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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-Q
------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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 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, 2003 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, 2003 and September 30, 2002.......... 1
Condensed Consolidated Statements of Operations (unaudited)-- For the Three Months Ended June 30, 2003, One 2
Month Ended April 30, 2002 and the Two Months Ended June 30, 2002
Condensed Consolidated Statements of Operations (unaudited)-- For the Nine Months Ended June 30, 2003, Seven 3
Months Ended April 30, 2002 and the Two Months Ended June 30, 2002
Condensed Consolidated Statements of Cash Flows (unaudited)-- For the Nine Months Ended June 30, 2003 and 4
Seven months ended April 30, 2002 and the Two months ended June 30, 2002
Notes to Condensed Consolidated Financial Statements (unaudited)......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 19
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................... 24
Item 4 Controls and Procedures.................................................................................. 24
Part II Other Information........................................................................................ 25
Item 1. Legal Proceedings........................................................................................ 25
Item 2. Changes in Securities and Use of Proceeds................................................................ 25
Item 3. Defaults Upon Senior Securities.......................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 25
Item 6. Exhibits and Reports on Form 8-K......................................................................... 25
Signatures............................................................................................................ 26/30
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
June 30, September 30,
2003 2002
---- ----
Assets
Current assets:
Cash and cash equivalents............................................................... $ 24,366 $ 47,562
Short-term investments.................................................................. 9,362 5,392
Marketable securities................................................................... 1,137 1,327
Accounts receivable, net of allowance for doubtful accounts of $ 2,487 and
$2,565, respectively.................................................................. 6,105 7,060
Prepaid expenses and other current assets............................................... 4,967 7,735
Restricted cash......................................................................... 1,813 1,760
----- -----
Total current assets................................................................ 47,750 70,836
Investments.................................................................................. 3,279 --
Investments, restricted...................................................................... 4,694 7,337
Property, plant and equipment, net........................................................... 166,390 174,710
Intangible assets, net of accumulated amortization of $1,522 and $543 respectively 8,633 9,612
Other assets................................................................................. 225 225
---------- --------
Total assets................................................................................. $ 230,971 $262,720
========= ========
Liabilities and Stockholders' Equity
Current liabilities:
Capital lease and other obligations..................................................... $ 1,532 $ 1,520
Accounts payable........................................................................ 8,852 8,971
Accrued liabilities..................................................................... 11,009 17,924
------ ------
Total current liabilities........................................................... 21,393 28,415
Capital lease obligations, net of current portion............................................ 1,995 2,807
Mortgage payable............................................................................. 19,980 20,186
11 % Senior Notes ........................................................................... 112,321 120,000
Accrued interest - 11 % Senior Notes......................................................... 2,094 5,681
Other long term liabilities.................................................................. 10,230 13,084
-------- ---------
Total liabilities................................................................... 168,013 190,173
-------- ---------
Commitments and contingencies
Minority interest in subsidiary 5,664 --
Stockholders' Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000 shares issued and
outstanding............................................................................... 165 165
Additional paid-in capital................................................................... 94,162 93,112
Accumulated other comprehensive income ...................................................... 1,828 401
Accumulated deficit.......................................................................... (38,861) (21,131)
--------- -------
Total stockholders' equity................................................................... 57,294 72,547
--------- --------
Total liabilities and stockholders' equity................................................... $230,971 $262,720
========= ========
The accompanying notes are an integral part of these condensed
consolidated financial statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(All Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
Predecessor
Successor Company Company
----------------- -------
Three Two One
Months Months Month
Ended Ended Ended
June 30 June 30 April 30
2003 2002 2002
----- ---- ----
Revenue $14,519 $ 12,702 $ 6,505
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization, payroll 4,601 4,505 2,723
and occupancy included below)
Selling, general and administrative 9,253 10,749 11,057
Loss on impairment of assets -- -- (643)
Restructuring and other expense -- -- --
Depreciation and amortization 4,057 2,454 3,929
------- -------- ---------
Total operating costs and expenses 17,911 17,708 17,066
------- -------- ---------
Loss from operations (3,392) (5,006) (10,561)
Other (expenses)income:
Interest and financing expense (3,758) (2,677) (451)
Interest income 295 314 183
Gain on debt discharge 1,154 -- 427,066
Minority interest in subsidiary 105 -- 4,434
Reorganization items -- -- (2,164)
Fresh start accounting adjustments -- -- (148,569)
Other income (expense) 220 (145) (113)
------- -------- --------
Net (loss) income (5,376) (7,514) 269,825
Dividends and accretion on preferred stock -- -- --
------- -------- --------
Net (loss) income attributable to common stockholders $(5,376) $ (7,514) $269,825
======= ======== ========
Basic net (loss) income per share attributable to common stockholders $ (0.33) $ (0.46) $ 6.52
======= ======== ========
Weighted average common shares outstanding - basic 16,460,000 16,460,000 41,395,781
========== ========== ==========
Diluted net (loss) income per share
attributable to common stockholders $(0.33) $ (0.46) $ 5.37
========== ========== ==========
Weighted average common shares
outstanding-diluted 16,460,000 16,460,000 50,284,381
========== =========== ==========
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)
Predecessor
Successor Company Company
----------------- -------
Nine Two Seven
Months Months Months
Ended Ended Ended
June 30 June 30 April 30
2003 2002 2002
---- ---- ----
Revenue $ 46,367 $ 12,702 $ 51,273
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization, payroll 15,499 4,505 22,123
and occupancy included below)
Selling, general and administrative 33,714 10,749 57,206
Loss on impairment of assets - - 2,578
Restructuring and other expense - - 24,834
Depreciation and amortization 11,900 2,454 28,115
----------- ----------- -----------
Total operating costs and expenses 61,113 17,708 134,856
Other operating income 345 - -
----------- ----------- -----------
Loss from operations (14,401) (5,006) (83,583)
Other income (expenses)
Interest and financing expense (11,223) (2,677) (34,511)
Interest income 1,030 314 2,024
Gain on debt discharge 5,925 - 427,066
Minority interest in subsidiary 333 - 5,778
Reorganization items - - (7,762)
Fresh start accounting adjustments - - (148,569)
Other income (expense) 606 (145) (509)
----------- ----------- -----------
Net (loss) income (17,730) (7,514) 159,934
Dividends and accretion on preferred stock - - (3,178)
----------- ----------- -----------
Net (loss) income attributable to common stockholders $ (17,730) $ (7,514) $ 156,756
=========== =========== ===========
Basic net (loss) income per share attributable to common
stockholders $ (1.08) $ (0.46) $ 3.96
=========== =========== ===========
Weighted average common shares outstanding - basic 16,460,000 16,460,000 39,618,856
Diluted net (loss) income per share
attributable to common stockholders $ (1.08) $ (0.46) $ 3.30
=========== =========== ===========
Weighted average common shares
outstanding-diluted 16,460,000 16,460,000 48,507,456
=========== =========== ===========
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 Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
Predecessor
Successor Company Company
----------------- -------
Nine Months Two Months Seven Months
Ended Ended Ended
June 30, 2003 June 30, 2002 April 30, 2002
Cash flows from operating activities
Net (loss) income $(17,730) $(7,514) $159,934
Adjustments to reconcile net (loss) income to
net cash provided by (used in) operating activities:
Depreciation and amortization 11,900 2,454 28,115
Provision for uncollectible accounts receivable 1,432 984 4,284
Services contributed to minority-owned subsidiary -- -- 372
Amounts charged in respect of warrant granted to consultant 1,051 -- --
Gain on debt discharge (5,925) -- (427,066)
Unrealized loss(gain) on investments (356) -- --
Non Cash Restructuring and other charges -- -- 8,233
Loss on impairment of operating assets -- -- 2,578
Loss on impairment of investments -- 25 490
Gain on sale of marketable securities -- -- (27)
Amortization of debt issuance costs -- -- 650
Amortization of deferred compensation -- -- 7,027
Minority interest in subsidiary (333) -- (5,778)
Fresh start accounting adjustment -- -- 148,569
Changes in operating assets and liabilities:
Accounts receivable (336) 2,909 (3,449)
Prepaid expenses and other current assets 2,846 3,088 (4,574)
Other assets -- -- 54
Accounts payable (265) 2,332 (5,181)
Accrued liabilities (7,184) (3,440) 497
Accrued interest 9,271 2,200 31,431
Other (3,112) (67) (1,152)
-------- ------- --------
Net cash (used in) provided by operating activities (8,741) 2,971 (54,993)
-------- ------- --------
Cash flows from investing activities
Use of restricted cash and investments 2,727 511 24,235
Proceeds from sale of marketable securities -- -- 64
Return of strategic investments -- -- 193
Purchases of property, plant and equipment (1,186) (415) (23,341)
Investment in short-term and long-term investments (6,967) -- --
-------- ------- --------
Net cash (used in) provided by investing activities (5,426) 96 1,151
-------- ------- --------
4
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
Predecessor
Successor Company Company
----------------- -------
Nine Months Two Months Seven Months
Ended Ended Ended
June 30, 2003 June 30, 2002 April 30, 2002
Cash flows from financing activities
Capital contribution from minority-owned subsidiary 6,094 -- --
Capital distribution to minority-owned subsidiary (97) -- --
Repayments of mortgage payable and capital lease obligations (1,050) (2,012) (4,946)
Repurchase of Senior Notes (14,612) -- --
--------- --------- ---------
Net cash used in financing activities (9,665) (2,012) (4,946)
--------- --------- ---------
Effects of exchange rate changes on cash and cash equivalents 636 308 8
Net (decrease) increase in cash and cash equivalents (23,196) 1,363 (58,780)
Cash and cash equivalents, beginning of period 47,562 52,722 111,502
--------- --------- ---------
Cash and cash equivalents, end of period $ 24,366 $ 54,085 $ 52,722
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest $ 1,755 $ 399 $ 2,101
Non-cash investing and financing activities
Equipment acquired under capital lease obligations $ -- $ -- $ 1,036
Capital expenditures included in accounts payable
accrued liabilities and other long term liabilities $ -- $ 378 $ 273
Cumulative dividends and accretion on preferred stock $ -- $ -- $ 3,178
Restructuring of mandatorily redeemable convertible
preferred stock $ -- $ -- $ 83,220
Issuance of 11% Senior Notes as payable in kind interest $ 11,298
Restructuring of debt $ -- $ -- $ 427,066
The accompanying notes are an integral part of these
condensed consolidated financial statements
5
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
1. Reorganization and Emergence from Chapter 11
Globix Corporation ("Globix", the "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 subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. 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:
- 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:
- $120,000 in aggregate principal amount of the
Company's 11% Senior Secured Notes due 2008 (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;
- 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
- 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 September 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 14, 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 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
6
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
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 of the
Plan, 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 former officers and directors described in
Note 14.
The Company historically has experienced negative cash flow 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
nine-month period ended June 30, 2003, the Company had a net loss of $17,730.
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 come due. Although no assurances can be given, the Company's
management believes that actions taken pursuant to the Plan, including company
downsizing, headcount reductions and other cost reductions, as well as cost
control measures and the restructuring of the Company's 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
requirements for the next twelve months. There can be no assurance, however,
that the Company will be successful in executing its business plan, achieving
profitability, attracting new customers, or 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 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 accompanying 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, 2003 and the three month and nine month
periods ended June 30, 2003 and one month and seven month periods ended April
30, 2002 and two month period ended June 30, 2002. 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
month and nine month periods ended June 30, 2003 and for the three month and
nine month periods ended June 30, 2002 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 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. 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 June 30, 2003 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, 2003 "Successor Company"
From October 1, 2001 through April 30, 2002 "Predecessor Company"
Certain amounts in the consolidated condensed financial statements of the prior
period have been reclassified to conform to the current period presentation
for comparative purposes.
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, equipment,
intangible assets, 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's 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
7
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
The Company adopted Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standard No. 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 seven-months ended April 30, 2002 goodwill amortization amounted to
$1,141. If the Company had adopted SFAS 142 as of October 1, 2001 and
discontinued goodwill amortization, the Company's net income and loss per common
share on a proforma basis would have been as follows:
PRO FORMA RESULTS
Predecessor
Seven Months
Ended
April 30,
2002
-------------
Net income $159,934
Addback of goodwill amortization 1,141
--------
Adjusted net income 161,075
Dividends and accretions on preferred stock (3,178)
--------
Adjusted net income attributable to common shareholders $157,897
========
Adjusted basic earnings per share attributable to common shareholders $ 3.99
=======
Adjusted diluted earnings per share attributable to common shareholders $ 3.32
=======
Stock Based Compensation
In December 2002, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure, an amendment of FASB Statement No. 123
(SFAS 148). This statement provides alternative methods of transition for an
entity that voluntarily changes to the fair value based method of accounting
for stock based compensation. It also amends the disclosure provisions of
SFAS 123 to require prominent disclosure about the effects on reported net loss
of an entity's accounting policy decisions with respect to stock-based employee
compensation. Further, SFAS 148 amends Accounting Principles Board Opinion
No. 28, Interim Financial Reporting, to require disclosure about those effects
in interim financial information.
The following table illustrates the effect on net loss from continuing
operations and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation. The
estimated fair value of each Globix option is calculated using the Black-Scholes
option-pricing model.
8
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Successor Company Predecessor
Company
Three months ended Two months ended One month ended
June 30, 2003 June 30, 2002 April 30, 2002
Net(loss) income attributable to common
stockholders: $(5,376) $(7,514) $269,825
======= ======= ========
Pro forma net (loss) income attributed to
common stockholders: $(5,960) $(7,514) $264,841
======= ======= ========
Pro forma basic (loss) income per per
share attributable to common stockholders: $ (0.36) $ (0.46) $ 6.40
======= ======= ========
Pro forma diluted (loss) income per
share attributable to common stockholders: $ (0.36) $ (0.46) $ 5.27
======= ======= ========
Successor Company Predecessor Company
---------------------------------- --------------------
Nine months Two months Seven months
ended ended ended
June 30, 2003 June 30, 2002 April 30, 2002
------------- ------------- ---------------
Net(loss) income attributable to common
stockholders: $ (17,730) $(7,514) $156,756
========= ======= ========
Pro forma net (loss) income attributed to common
stockholders $ (18,863) $(7,514) $151,621
========= ======= ========
Pro forma basic (loss) income per
share attributable to common stockholders: $ (1.15) $ (0.46) $ 3.83
========= ======= ========
Pro forma diluted (loss) income per share
attributable to common stockholders: $ (1.15) $ (0.46) $ 3.19
========= ======= ========
The fair value of each stock option granted is estimated on the date of grant
using Black-Scholes option pricing model with the following assumptions:
2003 2002
----- ----
Ranges from Average
---------------- ---------
Risk-free interest rate 2.12% 2.74% 4.18%
Expected Volatility 133% 133%
Expected Life 5 years 6 years
Contractual Life 10 years 10 years
Expected dividend yield 0% 0%
Fair value of options granted $1.41 $2.61 $0.41
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts, as additional stock option awards are anticipated
in future years.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities ("SFAS No. 149"). SFAS No. 149
clarifies under what circumstances a contract with an initial net investment
meets the characteristics of a derivative as discussed in Statement No. 133. It
also specifies when a derivative contains a financing component that warrants
special reporting in the Consolidated Statement of Cash Flows. SFAS No. 149
amends certain other existing pronouncements in order to
9
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
improve consistency in reporting these types of transactions. The new guidance
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The Company does not
expect this standard to have a material impact on its consolidated financial
statements.
In May 2003, the FASB issued SFAS No. 150 ("SFAS No. 150"), Accounting for
Certain Financial Instruments with Characteristics of Both Liabilities and
Equity. SFAS No. 150 specifies that instruments within its scope embody
obligations of the issuer and that, therefore, the issuer must classify them
as liabilities. SFAS No. 150 requires issuers to classify as liabilities the
following three types of free standing financial instruments: (1) mandatorily
redeemable financial instruments; (2) obligations to repurchase the issuer's
equity shares by transferring assets and (3) certain obligations to issue a
variable number of shares. SFAS No. 150 defines a "freestanding financial
instrument" as a financial instrument that (1) is entered into separately and
apart from any of the entity's other financial instruments or equity
transactions or (2) is entered into in conjunction with some other transaction
and can be legally detached and exercised on a separate basis. For all financial
instruments entered into or modified after May 31, 2003, SFAS No. 150 is
effective immediately. For all other instruments of public companies, SFAS
No. 150 goes into effect at the beginning of the first interim period
beginning after June 15, 2003. For contracts that were created or modified
before May 31, 2003 and still exist at the beginning of the first interim period
beginning after June 15, 2003, entities should record the transition to SFAS
No. 150 by reporting the cumulative effect of a change in an accounting
principle. SFAS No. 150 prohibits entities from restating financial
statements for earlier years presented. The Company does not expect the adoption
of SFAS No. 150 to have a material impact on its financial statements.
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
June 30, September 30,
2003 2002
---- ----
Land ............................................... $ 2,713 $ 2,713
Building and building improvements ................. 84,380 84,094
Leasehold improvements ............................. 75,404 71,322
Computer hardware and software and network equipment 16,750 15,607
Furniture and equipment ............................ 3,761 3,660
--------- ---------
183,008 177,396
Less: Accumulated depreciation and amortization .... (16,618) (5,549)
Add: Construction in progress ...................... -- 2,863
--------- ---------
Property, plant and equipment, net ................. $ 166,390 $ 174,710
========= =========
Certain computer and network equipment are recorded under capital leases that
aggregated approximately $4,466 and $4,466 as of June 30, 2003 and September 30,
2002, respectively. Accumulated amortization on the assets recorded under
capital leases aggregated approximately $1,302 and $465 as of June 30, 2003 and
September 30, 2002, respectively.
ATC Merger 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) $1.0 million (subject
to increase after June 1, 2018 by ten percent and an additional ten percent
every fifth year thereafter), or (b) ten percent of the gross sales price of the
property if such sales price is greater than $17.5 million.
4. 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, 2003, the LLC had received $11,872 of such
capital contribution. The balance of the capital contribution is due from the
Investor in annual installments as follows:
10
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Year Ending September 30, Contribution
-------------------------- ------------
2004 ...................................................... $ 1,557
2005 ...................................................... 1,479
2006....................................................... 1,400
2007....................................................... 241
-------
Total ..................................................... $ 4,677
=======
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
interest in 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, 2003, the fair
value of this option is negligible.
5. Accrued Liabilities
Accrued liabilities consist of the following:
June 30, September 30,
2003 2002
---- ----
Franchise tax, sales tax, and property tax................... $ 767 $ 2,177
Salaries, benefits and commissions........................... 868 1,636
Telecommunications accrual................................... 2,185 1,706
Technology licenses and maintenance contracts................ 249 1,205
Deferred Revenue............................................. 2,434 1,503
Restructuring................................................ 1,105 1,828
Other........................................................ 3,401 7,869
------- -------
$11,009 $17,924
======= =======
11
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
6. Restructuring and Other
The following table displays the activity and balances of the restructuring
reserve account from inception to June 30, 2003:
Restructuring Other
-------------------------------------- ----------
Employee Contract Facility Asset
Terminations Settlements Closings Write-Down Total
------------ ----------- -------- ---------- -----
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
Deductions - Cash (60) -- (185) -- (245)
------- -------- ------- ------- --------
September 30, 2002 Balance (Successor Company) 143 1,299 386 -- 1,828
------- -------- ------- ------- --------
Deductions - Cash (143) (485) (95) -- (723)
------- -------- ------- ------- --------
June 30, 2003 Balance (Successor Company) $ - $ 814 $ 291 $ - $ 1,105
======= ======== ======== ======= ========
The above deductions to the restructuring reserve represent primarily cash
payments and write-offs of previously capitalized costs.
7. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
June, 30 September 30
2003 2002
---- ----
Note Payable $ 2,600 $ 2,600
Rabbi Trust Obligation -- 2,777
Negative Leasehold Liability 7,369 7,607
Deferred Rent 261 100
------- -------
$10,230 $13,084
======= =======
The Company has a $2,600 note payable, due November 15, 2005. 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
investments, restricted on the accompanying consolidated balance sheet.
On July 21, 1999, the Company established a 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 trust commencing April 2001. Payments were made from the
Trust until March 1, 2002, when the Company and two of its wholly owned
subsidiaries filed for Chapter 11 bankruptcy protection. 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.
8. 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
12
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
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. The
interest of $11,507 on the 12.5% Senior Notes for the period March 1, 2002
through the Effective Date of the Plan was not accrued in accordance with SOP
90-7.
The Company 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 14.
The 11% Senior Notes will mature on May 1, 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 year of the two year
period following the initial date of issuance was paid in May of 2003 in kind by
the issuance of additional notes in the amount of $11,300. The terms of the
notes issued in payment of interest are identical to the 11% Senior Notes (other
than the date of issuance). For the third and fourth years following issuance,
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, 415
Greenwich GC MM, LLC, with and into the Company.
The Indenture governing the 11% Senior Notes 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 the Company's
subsidiaries.
In December 2002, the Company repurchased in the open market for $7,030 a
portion of its outstanding 11% Senior Notes, which had a principal value of
approximately $9,130 and associated accrued interest of $627. The repurchase
resulted in a gain on the discharge of debt of approximately $2,727. Such gain
is included in the Consolidated Statement of Operations in the nine months ended
June 30, 2003.
In February 2003, the Company repurchased in the open market for $4,913 a
portion of its outstanding 11% Senior Notes, which had a principal value of
approximately $6,380 and associated accrued interest of $577. The repurchase
resulted in a gain on the discharge of debt of approximately $2,044. Such gain
is included in the Consolidated Statement of Operations for the nine months
ended June 30, 2003.
In April 2003, the Company repurchased on the open market for $2,669 a portion
of its outstanding 11% Senior Notes, which had a principal value of
approximately $3,466 and associated accrued interest of $357. The repurchase
resulted in a gain on the discharge of debt of approximately $1,154. Such gain
is included in the Consolidated Statement of Operations for the three and nine
months ended June 30, 2003.
9. Mortgage Interest
On January 25, 2000, the Company borrowed $21,000 from a financial institution
pursuant to a mortgage note secured by the Company's property at 139 Centre
Street, 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.
10. Stockholders Equity
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 164,400 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 September 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
13
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
reserve in escrow pursuant to a Stipulation and Order entered into with the lead
plaintiffs in the class action lawsuit described in Note 14. Distribution of the
remaining 164,600 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 the
holders the Predecessor Company's common stock, will occur following the
resolution of the shareholder derivative suit described in Note 14 against the
Company and certain of its present and former officers and directors.
On March 14, 2003, the Company's board of directors approved the 2003 Stock
Option Plan, authorized the issuance of options to acquire 1,828,889 shares of
the Company's common stock and granted options to acquire 1,128,943 shares of
the Company's common stock. The compensation committee of the Company's board of
directors had previously approved the 2003 Stock Option Plan on November 5,
2002, and set the fair value strike price of options granted under the 2003
Stock Option Plan at $3.04.
On June 13, 2003, the Company's board of directors granted the issuance of
options to acquire 182,000 shares of the Company's common stock. During the
third quarter 2003, options covering 279,828 shares were forfeited by former
employees.
On March 14, 2003, the Company's board of directors approved the sale to
Communication Technology Advisors, LLC ("CTA") of a warrant exercisable for
500,000 shares of the Company's common stock at an exercise price of $3.00 per
share. CTA provides consulting services to the Company. CTA's Chairman, Jared
Abbruzzese, was a member of our board of directors until June 24, 2003. The
purchase price of the warrants is $25. Although CTA has not yet purchased this
warrant, it currently has the right to do so. If CTA elects to purchase this
warrant, it will be immediately exercisable for a period of 10 years from the
date of issuance. CTA is a provider of services to the Company and as such, the
value of the warrant is expensed as determined by using the Black Scholes
valuation model. The assumptions used in the Black- Scholes model include the
risk free rate of 2.92%, volatility of 133%, nil dividend yield, a contractual
life of 10 years and an expected life of five years with a fair market value of
$2.50. The fair value of the warrant $ 1,051 was expensed as part of SG&A in the
quarter ended March 30, 2003.
In October 2002, a total of 16,295,400 shares of common stock were distributed
in accordance with the terms of the Plan. 164,600 shares of common stock will be
distributed following resolution of the shareholder derivative suit discussed in
Note 14. For purposes of these financial statements, however, and consistent
with the provisions of the Plan, a total 16,460,000 shares have been treated as
outstanding.
11. Loss per Share
Basic loss per share is calculated by dividing net loss attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common shareholders by the weighted average number of
common shares outstanding, adjusted for potentially dilutive securities. In
accordance with the requirements of Statement of Financial Accounting Standard
No. 128, the following common stock equivalents have been excluded from the
calculation of diluted net loss per common share as their inclusion would be
antidilutive.
Successor Predecessor
Company Company
Nine months ended Two months ended Seven months ended
June 30, June 30, April 30,
2003 2002 2002
--------------------------------------------------------------------
Stock Options................. 1,031,115 -- 10,021,258
Warrants ..................... 500,000 -- 194,797
--------- --------- ----------
1,531,115 -- 10,216,055
========= ========= ==========
The following is a reconciliation of basic earnings per share to diluted
earnings per share:
14
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Predecessor Company
---------------------------------------------
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 dividends on preferred stock 3,178 8,888,600
Diluted earnings per share
---------- ----------
Net income attributable to common stockholders $ 159,934 48,507,456 $ 3.30
========== ========== ==========
Predecessor Company
---------------------------------------------
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 dividends on preferred stock 8,888,600
Diluted earnings per share
---------- ----------
Net income attributable to common stockholders $ 269,825 50,284,381 $ 5.37
========== ========== ==========
12. Segment Reporting
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 of America and Europe. Each Internet data
center provides the same internet related services to similar type of customers.
The Company's activities fall within one operating segment. The following table
sets forth geographic segment information for the three months and the nine
months ended June 30, 2003 (Successor Company), two months ended June 30, 2002
(Successor Company) and the one month and seven months ended April 30, 2002
(Predecessor Company):
15
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Successor Company Predecessor Successor Company Predecessor
----------------- Company ----------------- Company
------- --------
Three Months Two Months One Month Nine Months Two Months Seven Months
Ended Ended Ended Ended Ended Ended
June 30, 2003 June 30, 2002 April 30, 2002 June 30, 2003 June 30, 2002 April 30, 2002
------------ ------------- -------------- ------------- ------------- --------------
Revenue:
United States $8,785 $ 8,581 $4,697 $ 28,764 $ 8,581 $ 37,747
Europe 5,734 4,121 1,808 17,603 4,121 13,526
-------- -------- ------- -------- -------- --------
Consolidated $ 14,519 $ 12,702 $ 6,505 $ 46,367 $12,702 $ 51,273
======== ======== ======= ======== ======== ========
Identifiable Tangible Assets:
United States $ 176,714
Europe 45,624
---------
Consolidated $ 222,338
=========
13. Comprehensive Income (Loss)
The Company reports comprehensive loss under the provisions of SFAS No. 130.
Accumulated other comprehensive 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 for the three-month and
nine-month periods ended June 30, 2003 and for the two months ended June 30,
2002 and the seven months ended April 30, 2002:
Successor Company Predecessor
----------------- Company
-------
Three months Two months One month
ended ended ended
June 30, 2003 June 30, 2002 April 30, 2002
------------- ------------- ---------------
Net (loss) income....................................... $(5,376) $(7,514) $269,825
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities
available for sale...................................... 3 (1,046) (116)
Foreign currency translation adjustment................. 1,482 1,325 996
-------- -------- ---------
Comprehensive (loss) income $ (3,891) $(7,235) $270,705
========= ========= =========
16
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Nine months Two months Seven months
Ended Ended ended
June 30, 2003 June 30, 2002 April 30, 2002
(Successor) (Successor) (Predecessor)
------------ ------------ --------------
Net (loss) income $ (17,730) $(7,514) $ 159,934
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities
available for sale (316) (1,046) 1,185
Foreign currency translation adjustment 1,743 1,325 (1,807)
---------- --------- ---------
Comprehensive (loss) income: $ (16,303) $(7,235) $ 159,312
========== ========= =========
14 . 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 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 a trust (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 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.
17
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
15. Reclassification information:
In the three months ended December 31, 2002 Condensed Consolidated Statements of
Cash Flows, the repurchase of Senior Notes of $7,030 were presented as cash
flows from investing activities. For the nine-months ended June 30, 2003 such
amounts have been reclassified to financing activities.
In the seven months ended April 30, 2002 Condensed Consolidated Statement of
Cash Flows presented previously, the purchase of $4.7 million of fixed assets
was presented as cash flows from operating activities. Such amounts have been
reclassified to investment activities.
18
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 the 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 and attract new 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 herein and in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002, which should be
considered in connection 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.
As is more fully discussed in Note 2 ("Basis of Presentation") to the condensed
consolidated financial statements included in this quarterly report, 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:
- 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.
- 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, 2003. Successor Company and Predecessor Company
financial data are derived from the condensed consolidated
financial statements that appear elsewhere in this quarterly
report.
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 growth of the
Internet. In April 1998, we completed a $160.0 million offering of 13.0% Senior
Notes due 2005 (the "13.0% Senior Notes"). In July 1999, we completed
construction of our initial Internet data center facilities in New York City,
New York; London, England and Santa Clara, California and began operations at
each facility.
In March 1999, we completed a public offering of 16,000,000 shares of common
stock, resulting in net proceeds to our company of approximately $136.5 million.
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 to our company of $75.3 million.
In February 2000, we issued $600 million in aggregate principal amount of 12.5%
Senior Notes due 2010 (the "12.5% Senior Notes") to fund the continued expansion
of our facilities and network and to consummate a tender offer to purchase all
of the outstanding 13.0% Senior Notes. The purchase price of the tender,
completed on February 8, 2000, was 106.5% of the $160.0 million in aggregate
principal amount of the 13.0% Senior Notes outstanding, plus all accrued and
unpaid interest.
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, in the United States
Bankruptcy Court for the District of Delaware. We continued to operate in
Chapter 11 in the ordinary course of business and 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 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.
19
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, 2002
and critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2002. 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.
Quarter Ended June 30, 2003 Compared To The Quarter Ended June 30, 2002
Revenue. Revenue for the quarter ended June 30, 2003 decreased 24.4% or $4.7
million to $14.5 million from $19.2 million for the three-month period ended
June 30, 2002. This decrease was primarily attributable to customer churn. 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. During the quarter ended June 30, 2003 our
monthly churn averaged 1.7% as compared to 2.5% for the quarter ended June 30,
2002. Of this average monthly churn, 2.5% was related to downgrades, 2.2% was
related to cancellations, offset by 1.4% and 1.7% related to new and upgraded
contracts, respectively.
Cost of Revenue. Cost of revenue for the quarter ended June 30, 2003, decreased
to $4.6 million from $7.2 million for the quarter ended June 30, 2002. A
decrease of $2.5 million, representing 95.3% of the total decrease in cost of
revenue, was realized within non-hardware related costs. This decrease was
primarily attributable to our continued focus on deriving efficiencies and cost
savings from our network.
Selling, General and Administrative. Selling, general and administrative
expenses were $9.3 million, or 64.1% of revenue for the quarter ended June 30,
2003, as compared to $21.8 million, or 113.5% of revenue for the quarter ended
June 30, 2002. The decrease in selling, general and administrative expenses as a
percentage of revenue was primarily attributable to a decrease in salaries and
benefits in connection with our restructuring efforts, which focused on
significant reductions in facilities and personnel. In the quarter ended June
30, 2003, salaries and benefits were $5.0 million, representing 34.7% of
revenue, as compared with $13.4 million, or 70.0% of revenue, in the quarter
ended June 30, 2002. Our average number of employees decreased from
approximately 350 as of quarter ending June 30, 2002 to 230 as of quarter ending
June 30, 2003. In the quarter ended June 30, 2003, rent expense was $1.7
million, representing 11.0% of revenue, as compared to $1.5 million, or 8.0% of
revenue, for the quarter ended June 30, 2002. In the quarter ended June 30,
2003, bad debt expense was $177 thousand, representing 1.0% of revenue, as
compared to $1.7 million, or 9.0% of revenue, for the quarter ended June 30,
2002. This decrease was attributable to improvements in our collections process
as well as proactive reduction in the number of high risk customer account
receivable balances from 2001. Selling, general and administrative expenses
were reduced by $1.7 million in the quarter ended June 30, 2003 due to the
receipt of $1.7 million from the settlement of the Rabbi Trust litigation.
Loss on Impairment of Intangibles. 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 decreased to $4.1
million for the quarter ended June 30, 2003, as compared to $6.4 million in the
quarter ended June 30, 2002. The decrease was primarily attributable to the
impact of fresh start accounting, in particular the revaluation of our property,
plant and equipment as of April 30, 2002.
Interest and Financing Expense. Interest and financing expense for the quarter
ended June 30, 2003 was $3.8 million, or 26.2% of revenue, as compared to $3.1
million, or 16.3% of revenue, for the quarter ended June 30, 2002. In April
2003, the Company repurchased on the open market a portion of its outstanding
11% Senior Notes, which had a principal value of approximately $3,466 and
associated accrued interest of $357, reducing its interest expense.
In the quarter ended June 30, 2002 interest expense was not recorded in April
due to the bankruptcy filing thus reducing interest expense.
Interest Income. The decrease in interest income to $295 thousand in the quarter
ended June 30, 2003 from $497 thousand in the quarter ended June 30, 2002
reflected our reduced cash balance in the quarter ended June 30, 2003 and the
impact of declining interest rates as compared to the same period of the prior
year.
Gain on Debt Discharge. Gain on debt discharge was $1.2 million for the quarter
ended June 30, 2003, as compared to $427.1 million for the quarter ended June
30, 2002. The gain in the quarter ended June 30, 2003 is a direct result of the
repurchase of 11.0% Senior Notes. The gain of $427.1 million in the quarter
ended June 30, 2002 is a direct result of the exchange of 12.5% Senior Notes for
11% Senior Notes as prescribed in the Plan.
Reorganization Items. Reorganization expenses of $ 2.2 million in the quarter
ending June 30,2002 were attributable to expenses incurred by the Predecessor
Company in connection with its bankruptcy filing.
20
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 quarter ended June 30, 2002 resulted in a charge of $148.6
million.
Other Income (Expense). Other income in the quarter ended June 30, 2003 was
$220 thousand, as compared to an expense of $258 thousand in the quarter ended
June 30, 2002 an increase of $458 thousand. The primary reason for the increase
was the recognition of $175 thousand gain on investments in the quarter ended
June 30, 2003 and the recognition of $175 thousand loss on investments in the
quarter ended June 30, 2002.
Nine Months Ended June 30, 2003 Compared To The Nine Months Ended June 30, 2002
Revenue. Revenue for the nine months ended June 30, 2003 decreased 27.5% or
$17.6 million to $46.4 million from $64.0 million for the nine months ended June
30, 2002. This decrease was primarily attributable to customer churn. During the
nine months ended June 30, 2003 our monthly churn averaged 2.0% as compared to
approximately 2.6% for the nine months ended June 30, 2002. Of this average
monthly churn, 1.9% was related to downgrades, 3.0% was related to
cancellations, offset by 1.4% and 1.6% related to new and upgraded contracts,
respectively. Hardware and software sales decreased $1.5 million, or 73.0%, as a
result of our shift away from lower margin hardware and software revenue. This
decrease accounted for 8.7% of our total revenue decline.
Cost of Revenue. Cost of revenue for the nine-months ended June 30, 2003,
decreased to $15.5 million from $26.6 million for the nine-months ended June 30,
2002. A decrease of $11.1 million, representing 86.8% of the total decrease in
cost of revenue, was realized within non-hardware related costs. This decrease
was primarily attributable to our continued focus on deriving efficiencies and
cost savings from our network. Decreases of $1.5 million, representing 13.2% 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. Selling, general and administrative
expenses were $33.7 million, or 72.6% of revenue for the nine-months ended June
30, 2003, as compared to $68.0 million, or 106.3% of revenue for the nine-months
ended June 30, 2002. The decrease in selling, general and administrative
expenses as a percentage of revenue was primarily attributable to a decrease in
salaries and benefits in connection with our restructuring efforts, which
focused on significant reductions in facilities and personnel. In the
nine-months ended June 30, 2003, salaries and benefits were $16.4 million,
representing 35.3% of revenue, as compared with $39.1 million, or 55.6% of
revenue, in the nine-months ended June 30, 2002. Our average number of employees
decreased from approximately 485 as of nine-months ending June 30, 2002 to 240
as of nine-months ended June 30, 2003. In the nine-months ended June 30, 2003,
rent expense was $4.9 million, representing 10.6% of revenue, as compared to
$7.3 million, or 11.5% of revenue, for the nine-months ended June 30, 2002. This
decrease was the result of the mid 2002 lease renegotiation for Globix House,
one of our data centers in London, and the impact of lower lease expenses
resulting from a revaluation of the lease values in conjunction with negative
leasehold adjustments as a result of fresh start accounting. In the nine-months
ended June 30, 2003, bad debt expense was $1.4 million, representing 3.1% of
revenue, as compared to $5.3 million, or 8.2% of revenue, for the nine-months
ended June 30, 2002. This decrease was attributable to improvements in
collections as well as the impact of the deterioration in the internet business
environment, which resulted in our proactive reduction in the number of high
risk customer account receivable balances from 2001. Selling, general and
administrative expenses were reduced by $1.7 million in the quarter ended
June 30, 2003 due to the receipt of $1.7 million from the settlement of the
Rabbi Trust litigation.
Loss on Impairment of Intangibles. This non cash expense during the nine-months
ended June, 2002 was attributable to the write-down, in accordance with SFAS No.
121 of goodwill generated from our acquisition of Comstar.net, Inc., totaling
$2.6 million.
Restructuring and Other Expense. During the nine-months ended June 30, 2002, the
Company made an additional modification to its business plan, under the Plan of
Reorganization, to reduce certain Internet data center lease obligations, close
certain network access points and network aggregation points, resulting in the
termination of certain employees, lease obligations and write-off of certain
equipment, leasehold improvements and other costs. In connection with this
modification, a restructuring charge of $24.8 million was recorded, of which
$17.2 million was for the write-off of previously escrowed lease deposit and
landlord inducement and legal payments, $ 4.7 million was a write-off of
equipment and leasehold improvements and $2.9 million associated with employee
terminations.
Depreciation and Amortization. Depreciation and amortization decreased to $11.9
million for the nine-months ended June 30, 2003, as compared to $30.6 million in
the nine-months ended June 30, 2002. The decrease was primarily attributable to
the impact of fresh start accounting, in particular the revaluation of our
property, plant and equipment as of April 30, 2002.
Other Operating Income. This increase is due to the sale of DSL customer
accounts in the amount of $345 thousand during the nine months ended June 30,
2003.
Interest and Financing Expense. Interest and financing expense for the
nine-months ended June 30, 2003 was $11.2 million, or 24.1% of revenue, as
compared to $37.2 million, or 58.1% of revenue, for the nine-months ended June
30, 2002. The decrease in interest and financing expense was primarily
attributable to the reduction in our outstanding indebtedness pursuant to the
Plan. The reduction in the principal amount of outstanding Bonds from $600
million to $120 million in May 2002 reduced interest expense.
Interest Income. The decrease in interest income to $1.0 million in the
nine-months ended June 30, 2003 from $2.3 million in the nine-months ended June
30, 2002 reflected our reduced cash balance in the nine-months ended June 30,
2003 and the impact of declining interest rates as compared to the same period
of the prior year.
Gain on Debt Discharge. Gain on debt discharge was $5.9 million for the
nine-months ended June 30, 2003, as compared to $427.1 million for the
nine-months ended June 30, 2002. The gain in the nine-months ended June 30, 2003
is a direct result of the repurchase of 11.0% Senior Notes. The gain of $427.1
million in the nine-months ended June 30, 2002 is a direct result of the
exchange of 12.5% Senior Notes for 11% Senior Notes as prescribed in the Plan.
21
Reorganization Items. Reorganization expenses of $ 7.8 million in the
nine-months ended June 30, 2002 were attributable to expenses incurred by the
predecessor company in connection with its bankruptcy filing.
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 nine-months ended June 30, 2002 resulted in a charge of
$148.6 million.
Other Income/Expense. Other income in the nine-months ended June 30, 2003 was
$606 thousand, as compared to an expense of $654 thousand in the nine months
ended June 30, 2002, an increase of $1.3 million. This increase is due primarily
to write-offs of strategic investments in the amount of $490 thousand in the
prior period and insurance receipts in the amount of $88 thousand
associated with the September 11th, 2001 terrorist attack in the current period.
Liquidity and Capital Resources
On March 1, 2002, our company and two of our wholly-owned domestic 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. We continued to operate in
Chapter 11 in the ordinary course of business and 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 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.
As of the Effective Date of the Plan, all of our existing securities
were cancelled and:
- each holder of 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:
- $120 million in aggregate principal amount of our 11% Senior
Secured Notes, due 2008 (the "11% Senior Notes"); and
- 13,991,000 shares of our common stock, representing 85% of the
shares of our common stock issued and outstanding following
the Effective Date of the Plan; and
- each holder of shares of our 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 our common stock, representing 14% of the shares of our
common stock issued and outstanding following the Effective Date
of the Plan; and
- each holder of shares of our common stock outstanding immediately prior
to the Effective Date of the Plan became entitled to receive, in
exchange for its claims in respect of its shares of common stock, its
pro rata share of 164,600 shares of our common stock, representing 1%
of the shares of our common stock issued and outstanding following the
Effective Date of the Plan.
The Plan provides that all of the shares of our 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 our 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
September 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 of (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 $8.7 million in the nine-months ended
June 30, 2003, compared to $52.0 million in the nine months ended June 30, 2002.
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
22
depreciation and amortization of $18.8 million, gain on debt discharge of $421.1
million, the fresh start accounting adjustment of $148.6 million in 2002 and non
cash restructuring charges of $8.2 million in 2002.
Net cash used in investing activities was $5.4 million in the nine-months ended
June 30, 2003, compared to net cash provided by investing activities of $1.2
million in the nine months ended June 30, 2002. The decrease in cash flows from
investing activities of $11.3 million was primarily attributable to the decrease
in restricted deposits related to net settlements of prior year leases of
approximately $22 million, increased investments of $7 million, partially offset
by lower capital spending of $22.6 million.
Net cash used in financing activities was $9.7 million in the nine-months ended
June 30, 2003, as compared to $7 million in the nine-months ended June 30, 2002.
The increase in net cash used in financing activities of $2.7 million is
primarily attributable to the repurchase in the open market for $14.6 million a
portion of our outstanding 11% Senior Notes in the nine months ended June 30,
2003, offset by a capital contribution into a minority-owned subsidiary of $6.1
million and a decrease in repayments of mortgage and capital lease obligations
of $5.9 million.
As of June 30, 2003, we had $24.4 million of cash and cash equivalents, $9.4
million of short-term investments and $1.1 million of marketable securities.
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 our consolidated balance sheet at June 30, 2003.
As of June 30, 2003, we had no material commitments for capital expenditures.
As of June 30, 2003, 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
11% Senior Notes $ 112,321 $ - $ - $ - $ 112,321
11% Senior Notes - Accrued Interest 2,094 - - - 2,094
Mortgage Payable 20,248 268 627 750 18,603
Capital Lease Obligations 2,473 1,187 1,286 - -
Operating Leases 64,592 4,460 8,042 8,196 43,894
Telecommunications Commitments 45,013 13,883 18,698 10,331 2,101
Note Payable 2,600 - 2,600 - -
---------- --------- --------- --------- ----------
Total Contractual Cash Obligations $ 249,341 $ 19,798 $ 31,253 $ 19,277 $ 179,013
========== ========= ========= ========= ==========
We historically have experienced negative cash flow from operations and have
incurred net losses. Our ability to generate positive cash flow from operations
and achieve profitability is dependent upon our ability to grow the Company's
revenue and achieve further operating efficiencies. We are dependent upon our
cash on hand and cash generated from revenues to support our capital
requirements and financing obligations. Although no assurances can be given, our
management believes that actions taken pursuant to the Plan, including company
downsizing, headcount reductions and other cost reductions, as well as cost
control measures and the restructuring of our outstanding indebtedness in
connection with the Plan, have positioned us to maintain sufficient cash flows
to meet our operating, capital and debt service requirements for the next 12
months. There can be no assurance, however, that we will be successful in
executing our business plan, achieving profitability, attracting new customers
or maintaining our existing customer base. Moreover, despite our restructuring
we have continued to experience significant decreases in revenue and low levels
of new customer additions in the period following our restructuring. In the
future, we may make acquisitions or repurchase indebtedness of our company,
which, in turn, may adversely affect liquidity.
23
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At June 30, 2003, short-term investments consisted of an investment in a limited
partnership that invests in fixed income securities. Marketable securities
include our investments in two publicly traded entities, Edgar On-Line and
Globecomm Systems Inc., which are recorded at fair market value. We do not hedge
our exposure to fluctuations in the value of our investments in equity
securities.
Our other investments are generally fixed rate investment grade and government
securities denominated in U.S. dollars. At June 30, 2003, all of our investments
were due to mature within twelve months and the carrying value of these
investments approximated fair value. At June 30, 2003, $6.5 million of our cash
and investments were restricted in accordance with the terms of certain
collateral obligations.
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 majority
of our investment portfolio and the current interest rates 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.
Item 4. Controls and Procedures
Since the Company's emergence from bankruptcy effective April 25, 2002, the
Company has had to face many challenging and complex accounting and financial
reporting issues, including fresh start accounting, restructuring and
restatements. In addition, the Company has experienced significant turnover in
its financial reporting staff, as well as limited management resources. The
Company fell behind in its SEC reporting for the year ended September 30, 2002,
and has experienced difficulty in catching up with its filing obligations for
the year ended September 30, 2002 while fulfilling its responsibilities for
current periods. While the Company is attempting to address these challenges and
fulfill its reporting obligations for the current and prior year, the combined
effect of these challenges has created weaknesses in the Company's accounting
and reporting environment.
Based on their evaluation of the Company's disclosure controls and procedures
as of the end of the period covered by this report, the Chief Executive Officer
and Chief Financial Officer have concluded that such controls and procedures
were effective as of that date, except as noted above. In addition, except as
noted above, there were no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
24
PART II - OTHER INFORMATION
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 there under 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 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. The plaintiff and
the initial purchasers have entered into a tolling agreement pending resolution
of 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
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(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 April 25, 2003, relating to the Company's press
release issued under Item 9 of Form 8-K
Current Report on Form 8-K filed May 14, 2003, relating to the appointment of
the Company's Chief Financial Officer
Current Report on Form 8-K filed May 20, 2003, relating to the Company's
earnings press release
25
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: August 20, 2003
By: /s/ Robert M. Dennerlein
-------------------------------------------
Robert Dennerlein, Chief
Financial Officer (principal financial
officer and principal accounting officer)
Date: August 20, 2003
26
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...................................'SS'