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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 March 31, 2003.
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)
2626 Warrenville Road, Suite 400
Downers Grove, IL 60515
(Address of principal executive offices)
(312) 456-2536
--------------
(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 [ ]
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). YES [ ] NO [X]
As of April 25, 2003, the Registrant had 32,940,207 shares of Common Stock, par
value $0.0001, outstanding.
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WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements - unaudited
Condensed Consolidated Balance Sheets as of
March 31, 2003 and December 31, 2002........................ 3
Condensed Consolidated Statements of Operations
for the Three Months Ended March 31, 2003 and 2002.......... 4
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2003 and 2002.................. 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.. 24
Item 4. Controls and Procedures..................................... 24
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings........................................... 26
Item 2. Changes in Securities....................................... 27
Item 6. Exhibits and Reports on Form 8-K............................ 28
SIGNATURE.................................................................... 29
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
MARCH 31, DECEMBER 31,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 38,681 $ 107,697
Marketable securities....................................................... 10,942 10,841
Other current assets........................................................ 165 284
-------- ---------
Total current assets.......................................... 49,788 118,822
PROPERTY AND EQUIPMENT, net................................................. 67 101
OTHER ASSETS................................................................ 185 197
-------- ---------
TOTAL ASSETS............................................. $ 50,040 $ 119,120
======== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 2,877 $ 3,014
Accrued expenses........................................................... 14,744 14,473
Net liabilities of non-controlled subsidiaries............................. 9,582 9,528
Current portion of obligations under capital leases ....................... 3,389 3,210
Other current liabilities.................................................. 814 846
-------- ---------
Total current liabilities................................... 31,406 31,071
Long-term obligations under capital leases, net of current portion........ -- 834
-------- ---------
Total liabilities........................................... 31,406 31,905
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, 34,056 and 956,417 shares issued and outstanding in 2003
and 2002, respectively ................................................. -- --
Series C convertible preferred stock, $0.0001 par value, 1,450,000 shares
authorized, 0 and 1,416,030 shares issued and outstanding in 2003 and
2002, respectively ..................................................... -- --
Series D convertible preferred stock, $0.0001 par value, 650,000 shares
authorized, 0 and 316,921 shares issued and outstanding in 2003 and
2002, respectively ..................................................... -- --
Series E convertible preferred stock, $0.0001 par value, 145,000 shares
authorized, 0 and 141,603 shares issued and outstanding in 2003 and
2002, respectively ..................................................... -- --
Series G convertible preferred stock, $0.0001 par value, 1,000 shares
authorized, 0 and 1,000 shares issued and outstanding in 2003 and
2002, respectively ..................................................... -- --
Common stock, $0.0001 par value, 200,000,000 shares authorized, 39,087,252
shares issued and outstanding........................................... 4 4
Warrants................................................................... 2,611 2,611
Additional paid-in capital................................................. 124,240 187,213
Accumulated other comprehensive loss....................................... (7,210) (6,511)
Accumulated deficit........................................................ (101,011) (96,102)
--------- --------
Total stockholders' equity ................................. 18,634 87,215
-------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 50,040 $ 119,120
======== =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(Unaudited)
Three Months Ended
March 31,
----------------------------
2003 2002
---- ----
REVENUES........................................................ $ -- $ --
COST OF SERVICES................................................ -- --
-------- --------
Gross profit............................................... -- --
OPERATING EXPENSES:
Selling, general and administrative expenses............... 821 930
Depreciation and amortization.............................. 33 39
-------- --------
Operating loss........................................ (854) (969)
OTHER INCOME (EXPENSE):
Interest income............................................ 309 304
Interest expense........................................... -- (111)
Other income (expense)..................................... 57 (4)
-------- --------
LOSS BEFORE INCOME TAXES........................................ (488) (780)
INCOME TAXES.................................................... -- --
-------- --------
NET LOSS FROM CONTINUING OPERATIONS............................. (488) (780)
LOSS FROM DISCONTINUED OPERATIONS, net of tax................... -- (7,319)
-------- --------
NET LOSS........................................................ $ (488) $(8,099)
======= ========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS:
BASIC........................................................ $ (0.01) $ (0.02)
======== ========
DILUTED...................................................... $ (0.01) $ (0.02)
======== ========
NET LOSS PER SHARE:
BASIC........................................................ $ (0.01) $ (0.21)
======== ========
DILUTED...................................................... $ (0.01) $ (0.21)
======== ========
SHARES USED IN NET LOSS PER SHARE CALCULATION:
BASIC....................................................... 39,087 38,087
CONVERTIBLE PREFERRED STOCK............................... -- --
WARRANTS.................................................. -- --
OPTIONS................................................... -- --
-------- --------
DILUTED..................................................... 39,087 38,087
======== ========
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
Three Months Ended
-------------------------
March 31,
--------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................................................ $ (488) $ (8,099)
Adjustments to reconcile net loss to net cash flows from operating activities:
Loss from discontinued operations ......................................... -- 7,319
Depreciation and amortization ............................................. 33 39
(Gain) loss on disposal of assets ......................................... (50) 3
Change in other current and noncurrent assets ............................. 131 827
Change in accounts payable, accrued expenses and other liabilities ........ (207) (1,276)
--------- ---------
Net cash flows from operating activities ........................ (581) (1,187)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets .............................................. 50 --
--------- ---------
Net cash flows from investing activities ........................ 50 --
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of preferred stock, including dividend ............................. (67,382) --
Principal payments on obligations under capital leases ........................ -- (1,229)
--------- ---------
Net cash flows from financing activities ........................ (67,382) (1,229)
Net cash flows from discontinued operations ......................................... (1,103) (4,154)
--------- ---------
NET DECREASE IN CASH AND CASH EQUIVALENTS ........................................... (69,016) (6,570)
CASH AND CASH EQUIVALENTS, beginning of the period .................................. 107,697 61,475
--------- ---------
CASH AND CASH EQUIVALENTS, end of the period ........................................ $ 38,681 $ 54,905
========= =========
CASH PAID DURING THE PERIOD FOR INTEREST ............................................ $ 65 $ 111
========= =========
CASH PAID DURING THE PERIOD FOR INCOME TAXES ........................................ $ -- $ --
========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
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, the Company pursued a new business
strategy, focused on the delivery of Internet managed hosting services
to global companies doing business in the European marketplace.
However, the Company did not achieve the revenue growth it had
anticipated, which, combined with the general economic downturn and the
slowdown in technology spending, prompted the Company to review various
alternatives to its existing business plan. The Company 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, the Company no longer has active
business operations. Accordingly, results of the exited operations have
been classified as discontinued.
Since ceasing its business operations in the first quarter of
2002, the Company has been operating with a minimal headquarters staff
while it completes the activities related to exiting its prior
businesses and determines how to use its cash resources. During this
period, the Company has actively worked to resolve and settle the
Company's outstanding liabilities. Additionally, the Company has
considered various alternatives in determining how and when to use its
cash resources. The Company has sought and reviewed acquisition
opportunities. However, the Company did not pursue any of these
opportunities since it did not believe that any of them were in the
best interests of its stockholders. The Company has also analyzed a
potential liquidation of the Company and its effects on the Company's
stockholders.
As described in Note 6, the Company commenced a self-tender
offer for the Company's common stock on March 7, 2003. The self-tender
offer expired on April 11, 2003, and approximately 6.1 million shares
were repurchased by the Company as a result of the self-tender offer.
As of April 25, 2003, the Company had approximately 32.9 million shares
of common stock outstanding after the repurchase of the shares. On
April 15, 2003, the Company's two largest shareholders and a member of
the Company's board of directors entered into a stockholders agreement.
This agreement is described further in Note 6.
On March 7, 2003, in a separate transaction, the Company
repurchased approximately 99% of its outstanding preferred stock from
The Heico Companies, L.L.C. ("Heico"). The shares were repurchased for
$67.4 million, including a 7% dividend. During April 2003, the Company
repurchased the remaining preferred stock from the three remaining
preferred stockholders for an aggregate purchase price of $0.2 million.
Worldport has retired the preferred stock it has repurchased and as of
April 25, 2003, the Company had no preferred stock outstanding.
6
As of April 25, 2003, after the repurchase of shares pursuant to
the self-tender offer and the repurchase of the preferred stock, the
Company had approximately $45.4 million in cash, cash equivalents and
marketable securities. The Company intends to explore the possible
benefits to its stockholders of a change in domicile to outside the
United States of America. The Company also intends to continue to
consider potential acquisition opportunities, although the Company has
not identified a specific industry on which it intends to focus and has
no present plans, proposals, arrangements or understandings with
respect to the acquisition of any specific business.
Basis of Presentation
---------------------
The accompanying condensed consolidated financial statements
have been prepared by the Company without audit pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this Form 10-Q pursuant to
such rules and regulations; however, management believes that the
disclosures herein are adequate to make the information presented not
misleading. The financial statements and notes thereto included in this
Form 10-Q should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-K
for the year ended December 31, 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
March 31, 2003, and the results of operations and cash flows for the
three months ended March 31, 2003 and 2002. The results of operations
for the three months ended March 31, 2003, 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. All
significant intercompany accounts and transactions have been
eliminated.
Under accounting principles generally accepted in the United
States of America ("GAAP"), 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 in Note 3, the Company's U.K., Irish, German and
Swedish subsidiaries filed or were placed into the local jurisdiction's
applicable proceedings. As a result, the Company deconsolidated these
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.
Use of Estimates
----------------
The Company's financial statements are prepared in accordance with
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 were translated at the rates of exchange as of
the balance sheet date, and income statement items were translated at
the average rates prevailing during the period. The resulting
translation adjustment was recorded as a component of stockholders'
7
equity. Exchange gains and losses on intercompany balances of a
long-term investment nature were also recorded as a component of
stockholders' equity. Other foreign exchange gains and losses were
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 months ended March 31, 2003 and 2002,
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. At March 31, 2003
there were no significant foreign currency hedge contracts outstanding.
Earnings (Loss) per Share
-------------------------
The Company has applied the provisions of Statement of Financial
Accounting Standards ("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. In 2003
and 2002, basic and diluted loss per share is the same because all
dilutive securities had an antidilutive effect on loss per share.
New Accounting Pronouncements
-----------------------------
In June 2002, the Financial Accounting Standards Board ("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.
In June 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123." The statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company adopted the new disclosure requirements
in this statement in 2002.
(2) COMPREHENSIVE LOSS
Total comprehensive loss for the three months ended March 31,
2003 and 2002 was as follows (in thousands):
Three Months Ended
March 31,
2003 2002
---- ----
Net loss $ (488) $(8,099)
Foreign currency translation adjustments (799) 393
Unrealized gains on marketable securities
held-for-sale 100 111
------ --------
Total comprehensive loss $ (1,187) $(7,595)
======== ========
8
(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 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
related to these actions.
> In November 2001, the Company announced that its 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 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 gained control over
this subsidiary's assets. In September 2002, the liquidator
disclaimed the leases for the two facilities previously used by
the Irish subsidiary. The Company provided a guarantee with
respect to the lease of one of these facilities. (See Note 8 for
a discussion of the legal proceedings relating to this
guarantee.) 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 sheets (see Note 5). At March 31, 2003, the Net
Liabilities of Non-controlled Subsidiaries relating to Ireland
equaled $4.1 million. Approximately $18.5 million of liabilities
that were guaranteed or incurred by Worldport Inc. have not been
deconsolidated and are reflected as liabilities of the Company at
March 31, 2003.
> In December 2001, the Company sold the assets and certain
liabilities of its Swedish subsidiary, Hostmark AB, to OM
Technology AB for a final sales price of 7.5 million Swedish
kronor (approximately $0.8 million), 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 were deconsolidated in the third quarter of
2002 and reflected in Net Liabilities of Non-controlled
Subsidiaries on the Company's balance sheets (see Note 5). At
March 31, 2003, the Net Liabilities of Non-controlled
Subsidiaries relating to Hostmark AB equaled $0.1 million.
> In December 2001, the Company sold its Swedish professional
services business 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, the Company placed its German subsidiary,
Hostmark GmbH, into receivership under German law. As a result of
this action, the receiver gained control over this subsidiary's
9
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 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). As of March 31, 2003, there were no Net Liabilities
of Non-controlled Subsidiaries relating to Hostmark GmbH.
> In March 2002, the Company made the decision to make no further
investment in its U.K. managed hosting operation. On March 26,
2002, the Company's 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 gained
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 sheets (see Note 5). At March 31, 2003, the Net
Liabilities of Non-controlled Subsidiaries relating to the U.K.
equaled $5.4 million.
In addition, the Company completed the sale of its remaining
carrier business, Telenational Communications, Inc. ("TNC") in October
2001 for $0.4 million. Due to uncertainties related to the
collectibility of this note, the note was fully reserved for in 2001.
However, in the fourth quarter of 2002, the Company reached an
agreement with the purchaser to accept $0.3 million in full
satisfaction of the note. This amount was paid to the Company in the
fourth quarter of 2002 and resulted in a cash gain of $0.3 million.
As a result of these transactions, the Company had exited all
three of its operating segments as of March 31, 2002 and has been
operating since then with only a minimal headquarters staff.
Accordingly, results of these exited operations have been classified as
discontinued.
There were no operating results from discontinued operations for
the three months ended March 31, 2003. The operating results of
discontinued operations for the three months ended March 31, 2002 were
as follows (in thousands):
Three Months Ended
March 31,
---------
2002
----
Net revenue $ 291
Restructuring costs (see Note 4) $ 10,000
Loss before income taxes $(12,916)
Income tax benefit $ 5,597
Net loss from discontinued operations $ (7,319)
Assets and liabilities related to the discontinued operations consist
of the following (in thousands):
March 31, December 31,
2003 2002
---- ----
Current assets $ 6 $ 5
Other noncurrent assets 9 9
Current liabilities (28,109) (27,578)
Long-term liabilities -- (834)
--------- ----------
Net liabilities of discontinued operations $(28,094) $ (28,398)
========= ==========
10
(4) RESTRUCTURING ACTIVITIES
In the fourth quarter of 2001 and in the first quarter of 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 5, 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 recognized a
non-cash gain 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
charges.
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 $1.7 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 March 31, 2003
(in thousands):
Balance At Balance At
December 31, Cash Non-cash March 31,
2002 Payments Adjustments 2003
---- -------- ----------- ----
Facility exit costs $ 5,887 $ (68) $ 224 $ 6,043
Bandwidth contract termination 4,299 -- 170 4,469
Severance -- -- -- --
Other costs 189 (65) 8 132
------- ------- ----- -------
Total $10,375 $ (133) $ 402 $10,644
======= ======= ===== =======
The non-cash adjustments of $0.4 million primarily represent the
impact of foreign currency fluctuations on translated balances.
The Company's management is continuing to seek opportunities to
further reduce its liabilities related to the exited businesses and
evaluate the possible sale or disposition of the remaining assets,
including potentially subleasing the facilities remaining under
11
operating lease agreements. All remaining restructuring costs are due
to be paid by December 31, 2010, with $4.3 million due in 2003, $0.9
million in 2004, $0.9 million in 2005, $0.9 million in 2006, $1.0
million in 2007 and $2.6 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, the Company placed its German
subsidiary, Hostmark GmbH, into receivership under German law in
December 2001 and a receiver was appointed for this subsidiary. In
March 2002, the Company's 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, the Company's 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, the
Company's 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
recorded value of their assets, there can be no assurance that these
creditors will not make claims against the parent company, 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 Accumulated Other Comprehensive Income.
12
In August 2002, the U.K. administrator identified a new third
party tenant for the Slough data center. 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. The Company had previously agreed to guarantee, on
behalf of its U.K. subsidiary, the Slough data center lease 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 a non-cash gain from discontinued operations of, $7.7
million in the second quarter of 2002.
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 was 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, the Company was
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 did
not believe it was 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 a non-cash gain from
discontinued operations of, $1.4 million relating to the net
liabilities of the German subsidiary.
In addition to the third party creditors of the Company's
subsidiaries, Worldport Inc. from time to time made advances to these
subsidiaries prior to the Company's subsidiaries entering into the
relevant proceedings. Therefore, Worldport Inc. is also a creditor of
these subsidiaries in these proceedings. The Company is 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, the Company 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 $21.8 million
of liabilities reflected on the Company's March 31, 2003, balance sheet
attributable to Worldport Inc. and the remaining subsidiaries not in
Administration, receivership or liquidation. The Company has assumed,
for purposes of calculating these liabilities, that it will not be able
to mitigate them, however, Company management is currently seeking
opportunities to further reduce these liabilities. There can be no
13
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) EQUITY TRANSACTIONS
On March 7, 2003, the Company repurchased approximately 99% of
its outstanding preferred stock from a single owner, The Heico
Companies L.L.C. The shares were repurchased for $67.4 million, which
represents the aggregate liquidation preference of the purchased
shares, including a 7% dividend that was required under the terms of
the preferred stock before any distributions on or purchase of the
Company's common stock. As a result of this repurchase, Additional
Paid-in Capital was reduced by $63.0 million and Accumulated Deficit
was increased by $4.4 million, reflecting the 7% dividend. In April
2003, Worldport paid an aggregate purchase price of $0.2 million to
complete similar purchase offers with the three remaining preferred
stockholders, who owned, in aggregate, 34,056 shares of Series B
preferred stock. Worldport has retired the preferred stock it has
repurchased and as of April 25, 2003, the Company had no preferred
stock outstanding.
On December 23, 2002, W.C.I. Acquisition Corp., a Delaware
corporation ("W.C.I."), commenced a tender offer for any and all of the
Company's outstanding common stock at a price of $0.50 per share (the
"W.C.I. Offer"). W.C.I. was formed by Heico, J O Hambro Capital
Management Limited ("Hambro") and certain of their affiliates to
complete the W.C.I. Offer. At the time of the W.C.I. Offer, these
entities owned or had the right to acquire approximately 45% of the
Company's outstanding common stock. The W.C.I. Offer was conditioned
on, among other things, the valid tender of a majority of the
outstanding shares, excluding the shares owned by W.C.I. or its
stockholders. W.C.I.'s tender offer expired on February 14, 2003
without purchase of any shares, as certain conditions were not
satisfied. W.C.I. reported that approximately 6.8 million shares were
tendered in response to the W.C.I. Offer.
Recognizing that the tender of shares pursuant to the W.C.I.
Offer demonstrated the apparent desire of certain stockholders for
liquidity, the Company's Board of Directors considered and approved a
self-tender offer. The Company commenced a self-tender offer on March
7, 2003 for any and all of the Company's outstanding common stock at a
price of $0.50 per share (the "Self-Tender Offer"). The Self-Tender
Offer was not conditioned on any minimum number of shares being
tendered, however it was subject to certain conditions described in the
Company's Form TO-I filed with the Securities and Exchange Commission
on March 7, 2003. The Self-Tender Offer expired on April 11, 2003.
Approximately 6.1 million shares were validly tendered and repurchased
by the Company for a purchase price of approximately $3.1 million. The
repurchased shares have been retired by the Company, and, as of April
25, 2003, the Company had approximately 32.9 million shares of common
stock outstanding.
Heico and Hambro, neither of which tendered any shares in the
offering, are the Company's two largest shareholders. Heico, which is
controlled by Michael E. Heisley, a director of the Company, and his
family, including his daughter, Emily Heisley Stoeckel. who is a
director of the Company, Hambro, and Stanley H. Meadows, a director of
the Company, entered into a stockholders agreement as of April 15,
2003, in which they agreed, among other things, to vote all shares of
the Company's common stock over which they have voting control in order
to cause the Company's Board to consist of two representatives
designated by Heico and two representatives designated by Hambro and to
cause the Company not to take specified actions, including the issuance
or repurchase of equity securities, a material change in the Company's
business and certain acquisitions, investments and claim settlements,
without the approval of a majority of the directors designated by Heico
and of the majority of the directors designated by Hambro. According to
the Schedule 13D, as amended, of Michael E. Heisley and Heico, Heico is
the beneficial owner of 6,077,707 shares of the Company's common stock
(18.4% of the Company's currently outstanding shares of common stock)
and holds warrants to purchase 679,451 shares of common stock (2.1% of
the currently outstanding shares) and Mr. Heisley holds options to
purchase 2,114,583 shares of common stock (6.4% of the currently
14
outstanding shares). According to the Schedule 13D, as amended, of
Hambro, Hambro is the beneficial owner of 9,367,869 shares of the
Company's common stock (28.4% of the currently outstanding shares). Mr.
Meadows is the beneficial owner of 1,764,129 shares of the Company's
common stock (5.4% of the currently outstanding shares). A copy of the
stockholders' agreement is attached to the Amended Form 13-D filed by
Heico on April 28, 2003.
(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.
During 2001, 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
exited all of its operating segments as of March 31, 2002.
(8) CONTINGENCIES
In March 2002, an Administrator was appointed for the U.K.
subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, 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 these
actions, the Administrator or liquidator has control over these
subsidiaries' assets. The Company believes that each of these
subsidiaries has liabilities which exceed the recorded value of its
assets. Certain creditors of these subsidiaries have made claims
directly against the parent company, 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 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 $4.0 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 is
contesting the validity of the claims and 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.
15
In October 2002, the Company received a letter from legal
counsel to Channor Limited, the landlord of the data center in Dublin,
Ireland, with respect to the Company's guarantee on that facility. This
letter demanded the payment within 14 days of approximately 0.9 million
Euros and the confirmation of the Company's liabilities as guarantor
under the lease. In January 2003, the Company's legal counsel received
a letter from legal counsel for the landlord in which the landlord
demanded that the Company assume the position of tenant under the
lease. Should the Company be forced to assume the position of tenant
under the lease, the Company could be obligated for the full amount of
rent through 2010 plus certain taxes and maintenance expenses. In
February 2003, Channor Limited filed a Notice of Motion in the High
Court of Ireland against Worldport Inc. in which the landlord demands
payment of approximately 1.2 million Euros, which included additional
rent that they claim had accrued since their prior demand. The demand
amount was subsequently increased to 1.4 million Euros in April 2003.
The Company is contesting the validity of the landlord's demands.
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. Included in Accrued Expenses at March 31,
2003 is $5.9 million, which represents rent payable on the data center
between January 2002 and 2010, the earliest contractual termination
date of the lease.
The Industrial Development Agency Ireland ("IDA") is seeking
payment of 3.4 million Euros from the Company. These claims relate to
unpaid invoices for bandwidth services provided to the Company's
subsidiary in Ireland (now in liquidation). The Company is contesting
the validity of the claims and 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.
On January 8, 2003, four substantially identical complaints were
filed in the Circuit Court of Cook County, Illinois, County Department,
Chancery Division against Worldport and its current directors.
Additionally, on January 16, 2003, a complaint was filed in the Court
of Chancery of the State of Delaware. The foregoing actions purport to
be brought on behalf of all public stockholders of Worldport in
connection with the W.C.I. Offer. The actions allege, among other
things, that certain of the defendants have breached their fiduciary
duties to Worldport and its stockholders. The complaints purport to
seek, inter alia, a variety of relief, including in certain
circumstances damages and an injunction preventing consummation of the
W.C.I. offer. An amended complaint has been filed that alleges breach
of fiduciary duties, waste of corporate assets and unjust enrichment
with regard to the Company's self-tender offer and repurchase of
preferred stock. The amended complaint purports to seek, inter alia,
rescission of the Company's self-tender offer and repurchase of the
Company's preferred stock and damages. The Company believes these
allegations to be without merit and intends to vigorously contest the
allegations.
On March 12, 2003, a complaint was filed in the United States
Bankruptcy Court for the District of Delaware against the Company. The
complaint was filed on behalf of one of the Company's former customers
which is now in bankruptcy and alleges breach of contract, fraud, and
misrepresentation in connection with the sale of indefeasible rights of
use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2
million plus legal costs and punitive damages. The Company is still
evaluating this claim and has not yet made a determination as to the
merits of this case. Accordingly, no accrual has been recorded on the
Company's financial statements at this time. The Company intends to
vigorously contest the allegations.
On March 13, 2003, a complaint was filed in the Court of
Chancery of the State of Delaware against the Company, its current
directors and Heico. The complaint alleges breach of fiduciary duty
relating to the March 7, 2003 repurchase of the preferred stock from
Heico. The complaint seeks relief in the form of a declaration that the
defendants have breached their fiduciary duties to the Company and its
common stockholders, an accounting by the defendant to the Company for
damages resulting from the defendants' breaches of fiduciary duty and
reimbursement of the plaintiffs' costs for the action, including
16
attorneys' fees. The Company believes these allegations to be without
merit and intends to vigorously contest the allegations.
In addition to the aforementioned claims, the Company is
involved in various lawsuits or claims arising in the normal course of
business, and the Company has established reserves for several such
suits and claims. In the opinion of management, none of these lawsuits
or claims will have a material adverse effect on the consolidated
results of operations of the Company, however there can be no
assurances that current reserves will be sufficient.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
NOTE ON "FORWARD-LOOKING" STATEMENTS
------------------------------------
The information set forth in Management's Discussion and Analysis
of Financial Condition and Results of Operations ("MD&A") contains
certain "forward-looking statements" within the meaning of Section 27A
of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities
Litigation Reform Act of 1995, including, among others (i) expected
resolution of the Company's contingent liabilities and (ii) prospective
business opportunities, as further explained in Item 1 of the Company's
Annual Report on Form 10-K for the year ended December 31, 2002.
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.
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, 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 the fourth quarter of fiscal 2001 and the first quarter of
fiscal 2002, the Company either sold or ceased operating all of its
operating businesses. Accordingly, the Company's results of these
exited businesses have been classified as discontinued. 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, 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 (as described
below).
17
In November 1999, the Company entered into a series of agreements
with Energis Plc to sell its 85% ownership interest in 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 of approximately $57
million on the gain.
In the second quarter of 2000 the Company announced a new
business strategy, focused on the delivery of Internet solutions to
global companies doing business in the European marketplace. Pursuant
to this strategy, the Company invested over $40 million to construct a
new Internet solutions SuperCentre in Dublin, Ireland, which became
operational in October 2000. In September 2000, the Company purchased
VIS-able, a Swedish professional services firm specializing in complex
systems development and consulting, for approximately $17.7 million.
Finally, in April 2001, the Company 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 the
Company's 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 the
transaction was completed, and only one ISC was open for business.
During 2001, the Company did not achieve the revenue growth in
its managed hosting business that the Company had anticipated. The
Company also experienced a decline in revenue in its 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, the Company's 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.
Following the exploration and review of strategic alternatives,
the Company determined that it was necessary to dramatically reduce the
rate at which its operations were using cash and to minimize its
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, the Company took the following actions in the
fourth quarter of 2001 and the first quarter of 2002:
> In November 2001, the Company announced that its 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, the Company sold the assets and certain
liabilities of its managed services business in Stockholm,
Sweden, to OM Technology AB for a final sales price of 7.5
million Swedish kronor (approximately $0.8 million), 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, the Company also sold its 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, the Company placed its German subsidiary,
Hostmark GmbH, into receivership under German law. As a result of
this action, the receiver has control over this subsidiary's
assets.
18
> In March 2002, the Company's Board of Directors made the decision
to make no further investment in its U.K. managed hosting
operation. The Company recorded a $10.0 million restructuring
charge in the first quarter of 2002 related to this action. On
March 26, 2002, the Company's 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 their creditors. As a result of
this action, the administrator has control over these
subsidiaries' assets.
In connection with these activities, the Company recorded
restructuring charges of $101.5 million and $10.0 million in the fourth
quarter of 2001 and first quarter of 2002, respectively. The 2001
restructuring charges included an $84.8 million asset impairment charge
to write down the managed hosting long-lived assets to their expected
net realizable value, facility exit costs of $9.3 million, bandwidth
contract termination costs of $4.7 million, severance of $1.3 million,
and other costs of $1.4 million. The 2002 restructuring charges
included facility exit costs of $7.9 million, bandwidth contract
termination costs of $0.4 million, and other costs of $1.7 million.
In addition, the Company completed the sale of its remaining
carrier business, Telenational Communications, Inc. ("TNC") in October
2001 for a $0.4 million promissory note. Due to uncertainties related
to the collectibility of this note, the note was fully reserved in
2001. However, in the fourth quarter of 2002, the Company reached an
agreement with the purchaser to accept $0.3 million in full
satisfaction of the note. This amount was paid to the Company in the
fourth quarter of 2002 and resulted in a cash gain of $0.3 million.
As a result of the transactions described above, the Company no
longer had active business operations as of March 31, 2002.
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.
Since March 31, 2002, the Company has operated with a minimal
headquarters staff while it has conducted the activities related to
exiting its prior businesses. Following is a summary of the significant
exit activities that have occurred since March 31, 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, on behalf of its U.K. subsidiary,
the Slough data center lease 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 a non-cash gain from
discontinued operations of, $7.7 million in the second quarter of
2002.
> In September 2002, the liquidator for the Company's Irish
subsidiary disclaimed the leases for the two facilities
previously used by the Irish subsidiary. The Company provided a
guarantee with respect to the lease of one of the facilities. See
Part II, Item I "Legal Proceedings" for a discussion of the legal
proceedings relating to this guarantee.
19
> 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, the Company was 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 or 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 a non-cash gain from discontinued
operations of, $1.4 million relating to the net liabilities of
the German subsidiary.
RESULTS OF OPERATIONS
- -----------------------
As described above, the Company had no active business operations
as of March 31, 2002. Accordingly, results of these exited operations
have been classified as discontinued.
There were no revenues or cost of services from continuing
operations in the first quarter of 2002 and 2001.
Selling, general and administrative ("SG&A") expenses were $0.8
million and $0.9 million for the quarters ended March 31, 2003 and
2002. SG&A expenses in the current and prior year primarily consisted
of corporate salaries and benefits, professional service fees,
corporate governance expenses and facility costs.
Depreciation and amortization expense represented depreciation on
the corporate office leasehold improvements and related computer
hardware and software. Depreciation and amortization expense was less
than $0.1 million for the first quarter of 2003 and 2002.
Interest income, which was earned on the Company's cash and cash
equivalents, was $0.3 million for each of the quarters ended March 31,
2003 and 2002, respectively. As a result of the lack of an operating
business and its large number of stockholders, the Company must
maintain its liquid assets in government securities, which generally
produce low returns, or comply with the requirements of the Investment
Company Act of 1940. As described in Note 6 to the Condensed
Consolidated Financial Statements in Part I, Item I, the Company paid
$67.4 million during the first quarter of 2003 for the repurchase of
preferred stock from Heico. Therefore, the Company expects to earn less
interest income from its cash and cash equivalents in future periods.
The Company incurred interest expense of $0.1 million in the prior year
first quarter primarily related to equipment financed under capital
leases.
20
Net loss from continuing operations was $0.5 million and $0.8
million in the quarters ended March 31, 2003 and 2002, respectively.
The Company had losses from discontinued operations of $7.3
million during the quarter ended March 31, 2002. The operating results
of discontinued operations were as follows (in thousands):
First Quarter
-------------
2002
----
Net revenue $ 291
Restructuring costs $ 10,000
Loss before income taxes $(12,916)
Income tax benefit $ 5,597
Net loss from discontinued operations $ (7,319)
Restructuring charges of $10.0 million were recorded in the first
quarter of 2002 relating to the actions taken in the U.K. in March
2002. These charges consisted of approximately $7.9 million in facility
exit costs, approximately $0.4 million in bandwidth termination costs,
and approximately $1.7 million in other related costs. Operating losses
of $3.0 million were incurred in the first quarter of 2002 from the
U.K. business prior to it being discontinued. A $5.6 million tax
benefit from discontinued operations was recorded in the first quarter
of 2002 as the result of a new U.S. federal tax law that was enacted in
March 2002. This new tax law allowed the Company to carry back a $5.6
million AMT tax credit from 2001 against taxable income in 2000 that
was previously 100% reserved by a valuation allowance.
As a result, the Company had a net loss of $0.5 million in the
first quarter of 2003, compared to net loss of $8.1 million for the
same period in 2002.
The following table summarizes the significant components of the
restructuring reserve included in Accrued Expenses at March 31, 2003
(in thousands):
Balance At Balance At
December 31 Cash Non-cash March 31
2002 Payments Adjustments 2003
---- -------- ----------- ----
Facility exit costs $ 5,887 $ (68) $ 224 $ 6,043
Bandwidth contract termination 4,299 -- 170 4,469
Severance -- -- -- --
Other costs 189 (65) 8 132
------- ------- ----- -------
Total $10,375 $ (133) $ 402 $10,644
======= ======= ===== =======
The non-cash adjustments of $0.4 million primarily represent the
impact of foreign currency fluctuations on translated balances.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's continuing operations used $0.6 million and $1.2
million during the first quarter of 2003 and 2002, respectively, due
primarily to salaries and benefits, professional service fees,
corporate governance expenses and facility costs related to the
Company's minimal corporate operations remaining after the shut down
and sale transactions of the fourth quarter of 2001 and the first
quarter of 2002.
The Company had minimal or no cash flows from investing
activities during the first quarter of 2003 and 2002.
21
Financing activities used $67.4 million during the first quarter
of 2003 for the repurchase of preferred stock from Heico in March 2003.
The shares were repurchased for $67.4 million, which represents the
aggregate liquidation preference of the purchased shares, including a
7% dividend that is required under the terms of the preferred stock
before any distributions on or purchase of the Company's common stock.
Financing activities used $1.2 million during the three months ended
March 31, 2002 for principal payments on capital leases.
The Company's discontinued operations used $1.1 million and $4.2
million during the first quarter of 2003 and 2002, respectively.
In April 2002, the Company received its $57.6 million income tax
refund in connection with the Company's 2001 Federal income tax return.
However, 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 Company has received a notice dated April 11, 2003,
that the Internal Revenue Service will conduct such an examination. The
Internal Revenue Service could require the Company to return all or a
portion of this refund.
Since ceasing its business operations, the Company has considered
various alternatives in determining how and when to use its cash
resources. The Company has sought and reviewed acquisition
opportunities. However, the Company did not pursue any of these
opportunities since it did not believe that any of them were in the
best interests of its stockholders. The Company has also analyzed a
potential liquidation of the Company and its effects on the Company's
stockholders.
The Company commenced a self-tender offer on March 7, 2003 for
any and all of its outstanding common stock at a price of $0.50 per
share (the "Self-Tender Offer"). The Self-Tender Offer expired on April
11, 2003. Approximately 6.1 million shares were validly tendered and
repurchased by the Company for a purchase price of approximately $3.1
million. The repurchased shares have been retired by the Company, and,
as of April 25, 2003, the Company has approximately 32.9 million shares
of common stock outstanding.
On March 7, 2003, in a separate transaction, the Company
repurchased approximately 99% of its outstanding preferred stock from
Heico. The shares were repurchased for $67.4 million, which represents
the aggregate liquidation preference of the purchased shares, including
a 7% dividend that is required under the terms of the preferred stock
before any distributions on or purchase of the Company's common stock.
. In April 2003, Worldport paid an aggregate purchase price of $0.2
million to complete similar purchase offers with the three remaining
preferred stockholders, who owned, in aggregate, 34,056 shares of
Series B preferred stock. Worldport has retired the preferred stock it
has repurchased and as of April 25, 2003, the Company has no preferred
stock outstanding. Litigation alleging breach of fiduciary duty has
been filed relating to the repurchase of the preferred stock from Heico
(see Part II, Item I "Legal Proceedings"). The Company intends to
vigorously contest the allegations.
As of April 25, 2003, the Company had approximately $45.5 million
in cash, cash equivalents and marketable securities. The Company's cash
equivalents currently consist of money market funds.
The Company intends to explore the possible benefits to its
stockholders of a change in domicile to outside the United States. The
Company also intends to continue to consider potential acquisition
opportunities, although the Company has not identified a specific
industry on which it intends to focus and has no present plans,
proposals, arrangements or understandings with respect to the
acquisition of any specific business.
The Company's March 31, 2003 consolidated balance sheet reflected
total liabilities of approximately $31.4 million. Included in this
amount are $9.6 million of Net Liabilities of Non-Controlled
Subsidiaries for the U.K., Irish and Swedish operations (see Note 5 to
22
the Condensed Consolidated Financial Statements in Part I, Item I). The
Company believes the parent company, 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 the Company's 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. The Company is 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, the Company 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 $21.8 million of liabilities reflected on the Company's
March 31, 2003, balance sheet attributable to Worldport Inc. and the
remaining subsidiaries not in Administration, receivership or
liquidation. Approximately $2.0 million of that amount represents
normal operating accruals and reserves related to the continuing
operations. The remaining $19.8 million consist of the following
accruals for potential obligations related to the exited businesses:
> $5.9 million of future rent payments on the Dublin data center
lease for which Worldport Inc. had provided a guarantee (see Part
II, Item I "Legal Proceedings"),
> $4.8 million accrued for the potential exposure (including VAT)
related to the litigation by Cable & Wireless (see Part II, Item
I "Legal Proceedings"),
> $3.4 million of obligations under capital leases, which expire in
2004,
> $4.1 million of obligations related to bandwidth contracts
entered into in Ireland,
> $0.8 million of obligations related to the old telecommunications
business, and
> $0.8 million of other Worldport Inc. obligations related to the
Irish operations.
The Company has assumed, for purposes of calculating these
liabilities, that it 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.
On March 12, 2003, a complaint was filed in the United States
Bankruptcy Court for the District of Delaware against the Company. The
complaint was filed on behalf of one of the Company's former customers,
which is now in bankruptcy and alleges breach of contract, fraud, and
misrepresentation in connection with the sale of indefeasible rights of
use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2
million plus legal costs and punitive damages. The Company is still
evaluating this claim and has not yet made a determination as to the
merits of this case. Accordingly, no accrual has been recorded on the
Company's financial statements at this time. The Company intends to
vigorously contest the allegations.
23
The Company is involved in various lawsuits or claims arising in
the normal course of business, and the Company has established reserves
for several such suits and claims. In the opinion of management, none
of these lawsuits or claims will have a material adverse effect on the
consolidated results of operations of the Company, however there can be
no assurances that current reserves will be sufficient. See Part II,
Item I "Legal Proceedings" for a discussion of ongoing litigation.
NEW ACCOUNTING PRONOUNCEMENTS
-----------------------------
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.
In June 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of
FASB Statement No. 123." The statement amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation", to provide alternative
methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of
Statement 123 to require prominent disclosures in both annual and
interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on
reported results. The Company adopted the new disclosure requirements
in this statement in 2002.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Prior to the fourth quarter 2001 and first quarter 2002
transactions described above, the majority of the Company's operations
were in Europe, and the revenue and expenses of those operations were
denominated in local currencies. The remaining assets and liabilities
of the Company's non-U.S. subsidiaries are translated at period-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. Due
to the volatility of currency exchange rates, among other factors, the
Company cannot predict the effect of exchange rate fluctuations on the
Company's future operating results. As a result, the Company may incur
gains and losses on foreign currency fluctuations. Other foreign
exchange gains and losses included in income were minimal for the three
months ended March 31, 2003 and 2002. The Company has used derivative
instruments to hedge its foreign currency exposure only on a limited
basis, and had no significant foreign currency hedge contracts
outstanding at March 31, 2003.
ITEM 4. CONTROLS AND PROCEDURES
Kathleen A. Cote, the Company's Chief Executive Officer and
acting Chief Financial Officer, has evaluated the Company's disclosure
controls and procedures within 90 days of the filing date of this
report. Based on her evaluation, she has concluded that the Company's
disclosure controls and procedures are effective to ensure that
information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
24
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 the Company's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of the previously mentioned evaluation.
25
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
In March 2002, an Administrator was appointed for the U.K.
subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, 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 these
actions, the Administrator or liquidator has control over these
subsidiaries' assets. The Company believes that each of these
subsidiaries has liabilities which exceed the recorded value of its
assets. Certain creditors of these subsidiaries have made claims
directly against the parent company, 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.
One of the Company's subsidiaries, Hostmark World Limited, was
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 was stayed by the appointment of an Administrator for
Hostmark World Limited.
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 $4.0 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 is
contesting the validity of the claims and 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 October 2002, the Company received a letter from legal counsel
to Channor Limited, the landlord of the data center in Dublin, Ireland,
with respect to the Company's guarantee on that facility. This letter
demanded the payment within 14 days of approximately 0.9 million Euros
and the confirmation of the Company's liabilities as guarantor under
the lease. In January 2003, the Company's legal counsel received a
letter from legal counsel for the landlord in which the landlord
demanded that the Company assume the position of tenant under the
lease. Should the Company be forced to assume the position of tenant
under the lease, the Company could be obligated for the full amount of
rent through 2010 plus certain taxes and maintenance expenses. In
February 2003, Channor Limited filed a Notice of Motion in the High
Court of Ireland against Worldport Inc. in which the landlord demands
payment of approximately 1.2 million Euros, which included additional
rent that they claim had accrued since their prior demand. The demand
amount was subsequently increased to 1.4 million Euros in April 2003.
The Company is contesting the validity of the landlord's demands.
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. Included in Accrued Expenses at March 31,
2003 is $5.9 million, which represents rent payable on the data center
between January 2002 and 2010, the earliest contractual termination
date of the lease.
26
On January 8, 2003, four substantially identical complaints were
filed in the Circuit Court of Cook County, Illinois, County Department,
Chancery Division against Worldport and its current directors.
Additionally, on January 16, 2003, a complaint was filed in the Court
of Chancery of the State of Delaware. The foregoing actions purport to
be brought on behalf of all public stockholders of Worldport in
connection with the W.C.I. Offer. The actions allege, among other
things, that certain of the defendants have breached their fiduciary
duties to Worldport and its stockholders. The complaints purport to
seek, inter alia, a variety of relief, including in certain
circumstances damages and an injunction preventing consummation of the
W.C.I. offer. An amended complaint has been filed that alleges breach
of fiduciary duties, waste of corporate assets and unjust enrichment
with regard to the Company's self-tender offer and repurchase of
preferred stock. The amended complaint purports to seek, inter alia,
rescission of the Company's self-tender offer and repurchase of the
Company's preferred stock and damages. The Company believes these
allegations to be without merit and intends to vigorously contest the
allegations.
On March 12, 2003, a complaint was filed in the United States
Bankruptcy Court for the District of Delaware against the Company. The
complaint was filed on behalf of one of the Company's former customers
which is now in bankruptcy and alleges breach of contract, fraud, and
misrepresentation in connection with the sale of indefeasible rights of
use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2
million plus legal costs and punitive damages. The Company is still
evaluating this claim and has not yet made a determination as to the
merits of this case. Accordingly, no accrual has been recorded on the
Company's financial statements at this time. The Company intends to
vigorously contest the allegations.
On March 13, 2003, a complaint was filed in the Court of Chancery
of the State of Delaware against the Company, its current directors and
Heico. The complaint alleges breach of fiduciary duty relating to the
March 7, 2003 repurchase of the preferred stock from Heico. The
complaint seeks relief in the form of a declaration that the defendants
have breached their fiduciary duties to the Company and its common
stockholders, an accounting by the defendant to the Company for damages
resulting from the defendants' breaches of fiduciary duty and
reimbursement of the plaintiffs' costs for the action, including
attorneys' fees. The Company believes these allegations to be without
merit and intends to vigorously contest the allegations.
In addition to the aforementioned claims, the Company is involved
in various lawsuits or claims arising in the normal course of business,
and the Company has established reserves for several such suits and
claims. In the opinion of management, none of these lawsuits or claims
will have a material adverse effect on the consolidated results of
operations of the Company, however there can be no assurances that
current reserves will be sufficient.
ITEM 2. CHANGES IN SECURITIES
On March 7, 2003, the Company repurchased approximately 99% of
its outstanding preferred stock from Heico. The shares were repurchased
for $67.4 million, which represents the aggregate liquidation
preference of the purchased shares, including a 7% dividend that is
required under the terms of the preferred stock before any
distributions on or purchase of the Company's common stock. In April
2003, Worldport paid an aggregate purchase price of $0.2 million to
complete similar purchase offers with the three remaining preferred
stockholders, who owned, in aggregate, 34,056 shares of Series B
preferred stock. Worldport has retired the stock it has repurchased.
The Company commenced a self-tender offer on March 7, 2003 for
any and all of the Company's outstanding common stock at a price of
$0.50 per share (the "Self-Tender Offer"). The Self-Tender Offer
expired on April 11, 2003. Approximately 6.1 million shares were
validly tendered and repurchased by the Company for a purchase price of
approximately $3.1 million.
27
Heico, which is controlled by Michael E. Heisley, a director of
the Company, and his family, including his daughter, Emily Heisley
Stoeckel. who is a director of the Company, Hambro, and Stanley H.
Meadows, a director of the Company, entered into a stockholders
agreement as of April 15, 2003, in which they agreed, among other
things, to vote all shares of the Company's common stock over which
they have voting control in order to cause the Company's Board to
consist of two representatives designated by Heico and two
representatives designated by Hambro and to cause the Company not to
take specified actions, including the issuance or repurchase of equity
securities, a material change in the Company's business and certain
acquisitions, investments and claim settlements, without the approval
of a majority of the directors designated by Heico and of the majority
of the directors designated by Hambro. According to the Schedule 13D,
as amended, of Michael E. Heisley and Heico, Heico is the beneficial
owner of 6,077,707 shares of the Company's common stock (18.4% of the
Company's current outstanding shares of common stock) and holds
warrants to purchase 679,451 shares of common stock (2.1% of the
currently outstanding shares) and Mr. Heisley holds options to purchase
2,114,583 shares of common stock (6.4% of the currently outstanding
shares). According to the Schedule 13D, as amended, of Hambro, Hambro
is the beneficial owner of 9,367,869 shares of the Company's common
stock (28.4% of the currently outstanding shares). Mr. Meadows is the
beneficial owner of 1,764,129 shares of the Company's common stock
(5.4% of the currently outstanding shares). A copy of the shareholders'
agreement is attached to the Amended Form 13-D filed by Heico on April
28, 2003.
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 March 10, 2003.
The Form 8-K was dated March 7, 2003, and reported information under
Item 5 related to the Company's announcement that it had completed the
repurchase of approximately 99% of its outstanding preferred stock from
The Heico Companies LLC.
The Company filed a Current Report on Form 8-K on March 26, 2003.
The Form 8-K was dated March 26, 2003, and reported information under
Item 5 relating to the Company's announcement that a complaint had been
filed against the Company, its directors, and The Heico Companies, LLC,
in connection with the Company's repurchase of preferred stock.
The Company filed a Current Report on Form 8-K on April 1, 2003.
The Form 8-K was dated March 31, 2003, and reported information under
Item 12 relating to the Company's announcement of its fiscal year 2002
financial results.
28
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: April 30, 2003 By: /s/ Kathleen A. Cote
-----------------------
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
29
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
--------------------
Kathleen A. Cote
Chief Executive Officer and acting Chief Financial Officer
April 30, 2003
30