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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------
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, 2002
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 |X| No |_|
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
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...... Not Applicable - Securities not yet distributed.
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares of the Registrant's common stock outstanding as of April
24, 2002 was 41,896,479.
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GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
Part I Financial Information
Item 1. Consolidated Balance Sheets-- As of March 31, 2002 (unaudited) and September 30, 2001 .................... 1
Consolidated Statements of Operations-- For the Three Months Ended March 31, 2002 and 2001 (unaudited) ... 2
Consolidated Statements of Operations-- For the Six Months Ended March 31, 2002 and 2001 (unaudited) ..... 2
Consolidated Statements of Cash Flows-- For the Six Months Ended March 31, 2002 and 2001 (unaudited) ..... 3
Notes to Consolidated Financial Statements (unaudited) ................................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .................... 15
Item 3. Quantitative and Qualitative Disclosure about Market Risk ................................................ 21
Part II Other Information
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
Item 5. Other Information ........................................................................................ 23
Item 6. Exhibits and Reports on Form 8-K ......................................................................... 23
Signatures ................................................................................................................ 25
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollars in Thousands, Except Share and Per Share Data)
March 31, September 30,
2002 2001
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents .................................................................. $ 56,511 $ 111,502
Marketable securities ...................................................................... 2,874 1,610
Accounts receivable, net of allowance for doubtful accounts of $2,129 and
$6,852, respectively ..................................................................... 11,476 13,809
Prepaid expenses and other current assets .................................................. 11,450 7,785
Restricted cash ............................................................................ 19,165 6,984
--------- ---------
Total current assets ................................................................... 101,476 141,690
Investments, restricted ......................................................................... 7,666 26,886
Property, plant and equipment, net .............................................................. 316,396 356,149
Debt issuance costs, net of accumulated amortization of $2,543 and $1,896,
respectively ................................................................................. 24,436 19,006
Intangible assets, net of accumulated amortization of $0 and $2,485,
respectively ................................................................................. - 4,362
Other assets .................................................................................... 501 4,895
--------- ---------
Total assets .................................................................................... $450,475 $ 552,988
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Capital lease and other obligations ........................................................ $ 6,299 $6,687
Accounts payable ........................................................................... 5,694 14,022
Accrued liabilities ........................................................................ 44,053 30,141
Accrued interest ........................................................................... 43,750 12,500
--------- ---------
Total current liabilities .............................................................. 99,796 63,350
Capital lease obligations, net of current portion ............................................... 7,085 10,309
Mortgage payable ................................................................................ 20,309 20,441
Senior Notes (see Note 5) ....................................................................... 600,000 600,000
Other long term liabilities ..................................................................... 3,062 7,577
--------- ---------
Total liabilities ...................................................................... 730,252 701,677
Minority interest in subsidiary ................................................................. 4,435 5,406
Redeemable convertible preferred stock (see Note 7) ............................................. 83,695 83,230
Stockholders' Deficit:
Common stock, $.01 par value; 500,000,000 shares authorized; 41,896,479 and
41,920,229 shares issued and outstanding, respectively ....................................... 419 419
Additional paid-in capital ...................................................................... 167,929 171,176
Deferred compensation ........................................................................... (5,056) (7,097)
Accumulated other comprehensive income .......................................................... (4,206) (2,703)
Accumulated deficit ............................................................................. (526,993) (399,120)
--------- ---------
Total stockholders' deficit ..................................................................... (367,907) (237,325)
--------- ---------
Total liabilities and stockholders' deficit ..................................................... $ 450,475 $ 552,988
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollars in Thousands, Except Share and Per Share Data)
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue $ 21,389 $ 26,782 $ 44,767 $ 53,018
Operating costs and expense:
Cost of revenue ...................................................... 9,737 10,480 19,399 20,948
Selling, general and administrative .................................. 21,402 28,308 46,150 59,072
Restructuring expenses ............................................... 48,447 -- 48,447 38,109
Impairment of intangible assets ...................................... 3,220 -- 3,220 --
Depreciation and amortization ........................................ 12,174 7,951 24,186 15,547
----------- ----------- ---------- -----------
Total operating costs and expenses ........................................ 94,980 46,739 141,402 133,676
----------- ----------- ---------- -----------
Loss from operations ...................................................... (73,591) (19,957) (96,635) (80,658)
Interest and financing expense ....................................... (14,036) (16,118) (34,060) (32,598)
Interest income ...................................................... 875 4,439 1,840 10,915
Other income/(expense) ............................................... (472) (330) (362) (577)
Minority interest in subsidiary ...................................... 955 -- 1,344 --
----------- ----------- ---------- -----------
Loss before cumulative effect of a change in accounting principle ......... (86,269) (31,966) (127,873) (102,918)
Cumulative effect of a change in accounting principle ..................... -- -- -- (2,332)
----------- ----------- ---------- -----------
Net loss .................................................................. (86,269) (31,966) (127,874) (105,250)
Dividends and accretion on preferred stock ........................... (1,329) (1,761) (3,178) (3,496)
----------- ----------- ---------- -----------
Net loss attributable to common stockholders' ............................. $ (87,598) $ (33,727) $ (131,051) $ (108,746)
=========== =========== =========== ===========
Basic and diluted loss per share attributable to common stockholders'
before cumulative effect of a change in accounting principle ........... $ (2.21) $ (0.87) $ (3.33) $ (2.80)
Cumulative effect of a change in accounting principle ..................... -- -- -- (0.06)
Basic and diluted net loss per share attributable to common
stockholders' .......................................................... $ (2.21) $ (0.87) $ (3.33) $ (2.86)
----------- ----------- ---------- -----------
Weighted average common shares outstanding--basic and diluted ............. 39,688,862 38,709,658 39,330,033 38,011,488
=========== =========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollars in Thousands, Except Share and Per Share Data)
Six months ended
March 31,
---------
2002 2001
---- ----
(Unaudited)
Cash flows from operating activities:
Net loss ......................................................................................... $(127,873) $(105,250)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................................... 24,186 15,547
Provision for uncollectible accounts receivable .................................................. 3,534 2,557
Cumulative effect of a change in accounting principle ............................................ -- 2,332
Restructuring expenses ........................................................................... 48,447 17,094
Minority interest in subsidiary .................................................................. (1,344) --
Gain on sale of short term investment ............................................................ -- (1,459)
Gain on sale of marketable securities ............................................................ (27) --
Loss on impairment of intangible assets .......................................................... 3,220 --
Loss on impairment of investments ................................................................ 490 1,950
Amortization of debt issuance costs .............................................................. 647 568
Amortization of deferred compensation ............................................................ 1,083 562
Changes in operating assets and liabilities:
Accounts receivable .............................................................................. (2,236) (1,517)
Prepaid expenses and other current assets ........................................................ (126) (4,618)
Other assets ..................................................................................... (5,921) (4,274)
Accounts payable ................................................................................. (7,371) (1,481)
Accrued liabilities .............................................................................. 555 9,253
Accrued interest ................................................................................. 31,250 (2)
Other ............................................................................................ (3,541) (736)
--------- ---------
Net cash used in operating activities ............................................................ (35,027) (69,474)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of short term investments ..................................................... -- 10,180
Use of restricted cash and investments ........................................................... 7,038 5,747
Proceeds from sale of marketable securities ...................................................... 64 --
Purchases of property, plant and equipment ....................................................... (20,051) (91,269)
--------- ---------
Net cash used in investing activities ............................................................ (12,949) (75,342)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants, net ........................................ -- 2,456
Capital contribution in minority-owned subsidiary ................................................ 372 --
Repayments of mortgage payable and capital lease obligations ..................................... (4,583) (2,065)
---------
Net cash (used in) provided by financing activities .............................................. (4,211) 391
Effects of exchange rate changes on cash and cash equivalents .................................... (2,804) (2,157)
---------
Net decrease in cash and cash equivalents ........................................................ (54,991) (146,582)
Cash and cash equivalents, beginning of period ................................................... 111,502 363,877
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 56,511 $ 217,295
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................................... $ 1,814 $ 38,907
Cash paid for income taxes ....................................................................... $ -- $ 34
Non-cash financing activities:
Equipment acquired under capital lease obligations ............................................ $ 1,036 $ 8,573
Capital expenditures included in accounts payable, accrued liabilities and other long
term liabilities ............................................................................ $ 308 $ 4,969
Cumulative dividends and accretion on preferred stock ............................................ $ 3,178 $ 3,496
The accompanying notes are an integral part of these consolidated financial
statements
3
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions 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
consolidated financial statements furnished herein include all adjustments
necessary for a fair presentation of the Company's financial position at March
31, 2002 and the results of its operations for the three-month and six-month
periods ended March 31, 2002 and 2001 and its cash flows for the six- month
period ended March 31, 2002 and 2001. All such adjustments are of a normal
recurring nature. Interim financial statements are prepared on a basis
consistent with the Company's annual financial statements. Results of operations
for the three-month and six-month periods ending March 31, 2002 are not
necessarily indicative of the operating results that may be expected for future
periods.
The consolidated balance sheet as of September 30, 2001 has been derived
from the audited consolidated financial statements at that date but does not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
For further information and factors to consider, refer to the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended September 30, 2001 on file
with the Securities and Exchange Commission.
2. Financial Restructuring Plan and Reorganization
On March 1, 2002, the Company and two of its wholly owned domestic
subsidiaries 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. The
Company received from the Bankruptcy Court authority to pay its employees,
trade, and certain other creditors in full and on time, regardless of whether
such claims arose prior to or after the Chapter 11 filing. The financial
reporting of the Company following the filing of the Chapter 11 petitions is
governed by the American Institute of Certified Public Accountants Statement of
Position No. 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). SOP 90-7 provides guidance for companies that
have filed petitions with the Bankruptcy Court and expect to reorganize under
Chapter 11 of the Bankruptcy Code. The Company implemented the guidance of SOP
90-7 upon the initial filing on March 1, 2002, pursuant to SOP 90-7.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the Company's issued and outstanding
new Common Stock on a fully-diluted basis; (b) each holder of Preferred Stock,
in exchange for such Preferred Stock (which, as stated above, is deemed
cancelled as of the effective date), is entitled to receive, in exchange for
such Preferred Stock, its pro rata share of shares of new Common Stock
representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
The reorganization reduced significantly the principal amount of the
Company's outstanding indebtedness by reducing outstanding indebtedness by
approximately $480 million and converting a substantial portion of the Company's
indebtedness into new Common Stock. Moreover, the new debt issued under the Plan
permits Globix to satisfy interest payments in kind for at least two years and,
at the discretion of the Company's board of directors, up to four years, thereby
significantly reducing liquidity concerns arising from pre-Chapter 11 bankruptcy
debt service obligations. The Company believes that the restructuring
substantially reduces uncertainty with respect to its future and better
positions it to attract and maintain new customers. There can be no assurance
that the Company will be successful in executing its business plan and there is
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Upon the consummation of the Chapter 11 filing and emergence from
bankruptcy in April 2002, the Company will record a gain on the exchange of the
Senior Notes and preferred stock for the Senior Secured Notes and new common
stock. Such gain includes the extinguishment of the Senior Notes and the
cancellation of associated accrued interest and will be offset by the write-off
of previously deferred costs associated with the Senior Notes and reorganization
related expenses.
The following table sets forth the unaudited proforma consolidated
balance sheet of Globix as of March 31, 2002 upon exchange of the Senior Notes
and Preferred Stock for the Senior Secured Note and new common equity under the
Plan. The assigned equity values are based upon the reorganized value of the
ongoing business and include significant estimates made by management based on
facts and circumstances currently available. Valuation methodologies require the
input of highly subjective assumptions. Actual future results and events could
differ substantially from current estimates and assumptions. Any changes in
valuation could affect the Company's balance sheet.
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
Actual Proforma
March 31, 2002 Debit Credit March 31, 2002
-------------- ----- ------ --------------
Assets
Total current assets $ 101,476 $ - $ - $ 101,476
Property, plant and equipment, net 316,396 - - 316,396
Debt issuance costs, net 24,436 - 23,581(c) 855
Other assets 8,167 - - 8,167
------------------ ----------- ----------- -----------------
Total assets $ 450,475 $ - $ 23,581 $ 426,894
================== =========== =========== =================
Liabilities and Stockholders'
(Deficit) Equity
Capital lease and other obligations $ 6,299 $ - $ - $ 6,299
Accounts payable 5,694 - - 5,694
Accrued liabilities 44,053 2,713(d) - 41,340
Accrued interest 43,750 43,750(b) - -
------------------ ----------- ----------- -----------------
Total current liabilities 99,796 46,463 - 53,333
Capital lease obligations, net of
current portion 7,085 - - 7,085
Mortgage payable 20,309 - - 20,309
Senior Notes 600,000 600,000(b) - -
Senior Secured Notes - - 120,000(a) 120,000
Other long term liabilities 3,062 - - 3,062
------------------ ----------- ----------- -----------------
Total Liabilities 730,252 646,463 120,000 203,789
Minority interest in subsidiary 4,435 - - 4,435
Redeemable Convertible Preferred Stock 83,695 83,695(d) - -
Stockholders' (Deficit) Equity
Common stock 419 - - 419
Additional paid-in capital 167,929 - 173,664(d),(f) 341,593
Deferred compensation (5,056) - - (5,056)
Accumulated other comprehensive income (4,206) - - (4,206)
Accumulated deficit (526,993) - 412,913(e) (114,080)
------------------ ----------- ----------- -----------------
Total Stockholders' (Deficit) Equity (367,907) 83,695 586,577 218,670
------------------ ----------- ----------- -----------------
Total Liabilities and Stockholders'
(Deficit) Equity $ 450,475 $ 730,158 $ 730,158 $ 426,894
================== =========== =========== =================
Explanation of the above adjustment columns are as follows:
a) To reflect the issuance of the 11% Senior Secured Notes.
b) To eliminate the 12.5% Senior Notes and associated accrued interest.
c) Write-off of deferred costs associated with the Senior Notes and
restructuring related expenses.
d) To eliminate Preferred stock and the associated accrued dividends.
e) The extraordinary gain on extinguishment of debt and associated costs
is calculated as follows:
Carrying value of Senior Notes 12.5% $ 600,000
Carrying value of related accrued interest 43,750
Carrying value of Senior Secured Notes 11% (120,000)
Equity value of reorganized Globix (87,256)
Carrying value of related capitalized costs (23,581)
-----------
Extraordinary gain on extinguishment of debt $ 412,913
===========
f) The equity value of the reorganized Globix is calculated as follows:
Enterprise value $ 240,000
New Senior Secured Notes (120,000)
Mortgage (20,552)
Capitalized leases (12,192)
-----------
Equity value of reorganized Globix $ 87,256
===========
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
March 31, September 30,
2002 2001
---- ----
Land ............................................................................................ $ 1,997 $ 1,997
Building and building improvements .............................................................. 102,810 108,216
Leasehold improvements .......................................................................... 139,267 145,617
Computer hardware and software and network equipment ............................................ 129,694 134,767
Furniture and equipment ......................................................................... 9,866 9,693
-------- --------
383,634 400,290
Less: Accumulated depreciation and amortization ................................................. (75,671) (54,499)
Add: Construction in progress ................................................................... 8,433 10,358
-------- --------
Property, plant and equipment, net .............................................................. $316,396 $356,149
======== ========
Certain computer and network equipment are recorded under capital leases
that aggregated approximately $23.1 and $23.5 million as of March 31, 2002 and
September 30, 2001, respectively. Accumulated amortization on the assets
recorded under capital leases aggregated approximately $9.8 and $6.6 million as
of March 31, 2002 and September 30, 2001, respectively.
Costs incurred prior to completion of construction of Internet data
centers and network infrastructure upgrades are reflected as construction in
progress in the accompanying consolidated balance sheets and are recorded as
property, plant and equipment at the date each Internet data center or network
segment becomes operational. Construction in progress includes direct
expenditures for construction of the Internet data center facilities, related
network equipment and network upgrade projects and is stated at cost.
Capitalized costs include costs incurred under the construction contract,
advisory and consulting fees incurred during the construction phase. Capitalized
interest is included in property, plant and equipment under the provision of
SFAS No. 34 and totals zero and $7.1 million for the periods ended March 31,
2002 and 2001, respectively. Included in the construction in progress at March
31, 2002 and September 30, 2001 are capital projects currently in progress
related to the completion of the New York and London Internet data centers and
certain equipment associated with these facilities, which has not been placed in
service.
ATC Merger Corp. ("ATC Corp."), a wholly-owned subsidiary of the Company,
owns the land and building located at 139 Centre Street, New York, New York. The
nine-story building houses the Company's corporate headquarters and one of its
Internet data center facilities. A former owner of the right to purchase the
Centre Street property may be entitled to additional consideration if Globix
sells the property. Such amount will be equal to the greater of (a) $1.0 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.
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 entered into an agreement whereby the Tax
Credits generated from the renovation of the Property will be utilized by a
third party (the "Investor") via a Globix minority-owned subsidiary (the "LLC")
in consideration for up to approximately $14 million capital contribution to the
LLC. As of March 31, 2002, approximately $5.4 million of such capital
contribution has been received by the LLC. The balance of the funding under the
capital contribution is based upon the completion of future project related
events, as defined in the LLC agreement. The Company has consolidated the
financial statements of the LLC since inception, due to effective control of the
LLC by Globix; resulting in a minority interest in subsidiary in the
accompanying consolidated financial statements.
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
4. Accrued Liabilities
Accrued liabilities consist of the following:
March 31, September 30,
2002 2001
---- ----
Restructuring reserves ..................... $22,471 $ 9,191
Deferred revenue ........................... 2,681 2,692
Accrued construction costs ................. -- 6,490
Accrued dividends payable .................. 2,713 --
Other ...................................... 16,251 11,768
------- -------
$44,053 $30,141
======= =======
During the quarter ended December 31, 2000 the Company modified its
Internet data center expansion plan to delay, scale back and eliminate certain
facilities. During November 2000, management's plan to terminate certain lease
obligations, associated surplus power and environmental equipment related to the
proposed expansion of Globix Internet data centers in Boston, MA; Seattle, WA;
and Los Angeles, CA was completed and approved by the Board of Directors. When
initiated, the restructuring plan was expected to take approximately one year to
complete. The Company recorded a $38.1 million charge associated with this
restructuring plan in the fiscal quarter ending December 31, 2000. Approximately
$15.7 million of this charge was recorded as a write-off of construction in
progress, which included capitalized interest, consulting and legal fees,
construction and pre-construction related costs previously capitalized.
During the quarter ending September 30, 2001, the Company further
modified its business plan to eliminate certain additional Internet data center
and sales office facilities, resulting in the termination of certain employees,
lease obligations and write-off of certain equipment, leasehold improvements and
intangible assets and other costs. In connection with this modification,
additional restructuring charges of $18.0 million were recorded, of which $10.0
million was a write-off of equipment, leasehold improvements and intangible
assets and $1.2 million associated with employee terminations.
During the quarter ending 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 $48.4 million was recorded, of which $17.1 million was
for the write-off of previously escrowed lease deposit and landlord inducement
and legal payments, $28.4 million was a write-off of equipment and leasehold
improvements and $2.9 million associated with employee terminations.
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
As of March 31, 2002, restructuring charges totaling $82.1 million were
charged against the established restructuring reserve, resulting in a remaining
reserve balance of $22.4 million. The following table displays the activity and
balances of the restructuring reserve account from inception to March 31, 2002:
Restructuring Charge Activity Amount
----------------------------- ------
Initial charge-- November 2000 (balance) ............ $ 38,109
Additions ........................................... 0
Deductions .......................................... (27,667)
--------
Balance, December 31, 2000 .......................... 10,442
Additions ........................................... 0
Deductions .......................................... (2,662)
--------
Balance, March 31, 2001 ............................. 7,780
Additions ........................................... 0
Deductions .......................................... (1,610)
--------
Balance, June 30, 2001 .............................. 6,170
Additions ........................................... 18,000
Deductions .......................................... (14,979)
--------
Balance, September 30, 2001 ......................... 9,191
Additions ........................................... 0
Deductions .......................................... (1,647)
--------
Balance, December 31, 2001 .......................... 7,544
Additions ........................................... 48,447
Deductions .......................................... (33,520)
--------
Balance, March 31, 2002 ............................. $ 22,471
========
The above deductions to the restructuring reserve represent primarily
cash payments and write-offs of previously capitalized costs.
5. Senior Notes
In January 2000, the Company agreed to sell $600.0 million 12.5% senior
notes (the "Senior Notes") due 2010 in a private placement to a group of initial
purchasers and in March 2000 completed a tender offer to purchase all of the
outstanding 13% Senior Notes, $160.0 million in principal amount. The purchase
price in the tender offer was 106.5% of the principal amount, plus accrued and
unpaid interest. On February 8, 2000 the Company closed on its offering for the
$600.0 million 12.5% Senior Notes due 2010, resulting in net proceeds of
approximately $580.0 million, after underwriting fees and offering expenses.
The 12.5% Senior Notes were to mature on February 1, 2010. Interest on
the 12.5% Senior Notes was payable semiannually on February 1 and August 1 of
each year, commencing August 1, 2000. The 12.5% Senior Notes were unsecured
obligations of the Company and ranked pari passu in right of payment with all
existing and future unsecured and unsubordinated indebtedness and ranked senior
in right of payment to any future subordinated indebtedness. In connection with
the offering the Company incurred costs of approximately $20.0 million that was
being amortized over ten years using the effective interest method.
On February 1, 2002 Globix did not make its scheduled interest payment on
the Senior Notes in anticipation of commencing Chapter 11 cases under the U.S.
Bankruptcy Code. The Company filed its voluntary prepackaged bankruptcy petition
under Chapter 11 of the U.S. Bankruptcy Code on March 1, 2002 and in accordance
with SOP 90-7, upon entering Chapter 11 of the U.S. Bankruptcy Code, accrued
interest on the 12.5% Senior Notes was discontinued.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the Company's issued and outstanding
new Common Stock on a fully-diluted basis; (b) each holder of Preferred Stock,
in exchange for such Preferred Stock (which, as stated above, is deemed
cancelled as of the effective date), is entitled to receive, in exchange for
such Preferred Stock, its pro rata share of shares of new Common Stock
representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
The 11% Senior Secured Notes mature on May 1, 2008. Interest on the 11%
Senior Secured Notes shall accrue and for the first two years after the closing
date in kind by the issuance of additional 11% Senior Secured Notes in such
principal amount as shall equal the interest payment that is then due. For the
two year period thereafter, interest is payable in cash or, at the Company's
option when authorized by the board of directors, in additional 11% Senior
Secured Notes, or in any combination of cash and securities. For the remaining
year interest is payable in arrears annually.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
6. Mortgage Payable
On January 25, 2000, ATC Corp. borrowed $21.0 million from a financial
institution pursuant to a mortgage note secured by the 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.
7. Redeemable Convertible Preferred Stock
The Company had designated 250,000 shares of its authorized 5,000,000
shares of Preferred Stock, $0.01 par value, as Series A 7.5% Convertible
Preferred Stock. At March 31, 2002, there were 89,435 shares of Preferred Stock
outstanding and 160,565 shares of Preferred Stock reserved for issuance.
On December 3, 1999, the Company issued $80.0 million (80,000 shares) in
Preferred Stock to affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") to expand the build-out of its Internet data centers and other
facilities. The Preferred Stock was convertible into common stock at $10.00 per
share at any time and could not be called for redemption by the Company for five
years. Under the agreement, the Preferred Stock is subject to mandatory
redemption in 2014 and yielded an annual dividend of 7.5% payable quarterly in
cash or additional shares of Preferred Stock, at the option of the Company. The
holders of the Preferred Stock had a liquidation preference of $1,000 per share
and were entitled to cumulative dividends.
The Preferred Stock is recorded in the accompanying consolidated balance
sheet outside the stockholders equity section due to its mandatory redemption
feature. The Company incurred approximately $4.75 million of issuance costs in
connection with the Preferred Stock transaction. Such costs have been recorded
as a reduction of the carrying amount of the Preferred Stock and were being
accreted through a charge to additional paid in capital over the five-year
period to the earliest redemption date.
The Company did not declare or pay dividends for the three-month periods
ended March 31, 2002 and December 31, 2001.
10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
Cumulative dividends payable for such period totaling $2.7 million, have been
accrued at March 31, 2002 and are included in accrued liabilities. On March 1,
2002, the Company and two of its wholly owned domestic subsidiaries filed
Chapter 11 petitions in the United States Bankruptcy Court for the District of
Delaware. In accordance with SOP 90-7, upon entering Chapter 11 of the U. S.
Bankruptcy Code, the Preferred Stock dividend accrual was discontinued as of
March 1, 2002.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the Company's issued and outstanding
new Common Stock on a fully-diluted basis; (b) each holder of Preferred Stock,
in exchange for such Preferred Stock (which, as stated above, is deemed
cancelled as of the effective date), is entitled to receive, in exchange for
such Preferred Stock, its pro rata share of shares of new Common Stock
representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
8. Stockholder's Equity
In December 2000, Globix granted approximately 3.1 million shares of
restricted stock to certain employees and directors. The restricted stock awards
vest 25% per year over a four-year period on the anniversary date of the grant.
In connection with this restricted stock grant the Company recorded a deferred
compensation charge of $8,999 in stockholders equity. This deferred compensation
will be recorded as compensation expense over the four-year vesting period.
Compensation expense recorded in the six-month period ended March 31, 2002 was
$2,041, including $889 associated with officers terminated in connection with
the restructuring charge discussed in Note 4. During the six-month period ended
March 31, 2002, 1,072,123 of such restricted shares were vested. Since the
initial restricted stock grant in December 2000, approximately 113,750
restricted shares have been canceled.
Effective April 26, 2002, the new Board of Directors of the Company
approved the vesting of 100% of the remaining unvested restricted preferred
shares. This will result in a non-cash charge to compensation expense of $5.1
million in the month of April 2002.
9. Segment Information
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
11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
operates several Internet data centers throughout the United States and the
United Kingdom. Each Internet data center provides the same internet related
services to similar type of customers. Effective April 1, 2001 and for the
fiscal quarter ended June 30, 2001, Globix reports its results of operations in
one operating segment under the provisions of SFAS No. 131. Previously the
Company reported under two operating segments. The following table sets forth
geographic segment information for the three month and six-month periods ended
March 31, 2002 and 2001:
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
United States .......................... $ 15,499 $ 21,138 $ 33,050 $42,785
Europe ................................. 5,890 5,644 11,717 10,233
-------- -------- -------- --------
Consolidated ........................... $ 21,389 $ 26,782 $ 44,767 $53,018
======== ======== ======== ========
Operating income (loss):
United States .......................... $(27,476) $(17,008) $(46,042) $(74,701)
Europe ................................. (46,115) (2,949) (50,593) (5,957)
-------- -------- -------- --------
Consolidated ........................... $(73,591) $(19,957) $(96,635) $(80,658)
======== ======== ======== ========
Identifiable assets:
United States .......................... $361,684 $566,239 $361,684 $566,239
Europe ................................. 64,355 75,038 64,355 75,038
-------- -------- -------- --------
Consolidated ........................... $426,039 $641,277 $426,039 $641,277
======== ======== ======== ========
10. 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. Diluted
loss per share has not been presented since the inclusion of outstanding
convertible preferred stock, stock options and warrants would be antidilutive.
The following table summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of March 31, 2002 and
2001 had been converted, but not included in the calculation of diluted loss per
share as such shares are antidilutive:
March 31,
---------
2002 2001
---- ----
Convertible preferred stock .......... 8,617,300 8,303,000
Stock options ........................ 12,356,158 10,398,400
Unvested restricted stock ............ 1,767,600 3,063,500
Warrants ............................. 194,800 194,800
---------- ----------
22,935,858 21,959,700
========== ==========
As a result of the Chapter 11 reorganization, effective April 25, 2002,
all unexercised options and warrants were cancelled.
12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
The following is a reconciliation of net loss attributable to common
stockholders' for the three-month periods and six-months ended March 31, 2002
and 2001:
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Loss before cumulative effect of a change in accounting
principle ....................................................... $ (86,269) $ (31,966) $ (127,873) $ (102,918)
ividend and accretion on preferred stock ........................ (1,329) (1,761) (3,178) (3,496)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders' before
cumulative effect of a change in accounting principle ........... (87,598) (33,727) (131,051) (106,414)
Cumulative effect of a change in accounting principle ........... -- -- -- (2,332)
----------- ----------- ----------- -----------
Net loss attributable to common stockholders' ................... $ (87,598) $ (33,727) $ (131,051) $ (108,746)
=========== =========== =========== ===========
Denominator:
Weighted average shares outstanding--basic and diluted .......... 39,688,862 38,709,658 $39,330,033 38,011,488
=========== =========== =========== ===========
11. 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, 2002 and 2001:
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Net loss ........................................................ $(86,269) $ (31,966) $(127,873) $(105,250)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities available
for sale ........................................................ 226 (290) 1,301 (3,403)
Foreign currency translation adjustment ......................... (1,576) (3,268) (2,804) (2,156)
---------- ---------- ---------- ----------
Comprehensive loss: ............................................. $ (87,619) $ (35,524) $(129,376) $ (110,809)
========== ========== ========== ==========
12. Recent Technical Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144 entitled "Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 will be effective for
financial statements of fiscal years beginning after December 15, 2001. Globix
expects the adoption of SFAS No. 144 will not have a material impact on the
Globix consolidated financial position results of operations or cash flows.
In June 2001, the FASB issued SFAS Nos. 141 and 142 entitled, "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS No
141, among other things, eliminates the pooling of interests method of
accounting for business acquisitions entered into after June 30, 2001. SFAS No.
142 requires companies to use a fair-value approach to determine whether there
is an impairment of existing and future goodwill. SFAS No. 142 is effective
beginning October 1, 2002. Globix expects the adoption of SFAS Nos. 141 and 142
will not have a material impact on Globix's consolidated financial position,
results of operations or cash flows.
13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
13. Contingencies
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management and
counsel, it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
In January 2002, Globix and Marc Bell (Non-Executive Chairman), Peter
Herzig (Chief Executive Officer) and Brian Reach (former Chief Financial
Officer) were named as defendants in purported class action lawsuits filed in
the United States District Court for the Southern District of New York. The
complaints have been consolidated into a single proceeding under the caption
George Schirripa, et al., v. Globix Corporation, et al., No. 02 CV 0082. Since
January 4, 2002, several additional substantially identical lawsuits, including
a purported class action filed on behalf of purchasers of the Company's 12.5%
Senior Notes, captioned Lance Brofman, et al. v. Globix Corp., et al., No. 02 CV
01063, have been filed in the same court, each naming the same group of
defendants.
Additionally, on January 30, 2002, a derivative action was filed in the
United States District Court for the Southern District of New York. The action
is captioned Susan Bonney, Plaintiff vs. Marc Bell, Anthony St. John, Robert
Bell, Martin Fox, Jack Furst, Michael Levitt, Sid Patterson, Harshad Shah,
Richard Videbeck, Peter Herzig and Brian Reach, Defendants vs. Globix
Corporation, Nominal Defendant. This action is substantially identical to the
above-mentioned lawsuit.
Except for the Brofman complaint, which was brought on behalf of
purchasers of the Company's 12.5% Senior Notes between November 16, 2000 and
December 27, 2001, these complaints are all brought on behalf of purchasers of
the Company's common stock between November 16, 2000 and December 27, 2001 and
allege essentially identical violations of the Securities Exchange Act of 1934,
as amended. The complaints have been brought as purported bondholder or
stockholder class actions under Sections 10(b) and 20(a) and Rule 10b-5 of the
Securities Exchange Act. In general, the complaints allege that Globix and the
individual defendants misrepresented Globix's financial condition and business
prospects to inflate the value of the Company's 12.5% Senior Notes or common
stock, as the case may be. The complaints seek unspecified monetary damages for
the alleged inflated price of the Company's 12.5% Senior Notes or common stock,
as the case may be, purchased by all class members, attorneys' fees and costs of
litigation. On April 17, 2002 the complaints were consolidated into a single
proceeding. The Company has not yet responded to any of these lawsuits, and no
discovery has been conducted. The Company believes that the allegations in each
of these actions are without merit and intends to defend against these actions
vigorously. However, there can be no assurance that this litigation will not
have a material adverse effect on the Company, its financial position, results
of operations or cash flows.
14. Subsequent Events
On April 25, 2002, the Company emerged from Chapter 11 bankruptcy
protection after the United States Bankruptcy Court confirmed the plan of
reorganization, and all conditions necessary for the plan to become effective
were satisfied or waived.
In April and May of 2002, the Company expects to settle certain long-term
lease obligations with various vendors, which had a carrying value of
approximately $6.8 million at March 31, 2002. These settlements will result in a
gain on early extinguishment of debt of approximately $4.1 million. Such gain
will be recorded in the Statement of Operations in the quarter ending June 30,
2002.
Effective with the emergence from bankruptcy on April 25, 2002, the
Company negotiated a new 15 year lease for its second London Internet data
center and significantly reduced the leased square footage and associated
operating costs. This transaction resulted in the payment of certain escrow
amounts and inducement payments, which were recorded as part of the
restructuring charge recorded in the three-months ended March 31, 2002. These
payments include $15.1 million of previously escrowed funds recorded as
restricted cash in the accompanying March 31, 2002 Balance Sheet.
14
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Information
This Report on Form 10-Q contains certain forward-looking statements
concerning, among other things, the Company's plans and objectives for future
operations, planned products and services, potential expansion into new markets,
and anticipated customer demand for our existing and future products and
services. The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage the inclusion of prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying factors that could cause actual results to differ
materially. Among the factors that could cause actual results, performance or
achievement to differ materially from those described or implied in the
forward-looking statements are:
o ability to maintain and increase revenue by retaining existing customers
and attracting new customers,
o ability to match the operating cost structure with revenue to achieve
positive cash flow, including possible cost reductions, if necessary,
o ability to conduct business with critical vendors on acceptable terms,
o the sufficiency of existing cash and cash flow to complete our business
plan and fund our working capital requirements,
o the insolvency of customers, vendors, and other parties critical to our
business,
o Globix's large existing debt obligations and history of operating
losses,
o the ability of Globix to integrate, operate and upgrade/downgrade our
network,
o Globix's ability to recruit and retain sufficient and qualified
personnel needed to staff our operations,
o the ability of Globix to raise additional capital, if necessary,
o ability to obtain and maintain relisting on the NASDAQ National Market
or another primary market,
o potential marketplace or technology changes, rendering existing products
and services obsolete, and
o changes in or the lack of anticipated changes in the regulatory
environment, including potential legislation increasing our exposure to
content distribution and intellectual property liability,
The following discussion and analysis should be read together with the
consolidated financial statements and notes to the financial statements included
in Part II Item 8 of the Company's Annual Report on Form 10-K. The following
discussion contains forward-looking statements based on Globix's current
expectations, assumptions, estimates and projections about Globix and its
industry. Globix's results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the
risks and uncertainties appearing 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.
Overview
We are a leading full-service provider of sophisticated Internet
solutions to businesses. Our solutions include secure and fault-tolerant
Internet data centers with premium network services providing connectivity to
the Internet and complex Internet-based application services, which include
dedicated hosting, streaming media and content delivery and messaging services.
These elements of our total Internet solution combine to provide our customers
with the ability to create operate and scale their increasingly complex Internet
operations in a cost-efficient manner.
Globix, founded in 1989, undertook a major expansion plan in 1998 in
order to more aggressively pursue opportunities resulting from the tremendous
growth of the Internet. In April 1998, Globix completed a $160.0 million
offering of 13% senior notes. In June and July 1999, Globix completed
construction of its initial Internet data center facilities in New York City,
London and Santa Clara, California and began operations at each facility.
In March 1999, Globix completed a public offering of 16,000,000 shares of
its common stock, resulting in net proceeds to Globix of approximately $136.6
million.
15
In December 1999, Globix completed the private placement of 80,000 shares
of Preferred Stock to affiliates of Hicks, Muse, Tate & Furst Incorporated,
resulting in net proceeds of $75.3 million.
In February 2000, Globix completed a $600.0 million debt financing to
fund (a) the continued expansion of its facilities and network and (b) the
tender offer to purchase all of the outstanding 13% Senior Notes, $160.0 million
principal amount. The purchase price of the tender, completed on February 8,
2000, was 106.5% of principal amount plus all accrued and unpaid interest.
On March 1, 2002, the Company and two of its wholly owned domestic
subsidiaries 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. The
Company received from the Bankruptcy Court authority to pay its employees,
trade, and certain other creditors in full and on time, regardless of whether
such claims arise prior to or after the Chapter 11 filing.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
For fiscal periods ended on or before March 31, 2001 Globix reported its
results of operations in two operating segments: the "Internet Division" and the
"Server Sales and Integration Division." The Internet Division provides, complex
managed hosting, dedicated Internet access and application services, (such as,
streaming media, network security and server administration and network
monitoring). The Server Sales and Integration Division provides Internet-related
hardware and software, systems and network integration. Revenue from the
Internet Division has grown significantly as a percentage of total revenue,
increasing from 6% in 1996 to 94% in the three-month period ended March 31,
2001. Effective April 1, 2001 and for the fiscal year ended September 30, 2001,
Globix reports its results of operations in one operating segment under the
provisions of SFAS No. 131.
The largest component of Globix's total revenue is complex hosting
services and connectivity including both minimum committed amounts and overages.
In addition to fees based on bandwidth usage, Globix charges certain customers
monthly fees for the use of its physical facilities. Globix refers to this
service as complex hosting. Globix's complex hosting contracts typically range
from one to three years. The second largest component of Globix's total revenue
is dedicated Internet access services to business customers. Globix's dedicated
access customers typically sign one or two-year contracts that provide for
fixed, monthly-recurring service fees and a one-time installation fee.
Application services are charged on a monthly, fixed price or time and materials
basis.
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting customers. Telecommunications costs include
the cost of providing local loop costs for connecting dedicated access customers
to the Globix network, leased line and associated costs related to connecting
with our peering partners, and costs associated with leased lines connecting our
facilities to our backbone and aggregation points of presence.
Selling, general and administrative expenses consist primarily of
salaries and occupancy costs for executive, financial, operational and
administrative personnel and related operating expenses associated with network
operations, customer service and field services as well as marketing expenses,
professional fees and bad debt expense.
Globix depreciates its capital assets on a straight-line basis over the
useful life of the assets, ranging from 3 to 40 years. Globix amortizes its
identifiable intangible assets (primarily customer lists) on a straight-line
basis over periods ranging up to 36 months. In addition, Globix amortizes debt
issuance costs associated with its debt financings over the term of those
obligations using the effective interest method.
Globix historically has experienced negative cash flow from operations
and has incurred net losses. Globix's ability to generate positive cash flow
from operations and achieve profitability is dependent upon Globix's ability to
continue to grow its revenue base and achieve further operating efficiencies.
For the six months ended March 31, 2002 and 2001, Globix generated negative cash
flows from operations of approximately $ 35.0 million and $69.5 million,
respectively, and incurred net losses of approximately $127.9million and $105.3
million, respectively. As of March 31, 2002, Globix had an accumulated deficit
of approximately $527.0 million.
16
Three-Months Ended March 31, 2002 As Compared To The Three-Months Ended March
31, 2001
Revenue. Revenue for the three-month period ended March 31, 2002
decreased 20.1% to $21.4 million from $26.8 million for the three-month period
ended March 31, 2001. This decrease was primarily attributable to the decrease
in lower margin hardware sales and increased customer churn and the reluctance
of new customers to contract with Globix during the bankruptcy proceeding.
Cost of Revenue. Cost of revenue for the three-month period ended March
31, 2002 was $9.7 million or 45.5% of total revenue as compared to $10.5 million
or 39.1% of total revenue for the three-month period ended March 31, 2001. This
decrease was primarily attributable to the revenue decline and revenue mix.
Selling, General and Administrative. Selling, general and administrative
expenses for the three-month period ended March 31, 2002 were $21.4 million or
100.1% of revenue as compared to $28.3 million or 105.7% of revenue for the
three-month period ended March 31, 2001. Approximately $6.5 million of the
decrease was attributable to a decrease in salaries and benefits necessitated by
the decrease in demand of Internet products and services. The number of
employees decreased from approximately 860 as of March 31, 2001 to approximately
380 as of March 31, 2002. In addition, approximately $0.8 million of the
decrease was related to the decrease in marketing spending and $1.0 million to
the decrease in professional fees. The decrease was offset by an increase of
approximately $1.3 million of rent expense, which was attributable to the
opening of a new Internet data center during June 2001.
Restructuring Expenses. This charge of approximately $48.4 million
recorded in the three-month period ended March 31, 2002 is attributable to lease
termination and other equipment related expenses associated with the execution
of the Company's Plan of Reorganization, whereby it took an estimated charge
associated with the reduction of certain lease obligations and write-off of
leasehold improvements and equipment related to certain Internet data center
lease obligations, closing certain network access points and network aggregation
points.
Impairment of Intangible Assets. The charge of approximately $3.2 million
recorded in the three-months ended March 31, 2002 is attributable to the write
down of intangible assets considered to be impaired as a result of the
deterioration of business conditions in certain markets.
Depreciation and Amortization. Depreciation and amortization increased to
$12.2 million for the three-month period ended March 31, 2002 as compared to
$8.0 million for the three-month period ended March 31, 2002. The increase was
primarily related to the increase in construction costs and equipment purchases
related to the construction and renovation of Internet data centers network
infrastructure enhancements, which are now largely placed in service.
Interest and Financing Expense and Interest Income. Interest and
financing expense decreased to $14.0 million for the three-month period ended
March 31, 2002 as compared to $16.1 million for the three-month period ended
March 31, 2001. $6.3 million of the decrease was attributed to the
discontinuance of the Senior Note interest accrual for the period March 1 to
March 31 due to our bankruptcy filing on March 1, 2002. This decrease was offset
by the interest capitalized for the three-month period ending March 31, 2001 for
the continuing construction of the data centers. The decrease in interest income
to $0.9 million for the three-month period ended March 31, 2002 reflects the
reduced cash and the impact of the declining interest rates as compared to the
same period in the prior year.
Minority Interest in Subsidiary. Minority interest credit results from
the consolidation of a minority owned subsidiary consolidated with our results
due to effective control of this entity by Globix.
Net Loss and Net Loss Attributable To Common Stockholders. As a result of
the above, Globix reported a net loss of $86.3 million and a net loss
attributable to common stockholders of $87.6 million for the three-month period
ended March 31, 2002 or $2.18 per share as compared to a net loss of $32.0
million and a net loss attributable to common stockholders of $33.7 million or
$0.87 per share for the three-month period ended March 31, 2001.
Six-Months Ended March 31, 2002 As Compared To The Six-Months Ended March 31,
2001
Revenue. Total revenue for the six-month period ended March 31, 2002
decreased 15.6% to $44.8 million from $53.0 for the six-month period ended March
31, 2001. This decrease was primarily attributable to the decrease in lower
margin hardware sales and to the increase in customer churn and the reluctance
of new customers to contract with Globix during the bankruptcy proceeding.
17
Cost of Revenue. Cost of revenue for the six-month period ended March 31,
2002 was $19.4 million or 43.3% of total revenue as compared to $20.9 million or
39.5% of total revenue for the six-month period ended March 31, 2001. The
decrease in cost of revenue was primarily attributable to a decrease in revenue.
Selling, General and Administrative. Selling, general and administrative
expenses for the six-month period ended March 31, 2002 were $46.2 million or
103.1% of total revenue as compared to $59.1 million or 111.5% of total revenue
for the six-month period ended March 31, 2001. Approximately $9.6 million or
74.4% of the decrease was attributable to a decrease in salaries and benefits
due to the decrease in the number of employees from approximately 860 as of
March 31, 2001 to approximately 380 as of March 31, 2002. Approximately $4.7
million of the decrease is due to a decrease in marketing and professional
expenses. Bad debt expense also decreased by $1.0 million. Also related to the
decrease in employees, travel and entertainment expense decreased by $1.0
million. These decreases were offset by an increase of $3.3 million of rent
expense and $0.9 million of technology license expense.
Restructuring Expenses. This charge of approximately $48.4 million
recorded in the six-month period ended March 31, 2002 is attributable to lease
termination and other equipment related expenses associated with the execution
of the Company's Plan of Reorganization, whereby it took an estimated charge
associated with the reduction of certain lease obligations and write-off of
leasehold improvements and equipment related to certain Internet data center
lease obligations, closing certain network access points and network aggregation
points.
The charge of approximately $38.1 million recorded in the six-month
period ended March 31, 2001 is attributable to the restructuring associated with
the execution of our revised business plan, whereby we plan to construct fewer
Internet data centers and have taken an estimated charge associated with the
termination of certain leases and reduction of certain commitments for surplus
power and environmental equipment related to the Internet data center expansion.
This charge includes estimated lease termination costs in addition to a
write-off of construction in progress associated with equipment, capitalized
interest, consulting and legal fees, construction and pre-construction related
costs previously capitalized.
Depreciation and Amortization Depreciation and amortization increased to
$24.2 million for the six-month period ended March 31, 2002 as compared to $15.5
million for the six-month period ended March 31, 2001. The increase was
primarily related to the increase in construction costs and equipment purchases
related to the network infrastructure enhancements of the Internet data centers
in New York, London and Santa Clara.
Interest and Financing Expense and Interest Income Interest and financing
expense increased to $34.1 million for the six-month period ended March 31, 2002
as compared to $32.6 million for the six-month period ended March 31, 2001. The
increase is due to capitalized interest on the build-out of the U.S. and U.K.
internet data centers through March 31, 2001. The decrease in interest income to
$1.8 million for the six-month period ended March 31, 2002 reflects the reduced
cash position derived from the net proceeds of the February 2000 debt financing
and the December 1999 issuance of the Series A Convertible Preferred Stock and
the impact of declining interest rates compared to the same six-month period in
the prior year.
Net Loss and Net Loss Attributable to Common Stockholders As a result of
the above, Globix reported a net loss of 127.9 million and net loss attributable
to common stockholders of $131.1 million for the six-month period ended March
31, 2002 or $3.33 per share as compared to a net loss of $105.3 million and a
net loss attributable to common stockholders of $108.7 million or $2.86 per
share for the six-month period ended March 31, 2001.
Liquidity and Capital Resources
On March 1, 2002, the Company and two of its wholly owned domestic
subsidiaries filed voluntary Chapter 11 petitions 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. The Company received
authority from the Bankruptcy Court to pay its employees, trade, and certain
other creditors in full and on time, regardless of whether such claims arise
prior to or after the Chapter 11 filing. The financial reporting of the Company
following the filing of the Chapter 11 petitions is governed by the American
Institute of Certified Public Accountants Statement of Position No. 90-7
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"). SOP 90-7 provides guidance for companies that have filed petitions
with the Bankruptcy Court and expect to reorganize under Chapter 11 of the
Bankruptcy Code. The Company implemented the guidance of SOP 90-7 upon the
initial filing on March 1, 2002.
On April 8, 2002, the United States Bankruptcy Court confirmed the joint
pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
18
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the Company's issued and outstanding
new Common Stock on a fully-diluted basis; (b) each holder of Preferred Stock,
in exchange for such Preferred Stock (which, as stated above, is deemed
cancelled as of the effective date), is entitled to receive, in exchange for
such Preferred Stock, its pro rata share of shares of new Common Stock
representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
The reorganization reduced significantly the principal amount of the
Company's outstanding indebtedness by reducing outstanding indebtedness by
approximately $480 million and converting a substantial portion of the Company's
indebtedness into new Common Stock. Moreover, the new debt issued under the Plan
permits Globix to satisfy interest payments in kind for at least two years and,
at the discretion of the Company's board of directors, up to four years, thereby
significantly reducing liquidity concerns arising from pre-Chapter 11 bankruptcy
debt service obligations. The Company believes that the restructuring
substantially reduces uncertainty with respect to its future and better
positions it to attract and maintain new customers. There can be no assurance
that the Company will be successful in executing its new business plan and there
is substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Cash flows used in operating activities were $35.0 and $69.5 million for
the six-months ended March 31, 2002 and 2001, respectively. Cash flows from
operating activities can vary significantly from period to period depending upon
the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets and accounts payable and accrued
liabilities. In both periods, our net loss was the primary component of cash
used in operating activities, offset by non-cash interest charges as well as
depreciation and amortization expenses, provisions for uncollectible accounts
receivable and non-cash restructuring charges and, in 2001, a cumulative effects
of a change in accounting principle and an impairment on investments.
Cash flows used in investing activities were $12.9 and $75.3 million for
the six-months ended March 31, 2002 and 2001, respectively. Investments in
capital expenditures related to our network and facilities were $ 18.7 million
and $104.8 million for the six-months ended March 31, 2002 and 2001,
respectively. $20.1 and $91.3 million for the six-months ended March 31, 2001
and 2000, respectively was expended in cash and the balance was financed under
financing arrangements or remained in accounts payable, accrued liabilities and
other long term liabilities at each period-end.
Cash flows used in (provided by) financing activities were $4.2 and $
(0.4) million for the six-months ended March 31, 2002 and 2001, respectively. In
2002 and 2001, Globix repaid certain mortgage and capital lease obligations. In
2002, offset by a capital contribution from a minority interest subsidiary and
in 2001 offset by proceeds from the exercise of stock options and warrants.
As of March 31, 2002, we had $86.2 million of cash, cash equivalents,
restricted cash, restricted investments and marketable securities, including
$59.4 million of cash without restrictions as to use.
Globix has also issued collateralized letters of credit aggregating
approximately $ 2.6 million. The related collateral funds are included in
restricted cash and investments on the consolidated balance sheet at March 31,
2002.
In addition, certain computer and network equipment has been financed
through vendors and financial institutions under capital and operating lease
arrangements. Capital lease obligations total approximately $12.2 million at
March 31, 2002. In April and May 2002, the Company expects to make cash payments
of approximately $2.8 million, in settlement of approximately $6.8 million of
the above capital lease obligations. This will result in a gain from the early
extinguishment of debt of approximately $4.0 million. As of March 31, 2002,
Globix has various agreements to lease facilities and equipment and is obligated
to make future minimum lease payments of approximately $72.2 million on
operating leases expiring in various years through 2017. At March 31, 2002 there
were no unused equipment financing arrangements with vendors or financial
institutions.
Net cash used in operating activities decreased to $35.0 million from
$69.5 million for the periods ended March 31, 2002 and 2001, respectively.
Operating losses are expected to continue to decrease during the course of the
fiscal 2002 versus the prior year due principally to reductions in headcount and
other cost savings initiatives. Capital expenditures for the year ending
September 30, 2002 are also expected to be significantly less than the prior
fiscal years and quarters.
19
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States for interim financial information, the instructions to Form
10-Q and Article 10 of Regulation S-X. 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. The following is a summary of our critical
accounting policies and estimates:
Revenue Recognition
The Company recognizes revenue in accordance with SAB No. 101 "Revenue
Recognition in Financial Statements" ("SAB No. 101"), as amended. SAB No. 101
expresses the view of the SEC Staff in applying generally accepted accounting
principles to certain revenue recognition issues. Under the provisions of SAB
No. 101 set up and installation revenue are deferred and recognized over the
estimated term of the underlying service contracts and/or the customer
relationship, which range from twelve to thirty six months.
Revenue consists primarily of managed hosting and dedicated Internet
access fees, sales of systems administration and application services (such as
streaming media, network security and administration and network monitoring).
Monthly service revenue related to managed hosting and Internet access is
recognized over the period services are provided. Revenue derived from
application services is recognized as the project progresses. Projects are
generally completed within less than one year. Payments received in advance of
providing services are deferred until the period such services are provided.
Cost of Revenue
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting customers. Telecommunications costs include
the cost of providing local loop costs for connecting dedicated access customers
to the Globix network, leased line and associated costs related to connecting
with our peering partners, and costs associated with leased lines connecting our
facilities to our backbone and aggregation points of presence.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, restricted cash and investments, marketable securities
and accounts receivable. The Company maintains cash and cash equivalents,
short-term investments, and restricted cash and investments with various major
financial institutions, which invest primarily in U.S. Government instruments,
high quality corporate obligations, certificates of deposit and commercial
paper.
The Company believes that concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number and geographic
dispersion of customers comprising the Company's customer base. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential losses. Management makes estimates of the uncollectibility of our
trade accounts receivable on a monthly basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, subject to adjustment
for impairment, less accumulated depreciation or amortization computed on the
straight-line method. Buildings and building improvements are depreciated over
their estimated useful life of up to forty years. Computer hardware and
software, network equipment and furniture and equipment are depreciated over
their estimated useful lives, ranging from three to seven years. Leasehold
improvements are amortized over the term of the lease or life of the asset,
whichever is shorter.
Long-Lived Assets
The Company reviews the carrying amount of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated
20
to be generated during the remaining life of the asset to the net carrying value
of the asset.
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized.
Recent Technical Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 144 entitled "Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 will be effective for
financial statements of fiscal years beginning after December 15, 2001. Globix
expects the adoption of SFAS No. 144 will not have a material impact on the
Globix consolidated financial position results of operations or cash flows.
In June 2001, the FASB issued SFAS Nos. 141 and 142 entitled, "Business
Combinations" and "Goodwill and Other Intangible Assets", respectively. SFAS No
141, among other things, eliminates the pooling of interests method of
accounting for business acquisitions entered into after June 30, 2001. SFAS No.
142 requires companies to use a fair-value approach to determine whether there
is an impairment of existing and future goodwill. SFAS No. 142 is effective
beginning October 1, 2002. Globix expects the adoption of SFAS Nos. 141 and 142
will not have a material impact on Globix's consolidated financial position,
results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 2002, we had financial instruments consisting of fixed rate
debt, mortgage payable marketable securities, short-term investments and other
investments. The substantial majority of our debt obligations consist of the
Senior Notes, which bear interest at 12.5% and mature May 1, 2010. On April 25,
2002, the Company emerged from Chapter 11 bankruptcy protection after the United
States Bankruptcy Court confirmed the plan of reorganization. The Plan provides
that all existing securities of the Company will be cancelled and each holder of
Senior Notes will receive, in exchange for such Senior Notes (which, as stated
above, will be cancelled upon consummation of the restructuring), its pro rata
share of (i) $120 million principal amount of new 11% Senior Secured Notes due
2008, and (ii) shares of new Common Stock representing approximately 85% of the
initial shares of new Common Stock, subject to dilution by the exercise of
management incentive options representing up to 10% of the Company's issued and
outstanding new Common Stock on a fully-diluted basis. The mortgage interest is
payable at 9.16% (subject to adjustment on February 11, 2010) based on a 25 year
amortization schedule. Principal and interest payments of $178.5 are payable
monthly and any balance of the principal and all accrued and unpaid interest is
due and payable in February 2025.
In April and May of 2002, the Company expects to settle certain long-term
capital lease obligations, which had a carrying value of approximately $6.8
million at March 31, 2002. After such settlements, annual maturities for our
capital lease obligations (including interest) in each of the next twelve-months
are as follows: $2.9 million in 2003, $2.4 million in 2004, $0.5 million in
2005, $0.3 million in 2006 and thereafter.
Marketable securities include Globix's strategic investment in Edgar
On-Line and Globecomm Systems Inc., publicly traded entities, which are recorded
at fair market value. Globix does not hedge its exposure to fluctuations in the
value of its equity securities.
Our other investments are generally fixed rate investment grade and
government securities denominated in U.S. dollars. At March 31, 2002, all of our
investments are due to mature within twelve months and the carrying value of
such investments approximates fair value. At March 31, 2002, $26.8 million of
our cash and investments were restricted in accordance with the terms of certain
collateral obligations. In April 2002, $17.8 million of such restricted cash has
been paid to settle such collateral obligations.
We actively monitor the capital and investing markets in analyzing our
investing decisions.
Globix is also subject to market risk associated with foreign currency
exchange rates. Globix's business plan includes the expansion of the U.K.
operation. To date, Globix has not utilized financial instruments to minimize
its exposure to foreign currency fluctuations. Globix will continue to analyze
risk management strategies to minimize foreign currency exchange risk in the
future. Globix believes it has limited exposure to financial market risks,
including changes in interest rates. The fair value of our investment portfolio
or related income would not be significantly impacted by a 100 basis point
increase or decrease in interest rates due mainly to the short-term nature of
the major portion of our investment portfolio. An increase or decrease in
21
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.
PART II
Item 1. Legal Proceedings
(a) On March 1, 2002, the Company and two of its subsidiaries, filed
petitions for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code with the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court").
Prior to the filing of the bankruptcy petitions, on January 14, 2002, the
Company commenced solicitation of acceptances of the joint prepackaged plan of
reorganization (the "Plan") from the holders of Senior Notes and Preferred Stock
as of December 28, 2001. The voting period for the solicitation ended on
February 13, 2002. The result of the solicitation was the acceptance of the Plan
by the holders of Senior Notes with respect to both numerosity and amount and
Preferred Stock with respect to amount, in each case as required for class
acceptance of the Plan under the Bankruptcy Code, as follows:
FOR AGAINST
AMOUNT/ % OF VOTED AMOUNT/ % OF VOTED
NUMBER NUMBER
Principal Amount of Senior Notes $ 483,487 97.5 % $ 12,530 2.5 %
Number of Senior Notes 151 96.8 % 5 3.2 %
Principal Amount of Preferred Stock $ 86,172 100 % $ 0 0 %
The Company did not solicit votes from holders of old Common Stock equity
interests. In the Chapter 11 proceeding, the Bankruptcy Court waived any
solicitation requirement with respect to such holders, and deemed such holders
to have rejected the Plan.
On April 8, 2002, the Bankruptcy Court entered an order confirming the
Plan.
On April 25, 2002, all conditions necessary for the Plan to become
effective were satisfied or waived and the Company emerged from Chapter 11
bankruptcy protection.
As a result of the effectiveness of the Plan, all of the Company's
securities existing prior to the effectiveness have been cancelled and (a) each
holder of Senior Notes will receive, in exchange for such Senior Notes, its pro
rata share of (i) $120 million principal amount of new 11% Senior Secured Notes
due 2008 and (ii) shares of new Common Stock representing approximately 85% of
the initial shares of new Common Stock, subject to dilution by the exercise of
management incentive options, (b) each holder of Preferred Stock, in exchange
for such Preferred Stock, will receive, in exchange for such Preferred Stock,
its pro rata share of shares of new Common Stock representing approximately 14%
of the initial shares of new Common Stock, subject to dilution by the exercise
of management incentive options; and (c) each holder of an old Common Stock
equity interest will receive, in exchange for such old Common Stock equity
interest, its pro rata share of shares of new Common Stock representing
approximately 1% of the initial shares of new Common Stock, subject to dilution
by the exercise of management incentive options. New Common Stock shall be
issued in whole shares only, with any factional share amounts to be rounded up
or down as provided in the Plan.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
(b) As previously reported in the Company's Quarterly Report on Form 10-Q
filed on February14, 2002, on January 4, 2002, the Company and certain officers
of the Company were named as defendants in a purported class action lawsuit
filed in the United States District Court for the Southern District of New York.
These complaints have been consolidated into a single proceeding under the
caption George Schirripa, et al., v. Globix Corporation, et al., No. 02 CV 0082.
After January 4, 2002, ten additional substantially identical lawsuits were
filed in the same court, each naming the same group of defendants.
22
These lawsuits are all brought on behalf of purchasers of our securities
between November 16, 2000 and December 27, 2001 and allege essentially identical
violations of the Securities Exchange Act of 1934, as amended. On April 17,
2002, the lawsuits were consolidated into a single proceeding. We have not yet
responded to the lawsuits, and no discovery has been conducted. We believe that
the allegations in the lawsuits are without merit and we intend to defend
against the lawsuits vigorously. However, we cannot give any assurance that this
litigation will not have a material adverse effect on us, our financial
condition or our results of operations.
Item 2. Changes in Securities and Use of Proceeds
See Item 1. Legal Proceedings.
Item 3. Defaults Upon Senior Securities
See Item 1. Legal Proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
See Item 1. Legal Proceedings.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
2.1 Amended Joint Prepackaged Plan of the Company and certain subsidiaries dated April 8, 2002.(1)
3.1 Amended and Restated Certificate of Incorporation of the Company.
3.2 Amended and Restated By-laws of the Company.
4.1 Indenture, dated as of April 23, 2002, between the Company, as issuer,
Subsidiary Guarantors of the Company, and HSBC Bank USA, as trustee, relating to
the Company's 11% Senior Secured Notes due 2008.
4.2 Form of Pledge and General Security Agreement between each Subsidiary
Guarantor of the Company and HSBC Bank USA, as collateral agent/trustee, dated
as of April 23, 2002.
4.3 Mortgage, Security Agreement and Fixture Filing, between 415 Greenwich GC,
LLC, as mortgagor and HSBC Bank USA, as collateral agent/trustee dated as of
April 23, 2002.
------------------
(1) Previously filed and incorporated by reference to the Company's
Form 8-K filed with the Securities and Exchange Commission on April 23, 2002.
23
(b) Reports on Form 8-K
Dated Filed: January 14, 2002 Date of Event: January 14, 2002
Subject: Press release announcing that the Company had entered into lock-up
agreements regarding the restructuring of the Company's equity and debt (the
"Chapter 11 Prepackaged Reorganization Plan") with certain holders owning more
than 51% of the Company's outstanding $600,000,000 issuance of 12-1/2% senior
notes due 2010 (the "Senior Notes"), and holders of its Series A 7-1/2%
Convertible Preferred Stock. The Company also announced that it commenced
soliciting acceptances of its proposed Chapter 11 Prepackaged Reorganization
Plan from the other holders of the Senor Notes.
Date Filed: February 1, 2002 Date of Event: February 1, 2002
Subject: The Company announced that it did not make its scheduled interest
payment on its 12-1/2% senior notes due 2010 and that it did not intend to make
the interest payment within the 30-day grace period thereafter.
Date Filed: March 4, 2002 Date of Event: March 1, 2002
Subject: Press release announcing that the Company and two of its subsidiaries
filed Chapter 11 petitions in the United States Bankruptcy Court for the
District of Delaware.
24
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/ JOHN D. MCCARTHY
---------------------------------------
John D. McCarthy, Acting Chief
Financial Officer
Date: May 14, 2002
By: /S/ SHAWN P. BROSNAN
---------------------------------------
Shawn P. Brosnan, Senior Vice
President, Corporate
Controller and Chief
Accounting Officer
Date: May 14, 2002
25