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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------------
FORM 10-Q
[X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 November 14, 2003, the Registrant had 32,940,207 shares of Common Stock,
par value $0.0001, outstanding.
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1
WORLDPORT COMMUNICATIONS, INC.
TABLE OF CONTENTS
PAGE
----
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 2003 and December 31, 2002................... 3
Condensed Consolidated Statements of Operations
for the Three Months and Nine Months Ended September 30,
2003 and 2002.............................................. 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 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.............. 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk. 26
Item 4. Controls and Procedures.................................... 26
PART II - OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings.......................................... 27
Item 2. Changes in Securities...................................... 28
Item 6. Exhibits and Reports on Form 8-K........................... 30
SIGNATURE................................................................... 30
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................................... $ 27,828 $ 107,697
Marketable securities....................................................... 11,008 10,841
Other current assets........................................................ 505 284
----------- -----------
Total current assets.......................................... 39,341 118,822
PROPERTY AND EQUIPMENT, net................................................. 9 101
OTHER ASSETS................................................................ 99 197
----------- -----------
TOTAL ASSETS............................................. $ 39,449 $ 119,120
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... $ 2,752 $ 3,014
Accrued expenses........................................................... 9,589 14,473
Net liabilities of non-controlled subsidiaries............................. 10,156 9,528
Current portion of obligations under capital leases ....................... -- 3,210
Other current liabilities.................................................. 771 846
----------- -----------
Total current liabilities................................... 23,268 31,071
Long-term obligations under capital leases, net of current portion........ -- 834
----------- -----------
Total liabilities........................................... 23,268 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, 0 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, 200,000,00 shares authorized, 32,940,207 and
39,087,252 shares issued and outstanding in 2003 and 2002, respectively. 3 3
Warrants................................................................... 2,611 2,611
Additional paid-in capital................................................. 120,984 187,213
Accumulated other comprehensive loss....................................... (7,418) (6,511)
Accumulated deficit........................................................ (99,999) (96,102)
----------- -----------
Total stockholders' equity ................................. 16,181 87,215
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY.................. $ 39,449 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
REVENUES.................................................... $ -- $ -- $ -- $ --
COST OF SERVICES............................................ -- -- -- --
-------- -------- -------- --------
Gross profit........................................... -- -- -- --
-------- -------- -------- --------
OPERATING EXPENSES:
Selling, general and administrative expenses........... 461 665 2,159 2,573
Depreciation and amortization.......................... 3 38 50 115
-------- -------- -------- --------
Operating loss................................... (464) (703) (2,209) (2,688)
-------- --------- -------- --------
OTHER INCOME (EXPENSE):
Interest income ...................................... 97 545 551 1,444
Other income (expense), net............................ (5) 20 36 16
-------- -------- -------- --------
LOSS BEFORE INCOME TAXES.................................... (372) (138) (1,622) (1,228)
INCOME TAX PROVISION........................................ -- -- -- --
-------- -------- -------- --------
NET LOSS FROM CONTINUING OPERATIONS......................... (372) (138) (1,622) (1,228)
INCOME FROM DISCONTINUED
OPERATIONS, net of tax.................................... 2,146 1,604 2,146 1,136
-------- -------- -------- --------
NET INCOME (LOSS)........................................... $ 1,774 $ 1,466 $ 524 $ (92)
======== ======== ======== ========
NET LOSS PER SHARE FROM CONTINUING OPERATIONS:
BASIC....................................................
DILUTED.................................................. $ (0.01) $ 0.00 $ (0.05) $ (0.03)
========= ========= ========= ========
$ (0.01) $ 0.00 $ (0.05) $ (0.03)
========= ========= ========= ========
NET INCOME (LOSS) PER SHARE:
BASIC.................................................... $ 0.05 $ 0.04 $ 0.01 $ 0.00
========= ========= ========= =========
DILUTED.................................................. $ 0.05 $ 0.02 $ 0.01 $ 0.00
========= ========= ========= =========
SHARES USED IN NET INCOME (LOSS) PER SHARE
CALCULATION:
BASIC................................................... 32,940 39,087 35,349 39,087
CONVERTIBLE PREFERRED STOCK............................. -- 22,066 -- --
WARRANTS................................................ 663 663 663 --
OPTIONS................................................. -- -- -- --
-------- -------- -------- --------
DILUTED................................................. 33,603 61,816 36,012 39,087
========= ========= ========= =========
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)
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2003 2002
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)................................................................... $ 524 $ (92)
Adjustments to reconcile net income (loss) to net cash flows from operating activities:
Income from discontinued operations....................................... (2,146) (1,136)
Depreciation and amortization............................................. 50 115
Gain on disposal of assets................................................ (38) (16)
Change in other current and noncurrent assets............................. (119) 672
Change in accounts payable, accrued expenses and other liabilities........ (1,030) (2,208)
----------- ------------
Net cash flows from operating activities........................ (2,759) (2,665)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets.............................................. 80 20
----------- -----------
Net cash flows from investing activities........................ 80 20
CASH FLOWS FROM FINANCING ACTIVITIES:
Repurchase of preferred stock, including dividend............................. (67,577) --
Repurchase of common stock ................................................... (3,074) --
----------- -----------
Net cash flows from financing activities........................ (70,651) --
Net cash flows from discontinued operations......................................... (6,539) 49,540
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS................................ (79,869) 46,895
CASH AND CASH EQUIVALENTS, beginning of the period.................................. 107,697 61,475
----------- -----------
CASH AND CASH EQUIVALENTS, end of the period........................................ $ 27,828 $ 108,370
=========== ===========
CASH PAID DURING THE PERIOD FOR INTEREST............................................ $ -- $ --
=========== ===========
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 Notes 3 and 4. 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 had 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. In the second quarter of 2003, the Company's Chief
Executive Officer resigned and its remaining employees were terminated.
As a result, the Company does not currently have any employees. Certain
employees of The Heico Companies, L.L.C. and its affiliates ("Heico")
are assisting the Company in maintaining its books and records and
performing other administrative functions. Heico is controlled by
Michael E. Heisley, Chairman and Chief Executive Officer of the
Company.
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, all of
which have been retired. 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.
In October 2003, the Company's board of directors authorized the
repurchase of up to 5 million shares of its outstanding common stock
from time to time, through open market purchases, private transactions
or other means.
6
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 represented
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 or purchase of the Company's common stock.
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 September 30, 2003, the Company had
no preferred stock outstanding. As of September 30, 2003, the Company
had approximately 32.9 million shares of common stock outstanding.
As of November 13, 2003, the Company had approximately $37.5
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 or
terminating the registration of its securities under the Securities
Exchange Act of 1934. The Company 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 accounting principles generally
accepted in the United States of America ("GAAP") 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
September 30, 2003, and the results of operations and cash flows for
the respective periods ended September 30, 2003 and 2002. The results
of operations for the three months and nine months ended September 30,
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 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.
7
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'
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 and nine months ended
September 30, 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 September 30, 2003
there were no 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.
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 adopted 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.
8
(2) COMPREHENSIVE LOSS
Total comprehensive income (loss) for the three and nine months
ended September 30, 2003 and 2002 was as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income (loss) $ 1,774 $ 1,466 $ 524 $ (92)
Foreign currency translation adjustments 1,204 (196) (1,074) (3,208)
Unrealized gain on marketable securities held-for-sale 21 (199) 167 38
--------- --------- -------- ---------
Total comprehensive income (loss) $ 2,999 $ 1,071 $ (383) $ (3,262)
========= ========= ======== =========
(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.
|X| 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 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 September 30, 2003, the Net Liabilities of Non-controlled
Subsidiaries relating to Ireland equaled $4.4 million.
Approximately $10.6 million of liabilities that were
guaranteed or incurred by Worldport Inc. have not been
deconsolidated and are reflected as accounts payable and
accrued expenses in the condensed consolidated balance
sheets at September 30, 2003.
|X| 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
9
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 September 30, 2003, the Net Liabilities of Non-controlled
Subsidiaries relating to Hostmark AB equaled $0.1 million.
|X| 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.
|X| 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 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
September 30, 2003, there were no Net Liabilities of
Non-controlled Subsidiaries relating to Hostmark GmbH.
|X| 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 their creditors. As a
result of this action, the administrator gained control over
these subsidiaries' assets. The assets and liabilities of
the U.K. subsidiaries 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 September
30, 2003, the Net Liabilities of Non-controlled Subsidiaries
relating to the U.K. equaled $5.7 million.
|X| 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. On August 8, 2003, a Company Voluntary
Arrangement was approved for the Company's UK subsidiaries.
The voluntary arrangements contemplate a first and final
dividend of approximately 18 pence in the pound in the case
of Hostmark World Limited and 60 pence in the pound in the
case of Hostmark UK Limited, both of which are anticipated
to be paid to unsecured creditors by March 2004. Based on
the amount of the Company's current claims in such
proceedings, the Company would receive aggregate dividends
of approximately $6 million if dividends were made in these
amounts. Additionally, the Company would reduce Liabilities
of Non-controlled Subsidiaries by up to $5.7 million. It is
still possible that creditors or other parties in interest
could challenge the Company's claim or could assert
additional claims. Therefore, there can be no assurance that
the Company will receive a distribution in these
proceedings, or if a distribution is received, there can be
no assurance that the Company will receive the amount
currently contemplated by the Company Voluntary
Arrangements. The Company will record a gain related to any
potential dividends upon receipt.
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 received by the Company in
the fourth quarter of 2002 and resulted in a gain of $0.3 million.
10
As a result of these transactions, the Company had exited all
three of its operating segments as of March 31, 2002. Accordingly,
results of these exited operations have been classified as
discontinued.
The operating results of discontinued operations for the three
and nine months ended September 30, 2003 and 2002 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenue $ -- $ -- $ -- $ 291
Restructuring costs, net (see Note 4) (2,146) (1,611) (2,146) 672
Income (loss) before income taxes 2,146 1,604 2,146 (4,239)
Income tax benefit -- -- -- 5,597
Income from discontinued operations 2,146 1,604 2,146 1,136
Assets and liabilities related to the discontinued operations as of
September 30, 2003 and December 31, 2002 consist of the following:
SEPTEMBER 30, DECEMBER 31,
2003 2002
---- ----
Current assets $ 14 $ 5
Noncurrent assets 9 9
Current liabilities (20,802) (27,578)
Long-term liabilities -- (834)
---------- ----------
Net liabilities of discontinued
operations $ (20,779) $ (28,398)
========== ==========
(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. These charges have been
primarily included in Income 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. In October 2003, the Company settled claims related to the
rent payments for the data center in Ireland, and reversed a portion of
previously recorded restructuring reserves resulting in a non-cash gain
of $2.2 million, which is recorded in Income from Discontinued
Operations. As part of the settlement, the Company is obligated to pay
11
$2.6 million, of which, $1.5 million was paid prior to September 30,
2003, with the remainder due in the fourth quarter of 2003.
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 accrued by the Company for the cancellation of 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.
Additionally, during the second quarter of 2003, the Company accepted
the resignation of its existing Chief Executive Officer and terminated
certain headquarters staff and recorded a charge of approximately $0.2
million in selling, general and administrative expenses.
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 September 30,
2003:
BALANCE AT CURRENCY BALANCE AT
DECEMBER 31, NET CASH TRANSLATION SEPTEMBER 30,
2002 REDUCTIONS(a) PAYMENTS ADJUSTMENTS 2003
---- ------------- -------- ----------- ----
Facility exit costs $ 5,887 $ (2,191) $ (1,706) $ (825) $ 1,165
Bandwidth contract termination 4,299 -- -- 478 4,777
Other costs 189 (29) (160) -- --
-------- -------- --------- -------- -----------
Total $ 10,375 $ (2,220) $ (1,866) $ (347) $ 5,942
======== ======== ========= ======== ===========
(a) The net reductions include a gain on the settlement of the lease in Dublin, Ireland of $2.2 million.
The Company's management is continuing to seek opportunities to
further reduce its liabilities related to the exited businesses. All
remaining restructuring costs are due to be paid by December 31, 2004,
with $1.2 million due in 2003 and $4.7 million in 2004.
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
12
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 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 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 GAAP, 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 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 losses on the foreign currency translation losses
currently included in Accumulated Other Comprehensive Loss.
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 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
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
13
proceedings, and consequently, no distributions could be made to the
third party creditors (including the Frankfurt landlord for lease
payments prior to the December 31, 2002 termination date). This
declaration can be revoked in the future to the extent money is
collected by the receiver on behalf of Hostmark GmbH in an amount
sufficient to provide a distribution to the third party creditors.
Based on its understanding of the German proceedings, the Company does
not believe it is obligated to fund the Frankfurt lease obligation and
other creditor liabilities of the German subsidiary. Therefore, in the
third quarter of 2002, the Company reduced its Net Liabilities of
Non-controlled Subsidiaries by, and recorded a 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. As described below, the Company has been
informed that it may receive a distribution as the result of the
administration proceedings of its U.K. subsidiaries. If Worldport Inc.
is successful in collecting any portion of the advances made to any of
its subsidiaries, 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 $13.1 million
of liabilities reflected on the Company's September 30, 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 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 August 8, 2003, a Company Voluntary Arrangement was approved
for the Company's UK subsidiaries. The voluntary arrangements
contemplate a first and final dividend of approximately 18 pence in the
pound in the case of Hostmark World Limited and 60 pence in the pound
in the case of Hostmark UK Limited, both of which are anticipated to be
paid to unsecured creditors by March 2004. Based on the amount of the
Company's current claims in such proceedings, the Company would receive
aggregate dividends of approximately $6 million if dividends were made
in these amounts. Additionally, the Company would reduce Liabilities of
Non-controlled Subsidiaries by up to $5.6 million. It is still possible
that creditors or other parties in interest could challenge the
Company's claim or could assert additional claims. Therefore, there can
be no assurance that the Company will receive a distribution in these
proceedings, or if a distribution is received, there can be no
assurance that the Company will receive the amount currently
contemplated by the Company Voluntary Arrangements. The Company will
record a gain related to any potential dividends upon receipt.
(6) EQUITY TRANSACTIONS
On March 7, 2003, the Company repurchased approximately 99% of
its outstanding preferred stock from a single owner, Heico. The shares
were repurchased for $67.4 million, which represented the aggregate
liquidation preference of the purchased shares, including a 7% dividend
14
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 all of
the preferred stock it has repurchased and as of September 30, 2003,
the Company had no preferred stock outstanding.
In October 2003, the Company's board of directors authorized the
repurchase of up to 5 million shares of its outstanding common stock
from time to time, through open market purchases, private transactions,
or other means.
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
September 30, 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, 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
outstanding shares as of September 30, 2003) and holds warrants to
purchase 679,451 shares of common stock (2.1% of the outstanding shares
as of September 30, 2003) and Mr. Heisley holds options to purchase
2,114,583 shares of common stock (6.4% of the outstanding shares as of
September 30, 2003). 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 outstanding shares as of September
30, 2003). Mr. Meadows is the beneficial owner of 1,764,129 shares of
the Company's common stock (5.4% of the outstanding shares as of
September 30, 2003). A copy of the stockholders' agreement is attached
to the Amended Form 13-D filed by Heico on April 28, 2003.
15
(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. 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 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. The Company has been informed that it may receive a
distribution as the result of the administration proceedings of its
U.K. subsidiaries. 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 $4.3 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 Euro 900,000 in
16
accrued rent and charges and the confirmation of the Company's
liabilities as guarantor under the lease. 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
Euro 1,200,000, which included additional rent that they claim had
accrued since their prior demand. The demand amount was subsequently
increased to Euro 1,400,000 in April 2003. In June 2003, judgment was
entered against Worldport requiring that Worldport pay Channor Limited
Euro 750,000. In addition the High Court required that Worldport place
Euro 500,000 into escrow with the Court pending plenary hearing. The
Company made these payments in July 2003. This claim was settled in
October 2003 for Euro 2,250,000, inclusive of the payments of Euro
1,250,000 made in July 2003. As a result of the settlement, the Company
reversed a portion of previously recorded restructuring reserves,
resulting in a non-cash gain of $2.2 million, included in income from
discontinued operations.
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 the Company and its then current directors
(the "Illinois actions"). 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 the Company 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 the Company 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.
In one of the Illinois actions, on April 30, 2003 an amended
complaint was filed (which added Heico and J O Hambro Capital
Management Limited ("Hambro") as defendants) that purports to allege
both class and shareholder derivative claims for 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, damages, costs and attorneys' fees. On July 8, 2003 the Illinois
actions were consolidated, and on July 10, 2003 a Consolidated Amended
Class and Derivative Complaint was filed which, on behalf of the
plaintiffs in each of the Illinois actions, purports to assert the same
claims, seeking the same relief against the same parties, as were
asserted in the amended complaint.
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 intends to
defend this claim and believes that it has meritorious defenses.
On March 12, 2003, a shareholder derivative complaint was filed
in the Court of Chancery of the State of Delaware against the Company,
its then current directors and Heico. The complaint alleges breaches of
fiduciary duty relating to the Company's repurchase of the Company's
preferred stock. The complaint seeks a declaration that the defendants
have breached their fiduciary duties to the Company and its common
stockholders, damages, costs, and attorneys' fees.
On August 8, 2003, the plaintiffs in the Delaware action filed
an Amended Complaint, which added claims that had been alleged in the
Consolidated Amended Class and Derivative Complaint filed in Illinois
17
and added Hambro as a defendant. The Company believes these allegations
to be without merit and intends to vigorously contest the allegations.
Discovery is ongoing. The plaintiffs have moved to voluntarily dismiss
without prejudice the Illinois actions.
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.
In April 2002, the Company received a $57.6 million income tax
refund in connection with the Company's 2001 Federal income tax return.
However, receipt of the refund does not indicate that the Internal
Revenue Service agrees with the positions taken by the Company in its
tax returns. The Internal Revenue Service is currently conducting a
survey of the refund claim. The Internal Revenue Service could require
the Company to return all or a portion of this refund.
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. 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.
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 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.
18
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).
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:
|X| 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.
|X| 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
19
the ownership of Worldport's Stockholm Internet solution
center and the operations at that center, and all customers'
contracts.
|X| 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.
|X| 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.
|X| 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.
Following is a summary of the significant exit activities that
have occurred since March 31, 2002.
|X| 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.
|X| In August 2002, the U.K. administrator identified a new
third party tenant for the Slough, U.K., 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 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
20
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.
|X| 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.
|X| 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.
|X| 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.
|X| In the second quarter of 2003, the Company's Chief Executive
Officer resigned and its remaining employees were
terminated. As a result, the Company does not currently have
any employees. Therefore, the Board appointed Michael E.
Heisley as Chief Executive Officer and Jonathan Y. Hicks as
Chief Financial Officer. Mr. Hicks is an employee of a Heico
affiliate, and certain employees of Heico are assisting the
Company in maintaining its books and records and performing
other administrative functions.
|X| On August 8, 2003, a Company Voluntary Arrangement was
approved for the Company's UK subsidiaries. The voluntary
arrangements contemplate a first and final dividend of
approximately 18 pence in the pound in the case of Hostmark
World Limited and 60 pence in the pound in the case of
Hostmark UK Limited, both of which are anticipated to be
paid to unsecured creditors by March 2004. Based on the
amount of the Company's current claims in such proceedings,
the Company would receive aggregate dividends of
approximately $6 million if dividends were made in these
amounts. Additionally, the Company would reduce Liabilities
of Non-controlled Subsidiaries by up to $5.6 million. It is
still possible that creditors or other parties in interest
could challenge the Company's claim or could assert
additional claims. Therefore, there can be no assurance that
the Company will receive a distribution in these
proceedings, or if a distribution is received, there can be
no assurance that the Company will receive the amount
currently contemplated by the Company Voluntary
Arrangements. The Company will record a gain related to any
potential dividends upon receipt.
21
|X| In October 2003, the Company settled certain claims related
to the lease of its data center in Ireland for Euro
2,250,000. Euro 1,250,000 was paid prior to September 30,
2003, with the balance paid in October 2003. The Company
reversed a portion of previously recorded restructuring
reserves, resulting in a non-cash gain of $2.2 million,
recorded in Income from Discontined Operations.
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 three and nine months ended September 30, 2003 and
2002.
Selling, general and administrative ("SG&A") expenses were $0.5
million and $0.7 million for the quarters ended September 30, 2003 and
2002, respectively, and were $2.2 million and $2.6 million for the nine
months ended September 30, 2003 and 2002, respectively. 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. For the nine months ended September 30, 2003, SG&A
expenses included $0.2 million of severance charges offset by the
reversal of a previously established litigation reserve.
Depreciation and amortization expense represented depreciation on
the corporate office leasehold improvements and related computer
hardware and software. Depreciation and amortization expense was $0.1
million for the nine months ended September 30, 2003 and 2002.
Interest income, which was earned on the Company's cash and cash
equivalents, was $0.1 million and $0.6 million for the quarters ended
September 30, 2003 and 2002, respectively, and was $0.6 million and
$1.4 million for the nine months ended September 30, 2003 and 2002,
respectively. As a result of the lack of an operating business and its
large number of stockholders, the Company must either maintain its
liquid assets in government securities, which generally produce low
returns, or otherwise 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, for the nine
months ended September 30, 2003, the Company paid $67.6 million to
repurchase preferred stock and $3.1 million to repurchase common stock.
Therefore, the Company expects to earn less interest income from its
cash and cash equivalents in future periods.
Net loss from continuing operations was $0.4 million and $0.1
million in the quarters ended September 30, 2003 and 2002,
respectively, and was $1.6 million and $1.2 million for the nine months
ended September 30, 2003 and 2002, respectively.
The operating results of discontinued operations for the three
and nine months ended September 30, 2003 and 2002 were as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net revenue $ -- $ -- $ -- $ 291
Restructuring costs, net (see Note 4) (2,146) (1,611) (2,146) 672
Income (loss) before income taxes 2,146 1,604 2,146 (4,239)
Income tax benefit -- -- -- 5,597
Income from discontinued operations 2,146 1,604 2,146 1,136
22
For the three and nine months ended September 30, 2003, the
Company had income from discontinued operations of $2.1 million, which
consisted primarily of the reversal of a portion of previously recorded
restructuring reserves resulting from the settlement of certain claims
related to the lease of its data center in Ireland.
As a result, the Company had net income of $1.8 million in the
third quarter of 2003, compared to net income of $1.5 million for the
same period in 2002. The Company had net income of $0.5 million for the
nine months ended September 30, 2003, as compared to a net loss of $0.1
million for the same period in 2002.
The Company had income from discontinued operations of $1.6
million in the third quarter of 2002. $1.4 million of non-cash income
was recorded in the third quarter of 2002 relating to the Company's
understanding that it is not obligated to fund the Frankfurt lease
obligation and other creditor liabilities of the German subsidiary. The
remaining $0.2 million was primarily a result of favorably settling
previously estimated accruals on items related to the discontinued
businesses.
The Company had income from discontinued operations of $1.1
million for the nine months ended September 30, 2002. This $1.1 million
in income primarily consisted of the following:
|X| $1.6 million income from discontinued operations for the
third quarter of 2002 described above.
|X| $10.0 million restructuring charge recorded in the first
quarter of 2002 on the U.K. business.
|X| $3.0 million of operating losses from the U.K. business
prior to it being discontinued.
|X| $7.7 million gain recorded in the second quarter, which is a
result of the Company's release from its underlying lease
guarantee on the Slough, U.K. data center lease.
|X| $5.6 million tax benefit that was recognized in the first
quarter of 2002. The first quarter tax benefit was the
result of a new U.S. federal tax law that was enacted in
March 2002, which allowed the Company to carryback a $5.6
million AMT tax credit from 2001 against taxable income in
2000, that was previously 100% reserved by a valuation
allowance.
|X| $1.1 million asset impairment charge recorded in the second
quarter of 2002 related to certain equipment from the
discontinued businesses.
|X| $0.3 million loss recorded in the second quarter of 2002 as
a result of the final adjustment to the sale price for
Hostmark AB.
|X| $0.7 million gain recorded in the second quarter of 2002 as
a result of favorably settling previously estimated accruals
on items related to the discontinued businesses.
The following table summarizes the significant components of the
restructuring reserve included in Accrued Expenses at September 30,
2003:
BALANCE AT CURRENCY BALANCE AT
DECEMBER NET CASH TRANSLATION SEPTEMBER 30,
31, 2002 REDUCTIONS(a) PAYMENTS ADJUSTMENTS 2003
-------- ------------- -------- ----------- ----
Facility exit costs $ 5,887 $ (2,191) $ (1,706) $ (825) $ 1,165
Bandwidth contract termination 4,299 -- -- 478 4,777
Other costs 189 (29) (160) -- --
-------- --------- --------- -------- --------
Total $ 10,375 $ (2,220) $ (1,866) $ (347) $ 5,942
======== ========= ========= ======== ========
(a) The net reductions include a gain on the settlement of the lease in Dublin, Ireland of $2.2 million.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
The Company's cash flows from operating activities used $2.8
million during the nine months ended September 30, 2003, compared to a
use of cash of $2.7 million during the nine months ended September 30,
2002. These expenditures were primarily for salaries and benefits,
23
severance, professional service fees, corporate governance expenses and
facility costs related to the Company's minimal remaining corporate
operations.
The Company had minimal cash flows from investing activities
during the nine months ended September 30, 2003 and 2002.
Financing activities used $70.7 million during the first nine
months of 2003. $67.6 million was used for the repurchase of preferred
stock, 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. Financing activities also used $3.1 million
for the repurchase of common stock pursuant to the Self-Tender Offer
during the nine months ended September 30, 2003.
The Company's discontinued operations used $6.5 million during
the nine months ended September 30, 2003, as compared to net cash flows
from discontinued operations of $49.5 million for the nine months ended
September 30, 2002. The cash used for discontinued operations for the
nine months ended September 2003, consisted primarily of repayment of
capital lease obligations of $4.5 million and payments for the
settlement of the lease on the data center in Ireland of $1.5 million.
The cash provided by discontinued operations for the nine months ended
September 30, 2002 were primarily attributable to the receipt of a
$57.6 million income tax refund in April 2002.
In April 2002, the Company received a $57.6 million income tax
refund in connection with the Company's 2001 Federal income tax return.
However, receipt of the refund does not indicate that the Internal
Revenue Service agrees with the positions taken by the Company in its
tax returns. The Internal Revenue Service is currently conducting a
survey of the refund claim. 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 September 30, 2003, the Company has approximately 32.9 million
shares of common stock outstanding.
In October 2003, the Company's board of directors authorized the
repurchase of up to 5 million shares of its outstanding common stock
from time to time, through open market purchases, private transactions,
or other means.
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 September 30, 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.
24
As of November 13, 2003, the Company had approximately $37.5
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 changing its domicile to outside the United States or
terminating the registration of its securities under the Securities
Exchange Act of 1934. The Company 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 September 30, 2003 consolidated balance sheet
reflected total liabilities of $23.3 million. Included in this amount
are $10.2 million of Net Liabilities of Non-Controlled Subsidiaries for
the U.K., Irish and Swedish operations (see Note 5 to 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. The Company has been informed that it may receive a
distribution as a result of the administration proceedings related to
its U.K. subsidiaries of approximately $6.0 million. If Worldport Inc.
is successful in collecting any portion of the advances made to any of
its subsidiaries, 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 $13.1 million of liabilities reflected on the Company's
September 30, 2003, balance sheet attributable to Worldport Inc. and
the remaining subsidiaries not in Administration, receivership or
liquidation. Approximately $1.6 million of that amount represents
normal operating accruals and reserves related to the continuing
operations. The remaining $11.5 million consist of the following
accruals for potential obligations related to the exited businesses:
|X| $1.2 million as a final settlement payment on the Dublin
data center lease. (See Part II, Item I "Legal
Proceedings"),
|X| $5.1 million accrued for the potential exposure (including
VAT) related to the litigation by Cable & Wireless (see Part
II, Item I "Legal Proceedings"),
|X| $4.3 million of obligations related to bandwidth contracts
entered into in Ireland,
|X| $0.8 million of obligations related to the old
telecommunications business, and
|X| $0.1 million of other Worldport Inc. obligations related to
the Irish operations.
25
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.
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 adopted
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 nine
months ended September 30, 2003 and 2002. The Company has used
derivative instruments to hedge its foreign currency exposure only on a
limited basis, and had no derivative instruments outstanding at
September 30, 2003.
ITEM 4. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
have concluded, based on their evaluation as of the end of the period
covered by the report, 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
26
Securities Exchange Act of 1934 is recorded, processed, summarized and
reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms.
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. 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 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. The Company has been informed that it may receive a
distribution as a result of the administration proceedings of its U.K.
subsidiaries. Certain creditors of the Company's 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 Euro 900,000 in
accrued rent and charges and the confirmation of the Company's
liabilities as guarantor under the lease. 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
Euro 1,200,000, which included additional rent that they claim had
accrued since their prior demand. The demand amount was subsequently
increased to Euro 1,400,000 in April 2003. In June 2003, judgment was
entered against Worldport requiring that Worldport pay Channor Limited
Euro 750,000. In addition the High Court required that Worldport place
Euro 500,000 into escrow with the Court pending plenary hearing. The
Company made these payments in July 2003. These amounts were previously
27
accrued in the fourth quarter of 2001. In October 2003, the Company
settled these claims for Euro 2,250,000, including the Euro 1,250,000
that was paid in July 2003, and the remaining balance of Euro 1,000,000
was paid in October 2003. Under the terms of the settlement, the
Company released its interest in the leased premises in full
satisfaction of its obligations under its guarantee.
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 then current directors (the
"Illinois actions"). 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
the Company 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 the Company 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.
In one of the Illinois actions, on April 30, 2003, an amended
complaint has been filed (which added Heico and J O Hambro Capital
Management Limited ("Hambro") as defendants) that purports to allege
both class and shareholder derivative claims for 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, damages, costs and attorneys' fees. On July 8, 2003 the Illinois
actions were consolidated, and on July 10, 2003 a Consolidated Amended
Class and Derivative Complaint was filed which, on behalf of the
plaintiffs in each of the Illinois actions, purports to assert the same
claims, seeking the same relief against the same parties, as were
asserted in the amended complaint.
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 intends to
defend this claim and believes its has meritorious defenses
On March 12, 2003, a shareholder derivative complaint was filed
in the Court of Chancery of the State of Delaware against the Company,
its then current directors, and Heico ("the Delaware action"). The
complaint alleges breaches of fiduciary duty relating to the Company's
repurchase of the Company's preferred stock. The complaint seeks a
declaration that the defendants have breached their fiduciary duties to
the Company and its common stockholders, damages, costs and attorneys'
fees.
On August 8, 2003, the plaintiffs in the Delaware action filed an
Amended Complaint, which added claims that had been alleged in the
Consolidated Amended Class and Derivative Complaint filed in Illinois
and added Hambro as a defendant. The Company believes these allegations
to be without merit and intends to vigorously contest the allegations.
Discovery is ongoing. The plaintiffs have moved to voluntarily dismiss
without prejudice the Illinois actions.
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.
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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.
Heico is controlled by Michael E. Heisley, Chairman and Chief
Executive Officer of the Company, and his family. Heico, 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
outstanding shares as of September 30, 2003) and holds warrants to
purchase 679,451 shares of common stock (2.1% of the outstanding shares
as of September 30, 2003) and Mr. Heisley holds options to purchase
2,114,583 shares of common stock (6.4% of the outstanding shares as of
September 30, 2003). 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 outstanding shares as of September
30, 2003). Mr. Meadows is the beneficial owner of 1,764,129 shares of
the Company's common stock (5.4% of the outstanding shares as of
September 30, 2003). A copy of the shareholders' agreement is attached
to the Amended Form 13-D filed by Heico on April 28, 2003.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to 15
U.S.C. Section 10A, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to 15
U.S.C. Section 10A, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1 Certification of the Chief Executive Officer 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 October 16,
2003. The Form 8-K was dated October 16, 2003, and reported information
under Item 12 relating to the Company's announcement of a claim
settlement.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
WORLDPORT COMMUNICATIONS, INC.
Date: November 14, 2003 By: /s/ Jonathan Y. Hicks
-----------------------
Jonathan Y. Hicks
Chief Financial Officer
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