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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 1-14168
Globix Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3781263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 Centre Street, New York, New York 10013
(address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (212) 334-8500
Indicate by check mark whether 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 [_] No [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes [_] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [_] No [X]
Number of shares of the Registrant's common stock outstanding as of June
30, 2002 was 16,460,000.
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GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Page
-----
Part I Financial Information
Item 1. Condensed Consolidated Balance Sheets (unaudited) -- As of June 30, 2002
(Successor Company) and September 30, 2001 (Predecessor Company)............. 1
Condensed Consolidated Statements of Operations (unaudited) -- For the
Two Months Ended June 30, 2002 (Successor Company), One Month Ended
April 30, 2002 (Predecessor Company) and Three Months Ended June 30, 2001
(Predecessor Company) ....................................................... 2
Condensed Consolidated Statements of Operations (unaudited) -- For the Two
Months Ended June 30, 2002 (Successor Company), Seven Months Ended
April 30, 2002 (Predecessor Company) and Nine Months Ended June 30, 2001
(Predecessor Company) ....................................................... 3
Condensed Consolidated Statements of Cash Flows (unaudited) -- For the Two
Months Ended June 30, 2002 (Successor Company), Seven Months Ended
April 30, 2002 (Predecessor Company) and Nine Months Ended June 30, 2001
(Predecessor Company) ....................................................... 4
Notes to Condensed Consolidated Financial Statements (unaudited)............. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations................................................................ 22
Item 3. Quantitative and Qualitative Disclosure about Market Risk.................... 28
Part II Other Information............................................................
Item 1. Legal Proceedings............................................................ 29
Item 2. Changes in Securities and Use of Proceeds.................................... 30
Item 3. Defaults upon Senior Securities.............................................. 30
Item 4. Submission of Matters to a Vote of Security Holders.......................... 30
Item 6. Exhibits and Reports on Form 8-K............................................. 30
Signatures................................................................................ 31/35
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor Predecessor
Company Company
June 30, September 30,
2002 2001
--------- -------------
Assets
Current assets:
Cash and cash equivalents.................................................... $ 54,085 $111,502
Marketable securities........................................................ 1,711 1,610
Accounts receivable, net of allowance for doubtful accounts of $2,613 and
$8,052, respectively...................................................... 8,234 13,809
Prepaid expenses and other current assets.................................... 12,404 7,785
Restricted cash.............................................................. 3,806 6,984
-------- --------
Total current assets...................................................... 80,240 141,690
Investments, restricted......................................................... 4,914 26,886
Property, plant and equipment, net.............................................. 176,885 356,149
Debt issuance costs, net of accumulated amortization of $0 and $1,896,
respectively................................................................. -- 19,006
Intangible assets, net of accumulated amortization of $217 and $2,485,
respectively................................................................. 9,938 4,362
Other assets.................................................................... 267 4,895
-------- --------
Total assets.............................................................. $272,244 $552,988
======== ========
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Capital lease obligations and other obligations.............................. $ 1,653 $ 6,687
Accounts payable............................................................. 10,176 14,022
Accrued liabilities.......................................................... 15,775 30,141
Accrued interest - 12.5% Senior Notes........................................ -- 12,500
-------- --------
Total current liabilities................................................. 27,604 63,350
Capital lease and other obligations, net of current portion..................... 2,856 10,309
Mortgage payable................................................................ 20,248 20,441
12.5% Senior Notes.............................................................. -- 600,000
11.5% Senior Notes.............................................................. 120,000 --
Accrued interest - 11% Senior Notes............................................. 2,381 --
Other long term liabilities..................................................... 13,113 7,577
-------- --------
Total liabilities......................................................... 186,202 701,677
Minority interest in subsidiary................................................. -- 5,406
Redeemable convertible preferred stock.......................................... -- 83,230
Commitments and contingencies
Stockholders' Equity (Deficit):
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000 and
41,920,229 shares issued and outstanding,.................................... 165 419
Additional paid-in capital...................................................... 93,112 171,176
Deferred compensation........................................................... -- (7,097)
Accumulated other comprehensive income (loss)................................... 279 (2,703)
Accumulated deficit............................................................. (7,514) (399,120)
-------- --------
Total stockholders' equity (deficit)...................................... 86,042 (237,325)
-------- --------
Total liabilities and stockholders' equity (deficit) .......................... $272,244 $552,988
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements
1
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor Predecessor
Company Company
----------- -------------------------
Two One Three
Months Month Months
Ended Ended Ended
June 30 April 30 June 30
2002 2002 2001
----------- ----------- -----------
Revenue $ 12,702 $ 6,505 $ 26,239
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization,
payroll and occupancy included below) 4,505 2,723 9,774
Selling, general and administrative 10,749 11,057 31,994
Reversal of Loss on impairment of operating assets -- (643) --
Depreciation and amortization 2,454 3,929 8,526
----------- ----------- -----------
Total operating costs and expenses 17,708 17,066 50,294
----------- ----------- -----------
Loss from operations (5,006) (10,561) (24,055)
Other (expenses) income:
Interest and financing expense (2,677) (451) (14,458)
Interest income 314 183 2,993
Gain on debt discharge -- 427,066 --
Minority interest in subsidiary -- 4,434 --
Reorganization items -- (2,164) --
Fresh start accounting adjustments -- (148,569) --
Other expense (145) (113) (480)
----------- ----------- -----------
Net (loss) income (7,514) 269,825 (36,000)
Dividends and accretion on preferred stock -- -- (1,789)
----------- ----------- -----------
Net (loss) income attributable to common stockholders $ (7,514) $ 269,825 $ (37,789)
=========== =========== ===========
Basic:
Net (loss) income per share attributable to common
stockholders $ (0.46) $ 6.52 $ (0.97)
=========== =========== ===========
Weighted average common shares outstanding - basic 16,460,000 41,395,781 38,933,135
=========== =========== ===========
Diluted:
Net (loss) income per share attributable to
common stockholders $ (0.46) $ 5.37 $ (0.97)
=========== =========== ===========
Weighted average common shares
outstanding-diluted 16,460,000 50,284,381 38,933,135
=========== =========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements
2
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor Predecessor
Company Company
----------- -------------------------
Two Seven Nine
Months Months Months
Ended Ended Ended
June 30, April 30, June 30,
2002 2002 2001
----------- ----------- -----------
Revenue $ 12,702 $ 51,273 $ 79,257
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization,
payroll and a occupancy included below) 4,505 22,123 30,720
Selling, general and administrative 10,749 57,206 91,069
Loss on impairment of operating assets -- 2,578 --
Restructuring and other expense -- 24,834 38,109
Depreciation and amortization 2,454 28,115 24,073
----------- ----------- -----------
Total operating costs and expenses 17,708 134,856 183,971
----------- ----------- -----------
Loss from operations (5,006) (83,583) (104,714)
Other income (expenses)
Interest and financing expense (2,677) (34,511) (47,056)
Interest income 314 2,024 13,908
Gain on debt discharge -- 427,066 --
Minority interest in subsidiary -- 5,778 --
Reorganization items -- (7,762) --
Fresh start accounting adjustments -- (148,569) --
Other expense (145) (509) (1,056)
----------- ----------- -----------
(Loss) income before cumulative effect of a change in accounting
principle (7,514) 159,934 (138,918)
Cumulative effect of a change in accounting principle -- -- (2,332)
----------- ----------- -----------
Net (loss) income (7,514) 159,934 (141,250)
Dividends and accretion on preferred stock -- (3,178) (5,286)
----------- ----------- -----------
Net (loss) income attributable to common stockholders $ (7,514) $ 156,756 $ (146,536)
=========== =========== ===========
(Loss) earnings per share attributable to common stockholders:
Basic:
Before cumulative effect of a change in
accounting principle $ (0.46) $ 3.96 $ (3.76)
Cumulative effect of a change in accounting principle -- -- (0.06)
----------- ----------- -----------
Basic net (loss) earnings: per share attributable to
common stockholders $ (0.46) $ 3.96 $ (3.82)
=========== =========== ===========
Weighted average common shares outstanding - basic 16,460,000 39,618,856 38,318,812
=========== =========== ===========
Diluted:
Before cumulative effect of a change in accounting
principle $ (0.46) $ 3.30 $ (3.76)
Cumulative effect of a change in accounting principle -- -- (0.06)
----------- ----------- -----------
Diluted (loss) earnings per share attributable to common
stockholders $ (0.46) $ 3.30 $ (3.82)
=========== =========== ===========
Weighted average common shares outstanding - diluted 16,460,000 48,507,456 38,318,812
=========== =========== ===========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollar Amounts in Thousands)
(unaudited)
Successor Company Predecessor Company
----------------- ------------------------------
Two Months Seven Months Nine Months
Ended Ended Ended
June 30, 2002 April 30, 2002 June 30, 2001
----------------- -------------- -------------
Cash flows from operating activities
Net (loss) income $(7,514) $ 159,934 $(141,250)
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization 2,454 28,115 24,073
Provision for uncollectible accounts receivable 984 4,284 7,348
Services contributed to minority-owned subsidiary -- 372 --
Gain on debt discharge -- (427,066) --
Cumulative effect of a change in accounting principle -- -- 2,332
Non-cash restructuring and other charges -- 8,233 17,094
Loss on impairment of operating assets -- 2,578 --
Gain on sale of short-term investments -- -- (1,459)
Loss on impairment of investments 25 490 2,750
Gain on sale of marketable securities -- (27) (427)
Amortization of debt issuance costs -- 650 866
Amortization of deferred compensation -- 7,027 1,110
Minority interest in subsidiary -- (5,778) --
Fresh start accounting adjustment -- 148,569 --
Changes in operating assets and liabilities:
Accounts receivable 2,909 (3,449) (5,149)
Prepaid expenses and other current assets 3,088 (4,574) (4,556)
Other assets -- 54 (3,834)
Accounts payable 2,332 (5,181) 1,796
Accrued liabilities (3,440) 497 7,331
Accrued interest 2,200 31,431 18,748
Other (67) (1,152) (748)
------- --------- ---------
Net cash provided by (used in) operating activities 2,971 (54,993) (73,975)
------- --------- ---------
Cash flows from investing activities
Use of restricted cash and investments 511 24,235 5,991
Proceeds from sale of marketable securities -- 64 1,026
Return of strategic investments -- 193 --
Purchases of property, plant and equipment (415) (23,341) (118,224)
Proceeds from sale of short-term investments -- -- 10,180
------- --------- ---------
Net cash provided by (used in) investing activities 96 1,151 (101,027)
------- --------- ---------
continued
4
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollar Amounts in Thousands)
(unaudited)
continued
Successor Company Predecessor Company
----------------- ------------------------------
Two Months Seven Months Nine Months
Ended Ended Ended
June 30, 2002 April 30, 2002 June 30, 2001
------------- -------------- -------------
Cash flows from financing activities
Proceeds from exercise of stock options and warrants, net -- -- 2,498
Repayments of mortgage payable and capital lease obligations (2,012) (4,946) (3,621)
------- -------- ---------
Net cash used in financing activities (2,012) (4,946) (1,123)
------- -------- ---------
Effects of exchange rate changes on cash and cash equivalents 308 8 (2,255)
Net increase (decrease) in cash and cash equivalents 1,363 (58,780) (178,380)
Cash and cash equivalents, beginning of period 52,722 111,502 363,877
------- -------- ---------
Cash and cash equivalents, end of period $54,085 $ 52,722 $ 185,497
======= ======== =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 399 $ 2,101 $ 39,655
Cash paid for income taxes $ -- $ -- $ 34
Non-cash investing and financing activities
Equipment acquired under capital lease obligations $ -- $ 1,036 $ 12,157
Capital expenditures included in accounts payable
accrued liabilities and other long term liabilities $ 378 $ 273 $ 16,978
Cumulative dividends and accretion on preferred stock $ -- $ 3,178 $ 5,286
Restructuring of mandatorily redeemable convertible preferred stock $ -- $ 83,220 $ --
Restructuring of debt $ -- $427,066 $ --
The accompanying notes are an integral part of these condensed consolidated
financial statements
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
1. Reorganization and Emergence from Chapter 11
Globix Corporation and its subsidiaries ("Globix", the "Company" or the
"Successor Company") is a provider of Internet solutions to businesses. The
solutions include secure and fault-tolerant Internet data centers with network
services providing network connectivity to the Internet and Internet-based
managed and application services, which include co-location, dedicated hosting,
streaming media and messaging services. The Company currently offers services
from facilities in New York City, New York, Santa Clara, California, Atlanta,
Georgia and London, England.
On March 1, 2002, the Company and two of its wholly-owned domestic subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code (the "Bankruptcy Code"), together with a
prepackaged plan of reorganization (the "Plan") with the United States
Bankruptcy Court for the District of Delaware. The Company continued to operate
in Chapter 11 in the ordinary course of business and received permission from
the bankruptcy court to pay its employees, trade and certain other creditors in
full and on time, regardless of whether these claims arose prior to or after the
Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective April 25,
2002 (the "Effective Date of the Plan"), all conditions necessary for the Plan
to become effective were satisfied or waived and the Company emerged from
Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of the Company's existing securities
were cancelled and:
o each holder of the Company's 12.5% Senior Notes due 2010 (the "12.5%
Senior Notes"), became entitled to receive, in exchange for its claims
in respect of the 12.5% Senior Notes, its pro rata share of:
o $120,000 in aggregate principal amount of the Company's 11%
Senior Secured Notes due 2008. the 11% Senior Notes;
and
o 13,991,000 shares of the Company's common stock,
representing 85% of the shares of the Company's common stock
issued and outstanding following the Effective Date of the
Plan;
o each holder of shares of the Company's preferred stock outstanding
immediately prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of these shares of
preferred stock, its pro rata share of 2,304,400 shares of the
Company's common stock, representing 14% of the shares of the
Company's common stock issued and outstanding following the Effective
Date of the Plan; and
o each holder of shares of the Company's common stock outstanding
immediately prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of these shares of
common stock, its pro rata share of 164,600 shares of the Company's
common stock, representing 1% of the shares of the Company's common
stock issued and outstanding following the Effective Date of the Plan,
The Plan provides that all of the shares of the Company's common stock issued
pursuant to the Plan are subject to dilution by the exercise of management
incentive stock options, representing up to 10% of the shares of the Company's
issued and outstanding common stock on a fully-diluted basis following the
Effective Date of the Plan.
A total of 16,460,000 shares of the Company's common stock and $120,000 in
aggregate principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date of the Plan pursuant to the terms of the Plan,
and are deemed to be issued and outstanding for purposes of these financial
statements. As of June 30, 2002, however, no shares of the Company's common
stock or 11% Senior Notes had been distributed. In October 2002, the Company
distributed a total of 16,295,400 shares of common stock and $120,000 in
aggregate principal amount of 11% Senior Notes. Pursuant to the terms of a
Stipulation and Order that the Company entered into with the lead plaintiffs in
the class action lawsuit described in Note 17, 229,452 of these shares of common
stock and $1,968 in aggregate principal amount of these 11% Senior Notes were
placed in reserve in escrow pending the outcome of the class action lawsuit. In
the event that any judgment or settlement entered into in connection with the
class action lawsuit requires the Company to pay an amount in excess of its
liability insurance, then the
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Company will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10,000 or greater) or a portion
of (in the event that this excess is less than $10,000) of the shares of common
stock and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date, which
are allocable under the terms of the Plan to the holders of the Company's common
stock outstanding immediately prior to the Effective Date of the Plan, will
occur following the resolution of the shareholder derivative suit against the
Company and certain of its former officers and directors.
The Company historically has experienced negative cash flows from operations and
has incurred net losses. The Company's ability to generate positive cash flow
from operations and achieve profitability is dependent upon its ability to grow
the Company's revenue and achieve further operating efficiencies. For the two
month period ended June 30, 2002, the Company had a net loss of $ 7,514.
Although no assurances can be given, our management believes that actions taken
by our company over the last several months, including company downsizing,
headcount reductions and other cost reductions, as well as cost control measures
and the restructuring of our outstanding debt in connection with the Plan, have
positioned the Company to maintain sufficient cash flows from operations to meet
its operating capital and debt service for the next twelve months. There can be
no assurance, however, that the Company will be successful in executing its
business plan, achieving profitability, or in attracting new customers, or in
maintaining its existing customer base. Moreover, despite its restructuring the
Company has continued to experience significant decreases in revenue and low
levels of new customer additions in the period following its restructuring. In
the future, the Company may make acquisitions or repurchase indebtedness of the
Company, which, in turn, may adversely affect the Company's liquidity.
2. BASIS OF PRESENTATION
The unaudited condensed consolidated financial statements have been prepared by
the Company according to accounting principles generally accepted in the United
States and the rules and regulations of the Securities and Exchange Commission.
The unaudited condensed consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instruction to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles in the United States
of America for complete financial statements. In the opinion of management, the
unaudited interim condensed consolidated financial statements furnished herein
include all of the adjustments necessary for a fair presentation of the
Company's financial position at June 30, 2002, and for the two month period
ended June 30, 2002, the one month and seven month periods ended April 30, 2002
and the three and nine month periods ended June 30, 2001. All such adjustments
are of a normal recurring nature.
As a result of the application of fresh start accounting under the American
Institute of Certified Public Accountants Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") as of May 1, 2002, the Company's financial results for the three
and nine month periods ended June 30, 2002 and for the three and nine month
periods ended June 30, 2001 include two different bases of accounting and,
accordingly, the operating results and cash flows of the Successor Company (as
defined below) and the Predecessor Company (as defined below) have been
separately disclosed. For the purposes of these financial statements references
to the "Predecessor Company" are references to our company for periods prior to
April 30, 2002 (the last day of the calendar month in which we emerged from
bankruptcy) and references to the "Successor Company" are references to our
company for periods subsequent to April 30, 2002. The Successor Company's
financial statements are not comparable to the Predecessor Company's financial
statements. Results of operations for the three-month and nine-month periods
ended are not necessarily indicative of the operating results that may be
expected for future periods.
The following table describes the periods presented in the financial statements
and related notes thereto:
PERIOD REFERRED TO AS
- ------ --------------
From May 1, 2002 through June 30, 2002 "Successor Company"
From October 1, 2001 through April 30, 2002 "Predecessor Company"
and for the three and nine month periods
ended June 30, 2001
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Use of Estimates
The preparation of the Company's financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosures of contingent assets and liabilities.
Significant estimates include estimates of the collectibility of accounts
receivable, the useful lives and ultimate realizability of property and
equipment and intangible assets, the realizability of deferred tax assets and
restructuring reserves. The market for the Company's services is characterized
by intense competition and could impact the future realizability of the
Company' assets. Estimates and assumptions are reviewed periodically and the
effects of revisions are reflected in the period that they are determined to be
necessary. Actual results may vary from these estimates under different
assumptions or conditions.
Intangible Assets
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
141,"Business Combinations" ("SFAS 141") and SFAS 142, "Goodwill and Other
Intangible Assets "("SFAS 142") at the Effective Date of the Plan. SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. This
statement provides that intangible assets with indefinite lives and goodwill
will not be amortized but will be tested at least annually for impairment. If
an impairment is indicated then the asset will be written down to its fair value
typically based upon its future expected discounted cash flows.
For the three months ended June 30, 2001, seven-months ended April 30, 2002
and nine months ended June 30, 2001, goodwill amortization amounted to
$725, $1,141 and $ 1,876 respectively. If the Company had adopted SFAS 142 as
of October 1, 2000 and discontinued goodwill amortization, the Company's net
income and loss per common share on a proforma basis would have been as follows:
Predecessor
--------------------------------
Three Seven Nine
Months Months Months
Ended Ended Ended
June 30, April 30, June 30,
2001 2002 2001
-------- --------- ---------
Net income (loss) $(36,000) $159,934 $(141,250)
Addback of goodwill amortization 725 1,141 1,876
-------- -------- ---------
Adjusted net income (loss) (35,275) 161,075 (139,374)
Dividends and accretions on preferred stock (1,789) (3,178) (5,286)
-------- -------- ---------
Adjusted net income (loss) attributable to common shareholders $(37,064) $157,897 $(144,660)
======== ======== =========
Adjusted earnings (loss) per common share
Basic earnings (loss) per share attributable to
common shareholders $ (0.95) $ 3.99 $ (3.78)
======== ======== =========
Diluted earnings (loss) per share attributable to
common shareholders $ (0.95) $ 3.32 $ (3.78)
======== ======== =========
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
3. FRESH START ACCOUNTING
Although April 25, 2002 was the effective date of the Company's emergence from
bankruptcy, for financial reporting purposes the Company accounted for the
consummation of the Plan as of April 30, 2002. The Company employed an
independent third party to determine the enterprise value of the Company as of
the emergence date. The third party determined the enterprise value to be
$240,000. This amount was based upon several generally accepted valuation
methodologies including discounted cash flows, comparable public company
analysis and comparable mergers and acquisitions analysis. The assigned equity
values are based upon the reorganized value of the ongoing business and include
significant estimates made by management based on information available as of
the Effective Date. Valuation methodologies require the input of highly
subjective assumptions. Actual future results and events could differ
substantially from current estimates and assumptions. Any changes in valuation
could affect the Company's balance sheet.
In accordance with the principles of fresh start accounting, the Company has
adjusted the value of its assets and liabilities to their fair values as of
April 30, 2002. The equity value of the Successor Company at May 1, 2002 was
calculated as follows:
Enterprise Value $ 240,000
11% Senior Notes (120,000)
Mortgage Payable (20,536)
Capitalized Leases (6,187)
---------
Equity value of Successor Company $ 93,277
=========
We engaged the services of an independent third party to perform a valuation
analysis of certain tangible and intangible assets. The valuation of the subject
assets was performed following standards promulgated by the American Society of
Appraisers and is in compliance with the Uniform Standards of Professional
Appraisal Practices. The tangible assets were valued using the costs and market
comparables methods. The intangible assets were valued using the income approach
and the cost approach methods.
The net effect of all fresh start accounting adjustments resulted in a charge of
$148,569 which is reflected in the Predecessor Company's statement of operations
for the one month and seven month-periods ended April 30, 2002. The interest
of $11,507 on the 12.5% Senior Notes for the period March 1, 2002 through the
Effective Date was not accrued in accordance with SOP 90-7.
On the Effective Date of the Plan, the Company recognized a gain of $427,066
associated with the exchange of the 12.5% Senior Notes for the 11% Senior Notes
and shares of the Company's common stock under the Plan. The Successor Company's
gain on discharge of debt at April 30, 2002 was calculated as follows:
Carrying value of 12.5% Senior Notes $ 600,000
Carrying value of related accrued interest 43,750
Carrying value of 11% Senior Notes (120,000)
Carrying value of capitalized costs associated with 12.5% Senior Notes (17,398)
85% of equity value of Successor Company (79,286)
---------
Gain on discharge of debt $ 427,066
=========
The effects of the transactions contemplated by the Plan and the application of
fresh start accounting on the Company's consolidated balance sheet are as
follows:
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor
Predecessor Company
Company Debt Fresh Start April 30,
April 30, 2002 Discharge Adjustment(1) 2002
-------------- ----------- ---------- ----------
ASSETS
Cash and cash equivalents $ 52,722 $ -- $ -- $ 52,722
Marketable securities 2,757 -- -- 2,757
Accounts receivable, net 11,959 -- -- 11,959
Prepaid expenses and other current assets 17,264 -- (2,024) 15,240
Restricted cash 4,018 -- -- 4,018
--------- --------- --------- --------
Total current assets 88,720 -- (2,024) 86,696
Investments, restricted 5,114 -- -- 5,114
Property, plant and equipment, net 333,063 -- (155,693) 177,370
Debt issuance costs, net 18,250 (17,398)(a) (852) --
Intangible assets, net -- -- 10,155 10,155
Other assets 500 -- (208) 292
--------- --------- --------- --------
TOTAL ASSETS $ 445,647 $ (17,398) $(148,622) $279,627
========= ========= ========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portions of capital lease obligations
and mortgage payable $ 5,239 $ -- $ (1,690) $ 3,549
Accounts payable 7,782 -- (110) 7,672
Accrued liabilities 26,067 (2,713)(b) (2,264) 21,090
Accrued restructuring 3,122 -- -- 3,122
--------- --------- --------- --------
Total current liabilities 42,210 (2,713) (4,064) 35,433
Liabilities not subject to compromise:
Capital lease obligations, net of current portion 6,383 -- (3,499) 2,884
Mortgage payable 20,291 -- -- 20,291
11% Senior Notes -- 120,000(c) -- 120,000
Other long term liabilities 232 -- 7,510 7,742
--------- --------- --------- --------
Total liabilities not subject to compromise 69,116 117,287 (53) 186,350
Liabilities subject to compromise 643,750 (643,750)(c),(d) -- --
--------- --------- --------- --------
Total liabilities 712,866 (526,463) (53) 186,350
Mandatorily Redeemable Convertible Preferred Stock 83,695 (83,695)(e) -- --
Total stockholders' (deficit) equity (350,914) 592,760 (148,569) 93,277
--------- --------- --------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 445,647 $ (17,398) $(148,622) $279,627
========= ========= ========= ========
(a) To remove debt issuance cost associated with the 12.5% Senior Notes.
(b) To remove accrued dividends payable on mandatorily redeemable convertible
preferred stock.
(c) To exchange 12.5% Senior Notes for 11.0% Senior Notes.
(d) To remove accrued interest on 12.5% Senior Notes.
(e) To remove mandatorily redeemable convertible preferred stock.
(1) To adjust assets and liabilities to fair value.
10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Pursuant to the requirements of SOP 90-7, which requires entities subject to
fresh start accounting to adopt, in the fresh start reporting period, new
accounting principles that will be required in the financial statements of the
emerging entity within 12 months of the fresh start reporting period, the
Company adopted the provisions of new accounting standards upon emergence from
bankruptcy.
In July 2001,the FASB issued SFAS 141, which requires that the purchase
method of accounting be used for business combinations, establishes specific
criteria for the recognition of intangible assets separately from goodwill, and
requires that unallocated negative goodwill be written off immediately as an
extraordinary gain instead of being deferred and amortized. The Company adopted
SFAS 141 on May 1, 2002, which had no impact on the Company's results of
operations or financial condition.
In July 2001, the FASB issued SFAS 142 and the Company adopted the requirements
of SFAS 142 effective May 1, 2002. SFAS 142 requires companies to cease
amortization of certain assets and provides a methodology to test these assets
for impairment on a periodic basis. The Company adopted SFAS 142 on May 1,
2002, which had no impact on the Company's results of operations or financial
condition.
On April 30, 2002, SFAS 145, "Rescission of SFAS 4, 44, and 64, Amendment of
SFAS 13, and Technical Corrections as of April 2002" (SFAS 145) was issued.
SFAS 145 is effective for transactions occurring after May 15, 2002. In
rescinding SFAS 4, "Reporting Gains and Losses from Extinguishment of Debt", and
SFAS 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements",
SFAS 145 eliminates the requirement that gains and losses from the
extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, pursuant to
SFAS 145, an entity would not be prohibited from classifying such gains and
losses as extraordinary items so long as they meet the criteria in paragraph 20
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations -- Reporting the Effects of Disposal of a Segment of Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions".
Further, SFAS 145 amends paragraph 14(a) of SFAS 13, "Accounting for Leases",
to eliminate an inconsistency between the accounting for sale-leaseback
transactions and certain lease modifications that have economic effects that
are similar to sale-leaseback transactions. The amendment requires that a
lease modification (1) results in recognition of a gain or loss in the
financial statements, (2) is subject to SFAS 66, "Accounting for Sales of
Real Estate", if the leased asset is real estate (including integral
equipment), and (3) is subject (in its entirety) to the sale-leaseback rules
of SFAS 98, "Accounting for Leases: Sale-Leaseback Transactions Involving
Real Estate, Sales-Type Leases of Real Estate, Definition of the Lease Term,
and Initial Direct Costs of Direct Financing Leases". The adoption of
SFAS 145, on the Effective Date, resulted in the classification of the
$427,066 gain on extinguishment of debt in the Predecessor Company's one
and seven months period ended April 30, 2002 Statement of Operations as a
component of other income as gain on discharge of debt and not as an
extraordinary items as had been previously required under SFAS 4.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated with
Exit or Disposal Activities" ("SFAS 146"). SFAS 146 requires companies to
recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to an exit or disposal plan.
Examples of costs covered by the standard include lease termination costs and
certain employee severance costs that are associated with a restructuring,
discontinued operation, plant closing, or other exit or disposal activity. The
Company adopted SFAS No. 146 upon the Effective Date and it did not have an
effect on the Company's consolidated financial position, results of operations
or liquidity. Prior to adoption of SFAS No. 146 the Company accounted for these
activities under Emerging Issues Task Force No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" ("EITF 94-3").
11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
4. Long-Lived Assets
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", on the Effective Date of the Plan. SFAS No. 144 supersedes
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and of
Long-Lived Assets to be Disposed Of", and portions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations, Reporting the
Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", and amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 generally
conforms, among other things, impairment accounting for assets to be disposed
of, including those in discontinued operations.
At September 30, 2001, in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company recorded an estimated loss on impairment of operating assets of
$3,500. In the seven month period ended April 30, 2002, the Company determined
that impaired assets previously held for disposal were to be used in operations
and, accordingly, $643 of this charge was not impaired. In addition, the Company
recorded a loss on the impairment of intangible assets in the amount of $3,221
for the seven month period ended April 30, 2002. The impairment was due to the
acquisition of Comstar.net, Inc., which ceased operations.
The Company reviews the carrying amount of long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. An impairment loss is indicated if the sum of the
expected net cash flows is less than the carrying amount of the long-lived
assets being evaluated. Measurement of any impairment is calculated as the
difference between the carrying amount of the long-lived assets being evaluated
and the fair value. The Company determines the estimated fair market value of
the assets based on the anticipated future cash flows discounted at rates
commensurate with the risks involved.
5. Property, Plant and Equipment
Property, plant and equipment consist of the following:
Successor Predecessor
Company Company
June 30, September 30,
2002 2001
--------- -------------
Land ................................................... $ 2,713 $ 1,997
Building and building improvements ..................... 84,094 108,216
Leasehold improvements ................................. 66,958 145,617
Computer hardware and software and network equipment ... 15,070 134,767
Furniture and equipment ................................ 3,624 9,693
-------- --------
172,459 400,290
Less: Accumulated depreciation and amortization ........ (2,256) (54,499)
Add: Construction in progress .......................... 6,682 10,358
-------- --------
Property, plant and equipment, net ..................... $176,885 $356,149
======== ========
Certain computer and network equipment are recorded under capital leases that
aggregated approximately $4,466 and $23,545 as of June 30, 2002 and September
30, 2001, respectively. Accumulated amortization on the assets recorded under
capital leases aggregated approximately $190 and $6,566 as of June 30, 2002 and
September 30, 2001, respectively.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the Company, owns
the land and building located at 139 Centre Street, New York, New York. The
nine-story building houses the Company's corporate headquarters and one of its
Internet data center facilities. A former owner of the right to purchase the
Centre Street property may be entitled to additional consideration if Globix
sells the property. Such amount will be equal to the greater of (a) $1,000
(subject to increase after June 1, 2018 by 10 percent and an additional 10
percent every fifth year thereafter) or (b) 10 percent of the gross sales price
of the property if the sale price is greater than $17,500.
6. Minority Interest
In September 2000, the Company purchased the land and the eight-story building
located at 415 Greenwich Street, New York, New York (the "Property"). The
Property, which serves as the Company's second New York City Internet Data
Center, is a certified historic structure eligible for historic tax credits
("Tax Credits") based on qualified expenditures, as defined in the Internal
Revenue Code.
In June 2001, the Company had entered into an agreement whereby the Tax Credits
generated from the renovation of the Property would be utilized by a third party
(the "Investor") via a subsidiary (the "LLC"), in consideration for a capital
contribution to the LLC of approximately $16,549, which represents a 99.9%
interest in the LLC. As of June 30, 2002, the LLC had received $5,778 of such
capital contribution. The balance of the capital contribution is due from the
Investor in annual installments as follows:
Year Ending September 30, Contribution
- ------------------------- ------------
2003 ............................................................ $6,094
2004 ............................................................ 1,557
2005 ............................................................ 1,479
2006 ............................................................ 1,400
2007 ............................................................ 241
-------
Total $10,771
=======
12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
In connection with the above transaction, the Investor has a put option with the
Company. The put option provides that during the six months following the 61st
month after the date of the certification of the qualifying rehabilitation
expenditures (the "Certification Date"), which occurred on September 17, 2002,
the Investor may require the Company to purchase the Investor's interest in the
LLC for an amount equal to 25% of the Investor's capital contribution in the
LLC. If the Investor does not exercise its put option, the Company may exercise
a call option during a period of 24 months following the 73rd month after the
Certification Date. The call option allows the Company to acquire the Investor's
interest in the LLC for the greater of the fair market value of the Investor
interest in the LLC or an amount equal, on an after tax basis, to taxes payable
by the Investor upon the sale of its investment.
Upon certain events including the sale of the Property at any time after 2007
(to the extent the above mentioned put/call options have not been exercised),
the Company is obligated to pay the Investor 30% of any proceeds received in
excess of the cost of the Property. In the event that the Property is sold
anytime before 2007, the Company is obligated to pay to the Investor its capital
contribution (less any unrecaptured Tax Credits available to the Investor), plus
any loss attributable to the projected economic benefits to the Investor and any
other amounts owed to the Investor (as defined). The above potential commitment
is mitigated during the initial 60 months following the Certification Date by
the Company's right to terminate the transaction by paying the difference
between a 20% annual return on the Investor's capital contributions up to the
termination date and the Investor's actual return up to the termination date.
The Put Option that the Company has written has been recorded at its fair value
and will be marked to fair value through earnings. At June 30, 2002, the fair
value of this option is negligible.
7. Accrued Liabilities
Accrued liabilities consist of the following:
Successor Predecessor
Company Company
June 30, September 30,
2002 2001
--------- -------------
Restructuring charges $ 2,073 $ 9,191
Franchise tax, sales tax and property tax 1,462 1,048
Salaries, benefits and other deferred compensation 1,502 1,284
Telecommunication accrual 1,296 993
Deferred revenue 1,037 2,692
Reorganization items 1,408 --
Rabbi Trust obligation -- 2,378
Accrued construction costs 133 6,175
Other 6,864 6,380
------- -------
$15,775 $30,141
======= =======
13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
The following table displays the activity and balances of the restructuring
reserve account from inception to June 30, 2002:
Restructuring
-------------------------------------- Other
---------
Employee Contract Facility Asset
Terminations Settlements Closings Write-down Total
------------ ----------- --------- ---------- --------
Restructured charge $ -- $ 17,019 $ 2,630 $ 18,460 $ 38,109
Deductions--non-cash -- -- -- (15,124) (15,124)
Deductions--cash -- (10,519) (2,960) (3,336) (16,815)
------- -------- ------- -------- --------
June 30, 2001 Balance
(Predecessor Company) -- 6,500 (330) -- 6,170
Additional restructure charge 1,200 4,150 2,703 9,947 18,000
Deductions -- non-cash -- -- -- (7,765) (7,765)
Deductions -- cash (194) (6,600) (420) -- (7,214)
------- -------- ------- ------- --------
September 30, 2001 balance
(Predecessor Company) 1,006 4,050 1,953 2,182 9,191
Additional restructure charge 2,946 16,407 2,120 6,922 28,395
Deductions -- non-cash (889) -- (422) (6,922) (8,233)
Deductions -- cash (2,520) (18,480) (1,669) -- (22,669)
Reversal to fiscal 2001 Plan -- (678) (701) (2,182) (3,561)
------- -------- ------- ------- --------
April 30, 2002 balance
(Predecessor Company) 543 1,299 1,281 -- 3,123
Deductions -- cash (340) -- (710) -- (1,050)
------- -------- ------- ------- --------
June 30, 2002 balance
(Successor Company) $ 203 $ 1,299 $ 571 $ -- $ 2,073
======= ======== ======= ======= ========
The above deductions to the restructuring reserve represent primarily cash
payments and write-offs of previously capitalized costs.
8. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
Successor Predecessor
Company Company
--------- -----------
June 30, September 30,
--------- -----------
2002 2001
------- -------
Note payable $ 2,600 $ 2,600
Rabbi trust obligation 2,705 --
Negative leasehold liability 7,768 --
Contractual obligation -- 3,900
Deferred rent 40 1,077
------- -------
$13,113 $ 7,577
======= =======
14
The Company has a $2,600 note payable, due January 15, 2004. The note bears
interest, payable monthly, at 4.75%. The note is collateralized by an
irrevocable standby letter of credit. The related funds are included in
restricted investments on the accompanying consolidated balance sheet.
On July 21, 1999, the Company established a trust (the "Rabbi Trust") for the
benefit of a former executive. The trust agreement was for three years beginning
in April 1999 through March 1, 2002. The agreement was amended on March 21,
2001, and provided for payments from the Rabbi Trust commencing April 2001.
Payments were made from the Trust until March 1 2002, when Globix and two of its
wholly-owned subsidiaries filed for Chapter 11.
The Company was in litigation over the trust which was settled pursuant to
court order confirmation of the settlement dated June 13, 2003. Pursuant to this
settlement, Mr. Bell received a distribution of $990 and the Company received a
distribution of approximately $1,700. The amount of approximately $100 was
retained by the trustee to cover the costs of winding up the trust.
In connection with fresh start accounting at the Effective Date, the Company
recorded a Negative Leasehold Liability associated with three of its Internet
data centers. The Negative Leasehold Liability amount was determined by
independent appraisal and based upon research of the local market conditions in
each market and estimation of the net effective market rental rates in
comparison to the Globix contractual lease rates through expiration of the
lease. Such liability will be amortized to reduce lease expense over the
remaining life of the lease as follows:
YEAR ENDING SEPTEMBER 30
2002 ................................................................. $ 162
2003 ................................................................. 653
2004 ................................................................. 653
2005 ................................................................. 653
2006 ................................................................. 653
2007 ................................................................. 653
Thereafter ........................................................... 4,994
-------
Total ................................................................ 8,421
Less: Current Portion ............................................... (653)
-------
Long-term Portion .................................................... $ 7,768
=======
9. Senior Notes
As of the Effective Date of the Plan, all of the existing 12.5% Senior Notes
were cancelled and each holder of the 12.5% Senior Notes became entitled to
receive, in exchange for its 12.5% Senior Notes, its pro rata share of $120,000
in aggregate principal amount of the 11% Senior Notes and 13,991,000 shares of
the Company's common stock, representing 85% of the shares of the Company's
common stock issued and outstanding following the Effective Date of the Plan,
subject to dilution by the exercise of management incentive options representing
up to 10% of the Company's issued and outstanding common stock on a
fully-diluted basis following the Effective Date. The interest of $11,507 on the
12.5% Senior Notes for the period March 1, 2002 through the Effective Date was
not accrued in accordance with SOP 90-7.
The Company is deemed to have issued the 11% Senior Notes on the Effective Date
of the Plan in one series that is initially limited to $120,000 aggregate
principal amount of 11% Senior Notes. However, none of the 11% Senior Notes had
been distributed as of September 30, 2002. In October 2002, the Company
distributed $120,000 in aggregate principal amount of the 11% Senior Notes,
which included $1,968 in aggregate principal amount of Notes placed in reserve
in escrow pursuant to a Stipulation and Order entered into with the lead
plaintiffs in the class action lawsuit described in Note 17.
The 11% Senior Notes will mature on December 31, 2008. The 11% Senior Notes will
bear interest at 11% per annum, payable annually in May of each year, commencing
on May 1, 2003. Interest on the 11% Senior Notes for the first two year period
following the initial date of issuance is payable in kind by the issuance of
additional notes with terms identical to the 11% Senior Notes (other than the
date of issuance) in a principal amount equal to the interest payment then due.
For the two year period thereafter, interest is payable in cash or, at the
Company's option when authorized by its board of directors, in additional notes
with terms identical to the 11% Senior Notes (other than the date of issuance),
or in any combination of cash and additional notes. For the remaining two years
until maturity, interest is payable in cash.
The 11% Senior Notes were issued under an indenture dated as of April 23, 2002
(the "Indenture"), among the Company, HSBC Bank USA, as trustee (the "Trustee")
and Bluestreak Digital, Inc., Gamenet Corporation, NAFT Computer Service
Corporation, NAFT International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.net, Inc. and Comstar Telecom & Wireless, Inc., as the initial
Subsidiary Guarantors. The Company has merged each of these subsidiary
guarantors, other than 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC and
415 Greenwich GC MM, LLC, with and into the Company.
In the event that:
- subject to certain exceptions, any person, entity or group of
persons or entities becomes the beneficial owner, directly or
indirectly, of 50% or more of the Company's outstanding voting
securities;
- at any time during the two-year period following the distribution
of the 11% Senior Notes, the individuals that comprise a majority
of the Company's board of directors on the date of distribution of
the 11% Senior Notes, plus any new directors whose election was
approved by the Company's board of directors during this two-year
period, cease to comprise a majority of the Company's board of
directors;
- subject to certain exceptions, the Company consolidates with or
merges with or into another entity, the Company sells or leases
all or substantially all of its assets to another entity or any
entity consolidates with or merges with or into the Company, in
each case pursuant to a transaction in which the Company's
outstanding voting securities are changed into or exchanged for
cash, securities or other property, unless no person, entity or
group of persons or entities owns, immediately after the
transaction, more than 50% of the Company's outstanding voting
stock,
then each holder of the 11% Senior Notes will have the right to require the
Company to repurchase all or a portion of its 11% Senior Notes for a purchase
price equal to 101% of the principal amount of that holder's 11% Senior Notes
plus accrued and unpaid interest to the date of repurchase.
The Indenture contains a number of covenants that impose significant operating
and financial restrictions on the Company and its subsidiaries. These
restrictions significantly limit, and in some cases prohibit, among other
things, the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, create liens on assets, enter into business
combinations or engage in certain activities with subsidiaries.
As of June 30, 2002, the Company was in compliance with the material operating
and financial restrictions imposed upon the Company contained in the Indenture.
However, as of the date of these financial statements, the Company was not in
compliance with the provisions of the Indenture which require the Company to:
- file reports and documents with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; specifically the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
- file copies of these reports with the Indenture trustee (the
"Trustee");
- cause these reports to be mailed to the holders of the 11% Senior
Notes;
- deliver to the Trustee a certificate from the Company's public
accountants related to the Company's compliance with certain
provisions of the Indenture; and
- deliver to the Trustee an officer's certificate with respect to
the Company's failure to satisfy the obligations set forth above.
The Company's failure to comply with each of the obligations described above
constitutes a default, but not an event of default, under the Indenture.
On March 19, 2003, holders of approximately 58% of the outstanding 11% Senior
Notes (excluding 11% Senior Notes repurchased by the Company) waived the
defaults under the Indenture.
15
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. Mortgage Payable
On January 25, 2000, ATC Corp. borrowed $21,000 from a financial institution
pursuant to a mortgage note secured by the property at 139 Centre Street, New
York New York. Interest is payable at 9.16% (subject to adjustment on February
11, 2010) based on a 25 year amortization schedule. Principal and interest
payments of $178.5 are payable monthly and any balance of the principal and all
accrued and unpaid interest is due and payable in February 2025.
11. Redeemable Convertible Preferred Stock
On December 3, 1999, the Company sold 80,000 shares of preferred stock to
affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") for a
purchase price of $80,000. The Company used the proceeds from the sale to expand
the build-out of its Internet data centers and other facilities. The preferred
stock paid a dividend of 7.5%.
The Preferred Stock was recorded in the accompanying consolidated balance sheet
outside the stockholders equity section due to its mandatory redemption feature.
The Company incurred approximately $4,750 of issuance costs in connection with
the sale of the preferred stock. These costs were recorded as a reduction of the
carrying amount of the preferred stock and were being accreted through a charge
to additional paid in capital over the five-year period to the earliest
redemption date.
As of the Effective Date of the Plan, all of the outstanding shares of preferred
stock were deemed cancelled and each holder of shares of the preferred stock
outstanding immediately prior to the Effective Date became entitled to receive,
in exchange for its shares of preferred stock, its pro rata share of 2,304,400
shares of the Company's common stock, representing 14% of the shares of the
Company's common stock issued and outstanding following the Effective Date,
subject to dilution by the exercise of management incentive options representing
up to 10% of the Company's issued and outstanding common stock on a
fully-diluted basis following the Effective Date.
In accordance with SOP 90-7, upon entering Chapter 11 of the U. S. Bankruptcy
Code, the Preferred Stock dividend accrual was discontinued as of March 1, 2002.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
16
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
12. Stockholders' Equity
In December 2000, the Company granted 3,063,490 shares of restricted stock to
certain employees and directors. The restricted stock awards vest 25% per year
over a four-year period on the anniversary date of the grant. In connection
with this restricted stock grant, the Company recorded a deferred compensation
charge of $8,999 in stockholders' equity. This deferred compensation was to be
recorded as compensation expense over the four-year vesting period. In April
2002, the Company's board of directors approved the vesting of 100% of the
remaining unvested restricted shares. This resulted in a non-cash charge to
compensation expense of $5,100 in April 2002. Compensation expense recorded in
the one and seven-month periods ended April 30, 2002 was $5,100 and $7,027
respectively. As a result of the Company's reorganization, effective April 25,
2002 all unexercised options and warrants were cancelled and none were issued as
of June 30, 2002.
As of the Effective Date of the Plan, all of the outstanding shares of the
Company's common stock were cancelled, and each holder of shares of the
Company's common stock outstanding immediately prior to the Effective Date of
the Plan became entitled to receive, in exchange for its claims in respect of
such shares, its pro rata share of 164,460 shares of the Company's common stock,
representing 1% of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan, subject to dilution by the
exercise of management incentive options representing up to 10% of the Company's
issued and outstanding common stock on a fully-diluted basis following the
Effective Date of the Plan.
Pursuant to the terms of the Successor Company's Amended and Restated
Certificate of Incorporation, the Company is authorized to issue 500,000,000
shares of common stock with a par value of $0.01 per share. A total of
16,460,000 shares of the Company's common stock were deemed to be issued and
outstanding on the Effective Date of the Plan. As of June 30, 2002, however,
no shares of the Company's common stock had been distributed pursuant to the
terms of the Plan. In October 2002, a total of 16,295,400 shares of common stock
were distributed in accordance with the terms of the Plan. 229,452 of these
shares were placed in reserve in escrow pursuant to a Stipulation and Order
entered into with the lead plaintiffs in the class action lawsuit described in
Note 17. Distribution of the remaining 164,460 shares of common stock deemed
to have been issued on the Effective Date of the Plan, which are allocable under
the terms of the Plan to the holders the Predecessor Company's common stock,
will occur following the resolution of the shareholder derivative suit
described in Note 17 against the Company and certain of its present and former
officers and directors.
13. Reorganization Items
Reorganization expenses are expenses incurred by the Predecessor Company in
connection with its reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization items included in the Statement of Operations include
professional fees directly related to the Predecessor Company's bankruptcy.
Reorganization expenses included in the Statement of Operations were
approximately $2,164 for the one month ended April 30, 2002 and $7,762 for the
seven months ended April 30, 2002.
14. Segment Information
The Company reports segment information under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which establishes standards
for reporting information about operating segments in annual financial
statements and requires selected information about operating segments in interim
financial reports issued to stockholders. It also establishes standards for
disclosures about products and services and geographic areas. Operating segments
are components of an enterprise for which separate financial information is
available and which is evaluated regularly by the Company's chief operating
decision-maker or decision-making group in deciding how to allocate resources
and assess performance. The Company is a full service provider of sophisticated
Internet solutions. The Company operates several Internet data centers
throughout the United States and the United Kingdom. Each Internet data center
provides the same internet related services to similar types of customers.
The Company's activities fall within one operating segment. The following table
sets forth geographic segment information for the two months ended June 30, 2002
(Successor Company), the one-month and seven months ended April 30, 2002
(Predecessor Company), and the three months and the nine months ended June 30,
2001.
Effective April 1, 2001 and for the fiscal quarter ended June 30, 2001, the
Company reported its results of operations in one operating segment under the
provisions of SFAS No. 131. Previously the Company reported its results of
operations in two operating segments. The following table sets forth geographic
segment information for the one-month and seven months ended April 30, 2002
(Predecessor Company) the two months ended June 30, 2002 and the three month
and nine months periods ended June 30, 2001:
17
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor
Company Predecessor Company
------------- --------------------------------------------------------------
Two Months One Month Three Months Seven Months Nine Months
Ended Ended Ended Ended Ended
June 30, 2002 April 30, 2002 June 30, 2001 April 30, 2002 June 30, 2001
------------- -------------- ------------- -------------- -------------
Revenue:
United States $ 8,581 $4,697 $20,434 $37,747 $62,943
Europe 4,121 1,808 5,805 13,526 16,314
-------- ------ ------- ------- -------
Consolidated $ 12,702 $6,505 $26,239 $51,273 $79,257
======== ====== ======= ======= =======
Tangible Assets:
United States $220,335
Europe 41,971
--------
Consolidated $262,306
========
15. Income (Loss) Per Share
Basic income (loss) per share is calculated by dividing net income (loss)
attributable to common shareholders by the weighted average number of shares
of common stock outstanding during the period. Diluted income (loss) per share
is calculated by dividing net loss attributable to common shareholders by the
weighted average number of shares of common stock outstanding, adjusted for
potentially dilutive securities.
All options and warrants outstanding on the Effective Date of the Plan were
cancelled as of the Effective Date of the Plan. At June 30, 2002 there were no
dilutive securities outstanding. Although the Successor Company's common stock
was not distributed until after June 30, 2002, the Plan provides that the
16,460,000 shares of the Company's common stock issuable under the Plan were
deemed to be issued and outstanding as of the Effective Date of the Plan.
Accordingly, for purposes of these financial statements 16,460,000 shares of the
Company's common stock are deemed to have been issued and outstanding as of June
30, 2002.
In April 1998, the Company completed a $160,000 debt financing consisting of
160,000 units, each unit consisting of a note in the principal amount of one
thousand dollars and one warrant to purchase 14.08 shares of common stock (total
of 2,252,800 shares of common stock) at a purchase price of $3.51 per share. Of
the 2,252,800 shares underlying the original 160,000 warrants, 194,797 shares
remained, until the Effective Date.
In accordance with the requirements of SFAS 128 the following common stock
equivalents have been excluded from the calculation of diluted net income (loss)
per common share as their inclusion would be antidilutive.
Successor Predecessor
Company Company
Two Months Seven Months Nine Months
Ended Ended Ended
June 30, April 30, June 30,
2002 2002 2001
---- ---- ----
Convertible preferred stock............................. -- -- 8,458,700
Stock options........................................... -- 10,021,258 10,571,700
Unvested restricted stock............................... -- -- 3,063,500
Warrants................................................ -- 194,797 194,800
--- ---------- ----------
-- 10,216,055 22,288,700
=== ========== ==========
The following is a reconciliation of basic earnings per share to diluted
earnings per share:
18
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
One month ended April 30, 2002
------------------------------------------
Numerator Denominator Per Share
Income or (loss) Shares Amount
---------------- ----------- ---------
Basic earnings per share
Net income $269,825
Dividends and accretion on preferred stock --
--------
Net income attributable to common stockholders $269,825 41,395,781 $6.52
======== =====
Addback of preferred stock 8,888,600
Diluted earnings per share
-------- ----------
Net income attributable to common stockholders $269,825 50,284,381 $5.37
======== ========== =====
Seven months ended April 30, 2002
------------------------------------------
Numerator Denominator Per Share
Income or (loss) Shares Amount
---------------- ----------- ---------
Basic earnings per share
Net income $159,934
Dividends and accretion on preferred stock (3,178)
--------
Net income attributable to common stockholders $156,756 39,618,856 $3.96
======== =====
Addback of preferred stock 3,178 8,888,600
Diluted earnings per share
-------- -----------
Net income attributable to common stockholders $159,934 $48,507,456 $3.30
======== =========== =====
16. Comprehensive Income or Loss
The Company reports comprehensive income or loss under the provisions of SFAS
No. 130. Accumulated other comprehensive income or loss is reported as a
component of stockholders' equity in the consolidated balance sheets. The
Company primarily has two components of comprehensive loss: cumulative
translation adjustments from the Company's operations in foreign countries and
unrealized gains and losses on marketable securities classified as available for
sale. The following table summarizes the components of other comprehensive
(loss) income for the two months ended June 30, 2002 and one and seven months
ended April 30, 2002 and three and nine months ended June 30, 2001.
19
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
Successor
Company Predecessor Company
------------- -----------------------------------------------------------------
Two Months One Month Three Months Seven Months Nine Months
Ended Ended Ended Ended Ended
June 30, 2002 April 30, 2002 June 30, 2001 April 30, 2002 June 30, 2001
------------- -------------- ------------- -------------- -------------
Net (loss) income $(7,514) $269,825 $(36,000) $159,934 $(141,250)
Other comprehensive
income (loss):
Unrealized gain (loss) on
marketable securities
available for sale (1,046) (116) 793 1,185 (2,610)
Foreign currency transaction
adjustment 1,325 996 (98) (1,807) (2,255)
------- -------- -------- -------- ---------
Comprehensive (loss) income $(7,235) $270,705 $(35,305) $159,312 $(146,115)
======= ======== ======== ======== =========
17. Contingencies
On January 28, 2002, a derivative suit was filed in the United States District
Court for the Southern District of New York against the Company, as nominal
defendant, and certain of the Company's current and former directors and
officers. The Company believes that the allegations in this lawsuit are without
merit and intends to vigorously defend against them. In addition, the plaintiff
in this lawsuit has not pursued her claims against the Company since the filing
of the lawsuit. Although there can be no assurance as to the outcome or effect
of this lawsuit, the Company's management does not believe, based on currently
available information, that the ultimate liabilities (if any) resulting from
this lawsuit will have a material adverse impact on its business, financial
condition, results of operations or cash flows.
There is a putative class action lawsuit pending in the United States District
Court for the Southern District of New York titled In re Globix Corp Securities
Litigation, No.02-CV-00082. This lawsuit names as defendants the Company and the
Company's former officers Marc Bell, Peter Herzig (who remains a director of the
Company) and Brian Reach, and asserts claims under sections 10(b) and 20(a) of
the Securities Exchange Act and Rule 10b-5 promulgated thereunder on behalf of
all persons or entities who purchased the Company's securities between November
16, 2000 and December 27, 2001.
On June 25, 2002, the Company entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of the Company's common stock and $1,968 in aggregate principal
amount of the 11% Senior Notes will be held in reserve in escrow pending the
outcome of the class action lawsuit. In the event that any judgment or
settlement entered into in connection with the class action lawsuit requires the
Company to pay an amount in excess of its liability insurance, the Company will
be required to issue to the class action litigants and their attorneys all (in
the event that
20
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Dollar Amounts in Thousands, Except Share and Per Share Data)
(unaudited)
this excess is $10,000 or greater) or a portion of (in the event that this
excess is less than $10,000) the shares of the Company's common stock and the
11% Senior Notes being held in escrow.
A consolidated amended complaint was filed in this lawsuit on June 28, 2002. The
Company has filed a motion to dismiss the consolidated amended complaint.
Briefing of that motion is not yet complete. If the motion is denied, the case
will proceed to the discovery stage. The Company believes that the allegations
in this lawsuit are without merit and intends to vigorously defend against them.
Although there can be no assurance as to the outcome or effect of this lawsuit,
the Company's management does not believe, based on currently available
information, that the ultimate liabilities (if any) arising from this lawsuit
will have a material adverse impact on the Company's business, financial
condition, results of operations or cash flows.
On June 12, 2002, Robert B. Bell, a former officer and director of the Company,
filed a complaint in the United States District Court for the Southern District
of New York entitled Robert B. Bell v. Arnold M. Bressler, as Trustee, and
Globix Corporation, alleging breach-of-contract claims related to the failure to
make payments under the "Rabbi Trust" that the Company formed pursuant to an
employment agreement with Mr. Bell. This action was settled on June 13, 2003.
As a result of the settlement Mr. Bell received a distribution of $ 990 from
the Rabbi Trust.
In addition, in connection with the same underlying issues, on July 24, 2002 the
Company filed a complaint in the United States Bankruptcy Court for the District
of Delaware entitled Globix Corporation v. Arnold N. Bressler, as Trustee of the
Globix Corporation Rabbi Trust, and Robert B. Bell. This action was also settled
on June 13, 2003. As a result of the settlement the Company received a
distribution of $ 1,700 from the Rabbi Trust.
From time to time, the Company is a party to legal proceedings arising in the
normal course of its business operations. Although there can be no assurance as
to the outcome or effect of any legal proceedings to which the Company is a
party, the Company's management does not believe, based on currently available
information, that the ultimate liabilities (if any) arising from any such legal
proceedings will have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
21
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Form 10-Q, under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
Quantitative and Qualitative Disclosures about Market Risk," and "Legal
Proceedings," constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve unknown and uncertain risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Forward-looking statements are identified by the use of forward
looking words or phrases such as "anticipates," "intends," "expects,"
"believes," "estimates," or words or phrases of similar import. These forward
looking statements are subject to numerous assumptions, risks, and
uncertainties, and the statements looking forward beyond 2003 are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from those
anticipated by forward-looking statements. Among these factors are the Company's
high degree of leverage and history of operating losses, its ability to retain
existing customers, its ability to achieve cost-savings and generate positive
cash flow, risks associated with potential acquisitions and divestitures and
other factors affecting the Company's business generally. Such factors are more
fully described in the Company's Annual Report on Form 10-K for the year ended
September 30, 2002, which should be considered in conjunction with a review of
this report. For a general discussion of risks affecting the Company's business,
see "Risk Factors" in the Company's Annual Report on Form 10-K for the year
ended September 30, 2002.
We reported under fresh start accounting pursuant to American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") during
the third quarter of the fiscal year ended September 30, 2002 resulting in a
change in the basis of accounting in the underlying assets and liabilities of
our company at the Effective Date (the "Effective Date") of our prepackaged
plan of reorganization which we entered into in connection with our Chapter 11
filing discussed below. Accordingly, the financial statements of the Successor
Company (as defined below) and the Predecessor Company (as defined below) are
not comparable. For purposes of this Management's Discussion and Analysis:
o references to the "Predecessor Company "are references to the Company
for periods prior to April 30, 2002 (the last day of the calendar
month in which the Company emerged from bankruptcy) and references to
the "Successor Company" are references to the Company for periods
subsequent to April 30, 2002.
o We have combined the actual results of operations for the Successor
Company for the two months ended June 30, 2002 and the Predecessor
Company for the one month and seven months ended April 30, 2002 as
pro forma combined 2002 operating results in order to present a
more meaningful comparative analysis to the current operating
results for the three and nine month periods ended June 30, 2001.
Successor Company and Predecessor Company financial data are derived
from the condensed consolidated financial statements that appear
elsewhere in this quarterly report.
The Successor Company recognized the effects of reduced depreciation,
additional amortization and reduced interest expense arising from the
revaluation of our assets and liabilities and the reduced amount of the
Successor Company's outstanding debt following the Effective Date of the Plan.
Overview
Our Company was founded in 1989 and undertook a major expansion plan in 1998 in
order to more aggressively pursue opportunities resulting from the tremendous
growth of the Internet. In April 1998, we completed a $160.0 million offering of
13% Senior Notes due 2005, which we refer to as the 13% notes. In July 1999, we
completed construction of our initial Internet data center facilities in New
York City, London and Santa Clara, California and began operations at each
facility.
In March 1999, we completed a public offering of 16,000,000 shares of our common
stock, resulting in net proceeds of approximately $136.5 million.
22
In December 1999, we completed the private placement of 80,000 shares of
preferred stock to affiliates of Hicks, Muse, Tate & Furst Incorporated,
resulting in net proceeds of $75.3 million.
In February 2000, we completed a $600.0 million offering of 12.5% Senior Notes
due 2010, which we refer to as the 12.5% notes, to fund the continued expansion
of our facilities and network and the tender offer to purchase all of the
outstanding $160 million in aggregate principal amount of the 13% notes. The
purchase price of the tender offer for the 13% notes, completed on February 8,
2000, was 106.5% of the outstanding aggregate principal amount, plus all accrued
and unpaid interest.
On March 1, 2002, our company and two of our wholly owned domestic subsidiaries
filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code, together
with a prepackaged plan of reorganization, which we refer to as the plan of
reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business. We received permission from the bankruptcy court to pay our employees,
trade, and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the United States Bankruptcy Court confirmed the plan of
reorganization. Effective April 25, 2002, which we refer to as the effective
date of the plan of reorganization, we emerged from Chapter 11 bankruptcy
protection and all conditions necessary for the plan to become effective were
satisfied or waived.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the
consolidated financial statements for the fiscal year ended September 30, 2001
in the Form 10-K for the fiscal year ended September 30, 2001. This Management's
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities. We base
our accounting estimates on historical experience and other factors that are
believed to be reasonable under the circumstances. However, actual results may
vary from these estimates under different assumptions or conditions.
Three-Months Ended June 30, 2002 As Compared To The Three-Months Ended June 30,
2001
Revenue. Revenue for the three-month period ended June 30, 2002 decreased 26.7%
to $19.2 million from $26.2 million for the three-month period ended June 30,
2001. This decrease was primarily attributable to increased customer churn
resulting from cancellations of services and a reduced market price for certain
services. We define churn as contractual revenue losses due to customer
cancellations and downgrades, net of upgrades, and additions of new services.
Cancellations refer to customers that have either stopped using our services
completely or remained a customer but terminated a particular service.
Downgrades are a result of customers taking less of a particular service or
renewing their contract for identical services at a lower price. Internet
revenue declined from $24.4 million for the three-month period ended June 30,
2001 to $19.1 million in the three-month period ended June 30, 2002, a 21.8%
decrease. Hardware sales decreased from $1.9 million for the three-month period
ended June 30, 2001 to $0.1 million in the three-month period ended June 30,
2002, a 94.7 % decrease, as result of our shift away from lower margin hardware
revenue.
Cost of Revenue. Cost of revenue for the three-month period ended June 30, 2002
was $7.2 million, or 37.5% of total revenue, as compared to $9.8 million, or
37.4% of total revenue, for the three-month period ended June 30, 2001. This
decrease was a result of our reconfiguration of our network to support our
current and near-term business needs and renegotiation of network costs to
market pricing with vendors and suppliers. Decreases of roughly $1.4 million,
representing approximately 54% of the total decrease in cost of revenue,
was attributable to lower hardware costs as a result of our shift away
from lower margin hardware sales.
Selling, General and administrative expenses, for the one-month period ended
April 30, 2002 were $11.1 million, or 170.8% of revenue, compared to $32.0
million, or 122.1% of revenue for the three months period ended June 30, 2001.
For the two month period ended June 30, 2002 selling general and administrative
expenses were $10.7 million or 84.3% of revenue. For the three-month period
ended June 30, 2002, selling general and administrative expenses totaled $21.8
million or 113.5% of revenue.
The decrease in selling, general and administrative expenses as a percent of
revenue for the two month period ended June 30, 2002, as well as for the three
months ended June 30, 2002 compared to the three month period ended June 30,
2001 was primarily the result of a net decrease in employee compensation costs
as a result of the Company's reduced staffing levels. Salaries and benefits in
the one-month period ended April 30, 2002 were $8.1 million or 124.6% of
revenue as compared to $19.8 million or 75.6% of revenue for the three-month
period ended June 30, 2001. Salaries and benefits in the one-month period
ended April 30, 2002 included a one time non-cash charge of approximately $5.1
million related to the recognition or deferred compensation costs associated
with the vesting of restricted stock awards. For the two-month period ended
June 30, 2002 salaries and benefits were $5.4 or 42.5% of revenue. For the
three-month period ended June 30, 2002 salaries and benefits totaled $13.5
million or 70.3% of revenue. The number of employees decreased from
approximately 800 as of June 30, 2001 to approximately 300 as of June 30, 2002.
The decrease in selling, general and administrative expenses as a percent of
revenue for the two month period ended June 30, 2002, as well as for the
consolidated three months ended June 30, 2002 over the three month period ended
June 30, 2001 was also the result of a reduction in marketing spending.
Marketing costs in the one-month period ended April 30, 2002 were $0.1 million
or 1.5% of revenue as compared to $1.8 million or 6.9% of revenue for the
three-month period ended June 30, 2001. For the two-month period ended June
30, 2002 marketing costs were $0.2 million or 1.6% of revenue. For the
three-month period ended June 30, 2002 marketing costs totaled $0.3 million or
1.6% of revenue. The decrease in marketing expenses was attributable to a
reduction in the amount of our advertising pursuant to our restructuring plan.
23
Reversal of loss on impairment of operating assets. The $(0.6) million credit in
the one month ended April 30, 2002 was associated with the partial reversal of
an estimated write-off in the fiscal year ended September 30, 2001 of certain
assets associated with an indefeasible right of use, or IRU, capacity on a
wavelength purchased from a supplier whose financial viability was originally
thought to have impaired the recoverability of these assets.
Depreciation and Amortization. Depreciation and Amortization expense in the
one-month period ended April 30, 2002 was $3.9 million or 60.0% of revenue as
compared to $8.5 million or 32.4% of revenue for the three-month period ended
June 30, 2001. The increase in depreciation and amortization expense as a
percentage of revenue for the one-month ended April 30, 2002 resulted from an
increase in our capital expenditures. Depreciation and amortization in the
two-month period ended June 30, 2002 was $2.5 million or 19.7% of revenue, this
decrease was attributable to the impact of fresh start accounting, in particular
the revaluation of our tangible and intangible assets as of April 30, 2002. For
the three-month period ended June 30, 2002 depreciation and amortization was
$6.4 million or 33.3% of revenue.
Interest and Financing Expense. Interest and financing expense in the one-month
period ended April 30, 2002 was $0.5 million or 7.7% of revenue as compared to
$14.5 million or 55.3% of revenue for the three-month period ended June 30,
2001. Interest and financing expense for the two-month period ended June 30,
2001 was $2.7 million or 20.2% of revenue. Interest and financing expense for
the three-month period ended June 30, 2002 was $3.2 million or 16.7% of revenue.
$18.8 million of the this decrease was attributable to the discontinuance of the
interest accrual on the 12.5% notes for the period from March 1, 2002 to June
30, 2002, in connection with our bankruptcy filing on March 1, 2002. This
decrease was offset by $2.4 million of interest on the 11% Senior Secured Notes,
due 2007, which we refer to as the new notes, issued pursuant to the plan of
reorganization. In addition, this decrease was offset by the $5.4 million of
interest capitalized for the three-month period ended June 30, 2001 for the
continuing construction of our Internet data centers.
Interest Income. Interest income in the one-month period ended April 30, 2002
was $0.2 million or 3.1% of revenue as compared to $3.0 million or 11.4% of
revenue for the three-month period ended June 30, 2001. Interest income in the
two-months ended June 30, 2002 was $0.3 million or 2.4% of revenue. This
decreasing trend was primarily attributable to the reduced amount of our cash
investments and the impact of declining interest rates as compared to the prior
period. For the three-month period ended June 30, 2002 interest income was $0.5
million or 2.6% of revenue.
Gain on Debt Discharge. Upon the effective date of the plan of reorganization,
we recognized a gain on discharge of debt of approximately $427.1 million in the
one month period ended April 30, 2002.
Minority Interest in Subsidiary. The minority interest credit resulted from the
consolidation of a minority owned subsidiary with our results due to our
effective control of this entity.
Reorganization items. The reorganization expenses of approximately $2.2 million
recorded in the one-month period ended April 30, 2002 were attributable to
expenses incurred by the Predecessor Company as a result of its reorganization
under Chapter 11 of the Bankruptcy Code.
Fresh Start Accounting Adjustments. Pursuant to fresh start accounting
principles, we have adjusted the value of our assets and liabilities to their
fair values as of April 30, 2002. The net effect of all fresh start accounting
adjustments in the one-month period ended April 30, 2002 resulted in a charge
of $148.6 million. There were no fresh start accounting adjustments in 2001.
Net Income (Loss). As a result of the above, we reported net income of $262.3
million for the three months ended June 30, 2002 as compared to a net loss of
$36.0 million and a net loss attributable to common stockholders of $37.8
million for the three months ended June 30, 2001.
Nine-Months Ended June 30, 2002 As Compared To The Nine-Months Ended June 30,
2001
Revenue. Total revenue for the nine-month period ended June 30, 2002 decreased
19.3% to $64.0 million from $79.3 for the nine-month period ended June 30, 2001.
This decrease was primarily attributable to the decrease in lower margin
hardware sales and to the increase in customer churn resulting from
cancellations of services and a reduced market price for certain services. We
define churn as contractual revenue losses due to customer cancellations and
downgrades, net of upgrades, and additions of new services. Cancellations refer
to customers that have either stopped using our services completely or remained
a customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price. Internet revenue declined from $73.0
million for the nine-month period ended June 30, 2001 to $61.9 million in the
nine-month period ended June 30, 2002, a 15.2% decrease. Hardware sales
decreased from $6.2 million for the nine-month period ended June 30, 2001 to
$2.1 million in the nine-month period ended June 30, 2002, a 66.1 % decrease
as a result of out shift away from lower margin hardware revenue.
24
Cost of Revenue. Cost of revenue for the nine-month period ended June 30, 2002
was $26.6 million, or 41.6% of total revenue, as compared to $30.7 million, or
38.7% of total revenue, for the nine-month period ended June 30, 2001. The
decrease in cost of revenue was partially attributable to a decrease in hardware
revenue. This decrease was also a result of our reconfiguration of our network
to support our current and near-term business needs and renegotiation of network
costs to market pricing with vendors and suppliers. Deccreases of approximately
$3.5 million, representing roughly 85% of the total decrease in cost of revenues
was attributable to lower hardware costs as a result of our shift away from
lower margin hardware sales.
Selling, General and administrative expenses, for the seven-month period ended
April 30, 2002 were $57.2 million, or 111.5% of revenue, compared to $91.1
million, or 114.9% of revenue for the nine-months period ended June 30, 2001.
For the two-month period ended June 30, 2002 selling general and administrative
expenses were $10.7 million or 84.3% of revenue. For the nine-month period ended
June 30, 2002, selling general and administrative expenses totaled $67.9 million
or 106.1% of revenue. The sequential decreases in selling, general and
administrative expenses as a percent of revenue from the nine month period
ended June 30, 2001 through both the seven month period ended April 30, 2002
and the two month period ended June 30, 2002, as well as for the nine months
ended June 30, 2002, was primarily the result of a net decrease in employee
compensation costs as a result of the Company's reduced staffing levels.
Salaries and benefits in the seven-month period ended April 30, 2002 were
$33.7 million or 65.7% of revenue as compared to $55.3 million or 69.8% of
revenue for the nine-month period ended June 30, 2001. Salaries and benefits
in the seven month period ended April 30, 2002 included a one time non-cash
charge of approximately $5.1 million related to the recognition or deferred
compensation costs associated with the vesting of restricted stock awards. For
the two-month period ended June 30, 2002 salaries and benefits were $5.4 or
42.5% of revenue. For the nine-month period ended June 30, 2002 salaries and
benefits totaled $39.1 million or 61.1% of revenue. The number of employees
decreased from approximately 800 as of June 30, 2001 to approximately 300 as
of June 30, 2002.
In addition to decreases in employee compensation costs, the sequential
decreases in selling, general and administrative expenses as a percent of
revenue from the nine month period ended June 30, 2001 through both the seven
month period ended April 30, 2002 and the two month period ended June 30, 2002,
as well as for the nine months ended June 30, 2002 were also the result of a
reduction in marketing spending. Marketing costs in the seven-month period
ended April 30, 2002 were $1.1 million or 2.1% of revenue as compared to $5.7
million or 7.2% of revenue for the nine-month period ended June 30, 2001. For
the two-month period ended June 30, 2002 marketing costs were $0.2 million or
1.6% of revenue. For the nine-month period ended June 30, 2002 marketing costs
totaled $1.3 million or 2.0% of revenue. The decrease in marketing expenses was
attributable to a reduction in the amount of our advertising pursuant to our
restructuring plan.
Loss on impairment of operating assets. This non cash expense during the
seven-months ended April 30, 2002 was attributable to the write-down, in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 121,
"Accounting for the impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of", of goodwill generated from our acquisition of Comstar.net,
Inc., totaling $ 3.2 million. This was offset in part by a credit of $(0.6)
million for the partial reversal of an estimated write-off in the fiscal year
ended September 30, 2001 of certain assets associated with an indefeasible right
of use, or IRU, capacity on a wavelength purchased from a supplier whose
financial viability was originally thought to have impaired the recoverability
of these assets.
Restructuring and Other Charges. The charge of approximately $24.8 million
recorded in the seven-month period ended April 30, 2002 was attributable to
lease termination and other equipment related expenses associated with the
execution of the plan of reorganization, pursuant to which we took an estimated
charge associated with the reduction of certain lease obligations and write-off
of leasehold improvements and equipment related to certain Internet data center
lease obligations, closing certain network access points and network aggregation
points. Also included in the restructuring expense is a restructuring credit of
approximately $3.6 million recorded in the seven-month period ended April 30,
2002 which was attributable to a change in estimate related to certain
components of the restructuring reserve, which settled at less than originally
estimated.
The charge of approximately $38.1 million recorded in the nine-month period
ended June 30, 2001 was attributable to the restructuring associated with the
execution of our revised business plan, whereby we plan to construct fewer
Internet data centers and have taken an estimated charge associated with the
termination of certain leases and reduction of certain commitments for surplus
power and environmental equipment related to our Internet data center expansion.
This charge included estimated lease termination costs in addition to a
write-off of construction in progress associated with equipment, capitalized
interest, consulting and legal fees, construction and pre-construction related
costs previously capitalized.
Depreciation and Amortization. Depreciation and Amortization expense in the
seven-month period ended April 30, 2002 was $28.1 million or 54.8% of revenue as
compared to $24.1 million or 30.4% of revenue for the nine-month period ended
June 30, 2001. The increase in depreciation and amortization expense as a
percentage of revenue for the seven-month ended April 30, 2002 resulted from an
increase in our capital expenditures. Depreciation and amortization in the
two-month period ended June 30, 2002 was $2.5 million or 19.7% of revenue, this
decrease was attributable to the impact of fresh start accounting, in particular
the revaluation of our tangible and intangible assets as of April 30, 2002. For
the nine-month period ended June 30, 2002 depreciation and amortization was
$30.6 million or 47.8% of revenue.
Fresh Start Accounting Adjustments. Pursuant to fresh start accounting
principles, we have adjusted the value of our assets and liabilities to their
fair values as of April 30, 2002. The net effect of all fresh start accounting
adjustments in the seven-month period ended April 30, 2002 resulted in a charge
of $148.6 million. There were no fresh start accounting adjustments in 2001.
Interest and Financing Expense. Interest and financing expense in the
seven-month period ended April 30, 2002 was $34.5 million or 67.4% of revenue as
compared to $47.1 million or 59.4% of revenue for the nine-month period ended
June 30, 2001. Interest and financing expense for the two-month period ended
June 30, 2002 was $2.7 million or 20.2% of revenue. Interest and financing
expense for the nine-month period ended June 30, 2002 was $37.2 million or 58.1%
of revenue. $25.0 million of the decrease was attributable to the discontinuance
of interest accrual on the 12.5% notes for the period from March 1, 2002 to June
30, 2002 in connection with our bankruptcy filing on March 1, 2002. This
decrease was offset by increased capitalized interest in connection with the
build-out of the network infrastructure and internet data centers totaling $12.4
million for the nine-months ended June 30, 2001, and the accrual of $2.3 million
of interest expense on the 11% notes for the months o may and June 2002.
Interest Income. Interest income in the seven-month period ended April 30, 2002
was $2.0 million or 3.9% of revenue as compared to $13.9 million or 17.5% of
revenue for the nine-month period ended June 30, 2001. Interest income in the
two-months ended June 30, 2002 was $0.3 million or 2.4% of revenue. This
decreasing trend was primarily attributable to the reduced amount of our cash
investments and the impact of declining interest rates as compared to the prior
period. For the nine-month period ended June 30, 2002 interest income was $2.3
million or 3.6% of revenue.
Gain on Debt Discharge. Upon the effective date of the plan of reorganization,
we recognized a gain on discharge of debt of approximately $427.1 million in
the seven-month period ended April 30, 2002.
25
Minority Interest in Subsidiary. The minority interest credit resulted from the
consolidation of a minority owned subsidiary with our results due to our
effective control of this entity.
Reorganization items. The reorganization expenses of approximately $7.8 million
recorded in the seven-month period ended April 30, 2002 were attributable to
expenses incurred by the Predecessor Company as a result of its reorganization
under Chapter 11 of the Bankruptcy code.
Net Income (Loss) and Net Income (Loss) Attributable to Common Stockholders. As
a result of the above, we reported net income of $152.4 million and net income
attributable to common stockholders of $149.2 million for the nine-month period
ended June 30, 2002, as compared to a net loss of $141.2 million and a net loss
attributable to common stockholders of $146.5 million for the nine-month period
ended June 30, 2001.
Liquidity and Capital Resources
On March 1, 2002, the Company and two of its wholly-owned domestic subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code (the "Bankruptcy Code"), together with a
prepackaged plan of reorganization (the "Plan") with the United States
Bankruptcy Court for the District of Delaware. The Company continued to operate
in Chapter 11 in the ordinary course of business and received permission from
the bankruptcy court to pay its employees, trade and certain other creditors in
full and on time, regardless of whether these claims arose prior to or after the
Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective April 25,
2002, all conditions necessary for the Plan to become effective were satisfied
or waived and the Company emerged from Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of the Company's existing
securities were cancelled and:
o each holder of the Company's 12.5% Senior Notes due 2010 (the
"12.5% Senior Notes"), became entitled to receive, in exchange
for its claims in respect of the 12.5% Senior Notes, its pro
rata share of:
o $120,000 in aggregate principal amount of the Company's 11%
Senior Secured Notes due 2008 (the "11% Senior Secured Notes");
and
o 13,991,000 shares of the Company's common stock, representing
85% of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan;
o each holder of shares of the Company's preferred stock outstanding
immediately prior to the Effective Date of the Plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of 2,304,400
shares of the Company's common stock, representing 14% of the
shares of the Company's common stock issued and outstanding
following the Effective Date of the Plan; and
o each holder of shares of the Company's common stock outstanding
immediately prior to the Effective Date of the Plan became
entitled to receive, in exchange for its claims in respect of these
shares of common stock, its pro rata share of 164,600 shares of the
Company's common stock, representing 1% of the shares of the
Company's common stock issued and outstanding following the
Effective Date of the Plan.
All of the shares of the Company's common stock issued pursuant to the Plan are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of the Company's issued and outstanding
common stock on a fully-diluted basis following the Effective Date of the Plan.
A total of 16,460,000 shares of our common stock and $120 million in aggregate
principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date pursuant to the terms of the Plan. As of June
26
30, 2002, however, no shares of our common stock or 11% Senior Notes had been
distributed. In October 2002, we distributed a total of 16,295,400 shares of
common stock and $120 million in aggregate principal amount of 11% Senior Notes.
Pursuant to the terms of a Stipulation and Order that we entered into with the
lead plaintiffs in the class action lawsuit described in the section of Part II
of this quarterly report entitled "Item 1 - Legal Proceedings", 229,452 of these
shares of common stock and $1,968,000 in aggregate principal amount of these 11%
Senior Notes were placed in reserve in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, then we will be required to issue to the class
action litigants and their attorneys all (in the event that this excess is $10
million or greater) or a portion (in the event that this excess is less than
$10 million) of the shares of common stock and 11% Senior Notes held in escrow.
Distribution of the remaining 164,600 shares of common stock deemed to have been
issued on the Effective Date, which are allocable under the terms of the Plan to
the holders of our common stock outstanding immediately prior to the Effective
Date of the Plan, will occur following the resolution of the shareholder
derivative suit against our company and certain of our former officers and
directors described in section of Part II of this quarterly report entitled
"Item 1 - Legal Proceedings". At present, we are unable to estimate when the
resolution of this lawsuit will take place or whether any shares will be
available for distribution to the holders of our common stock outstanding
immediately prior to the Effective Date, once the lawsuit is resolved.
Net cash used in operating activities was $52.0 million in the nine-months ended
June 30, 2002, as compared to $74.0 million for the nine-months ended June 30,
2001. The improvement in our operating cash flow was primarily the result of the
decrease in our net loss after giving effect to the non cash items of
depreciation and amortization of $6.5 million, gain on debt discharge of $427.1
million, the fresh start accounting adjustment of $148.6 million in 2002, and
non cash restructuring charges of $8.3 million. The reduction in net cash used
in operating activities also reflects a $14.9 million reduction in accrued
interest and a $10.3 million increase in accrued liabilities.
Net cash provided by investing activities was $1.2 million in the nine-months
ended June 30, 2002, as compared to net cash used in investing activities of
$101.0 million for the nine-months ended June 30, 2001. The increase in cash
flows from investing activities of $102.2 million was primarily attributable to
lower capital spending of $94.5 million and a decrease of $18.8 million in
restricted cash and investment. This was offset in part by $10.2 million of
proceeds from the sale of short-term investments in the nine month period ended
June 30, 2001.
Net cash used in financing activities was $7.0 million in the nine-months ended
June 30, 2002, as compared to $1.1 million in the nine-months ended June 30,
2001. The decrease in cash flows from financing activities of $5.9 million was
attributable to an increase in repayments of mortgage and capital lease
obligations of $3.3 million and net proceeds of $2.5 million from the exercise
of stock options and warrants in 2001.
As of June 30, 2002, we had $64.5 million of cash, cash equivalents, restricted
cash, restricted investments and marketable securities, including $55.8 million
without restrictions as to use.
We have also issued collateralized letters of credit aggregating approximately
$2.6 million. The related collateral funds are included in restricted cash and
investments on the consolidated balance sheet at June 30, 2002.
In addition, certain computer and network equipment has been financed through
vendors and financial institutions under capital and operating lease
arrangements. Capital lease obligations totaled approximately $4.5 million at
June 30, 2002. As of June 30, 2002, we had various agreements to lease
facilities and equipment and are obligated to make future minimum lease payments
of approximately $77.9 million on operating leases expiring in various years
through 2017. At June 30, 2002 there were no unused equipment financing
arrangements with vendors or financial institutions.
As of June 30, 2002 we had contractual obligations due in future periods
as follows:
Payments Due by Period (In Thousands)
---------------------------------------
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- -------- --------- -------------
Long-Term Debt 120,000 $ -- $ -- $ -- $120,000
Accrued interest 2,381 2,381
Mortgage Payable 20,498 249 567 688 18,994
Capital Lease Obligation 4,645 1,292 3,002 351 --
Operating Leases 77,902 5,102 11,679 11,952 49,169
Other Long-Term Obligations 3,062 -- 3,062 -- --
Telecom Commitments 58,346 13,195 25,689 14,187 5,275
-------- ------- ------- ------- --------
Total Contractual Cash Obligations $286,834 $19,838 $43,999 $27,178 $195,819
======== ======= ======= ======= ========
The Company historically has experienced negative cash flows from operations and
has incurred net losses. The Company is dependent upon its cash on hand and cash
generated from operations to support its capital requirements and meet its
financing obligations as they become due. Although no assurances can be given,
our management believes that actions taken by our company over the last several
months, including company downsizing, headcount reductions and other cost
reductions, as well as cost control measures and the restructuring of our
outstanding debt in connection with the Plan, have positioned The Company to
maintain sufficient cash flows from operations to meet its operating capital and
debt service for the next twelve months. There can be no assurance, however,
that the Company will be successful in executing its business plan, achieving
profitability, or in attracting new customers, or in maintaining its existing
customer base. Moreover, despite its restructuring the Company has continued to
experience significant decreases in revenue and low levels of new customer
additions in the period following its restructuring. In the future, the Company
may make acquisitions or repurchase indebtedness of the Company, which, in turn,
may adversely affect the Company's liquidity.
27
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2002, we had financial instruments consisting of fixed rate debt,
mortgage payable marketable securities, short-term investments and other
investments. At June 30, 2002 the substantial majority of our debt obligations
consisted of $120 million principal amount of the new notes. The mortgage
interest is payable at 9.16% (subject to adjustment on February 11, 2010) based
on a 25 year amortization schedule. Principal and interest payments of $178,500
are payable monthly and any balance of the principal and all accrued and unpaid
interest is due and payable in February 2025.
Marketable securities include our strategic investment in Edgar On-Line and
Globecomm Systems Inc., publicly traded entities, which are recorded at fair
market value. We do not hedge our exposure to fluctuations in the value of our
equity securities.
Our other investments are generally fixed rate investment grade and government
securities denominated in U.S. dollars. The carrying values of these investments
approximate fair value. At June 30, 2002, $8.7 million of our cash and
investments were restricted in accordance with the terms of certain collateral
obligations.
We actively monitor the capital and investing markets in analyzing our investing
decisions.
We are also subject to market risk associated with foreign currency exchange
rates. To date, we have not utilized financial instruments to minimize our
exposure to foreign currency fluctuations. We will continue to analyze risk
management strategies to minimize foreign currency exchange risk in the future.
We believe that we have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates due mainly to the short-term nature of the major
portion of our investment portfolio and the current interest rate for short to
medium term investments. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations due to
the fixed nature of the substantial majority of our debt obligations.
28
PART II
Item 1. Legal Proceedings
On January 28, 2002, a derivative suit was filed in the United States District
Court for the Southern District of New York against our company, as nominal
defendant, and certain of our current and former directors and officers. We
believe that the allegations in this lawsuit are without merit and we intend to
vigorously defend against them. In addition, the plaintiff has not pursued her
claims since the filing of the lawsuit. Although there can be no assurance as to
the outcome or effect of this lawsuit, we do not believe, based on currently
available information, that the ultimate liabilities, if any, resulting from
this lawsuit will have a material adverse impact on our business, financial
condition, results of operations or cash flows.
On March 1, 2002, our company and two of our wholly owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with the Plan, with the United States
Bankruptcy Court for the District of Delaware. On April 8, 2002, the bankruptcy
court confirmed the Plan. Effective April 25, 2002, all conditions necessary for
the Plan to become effective were satisfied or waived and we emerged from
Chapter 11 bankruptcy protection.
There is a putative class action lawsuit pending in the United States District
Court for the Southern District of New York entitled In re Globix Corp
Securities Litigation, No.02-CV-00082. This lawsuit names as defendants our
company and our former officers Marc Bell, Peter Herzig (who remains a director
of our company) and Brian Reach, and asserts claims under sections 10(b) and
20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder on
behalf of all persons or entities who purchased our securities between November
16, 2000 and December 27, 2001.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968,000 in aggregate principal amount
of the notes will be held in reserve in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) of the shares of our common stock and the notes being held in escrow.
A consolidated amended complaint was filed in this lawsuit on June 28, 2002. We
have filed a motion to dismiss the consolidated amended complaint. Briefing of
that motion is not yet complete. If the motion is denied, the case will proceed
to the discovery stage. We believe that the allegations in this lawsuit are
without merit and we intend to vigorously defend against them. Although there
can be no assurance as to the outcome or effect of this lawsuit, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material adverse
impact on our business, financial condition, results of operations or cash
flows.
On June 12, 2002, Robert B. Bell, a former officer and director of the Company,
filed a complaint in the United States District Court for the Southern District
of New York entitled Robert B. Bell v. Arnold M. Bressler, as Trustee, and
Globix Corporation, alleging breach-of-contract claims related to the failure to
make payments under the Rabbi Trust that the Company formed pursuant to an
employment agreement with Mr. Bell. This action was settled on June 13, 2003.
As a result of the settlement Mr. Bell received a distribution of $990
thousands from the Rabbi Trust.
In addition, in connection with the same underlying issues, on July 24, 2002 the
Company filed a complaint in the United States Bankruptcy Court for the District
of Delaware entitled Globix Corporation v. Arnold N. Bressler, as Trustee of the
Globix Corporation Rabbi Trust and Robert B. Bell. This action was also settled
on June 13, 2003. As a result of the settlement the Company received a
distribution of $1.7 million from the Rabbi Trust.
29
On February 6, 2003, a putative derivative suit was filed in New York State
Supreme Court (County of New York) against our company, as nominal defendant,
and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First Boston
Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon Smith
Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings, LLC), the
initial purchasers in our February 2000 offering of the 12.5% Senior Notes. The
suit alleges that the underwriting discount granted to the initial purchasers of
the 12.5% Notes violated Section 5-531 of the New York General Obligations Law,
which limits the amount that can be charged by a loan broker. On March 6, 2003,
the plaintiff and the initial purchasers entered into a tolling agreement that
would result in the dismissal of the action without prejudice pending action
in a similar case involving debt securities issued by another corporation. On
March 13, 2003 the court dismissed the action involving our company without
prejudice.
We are from time to time involved in legal proceedings in the ordinary course of
our business operations. Although there can be no assurance as to the outcome or
effect of any legal proceedings to which we are a party, we do not believe,
based on currently available information, that the ultimate liabilities, if any,
resulting from any such legal proceedings will have a material adverse impact on
our business, financial condition, results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
See Note 1 (Reorganization and Emergence from Chapter 11)
to Condensed Consolidated Financial Statements
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. (a) Exhibits
Exhibit Description
- ------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K filed August 2, 2002, relating to the change
in the Company's independent public accountants, under Item 4 of
Form 10-K.
30
SIGNATURES
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.
GLOBIX CORPORATION
By: /s/ Peter K. Stevenson
------------------------------------
Peter K. Stevenson, Chief Executive
Officer
Date: September 8, 2003
By: /s/ Robert M. Dennerlein
------------------------------------
Robert M. Dennerlein, Chief
Financial Officer (principal
financial officer and principal
accounting officer)
Date: September 8, 2003