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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 2002.
or
[ ] Transition Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from _____ to _______
Commission File Number 000-25015
WORLDPORT COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 84-1127336
-------- ----------
(State or other jurisdiction of (IRS Employer ID Number)
incorporation or organization)
975 Weiland Road, Ste. 160
Buffalo Grove, Illinois 60089
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(Address of principal executive offices)
(847) 229-8200
--------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [X] NO [ ]
As of November 1, 2002, the Registrant had 39,087,252 shares of Common Stock,
par value $0.0001, outstanding.
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WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
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Item 1. Financial Statements (unaudited)
Condensed Consolidated Balance Sheets as of
September 30, 2002 and December 31, 2001................. 3
Condensed Consolidated Statements of Operations
for the Three and Nine Months Ended September 30, 2002
and 2001................................................. 4
Condensed Consolidated Statements of Cash Flows for the
Three and Nine Months Ended September 30, 2002 and 2001.. 5
Notes to Condensed Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............ 17
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.. ........................................... 25
Item 4. Controls and Procedures.................................. 25
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings........................................ 26
Item 2. Changes in Securities.................................... 27
Item 6. Exhibits and Reports on Form 8-K......................... 27
SIGNATURE.................................................................... 28
CERTIFICATIONS............................................................... 28
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
ASSETS 2002 2001
---- ----
CURRENT ASSETS:
Cash and cash equivalents ....................................................... $ 108,370 $ 61,475
Marketable securities ........................................................... 10,797 10,759
Income tax receivable ........................................................... -- 51,964
Other current assets ............................................................ 431 3,230
--------- ---------
Total current assets .............................................. 119,598 127,428
PROPERTY AND EQUIPMENT, net ..................................................... 736 5,666
OTHER ASSETS .................................................................... 679 1,722
--------- ---------
TOTAL ASSETS ................................................. $ 121,013 $ 134,816
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ............................................................... $ 2,831 $ 9,938
Accrued expenses ............................................................... 13,777 21,264
Net liabilities of non-controlled subsidiaries ................................. 9,663 1,277
Current portion of obligations under capital leases ............................ 2,979 4,335
Other current liabilities ...................................................... 1,440 2,543
--------- ---------
Total current liabilities ....................................... 30,690 39,357
Long-term obligations under capital leases, net of current portion ............ 1,559 3,433
--------- ---------
Total liabilities ............................................... 32,249 42,790
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Undesignated preferred stock, $0.0001 par value, 4,004,000 shares
authorized, no shares issued and outstanding ................................ -- --
Series A convertible preferred stock, $0.0001 par value, 750,000 shares
authorized, no shares issued and outstanding ................................ -- --
Series B convertible preferred stock, $0.0001 par value, 3,000,000 shares
authorized, 956,417 and 965,642 shares issued and outstanding in 2002
and 2001, respectively....................................................... -- --
Series C convertible preferred stock, $0.0001 par value, 1,450,000 shares
authorized, 1,416,030 shares issued and outstanding ......................... -- --
Series D convertible preferred stock, $0.0001 par value, 650,000 shares
authorized, 316,921 shares issued and outstanding ........................... -- --
Series E convertible preferred stock, $0.0001 par value, 145,000 shares
authorized, 141,603 shares issued and outstanding ........................... -- --
Series G convertible preferred stock, $0.0001 par value, 1,000 shares
authorized, 1,000 shares issued and outstanding ............................. -- --
Common stock, $0.0001 par value, 200,000,000 shares authorized, 39,087,252
and 38,087,252 shares issued and outstanding in 2002 and 2001,
respectively................................................................. 4 4
Warrants ....................................................................... 2,611 2,611
Additional paid-in capital ..................................................... 187,213 187,213
Accumulated other comprehensive loss ........................................... (5,108) (1,938)
Accumulated deficit ............................................................ (95,956) (95,864)
--------- ---------
Total stockholders' equity ...................................... 88,764 92,026
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ...................... $ 121,013 $ 134,816
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
REVENUES .............................................................. $ -- $ -- $ -- $ --
COST OF SERVICES ...................................................... -- -- -- --
-------- -------- -------- --------
Gross profit ..................................................... -- -- -- --
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses ..................... 665 1,397 2,573 4,803
Depreciation and amortization .................................... 38 51 115 150
-------- -------- -------- --------
Operating loss ............................................. (703) (1,448) (2,688) (4,953)
-------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income .................................................. 545 973 1,444 4,132
Interest expense ................................................. -- -- (111) (67)
Gain (loss) on sale of assets ..................................... 20 -- 16 (289)
Other income (expense), net ...................................... -- -- -- 28
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES .............................................. (138) (475) (1,339) (1,149)
INCOME TAX PROVISION .................................................. -- -- -- --
-------- -------- -------- --------
NET LOSS FROM CONTINUING OPERATIONS ................................... (138) (475) (1,339) (1,149)
INCOME (LOSS) FROM DISCONTINUED
OPERATIONS, net of tax .............................................. 1,604 (27,105) 1,247 (51,490)
-------- -------- -------- --------
NET INCOME (LOSS) ..................................................... $ 1,466 $(27,580) $ (92) $(52,639)
======== ======== ======== ========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS:
BASIC
DILUTED ............................................................ $ (0.00) $ (0.01) $ (0.03) $ (0.03)
======== ======= ========== =========
$ (0.00) $ (0.01) $ (0.03) $ (0.03)
======== ======= ========== =========
NET INCOME (LOSS) PER SHARE:
BASIC .............................................................. $ 0.04 $ (0.71) $ (0.00) $ (1.43)
======== ======= ========== =========
DILUTED ............................................................ $ 0.02 $ (0.71) $ (0.00) $ (1.43)
======== ======= ========== =========
SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION:
BASIC ............................................................. 39,087 39,062 39,087 36,794
CONVERTIBLE PREFERRED STOCK ....................................... 22,066 -- -- --
WARRANTS .......................................................... 663 -- -- --
OPTIONS ........................................................... -- -- -- --
-------- ------- --------- -------
DILUTED ........................................................... 61,816 39,062 39,087 36,794
======== ======= ========= =======
The accompanying notes are an integral part of these condensed consolidated financial statements.
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------ -------------
2002 2001 2002 2001
---- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................................ $ 1,466 $ (27,580) $ (92) $ (52,639)
Adjustments to reconcile net income (loss) to net cash flows from
operating activities:
(Income) loss from discontinued operations ......................... (1,604) 27,105 (1,247) 51,490
Depreciation and amortization ...................................... 38 51 115 150
Gain on sale of assets ............................................. (20) -- (16) 289
Change in other current and noncurrent assets ...................... 579 17 672 (59)
Change in accounts payable, accrued expenses and other liabilities . (778) (4,339) (2,208) (5,886)
--------- --------- --------- ---------
Net cash flows from operating activities ................. (319) (4,746) (2,776) (6,655)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities .................................. -- (11,000) -- (11,000)
Capital expenditures ............................................... -- (27) -- (51)
Proceeds from sale of assets ....................................... 20 -- 20 1,311
--------- --------- --------- ---------
Net cash flows from investing activities ................. 20 (11,027) 20 (9,740)
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on obligations under capital leases ............ -- -- (1,229) (405)
--------- --------- --------- ---------
Net cash flows from financing activities ................. -- -- (1,229) (405)
Net cash flows from discontinued operations .................................. (909) (20,135) 50,880 (43,201)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ......................... (1,208) (35,908) 46,895 (60,001)
CASH AND CASH EQUIVALENTS, beginning of the period ........................... 109,578 108,303 61,475 132,396
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of the period ................................. $ 108,370 $ 72,395 $ 108,370 $ 72,395
========= ========= ========= =========
CASH PAID DURING THE PERIOD FOR INTEREST ..................................... $ 81 $ 158 $ 279 $ 402
========= ========= ========= =========
SUPPLEMENTAL SCHEDULE OF NON-CASH
INVESTING AND FINANCING ACTIVITIES:
Acquisition of hostmark through the issuance of common stock .......... $ -- $ -- $ -- $ 11,975
========= ========= ========= =========
Acquisition of property and equipment under capital lease ............. $ -- $ -- $ -- $ 7,875
========= ========= ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
Worldport Communications, Inc., a Delaware corporation (together
with its subsidiaries, the "Company"), was originally organized as a
Colorado corporation under the name Sage Resources, Inc. in January
1989. Worldport remained inactive until 1996 when the Company's
domicile was changed to Delaware and the name was changed to Worldport
Communications, Inc.
From 1997 to 1999, the Company was a facilities-based global
telecommunications carrier offering voice, data and other
telecommunications services to carriers, Internet service providers,
medium and large corporations and distributors and resellers operating
in Europe and the United States. In order to meet its obligations under
its interim loan facility, the Company sold substantially all of its
material assets during the first quarter of 2000.
During 2000 and 2001, we pursued a new business strategy,
focused on the delivery of Internet managed hosting services to global
companies doing business in the European marketplace. However, we did
not achieve the revenue growth we had anticipated, which, combined with
the general economic downturn and the slowdown in technology spending,
prompted us to review various alternatives to our existing business
plan. We made the decision to take restructuring actions and to divest
certain assets during the fourth quarter of 2001 and the first quarter
of 2002, as described in Note 3. As a result, we no longer have active
business operations. Accordingly, results of our exited operations have
been classified as discontinued, and prior periods have been restated
in order to conform to the new presentation.
After completing the activities related to exiting our
subsidiaries and satisfying the related liabilities, we expect to
continue to have significant cash resources. We are currently operating
with a minimal headquarters staff while we complete the activities
related to exiting our prior businesses and determine how to use our
cash resources. We will have broad discretion in determining how and
when to use these cash resources. Alternatives being considered include
potential acquisitions, a recapitalization which might provide
liquidity to some or all shareholders, and a full or partial
liquidation.
Since ceasing our business operations, we have sought and
reviewed acquisition opportunities. However, we have not yet actively
pursued any of these opportunities since we did not believe that any of
them were in the best interests of our shareholders. Although we intend
to continue to consider potential acquisition opportunities, we have
not identified a specific industry on which we intend to focus and have
no present plans, proposals, arrangements or understandings with
respect to the acquisition of any specific business.
We are also continuing to analyze a potential liquidation of the
Company and its effects on the Company's stockholders. Upon any
liquidation, dissolution or winding up of the Company, the holders of
our outstanding preferred stock would be entitled to receive
approximately $68 million prior to any distribution to the holders of
our common stock.
We have also actively worked to resolve and settle the Company's
outstanding liabilities. For example, as described in Note 4, we
settled a $7.7 million liability in August 2002 related to a lease for
real property in Slough, U.K.
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
condensed or omitted in this Form 10-Q pursuant to such rules and
regulations; however, management believes that the disclosures herein
are adequate to make the information presented not misleading. The
financial statements and notes thereto included in this Form 10-Q
should be read in conjunction with the financial statements and notes
thereto included in the Company's Annual Report on Form 10-K for the
year ended December 31, 2001 and the Company's Current Report on Form
8-K dated June 6, 2002.
In the opinion of the Company's management, the accompanying
condensed consolidated financial statements contain all adjustments
necessary to present fairly the Company's financial position as of
September 30, 2002, and the results of operations and cash flows for
the three and nine months ended September 30, 2002 and 2001. The
results of operations for the three and nine months ended September 30,
2002, are not necessarily indicative of the operating results for the
full year.
Consolidation
-------------
The accompanying consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries that are
under the Company's control. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
----------------
The Company's financial statements are prepared in accordance with
accounting principles generally accepted in the United States of
America ("GAAP"). Financial statements prepared in accordance with GAAP
require the use of management estimates and assumptions that affect the
reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Foreign Currency
----------------
Prior to the transactions described in Note 3, substantially all
of the Company's operations were in Europe. The assets and liabilities
of non-U.S. subsidiaries are translated at month-end rates of exchange,
and income statement items are translated at the average rates
prevailing during the period. The resulting translation adjustment is
recorded as a component of stockholders' equity. Exchange gains and
losses on intercompany balances of a long-term investment nature are
also recorded as a component of stockholders' equity. Other foreign
exchange gains and losses are recorded in income on a current basis and
have been included in Loss from Discontinued Operations. These other
foreign exchange gains and losses were minimal for the three and nine
months ended September 30, 2002 and 2001, respectively.
Derivatives
-----------
The Company has used derivative instruments to hedge its foreign
currency exposure only on a limited basis. Accordingly, the Company is
not subject to any additional significant foreign currency market risk
other than normal fluctuations in exchange rates.
In June 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of FASB Statement No. 133," which is effective
for fiscal years beginning after June 15, 2000. SFAS No. 133
establishes accounting and reporting standards for derivative
instruments and transactions involving hedge accounting. The Company
adopted SFAS No. 133, as amended, on January 1, 2001, which had no
impact on the consolidated financial statements.
At September 30, 2002 there were no foreign currency hedge
contracts outstanding.
Earnings (Loss) per Share
-------------------------
The Company has applied the provisions of SFAS No. 128,
"Earnings Per Share", which establishes standards for computing and
presenting earnings per share. Basic earnings per share is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The
calculation of diluted earnings per share includes the effect of
dilutive common stock equivalents. For the nine months ended September
30, 2002, and for the three and nine months ended September 30, 2001,
basic and diluted loss per share is the same because all dilutive
securities had an antidilutive effect on loss per share. For the three
months ended September 30, 2002, diluted earnings per share includes
the effect, if any, of the Company's convertible preferred stock, stock
options and warrants. The If Converted method was used to calculate the
weighted average shares outstanding for convertible preferred stock.
The Treasury Stock method was used to calculate the weighted average
shares outstanding for warrants and options. There were approximately
5.4 million options outstanding as of September 30, 2002 that were
excluded from the earnings per share calculation because their exercise
prices exceeded market value.
New Accounting Pronouncements
-----------------------------
In June 2001, the FASB issued SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 141 prospectively prohibits the pooling of interests
method of accounting for business combinations initiated after June 30,
2001. Under SFAS No. 142, goodwill amortization ceases when the new
standard is adopted. In the three and nine months ended September 30,
2001, the Company recorded goodwill amortization of approximately $0.8
million and $2.5 million, respectively. No goodwill amortization was
recorded in 2002. SFAS No. 142 also requires an initial goodwill
impairment assessment in the year of adoption and an impairment test
both on an annual basis and upon the occurrence of any event or change
in circumstances that would reduce the fair value of a reporting unit
below its carrying value. SFAS No. 142 also requires the Company to
complete a transitional goodwill impairment test six months from the
date of adoption. The Company adopted this standard at the beginning of
its 2002 fiscal year. As the Company had no goodwill or intangibles at
December 31, 2001, the adoption of this statement had no impact on the
Company's consolidated financial statements. Following is a
reconciliation of net income (loss) and earnings (loss) per share for
the three and nine months ended September 30, 2002 and 2001 assuming
the adoption of SFAS 142 at the beginning of the periods presented:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
Net loss from continuing operations, as reported $ (138) $ (475) $ (1,339) $ (1,149)
Goodwill amortization from continuing operations -- -- -- --
--------- ---------- --------- ----------
Net loss from continuing operations, proforma $ (138) $ (475) $ (1,339) $ (1,149)
========= ========== ========= ==========
Net income (loss), as reported $ 1,466 $ (27,580) $ (92) $ (52,639)
Goodwill amortization -- 796 -- 2,533
--------- ---------- --------- ----------
Net income (loss), proforma $ 1,466 $ (26,784) $ (92) $ (50,106)
========= ========== ========= ==========
Basic loss per share from continuing operations,
as reported $ (0.00) $ (0.01) $ (0.03) $ (0.03)
Goodwill amortization from continuing operations -- -- -- --
--------- ---------- --------- ----------
Basic loss per share from continuing operations,
proforma $ (0.00) $ (0.01) $ (0.03) $ (0.03)
========= ========== ========= ==========
Diluted loss per share from continuing operations,
as reported $ (0.00) $ (0.01) $ (0.03) $ (0.03)
Goodwill amortization from continuing operations -- -- -- --
--------- ---------- --------- ----------
Diluted loss per share from continuing operations,
proforma $ (0.00) $ (0.01) $ (0.03) $ (0.03)
========= ========== ========= ==========
Basic income (loss) per share, as reported $ 0.04 $ (0.71) $ (0.00) $ (1.43)
Goodwill amortization -- 0.02 -- 0.07
--------- ---------- --------- ----------
Basic income (loss) per share, proforma $ 0.04 $ (0.69) $ (0.00) $ (1.36)
========= ========== ========= ==========
Diluted income (loss) per share, as reported $ 0.02 $ (0.71) $ (0.00) $ (1.43)
Goodwill amortization -- 0.02 -- 0.07
--------- ---------- --------- ----------
Diluted income (loss) per share, proforma $ 0.02 $ (0.69) $ (0.00) $ (1.36)
========= ========== ========= ==========
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement provides a
single accounting model for long-lived assets to be disposed of. The
Company adopted SFAS No. 144 at the beginning of its 2002 fiscal year.
The adoption of this statement had no impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to the
date of an entity's commitment to an exit plan. The Company will adopt
SFAS No. 146 for any exit or disposal activities initiated after
December 31, 2002.
Certain Reclassifications
-------------------------
Certain reclassifications have been made to amounts previously
reported to conform to current period presentation.
(2) COMPREHENSIVE INCOME (LOSS)
Total comprehensive income (loss) for the three and nine months
ended September 30, 2002 and 2001 was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Net income (loss) $ 1,466 $(27,580) $ (92) $ (52,639)
Foreign currency translation adjustments (196) 5,662 (3,208) (4,056)
Unrealized gains (losses) on marketable
securities available-for-sale (199) (134) 38 (134)
------- -------- -------- ---------
Total comprehensive income (loss) $ 1,071 $(22,052) $(3,262) $ (56,829)
======= ========== ======== ==========
(3) DISCONTINUED OPERATIONS
During 2001, the Company did not achieve its expected revenue
growth in its Managed Hosting business. The general economic downturn,
the slowdown in technology spending and the lengthening in the sales
cycle for Managed Hosting services all contributed to these revenue
shortfalls. Company management believed that these conditions, as well
as the increasing level of competition and consolidation in the Web
hosting and Internet infrastructure markets, would continue to have an
adverse effect on the Company's ability to achieve near term revenue
targets and, if they continued, could erode the financial resources of
the Company more rapidly than planned.
Following the exploration and review of the strategic
alternatives, the Company determined that it was necessary to take
certain actions in the fourth quarter of 2001 and the first quarter of
2002 to dramatically reduce the rate at which its operations were using
cash and to minimize the Company's exposure in markets that were
experiencing significantly slower than expected market growth.
Following is a summary of these fourth quarter 2001 and first quarter
2002 actions and the subsequent exit activities that have occurred in
2002 related to these actions.
-- In November 2001, we announced that our Irish subsidiary,
Worldport Ireland Limited, was ceasing operations at its Dublin,
Ireland facility. An orderly shutdown of the Ireland operations
was commenced, and was substantially completed by December 31,
2001. In April 2002, Worldport Ireland Limited was given notice
that a petition for winding up was filed and would be presented
to the Irish High Court by Global Crossing Ireland Limited. The
petition was heard by the Irish High Court on May 13, 2002 and a
liquidator was appointed for this subsidiary to act on behalf of
the creditors. As a result of this action, the liquidator has
control over this subsidiary's assets. The assets and liabilities
of the Irish subsidiary that were not guaranteed or incurred
directly by the parent company, Worldport Communications, Inc.
("Worldport Inc."), were deconsolidated in the second quarter of
2002 and reflected in Net Liabilities of Non-controlled
Subsidiaries on the Company's balance sheet (see Note 5). At
September 30, 2002, the Net Liabilities of Non-controlled
Subsidiaries relating to Ireland equaled $4.2 million.
Approximately $18.9 million of liabilities that were guaranteed
or incurred by Worldport Inc. have not been deconsolidated and
continue to be reflected as liabilities of the Company. In
September 2002, the liquidator disclaimed the leases for the two
facilities previously used by the Irish subsidiary. We had
provided a letter of credit to the landlord of these facilities
equal to approximately 0.5 million Euros to support the lease of
one of the facilities, A partial draw of approximately 0.2
million Euros was made in October 2002 and paid to the landlord
under the letter of credit. We expect that the full amount of the
letter of credit will be drawn out. This letter of credit is
reflected in Other Assets on the Company's balance sheet. We
provided a guarantee with respect to the lease of the other
facility and accrued $5.3 million for that obligation as part of
the $18.9 million of liabilities referred to above. Under the
terms of our guarantee, in the event of a disclaimer of the lease
by a liquidator, the landlord may, by written notice within
twelve months after such disclaimer, compel us, as guarantor, to
enter into a new lease on the same terms. If the landlord does
not require us to enter into a new lease, the lease requires us
to pay to the landlord, upon demand, a sum equal to the rent and
other amounts payable under the lease for the twelve month period
following the disclaimer or for such shorter period until the
landlord has granted a lease of the property to a third party. On
October 29, 2002, we received a letter from legal counsel for the
landlord with respect to our guarantee. This letter demands the
payment within 14 days of approximately 0.9 million Euros and the
confirmation of our liabilities as guarantor under the lease. We
are attempting to determine the validity of the landlord's
demand.
-- In December 2001, we sold the assets and certain liabilities of
our Swedish subsidiary, Hostmark AB, to OM Technology AB for
approximately 10 million Swedish kronor, subject to the
resolution of a final working capital adjustment. The parties
agreed to a final sales price of 7.5 million Swedish kronor
(approximately $0.8 million) in July 2002, which was fully
collected by August 2002. OM also agreed to assume the ownership
of Hostmark AB's Stockholm Internet solutions center and the
operations at that center, and all customers' contracts. In
September 2002, Hostmark AB was put into liquidation and a
liquidator was appointed to control this subsidiary. As a result
of the asset sale to OM Technology AB in December 2001, there
were no assets and minimal liabilities remaining in this Swedish
subsidiary. Those liabilities have been deconsolidated in the
Company's financial statements in the current quarter and are
reflected in Net Liabilities of Non-controlled Subsidiaries on
the Company's balance sheet as a net liability of less than $0.1
million.
-- In December 2001, we sold our Swedish Professional Services
business (formerly known as VIS-able International AB) to its
employees in a management buyout for $0.9 million, the majority
of which is in the form of a note. Due to uncertainties related
to the collectibility of this note, it has been fully reserved.
-- In December 2001, we placed our German subsidiary, Hostmark GmbH,
into receivership under German law. As a result of this action,
the receiver has control over this subsidiary's assets. The
assets and liabilities of Hostmark GmbH held in receivership were
deconsolidated in the Company's financial statements in the
fourth quarter of 2001 and were reflected in Net Liabilities of
Non-controlled Subsidiaries on the Company's balance sheet as a
net liability of approximately $1.4 million (see Note 5). In the
third quarter of 2002, the Company was informed by its German
attorneys that the receiver terminated the Frankfurt lease
effective December 31, 2002 under the provisions of German law.
As a result, Hostmark GmbH is no longer obligated for lease
payments due after the effective date (approximately $1.6
million). The lease liability had originally been recorded by the
Company as part of the $101.5 million restructuring charge taken
on the discontinued businesses in the fourth quarter of 2001.
Additionally, we were informed that the receiver has declared
insufficiency of the estate under the provisions of German law.
This declaration was made because the receiver determined that
the remaining net assets of the German company were not
sufficient to cover the administrative costs of the proceedings,
and consequently, no distributions could be made to the third
party creditors (including the Frankfurt landlord for lease
payments prior to the December 31, 2002 termination date). This
declaration can be revoked in the future to the extent money is
collected by the receiver on behalf of Hostmark GmbH in an amount
sufficient to provide a distribution to the third party
creditors. Based on its understanding of the German proceedings,
the Company does not believe it is obligated to fund the
Frankfurt lease obligation and other creditor liabilities of the
German subsidiary. Therefore, in the third quarter of 2002, the
Company reduced its Net Liabilities of Non-controlled
Subsidiaries by, and recorded non-cash income from discontinued
operations of, $1.4 million relating to the net liabilities of
the German subsidiary.
-- In March 2002, we made the decision to make no further investment
in our U.K. Managed Hosting operation. On March 26, 2002, our
U.K. subsidiaries, Hostmark World Limited and Hostmark U.K.
Limited, filed a petition for Administration under the United
Kingdom Insolvency Act. An administrator was appointed for these
subsidiaries to either reorganize, find new investors, sell or
liquidate the U.K. businesses for the benefit of its creditors.
As a result of this action, the administrator has control over
these subsidiaries' assets. The assets and liabilities of the
U.K. subsidiaries that were not guaranteed by Worldport Inc. were
deconsolidated in the Company's financial statements in the first
quarter of 2002 and reflected in Net Liabilities of
Non-controlled Subsidiaries on the Company's balance sheet (see
Note 5). At September 30, 2002, the Net Liabilities of
Non-controlled Subsidiaries relating to the U.K. equaled $5.4
million. Approximately $7.7 million of liabilities relating to
the Slough, U.K. data center lease that were guaranteed by
Worldport Inc. were not deconsolidated on the Company's balance
sheet. In August 2002, the U.K. administrator identified a new
third party tenant for the Slough data center. The Company had
previously agreed to guarantee the Slough data center lease of
its U.K. subsidiary expiring in 2015. In connection with the
August 2002 transaction, the landlord agreed to release the
underlying lease guarantee and, therefore, relieve the Company
from the $7.7 million lease liability upon the payment of 0.2
million British pounds (approximately $0.3 million), which
payment was funded by the Company. The $7.7 million lease
liability had originally been recorded by the Company as part of
the $10.0 million restructuring charge taken on the U.K. business
in the first quarter of 2002. Accordingly, the Company reduced
its liabilities by, and recorded non-cash income from
discontinued operations of, $7.7 million in the second quarter of
2002.
In addition, we completed the sale of our remaining carrier
business, Telenational Communications, Inc. ("TNC") in October 2001 for
$0.4 million.
As a result of these transactions, the Company had exited all
three of its operating segments as of March 31, 2002 and is currently
operating with only a minimal headquarters staff. Accordingly, results
of these operations have been classified as discontinued, and prior
periods have been restated in order to conform to the new presentation.
The operating results of discontinued operations were as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2002 2001 2002 2001
---- ---- ---- ----
Net revenue $ -- $ 3,156 $ 291 $ 8,998
Restructuring costs (see Note 4) $ (1,611) $ -- $ 672 $ --
Gain (loss) before income taxes $ 1,604 $ (31,745) $ (4,350) $ (56,274)
Income tax benefit $ -- $ 4,640 $ 5,597 $ 4,784
Net income (loss) from discontinued
operations $ 1,604 $ (27,105) $ 1,247 $ (51,490)
Assets and liabilities related to the discontinued operations as
of September 30, 2002 and December 31, 2001 consist of the following:
September 30, December 31,
2002 2001
---- ----
Current assets $ 3 $ 3,733
Noncurrent assets 503 6,347
Current liabilities (26,695) (30,313)
Long-term liabilities (1,559) (3,433)
-------- --------
Net liabilities of discontinued operations $(27,748) $(23,666)
======== ========
(4) RESTRUCTURING ACTIVITIES
In the fourth quarter ended December 31, 2001 and in the first
quarter ended March 31, 2002, the Company recorded restructuring
charges of $101.5 million and $10.0 million, respectively, relating to
the actions described in Note 3. These restructuring charges primarily
included severance, facility exit costs, bandwidth contract termination
costs, and the write down of assets to their expected net realizable
value and have been primarily included in Income (Loss) from
Discontinued Operations.
The Company compared the carrying value of the long-lived assets
located primarily in Ireland, Germany and the U.K. to fair values
determined substantially through independent appraisals and estimated
future discounted cash flows. The excess carrying value of $84.8
million was recorded as a non-cash asset impairment charge in the
fourth quarter of 2001.
Facility exit costs of $9.3 million and $7.9 million were
recorded in the fourth quarter of 2001 and the first quarter of 2002,
respectively. These facility exit costs represented rent payments on
the Company's U.K., Ireland and German facilities, net of certain
estimated sublease recoveries. As discussed in Note 3, the obligations
related to the Slough, U.K., and the Frankfurt, Germany, data center
leases have been extinguished through the administration or
receivership proceedings. Accordingly, the Company has recognized
non-cash income of $7.7 million and $1.6 million in the second and
third quarters, respectively, of 2002 related to the Slough and
Frankfurt lease obligations that were originally recorded as
restructuring costs.
Bandwidth contract termination costs of $4.7 million and $0.4
million were recorded in the fourth quarter of 2001 and the first
quarter of 2002, respectively. These costs represent early termination
penalties incurred by the Company to cancel certain bandwidth contracts
related to its ceased Managed Hosting operations in Ireland and the
U.K.
Severance of $1.3 million was recorded in the fourth quarter of
2001 and all severance payments had been made by June 30, 2002. The
headcount reduction affected approximately 100 employees, who were
primarily located in Ireland. Substantially all employees terminated
under this plan were released by December 31, 2001, with the few
remaining employees terminated in the first quarter of 2002.
Other costs of $1.4 million and $1.6 million were recorded in the
fourth quarter of 2001 and the first quarter of 2002, respectively, and
include estimated legal expenses, costs to settle outstanding purchase
commitments, and other shutdown related expenses.
The following table summarizes the significant components of the
restructuring reserve included in Accrued Expenses at September 30,
2002 (in thousands):
Balance At Balance At
December Cash Non-cash September
31, 2001 Additions Payments Adjustments 30, 2002
-------- --------- -------- ----------- --------
Facility exit costs $ 9,213 $ 7,936 $(297) $ (11,251) $5,601
Bandwidth contract termination 4,329 418 -- (697) 4,050
Asset impairment -- -- -- --
Severance 761 -- (761) -- --
Other costs 1,257 1,646 (412) (2,244) 247
------- ------- ----- --------- ------
Total $15,560 $ 10,000 $ (1,470) $ (14,192) $ 9,898
======= ======== ========= ========== =======
The non-cash adjustments of $14.2 million primarily consist of
$7.7 million related to the Slough, U.K., lease liability that the
Company was released from in August 2002 (as discussed above) and $6.9
million of liabilities related to the U.K., German, and Irish
subsidiaries that, along with the other assets and liabilities of those
subsidiaries, have been deconsolidated into a separate line item on the
Company's balance sheet called Net Liabilities of Non-controlled
Subsidiaries (see Note 5).
The Company's management is currently seeking opportunities to
further reduce its liabilities related to the exited businesses and
evaluating the possible sale or disposition of the remaining assets,
including potentially subleasing the facilities remaining under
operating lease agreements. All remaining restructuring costs are due
to be paid by December 31, 2010, with $3.3 million due in 2002, $0.9
million in 2003, $0.9 million in 2004, $0.9 million in 2005, $0.8
million in 2006 and $3.1 million thereafter.
The Company used estimates to calculate the restructuring
charges, including the ability and timing of the Company to sublease
space and the net realizable value of remaining assets. These estimates
are subject to change based on the sale of the remaining assets along
with the sublease or settlement of future rent obligations.
(5) NET LIABILITIES OF NON-CONTROLLED SUBSIDIARIES
As described in Note 3, we placed our German subsidiary,
Hostmark GmbH, into receivership under German law in December 2001 and
a receiver was appointed for this subsidiary. In March 2002, our U.K.
subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, filed a
petition for Administration under the United Kingdom Insolvency Act and
an administrator was appointed for these subsidiaries. In April 2002,
our Irish subsidiary, Worldport Ireland Limited, was given notice that
a petition for winding up was filed and would be presented to the Irish
High Court on behalf of Global Crossing Ireland Limited. The petition
was heard by the Irish High Court on May 13, 2002 and a liquidator was
appointed for this subsidiary to act on behalf of the creditors. In
September 2002, our Swedish subsidiary, Hostmark AB was placed into
liquidation and a liquidator was appointed for this subsidiary. As a
result of these actions, the Company no longer has control over these
subsidiaries' assets.
Under generally accepted accounting principles, consolidation is
generally required for investments of more than 50% of the outstanding
voting stock of any investee, except when control is not held by the
majority owner. Under these principles, legal reorganization or other
proceedings (including Administration, receivership, or liquidation)
represent conditions which can preclude consolidation in instances
where control rests with an administrator, receiver or liquidator
rather than the majority owner. As discussed above, the U.K., Irish,
German and Swedish subsidiaries filed or were placed into the local
jurisdiction's applicable proceedings. As a result, the Company
deconsolidated the subsidiaries' financial results and began accounting
for its investment in the subsidiaries under the equity method of
accounting and began recording gains and losses upon settlement.
Prior to the filing or placement into the respective
proceedings, under generally accepted accounting principles of
consolidation, the Company had recognized losses in excess of its
investment in these subsidiaries of $10.8 million. Since these
subsidiaries' results are no longer consolidated and the Company
believes that it is not probable that it will be obligated to fund
losses related to these investments, any adjustments reflected in the
subsidiaries' financial statements subsequent to the effective dates of
these proceedings are not expected to adversely affect the Company's
consolidated results.
However, as the liabilities of these subsidiaries exceed the
value of its assets, there can be no assurance that these creditors
will not make claims against the parent company, Worldport
Communications, Inc. ("Worldport Inc.") for these obligations or that,
through the proceedings, Worldport Inc. would not be required to
satisfy any of these obligations. As a result, the Company has not
reflected any adjustments relating to the deconsolidation of these
subsidiaries other than by presenting the net liability for each of
these subsidiaries as Net Liabilities of Non-controlled Subsidiaries
and discontinuing the recording of earnings or losses from these
subsidiaries after the effective dates of these proceedings. To the
extent that any of these liabilities are extinguished through these
proceedings without funding from the Company, the Company may recognize
non-cash gains in future periods as a result of the forgiveness of such
obligations. Conversely, when the proceedings are completed and
liabilities are extinguished, the Company may recognize non-cash losses
on the foreign currency translation losses currently included in Other
Comprehensive Income.
As discussed in Note 3, a new third party tenant was identified
for the Slough, U.K., data center by the U.K. administrator in August
2002. The third party paid approximately 5.7 million British pounds to
the U.K. administrator, in addition to the assumption of the lease
liability, for the Slough data center operation and related assets. The
5.7 million British pounds proceeds may be used to satisfy all or a
portion of the Net Liabilities of Non-controlled Subsidiaries for the
U.K. entities, and accordingly, the Company may recognize non-cash
gains in future periods as a result of this transaction. Since
Worldport Inc. had agreed to guarantee this lease, the related
liability was not included in Net Liabilities of Non-controlled
Subsidiaries, and the assumption of that liability by the tenant
resulted in the recognition of a gain from discontinued operations in
the second quarter of 2002.
Also discussed in Note 3, based on its understanding of the
German proceedings, the Company believed that it will not be obligated
to fund the Frankfurt lease obligation and other creditor liabilities
of the German subsidiary. Therefore, in the third quarter of 2002, the
Company reduced its Net Liabilities of Non-controlled Subsidiaries by,
and recorded non-cash income from discontinued operations of, $1.4
million relating to the net liabilities of the Germany subsidiary.
In addition to the third party creditors of our subsidiaries,
Worldport Inc. from time to time made advances to these subsidiaries
prior to our subsidiaries entering into the relevant proceedings.
Therefore, Worldport Inc. is also a creditor of these subsidiaries in
these proceedings. We are not able to determine at this time the
priority of Worldport Inc.'s claim in such proceedings or whether or
not Worldport Inc. will be able to recover any portion of these
advances. If Worldport Inc. is successful in collecting any portion of
these advances, we would recognize a gain and an increase in cash at
that time.
The Company used estimates to calculate the Net Liabilities of
Non-controlled Subsidiaries. These estimates are subject to change
based on the ability of the administrator, receiver or liquidator, as
applicable, to sell the remaining assets and negotiate the final
liability amounts. Net Liabilities of Non-controlled Subsidiaries do
not include obligations that the parent company, Worldport Inc., has
guaranteed or incurred directly. Only those liabilities of these
subsidiaries which Worldport Inc. believes it will not be required to
pay have been included in Net Liabilities of Non-controlled
Subsidiaries.
Excluding the liabilities of the U.K., Irish and Swedish
subsidiaries that are recorded in Net Liabilities of Non-controlled
Subsidiaries as discussed above, there are approximately $22.5 million
of liabilities reflected on the Company's September 30, 2002, balance
sheet attributable to Worldport Inc. and the remaining subsidiaries not
in Administration, receivership or liquidation. We have assumed, for
purposes of calculating these liabilities, that we will not be able to
mitigate them, however, Company management is currently seeking
opportunities to further reduce these liabilities. There can be no
assurance that the Company will be successful in its efforts to
mitigate these liabilities or that additional claims will not be
asserted against Worldport Inc.
(6) CAPITAL STOCK
In May 2002, the Company issued 1.0 million shares of common
stock pursuant to the terms of the purchase agreement entered into by
the Company in April 2001 in connection with the Hostmark acquisition.
These shares represented the balance of the purchase price for the
Hostmark companies.
(7) SEGMENT REPORTING
SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information", requires the reporting of profit and loss,
specific revenue and expense items and assets for reportable segments.
It also requires the reconciliation of total segment revenues, total
segment profit or loss, total segment assets, and other amounts
disclosed for segments to the corresponding amounts in the general
purpose financial statements.
The Company had three reportable segments: Managed Hosting,
Professional Services and Carrier Operations. The Managed Hosting
segment derived revenues primarily from the delivery of services
including Internet networking, applications and value-added services,
infrastructure, and systems support. The Professional Services segment
derived revenues primarily from Internet-based applications, systems
development, and content management support. The Carrier Operations
segment derived revenues primarily from voice, data and other
telecommunication services. Company management viewed the three
distinct business strategies as different business segments when making
operating and investment decisions and for assessing performance.
As a result of the transactions discussed in Note 3, the Company
has exited all three of its operating segments as of March 31, 2002.
(8) CONTINGENCIES
Since July 14, 1999, Worldport and certain of its former officers
have been named as defendants in multiple shareholder class action
lawsuits filed in the United States District Court for the Northern
District of Georgia. On or about March 21, 2000, a Consolidated
Complaint was filed which adds The Heico Companies, LLC and Michael E.
Heisley, Sr. as defendants. The plaintiffs in these lawsuits seek to
represent a class of individuals who purchased or otherwise acquired
the Company's common stock from January 4, 1999 through June 28, 1999.
Among other things, the plaintiffs allege that the defendants spoke
positively about the Heico financing without disclosing the risk that
non-compliance with certain Nasdaq rules in connection with the
financing might cause Worldport to be delisted from Nasdaq. The
plaintiffs further allege the subsequent disclosure that Worldport
might be delisted from Nasdaq adversely affected the value of the
Company's common stock. The plaintiffs allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934 and seek
unspecified compensatory damages, interest, attorneys' fees and costs
of litigation. A proposed settlement was reached by the parties on
terms reflected in a Stipulation of Compromise and Settlement dated
July 20, 2001. This settlement was approved by the Court on October 19,
2001 and has been entirely funded by insurance. No appeal was taken,
but there can be no assurance that additional claims will not be
asserted by any class member who opted out of the settlement. However,
the outcome of this matter is not expected to have a material adverse
effect on the consolidated financial position or results of operations
of the Company.
In March 2002, Sturm Group Inc., Donald L. Sturm and Hostmark
World Holdings, LLC, filed a complaint against the Company and its
wholly owned subsidiary, Worldport Holdings Inc. in the Circuit Court
For the Nineteenth Judicial Circuit, Lake County, Illinois - Chancery
Division. This claim relates to the April 2001 acquisition of the
Company's Hostmark subsidiaries (the "Hostmark Subsidiaries"). The
Hostmark Subsidiaries were acquired by Worldport Holdings Inc. from
Hostmark World Holdings, LLC pursuant to a Stock Purchase Agreement. In
connection with these transactions, the Company agreed to use its
reasonable efforts to obtain the release of the plaintiffs from certain
guarantees that the plaintiffs had entered into on behalf of the
Hostmark Subsidiaries prior to the acquisition. The reasonable efforts
of the Company were to include, if required, the Company providing to
the landlord of the property located in Slough, U.K. a rent indemnity
and keeping such rent indemnity in place until November 20, 2008. If
required in order to obtain such rent indemnity, the Company agreed to
deposit funds with a commercial bank (or provide such other collateral
or security required by the bank). If required by the landlord, the
reasonable efforts of the Company were also to include providing a
one-year rent indemnity after November 2008 until the lease expires in
November 2015. In this action, the plaintiffs originally sought an
injunction ordering the Company to comply with the terms of these
agreements. In August 2002, the Company obtained the release of the
plaintiffs from the related guarantees. Therefore, the Company expects
that this portion of the suit will be dismissed. However, the
plaintiffs are continuing to seek damages for the defendants' alleged
breach of these agreements. The Company does not expect to pay material
damages in this suit.
One of the Company's subsidiaries, Hostmark World Limited, is the
subject of court action by WSP Communications ("WSP") in the Companies
Court of the Chancery Division of the High Court in the U.K. for the
payment of approximately $0.5 million. In addition, WSP has alleged
that a total of approximately $3 million is owed to it by Hostmark
World Limited. WSP alleges that these amounts are owed for work
completed on Internet solution centers in Germany, Sweden and the U.K.
This action has been stayed by the appointment of an Administrator for
Hostmark World.
In June 2002, the High Court of Ireland issued a Summary Summons
to the parent company, Worldport Inc., on behalf of Cable & Wireless
(Ireland) Limited, who is seeking payment of 1.0 million British pounds
and 2.3 million Euros, together with applicable VAT. (Excluding VAT,
this represents approximately $3.9 million.) These claims relate to
unpaid invoices for Internet services provided by Cable & Wireless
(Ireland) Limited to the Company's subsidiary in Ireland (now in
liquidation) and termination of contract charges. The Company believes
that the claims, to the extent valid, are obligations of the Company's
Irish subsidiary and not of Worldport Inc., but is continuing to
investigate the claims. There can be no assurance that such claims will
not be successful against Worldport Inc. However, the outcome of the
matter is not expected to have a material adverse effect on the
consolidated results of the Company in excess of amounts already
recorded.
In the fourth quarter of 2001, the SuperCentre in Dublin,
Ireland operated by our Irish subsidiary, Worldport Ireland Limited,
was closed; substantially all of the assets of our Swedish subsidiary,
Hostmark AB, were sold and that subsidiary retained certain
liabilities; and our German subsidiary, Hostmark GmBh, was placed into
preliminary receivership under German law by the order of the
Bankruptcy Court in Darmstadt. In addition, we ceased funding of our
U.K. subsidiaries, Hostmark World and Hostmark U.K., in the first
quarter of 2002. On March 28, 2002, an Administrator was appointed for
the U.K. subsidiaries by an order of the Companies Court, Chancery
Division of High Court under the United Kingdom Insolvency Act. In
April 2002, the Irish subsidiary, Worldport Ireland Limited, was given
notice that a petition for winding up was filed and would be presented
to the Irish High Court on behalf of Global Crossing Ireland Limited.
The petition was heard by the Irish High Court on May 13, 2002 and a
liquidator was appointed for this subsidiary to act on behalf of the
creditors. As a result of this action, the liquidator has control over
this subsidiary's assets. We believe that each of these subsidiaries
has potential liabilities that exceed the value of its assets. Certain
creditors of these subsidiaries have made claims directly against
Worldport Inc. for liabilities related to the operation of these
subsidiaries and additional creditors could assert similar claims.
There can be no assurance that Worldport Inc. will be successful in
defending these claims and in limiting its liability for the
obligations of its subsidiaries.
In addition to the aforementioned claims, the Company is
involved in various lawsuits or claims arising in the normal course of
business. In the opinion of management, none of these lawsuits or
claims will have a material adverse effect on the consolidated
financial position or results of operations of the Company.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE ON "FORWARD-LOOKING" STATEMENTS
------------------------------------
The information set forth in Management's Discussion and
Analysis of Financial Condition and Results of Operations ("MD&A")
contains certain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities Exchange Act of 1934, as amended, including, among
others, (i) expected changes in the Company's revenues and
profitability, (ii) prospective business opportunities and (iii) the
Company's strategy for redirecting and financing its business; as
further explained in Item 1 of the Company's Annual Report on Form 10-K
for the year ended December 31, 2001. Forward-looking statements are
statements other than historical information or statements of current
condition. Some forward-looking statements may be identified by use of
terms such as "believes", "anticipates", "intends" or "expects". These
forward-looking statements relate to the plans, objectives and
expectations of the Company for future operations. Although the Company
believes that its expectations with respect to the forward-looking
statements are based upon reasonable assumptions within the bounds of
its knowledge of its business and operations, in light of the risks and
uncertainties inherent in all future projections, the inclusion of
forward-looking statements in this report should not be regarded as a
representation by the Company or any other person that the objectives
or plans of the Company will be achieved.
During 2001, we acquired and sold numerous operating companies,
which significantly affects the comparability of the following
information. In addition, in the fourth quarter of 2001 and the first
quarter of 2002, we either sold or ceased operating all of our
operating businesses. Therefore, our historical results will not be
indicative of future performance. The Company undertakes no obligation
to release publicly the results of any future revisions it may make to
forward-looking statements to reflect events or circumstances after the
date hereof or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with the
Condensed Consolidated Financial Statements and Notes thereto included
under Item 1 of this Form 10-Q. In addition, the Financial Statements
and Notes thereto and related Management's Discussion and Analysis of
Financial Condition and Results of Operations included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2001, and
the Company's Current Report on Form 8-K dated June 6, 2002, should be
read in conjunction with this Form 10-Q.
OVERVIEW
--------
From 1997 to 1999, Worldport was a facilities-based global
telecommunications carrier offering voice, data and other
telecommunications services to carriers, Internet service providers,
medium and large corporations and distributors and resellers operating
in Europe and the United States. To finance certain acquisitions, the
Company borrowed $120 million in June 1998 under an interim loan
facility ("Interim Loan Facility"). In order to meet its obligations
under its Interim Loan Facility, the Company sold substantially all of
its material assets during the first quarter of 2000.
In November 1999, we entered into a series of agreements with
Energis to sell our 85% stake in the issued and outstanding shares of
EnerTel. The sale was consummated on January 14, 2000 for $453.2
million, net of certain transaction expenses. The Company applied a
portion of the net proceeds realized from the sale to repay existing
debt, including debt incurred under the Interim Loan Facility, trade
credit and other liabilities, and paid U.S. federal income taxes on the
gain of approximately $57 million. Additionally, the Company completed
the sale of IIC in March 2000.
In the second quarter of 2000 we announced a new business
strategy, focused on the delivery of Internet managed hosting services
to global companies doing business in the European marketplace.
Pursuant to this strategy, we invested over $40 million to construct a
new Internet solutions SuperCentre in Dublin, Ireland, which became
operational in October 2000. In September 2000, we purchased VIS-able,
a Swedish professional services firm specializing in complex systems
development and consulting, for approximately $17.7 million. In April
2001, we acquired hostmark entities in the U.K., Sweden and Germany
("hostmark"), including the assumption of approximately $22 million in
liabilities, for 5.1 million shares of common stock. The acquisition of
hostmark provided Worldport with Internet solution centers ("ISC's") in
London, Stockholm and Frankfurt. The hostmark companies had minimal
revenues when we completed the transaction, and only one ISC was open
for business.
Following the acquisition of hostmark, we initiated an aggressive
integration program to rapidly identify and eliminate operational and
system redundancies in the two companies and to further streamline the
combined business. Additionally, we shut down the unprofitable U.S. and
U.K. professional services operations and took steps toward further
cost alignment in our Swedish Professional Services operation. By the
end of the third quarter of 2001, we had reduced our total workforce by
approximately 41 percent and reduced total monthly operating expenses
by over 50 percent. Our statement of operations for the third quarter
of 2001 included $1.3 million of expenses related to employee severance
costs, termination penalties for excess bandwidth contracts and lease
disposition costs associated with this integration activity to
streamline the combined business.
After the completion of the hostmark acquisition, we did not
achieve the revenue growth in our Managed Hosting business that we had
anticipated. We also experienced a decline in revenue in our Swedish
Professional Services business. The general economic downturn, the
slowdown in technology spending and the lengthening in the sales cycle
for Managed Hosting services all contributed to these revenue
shortfalls. In addition, our Swedish Professional Services business was
negatively affected by excess capacity in the Swedish consulting
market, major pricing pressures, and slower customer decisions related
to new IT projects for those services. The Company believed that these
conditions, as well as the increasing level of competition and
consolidation in the Web hosting and Internet infrastructure markets,
would continue to have an adverse effect on Worldport's ability to
achieve near term revenue targets and, if they continued, could erode
the financial resources of the Company more rapidly than planned.
Therefore, the Company began a review of various alternatives to
its existing business plan. As part of this review, the Company
considered, among other alternatives, partnering with a strategic
investor, taking additional actions to reduce its operating
expenditures, closing one or more facilities or selling all or part of
the Company's assets or operations. At the beginning of the third
quarter of 2001, the Company engaged Schroder Salomon Smith Barney to
assist the Company in its efforts to explore and evaluate various
strategic and financial alternatives. Following the exploration and
review of the strategic alternatives, we determined that it was
necessary to dramatically reduce the rate at which our operations were
using cash and to minimize our exposure in markets that were
experiencing significantly slower than expected market growth. As a
result, the Company made a decision to take further restructuring
actions and to divest itself of certain assets. Accordingly, we took
the following actions in the fourth quarter of 2001 and recorded a
$101.5 million restructuring charge in that quarter related to these
actions:
-- In November 2001, we announced that our Irish subsidiary was
ceasing operations at its Dublin, Ireland facility. An orderly
shutdown of the Ireland operations was commenced, and was
substantially completed by December 31, 2001.
-- In December 2001, we sold the assets and certain liabilities of
our Managed Services business in Stockholm, Sweden, to OM
Technology AB for approximately 10 million Swedish kronor,
subject to the resolution of a final working capital adjustment.
The parties agreed to a final sales price of 7.5 million Swedish
kronor (approximately $0.8 million) in July 2002, which was fully
collected by August 2002. OM also agreed to assume the ownership
of Worldport's Stockholm Internet solution center and the
operations at that center, and all customers' contracts.
-- In December 2001, we also sold our Swedish Professional Services
business (formerly known as VIS-able International AB) to its
employees in a management buyout for $0.9 million, the majority
of which is in the form of a note. Due to uncertainties related
to the collectibility of this note, it has been fully reserved
for.
-- In December 2001, we placed our German subsidiary, Hostmark GmbH,
into receivership under German law. As a result of this action,
the receiver has control over this subsidiary's assets.
-- We also took steps to reduce corporate expenses at our Buffalo
Grove, Illinois, headquarters in connection with these
transactions.
In addition, we completed the sale of our remaining carrier
business, Telenational Communications, Inc. ("TNC") in October 2001 for
$0.4 million.
After completing these fourth quarter activities, we continued to
operate our Managed Hosting center in the U.K., where we believed the
greatest opportunities for the European Managed Hosting market existed.
However, during the first quarter of 2002, the U.K. Managed Hosting
market continued to develop at a much slower rate than anticipated. In
addition, increasing industry consolidations and the closure or
bankruptcy of competitors in the industry led us to believe that market
conditions would not improve in the near future, bringing increased
risk to the financial requirements for this business.
Therefore, in March 2002, the Company's board of directors made
the decision to make no further investment in its U.K. Managed Hosting
operation. On March 26, 2002, our U.K. subsidiaries, Hostmark World
Limited and Hostmark U.K. Limited, filed a petition for Administration
under the United Kingdom Insolvency Act. An administrator was appointed
for these subsidiaries to either reorganize, find new investors, sell
or liquidate the U.K. businesses for the benefit of its creditors. As a
result of this action, the administrator has control over these
subsidiaries' assets. The Company recorded a $10.0 million
restructuring charge in the first quarter of 2002 related to this
action.
During 2002, we have operated with a minimal headquarters staff
while we complete the activities related to exiting our prior
businesses. Following is a summary of the significant exit activities
that have occurred to date in 2002.
-- In April 2002, Worldport Ireland Limited was given notice that a
petition for winding up was filed and would be presented to the
Irish High Court by Global Crossing Ireland Limited. The petition
was heard by the Irish High Court on May 13, 2002 and a
liquidator was appointed for this subsidiary to act on behalf of
the creditors. As a result of this action, the liquidator has
control over this subsidiary's assets.
-- In August 2002, the U.K. administrator identified a new third
party tenant for the Slough, U.K., data center. The Company had
previously agreed to guarantee the Slough data center lease of
its U.K. subsidiary expiring in 2015. In connection with the
August 2002 transaction, the landlord agreed to release the
underlying lease guarantee and, therefore, relieve the Company
from the $7.7 million lease liability upon the payment of 0.2
million British pounds (approximately $0.3 million), which
payment was funded by the Company. The $7.7 million lease
liability had originally been recorded by the Company as part of
the $10.0 million restructuring charge taken on the U.K. business
in the first quarter of 2002. Accordingly, the Company reduced
its liabilities by, and recorded non-cash income from
discontinued operations of, $7.7 million in the second quarter of
2002.
-- In September 2002, the liquidator for our Irish subsidiary
disclaimed the leases for the two facilities previously used by
the Irish subsidiary. We had provided a letter of credit to the
landlord of these facilities equal to approximately 0.5 million
Euros to support the lease of one of the facilities. A partial
draw of approximately 0.2 million Euros was made in October 2002
and paid to the landlord under the letter of credit. We expect
that the full amount of the letter of credit will be drawn out.
This letter of credit is reflected in Other Assets on the
Company's balance sheet. We provided a guarantee with respect to
the lease of the other facility. Under the terms of our
guarantee, in the event of a disclaimer of the lease by a
liquidator, the landlord may, by written notice within twelve
months after such disclaimer, compel us, as guarantor, to enter
into a new lease on the same terms. If the landlord does not
require us to enter into a new lease, the lease requires us to
pay to the landlord, upon demand, a sum equal to the rent and
other amounts payable under the lease for the twelve month period
following the disclaimer or for such shorter period until the
landlord has granted a lease of the property to a third party. On
October 29, 2002, we received a letter from legal counsel for the
landlord with respect to our guarantee. This letter demands the
payment within 14 days of approximately 0.9 million Euros and the
confirmation of our liabilities as guarantor under the lease. We
are attempting to determine the validity of the landlord's
demand. This demand of 0.9 million Euro may not necessarily
represent our entire liability under the guarantee.
-- Also in September 2002, Hostmark AB was put into liquidation and
a liquidator was appointed to control this subsidiary. As a
result of the asset sale to OM Technology AB in December 2001,
there were no assets and minimal liabilities remaining in this
Swedish subsidiary.
-- In the third quarter of 2002, the Company was informed by its
German attorneys that the receiver terminated the Frankfurt lease
effective December 31, 2002 under the provisions of German law.
As a result, Hostmark GmbH is no longer obligated for lease
payments due after the effective date (approximately $1.6
million). The lease liability had originally been recorded by the
Company as part of the $101.5 million restructuring charge taken
on the discontinued businesses in the fourth quarter of 2001.
Additionally, we were informed that the receiver has declared
insufficiency of the estate under the provisions of German law.
This declaration was made because the receiver determined that
the remaining net assets of the German company were not
sufficient to cover the administrative costs of the proceedings,
and consequently, no distributions would be made to the third
party creditors (including the Frankfurt landlord for lease
payments prior to the December 31, 2002 termination date). This
declaration can be revoked in the future to the extent money is
collected by the receiver on behalf of Hostmark GmbH in an amount
sufficient to provide a distribution to the third party
creditors. Based on its understanding of the German proceedings,
the Company does not believe it is obligated to fund the
Frankfurt lease obligation and other creditor liabilities of the
German subsidiary. Therefore, in the third quarter of 2002, the
Company reduced its Net Liabilities of Non-controlled
Subsidiaries by, and recorded non-cash income from discontinued
operations of, $1.4 million relating to the net liabilities of
the German subsidiary.
As a result of the transactions described above, we no longer
have active business operations. Accordingly, the historical results of
operations for prior periods are not comparable to the current period
and are not representative of what future results will be.
RESULTS OF OPERATIONS
---------------------
As described above, the Company has exited all three of its
operating segments as of March 31, 2002. Accordingly, results of these
operations have been classified as discontinued, and prior periods have
been restated in order to conform to the new presentation.
There were no revenues or cost of services from continuing
operations for the three months and nine months ending September 30,
2002 and 2001.
Selling, general and administrative ("SG&A") expenses were $0.7
million and $1.4 million for the three months ended September 30, 2002
and 2001, respectively and were $2.6 million and $4.8 million for the
nine months ended September 30, 2002 and 2001, respectively. SG&A
expenses primarily consisted of corporate salaries and benefits,
professional service fees, corporate governance expenses and facility
costs. The decrease from the prior year expenses is primarily
attributable to the steps taken at the end of 2001 to reduce corporate
expenses at our Buffalo Grove, Illinois, headquarters in connection
with the transactions described above.
Depreciation and amortization expense represented depreciation
on the corporate office and related computer hardware and software.
Depreciation and amortization expense was less than $0.1 million for
the three months ended September 30, 2002 and 2001 and was $0.1 million
and $0.2 million for the nine months ended September 30, 2002 and 2001,
respectively.
Interest income, which was earned on the Company's cash and cash
equivalents, was $0.5 million and $1.0 million for the three months
ended September 30, 2002 and 2001, respectively, and was $1.4 million
and $4.1 million for the nine months ended September 30, 2002 and 2001,
respectively. The decrease in interest income in the current year is
primarily a result of a lower average yield on invested cash due to a
decline in market interest rates and the Company's move to lower
yielding instruments in 2002, including money market funds and
government securities. The Company's interest expense of $0.1 million
in the current and prior year primarily related to equipment financed
under capital leases. The Company incurred a $0.3 million loss in the
second quarter of 2001 on the sale of a Virginia residence originally
purchased in October 2000 in connection with an employment arrangement
with a former chief executive officer of the Company.
Net loss from continuing operations was $0.1 million and $0.5
million for the three months ended September 30, 2002 and 2001,
respectively and was $1.3 million and $1.4 million for the nine months
ended September 30, 2002 and 2001, respectively.
The Company had income from discontinued operations of $1.6
million in the third quarter of 2002. As discussed above, $1.4 million
of non-cash income was recorded in the third quarter of 2002 relating
to the Company's understanding that it is not obligated to fund the
Frankfurt lease obligation and other creditor liabilities of the German
subsidiary. The remaining $0.2 million was primarily a result of
favorably settling previously estimated accruals on items related to
the discontinued businesses.
The Company had income from discontinued operations of $1.2
million for the nine months ended September 30, 2002 that was comprised
of the following:
-- $1.6 million income from discontinued operations in the current
quarter as detailed above.
-- $7.7 million gain recorded in the second quarter of 2002 as a
result of the Company's release from its underlying lease
guarantee on the Slough, U.K. data center lease (as described
above).
-- $1.1 million asset impairment charge recorded in the second
quarter of 2002 related to certain equipment from the
discontinued businesses.
-- $0.3 million loss recorded in the second quarter of 2002 as a
result of the final adjustment to the sale price for Hostmark AB.
-- $0.7 million gain recorded in the second quarter of 2002 as a
result of favorably settling previously estimated accruals on
items related to the discontinued businesses.
-- $10.0 million restructuring charge recorded in the first quarter
of 2002 on the U.K. business.
-- $3.0 million of operating losses incurred in the first quarter of
2002 from the U.K. business prior to it being discontinued.
-- $5.6 million tax benefit recorded in the first quarter of 2002 as
the result of a new U.S. federal tax law that was enacted in
March 2002, which allowed the Company to carryback a $5.6 million
AMT tax credit from 2001 against taxable income in 2000.
Losses from discontinued operations for the three months and nine
months ended September 30, 2001 were $27.1 million and $51.5 million,
respectively, and primarily represent operating losses on the U.K.,
Ireland, German and Sweden entities.
The following table summarizes the significant components of the
restructuring reserve included in Accrued Expenses at September 30,
2002 (in thousands):
Balance At Balance At
December Cash Non-cash September
31, 2001 Additions Payments Adjustments 30, 2002
-------- --------- -------- ----------- --------
Facility exit costs $ 9,213 $ 7,936 $(297) $ (11,251) $5,601
Bandwidth contract termination 4,329 418 -- (697) 4,050
Asset impairment -- -- -- -- --
Severance 761 -- (761) -- --
Other costs 1,257 1,646 (412) (2,244) 247
------- ------- ----- --------- ------
Total $15,560 $ 10,000 $ (1,470) $ (14,192) $ 9,898
======= ======== ========= ========== =======
The non-cash adjustments of $14.2 million primarily consist of
$7.7 million related to the Slough, U.K., lease liability that the
Company was released from in August 2002 (as discussed above) and $6.9
million of liabilities related to the U.K., German, and Irish
subsidiaries that, along with the other assets and liabilities of those
subsidiaries, have been deconsolidated into a separate line item on the
Company's balance sheet called Net Liabilities of Non-controlled
Subsidiaries (see Note 5).
As a result, the Company had net income of $1.5 million in the
third quarter of 2002, as compared to net loss of $27.6 million for the
third quarter of 2001. The Company had a net loss of $0.1 million for
the nine months ended September 30, 2002, as compared to a net loss of
$52.6 million for the same period in 2001.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Operations used $0.3 million and $2.8 million during the three and
nine months ending September 30, 2002, respectively, as compared to
$4.7 million and $6.7 million during the three and nine months ended
September 30, 2001, respectively. These expenditures were primarily for
salaries, legal fees and other expenses related to the Company's
minimal corporate operations remaining after the shut down and sale
transactions described above.
The Company had no cash flows from investing activities during
the three and nine months ended September 30, 2002. The Company used
$11.0 million in the third quarter of 2001 for the purchase of
marketable securities and generated approximately $1.3 million in cash
in the second quarter of 2001 from the sale of a Virginia residence
originally purchased in October 2000 in connection with an employment
arrangement with a former chief executive officer of the Company.
Financing activities used $1.2 million and $0.4 million during the
nine months ended September 30, 2002 and 2001, respectively, for
principal payments on capital leases.
Discontinued operations used $0.9 million during the third quarter
ended September 30, 2002, primarily for payments on capital leases from
the discontinued businesses. Discontinued operations provided $50.9
million for the nine months ended September 30, 2002, and were
primarily attributable to the receipt of our $57.6 million income tax
refund in April 2002. Discontinued operations used $20.1 million and
$43.2 million during the three and nine months ended September 30, 2001
relating to the discontinued U.K., Ireland, German and Sweden entities.
We had approximately $108.4 million in cash and cash equivalents
and $10.6 million in marketable securities as of November 1, 2002. Our
cash equivalents currently consist of highly rated money market funds
and government securities.
Our cash balance includes the $57.6 million income tax refund
received in April 2002. Receipt of this refund does not indicate that
the Internal Revenue Service agrees with the positions taken by the
Company in its tax returns. The refund is still subject to review by
the Internal Revenue Service of the Company's 2001 tax return. It would
not be unusual for the Internal Revenue Service to audit a return
resulting in a refund of this magnitude. The Internal Revenue Service
could require the Company to return all or a portion of this refund.
The statute of limitations for the notification of an audit is
generally three years from the filing of the applicable tax return,
although this period can be extended by agreement.
Our September 30, 2002 consolidated balance sheet reflected total
liabilities of approximately $32.2 million. Included in this amount are
$9.7 million of Net Liabilities of Non-Controlled Subsidiaries for the
U.K., Irish and Swedish operations (see Note 5). We believe the parent
company, Worldport Communications, Inc. ("Worldport Inc."), will not be
required to pay these liabilities. However, there can be no assurance
that these creditors will not make claims against Worldport Inc. for
these obligations. The Company used estimates to calculate these net
liabilities. These estimates are subject to change based on the ability
of the administrator, receiver or liquidator, as applicable, to sell
the remaining assets and negotiate the final liability amounts.
In August 2002, an agreement was reached between the
Administrator for Hostmark U.K. Limited and a third party, in which the
third party paid approximately 5.7 million British pounds, in addition
to the assumption of the lease liability, for the Slough, U.K., data
center and related assets. The 5.7 million British pounds proceeds may
be used to satisfy all or a portion of the Net Liabilities of
Non-controlled Subsidiaries for the U.K. entities, and accordingly, the
Company may recognize non-cash gains in future periods as a result of
this transaction. Additionally, prior to our subsidiaries entering into
receivership and administrative proceedings, Worldport Inc. from time
to time made advances to these subsidiaries. Therefore Worldport Inc.
is also a creditor of these subsidiaries in these proceedings. We are
not able to determine at this time the priority of Worldport Inc.'s
claim in such proceedings or whether or not Worldport Inc. will be able
to recover any portion of these advances. If Worldport Inc. is
successful in collecting any portion of these advances, we would
recognize a gain and an increase of cash at that time.
Excluding the Net Liabilities of Non-Controlled Subsidiaries for
the U.K., Irish and Swedish operations discussed above, there are
approximately $22.5 million of liabilities reflected on the Company's
September 30, 2002, balance sheet attributable to Worldport Inc. and
the remaining subsidiaries not in Administration, receivership or
liquidation. Approximately $2.2 million of that amount represents
normal operating accruals and reserves related to the continuing
operations. The remaining $20.3 million consist of the following
obligations related to the exited businesses:
-- $5.3 million of future rent payments and early termination
penalties on the Dublin data center lease expiring in 2010 for
which Worldport Inc. had provided a guarantee,
-- $4.5 million of obligations under capital leases, which expire in
2004,
-- $4.3 million accrued for the potential exposure (including VAT)
related to the litigation by Cable & Wireless described below,
-- $3.7 million of obligations related to bandwidth contracts
entered into in Ireland,
-- $1.4 million of obligations relating to the old
telecommunications business, and
-- $1.1 million of other Worldport Inc. obligations related to the
Irish operations.
We have assumed, for purposes of calculating these liabilities,
that we will not be able to mitigate them. However, Company management
is currently seeking opportunities to further reduce these liabilities.
There can be no assurance that the Company will be successful in its
efforts to mitigate these liabilities or that additional claims will
not be asserted against Worldport Inc.
In March 2002, Sturm Group Inc., Donald L. Sturm and Hostmark
World Holdings, LLC, filed a complaint against the Company and its
wholly owned subsidiary, Worldport Holdings Inc. in the Circuit Court
For the Nineteenth Judicial Circuit, Lake County, Illinois -Chancery
Division. This claim relates to the April 2001 acquisition of the
Company's Hostmark subsidiaries (the "Hostmark Subsidiaries"). The
Hostmark Subsidiaries were acquired by Worldport Holdings Inc. from
Hostmark World Holdings, LLC pursuant to a Stock Purchase Agreement. In
connection with these transactions, the Company agreed to use its
reasonable efforts to obtain the release of the plaintiffs from certain
guarantees that the plaintiffs had entered into on behalf of the
Hostmark Subsidiaries prior to the acquisition. The reasonable efforts
of the Company were to include, if required, the Company providing to
the landlord of the property located in Slough, U.K., a rent indemnity
and keeping such rent indemnity in place until November 20, 2008. If
required in order to obtain such rent indemnity, the Company agreed to
deposit funds with a commercial bank (or provide such other collateral
or security required by the bank). If required by the landlord, the
reasonable efforts of the Company were also to include providing a
one-year rent indemnity after November 2008 until the lease expires in
November 2015. In this action, the plaintiffs originally sought an
injunction ordering the Company to comply with the terms of these
agreements. In August 2002, the Company obtained the release of the
plaintiffs from the related guarantees. Therefore, the Company expects
that this portion of the suit will be dismissed. However, the
plaintiffs are continuing to seek damages for the defendants' alleged
breach of these agreements. The Company does not expect to pay material
damages in this suit.
In June 2002, the High Court of Ireland issued a Summary Summons
to the parent company, Worldport Inc., on behalf of Cable & Wireless
(Ireland) Limited, who is seeking payment of 1.0 million British pounds
and 2.3 million Euros, together with applicable VAT (representing
approximately $3.9 million excluding VAT). These claims relate to
unpaid invoices for Internet services provided by Cable & Wireless
(Ireland) Limited to the Company's subsidiary in Ireland (now in
liquidation) and termination of contract charges. The Company believes
that the claims, to the extent valid, are obligations of the Company's
Irish subsidiary and not of Worldport Inc., but is continuing to
investigate the claims. There can be no assurance that such claims will
not be successful against Worldport Inc. However, the outcome of the
matter is not expected to have a material adverse effect on the
consolidated results of the Company in excess of amounts already
recorded.
After completing the activities related to the exiting of our
Irish, Swedish, German and U.K. subsidiaries and satisfying the related
liabilities, we expect to continue to have significant cash resources.
We are currently operating with a minimal headquarters staff while we
complete the activities related to exiting our prior businesses and
determine how to use these cash resources. We will have broad
discretion in determining how and when to use these cash resources.
Alternatives being considered include potential acquisitions, a
recapitalization which might provide liquidity to some or all
shareholders, and a full or partial liquidation.
Since ceasing our business operations, we have sought and
reviewed acquisition opportunities. However, we have not yet actively
pursued any of these opportunities since we did not believe that any of
them were in the best interests of our shareholders. Although we will
continue to consider potential acquisition opportunities, we have not
identified a specific industry on which we intend to focus and have no
present plans, proposals, arrangements or understandings with respect
to the acquisition of any specific business.
We are also continuing to analyze a potential liquidation of the
Company and its effects on the Company's stockholders. Upon any
liquidation, dissolution or winding up of the Company, the holders of
our outstanding preferred stock would be entitled to receive
approximately $68 million prior to any distribution to the holders of
our common stock.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
In June 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 141 prospectively prohibits the pooling of
interests method of accounting for business combinations initiated
after June 30, 2001. Under SFAS No. 142, goodwill amortization ceases
when the new standard is adopted. In the three and nine months ended
September 30, 2001, the Company recorded goodwill amortization of $0.8
million and $2.5 million, respectively. No goodwill amortization was
recorded in 2002. SFAS No. 142 also requires an initial goodwill
impairment assessment in the year of adoption and an impairment test
both on an annual basis and upon the occurrence of any event or change
in circumstances that would reduce the fair value of a reporting unit
below its carrying value. SFAS No. 142 also requires the Company to
complete a transitional goodwill impairment test six months from the
date of adoption. The Company adopted this standard at the beginning of
its 2002 fiscal year. As the Company had no goodwill or intangibles at
December 31, 2001, the adoption of this statement had no impact on the
Company's consolidated financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The statement provides a
single accounting model for long-lived assets to be disposed of. The
Company adopted SFAS No. 144 at the beginning of its 2002 fiscal year.
The adoption of this statement had no impact on the Company's
consolidated financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." The statement requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred as opposed to the
date of an entity's commitment to an exit plan. The Company will adopt
SFAS No. 146 for any exit or disposal activities initiated after
December 31, 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The majority of the Company's exited businesses were in Europe,
and many of the remaining assets and liabilities of those businesses
are denominated in local currencies. Due to the volatility of currency
exchange rates, among other factors, we cannot predict the effect of
exchange rate fluctuations on the ultimate settlement of these assets
and liabilities. The Company has used derivative instruments to hedge
its foreign currency exposure only on a limited basis, and had no
foreign currency hedge contracts outstanding at September 30, 2002.
Other foreign exchange gains and losses recorded in income were minimal
for the three and nine months ended September 30, 2002 and 2001,
respectively.
ITEM 4. CONTROLS AND PROCEDURES
Kathleen A. Cote, our Chief Executive Officer and acting Chief
Financial Officer, has evaluated our disclosure controls and procedures
within 90 days of the filing date of this report. Based on her
evaluation, she has concluded that our disclosure controls and
procedures are effective to ensure that information required to be
disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Securities and Exchange
Commission's rules and forms.
There have been no significant changes in our internal controls
or in other factors that could significantly affect these controls
subsequent to the date of the previously mentioned evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Since July 14, 1999, Worldport and certain of its former
officers have been named as defendants in multiple shareholder class
action lawsuits filed in the United States District Court for the
Northern District of Georgia. On or about March 21, 2000, a
Consolidated Complaint was filed which adds The Heico Companies, LLC
and Michael E. Heisley, Sr. as defendants. The plaintiffs in these
lawsuits seek to represent a class of individuals who purchased or
otherwise acquired the Company's common stock from January 4, 1999
through June 28, 1999. Among other things, the plaintiffs allege that
the defendants spoke positively about the Heico financing without
disclosing the risk that non-compliance with certain Nasdaq rules in
connection with the financing might cause Worldport to be delisted from
Nasdaq. The plaintiffs further allege the subsequent disclosure that
Worldport might be delisted from Nasdaq adversely affected the value of
the Company's common stock. The plaintiffs allege violations of
Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and
seek unspecified compensatory damages, interest, attorneys' fees and
costs of litigation. A proposed settlement was reached by the parties
on terms reflected in a Stipulation of Compromise and Settlement dated
July 20, 2001. This settlement was approved by the Court on October 19,
2001 and has been entirely funded by insurance. No appeal was taken,
but there can be no assurance that additional claims will not be
asserted by any class member who opted out of the settlement. However,
the outcome of this matter is not expected to have a material adverse
effect on the consolidated financial position or results of operations
of the Company.
In March 2002, Sturm Group Inc., Donald L. Sturm and Hostmark
World Holdings, LLC, filed a complaint against the Company and its
wholly owned subsidiary, Worldport Holdings Inc. in the Circuit Court
For the Nineteenth Judicial Circuit, Lake County, Illinois -Chancery
Division. This claim relates to the April 2001 acquisition of the
Company's Hostmark subsidiaries (the "Hostmark Subsidiaries"). The
Hostmark Subsidiaries were acquired by Worldport Holdings Inc. from
Hostmark World Holdings, LLC pursuant to a Stock Purchase Agreement. In
connection with these transactions, the Company agreed to use its
reasonable efforts to obtain the release of the plaintiffs from certain
guarantees that the plaintiffs had entered into on behalf of the
Hostmark Subsidiaries prior to the acquisition. The reasonable efforts
of the Company were to include, if required, the Company providing to
the landlord of the property located in Slough, U.K., a rent indemnity
and keeping such rent indemnity in place until November 20, 2008. If
required in order to obtain such rent indemnity, the Company agreed to
deposit funds with a commercial bank (or provide such other collateral
or security required by the bank). If required by the landlord, the
reasonable efforts of the Company were also to include providing a
one-year rent indemnity after November 2008 until the lease expires in
November 2015. In this action, the plaintiffs originally sought an
injunction ordering the Company to comply with the terms of these
agreements. In August 2002, the Company obtained the release of the
plaintiffs from the related guarantees. Therefore, the Company expects
that this portion of the suit will be dismissed. However, the
plaintiffs are continuing to seek damages for the defendants' alleged
breach of these agreements. The Company does not expect to pay material
damages in this suit.
One of the Company's subsidiaries, Hostmark World Limited, is the
subject of court action by WSP Communications ("WSP") in the Companies
Court of the Chancery Division of the High Court in the U.K. for the
payment of approximately $0.5 million. In addition, WSP has alleged
that a total of approximately $3 million is owed to it by Hostmark
World Limited. WSP alleges that these amounts are owed for work
completed on Internet solution centers in Germany, Sweden and the U.K.
This action has been stayed by the appointment of an Administrator for
Hostmark World.
In June 2002, the High Court of Ireland issued a Summary Summons
to the parent company, Worldport Communications, Inc. ("Worldport
Inc."), on behalf of Cable & Wireless (Ireland) Limited, who is seeking
payment of 1.0 million British pounds and 2.3 million Euros, together
with applicable VAT. (Excluding VAT, this represents approximately $3.9
million.) These claims relate to unpaid invoices for Internet services
provided by Cable & Wireless (Ireland) Limited to the Company's
subsidiary in Ireland (now in liquidation) and termination of contract
charges. The Company believes that the claims, to the extent valid, are
obligations of the Company's Irish subsidiary and not of Worldport
Inc., but is continuing to investigate the claims. There can be no
assurance that such claims will not be successful against Worldport
Inc. However, the outcome of the matter is not expected to have a
material adverse effect on the consolidated results of the Company in
excess of amounts already recorded.
In the fourth quarter of 2001, the Managed Hosting center in
Dublin, Ireland operated by our Irish subsidiary, Worldport Ireland
Limited, was closed; substantially all of the assets of our Swedish
subsidiary, Hostmark AB, were sold and that subsidiary retained certain
liabilities; and our German subsidiary, Hostmark GmBh, was placed into
preliminary receivership under German law by the order of the
Bankruptcy Court in Darmstadt. In addition, we ceased funding of our
U.K. subsidiaries, Hostmark World and Hostmark U.K., in the first
quarter of 2002. On March 28, 2002, an Administrator was appointed for
the U.K. subsidiaries by an order of the Companies Court, Chancery
Division of High Court under the United Kingdom Insolvency Act. In
April 2002, the Irish subsidiary, Worldport Ireland Limited, was given
notice that a petition for winding up was filed and would be presented
to the Irish High Court on behalf of Global Crossing Ireland Limited.
The petition was heard by the Irish High Court on May 13, 2002 and a
liquidator was appointed for this subsidiary to act on behalf of the
credits. As a result of this action, the liquidator has control over
this subsidiary's assets. We believe that each of these subsidiaries
has potential liabilities that exceed the value of its assets. Certain
creditors of these subsidiaries have made claims directly against the
parent company, Worldport Communications, Inc. ("Worldport Inc."), for
liabilities related to the operation of these subsidiaries and
additional creditors could assert similar claims. There can be no
assurance that Worldport Inc. will be successful in defending these
claims and in limiting its liability for the obligations of its
subsidiaries. See Management's Discussion and Analysis of Financial
Condition and Results of Operation - Liquidity and Capital Resources"
for a more detailed discussion of the liabilities of our subsidiaries
and how we have accounted for those liabilities on our consolidated
financial statements.
In addition to the aforementioned claims, the Company is involved
in various lawsuits or claims arising in the normal course of business.
In the opinion of management, none of these lawsuits or claims will
have a material adverse effect on the consolidated financial position
or results of operations of the Company.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(B) REPORTS ON FORM 8-K
The Company filed a Current Report on Form 8-K on August 16,
2002. The Form 8-K was dated August 16, 2002, and reported information
under Item 4 related to the Company's change in certifying accountants
from Arthur Andersen LLP to Deloitte & Touche LLP.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WORLDPORT COMMUNICATIONS, INC.
Date: November 11, 2002 By: /s/ Kathleen A. Cote
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Kathleen A. Cote
Chief Executive Officer
CERTIFICATIONS
I, Katheen A. Cote, certify that:
1. I have reviewed this quarterly report on Form 10-Q of
Worldport Communications, Inc.;
2. Based on my knowledge, this quarterly report does not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the
circumstances under which such statements were made, not misleading
with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present
in all material respects the financial condition, results of operations
and cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. I am responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act Rules
13a-14 and 15d-14) for the registrant and I have:
a) designed such disclosure controls and procedures
to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made
known to me by others within those entities, particularly
during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's
disclosure controls and procedures as of a date within 90 days
prior to the filing date of this quarterly report (the
"Evaluation Date"); and
c) presented in this quarterly report our conclusions
about the effectiveness of the disclosure controls and
procedures based on our evaluation as of the Evaluation Date;
5. I have disclosed, based on my most recent evaluation, to
the registrant's auditors and the audit committee of the registrant's
board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or
operation of internal controls which could adversely affect
the registrant's ability to record, process, summarize and
report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves
management or other employees who have a significant role in
the registrant's internal controls; and
6. I have indicated in this quarterly report whether or not
there were significant changes in internal controls or in other factors
that could significantly affect internal controls subsequent to the
date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
/s/ Kathleen A. Cote
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Kathleen A. Cote
Chief Executive Officer and acting Chief Financial Officer
November 11, 2002