10-Q 1 w48612_q203.txt MARCH 31, 2003 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------ FORM 10-Q [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2003. or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _____ to _______ Commission File Number 000-25015 WORLDPORT COMMUNICATIONS, INC. (Exact name of registrant as specified in its charter) Delaware 84-1127336 -------- ---------- (State or other jurisdiction of (IRS Employer ID Number) incorporation or organization) 2626 Warrenville Road, Suite 400 Downers Grove, IL 60515 (Address of principal executive offices) (312) 456-2536 -------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). YES [ ] NO [X] As of April 25, 2003, the Registrant had 32,940,207 shares of Common Stock, par value $0.0001, outstanding. ================================================================================ WORLDPORT COMMUNICATIONS, INC. TABLE OF CONTENTS PAGE ---- PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements - unaudited Condensed Consolidated Balance Sheets as of March 31, 2003 and December 31, 2002........................ 3 Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2003 and 2002.......... 4 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2003 and 2002.................. 5 Notes to Condensed Consolidated Financial Statements........ 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............... 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 24 Item 4. Controls and Procedures..................................... 24 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings........................................... 26 Item 2. Changes in Securities....................................... 27 Item 6. Exhibits and Reports on Form 8-K............................ 28 SIGNATURE.................................................................... 29 2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA) (UNAUDITED)

~~SEPTEMBER~~MARCH 3031, DECEMBER 31, ~~ASSETS~~2003 2002 ~~2001~~ ---- ---- ASSETS CURRENT ASSETS: Cash and cash equivalents ...................................................~~....~~ $ ~~108~~38,~~370~~681 $ 61107,~~475~~697 Marketable securities .......................................................~~....~~ 10,~~797~~942 10,~~759~~841 ~~Income tax receivable ........................................................... -- 51,964~~ Other current assets ........................................................~~....~~ ~~431~~165 ~~3,230~~284 --------- --------- Total current assets ..........................................~~....~~ ~~119~~49,~~598~~788 ~~127~~118,~~428~~822 PROPERTY AND EQUIPMENT, net .................................................~~....~~ ~~736~~67 ~~5,666~~101 OTHER ASSETS ................................................................~~....~~ ~~679~~185 ~~1,722~~197 --------- --------- TOTAL ASSETS .............................................~~....~~ $ ~~121~~50,~~013~~040 $ ~~134~~119,~~816~~120 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable ...........................................................~~....~~ $ 2,~~831~~877 $ 93,~~938~~014 Accrued expenses ...........................................................~~....~~ 1314,~~777~~744 2114,~~264~~473 Net liabilities of non-controlled subsidiaries .............................~~....~~ 9,~~663~~582 19,~~277~~528 Current portion of obligations under capital leases .......................~~.....~~ 23,~~979~~389 43,~~335~~210 Other current liabilities ..................................................~~....~~ ~~1,440~~814 ~~2,543~~846 --------- --------- Total current liabilities ...................................~~....~~ 3031,~~690~~406 3931,~~357~~071 Long-term obligations under capital leases, net of current portion ........~~....~~ ~~1,559~~-- ~~3,433~~834 --------- --------- Total liabilities ...........................................~~....~~ 3231,~~249~~406 4231,~~790~~905 ~~COMMITMENTS AND CONTINGENCIES~~ STOCKHOLDERS' EQUITY: Undesignated preferred stock, $0.0001 par value, 4,004,000 shares authorized, no shares issued and outstanding ............................~~....~~ -- -- Series A convertible preferred stock, $0.0001 par value, 750,000 shares authorized, no shares issued and outstanding ............................~~....~~ -- -- Series B convertible preferred stock, $0.0001 par value, 3,000,000 shares authorized, ~~956~~34,~~417~~056 and ~~965~~956,~~642~~417 shares issued and outstanding in ~~2002~~2003 and ~~2001~~2002, respectively .................................................~~......~~ -- -- Series C convertible preferred stock, $0.0001 par value, 1,450,000 shares authorized, 0 and 1,416,030 shares issued and outstanding in 2003 and 2002, respectively ..................................................... -- -- Series D convertible preferred stock, $0.0001 par value, 650,000 shares authorized, 0 and 316,921 shares issued and outstanding in 2003 and 2002, respectively ..................................................... -- -- Series E convertible preferred stock, $0.0001 par value, 145,000 shares authorized, 0 and 141,603 shares issued and outstanding in 2003 and 2002, respectively ..................................................... -- -- Series G convertible preferred stock, $0.0001 par value, 1,000 shares authorized, 0 and 1,000 shares issued and outstanding in 2003 and 2002, respectively ..................................................... -- -- Common stock, $0.0001 par value, 200,000,000 shares authorized, 39,087,252 ~~and 38,087,252~~ shares issued and outstanding ~~in 2002 and 2001, respectively~~...........................................~~......................~~ 4 4 Warrants ...................................................................~~....~~ 2,611 2,611 Additional paid-in capital .................................................~~....~~ ~~187~~124,~~213~~240 187,213 Accumulated other comprehensive loss .......................................~~....~~ (57,~~108~~210) (16,~~938~~511) Accumulated deficit ........................................................~~....~~ (95101,~~956~~011) (9596,~~864~~102) --------- --------- Total stockholders' equity .................................~~.....~~ 8818,~~764~~634 9287,~~026~~215 --------- --------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ..................~~....~~ $ ~~121~~50,~~013~~040 $ ~~134~~119,~~816~~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~~March ~~Months Ended September 30~~31, ~~September 30,~~ -------------- -------------- ~~2002~~2003 ~~2001~~ 2002 ~~2001~~ ---- ---- ~~---- ----~~ REVENUES ........................................................~~......~~ $ -- $ -- ~~$ -- $ --~~ COST OF SERVICES ................................................~~......~~ -- -- -- -- ----~~----~~ -------- ~~-------- --------~~ Gross profit ...............................................~~......~~ -- -- ~~-- -- -------- -------- -------- --------~~ OPERATING EXPENSES: Selling, general and administrative expenses ...............~~......~~ ~~665~~821 ~~1,397~~930 ~~2,573 4,803~~ Depreciation and amortization ..............................~~......~~ 3833 5139 ~~115 150~~ -------- -------- ~~-------- --------~~ Operating loss ........................................~~.....~~ (~~703~~854) (~~1,448~~969) ~~(2,688) (4,953) -------- -------- -------- --------~~ OTHER INCOME (EXPENSE): Interest income ............................................~~......~~ ~~545~~309 ~~973~~304 ~~1,444 4,132~~ Interest expense ...........................................~~......~~ -- -- (111) ~~(67) Gain (loss) on sale of assets ..................................... 20 -- 16 (289)~~ Other income (expense)~~, net~~ ...................................... --57 --(4) -- 28 -------- -------- ~~-------- --------~~ LOSS BEFORE INCOME TAXES ........................................~~......~~ (~~138~~488) (~~475~~780) ~~(1,339) (1,149)~~ INCOME ~~TAX PROVISION~~ TAXES.................................................... -- -- -- -- ----~~----~~ -------- ~~-------- --------~~ NET LOSS FROM CONTINUING OPERATIONS .............................~~......~~ (~~138~~488) (~~475~~780) ~~(1,339) (1,149) INCOME (~~LOSS) FROM DISCONTINUED OPERATIONS, net of tax ...................~~...........................~~ ~~1,604~~-- (277,~~105~~319) ~~1,247 (51,490)~~ -------- -------- ~~-------- --------~~ NET ~~INCOME (~~LOSS) ........................................................ $ ~~1,466 $~~(~~27,580~~488) $ (~~92) $(52~~8,~~639~~099) ======== ======== ~~======== ========~~ NET LOSS PER SHARE FROM CONTINUING OPERATIONS: BASIC ~~DILUTED~~ ........................................................~~....~~ $ (0.~~00) $ (0.~~01) $ (0.0302) ~~$ (0.03)~~ ======== ======= =~~=========~~ ~~========= $ (0~~DILUTED.~~00)~~..................................................... $ (0.01) $ (0.0302) ~~$ (0.03)~~ ======== ======= =~~=========~~ ~~=========~~ NET ~~INCOME (~~LOSS) PER SHARE: BASIC ........................................................~~......~~ $ ~~0.04 $~~ (0.7101) $ (0.0021) ~~$ (1.43)~~ ======== ======= =~~=========~~ ~~=========~~ DILUTED ......................................................~~......~~ $ ~~0.02 $~~ (0.7101) $ (0.0021) ~~$ (1.43)~~ ======== ======= =~~=========~~ ~~=========~~ SHARES USED IN NET ~~INCOME (~~LOSS) PER SHARE CALCULATION: BASIC .......................................................~~......~~ 39,087 3938,~~062 39,~~087 ~~36,794~~ CONVERTIBLE PREFERRED STOCK ...............................~~........~~ ~~22,066~~ -- -- -- WARRANTS ..................................................~~........~~ ~~663~~ -- -- -- OPTIONS ...................................................~~........~~ -- -- -- -- ----~~----~~ ------- -~~--------~~ ~~-------~~ DILUTED .....................................................~~......~~ ~~61,816~~ 39,~~062~~087 3938,087 ~~36,794~~ ======== ======= =~~========~~ ~~=======~~ The accompanying notes are an integral part of these condensed consolidated financial statements.

4 WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS) (Unaudited)

Three Months Ended ~~Nine Months Ended September 30, September 30,~~ ------------ ------------- ~~2002~~March ~~2001~~31, ~~2002 2001~~ ---- ---- 2003 2002 ---- ---- CASH FLOWS FROM OPERATING ACTIVITIES: Net ~~income (~~loss) ............................................................................ $ ~~1,466 $~~ (~~27,580~~488) $ (~~92) $ (52~~8,~~639~~099) Adjustments to reconcile net ~~income (~~loss) to net cash flows from operating activities: ~~(Income)~~Loss ~~loss~~ from discontinued operations ......................................... ~~(1,604)~~-- 277,~~105~~319 ~~(1,247) 51,490~~ Depreciation and amortization ............................................. 3833 5139 ~~115 150~~ (Gain) loss on ~~sale~~disposal of assets .........................................~~....~~ (2050) --3 ~~(16) 289~~ Change in other current and noncurrent assets ............................. ~~579~~131 17827 ~~672 (59)~~ Change in accounts payable, accrued expenses and other liabilities ........ (~~778~~207) (41,~~339~~276) ~~(2,208) (5,886)~~ --------- --------- ~~--------- ---------~~ Net cash flows from operating activities ........................ (~~319~~581) (41,~~746~~187) ~~(2,776) (6,655)~~ CASH FLOWS FROM INVESTING ACTIVITIES: ~~Purchase~~Proceeds offrom ~~marketable~~sale ~~securities~~of ~~..................................~~assets ~~-- (11,000) -- (11,000) Capital expenditures~~ ............................................... 50 -- ~~(27)~~--------- --------- ~~(51)~~Net ~~Proceeds~~cash flows from ~~sale~~investing ofactivities ~~assets~~ ........................~~...............~~ 2050 -- 20CASH ~~1,311~~FLOWS ~~---------~~FROM ~~---------~~FINANCING ~~---------~~ACTIVITIES: ~~---------~~Repurchase ~~Net~~of ~~cash~~preferred ~~flows~~stock, ~~from~~including ~~investing~~dividend ~~activities~~ ............................. 20 (1167,~~027~~382) 20-- ~~(9,740) CASH FLOWS FROM FINANCING ACTIVITIES:~~ Principal payments on obligations under capital leases ........................ -- -- (1,229) ~~(405)~~ --------- --------- ~~--------- ---------~~ Net cash flows from financing activities ........................ --(67,382) -- (1,229) ~~(405)~~ Net cash flows from discontinued operations ......................................... (~~909~~1,103) (204,~~135~~154) ~~50,880~~--------- ~~(43,201)~~--------- NET ~~INCREASE (~~DECREASE) IN CASH AND CASH EQUIVALENTS ........................................... (169,~~208~~016) (356,~~908~~570) ~~46,895 (60,001)~~ CASH AND CASH EQUIVALENTS, beginning of the period .................................. ~~109~~107,~~578~~697 ~~108,303~~ 61,475 ~~132,396~~ --------- --------- ~~--------- ---------~~ CASH AND CASH EQUIVALENTS, end of the period ........................................ $ ~~108~~38,~~370~~681 $ 7254,~~395~~905 ~~$ 108,370 $ 72,395~~ ========= ========= ~~========= =========~~ CASH PAID DURING THE PERIOD FOR INTEREST ............................................ $ 8165 $ ~~158~~111 ~~$ 279 $ 402~~ ========= ========= ~~========= ========= SUPPLEMENTAL SCHEDULE OF NON-~~CASH ~~INVESTING~~PAID ~~AND~~DURING ~~FINANCING~~THE ~~ACTIVITIES:~~PERIOD ~~Acquisition~~FOR ofINCOME ~~hostmark~~TAXES ~~through the issuance of common stock~~ .......... ~~$ -- $ -- $ -- $ 11,975 ========= ========= ========= ========= Acquisition of property and equipment under capital lease~~ .............................. $ -- $ -- ~~$ -- $ 7,875~~ ========= ========= ~~========= =========~~ The accompanying notes are an integral part of these condensed consolidated financial statements.

5 WORLDPORT COMMUNICATIONS, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ Worldport Communications, Inc., a Delaware corporation (together with its subsidiaries, the "Company"), was originally organized as a Colorado corporation under the name Sage Resources, Inc. in January 1989. Worldport remained inactive until 1996 when the Company's domicile was changed to Delaware and the name was changed to Worldport Communications, Inc. From 1997 to 1999, the Company was a facilities-based global telecommunications carrier offering voice, data and other telecommunications services to carriers, Internet service providers, medium and large corporations and distributors and resellers operating in Europe and the United States. In order to meet its obligations under its interim loan facility, the Company sold substantially all of its material assets during the first quarter of 2000. During 2000 and 2001, the Company pursued a new business strategy, focused on the delivery of Internet managed hosting services to global companies doing business in the European marketplace. However, the Company did not achieve the revenue growth it had anticipated, which, combined with the general economic downturn and the slowdown in technology spending, prompted the Company to review various alternatives to its existing business plan. The Company made the decision to take restructuring actions and to divest certain assets during the fourth quarter of 2001 and the first quarter of 2002, as described in Note 3. As a result, the Company no longer has active business operations. Accordingly, results of the exited operations have been classified as discontinued. Since ceasing its business operations in the first quarter of 2002, the Company has been operating with a minimal headquarters staff while it completes the activities related to exiting its prior businesses and determines how to use its cash resources. During this period, the Company has actively worked to resolve and settle the Company's outstanding liabilities. Additionally, the Company has considered various alternatives in determining how and when to use its cash resources. The Company has sought and reviewed acquisition opportunities. However, the Company did not pursue any of these opportunities since it did not believe that any of them were in the best interests of its stockholders. The Company has also analyzed a potential liquidation of the Company and its effects on the Company's stockholders. As described in Note 6, the Company commenced a self-tender offer for the Company's common stock on March 7, 2003. The self-tender offer expired on April 11, 2003, and approximately 6.1 million shares were repurchased by the Company as a result of the self-tender offer. As of April 25, 2003, the Company had approximately 32.9 million shares of common stock outstanding after the repurchase of the shares. On April 15, 2003, the Company's two largest shareholders and a member of the Company's board of directors entered into a stockholders agreement. This agreement is described further in Note 6. On March 7, 2003, in a separate transaction, the Company repurchased approximately 99% of its outstanding preferred stock from The Heico Companies, L.L.C. ("Heico"). The shares were repurchased for $67.4 million, including a 7% dividend. During April 2003, the Company repurchased the remaining preferred stock from the three remaining preferred stockholders for an aggregate purchase price of $0.2 million. Worldport has retired the preferred stock it has repurchased and as of April 25, 2003, the Company had no preferred stock outstanding. 6 As of April 25, 2003, after the repurchase of shares pursuant to the self-tender offer and the repurchase of the preferred stock, the Company had approximately $45.4 million in cash, cash equivalents and marketable securities. The Company intends to explore the possible benefits to its stockholders of a change in domicile to outside the United States of America. The Company also intends to continue to consider potential acquisition opportunities, although the Company has not identified a specific industry on which it intends to focus and has no present plans, proposals, arrangements or understandings with respect to the acquisition of any specific business. Basis of Presentation --------------------- The accompanying condensed consolidated financial statements have been prepared by the Company without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted in this Form 10-Q pursuant to such rules and regulations; however, management believes that the disclosures herein are adequate to make the information presented not misleading. The financial statements and notes thereto included in this Form 10-Q should be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002. In the opinion of the Company's management, the accompanying condensed consolidated financial statements contain all adjustments necessary to present fairly the Company's financial position as of March 31, 2003, and the results of operations and cash flows for the three months ended March 31, 2003 and 2002. The results of operations for the three months ended March 31, 2003, are not necessarily indicative of the operating results for the full year. Consolidation ------------- The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Under accounting principles generally accepted in the United States of America ("GAAP"), consolidation is generally required for investments of more than 50% of the outstanding voting stock of any investee, except when control is not held by the majority owner. Under these principles, legal reorganization or other proceedings (including Administration, receivership, or liquidation) represent conditions which can preclude consolidation in instances where control rests with an administrator, receiver or liquidator rather than the majority owner. As discussed in Note 3, the Company's U.K., Irish, German and Swedish subsidiaries filed or were placed into the local jurisdiction's applicable proceedings. As a result, the Company deconsolidated these subsidiaries' financial results and began accounting for its investment in the subsidiaries under the equity method of accounting and began recording gains and losses upon settlement. Use of Estimates ---------------- The Company's financial statements are prepared in accordance with GAAP'. Financial statements prepared in accordance with GAAP require the use of management estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Foreign Currency ---------------- Prior to the transactions described in Note 3, substantially all of the Company's operations were in Europe. The assets and liabilities of non-U.S. subsidiaries were translated at the rates of exchange as of the balance sheet date, and income statement items were translated at the average rates prevailing during the period. The resulting translation adjustment was recorded as a component of stockholders' 7 equity. Exchange gains and losses on intercompany balances of a long-term investment nature were also recorded as a component of stockholders' equity. Other foreign exchange gains and losses were recorded in income on a current basis and have been included in Loss from Discontinued Operations. These other foreign exchange gains and losses were minimal for the three months ended March 31, 2003 and 2002, respectively. Derivatives ----------- The Company has used derivative instruments to hedge its foreign currency exposure only on a limited basis. Accordingly, the Company is not subject to any additional significant foreign currency market risk other than normal fluctuations in exchange rates. At March 31, 2003 there were no significant foreign currency hedge contracts outstanding. Earnings (Loss) per Share ------------------------- The Company has applied the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share", which establishes standards for computing and presenting earnings per share. Basic earnings per share is computed by dividing income available to common stockholders by the weighted average number of common shares outstanding for the period. The calculation of diluted earnings per share includes the effect of dilutive common stock equivalents. In 2003 and 2002, basic and diluted loss per share is the same because all dilutive securities had an antidilutive effect on loss per share. New Accounting Pronouncements ----------------------------- In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan. The Company will adopt SFAS No. 146 for any exit or disposal activities initiated after December 31, 2002. In June 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." The statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the new disclosure requirements in this statement in 2002. (2) COMPREHENSIVE LOSS Total comprehensive loss for the three months ended March 31, 2003 and 2002 was as follows (in thousands): Three Months Ended March 31, 2003 2002 ---- ---- Net loss $ (488) $(8,099) Foreign currency translation adjustments (799) 393 Unrealized gains on marketable securities held-for-sale 100 111 ------ -------- Total comprehensive loss $ (1,187) $(7,595) ======== ======== 8 (3) DISCONTINUED OPERATIONS During 2001, the Company did not achieve its expected revenue growth in its managed hosting business. The general economic downturn, the slowdown in technology spending and the lengthening in the sales cycle for managed hosting services all contributed to these revenue shortfalls. Company management believed that these conditions, as well as the increasing level of competition and consolidation in the Web hosting and Internet infrastructure markets, would continue to have an adverse effect on the Company's ability to achieve near term revenue targets and, if they continued, could erode the financial resources of the Company more rapidly than planned. Following the exploration and review of strategic alternatives, the Company determined that it was necessary to take certain actions in the fourth quarter of 2001 and the first quarter of 2002 to dramatically reduce the rate at which its operations were using cash and to minimize the Company's exposure in markets that were experiencing significantly slower than expected market growth. Following is a summary of these fourth quarter 2001 and first quarter 2002 actions and the subsequent exit activities that have occurred related to these actions. > In November 2001, the Company announced that its Irish subsidiary was ceasing operations at its Dublin, Ireland facility. An orderly shutdown of the Ireland operations was commenced, and was substantially completed by December 31, 2001. In April 2002, Worldport Ireland Limited was given notice that a petition for winding up was filed and would be presented to the Irish High Court by Global Crossing Ireland Limited. The petition was heard by the Irish High Court on May 13, 2002 and a liquidator was appointed for this subsidiary to act on behalf of the creditors. As a result of this action, the liquidator gained control over this subsidiary's assets. In September 2002, the liquidator disclaimed the leases for the two facilities previously used by the Irish subsidiary. The Company provided a guarantee with respect to the lease of one of these facilities. (See Note 8 for a discussion of the legal proceedings relating to this guarantee.) The assets and liabilities of the Irish subsidiary that were not guaranteed or incurred directly by the parent company, Worldport Communications, Inc. ("Worldport Inc."), were deconsolidated in the second quarter of 2002 and reflected in Net Liabilities of Non-controlled Subsidiaries on the Company's balance sheets (see Note 5). At March 31, 2003, the Net Liabilities of Non-controlled Subsidiaries relating to Ireland equaled $4.1 million. Approximately $18.5 million of liabilities that were guaranteed or incurred by Worldport Inc. have not been deconsolidated and are reflected as liabilities of the Company at March 31, 2003. > In December 2001, the Company sold the assets and certain liabilities of its Swedish subsidiary, Hostmark AB, to OM Technology AB for a final sales price of 7.5 million Swedish kronor (approximately $0.8 million), which was fully collected by August 2002. OM also agreed to assume the ownership of Hostmark AB's Stockholm Internet solutions center and the operations at that center, and all customers' contracts. In September 2002, Hostmark AB was put into liquidation and a liquidator was appointed to control this subsidiary. As a result of the asset sale to OM Technology AB in December 2001, there were no assets and minimal liabilities remaining in this Swedish subsidiary. Those liabilities were deconsolidated in the third quarter of 2002 and reflected in Net Liabilities of Non-controlled Subsidiaries on the Company's balance sheets (see Note 5). At March 31, 2003, the Net Liabilities of Non-controlled Subsidiaries relating to Hostmark AB equaled $0.1 million. > In December 2001, the Company sold its Swedish professional services business to its employees in a management buyout for $0.9 million, the majority of which is in the form of a note. Due to uncertainties related to the collectibility of this note, it has been fully reserved. > In December 2001, the Company placed its German subsidiary, Hostmark GmbH, into receivership under German law. As a result of this action, the receiver gained control over this subsidiary's 9 assets. The assets and liabilities of Hostmark GmbH held in receivership were deconsolidated in the Company's financial statements in the fourth quarter of 2001 and reflected in Net Liabilities of Non-controlled Subsidiaries on the Company's balance sheet as a net liability of approximately $1.4 million (see Note 5). As of March 31, 2003, there were no Net Liabilities of Non-controlled Subsidiaries relating to Hostmark GmbH. > In March 2002, the Company made the decision to make no further investment in its U.K. managed hosting operation. On March 26, 2002, the Company's U.K. subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, filed a petition for Administration under the United Kingdom Insolvency Act. An administrator was appointed for these subsidiaries to either reorganize, find new investors, sell or liquidate the U.K. businesses for the benefit of its creditors. As a result of this action, the administrator gained control over these subsidiaries' assets. The assets and liabilities of the U.K. subsidiaries that were not guaranteed by Worldport Inc. were deconsolidated in the Company's financial statements in the first quarter of 2002 and reflected in Net Liabilities of Non-controlled Subsidiaries on the Company's balance sheets (see Note 5). At March 31, 2003, the Net Liabilities of Non-controlled Subsidiaries relating to the U.K. equaled $5.4 million. In addition, the Company completed the sale of its remaining carrier business, Telenational Communications, Inc. ("TNC") in October 2001 for $0.4 million. Due to uncertainties related to the collectibility of this note, the note was fully reserved for in 2001. However, in the fourth quarter of 2002, the Company reached an agreement with the purchaser to accept $0.3 million in full satisfaction of the note. This amount was paid to the Company in the fourth quarter of 2002 and resulted in a cash gain of $0.3 million. As a result of these transactions, the Company had exited all three of its operating segments as of March 31, 2002 and has been operating since then with only a minimal headquarters staff. Accordingly, results of these exited operations have been classified as discontinued. There were no operating results from discontinued operations for the three months ended March 31, 2003. The operating results of discontinued operations for the three months ended March 31, 2002 were as follows (in thousands): Three Months Ended March 31, --------- 2002 ---- Net revenue $ 291 Restructuring costs (see Note 4) $ 10,000 Loss before income taxes $(12,916) Income tax benefit $ 5,597 Net loss from discontinued operations $ (7,319) Assets and liabilities related to the discontinued operations consist of the following (in thousands): March 31, December 31, 2003 2002 ---- ---- Current assets $ 6 $ 5 Other noncurrent assets 9 9 Current liabilities (28,109) (27,578) Long-term liabilities -- (834) --------- ---------- Net liabilities of discontinued operations $(28,094) $ (28,398) ========= ==========

10 (4) RESTRUCTURING ACTIVITIES In the fourth quarter of 2001 and in the first quarter of 2002, the Company recorded restructuring charges of $101.5 million and $10.0 million, respectively, relating to the actions described in Note 3. These restructuring charges primarily included severance, facility exit costs, bandwidth contract termination costs, and the write down of assets to their expected net realizable value and have been primarily included in Income (Loss) from Discontinued Operations. The Company compared the carrying value of the long-lived assets located primarily in Ireland, Germany and the U.K. to fair values determined substantially through independent appraisals and estimated future discounted cash flows. The excess carrying value of $84.8 million was recorded as a non-cash asset impairment charge in the fourth quarter of 2001. Facility exit costs of $9.3 million and $7.9 million were recorded in the fourth quarter of 2001 and the first quarter of 2002, respectively. These facility exit costs represented rent payments on the Company's U.K., Ireland and German facilities, net of certain estimated sublease recoveries. As discussed in Note 5, the obligations related to the Slough, U.K., and the Frankfurt, Germany, data center leases have been extinguished through the administration or receivership proceedings. Accordingly, the Company recognized a non-cash gain of $7.7 million and $1.6 million in the second and third quarters, respectively, of 2002 related to the Slough and Frankfurt lease obligations that were originally recorded as restructuring charges. Bandwidth contract termination costs of $4.7 million and $0.4 million were recorded in the fourth quarter of 2001 and the first quarter of 2002, respectively. These costs represent early termination penalties incurred by the Company to cancel certain bandwidth contracts related to its ceased managed hosting operations in Ireland and the U.K. Severance of $1.3 million was recorded in the fourth quarter of 2001 and all severance payments had been made by June 30, 2002. The headcount reduction affected approximately 100 employees, who were primarily located in Ireland. Substantially all employees terminated under this plan were released by December 31, 2001, with the few remaining employees terminated in the first quarter of 2002. Other costs of $1.4 million and $1.7 million were recorded in the fourth quarter of 2001 and the first quarter of 2002, respectively, and include estimated legal expenses, costs to settle outstanding purchase commitments, and other shutdown related expenses. The following table summarizes the significant components of the restructuring reserve included in Accrued Expenses at March 31, 2003 (in thousands): Balance At Balance At December 31, Cash Non-cash March 31, 2002 Payments Adjustments 2003 ---- -------- ----------- ---- Facility exit costs $ 5,887 $ (68) $ 224 $ 6,043 Bandwidth contract termination 4,299 -- 170 4,469 Severance -- -- -- -- Other costs 189 (65) 8 132 ------- ------- ----- ------- Total $10,375 $ (133) $ 402 $10,644 ======= ======= ===== =======

The non-cash adjustments of $0.4 million primarily represent the impact of foreign currency fluctuations on translated balances. The Company's management is continuing to seek opportunities to further reduce its liabilities related to the exited businesses and evaluate the possible sale or disposition of the remaining assets, including potentially subleasing the facilities remaining under 11 operating lease agreements. All remaining restructuring costs are due to be paid by December 31, 2010, with $4.3 million due in 2003, $0.9 million in 2004, $0.9 million in 2005, $0.9 million in 2006, $1.0 million in 2007 and $2.6 million thereafter. The Company used estimates to calculate the restructuring charges, including the ability and timing of the Company to sublease space and the net realizable value of remaining assets. These estimates are subject to change based on the sale of the remaining assets along with the sublease or settlement of future rent obligations. (5) NET LIABILITIES OF NON-CONTROLLED SUBSIDIARIES As described in Note 3, the Company placed its German subsidiary, Hostmark GmbH, into receivership under German law in December 2001 and a receiver was appointed for this subsidiary. In March 2002, the Company's U.K. subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, filed a petition for Administration under the United Kingdom Insolvency Act and an administrator was appointed for these subsidiaries. In April 2002, the Company's Irish subsidiary, Worldport Ireland Limited, was given notice that a petition for winding up was filed and would be presented to the Irish High Court on behalf of Global Crossing Ireland Limited. The petition was heard by the Irish High Court on May 13, 2002 and a liquidator was appointed for this subsidiary to act on behalf of the creditors. In September 2002, the Company's Swedish subsidiary, Hostmark AB was placed into liquidation and a liquidator was appointed for this subsidiary. As a result of these actions, the Company no longer has control over these subsidiaries' assets. Under generally accepted accounting principles, consolidation is generally required for investments of more than 50% of the outstanding voting stock of any investee, except when control is not held by the majority owner. Under these principles, legal reorganization or other proceedings (including Administration, receivership, or liquidation) represent conditions which can preclude consolidation in instances where control rests with an administrator, receiver or liquidator rather than the majority owner. As discussed above, the U.K., Irish, German and Swedish subsidiaries filed or were placed into the local jurisdiction's applicable proceedings. As a result, the Company deconsolidated the subsidiaries' financial results and began accounting for its investment in the subsidiaries under the equity method of accounting and began recording gains and losses upon settlement. Prior to the filing or placement into the respective proceedings, under generally accepted accounting principles of consolidation, the Company had recognized losses in excess of its investment in these subsidiaries of $10.8 million. Since these subsidiaries' results are no longer consolidated and the Company believes that it is not probable that it will be obligated to fund losses related to these investments, any adjustments reflected in the subsidiaries' financial statements subsequent to the effective dates of these proceedings are not expected to adversely affect the Company's consolidated results. However, as the liabilities of these subsidiaries exceed the recorded value of their assets, there can be no assurance that these creditors will not make claims against the parent company, Worldport Inc., for these obligations or that, through the proceedings, Worldport Inc. would not be required to satisfy any of these obligations. As a result, the Company has not reflected any adjustments relating to the deconsolidation of these subsidiaries other than by presenting the net liability for each of these subsidiaries as Net Liabilities of Non-controlled Subsidiaries and discontinuing the recording of earnings or losses from these subsidiaries after the effective dates of these proceedings. To the extent that any of these liabilities are extinguished through these proceedings without funding from the Company, the Company may recognize non-cash gains in future periods as a result of the forgiveness of such obligations. Conversely, when the proceedings are completed and liabilities are extinguished, the Company may recognize non-cash losses on the foreign currency translation losses currently included in Accumulated Other Comprehensive Income. 12 In August 2002, the U.K. administrator identified a new third party tenant for the Slough data center. The third party paid approximately 5.7 million British pounds to the U.K. administrator, in addition to the assumption of the lease liability, for the Slough data center operation and related assets. The 5.7 million British pounds proceeds may be used to satisfy all or a portion of the Net Liabilities of Non-controlled Subsidiaries for the U.K. entities, and accordingly, the Company may recognize non-cash gains in future periods as a result of this transaction. The Company had previously agreed to guarantee, on behalf of its U.K. subsidiary, the Slough data center lease expiring in 2015. In connection with the August 2002 transaction, the landlord agreed to release the underlying lease guarantee and, therefore, relieve the Company from the $7.7 million lease liability upon the payment of 0.2 million British pounds (approximately $0.3 million), which payment was funded by the Company. The $7.7 million lease liability had originally been recorded by the Company as part of the $10.0 million restructuring charge taken on the U.K. business in the first quarter of 2002. Accordingly, the Company reduced its liabilities by, and recorded a non-cash gain from discontinued operations of, $7.7 million in the second quarter of 2002. In the third quarter of 2002, the Company was informed by its German attorneys that the receiver terminated the Frankfurt lease effective December 31, 2002 under the provisions of German law. As a result, Hostmark GmbH was no longer obligated for lease payments due after the effective date (approximately $1.6 million). The lease liability had originally been recorded by the Company as part of the $101.5 million restructuring charge taken on the discontinued businesses in the fourth quarter of 2001. Additionally, the Company was informed that the receiver has declared insufficiency of the estate under the provisions of German law. This declaration was made because the receiver determined that the remaining net assets of the German company were not sufficient to cover the administrative costs of the proceedings, and consequently, no distributions could be made to the third party creditors (including the Frankfurt landlord for lease payments prior to the December 31, 2002 termination date). This declaration can be revoked in the future to the extent money is collected by the receiver on behalf of Hostmark GmbH in an amount sufficient to provide a distribution to the third party creditors. Based on its understanding of the German proceedings, the Company did not believe it was obligated to fund the Frankfurt lease obligation and other creditor liabilities of the German subsidiary. Therefore, in the third quarter of 2002, the Company reduced its Net Liabilities of Non-controlled Subsidiaries by, and recorded a non-cash gain from discontinued operations of, $1.4 million relating to the net liabilities of the German subsidiary. In addition to the third party creditors of the Company's subsidiaries, Worldport Inc. from time to time made advances to these subsidiaries prior to the Company's subsidiaries entering into the relevant proceedings. Therefore, Worldport Inc. is also a creditor of these subsidiaries in these proceedings. The Company is not able to determine at this time the priority of Worldport Inc.'s claim in such proceedings or whether or not Worldport Inc. will be able to recover any portion of these advances. If Worldport Inc. is successful in collecting any portion of these advances, the Company would recognize a gain and an increase in cash at that time. The Company used estimates to calculate the Net Liabilities of Non-controlled Subsidiaries. These estimates are subject to change based on the ability of the administrator, receiver or liquidator, as applicable, to sell the remaining assets and negotiate the final liability amounts. Net Liabilities of Non-controlled Subsidiaries do not include obligations that the parent company, Worldport Inc., has guaranteed or incurred directly. Only those liabilities of these subsidiaries which Worldport Inc. believes it will not be required to pay have been included in Net Liabilities of Non-controlled Subsidiaries. Excluding the liabilities of the U.K., Irish and Swedish subsidiaries that are recorded in Net Liabilities of Non-controlled Subsidiaries as discussed above, there are approximately $21.8 million of liabilities reflected on the Company's March 31, 2003, balance sheet attributable to Worldport Inc. and the remaining subsidiaries not in Administration, receivership or liquidation. The Company has assumed, for purposes of calculating these liabilities, that it will not be able to mitigate them, however, Company management is currently seeking opportunities to further reduce these liabilities. There can be no 13 assurance that the Company will be successful in its efforts to mitigate these liabilities or that additional claims will not be asserted against Worldport Inc. (6) EQUITY TRANSACTIONS On March 7, 2003, the Company repurchased approximately 99% of its outstanding preferred stock from a single owner, The Heico Companies L.L.C. The shares were repurchased for $67.4 million, which represents the aggregate liquidation preference of the purchased shares, including a 7% dividend that was required under the terms of the preferred stock before any distributions on or purchase of the Company's common stock. As a result of this repurchase, Additional Paid-in Capital was reduced by $63.0 million and Accumulated Deficit was increased by $4.4 million, reflecting the 7% dividend. In April 2003, Worldport paid an aggregate purchase price of $0.2 million to complete similar purchase offers with the three remaining preferred stockholders, who owned, in aggregate, 34,056 shares of Series B preferred stock. Worldport has retired the preferred stock it has repurchased and as of April 25, 2003, the Company had no preferred stock outstanding. On December 23, 2002, W.C.I. Acquisition Corp., a Delaware corporation ("W.C.I."), commenced a tender offer for any and all of the Company's outstanding common stock at a price of $0.50 per share (the "W.C.I. Offer"). W.C.I. was formed by Heico, J O Hambro Capital Management Limited ("Hambro") and certain of their affiliates to complete the W.C.I. Offer. At the time of the W.C.I. Offer, these entities owned or had the right to acquire approximately 45% of the Company's outstanding common stock. The W.C.I. Offer was conditioned on, among other things, the valid tender of a majority of the outstanding shares, excluding the shares owned by W.C.I. or its stockholders. W.C.I.'s tender offer expired on February 14, 2003 without purchase of any shares, as certain conditions were not satisfied. W.C.I. reported that approximately 6.8 million shares were tendered in response to the W.C.I. Offer. Recognizing that the tender of shares pursuant to the W.C.I. Offer demonstrated the apparent desire of certain stockholders for liquidity, the Company's Board of Directors considered and approved a self-tender offer. The Company commenced a self-tender offer on March 7, 2003 for any and all of the Company's outstanding common stock at a price of $0.50 per share (the "Self-Tender Offer"). The Self-Tender Offer was not conditioned on any minimum number of shares being tendered, however it was subject to certain conditions described in the Company's Form TO-I filed with the Securities and Exchange Commission on March 7, 2003. The Self-Tender Offer expired on April 11, 2003. Approximately 6.1 million shares were validly tendered and repurchased by the Company for a purchase price of approximately $3.1 million. The repurchased shares have been retired by the Company, and, as of April 25, 2003, the Company had approximately 32.9 million shares of common stock outstanding. Heico and Hambro, neither of which tendered any shares in the offering, are the Company's two largest shareholders. Heico, which is controlled by Michael E. Heisley, a director of the Company, and his family, including his daughter, Emily Heisley Stoeckel. who is a director of the Company, Hambro, and Stanley H. Meadows, a director of the Company, entered into a stockholders agreement as of April 15, 2003, in which they agreed, among other things, to vote all shares of the Company's common stock over which they have voting control in order to cause the Company's Board to consist of two representatives designated by Heico and two representatives designated by Hambro and to cause the Company not to take specified actions, including the issuance or repurchase of equity securities, a material change in the Company's business and certain acquisitions, investments and claim settlements, without the approval of a majority of the directors designated by Heico and of the majority of the directors designated by Hambro. According to the Schedule 13D, as amended, of Michael E. Heisley and Heico, Heico is the beneficial owner of 6,077,707 shares of the Company's common stock (18.4% of the Company's currently outstanding shares of common stock) and holds warrants to purchase 679,451 shares of common stock (2.1% of the currently outstanding shares) and Mr. Heisley holds options to purchase 2,114,583 shares of common stock (6.4% of the currently 14 outstanding shares). According to the Schedule 13D, as amended, of Hambro, Hambro is the beneficial owner of 9,367,869 shares of the Company's common stock (28.4% of the currently outstanding shares). Mr. Meadows is the beneficial owner of 1,764,129 shares of the Company's common stock (5.4% of the currently outstanding shares). A copy of the stockholders' agreement is attached to the Amended Form 13-D filed by Heico on April 28, 2003. (7) SEGMENT REPORTING SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", requires the reporting of profit and loss, specific revenue and expense items and assets for reportable segments. It also requires the reconciliation of total segment revenues, total segment profit or loss, total segment assets, and other amounts disclosed for segments to the corresponding amounts in the general purpose financial statements. During 2001, the Company had three reportable segments: managed hosting, professional services and carrier operations. The managed hosting segment derived revenues primarily from the delivery of services including Internet networking, applications and value-added services, infrastructure, and systems support. The professional services segment derived revenues primarily from Internet-based applications, systems development, and content management support. The carrier operations segment derived revenues primarily from voice, data and other telecommunication services. Company management viewed the three distinct business strategies as different business segments when making operating and investment decisions and for assessing performance. As a result of the transactions discussed in Note 3, the Company exited all of its operating segments as of March 31, 2002. (8) CONTINGENCIES In March 2002, an Administrator was appointed for the U.K. subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, by an order of the Companies Court, Chancery Division of High Court under the United Kingdom Insolvency Act. In April 2002, the Irish subsidiary, Worldport Ireland Limited, was given notice that a petition for winding up was filed and would be presented to the Irish High Court on behalf of Global Crossing Ireland Limited. The petition was heard by the Irish High Court on May 13, 2002 and a liquidator was appointed for this subsidiary to act on behalf of the creditors. As a result of these actions, the Administrator or liquidator has control over these subsidiaries' assets. The Company believes that each of these subsidiaries has liabilities which exceed the recorded value of its assets. Certain creditors of these subsidiaries have made claims directly against the parent company, Worldport Inc., for liabilities related to the operation of these subsidiaries and additional creditors could assert similar claims. There can be no assurance that Worldport Inc. will be successful in defending these claims and in limiting its liability for the obligations of its subsidiaries. In June 2002, the High Court of Ireland issued a Summary Summons to the parent company, Worldport Inc., on behalf of Cable & Wireless (Ireland) Limited, who is seeking payment of 1.0 million British pounds and 2.3 million Euros, together with applicable VAT. (Excluding VAT, this represents approximately $4.0 million.) These claims relate to unpaid invoices for Internet services provided by Cable & Wireless (Ireland) Limited to the Company's subsidiary in Ireland (now in liquidation) and termination of contract charges. The Company is contesting the validity of the claims and believes that the claims, to the extent valid, are obligations of the Company's Irish subsidiary and not of Worldport Inc., but is continuing to investigate the claims. There can be no assurance that such claims will not be successful against Worldport Inc. However, the outcome of the matter is not expected to have a material adverse effect on the consolidated results of the Company in excess of amounts already recorded. 15 In October 2002, the Company received a letter from legal counsel to Channor Limited, the landlord of the data center in Dublin, Ireland, with respect to the Company's guarantee on that facility. This letter demanded the payment within 14 days of approximately 0.9 million Euros and the confirmation of the Company's liabilities as guarantor under the lease. In January 2003, the Company's legal counsel received a letter from legal counsel for the landlord in which the landlord demanded that the Company assume the position of tenant under the lease. Should the Company be forced to assume the position of tenant under the lease, the Company could be obligated for the full amount of rent through 2010 plus certain taxes and maintenance expenses. In February 2003, Channor Limited filed a Notice of Motion in the High Court of Ireland against Worldport Inc. in which the landlord demands payment of approximately 1.2 million Euros, which included additional rent that they claim had accrued since their prior demand. The demand amount was subsequently increased to 1.4 million Euros in April 2003. The Company is contesting the validity of the landlord's demands. However, the outcome of the matter is not expected to have a material adverse effect on the consolidated results of the Company in excess of amounts already recorded. Included in Accrued Expenses at March 31, 2003 is $5.9 million, which represents rent payable on the data center between January 2002 and 2010, the earliest contractual termination date of the lease. The Industrial Development Agency Ireland ("IDA") is seeking payment of 3.4 million Euros from the Company. These claims relate to unpaid invoices for bandwidth services provided to the Company's subsidiary in Ireland (now in liquidation). The Company is contesting the validity of the claims and believes that the claims, to the extent valid, are obligations of the Company's Irish subsidiary and not of Worldport Inc., but is continuing to investigate the claims. There can be no assurance that such claims will not be successful against Worldport Inc. However, the outcome of the matter is not expected to have a material adverse effect on the consolidated results of the Company in excess of amounts already recorded. On January 8, 2003, four substantially identical complaints were filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division against Worldport and its current directors. Additionally, on January 16, 2003, a complaint was filed in the Court of Chancery of the State of Delaware. The foregoing actions purport to be brought on behalf of all public stockholders of Worldport in connection with the W.C.I. Offer. The actions allege, among other things, that certain of the defendants have breached their fiduciary duties to Worldport and its stockholders. The complaints purport to seek, inter alia, a variety of relief, including in certain circumstances damages and an injunction preventing consummation of the W.C.I. offer. An amended complaint has been filed that alleges breach of fiduciary duties, waste of corporate assets and unjust enrichment with regard to the Company's self-tender offer and repurchase of preferred stock. The amended complaint purports to seek, inter alia, rescission of the Company's self-tender offer and repurchase of the Company's preferred stock and damages. The Company believes these allegations to be without merit and intends to vigorously contest the allegations. On March 12, 2003, a complaint was filed in the United States Bankruptcy Court for the District of Delaware against the Company. The complaint was filed on behalf of one of the Company's former customers which is now in bankruptcy and alleges breach of contract, fraud, and misrepresentation in connection with the sale of indefeasible rights of use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2 million plus legal costs and punitive damages. The Company is still evaluating this claim and has not yet made a determination as to the merits of this case. Accordingly, no accrual has been recorded on the Company's financial statements at this time. The Company intends to vigorously contest the allegations. On March 13, 2003, a complaint was filed in the Court of Chancery of the State of Delaware against the Company, its current directors and Heico. The complaint alleges breach of fiduciary duty relating to the March 7, 2003 repurchase of the preferred stock from Heico. The complaint seeks relief in the form of a declaration that the defendants have breached their fiduciary duties to the Company and its common stockholders, an accounting by the defendant to the Company for damages resulting from the defendants' breaches of fiduciary duty and reimbursement of the plaintiffs' costs for the action, including 16 attorneys' fees. The Company believes these allegations to be without merit and intends to vigorously contest the allegations. In addition to the aforementioned claims, the Company is involved in various lawsuits or claims arising in the normal course of business, and the Company has established reserves for several such suits and claims. In the opinion of management, none of these lawsuits or claims will have a material adverse effect on the consolidated results of operations of the Company, however there can be no assurances that current reserves will be sufficient. ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS NOTE ON "FORWARD-LOOKING" STATEMENTS ------------------------------------ The information set forth in Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contains certain "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected resolution of the Company's contingent liabilities and (ii) prospective business opportunities, as further explained in Item 1 of the Company's Annual Report on Form 10-K for the year ended December 31, 2002. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as "believes", "anticipates", "intends" or "expects". These forward-looking statements relate to the plans, objectives and expectations of the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. During the fourth quarter of fiscal 2001 and the first quarter of fiscal 2002, the Company either sold or ceased operating all of its operating businesses. Accordingly, the Company's results of these exited businesses have been classified as discontinued. The Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. The following discussion should be read in conjunction with the Condensed Consolidated Financial Statements and Notes thereto included under Item 1 of this Form 10-Q. In addition, the Financial Statements and Notes thereto and related Management's Discussion and Analysis of Financial Condition and Results of Operations included in the Company's Annual Report on Form 10-K for the year ended December 31, 2002 should be read in conjunction with this Form 10-Q. OVERVIEW -------- From 1997 to 1999, Worldport was a facilities-based global telecommunications carrier offering voice, data and other telecommunications services to carriers, Internet service providers, medium and large corporations and distributors and resellers operating in Europe and the United States. To finance certain acquisitions, the Company borrowed $120 million in June 1998 under an interim loan facility ("Interim Loan Facility"). In order to meet its obligations under its Interim Loan Facility, the Company sold substantially all of its material assets during the first quarter of 2000 (as described below). 17 In November 1999, the Company entered into a series of agreements with Energis Plc to sell its 85% ownership interest in EnerTel. The sale was consummated on January 14, 2000 for $453.2 million, net of certain transaction expenses. The Company applied a portion of the net proceeds realized from the sale to repay existing debt, including debt incurred under the Interim Loan Facility, trade credit and other liabilities, and paid U.S. federal income taxes of approximately $57 million on the gain. In the second quarter of 2000 the Company announced a new business strategy, focused on the delivery of Internet solutions to global companies doing business in the European marketplace. Pursuant to this strategy, the Company invested over $40 million to construct a new Internet solutions SuperCentre in Dublin, Ireland, which became operational in October 2000. In September 2000, the Company purchased VIS-able, a Swedish professional services firm specializing in complex systems development and consulting, for approximately $17.7 million. Finally, in April 2001, the Company acquired hostmark entities in the U.K., Sweden and Germany ("hostmark"), including the assumption of approximately $22 million in liabilities, for 5.1 million shares of the Company's common stock. The acquisition of hostmark provided Worldport with Internet solution centers ("ISC's") in London, Stockholm and Frankfurt. The hostmark companies had minimal revenues when the transaction was completed, and only one ISC was open for business. During 2001, the Company did not achieve the revenue growth in its managed hosting business that the Company had anticipated. The Company also experienced a decline in revenue in its Swedish professional services business. The general economic downturn, the slowdown in technology spending and the lengthening in the sales cycle for managed hosting services all contributed to these revenue shortfalls. In addition, the Company's Swedish professional services business was negatively affected by excess capacity in the Swedish consulting market, major pricing pressures, and slower customer decisions related to new IT projects for those services. The Company believed that these conditions, as well as the increasing level of competition and consolidation in the Web hosting and Internet infrastructure markets, would continue to have an adverse effect on Worldport's ability to achieve near term revenue targets and, if they continued, could erode the financial resources of the Company more rapidly than planned. Following the exploration and review of strategic alternatives, the Company determined that it was necessary to dramatically reduce the rate at which its operations were using cash and to minimize its exposure in markets that were experiencing significantly slower than expected market growth. As a result, the Company made a decision to take further restructuring actions and to divest itself of certain assets. Accordingly, the Company took the following actions in the fourth quarter of 2001 and the first quarter of 2002: > In November 2001, the Company announced that its Irish subsidiary was ceasing operations at its Dublin, Ireland facility. An orderly shutdown of the Ireland operations was commenced, and was substantially completed by December 31, 2001. > In December 2001, the Company sold the assets and certain liabilities of its managed services business in Stockholm, Sweden, to OM Technology AB for a final sales price of 7.5 million Swedish kronor (approximately $0.8 million), which was fully collected by August 2002. OM also agreed to assume the ownership of Worldport's Stockholm Internet solution center and the operations at that center, and all customers' contracts. > In December 2001, the Company also sold its Swedish professional services business (formerly known as VIS-able International AB) to its employees in a management buyout for $0.9 million, the majority of which is in the form of a note. Due to uncertainties related to the collectibility of this note, it has been fully reserved. > In December 2001, the Company placed its German subsidiary, Hostmark GmbH, into receivership under German law. As a result of this action, the receiver has control over this subsidiary's assets. 18 > In March 2002, the Company's Board of Directors made the decision to make no further investment in its U.K. managed hosting operation. The Company recorded a $10.0 million restructuring charge in the first quarter of 2002 related to this action. On March 26, 2002, the Company's U.K. subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, filed a petition for Administration under the United Kingdom Insolvency Act. An administrator was appointed for these subsidiaries to either reorganize, find new investors, sell or liquidate the U.K. businesses for the benefit of their creditors. As a result of this action, the administrator has control over these subsidiaries' assets. In connection with these activities, the Company recorded restructuring charges of $101.5 million and $10.0 million in the fourth quarter of 2001 and first quarter of 2002, respectively. The 2001 restructuring charges included an $84.8 million asset impairment charge to write down the managed hosting long-lived assets to their expected net realizable value, facility exit costs of $9.3 million, bandwidth contract termination costs of $4.7 million, severance of $1.3 million, and other costs of $1.4 million. The 2002 restructuring charges included facility exit costs of $7.9 million, bandwidth contract termination costs of $0.4 million, and other costs of $1.7 million. In addition, the Company completed the sale of its remaining carrier business, Telenational Communications, Inc. ("TNC") in October 2001 for a $0.4 million promissory note. Due to uncertainties related to the collectibility of this note, the note was fully reserved in 2001. However, in the fourth quarter of 2002, the Company reached an agreement with the purchaser to accept $0.3 million in full satisfaction of the note. This amount was paid to the Company in the fourth quarter of 2002 and resulted in a cash gain of $0.3 million. As a result of the transactions described above, the Company no longer had active business operations as of March 31, 2002. Accordingly, the historical results of operations for prior periods are not comparable to the current period and are not representative of what future results will be. Since March 31, 2002, the Company has operated with a minimal headquarters staff while it has conducted the activities related to exiting its prior businesses. Following is a summary of the significant exit activities that have occurred since March 31, 2002. > In April 2002, Worldport Ireland Limited was given notice that a petition for winding up was filed and would be presented to the Irish High Court by Global Crossing Ireland Limited. The petition was heard by the Irish High Court on May 13, 2002 and a liquidator was appointed for this subsidiary to act on behalf of the creditors. As a result of this action, the liquidator has control over this subsidiary's assets. > In August 2002, the U.K. administrator identified a new third party tenant for the Slough, U.K., data center. The Company had previously agreed to guarantee, on behalf of its U.K. subsidiary, the Slough data center lease expiring in 2015. In connection with the August 2002 transaction, the landlord agreed to release the underlying lease guarantee and, therefore, relieve the Company from the $7.7 million lease liability upon the payment of 0.2 million British pounds (approximately $0.3 million), which payment was funded by the Company. The $7.7 million lease liability had originally been recorded by the Company as part of the $10.0 million restructuring charge taken on the U.K. business in the first quarter of 2002. Accordingly, the Company reduced its liabilities by, and recorded a non-cash gain from discontinued operations of, $7.7 million in the second quarter of 2002. > In September 2002, the liquidator for the Company's Irish subsidiary disclaimed the leases for the two facilities previously used by the Irish subsidiary. The Company provided a guarantee with respect to the lease of one of the facilities. See Part II, Item I "Legal Proceedings" for a discussion of the legal proceedings relating to this guarantee. 19 > Also in September 2002, Hostmark AB was put into liquidation and a liquidator was appointed to control this subsidiary. As a result of the asset sale to OM Technology AB in December 2001, there were no assets and minimal liabilities remaining in this Swedish subsidiary. > In the third quarter of 2002, the Company was informed by its German attorneys that the receiver terminated the Frankfurt lease effective December 31, 2002 under the provisions of German law. As a result, Hostmark GmbH is no longer obligated for lease payments due after the effective date (approximately $1.6 million). The lease liability had originally been recorded by the Company as part of the $101.5 million restructuring charge taken on the discontinued businesses in the fourth quarter of 2001. Additionally, the Company was informed that the receiver has declared insufficiency of the estate under the provisions of German law. This declaration was made because the receiver determined that the remaining net assets of the German company were not sufficient to cover the administrative costs of the proceedings, and consequently, no distributions would be made to the third party creditors (including the Frankfurt landlord for lease payments prior to the December 31, 2002 termination date). This declaration can be revoked in the future to the extent money is collected by the receiver on behalf of Hostmark GmbH in an amount sufficient to provide a distribution to the third party creditors. Based on its understanding of the German proceedings, the Company does not believe it is obligated to fund the Frankfurt lease obligation or other creditor liabilities of the German subsidiary. Therefore, in the third quarter of 2002, the Company reduced its Net Liabilities of Non-controlled Subsidiaries by, and recorded a non-cash gain from discontinued operations of, $1.4 million relating to the net liabilities of the German subsidiary. RESULTS OF OPERATIONS ----------------------- As described above, the Company had no active business operations as of March 31, 2002. Accordingly, results of these exited operations have been classified as discontinued. There were no revenues or cost of services from continuing operations in the first quarter of 2002 and 2001. Selling, general and administrative ("SG&A") expenses were $0.8 million and $0.9 million for the quarters ended March 31, 2003 and 2002. SG&A expenses in the current and prior year primarily consisted of corporate salaries and benefits, professional service fees, corporate governance expenses and facility costs. Depreciation and amortization expense represented depreciation on the corporate office leasehold improvements and related computer hardware and software. Depreciation and amortization expense was less than $0.1 million for the first quarter of 2003 and 2002. Interest income, which was earned on the Company's cash and cash equivalents, was $0.3 million for each of the quarters ended March 31, 2003 and 2002, respectively. As a result of the lack of an operating business and its large number of stockholders, the Company must maintain its liquid assets in government securities, which generally produce low returns, or comply with the requirements of the Investment Company Act of 1940. As described in Note 6 to the Condensed Consolidated Financial Statements in Part I, Item I, the Company paid $67.4 million during the first quarter of 2003 for the repurchase of preferred stock from Heico. Therefore, the Company expects to earn less interest income from its cash and cash equivalents in future periods. The Company incurred interest expense of $0.1 million in the prior year first quarter primarily related to equipment financed under capital leases. 20 Net loss from continuing operations was $0.5 million and $0.8 million in the quarters ended March 31, 2003 and 2002, respectively. The Company had losses from discontinued operations of $7.3 million during the quarter ended March 31, 2002. The operating results of discontinued operations were as follows (in thousands): First Quarter ------------- 2002 ---- Net revenue $ 291 Restructuring costs $ 10,000 Loss before income taxes $(12,916) Income tax benefit $ 5,597 Net loss from discontinued operations $ (7,319) Restructuring charges of $10.0 million were recorded in the first quarter of 2002 relating to the actions taken in the U.K. in March 2002. These charges consisted of approximately $7.9 million in facility exit costs, approximately $0.4 million in bandwidth termination costs, and approximately $1.7 million in other related costs. Operating losses of $3.0 million were incurred in the first quarter of 2002 from the U.K. business prior to it being discontinued. A $5.6 million tax benefit from discontinued operations was recorded in the first quarter of 2002 as the result of a new U.S. federal tax law that was enacted in March 2002. This new tax law allowed the Company to carry back a $5.6 million AMT tax credit from 2001 against taxable income in 2000 that was previously 100% reserved by a valuation allowance. As a result, the Company had a net loss of $0.5 million in the first quarter of 2003, compared to net loss of $8.1 million for the same period in 2002. The following table summarizes the significant components of the restructuring reserve included in Accrued Expenses at March 31, 2003 (in thousands): Balance At Balance At December 31 Cash Non-cash March 31 2002 Payments Adjustments 2003 ---- -------- ----------- ---- Facility exit costs $ 5,887 $ (68) $ 224 $ 6,043 Bandwidth contract termination 4,299 -- 170 4,469 Severance -- -- -- -- Other costs 189 (65) 8 132 ------- ------- ----- ------- Total $10,375 $ (133) $ 402 $10,644 ======= ======= ===== =======

The non-cash adjustments of $0.4 million primarily represent the impact of foreign currency fluctuations on translated balances. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- The Company's continuing operations used $0.6 million and $1.2 million during the first quarter of 2003 and 2002, respectively, due primarily to salaries and benefits, professional service fees, corporate governance expenses and facility costs related to the Company's minimal corporate operations remaining after the shut down and sale transactions of the fourth quarter of 2001 and the first quarter of 2002. The Company had minimal or no cash flows from investing activities during the first quarter of 2003 and 2002. 21 Financing activities used $67.4 million during the first quarter of 2003 for the repurchase of preferred stock from Heico in March 2003. The shares were repurchased for $67.4 million, which represents the aggregate liquidation preference of the purchased shares, including a 7% dividend that is required under the terms of the preferred stock before any distributions on or purchase of the Company's common stock. Financing activities used $1.2 million during the three months ended March 31, 2002 for principal payments on capital leases. The Company's discontinued operations used $1.1 million and $4.2 million during the first quarter of 2003 and 2002, respectively. In April 2002, the Company received its $57.6 million income tax refund in connection with the Company's 2001 Federal income tax return. However, receipt of this refund does not indicate that the Internal Revenue Service agrees with the positions taken by the Company in its tax returns. The Company has received a notice dated April 11, 2003, that the Internal Revenue Service will conduct such an examination. The Internal Revenue Service could require the Company to return all or a portion of this refund. Since ceasing its business operations, the Company has considered various alternatives in determining how and when to use its cash resources. The Company has sought and reviewed acquisition opportunities. However, the Company did not pursue any of these opportunities since it did not believe that any of them were in the best interests of its stockholders. The Company has also analyzed a potential liquidation of the Company and its effects on the Company's stockholders. The Company commenced a self-tender offer on March 7, 2003 for any and all of its outstanding common stock at a price of $0.50 per share (the "Self-Tender Offer"). The Self-Tender Offer expired on April 11, 2003. Approximately 6.1 million shares were validly tendered and repurchased by the Company for a purchase price of approximately $3.1 million. The repurchased shares have been retired by the Company, and, as of April 25, 2003, the Company has approximately 32.9 million shares of common stock outstanding. On March 7, 2003, in a separate transaction, the Company repurchased approximately 99% of its outstanding preferred stock from Heico. The shares were repurchased for $67.4 million, which represents the aggregate liquidation preference of the purchased shares, including a 7% dividend that is required under the terms of the preferred stock before any distributions on or purchase of the Company's common stock. . In April 2003, Worldport paid an aggregate purchase price of $0.2 million to complete similar purchase offers with the three remaining preferred stockholders, who owned, in aggregate, 34,056 shares of Series B preferred stock. Worldport has retired the preferred stock it has repurchased and as of April 25, 2003, the Company has no preferred stock outstanding. Litigation alleging breach of fiduciary duty has been filed relating to the repurchase of the preferred stock from Heico (see Part II, Item I "Legal Proceedings"). The Company intends to vigorously contest the allegations. As of April 25, 2003, the Company had approximately $45.5 million in cash, cash equivalents and marketable securities. The Company's cash equivalents currently consist of money market funds. The Company intends to explore the possible benefits to its stockholders of a change in domicile to outside the United States. The Company also intends to continue to consider potential acquisition opportunities, although the Company has not identified a specific industry on which it intends to focus and has no present plans, proposals, arrangements or understandings with respect to the acquisition of any specific business. The Company's March 31, 2003 consolidated balance sheet reflected total liabilities of approximately $31.4 million. Included in this amount are $9.6 million of Net Liabilities of Non-Controlled Subsidiaries for the U.K., Irish and Swedish operations (see Note 5 to 22 the Condensed Consolidated Financial Statements in Part I, Item I). The Company believes the parent company, Worldport Inc., will not be required to pay these liabilities. However, there can be no assurance that these creditors will not make claims against Worldport Inc. for these obligations. The Company used estimates to calculate these net liabilities. These estimates are subject to change based on the ability of the administrator, receiver or liquidator, as applicable, to sell the remaining assets and negotiate the final liability amounts. In August 2002, an agreement was reached between the Administrator for Hostmark U.K. Limited and a third party, in which the third party paid approximately 5.7 million British pounds, in addition to the assumption of the lease liability, for the Slough, U.K., data center and related assets. The 5.7 million British pounds proceeds may be used to satisfy all or a portion of the Net Liabilities of Non-controlled Subsidiaries for the U.K. entities, and accordingly, the Company may recognize non-cash gains in future periods as a result of this transaction. Additionally, prior to the Company's subsidiaries entering into receivership and administrative proceedings, Worldport Inc. from time to time made advances to these subsidiaries. Therefore Worldport Inc. is also a creditor of these subsidiaries in these proceedings. The Company is not able to determine at this time the priority of Worldport Inc.'s claim in such proceedings or whether or not Worldport Inc. will be able to recover any portion of these advances. If Worldport Inc. is successful in collecting any portion of these advances, the Company would recognize a gain and an increase of cash at that time. Excluding the Net Liabilities of Non-Controlled Subsidiaries for the U.K., Irish and Swedish operations discussed above, there are approximately $21.8 million of liabilities reflected on the Company's March 31, 2003, balance sheet attributable to Worldport Inc. and the remaining subsidiaries not in Administration, receivership or liquidation. Approximately $2.0 million of that amount represents normal operating accruals and reserves related to the continuing operations. The remaining $19.8 million consist of the following accruals for potential obligations related to the exited businesses: > $5.9 million of future rent payments on the Dublin data center lease for which Worldport Inc. had provided a guarantee (see Part II, Item I "Legal Proceedings"), > $4.8 million accrued for the potential exposure (including VAT) related to the litigation by Cable & Wireless (see Part II, Item I "Legal Proceedings"), > $3.4 million of obligations under capital leases, which expire in 2004, > $4.1 million of obligations related to bandwidth contracts entered into in Ireland, > $0.8 million of obligations related to the old telecommunications business, and > $0.8 million of other Worldport Inc. obligations related to the Irish operations. The Company has assumed, for purposes of calculating these liabilities, that it will not be able to mitigate them. However, Company management is currently seeking opportunities to further reduce these liabilities. There can be no assurance that the Company will be successful in its efforts to mitigate these liabilities or that additional claims will not be asserted against Worldport Inc. On March 12, 2003, a complaint was filed in the United States Bankruptcy Court for the District of Delaware against the Company. The complaint was filed on behalf of one of the Company's former customers, which is now in bankruptcy and alleges breach of contract, fraud, and misrepresentation in connection with the sale of indefeasible rights of use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2 million plus legal costs and punitive damages. The Company is still evaluating this claim and has not yet made a determination as to the merits of this case. Accordingly, no accrual has been recorded on the Company's financial statements at this time. The Company intends to vigorously contest the allegations. 23 The Company is involved in various lawsuits or claims arising in the normal course of business, and the Company has established reserves for several such suits and claims. In the opinion of management, none of these lawsuits or claims will have a material adverse effect on the consolidated results of operations of the Company, however there can be no assurances that current reserves will be sufficient. See Part II, Item I "Legal Proceedings" for a discussion of ongoing litigation. NEW ACCOUNTING PRONOUNCEMENTS ----------------------------- In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The statement requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred as opposed to the date of an entity's commitment to an exit plan. The Company will adopt SFAS No. 146 for any exit or disposal activities initiated after December 31, 2002. In June 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123." The statement amends FASB Statement No. 123, "Accounting for Stock-Based Compensation", to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, this Statement amends the disclosure requirements of Statement 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company adopted the new disclosure requirements in this statement in 2002. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Prior to the fourth quarter 2001 and first quarter 2002 transactions described above, the majority of the Company's operations were in Europe, and the revenue and expenses of those operations were denominated in local currencies. The remaining assets and liabilities of the Company's non-U.S. subsidiaries are translated at period-end rates of exchange, and income statement items are translated at the average rates prevailing during the period. The resulting translation adjustment is recorded as a component of stockholders' equity. Exchange gains and losses on intercompany balances of a long-term investment nature are also recorded as a component of stockholders' equity. Other foreign exchange gains and losses are recorded in income on a current basis and have been included in Loss from Discontinued Operations. Due to the volatility of currency exchange rates, among other factors, the Company cannot predict the effect of exchange rate fluctuations on the Company's future operating results. As a result, the Company may incur gains and losses on foreign currency fluctuations. Other foreign exchange gains and losses included in income were minimal for the three months ended March 31, 2003 and 2002. The Company has used derivative instruments to hedge its foreign currency exposure only on a limited basis, and had no significant foreign currency hedge contracts outstanding at March 31, 2003. ITEM 4. CONTROLS AND PROCEDURES Kathleen A. Cote, the Company's Chief Executive Officer and acting Chief Financial Officer, has evaluated the Company's disclosure controls and procedures within 90 days of the filing date of this report. Based on her evaluation, she has concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Securities Exchange Act of 1934 is recorded, 24 processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of the previously mentioned evaluation. 25 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS In March 2002, an Administrator was appointed for the U.K. subsidiaries, Hostmark World Limited and Hostmark U.K. Limited, by an order of the Companies Court, Chancery Division of High Court under the United Kingdom Insolvency Act. In April 2002, the Irish subsidiary, Worldport Ireland Limited, was given notice that a petition for winding up was filed and would be presented to the Irish High Court on behalf of Global Crossing Ireland Limited. The petition was heard by the Irish High Court on May 13, 2002 and a liquidator was appointed for this subsidiary to act on behalf of the creditors. As a result of these actions, the Administrator or liquidator has control over these subsidiaries' assets. The Company believes that each of these subsidiaries has liabilities which exceed the recorded value of its assets. Certain creditors of these subsidiaries have made claims directly against the parent company, Worldport Inc., for liabilities related to the operation of these subsidiaries and additional creditors could assert similar claims. There can be no assurance that Worldport Inc. will be successful in defending these claims and in limiting its liability for the obligations of its subsidiaries. One of the Company's subsidiaries, Hostmark World Limited, was the subject of court action by WSP Communications ("WSP") in the Companies Court of the Chancery Division of the High Court in the U.K. for the payment of approximately $0.5 million. In addition, WSP has alleged that a total of approximately $3 million is owed to it by Hostmark World Limited. WSP alleges that these amounts are owed for work completed on Internet solution centers in Germany, Sweden and the U.K. This action was stayed by the appointment of an Administrator for Hostmark World Limited. In June 2002, the High Court of Ireland issued a Summary Summons to the parent company, Worldport Inc., on behalf of Cable & Wireless (Ireland) Limited, who is seeking payment of 1.0 million British pounds and 2.3 million Euros, together with applicable VAT. (Excluding VAT, this represents approximately $4.0 million.) These claims relate to unpaid invoices for Internet services provided by Cable & Wireless (Ireland) Limited to the Company's subsidiary in Ireland (now in liquidation) and termination of contract charges. The Company is contesting the validity of the claims and believes that the claims, to the extent valid, are obligations of the Company's Irish subsidiary and not of Worldport Inc., but is continuing to investigate the claims. There can be no assurance that such claims will not be successful against Worldport Inc. However, the outcome of the matter is not expected to have a material adverse effect on the consolidated results of the Company in excess of amounts already recorded. In October 2002, the Company received a letter from legal counsel to Channor Limited, the landlord of the data center in Dublin, Ireland, with respect to the Company's guarantee on that facility. This letter demanded the payment within 14 days of approximately 0.9 million Euros and the confirmation of the Company's liabilities as guarantor under the lease. In January 2003, the Company's legal counsel received a letter from legal counsel for the landlord in which the landlord demanded that the Company assume the position of tenant under the lease. Should the Company be forced to assume the position of tenant under the lease, the Company could be obligated for the full amount of rent through 2010 plus certain taxes and maintenance expenses. In February 2003, Channor Limited filed a Notice of Motion in the High Court of Ireland against Worldport Inc. in which the landlord demands payment of approximately 1.2 million Euros, which included additional rent that they claim had accrued since their prior demand. The demand amount was subsequently increased to 1.4 million Euros in April 2003. The Company is contesting the validity of the landlord's demands. However, the outcome of the matter is not expected to have a material adverse effect on the consolidated results of the Company in excess of amounts already recorded. Included in Accrued Expenses at March 31, 2003 is $5.9 million, which represents rent payable on the data center between January 2002 and 2010, the earliest contractual termination date of the lease. 26 On January 8, 2003, four substantially identical complaints were filed in the Circuit Court of Cook County, Illinois, County Department, Chancery Division against Worldport and its current directors. Additionally, on January 16, 2003, a complaint was filed in the Court of Chancery of the State of Delaware. The foregoing actions purport to be brought on behalf of all public stockholders of Worldport in connection with the W.C.I. Offer. The actions allege, among other things, that certain of the defendants have breached their fiduciary duties to Worldport and its stockholders. The complaints purport to seek, inter alia, a variety of relief, including in certain circumstances damages and an injunction preventing consummation of the W.C.I. offer. An amended complaint has been filed that alleges breach of fiduciary duties, waste of corporate assets and unjust enrichment with regard to the Company's self-tender offer and repurchase of preferred stock. The amended complaint purports to seek, inter alia, rescission of the Company's self-tender offer and repurchase of the Company's preferred stock and damages. The Company believes these allegations to be without merit and intends to vigorously contest the allegations. On March 12, 2003, a complaint was filed in the United States Bankruptcy Court for the District of Delaware against the Company. The complaint was filed on behalf of one of the Company's former customers which is now in bankruptcy and alleges breach of contract, fraud, and misrepresentation in connection with the sale of indefeasible rights of use ("IRUs") to the customer. The plaintiff is seeking payment of $2.2 million plus legal costs and punitive damages. The Company is still evaluating this claim and has not yet made a determination as to the merits of this case. Accordingly, no accrual has been recorded on the Company's financial statements at this time. The Company intends to vigorously contest the allegations. On March 13, 2003, a complaint was filed in the Court of Chancery of the State of Delaware against the Company, its current directors and Heico. The complaint alleges breach of fiduciary duty relating to the March 7, 2003 repurchase of the preferred stock from Heico. The complaint seeks relief in the form of a declaration that the defendants have breached their fiduciary duties to the Company and its common stockholders, an accounting by the defendant to the Company for damages resulting from the defendants' breaches of fiduciary duty and reimbursement of the plaintiffs' costs for the action, including attorneys' fees. The Company believes these allegations to be without merit and intends to vigorously contest the allegations. In addition to the aforementioned claims, the Company is involved in various lawsuits or claims arising in the normal course of business, and the Company has established reserves for several such suits and claims. In the opinion of management, none of these lawsuits or claims will have a material adverse effect on the consolidated results of operations of the Company, however there can be no assurances that current reserves will be sufficient. ITEM 2. CHANGES IN SECURITIES On March 7, 2003, the Company repurchased approximately 99% of its outstanding preferred stock from Heico. The shares were repurchased for $67.4 million, which represents the aggregate liquidation preference of the purchased shares, including a 7% dividend that is required under the terms of the preferred stock before any distributions on or purchase of the Company's common stock. In April 2003, Worldport paid an aggregate purchase price of $0.2 million to complete similar purchase offers with the three remaining preferred stockholders, who owned, in aggregate, 34,056 shares of Series B preferred stock. Worldport has retired the stock it has repurchased. The Company commenced a self-tender offer on March 7, 2003 for any and all of the Company's outstanding common stock at a price of $0.50 per share (the "Self-Tender Offer"). The Self-Tender Offer expired on April 11, 2003. Approximately 6.1 million shares were validly tendered and repurchased by the Company for a purchase price of approximately $3.1 million. 27 Heico, which is controlled by Michael E. Heisley, a director of the Company, and his family, including his daughter, Emily Heisley Stoeckel. who is a director of the Company, Hambro, and Stanley H. Meadows, a director of the Company, entered into a stockholders agreement as of April 15, 2003, in which they agreed, among other things, to vote all shares of the Company's common stock over which they have voting control in order to cause the Company's Board to consist of two representatives designated by Heico and two representatives designated by Hambro and to cause the Company not to take specified actions, including the issuance or repurchase of equity securities, a material change in the Company's business and certain acquisitions, investments and claim settlements, without the approval of a majority of the directors designated by Heico and of the majority of the directors designated by Hambro. According to the Schedule 13D, as amended, of Michael E. Heisley and Heico, Heico is the beneficial owner of 6,077,707 shares of the Company's common stock (18.4% of the Company's current outstanding shares of common stock) and holds warrants to purchase 679,451 shares of common stock (2.1% of the currently outstanding shares) and Mr. Heisley holds options to purchase 2,114,583 shares of common stock (6.4% of the currently outstanding shares). According to the Schedule 13D, as amended, of Hambro, Hambro is the beneficial owner of 9,367,869 shares of the Company's common stock (28.4% of the currently outstanding shares). Mr. Meadows is the beneficial owner of 1,764,129 shares of the Company's common stock (5.4% of the currently outstanding shares). A copy of the shareholders' agreement is attached to the Amended Form 13-D filed by Heico on April 28, 2003. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 99.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) REPORTS ON FORM 8-K The Company filed a Current Report on Form 8-K on March 10, 2003. The Form 8-K was dated March 7, 2003, and reported information under Item 5 related to the Company's announcement that it had completed the repurchase of approximately 99% of its outstanding preferred stock from The Heico Companies LLC. The Company filed a Current Report on Form 8-K on March 26, 2003. The Form 8-K was dated March 26, 2003, and reported information under Item 5 relating to the Company's announcement that a complaint had been filed against the Company, its directors, and The Heico Companies, LLC, in connection with the Company's repurchase of preferred stock. The Company filed a Current Report on Form 8-K on April 1, 2003. The Form 8-K was dated March 31, 2003, and reported information under Item 12 relating to the Company's announcement of its fiscal year 2002 financial results. 28 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. WORLDPORT COMMUNICATIONS, INC. Date: April 30, 2003 By: /s/ Kathleen A. Cote ----------------------- Kathleen A. Cote Chief Executive Officer CERTIFICATIONS -------------- I, Katheen A. Cote, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Worldport Communications, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and I have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. I have disclosed, based on my most recent evaluation, to the registrant's auditors and the audit committee of the registrant's Board of Directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and 29 report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. /s/ Kathleen A. Cote -------------------- Kathleen A. Cote Chief Executive Officer and acting Chief Financial Officer April 30, 2003 30

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