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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
AND EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-14168
GLOBIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3781263
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 CENTRE STREET, NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 334-8500
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
and Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court.
Yes [ ] No [X]
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares of the Registrant's common stock outstanding as of March 31,
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-- As of March 31, 2003 (unaudited) and September 30, 2002.......... 1
Condensed Consolidated Statements of Operations-- For the Three Months Ended March 31, 2003 and 2002 2
(unaudited)
Condensed Consolidated Statements of Operations-- For the Six Months Ended March 31, 2003 and 2002 2
(unaudited)
Condensed Consolidated Statements of Cash Flows-- For the Six Months Ended March 31, 2003 and 2002 3
(unaudited)
Notes to Condensed Consolidated Financial Statements (unaudited)......................................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 16
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................... 20
Item 4 Controls and Procedures.................................................................................. 20
Part II Other Information........................................................................................ 22
Item 1. Legal Proceedings........................................................................................ 22
Item 2. Changes in Securities and Use of Proceeds................................................................ 23
Item 3. Defaults Upon Senior Securities.......................................................................... 23
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 23
Signatures............................................................................................................ 23/24
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
MARCH 31, SEPTEMBER 30,
2003 2002
---- ----
ASSETS
Current assets:
Cash and cash equivalents ........................................................... 30,926 $ 47,562
Short-Term investments .............................................................. 7,613 5,392
Marketable securities ............................................................... 1,072 1,327
Accounts receivable, net of allowance for doubtful accounts of $ 1,969 and
$2,565, respectively .............................................................. 6,070 7,060
Prepaid expenses and other current assets ........................................... 4,777 7,735
Restricted cash ..................................................................... 1,866 1,760
--------- ---------
Total current assets ............................................................ 52,324 70,836
Investments .............................................................................. 2,397 --
Investments, restricted .................................................................. 7,359 7,337
Property, plant and equipment, net ....................................................... 168,579 174,710
Intangible assets, net of accumulated amortization of $1,196 and $543 respectively ....... 8,959 9,612
Other assets ............................................................................. 225 225
--------- ---------
Total assets ............................................................................. $ 239,843 $ 262,720
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Capital lease and other obligations ................................................. $ 1,687 $ 1,520
Accounts payable .................................................................... 8,586 8,971
Accrued liabilities ................................................................. 12,455 17,924
--------- ---------
Total current liabilities ....................................................... 22,728 28,415
Capital lease obligations, net of current portion ........................................ 2,097 2,807
Mortgage payable ......................................................................... 20,047 20,186
11 % Senior Notes ........................................................................ 104,489 120,000
Accrued interest - 11 % Senior Notes ..................................................... 10,636 5,681
Other long term liabilities .............................................................. 12,892 13,084
--------- ---------
Total liabilities ............................................................... 172,889 190,173
Commitments and Contingencies ............................................................ -- --
Minority interest in subsidiary .......................................................... 5,769 --
Stockholders' Equity :
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000 shares issued and
outstanding, respectively ............................................................. 165 165
Additional paid-in capital ............................................................... 94,162 93,112
Accumulated other comprehensive income ................................................... 343 401
Accumulated deficit ...................................................................... (33,485) (21,131)
--------- ---------
Total stockholders' equity ............................................................... 61,185 72,547
---------
Total liabilities and stockholders' equity ............................................... $ 239,843 $ 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)
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
2003 2002 2003 2002
---- ---- ---- ----
RESTATED RESTATED
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY COMPANY
Revenue $ 15,368 $ 21,389 $ 31,848 $ 44,768
Operating costs and expenses:
Cost of revenue..................................................... 5,274 9,737 10,898 19,400
Selling, general and administrative................................. 12,570 21,401 24,461 46,149
Restructuring charges............................................... ---- 24,834 ---- 24,834
Impairment of intangible assets..................................... ---- 3,221 ---- 3,221
Depreciation and amortization....................................... 4,116 12,174 7,843 24,186
----------- ---------- ---------- -----------
Total operating costs and expenses....................................... 21,960 71,367 43,202 117,790
----------- ---------- ---------- -----------
Other operating income.............................................. 345 ---- 345 ----
Loss from operations..................................................... (6,247) (49,978) (11,009) (73,022)
Interest and financing expense...................................... (3,561) (14,036) (7,465) (34,060)
Interest income..................................................... 347 875 735 1,841
Other income/(expense).............................................. 204 (506) 386 (396)
Gain on debt discharge............................................... 2,044 ---- 4,771 ----
Minority interest in subsidiary..................................... 120 955 228 1,344
Reorganization Items.............................................. ---- (5,598) ---- (5,598)
----------- ---------- ---------- -----------
Net loss................................................................. (7,093) (68,288) (12,354) (109,891)
Dividends and accretion on preferred stock.......................... ---- (1,329) ---- (3,177)
----------- ---------- ---------- -----------
Net loss attributable to common stockholders............................. $ (7,093) $ (69,617) $ (12,354) $ (113,068)
=========== ========== ========== ===========
Basic and diluted net loss per share attributable to common stockholder.. $ (0.43) $ (1.75) $ (0.75) $ (2.87)
=========== ========== ========== ===========
Weighted average common shares outstanding--basic and diluted............. 16,460,000 39,688,862 16,460,000 39,330,033
=========== ========== ========== ===========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
SIX MONTHS ENDED MARCH 31,
2003 2002
---- ----
RESTATED
SUCCESSOR PREDECESSOR
COMPANY COMPANY
Cash flows from operating activities:
Net loss ....................................................................................... $ (12,354) $(109,891)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................................. 7,843 24,186
Provision for uncollectible accounts receivable ................................................ 1,255 3,534
Issuance of stock warrants to consultants ...................................................... 1,051 --
Services contributed to minority-owned subsidiary .............................................. -- 372
Gain on debt discharge ......................................................................... (4,771) --
Restructuring and other charges (net of cash payments) ......................................... -- 8,233
Minority interest in subsidiary ................................................................ (228) (1,344)
Gain on investment ............................................................................. (181) --
Gain on sale of marketable securities .......................................................... -- (27)
Loss on impairment of intangible assets ........................................................ -- 3,221
Loss on impairment of investments .............................................................. -- 490
Amortization of debt issuance costs ............................................................ -- 647
Amortization of deferred compensation .......................................................... -- 1,971
Changes in operating assets and liabilities:
Accounts receivable ............................................................................ (240) (2,321)
Prepaid expenses and other current assets ...................................................... 2,900 (208)
Other assets ................................................................................... -- 50
Accounts payable ............................................................................... (459) (7,231)
Accrued liabilities ............................................................................ (5,469) 12,315
Accrued interest ............................................................................... 6,158 31,250
Other .......................................................................................... (233) (153)
--------- ---------
NET CASH USED IN OPERATING ACTIVITIES .......................................................... (4,728) (34,906)
--------- ---------
Cash flows from investing activities:
Investment in short-term and long-term investments ............................................. (4,410) --
(Investment in) use of restricted cash and investments ......................................... (96) 6,365
Proceeds from sale of marketable securities .................................................... -- 64
Return of strategic investments ................................................................ -- 193
Purchases of property, plant and equipment ..................................................... (790) (22,115)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES .......................................................... (5,296) (15,493)
--------- ---------
Cash flows from financing activities:
Capital distribution to minority-owned subsidiary .............................................. (97) --
Capital contribution from minority-owned subsidiary ............................................ 6,094 --
Repayments of mortgage payable and capital lease obligations ................................... (692) (4,545)
Repayment of Senior Notes....................................................................... (11,943) --
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES .......................................................... 6,638 (4,545)
--------- ---------
Effects of exchange rate changes on cash and cash equivalents .................................. 26 (47)
--------- ---------
Net decrease in cash and cash equivalents ...................................................... (16,636) (54,991)
Cash and cash equivalents, beginning of period ................................................. 47,562 111,502
--------- ---------
Cash and cash equivalents, end of period ....................................................... $ 30,926 $ 56,511
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ......................................................................... $ 1,165 $ 1,814
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations .......................................... $ -- $ 1,036
Capital expenditures included in accounts payable, accrued liabilities ...................... $ 191 $ 308
and other long term liabilities
Cumulative dividends and accretion on preferred stock ....................................... $ -- $ 3,177
The accompanying notes are an integral part of these condensed consolidated
financial statements
3
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PART 2
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.
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 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.
4
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
continue to grow the Company's revenue and achieve further operating
efficiencies. For the six-month period ended March 31, 2003, the Company had a
net loss of $12,354. 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, or in attracting new customers, or in maintaining its existing
customer base. Moreover, despite its restructuring the Company has continued to
experience significant decreases in revenue and low levels of new customer
additions in the period following its restructuring. In the future, the Company
may make acquisitions or repurchase indebtedness of the Company, which, in turn,
may adversely affect the Company's liquidity.
2. BASIS OF PRESENTATION
The 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 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 March, 31, 2003 and the three month and six month periods ended
March 31, 2003 and 2002. All such adjustments are of a normal recurring nature.
As a result of the application of fresh start accounting under 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 six month periods ended March 31, 2003 and for the three month and six
month periods ended March 31, 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 six month periods
ended March 31, 2003 are not necessarily indicative of the operating results
that may be expected for future periods.
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
Recent Accounting Pronouncements
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 three-month and six-month periods ended March 31, 2002, goodwill
amortization amounted to $571 and $1,141 respectively. 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 pro forma basis would
have been as follows:
5
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pro Forma Results Predecessor Company Predecessor Company
---------------------------------------
Three Months ended Six months ended
March 31, 2002 March 31, 2002
-------------------------------------
Net Loss (restated) $ (68,288) $(109,891)
Add back of goodwill amortization 571 1,141
--------- ---------
Adjusted net loss (67,717) (108,750)
Dividends and accretion on preferred stock (1,329) (3,177)
--------- ---------
Adjusted net loss attributable to common
shareholders $ (69,046) $(111,927)
Basic and diluted loss per share attributable
to common stockholders $ (1.74) $ (2.85)
========= =========
Stock Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB No. 25") for recognizing
stock-based compensation expense for financial statement purposes. Under APB No.
25, the Company applied the intrinsic value method of accounting and therefore
does not recognize compensation expense for options granted to employees,
because options are only granted at a price equal or higher to fair value on the
day of grant. For companies that choose to continue applying the intrinsic value
method, SFAS No. 123 and SFAS No. 148 "Accounting for Stock-Based Compensation"
which amends and mandates certain additional methods and pro forma disclosures
as if the fair value method had been utilized.
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.
Three Months Ended Six Months Ended
March 31, 2003 March 31, 2002 March 31, 2003 March 31, 2002
-------------- -------------- -------------- --------------
Pro forma Net Loss:
As Reported $ (7,093) $ (68,288) $ (12,354) $ (109,891)
Pro Forma
Pro forma Net income per share $ (7,573) (69,887) $ (12,903) $ (113,220)
------------- ------------- -------------- -------------
As Reported $ (0.43) (1.72) $ (0.75) $ (2.79)
Pro Forma $ (0.46) $ (1.76) $ (0.78) $ (2.88)
------------- ------------- -------------- -------------
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:
6
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2003 2002
---- ----
Ranges from Average
---------------------------- ----------
Risk-free interest rate 2.17% to 2.74% 4.18%
Expected Volatility 133% to 133% 133%
Expected Life 3 years to 5 years 6 years
Contractual Life 10 years to 10 years 10 years
Expected dividend yield 0 % 0 % 0%
Fair value of options granted $ 1.41 to $ 2.05 $ 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.
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
MARCH 31, SEPTEMBER 30,
2003 2002
---- ----
Land ............................................... $ 2,713 $ 2,713
Building and building improvements ................. 84,094 84,094
Leasehold improvements ............................. 74,612 71,322
Computer hardware and software and network equipment 16,201 15,607
Furniture and equipment ............................ 3,691 3,660
--------- ---------
181,311 177,396
Less: Accumulated depreciation and amortization .... (12,732) (5,549)
Add: Construction in progress ...................... 0 2,863
--------- ---------
Property, plant and equipment, net ................. $ 168,579 $ 174,710
========= =========
Certain computer and network equipment are recorded under capital leases that
aggregated approximately $4,466 and $4,466 as of March 31, 2003 and September
30, 2002, respectively. Accumulated amortization on the assets recorded under
capital leases aggregated approximately $1,023 and $465 as of March 31, 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 September 30, 2002, the LLC had received $5,778 of
such capital contribution. The LLC received an additional $4,458 in October 2002
and an additional $1,636 in January 2003. As of March 31, 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:
Year Ending September 30, Contribution
-------------------------- ------------
2004 .......................................... 1,557
2005 .......................................... 1,479
2006........................................... 1,400
2007........................................... 241
---
Total 4,677
7
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pursuant to the LLC's operating agreement, the LLC paid the Investor $97 for the
six months ended March 31, 2003 in relation to a mandatory priority return owed
to them. The priority return is an annual calculated amount based on 3% of the
Investor's capital contribution.
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 March 31, 2003, the fair
value of this option is negligible.
5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
MARCH 31, SEPTEMBER 30,
2003 2002
---- ----
Franchise tax, sales tax, and property tax................ $ 671 $ 2,177
Salaries, benefits and commissions........................ 907 1,636
Telecommunications accrual 1,103 1,706
Technology licenses and maintenance contracts 151 1,205
Deferred Revenue 3,186 1,503
Restructuring.............................................. 1,612 1,828
Other...................................................... 4,825 7,869
--------- ---------
$ 12,455 $ 17,924
========= =========
6. RESTRUCTURING AND OTHER
The following table displays the activity and balances of the restructuring
reserve account from inception to March 31, 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 (2,162) (18,480) (812) -- (21,454)
Reversal to Fiscal 2001 Plan - (678) (701) (2,182) (3,561)
8
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
------- -------- ------- ------- --------
March 31, 2002 Balance (Predecessor Company) 901 1,299 2,138 0 4,338
Deductions - Cash (358) -- (857) -- (1,215)
------- -------- ------- ------- --------
April 30, 2002 Balance (Predecessor Company) 543 1,299 1,281 -- 3,123
Deductions - Cash (400) -- (895) -- (1,295)
------- -------- ------- ------- --------
September 30, 2002 Balance (Successor Company) 143 1,299 386 -- 1,828
------- -------- ------- ------- --------
Deductions - Cash (143) -- (73) -- (216)
------- -------- ------- ------- --------
March 31, 2003 Balance (Successor Company) $ - $ 1,299 $ 313 $ - $ 1,612
======= ======== ======= ======= ========
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:
Successor Company
March 31 September 30
2003 2002
--------- --------
Note Payable $ 2,600 $ 2,600
Rabbi Trust Obligation 2,762 2,777
Negative Leasehold Liability 7,320 7,607
Deferred Rent 210 100
--------- --------
$ 12,892 $ 13,084
========= ========
The Company has a $2,600 note payable, due April 15, 2004. The note bears
interest, payable monthly, at 4.75%. The note is collateralized by an
irrevocable standby letter of credit. The related funds are included in
restricted cash 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 is
currently in litigation over the trust. See Note 14 "Contingencies."
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 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 December 31, 2008. The 11% Senior Notes will
bear interest at 11% per annum, payable annually in May of each year, commencing
on May 1, 2003. Interest on the 11% Senior Notes for the first two year period
following the initial date of issuance is payable in kind by the issuance of
additional notes with terms identical to the 11% Senior Notes (other than the
date of issuance) in a principal amount equal to the interest payment then due.
For the two year period thereafter, interest is payable in cash or, at the
Company's option when authorized by its board of directors, in additional notes
9
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 is in the process of merging 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.
On March 19, 2003, holders of approximately 58% of the outstanding 11% Senior
Notes waived the following defaults:
- File reports and documents with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934, specifically the Company's
Quarterly Report on Form 10-Q for the quarter ended June
30, 2002;
- File copies of these reports with the indenture trustee;
- Cause these reports to be mailed to the holders of the 11%
Senior Notes;
- Deliver to the indenture trustee a certificate from the
company's public accountants related to the Company's
compliance with certain provisions of the Indenture; and
- Deliver to the indenture trustee a certificate an officer's
certification with respect to the Company's failure to satisfy
the obligations set forth above
After giving effect to the waiver, as of March 31, 2003, the Company was in
compliance with the provisions of the Indenture.
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 six-months ended
March 31, 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 three months and
six months ended March 31, 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 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
10
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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, is currently a member of our board of directors. The purchase price
of the warrant 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, this
warrant 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, using the
Black Scholes valuation model, the fair value of the warrant $ 1,051 is expensed
as part of SG&A in the current quarter ended March 31, 2003. 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.
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.
March 31
Successor Predecessor
Company Company
------------------------
2003 2002
Convertible preferred stock ..... -- 8,617,300
Stock Options.................... 1,128,943 13,439,900
Unvested Restricted Stock........ -- 2,207,600
Warrants ........................ 500,000 194,800
--------- ----------
1,628,943 24,459,600
========= ==========
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
12. SEGMENT REPORTING
The Company reports segment information under SFAS No. 131, 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 three months and the six months
ended March 31, 2003 (Successor Company) and three months and the six months
ended March 31, 2002 (Predecessor Company):
11
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Successor Predecessor Successor Predecessor
Company Company Company Company
Three Month Period Six Month Period
Ended March 31, Ended March 31,
2003 2002 2003 2002
---- ---- ---- ----
Revenue:
United States $ 9,398 $ 15,499 $ 19,979 $ 33,050
Europe 5,970 5,890 11,869 11,718
----------- --------- --------- -----------
Consolidated 15,368 21,389 31,848 44,768
=========== ========= ========= ===========
Identifiable assets:
United States................................... $ 185,922 $ 185,922
Europe.......................................... 44,962 44,962
Consolidated.................................... $ 230,884 $ 230,884
=========== =========
The identifiable assets reflected in the table exclude intangible assets
13. COMPREHENSIVE 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
six-month periods ended March 31, 2003 and 2002:
THREE-MONTH PERIOD ENDED SIX-MONTH PERIOD ENDED
MARCH 31, MARCH 31,
--------- ---------
SUCCESSOR PREDECESSOR SUCCESSOR PREDECESSOR
--------- ----------- --------- -----------
2003 2002 2003 2002
---- ---- ---- ----
Net loss....................................................... $ (7,093) $ (68,288) $ (12,354) $ (109,891)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities available
for sale....................................................... (448) 226 (319) 1,301
Foreign currency translation adjustment....................... (565) (1,576) 261 (2,804)
--------- ---------- --------- -----------
Comprehensive loss: $ (8,106) $ (69,638) $ (12,412) $ (111,394)
========= ========== ========= ===========
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
12
GLOBIX CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. Mr. Bell is seeking damages in excess
of $2.0 million plus costs, disbursements and legal fees. This action is
currently being stayed pending resolution of the Company's lawsuit against Mr.
Bell and Arnold N. Bressler, the Trustee of the Rabbi Trust, described below.
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. In this action, the Company
has requested that the assets of the Rabbi Trust be turned over to the Company.
The Company has also requested that Mr. Bressler, as Trustee of the Rabbi Trust,
be enjoined from dissipating the assets of the Rabbi Trust pending resolution of
the Company's claims by the court and has filed a motion for a declaratory
judgment to establish the maximum amount of Mr. Bell's claims. Mr. Bressler has
asserted counter claims in this action, and both Mr. Bressler and Mr. Bell have
submitted objections in this action, which is currently in the discovery phase.
The Company is vigorously pursuing its claims in this action and defending
against Mr. Bressler's counterclaims.
The Company and Mr. Bell are currently in settlement discussions to resolve both
of these lawsuits.
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.
15. RESTATEMENT INFORMATION:
During the audit for the period ended September 30, 2002 the following
restatements to restructuring and other charges and to reorganization items were
recorded which related to the three and six month ended March 31, 2002.
(1) A change of $23,612 in restructuring and other charges was comprised of the
following:
o The reversal of $22,428 of asset impairments that were not recorded in
compliance with the requirements of SFAS No. 121.
o A reversal of $1,184 related to assets previously written-off by the
Company for which the Company received a subsequent settlement payment
from the vendor. The Company had previously increased the restructuring
accrual in connection with the settlement payment.
(2) An adjustment of $5,631 to reorganization items included the following:
o $6,181 write-off of deferred reorganization costs the Company
subsequently determined should have been expensed as incurred in
conformity with SOP 90-7.
o A gain of $550 related to a settlement of an obligation under a software
purchase agreement that had not been previously recorded.
The following is a reconciliation of the net loss attributable to common
stockholders from the three months ended March 31, 2002 previously filed to the
restated three months ended March 31, 2002.
THREE MONTHS SIX MONTHS
ENDED ENDED
MARCH 31, 2002 MARCH 31, 2002
-------------- --------------
Net loss attributable to common
stockholders (previously filed) $ (87,598) $(131,049)
Change in restructuring and other
charges 23,612(1) 23,612(1)
Adjustments to reorganization items (5,631)(2) (5,631)(2)
--------- ---------
Net loss attributable to common
stockholders (restated) $ (69,617) $(113,068)
========= =========
In the three-months ended December 31, 2002 Condensed Consolidated Statements of
Cash Flows, the repurchase of Senior Notes of $7,030 were presented in the Cash
Flows from Investing section. For the six-months ended March 31, 2003 such
amounts have been reclassified to financing activities.
16. SUBSEQUENT EVENTS
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
will be included in the consolidated statement of operations in the quarter
ending June 30, 2003.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of our financial condition and results of
operations should be read together with our consolidated financial statements
and the accompanying notes appearing elsewhere in this quarterly report. The
following discussion contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about our company and our
industry. Our results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including the risks
and uncertainties discussed in our other periodic reports and documents filed
with the Securities and Exchange Commission. The results shown herein are not
necessarily indicative of the results to be expected in any future periods.
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 compared the results of the Predecessor Company three and six
month periods ended March 31, 2002 with Successor Company three and
six-month periods ended March 31, 2003
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 Note") 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.
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 MARCH 31, 2002 COMPARED TO THE QUARTER ENDED MARCH 31, 2003
Revenue. Revenue for the quarter ended March 31, 2003 decreased 28.1% to $15.4
million from $21.4 million for the three-month period ended March 31, 2002. This
decrease was primarily attributable to increased customer churn. Customer churn
accounted for $5.2 million, or 85.0% of our revenue decrease. 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
14
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 March 31, 2003 our
monthly churn averaged 2.2% as compared to 2.3% for the quarter ended March 31,
2002. Of this average monthly churn, 1.6% was related to downgrades, 3.1% was
related to cancellations, offset by 1.1% and 1.3% related to new and upgraded
contracts, respectively. Hardware and software sales decreased $851 thousand, or
85.9%, as a result of our shift away from lower margin hardware and software
revenue. This decrease accounted for 15.0% of our total revenue decline.
Cost of Revenue. Cost of revenue for the quarter ended March 31, 2003, decreased
to $5.3 million from $9.7 million for the quarter ended March 31, 2002. A
decrease of $3.7 million, representing 82.0% 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 $790 thousand, representing 17.7% 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 $12.6 million, or 81.8% of revenue for the quarter ended March 31,
2003, as compared to $21.4 million, or 100.0% of revenue for the quarter ended
March 31, 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 March
31, 2003, salaries and benefits were $5.6 million, representing 36.2% of
revenue, as compared with $11.5 million, or 53.6% of revenue, in the quarter
ended March 31, 2002. Our average number of employees decreased from
approximately 490 as of quarter ending March 31, 2002 to 240 as of quarter
ending March 31, 2003. In the quarter ended March 31, 2003, rent expense was
$1.6 million, representing 10.3% of revenue, as compared to $2.7 million, or
12.8% of revenue, for the quarter ended March 31, 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 of $166 thousand as a result of fresh start accounting. In the
quarter ended March 31, 2003, bad debt expense was $631 thousand, representing
4.0% of revenue, as compared to $2.0 million, or 9.6% of revenue, for the
quarter ended March 31, 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.
Restructuring Charges. During the quarter ended March 31, 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 was associated with
employee terminations.
Loss on Impairment of Intangibles. This non cash expense during the three-months
ended March 31, 2003 was attributable to the write-down, in accordance with SFAS
No. 121 of goodwill generated from our acquisition of Comstar.net, Inc.,
totaling $ 3.2 million in the quarter ending March 31, 2002.
Depreciation and Amortization. Depreciation and amortization decreased to $4.1
million for the quarter ended March 31, 2003, as compared to $12.2 million in
the quarter ended March 31, 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.
Interest and Financing Expense. Interest and financing expense for the quarter
ended March 31, 2003 was $3.6 million, or 22.9% of revenue, as compared to $14.0
million, or 65.6% of revenue, for the quarter ended March 31, 2002. The decrease
in interest and financing expense was primarily attributable to the reduction in
our outstanding indebtedness pursuant to the Plan. As of the Effective Date of
the Plan, quarterly interest expense was reduced to $3.6 million from
approximately $14.0 million before compounding.
Interest Income. The decrease in interest income to $347 thousand in the quarter
ended March 31, 2003 from $875 thousand in the quarter ended March 31, 2002
reflected our reduced cash balance in the quarter ended March 31, 2003 and the
impact of declining interest rates as compared to the same period of the prior
year.
Other Income/Expense. Other income in the quarter ended March 31, 2003 was $204
thousand, as compared to an expense of $506 thousand in the quarter ended March
31, 2002, an increase of $0.7 million. This was primarily due to insurance
receipts in the amount of $88 thousand associated with the September 11th, 2001
terrorist attack, while the prior period results from write-offs of strategic
investments in the amount of $490 thousand.
Gain on Debt Discharge. In the quarter ended March 31, 2003, we recorded a
non-cash gain of $2.0 million on the discharge of debt, which includes both
principal and accrued interest. This gain was related to our repurchase of $6.4
million in aggregate principal amount of the 11.0% Senior Notes for cash
totaling $4.9 million, and the elimination of associated accrued interest of
$577 thousand. There was no gain on debt discharge in the quarter ended March
31, 2002.
Reorganization Items. Reorganization expenses of $5.6 million in the quarter
ending March 31,2002 were attributable to expenses incurred by the Predecessor
Company in connection with its bankruptcy filing.
Net Loss and Net Loss Attributable To Common Stockholders. As a result of the
above, we reported a net loss of $7.1 million and a net loss attributable to
common stockholders of $7.1 million, or $0.43 per share, for the quarter ended
March 31, 2003, compared to a restated net loss of $68.3 million and a net loss
attributable to common stockholders of $69.6 million, or $1.75 per share, for
the quarter ended March 31, 2002. As a result of the cancellation of the shares
of our preferred stock outstanding immediately prior to the Effective Date of
the Plan pursuant to the terms of the Plan, dividends and accretion on preferred
stock decreased from $1.3 million in the quarter ended March 31, 2002 to zero in
the quarter ended March 31, 2003.
15
SIX MONTHS ENDED MARCH 31, 2002 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2003
Revenue. Revenue for the six months ended March 31, 2003 decreased 29.1% to
$31.8 million from $44.8 million for the six-month period ended March 31, 2002.
This decrease was primarily attributable to increased customer churn. Customer
churn accounted for $11.5 million, or 89.2% of our revenue decrease. 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 six-months ended March 31, 2003
our monthly churn averaged 2.2% as compared to approximately 2.7% for the
six-months ended March 31, 2002. Of this average monthly churn, 1.6% was related
to downgrades, 3.5% was related to cancellations, offset by 1.3% and 1.5%
related to new and upgraded contracts, respectively. For the six-months ended
March 31, 2003, cancellations constituted approximately 69.0% of our monthly
revenue losses and downgrades contributed approximately 31.0% of our monthly
revenue losses. Hardware and software sales decreased $1.5 million, or 77.0%, as
a result of our shift away from lower margin hardware and software revenue. This
decrease accounted for 11.6% of our total revenue decline.
Cost of Revenue. Cost of revenue for the six-months ended March 31, 2003,
decreased to $10.9 million from $19.4 million for the six-months ended March 31,
2002. A decrease of $7.2 million, representing 84.2% 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 $1.3 million, representing 15.8% 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 $24.5 million, or 76.9% of revenue for the six-months ended March
31, 2003, as compared to $46.1 million, or 103.1% of revenue for the six-months
ended March 31, 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 six-months
ended March 31, 2003, salaries and benefits were $11.3 million, representing
35.5% of revenue, as compared with $25.7 million, or 57.3% of revenue, in the
six-months ended March 31, 2002. Our average number of employees decreased from
approximately 554 as of six-months ending March 31, 2002 to 246 as of six-months
ended March 31, 2003. In the six-months ended March 31, 2003, rent expense was
$3.2 million, representing 10.1% of revenue, as compared to $5.8 million, or
13.0% of revenue, for the six-months ended March 31, 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 of $330 thousand as a result of fresh start accounting. In the
six-months ended March 31, 2003, bad debt expense was $1.1 million, representing
3.7% of revenue, as compared to $3.5 million, or 7.9% of revenue, for the
six-months ended March 31, 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. In the six-months
ended March 31, 2003 professional fees were $2.5 million, or 7.8% of revenue, as
compared to $1.2 million, or 2.6% of revenue in the six-months ended March 31,
2002. 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.
Restructuring Charges. During the six-months ended March 31, 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.
Loss on Impairment of Intangibles. This non cash expense during the six-months
ended March 31, 2003 was attributable to the write-down, in accordance with
SFAS No. 121 of goodwill generated from our acquisition of Comstar.net, Inc.,
totaling $3.2 million.
Depreciation and Amortization. Depreciation and amortization decreased to $7.8
million for the six-months ended March 31, 2003, as compared to $24.2 million in
the six-months ended March 31, 2001. 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.
Interest and Financing Expense. Interest and financing expense for the
six-months ended March 31, 2003 was $7.5 million, or 23.3% of revenue, as
compared to $34.1 million, or 76.1% of revenue, for the six-months ended March
31, 2002. The decrease in interest and financing expense was primarily
attributable to the reduction in our outstanding indebtedness pursuant to the
Plan. As of the Effective Date of the Plan, quarterly interest expense was
reduced to $3.6 million from approximately $14.0 million before compounding.
Interest Income. The decrease in interest income to $735 thousand in the
six-months ended March 31, 2003 from $1.8 million in the six-months ended March
31, 2002 reflected our reduced cash balance in the six-months ended March 31,
2003 and the impact of declining interest rates as compared to the same period
of the prior year.
Other Income/Expense. Other income in the six-months ended March 31, 2003 was
$386 thousand, as compared to an expense of $396 thousand in the six months
ended March 31, 2002, an increase of $0.8 million. This increase is due to
insurance receipts in the amount of $88 thousand associated with the September
11th, 2001 terrorist attack, while the prior period results from write-offs of
strategic investments in the amount of $490 thousand.
Gain on Debt Discharge. In the six-months ended March 31, 2003, we recorded a
non-cash gain of $4.8 million on the discharge of debt, which includes both
principal and accrued interest. This gain was related to our repurchase of $15.5
million in aggregate principal amount of the 11.0% Senior Notes for cash
totaling $11.9 million, and the elimination of associated accrued interest of
$1.2 million. There was no gain on debt discharge in the six-months ended March
31, 2002.
Reorganization Items. Reorganization expenses of $5.6 million were attributable
to expenses incurred by the Predecessor Company in connection with its
bankruptcy filing.
16
Net Loss and Net Loss Attributable To Common Stockholders. As a result of the
above, we reported a net loss of $12.4 million and a net loss attributable to
common stockholders of $12.4 million, or $0.75 per share, for the six-months
ended March 31, 2003, compared to a net loss of $109.9 million and a net loss
attributable to common stockholders of $113.1 million, or $2.87 per share, for
the six-months ended March 31, 2002. As a result of the cancellation of the
shares of our preferred stock outstanding immediately prior to the Effective
Date of the Plan pursuant to the terms of the Plan, dividends and accretion on
preferred stock decreased from $3.2 million in the six-months ended March 31,
2002 to zero in the six-months ended March 31, 2003.
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.
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 $4.7 million in the six-months ended
March 31, 2003, compared to $34.9 million in the six months ended March 31,
2002. The improvement in our operating cash flow was primarily the result of a
decrease in net loss, excluding the non-cash impact of depreciation and
amortization of $7,843 and $24,186 respectively and the lack of restructuring
charges. The reduction in net cash used in operating activities also reflects a
$11.0 million reduction in accounts payable and accrued liabilities.
Net cash used in investing activities was $5.3 million in the six-months ended
March 31, 2003, compared to $15.5 million in the six-months ended March 31,
2002. $4.4 million of our net cash used in investing activities was attributable
to investments made in fixed income securities. The use of restricted cash and
investments of $96 thousand was primarily attributable to the release of the
collateral funds for the Company's corporate credit card. Investments in capital
expenditures related to our network and facilities were $981 thousand. Of this
amount, we paid $790 thousand in cash, and the balance was financed under
financing arrangements or remained in accounts payable, accrued liabilities and
other long term liabilities at the period-end.
17
Net cash used in financing activities was $6.6 million in the six-months ended
March 31, 2003, as compared to $4.6 million in the quarter ended March 31, 2002.
In the six-months ended March 31, 2003, we repaid certain mortgage and capital
lease obligations totaling $692 thousand. In the six-months ended March 31,
2003, we received a capital contribution into a minority-owned subsidiary of
approximately $6.1 million. Also we repurchased in the open market for $11.9
million a portion of our outstanding 11% Senior Notes, which had a principal
value of approximately $15.5 million and accrued interest of $1.2 million.
As of March 31, 2003, we had $30.9 million of cash and cash equivalents, $7.6
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 March 31, 2003.
In addition, we have financed certain network equipment through vendors and
financial institutions under capital and operating lease arrangements. Capital
lease obligations totaled approximately $3.5 million at March 31, 2003. As of
March 31, 2003, we had various agreements to lease facilities and equipment and
are obligated to make future minimum lease payments of approximately $73.1
million on operating leases expiring in various years through 2017. As of March
31, 2003, there were no available or unused equipment financing arrangements
with vendors or financial institutions.
In April 2003, we repurchased on the open market for $2,669 a portion of our
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 will be
included in the condensed consolidated statement of operations in the quarter
ending June 30, 2003.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 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 March 31, 2003, all of our
investments were due to mature within twelve months and the carrying value of
these investments approximated fair value. At March 31, 2003, $9.2 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
Our disclosure controls and procedures (as defined in Rule 13a-14(c) or 15d -14
under the Exchange Act) ("Disclosure Controls") are procedures that are designed
with the objective of ensuring that information required to be disclosed in our
reports filed under the Exchange Act, such as this quarterly report, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure Controls are also designed with the
objective of ensuring that this information is accumulated and communicated to
our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal controls and procedures for financial reporting ("Internal Controls")
are procedures that are designed with the objective of providing reasonable
assurance that:
- our transactions are properly authorized;
- assets are safeguarded against unauthorized or improper use;
and
18
- transactions are properly recorded and reported,
in each case all to permit the preparation of our financial statements in
conformity with U.S. generally accepted accounting principles.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing of this quarterly report, an
evaluation was carried out under the supervision and with the participation of
our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our Disclosure
Controls. Based upon that evaluation, our Chief Executive Officer and Chief
Financial Officer concluded, subject to the limitations noted above, that:
- the design and operation of our Disclosure Controls were
effective to ensure that material information related to our
company which is required to be disclosed in reports filed
under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods
specified in SEC rules and forms.
- our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented
in conformity with U.S. generally accepted accounting
principles.
No significant changes were made to our Internal Controls or in other factors
that could significantly affect these controls subsequent to the date of their
evaluation.
19
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 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. Mr. Bell is seeking damages
in excess of $2.0 million plus costs, disbursements and legal fees. This action
is currently being stayed pending resolution of the Company's lawsuit in the
United States Bankruptcy Court for the District of Delaware described below.
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. In this action, the Company
has requested that the assets of the Rabbi Trust be turned over to the Company.
The Company has also requested that Mr. Bressler, as Trustee of the Rabbi Trust,
be enjoined from dissipating the assets of the Rabbi Trust pending resolution of
the Company's claims by the court and has filed a motion for a declaratory
judgment to establish the maximum amount of Mr. Bell's claims. Mr. Bressler has
asserted counter claims in this action, and both Mr. Bressler and Mr. Bell have
submitted objections in this action, which is currently in the discovery phase.
The Company is vigorously pursing its claims in this action and defending
against Mr. Bressler's counterclaims.
The Company and Mr. Bell are currently in settlement discussions to resolve both
of these lawsuits.
On February 6, 2003, a putative derivative suit was filed in New York State
Supreme Court (County of New York) against our company, as nominal defendant,
and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First Boston
Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon Smith
Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings, LLC), the
initial purchasers in our February 2000 offering of the 12.5% Senior Notes. The
suit alleges that the underwriting discount granted to the initial purchasers of
the 12.5% Notes violated Section 5-531 of the New York General Obligations Law,
which limits the amount that can be charged by a loan broker. On March 6, 2003,
the plaintiff and the initial purchasers entered into a tolling agreement that
would result in the dismissal of the action without prejudice pending action on
a motion to dismiss an amended complaint submitted in a similar case involving
debt securities issued by another corporation. On March 13, 2003 the court
dismissed the action 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
20
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
(a) Exhibits
Exhibit Description
------- -----------
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 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 March 28, 2003, relating to a press release
filed under Item 12 of Form 8-K
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: May 15, 2003
By: /S/ ROBERT M. DENNERLEIN
-------------------------------------------
Robert M. Dennerlein, Chief
Financial Officer (principal financial
officer and principal accounting officer)
Date: May 15, 2003
21
CERTIFICATIONS
I, Peter K. Stevenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globix Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/Peter K. Stevenson
--------------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
22
I, Robert M. Dennerlein, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globix Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 15, 2003
/s/ Robert M. Dennerlein
------------------------------
Name: Robert M. Dennerlein
Title: Chief Financial Officer
23