth Quarter ........................... 7.375 4.500
YEAR ENDED DECEMBER 31, 1998:
First Quarter ............................ 7.620 6.500
Second Quarter ........................... 14.500 6.750
Third Quarter ............................ 17.500 8.750
Fourth Quarter (through November 20, 1998) 11.125 6.750
Fourth Quarter (since November 23, 1998) . 10.875 7.500
As of March 1, 1999, there were approximately 160 stockholders of
record of our Common Stock.
We have never declared or paid any cash dividends on our capital stock,
although our Series A Preferred Stock has been accruing dividends since
issuance. In addition, our current credit facility prevents the payment of cash
dividends under certain circumstances. We currently intend to retain future
earnings, if any, to finance the growth and development of our business and,
therefore, do not anticipate paying any cash dividends in the future.
In 1998, in addition to the stock issuances which we have previously
described in our Forms 10-QSB, we made the following issuances of securities
without registration under the Securities Act of 1934, as amended (the
"Securities Act"). All such issuances were made to "accredited investors" as
defined in the Securities Act and its regulations and were exempt from
registration under Section 4(2) of the Securities Act.
- In the first six months of 1998, we issued an aggregate of
460,655 shares of our Series B Preferred Stock to accredited
investors, including our Chief Executive Officer and Chief
Financial Officer, for a purchase price of $5.36 per share.
The Series B Convertible Preferred Stock is convertible into
shares of our Common Stock at any time at the option of the
holder at a rate of four shares of Common Stock for each share
of Series B Preferred Stock. Holders of Series B Convertible
Preferred Stock have voting rights equal to 40 votes per share
on all matters submitted to a vote of the stockholders of the
Company.
- In April 1998, we issued 20,000 shares of Common Stock in
connection with our acquisition of a United Kingdom company.
- In June 1998, we issued 80,000 shares of Common Stock to a
marketing consultant pursuant to a services agreement in
exchange for services rendered.
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- In June 1998, we issued 57,380 shares of Common Stock in a
private placement, for a purchase price of $1.34 per share.
- In 1998, we issued an aggregate of 273,548 shares of Common
Stock upon conversion of 68,387 shares of our Series B
Convertible Preferred Stock.
- On December 31, 1998, we sold to The Heico Companies, LLC
("Heico") 212,405 shares of our Series C Convertible Preferred
Stock for an aggregate purchase price of $7.5 million. In such
transaction, Heico also (i) committed to acquire an additional
920,419 shares of Series C Preferred Stock for an aggregate
purchase price of $32.5 million (which it subsequently
acquired in January 1999) and (ii) received an option to
acquire up to 283,206 shares of Series C Stock for an
aggregate purchase price of $10.0 million. See, "Certain
Relationships and Related Transactions." Heico may, at its
option and without any payment of consideration, convert each
of its shares of Series C Preferred Stock into 10.865 shares
of our Common Stock (the number of shares of Common Stock into
which the Series C Stock is convertible is subject to
adjustment in certain circumstances, such as stock splits,
stock dividends and recapitalizations). Since the sale of our
Series C Convertible Preferred Stock was in accordance with
Rule 506 of Regulation D under the Securities Act of 1933, as
amended (the "Act"), it was exempt from registration under the
Act.
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ITEM 6. SELECTED FINANCIAL DATA
The selected statements of operations data for the period from
inception (January 6, 1989) to December 31, 1995 and each of the years ended
December 31, 1996, 1997 and 1998 and the selected balance sheet data for the
periods then ended have been derived from our Consolidated Financial Statements
audited by Arthur Andersen LLP, included elsewhere herein. You should read the
following selected financial data in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations," and our
Consolidated Financial Statements and Notes thereto, included elsewhere in this
Report.
FOR THE PERIOD
FROM INCEPTION
(JANUARY 6,
1989) TO YEARS ENDED DECEMBER 31
DECEMBER 31, -------------------------------------
1995 1996 1997(1) 1998(2)
----- ------- -------- --------
(IN THOUSANDS, EXCEPT RATIO AND PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues ............................................. $ -- $ -- $ 2,776 $ 28,591
Cost of services ..................................... -- -- 2,605 21,187
------ ------- -------- --------
Gross margin ......................................... 171 7,404
Other operating expenses:
Selling, general and administrative ............. 43 270 2,723 39,147
Depreciation and amortization ................... -- -- 818 11,069
Asset impairment ................................ -- -- -- 4,842
------ ------- -------- --------
Operating loss ....................................... (43) (270) (3,370) (47,654)
--------
Other:
Interest income (expense), net ....................... 7 10 (128) (24,570)
Other ................................................ -- -- 6 (5,451)
------ ------- -------- --------
Loss before minority interest and income tax provision (36) (260) (3,492) (77,675)
Minority interest .................................... -- -- -- 903
------ ------- -------- --------
Loss before income tax provision ..................... (36) (260) (3,492) (76,772)
Income tax provision ................................. -- -- -- --
------ ------- -------- --------
Net loss ............................................. $ (36) $ (260) $ (3,492) $(76,772)
======= ======= ======== ========
Basic and diluted net loss per common share .......... $(0.60) $ (0.11) $ (0.26) $ (4.47)
====== ======= ======== ========
Weighted average common shares ....................... 60 2,358 13,245 17,158
------ ------- -------- --------
OTHER OPERATING DATA:
EBITDA(3) ....................................... $ (43) $ (270) $ (2,552) $(31,743)
Ratio of earnings to fixed charges(4) ........... N/A -- -- --
Capital expenditures ............................ -- -- 771 8,822
AS OF DECEMBER 31,
----------------------------------------------
1995 1996 1997 1998
---- ------ -------- ---------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital (deficit) . $15 $2,787 $ (4,143) $(103,845)
Property and equipment, net 0 0 5,032 91,226
Total assets .............. 15 2,889 13,197 220,455
Long-term obligations ..... 0 420 4,197 29,567
Stockholders' equity ...... 15 2,367 4,155 17,522
- ---------
(1) Includes the financial results of Telenational Communications, Inc. and
Wade Wallace, Inc. from June 20, 1997 and July 3, 1997, the respective
dates of their acquisition.
(2) Includes the financial results of EnerTel and IIC from June 23, 1998
and August 1, 1998, the respective dates of their acquisition.
(3) EBITDA represents net loss adjusted for interest, income taxes,
depreciation and amortization. EBITDA is provided because it is a
measure commonly used in our industry. EBITDA is not a measurement of
financial performance under GAAP and should not be considered an
alternative to net income as a measure of performance or to cash flow
as a measure of liquidity.
(4) For the years ended December 31, 1996, 1997 and 1998, earnings were
insufficient to cover fixed charges by approximately $0.3 million, $3.5
million, and $77.7 million, respectively. Earnings consist of income
before income taxes plus fixed charges (exclusive of interest
capitalized). Fixed charges consist of interest charges and
amortization of debt issuance costs, whether expensed or capitalized,
and the portion of rent under operating leases representing interest.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction
with "Selected Financial Data," the Consolidated Financial Statements and Notes
thereto, and the other financial data appearing elsewhere in this Report.
OVERVIEW
We are a rapidly growing facilities-based global telecommunications
carrier offering voice, data and other telecommunications services to carriers,
ISPs, medium and larger corporations and distributors and resellers.
Our growth to date has occurred principally through acquisitions, most
notably our acquisition of EnerTel. We acquired EnerTel in June 1998, for
consideration consisting of approximately $92 million and the payment of certain
EnerTel indebtedness of approximately $17 million. In November 1998 we sold a
15% interest in the direct parent of EnerTel to former shareholders of EnerTel
for approximately $14.8 million, including approximately $2.8 million in cash
and approximately $12 million in a shareholder note. The principal on this
shareholder note is payable ten years after our repayment of the Interim Loan,
which financed our acquisition of EnerTel. During 1997 and a portion of 1998,
EnerTel's principal source of revenue was indirect access services provided by
its Bel 1600 division to small and medium size business and residential
subscribers. In October 1998, we sold the Bel 1600 division of EnerTel for
approximately $2.8 million (its net carrying value) as part of a strategic
repositioning of EnerTel to serve carriers, ISPs and other high volume
customers. As a condition to the sale we retained, on a wholesale basis, the
traffic minutes generated by the residential subscribers. Of our 1998 revenue,
approximately $2.7 million was related to the Bel 1600 division, prior to sale,
and approximately $1.8 million was related to our carrying Bel 1600 traffic on a
wholesale basis after the sale.
In addition to our EnerTel operations, during 1998 we acquired IIC
(August 1998) and ICX (April 1998) which serve distributors and resellers
focused on international calling card and private line services. We believe that
these operations help us to expand our name recognition and traffic volumes in
emerging markets. Based in the San Francisco Bay area, ICX provides
telecommunication services principally through a network of agents and
distributors in Japan and other Asian countries. We acquired the assets and
operations of ICX in April 1998, in exchange for 400,000 shares of Common Stock
(of which 200,000 shares are held pursuant to an escrow agreement for a period
of eighteen months following the closing subject to the attainment of certain
future revenue requirements and to indemnify us for any breach of certain
representations and warranties).
In August 1998, we acquired the assets and operations of International
InterConnect, Inc. ("IIC"). The purchase consideration was 916,520 shares of
Common Stock (of which 38,500 are held in escrow) and $750,000. IIC specializes
in providing international long distance services primarily to Latin America.
IIC's customer base consists primarily of resellers, multinational corporations,
foreign embassies, and other businesses.
In February 1998, we commenced operations in the Netherlands through
the acquisition of MathComp B.V., whose name we changed to WorldPort
Communications Europe, B.V. ("WorldPort Europe"). In connection with this
acquisition, we issued 150,000 shares of Common Stock and paid $250,000 in cash.
The former shareholder of WorldPort Europe is eligible to earn an additional
2,350,000 shares of common stock contingent upon the attainment of certain
future revenue and gross margin requirements during the first and second
quarters of 1999. Following the acquisition of EnerTel, we have taken reserves
of approximately $5.2 million for the wind down of those operations in 1999. See
"Legal Proceedings."
In June 1997, our subsidiary, Telenational Communications, Inc. ("TNC")
completed the acquisition (the "TNC Acquisition") of substantially all of the
telecommunications assets and operations of Telenational Communications Limited
Partnership, a Nebraska limited partnership. The results of operations of TNC
are included in our consolidated financial statements from the date of
acquisition. The assets were purchased in exchange for (i) 3,750,000 shares of
our Common Stock and (ii) our assumption of certain indebtedness up to a maximum
of $4.6 million. The purchased assets include telecommunications switches and
other network equipment, customer and vendor contracts, an FCC section 214
common carrier license and an operator services center in
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Omaha, Nebraska. The FCC section 214 common carrier license gives us the
authority to resell both international switched and private line services of
authorized carriers.
In July 1997, we merged The Wallace Wade Company ("WWC"), a Texas
corporation, into a wholly-owned subsidiary (the "WWC Acquisition"). WWC was a
telecommunications marketing consulting firm which produced and implemented
marketing strategies for clients ranging from small companies to large corporate
clients. Our former President and Chief Executive Officer was the sole
shareholder of WWC. In connection with the WWC acquisition, we delivered (i)
1,200,000 shares of Common Stock, (ii) $75,000 in cash and (iii) a promissory
note in the amount of $175,000. See "Legal Proceedings." WWC's operating
revenues and expenses did not have a material impact on our operating revenues
and expenses in fiscal 1997 or 1998. In 1998 we wrote-down the assets of WWC
which is no longer part of our strategic plan.
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues
Revenues increased to $28.6 million from $2.8 million for the years
ended December 31, 1998 and 1997, respectively. The increase in revenues was
primarily due to the inclusion of the results of operations of newly acquired
entities. Of our 1998 revenues, EnerTel contributed $18.3 million, ICX $3.4
million, and IIC $3.2 million.
EnerTel primarily generates revenue from the transmission of both
domestic and international switched minutes in the Netherlands. EnerTel also
derives revenues from the fixed monthly rental of private line circuits. The
growth in EnerTel's revenues in 1998 included growth in all EnerTel product
lines including virtual point of presence (VPOP) internet access; direct access
local, national and international switched services; and 800/900 products as
well as the wholesale portion of the former Bel 1600 business. In 1998, the VPOP
business represented 36% of EnerTel revenues. In addition, our calling card and
private line operations represented approximately $10.3 million in 1998
revenues, generated through the sale of switched minutes.
Gross Margin
Gross margin increased to $7.4 million from $0.2 million for the years
ended December 31, 1998 and 1997, respectively. The increase in gross margin was
primarily due to the inclusion of the results of operations of ICX, EnerTel, and
IIC subsequent to the closing of those acquisitions in April, June and August