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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 December 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 |_| No |X|
Indicate by checkmark whether the registrant is an accelerated filer (as defined
in Exchange Act Rule 12b-2).
Indicate by checkmark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act
subsequent to the distribution of securities under a plan confirmed by a court.
Yes|_| No|X|
APPLICABLE ONLY TO CORPORATE ISSUERS
The number of shares of the registrant's common stock deemed to be
outstanding as of March 24, 2003 was 16,460,000.
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GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I Financial Information
Item 1. Condensed Consolidated Balance Sheets-- As of December 31, 2002 (Successor Company)(unaudited) and 1
September 30, 2002 (Successor Company)...................................................................
Unaudited Condensed Consolidated Statements of Operations--For the Three Months Ended December 31, 2002
(Successor Company) and December 31, 2001 (Predecessor Company)......................................... 2
Unaudited Condensed Consolidated Statements of Cash Flows--For the Three Months Ended December 31, 2002
(Successor Company) and December 31, 2001 (Predecessor Company).......................................... 3
Notes to Unaudited Condensed Consolidated Financial Statements........................................... 4
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................................... 20
Item 4. Controls and Procedures.................................................................................. 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...................................................... 24
Item 5. Other Information........................................................................................ 24
Item 6. Exhibits and Reports on Form 8-K......................................................................... 24
Signatures............................................................................................... 25
Certifications...........................................................................................
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands, Except Per Share Data)
Successor Company
-------------------------------
December 31, September 30,
2002 2002
---- ----
(Unaudited)
Assets
Current assets:
Cash and cash equivalents................................................................. $ 40,484 $ 47,562
Short-term investments ................................................................... 6,671 5,392
Marketable securities .................................................................... 1,549 1,327
Accounts receivable, net of allowance for doubtful accounts of $2,036 and $2,565
respectively ........................................................................... 5,914 7,060
Prepaid expenses and other current assets ................................................ 5,104 7,735
Restricted cash .......................................................................... 1,461 1,760
--------- ---------
Total current assets ................................................................. 61,183 70,836
Long-term Investments ......................................................................... 2,000 --
Investments, restricted ....................................................................... 7,395 7,337
Property, plant and equipment, net ............................................................ 172,628 174,710
Intangible assets, net of accumulated amortization of $870 and $543, respectively ............. 9,285 9,612
Other assets .................................................................................. 225 225
--------- ---------
Total assets .................................................................................. $ 252,716 $ 262,720
========= =========
Liabilities and Stockholders' Equity (Deficit):
Current liabilities:
Capital lease and other obligations ...................................................... $ 1,668 $ 1,520
Accounts payable ......................................................................... 9,458 8,971
Accrued liabilities ...................................................................... 12,501 16,096
Accrued restructuring .................................................................... 1,725 1,828
--------- ---------
Total current liabilities ............................................................ 23,352 28,415
Capital lease obligations, net of current portion ............................................. 2,465 2,807
Mortgage payable .............................................................................. 20,117 20,186
11% Senior Notes .............................................................................. 110,870 120,000
Accrued interest - 11% Senior Notes ........................................................... 8,317 5,681
Other long term liabilities ................................................................... 13,100 13,084
--------- ---------
Total liabilities .................................................................... 180,221 190,173
Commitments and contingencies (Note 14)
Minority interest in subsidiary ............................................................... 4,254 --
Stockholders' Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000 issued and outstanding,
respectively ............................................................................... 165 165
Additional paid-in capital .................................................................... 93,112 93,112
Accumulated other comprehensive income ........................................................ 1,356 401
Accumulated deficit ........................................................................... (26,392) (21,131)
--------- ---------
Total stockholders' equity .................................................................... 68,241 72,547
--------- ---------
Total liabilities and stockholders' equity .................................................... $ 252,716 $ 262,720
========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in Thousands, Except Per Share Data)
Three months ended December 31,
------------------------------
2002 2001
---- ----
Successor Co. Predecessor Co.
---------------------------------
(Unaudited)
Revenue ............................................................... $ 16,480 $ 23,379
Operating costs and expense:
Cost of revenue (excludes payroll, occupancy and depreciation).... 5,624 9,663
Selling, general and administrative .............................. 11,891 24,748
Depreciation and amortization .................................... 3,727 12,012
------------ ------------
Total operating costs and expenses .................................... 21,242 46,423
------------ ------------
Loss from operations .................................................. (4,762) (23,044)
Interest and financing expense ................................... (3,904) (20,024)
Interest income .................................................. 388 966
Other income/(expense) ........................................... 182 110
Gain on debt discharge ........................................... 2,727 --
Minority interest in subsidiary .................................. 108 389
------------ ------------
Net loss .............................................................. (5,261) (41,603)
Dividends and accretion on preferred stock ....................... -- (1,848)
------------ ------------
Net loss attributable to common stockholders .......................... $ (5,261) $ (43,451)
============ ============
Basic and diluted loss per share attributable to common stockholders $ (0.32) $ (1.11)
============ ============
Weighted average common shares outstanding--basic and diluted ......... 16,460,000 38,979,005
============ ============
The accompanying notes are an integral part of these consolidated
financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(Amounts in Thousands)
Three months ended December 31,
-------------------------------
2002 2001
---- ----
Successor Co. Predecessor Co.
---------------------------------
(Unaudited)
Cash flows from operating activities
Net loss .............................................................. $ (5,261) $ (41,603)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization ...................................... 3,727 12,012
Provision for uncollectible accounts receivable .................... 624 1,488
Gain on debt discharge ............................................. (2,727) --
Gain on investment ................................................. (138) --
Minority interest in subsidiary .................................... (108) (389)
Amortization of debt issuance costs ................................ -- 317
Amortization of deferred compensation .............................. -- 546
Changes in operating assets and liabilities:
Accounts receivable ................................................ 594 (525)
Prepaid expenses and other current assets .......................... 2,702 (1,122)
Other assets ....................................................... -- (1,003)
Accounts payable ................................................... 332 (4,913)
Accrued liabilities ................................................ (3,709) 3,431
Accrued restructuring .............................................. (103) --
Accrued interest ................................................... 3,263 18,750
Other ................................................................. (111) (87)
------------ ------------
Net cash used in operating activities ................................. (915) (13,098)
------------ ------------
Cash flows from investing activities:
Repayments on Senior Notes ......................................... (7,030) --
Investment in short-term and long-term investments ................. (3,234) --
Proceeds from restricted cash and investments ...................... 306 5,773
Purchases of property, plant and equipment ......................... (555) (12,256)
------------ ------------
Net cash used in investing activities ................................. (10,513) (6,483)
------------ ------------
Cash Flows from Financing Activities
Capital contribution into minority-owned subsidiary ................ 4,458 372
Capital distribution in minority-owned subsidiary .................. (97) --
Repayments of mortgage payable and capital lease obligations ....... (286) (1,986)
------------ ------------
Net cash provided by (used in) financing activities ................... 4,075 (1,614)
------------ ------------
Effects of exchange rate changes on cash and cash equivalents ......... 275 (1,228)
Net decrease in cash and cash equivalents ............................. (7,078) (22,423)
Cash and cash equivalents, beginning of period ........................ 47,562 111,502
------------ ------------
Cash and cash equivalents, end of period .............................. $ 40,484 $ 89,079
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................ $ 570 $ 931
Non-cash financing activities:
Equipment acquired under capital lease obligations ................. $ -- $ 835
Capital expenditures included in accounts payable, accrued
liabilities and other long term liabilities ...................... $ 215 $ 8,916
Cumulative dividends and accretion on preferred stock ................. $ -- $ 1,848
The accompanying notes are an integral part of these consolidated
financial statements
3
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
1. Reorganization and Emergence from Chapter 11
Globix Corporation ("Globix", the "Company", or the "Successor
Company") is a provider of Internet solutions to businesses. The solutions
include secure and fault-tolerant Internet data centers with network services
providing network connectivity to the Internet and Internet-based managed and
application services, which include co-location, dedicated hosting, streaming
media and messaging services. The Company currently offers services from
facilities in New York City, New York, Santa Clara, California, Atlanta, Georgia
and London, England.
On March 1, 2002, the Company and two of its wholly-owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with a prepackaged Plan of
Reorganization (the "Plan") with the United States Bankruptcy Court for the
District of Delaware. The Company continued to operate in Chapter 11 in the
ordinary course of business and received permission from the bankruptcy court to
pay its employees, trade, and certain other creditors in full and on time,
regardless of whether these claims arose prior to or after the Chapter 11
filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective
April 25, 2002 (the "Effective Date of the Plan"), all conditions necessary for
the Plan to become effective were satisfied or waived and the Company emerged
from Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of the Company's existing
securities were cancelled and:
o each holder of the Company's 12.5% Senior Notes due 2010 (the
"12.5% Senior Notes"), became entitled to receive, in exchange
for its claims in respect of the 12.5% Senior Notes, its pro
rata share of:
o $120,000 in aggregate principal amount of the
Company's 11% Senior Secured Notes due 2008 (the "11%
Senior Notes"), and
o 13,991,000 shares of the Company's common stock,
representing 85% of the shares of the Company's
common stock issued and outstanding following the
Effective Date of the Plan;
o each holder of shares of the Company's preferred stock
outstanding immediately prior to the Effective Date of the
Plan became entitled to receive, in exchange for its claims in
respect of these shares of preferred stock, its pro rata share
of 2,304,400 shares of the Company's common stock,
representing 14% of the shares of the Company's common stock
issued and outstanding following the Effective Date of the
Plan; and
o each holder of shares of the Company's common stock
outstanding immediately prior to the Effective Date of the
Plan became entitled to receive, in exchange for its claims in
respect of these shares of common stock, its pro rata share of
164,600 shares of the Company's common stock, representing 1%
of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan.
All of the shares of the Company's common stock issued pursuant to the
Plan are subject to dilution by the exercise of management incentive stock
options, representing up to 10% of the shares of the Company's issued and
outstanding common stock on a fully-diluted basis following the Effective Date
of the Plan.
A total of 16,460,000 shares of the Company's common stock and $120,000
in aggregate principal amount of the 11% Senior Notes were deemed to be issued
and outstanding on the Effective Date of the Plan pursuant to the terms of the
Plan, and are deemed to be issued and outstanding for purposes of these
financial statements. As of September 30, 2002, however, no shares of the
Company's common stock or 11% Senior Notes had been distributed. In October
2002, the Company distributed a total of 16,295,400 shares of common stock and
$120,000 in aggregate principal amount of 11% Senior Notes. Pursuant to the
terms of a Stipulation and Order that the Company entered into with the lead
plaintiffs in the class action lawsuit described in Note 14, 229,452 of these
shares of common stock and $1,968 in aggregate principal amount of these 11%
Senior Notes were placed in reserve
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
in escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires the Company to pay an amount in excess of its liability insurance, then
the Company will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10,000 or greater) or a portion
of (in the event that this excess is less than $10,000) of the shares of common
stock and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date of the
Plan, which are allocable under the terms of the Plan to the holders of the
Company's common stock outstanding immediately prior to the Effective Date of
the Plan, will occur following the resolution of the shareholder derivative suit
against the Company and certain of former officers and directors described in
Note 14.
The Company historically has experienced negative cash flow from
operations and has incurred net losses. The Company's ability to generate
positive cash flow from operations and achieve profitability is dependent upon
its ability to continue to grow the Company's revenue and achieve further
operating efficiencies. For the five month period ended September 30, 2002, the
Company had a net loss of $21,100. The Company is dependent upon its cash on
hand and cash generated from operations to support its capital requirements.
Although no assurances can be given, the Company's management believes that
actions taken pursuant to the Plan, including company downsizing, headcount
reductions and other cost reductions, as well as cost control measures and the
restructuring of the Company's outstanding debt in connection with the Plan,
have positioned the Company to maintain sufficient cash flows from operations to
meet its operating, capital and debt service requirements for the next twelve
months. There can be no assurance, however, that the Company will be successful
in executing its business plan, achieving profitability, or in attracting new
customers, or in maintaining its existing customer base. Moreover, despite its
restructuring the Company has continued to experience significant decreases in
revenue and low levels of new customer additions in the period following its
restructuring. In the future, the Company may make acquisitions or repurchase
indebtedness of the Company which, in turn, may adversely affect the Company's
liquidity.
2. Basis of Presentation
The financial statements presented have been prepared by the Company
according to generally accepted accounting principles in the United States and
the rules and regulations of the Securities and Exchange Commission.
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instruction to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and notes required by generally accepted accounting principles for
complete financial statements. In the opinion of management, the unaudited
interim condensed consolidated financial statements furnished herein include all
of the adjustments necessary for a fair presentation of the Company's financial
position at December, 31, 2002 and the three month period ended December 31,
2002 and 2001. All such adjustments are of a normal recurring nature.
As a result of the application of fresh start accounting under American
Institute of Certified Public Accountants Statement of Position No. 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7"), as of May 1, 2002, the Company's financial results for the quarter
ended December 31, 2002 and for the quarter ended December 31, 2001 include two
different bases of accounting and, accordingly, the operating results and cash
flows of the Successor Company (as defined below) and the Predecessor Company
(as defined below) have been separately disclosed. For the purposes of these
financial statements, references to the "Predecessor Company" are references to
the Company for periods prior to April 30, 2002 (the last day of the calendar
month in which the Company emerged from bankruptcy) and references to the
"Successor Company" are references to the Company for periods subsequent to
April 30, 2002. The Successor Company's financial statements are not comparable
to the Predecessor Company's financial statements. Results of operations for the
three-month period ended December 31, 2002 are not necessarily indicative of the
operating results that may be expected for future periods.
The preparation of the Company's financial statements in accordance with
generally accepted accounting principles in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosures of contingent assets and liabilities.
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Significant estimates include estimates of the collectibility of accounts
receivable, the useful lives and ultimate realizability of property, equipment,
intangible assets, deferred tax assets and restructuring reserves. The market
for the Company's services is characterized by intense competition and could
impact the future realizability of the Company's assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. Actual results may vary
from these estimates under different assumptions or conditions.
Recent Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board ("FASB")
issued FASB Interpretation No. 45, or FIN 45, "Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others". FIN 45 requires a liability to be recognized at the
time a company issues a guarantee for the fair value of the obligations assumed
under certain guarantee agreements. Additional disclosures about guarantee
agreements are also required in the interim and annual financial statements. FIN
45 is effective for our 2003 fiscal year. The adoption of FIN 45 did not have a
material impact on consolidated results of operations or financial position.
In December 2002, the FASB issued Statement of Financial Accounting
Standards ("SFAS") No. 148, "Accounting for Stock-Based Compensation -
Transition and Disclosure - An Amendment of FASB Statement No. 123", which
provides optional transition guidance for those companies electing to
voluntarily adopt the accounting provisions of SFAS 123. In addition, the
statement mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company will continue to account for stock-based
compensation in accordance with APB No. 25. As such, the adoption of this
standard did not have a material impact on its consolidated financial position
or results of operations.
The Company adopted Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standard No. 142, "Goodwill and other Intangible Assets "("SFAS 142") at the
Effective Date of the Plan. SFAS 141 requires all business combinations to be
accounted for using the purchase method of accounting and that certain
intangible assets acquired in a business combination must be recognized as
assets separate from goodwill. SFAS 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 also addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination whether acquired
individually or with a group of other assets. This statement provides that
intangible assets with indefinite lives and goodwill will not be amortized but,
will be tested at least annually for impairment. If an impairment is indicated
then the asset will be written down to its fair value typically based upon its
future expected discounted cash flows.
For the three month period ended December 31, 2001, goodwill
amortization amounted to $571. If the Company had adopted SFAS 142 as of October
1, 2000 and discontinued goodwill amortization, the Company's net income and
loss per common share on a pro forma basis would have been as follows:
Pro Forma Results Predecessor Company
-------------------
Three months
Ended
December 31, 2001
-------------------
Net loss $ (41,603)
Addback of goodwill amortization 571
---------------
Adjusted net loss (41,032)
Dividends and accretion on preferred stock (1,848)
---------------
Adjusted net loss attributable to common
stockholders $ (42,880)
===============
Ajusted loss common share
Basic and diluted loss per share attributable to
common stockholders $ (1.10)
===============
Intangible assets of the Successor Company are as follows:
o trademark and trade name;
o network build-out/know-how; and
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
o customer contracts.
The trademark and trade name identifiable assets are considered
indefinite-lived intangible assets. Accordingly, trademarks and trade name are
not amortized but are periodically reviewed for impairment. The network
build-out/know-how and customer contracts are considered finite-lived intangible
assets. Finite-lived intangible assets are amortized over their useful lives.
The network build-out/know-how intangible asset is being amortized over eight
years and the customer contracts intangible assets are being amortized over
three years.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation",
which establishes a fair value based method of accounting for stock-based
compensation plans, the Company has elected to follow Accounting Principles
Board Opinion No. 25 "Accounting for Stock Issued to Employees" ("APB No.25")
for recognizing stock-based compensation expense for financial statement
purposes. Under APB No. 25, the Company applied the intrinsic value method of
accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to fair value on the
day of grant. For companies that choose to continue applying the intrinsic
value method, SFAS No. 123 mandates certain pro forma disclosures as if the
fair value method had been utilized.
The following table illustrates the effect on income from continuing
operations and earnings per share if the Company had applied the fair value
recognition provisions of SFAS No. 123 to stock-based employee compensation.
The estimated fair value of each Globix option is calculated using the
Black-Scholes option-pricing model.
<Table>
<Caption>
Quarter ended
December 31, 2002
-----------------
Pro forma net loss attributable to common stockholders $ (5,330)
--------------
Pro forma basic and diluted loss per share attributable
to common stockholders $ (0.32)
--------------
</Table>
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts, as additional stock option awards are anticipated
in future years.
3. Property, Plant and Equipment
Property, plant and equipment consists of the following:
Successor Company
--------------------------------
December 31, September 30,
2002 2002
---- ----
Land .................................................................. $ 2,713 $ 2,713
Building and building improvements .................................... 84,380 84,094
Leasehold improvements ................................................ 71,933 71,322
Computer hardware and software and network equipment .................. 15,735 15,607
Furniture and equipment ............................................... 3,695 3,660
------------ ------------
178,456 177,396
Less: Accumulated depreciation and amortization ...................... (8,994) (5,549)
Add: Construction in progress ........................................ 3,166 2,863
------------ ------------
Property, plant and equipment, net .................................... $ 172,628 $ 174,710
============ ============
Certain computer and network equipment are recorded under capital
leases that aggregated approximately $4,466 and $4,466 as of December 31, 2002
and September 30, 2002, respectively. Accumulated amortization on the assets
recorded under capital leases aggregated $744 and $465 as of December 31, 2002
and September 30, 2002, respectively.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the
Company owns the land and building located at 139 Centre Street, New York, New
York. The nine-story building with approximately 160,000 square feet of floor
space 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 is entitled to additional consideration if the Company sells the
property. Such amount will be equal to the greater of (a) $1,000 (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 $17,500.
4. Minority Interest
In September 2000, the Company purchased the land and the eight-story
building located at 415 Greenwich Street, New York, New York (the "Property").
The Property, which serves as the Company's second New York City Internet data
center, is a certified historic structure eligible for historic tax credits
("Tax Credits") based on qualified expenditures, as defined in the Internal
Revenue Code.
In June 2001, the Company had entered into an agreement whereby the Tax
Credits generated from the renovation of the Property will be utilized by a
third party (the "Investor") via a subsidiary (the "LLC"), in consideration for
a capital contribution to the LLC of approximately $16,549, which represents a
99.9% interest in the LLC. As of September 30, 2002, the LLC had received $5,778
of such capital contribution. The LLC received an additional $4,458 in October
2002 and an additional $1,636 in January 2003. The balance of the capital
contribution is due from the Investor in annual installments as follows:
Year Ending September 30, Contribution
- -------------------------- ------------
2004 ...................................................... 1,557
2005 ...................................................... 1,479
2006 ...................................................... 1,400
2007....................................................... 241
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Total ..................................................... $4,677
======
</Table>
In connection with the LLC's operating agreement, the LLC paid the
Investor $97 for the three months ended December 31, 2002 in relation to a
mandatory priority return owed to them. The priority return is an annual
calculated amount based on 3% of the Investor's capital contribution.
In connection with the above transaction, the Investor has a put option
with the Company. The put option provides that during the 6 months following the
61st month after the date of the certification of the qualifying rehabilitation
expenditures (the "Certification Date"), which occurred on September 17, 2002,
the Investor may require the Company to purchase the Investor's interest in the
LLC for an amount equal to 25% of the Investor's capital contribution in the
LLC. If the Investor does not exercise its put option, the Company may exercise
a call option during a period of 24 months following the 73rd month after the
Certification Date. The call option allows the Company to acquire the Investor
interest in LLC for the greater of the fair market value of the Investor
interest in the LLC or an amount equal, on an after tax basis, to taxes payable
by the Investor upon the sale of its investment.
Upon certain events including the sale of the Property at any time
after 2007 (to the extent the above mentioned put/call options have not been
exercised), the Company is obligated to pay the Investor 30% of any proceeds
received in excess of the cost of the Property. In the event that the Property
is sold anytime before 2007, the Company is obligated to pay to the Investor its
capital contribution (less any unrecaptured Tax Credits available to the
Investor), plus any loss attributable to the projected economic benefits to the
Investor and any other amounts owed to the Investor (as defined). The above
potential commitment is mitigated during the initial 60 months following the
Certification Date by the Company's right to terminate the transaction by paying
the difference between a 20% annual return on the Investor's capital
contributions up to the termination date and the Investor's actual return up to
the termination date.
5. Accrued Liabilities
Accrued liabilities consist of the following:
Successor Company
----------------------- -----
December 31, September 30,
2002 2002
------------ ------------
Franchise tax, sales tax and property tax ........................... 1,666 2,177
Salaries, benefits and commissions .................................... 1,036 1,636
Telecommunications accrual ............................................ 1,670 1,706
Technology licenses and maintenance contracts ......................... 514 1,205
Deferred revenue ...................................................... 2,306 1,503
8
================================================================================
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
Accrued construction costs ............................................ 116 147
Other ................................................................. 5,193 7,722
------------ ------------
$ 12,501 $ 16,096
============ ============
6. Restructuring and Other
The following table displays the activity and balances of the restructuring
reserve account from inception to December 31, 2002:
Restructuring Other
-------------------------------------- ----------
Employee Contract Facility Asset
Terminations Settlements Closings Write-Down Total
------------ ----------- -------- ---------- -----
September 30, 2001 Balance (Predecessor Company) $ 1,006 $ 4,050 $ 1,953 $ 2,182 $ 9,191
Deductions - Cash (689) -- (958) -- (1,647)
------- -------- ------- ------- --------
December 31, 2001 Balance (Predecessor Company) 317 4,050 995 2,182 7,544
Additional Restructure Charge 2,946 16,407 2,120 6,922 28,395
Deductions - Non-cash (889) -- (422) (6,922) (8,233)
Deductions - Cash (1,831) (18,480) (711) -- (21,022)
Reversal to Fiscal 2001 Plan -- (678) (701) (2,182) (3,561)
------- -------- ------- ------- --------
April 30, 2002 Balance (Predecessor Company) 543 1,299 1,281 0 3,123
Deductions - Cash (400) -- (895) -- (1,295)
------- -------- ------- ------- --------
September 30, 2002 Balance (Successor Company) 143 1,298 386 -- 1,828
Deductions - Cash (69) -- (34) -- (103)
------- -------- ------- ------- --------
December 31, 2002 Balance (Successor Company) $ 74 $ 1,298 $ 352 $ -- $ 1,725
======= ======== ======= ======= ========
The above deductions to the restructuring reserve represent primarily cash
payments and write-offs of previously capitalized costs and asset write-downs.
7. Other Long-Term Liabilities
Other long-term liabilities consist of the following:
Successor Company
-----------------
December 31, September 30,
--------------------------
2002 2002
---- ----
Note Payable $2,600 $ 2,600
Rabbi Trust Obligation 2,769 2,777
Negative Leasehold Liability 7,571 7,607
Deferred Rent 160 100
-------- --------
$13,100 $13,084
======== ========
The Company has a $2,600 note payable, due January 15, 2004. The note
bears interest, payable monthly, at 4.75%. The note is collateralized by an
irrevocable standby letter of credit. The related funds are included in
restricted cash on the accompanying consolidated balance sheet.
On July 21, 1999, the Company established a trust for the benefit of a
former executive. The Trust agreement was for three years beginning in April
1999 through March 1, 2002. The agreement was amended on March 21, 2001, and
provided for payments from the Trust commencing April 2001. Payments were made
from the Trust until March 1, 2002, when the Company and two of its wholly owned
subsidiaries filed for Chapter 11 bankruptcy protection. The Company is
currently in litigation over the Trust. See Note 14 "Contingencies."
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
8. 11% Senior Notes
As of the Effective Date of the Plan, all of the existing 12.5% Senior
Notes were cancelled and each holder of the 12.5% Senior Notes became entitled
to receive, in exchange for its 12.5% Senior Notes, its pro rata share of
$120,000 in aggregate principal amount of the 11% Senior Notes and 13,991,000
shares of the Company's common stock, representing 85% of the shares of the
Company's common stock issued and outstanding following the Effective Date of
the Plan, subject to dilution by the exercise of management incentive options
representing up to 10% of the Company's issued and outstanding common stock on a
fully-diluted basis following the Effective Date of the Plan. The interest of
$11,507 on the 12.5% Senior Notes for the period March 1, 2002 through the
Effective Date of the Plan was not accrued in accordance with SOP 90-7.
The Company issued the 11% Senior Notes on the Effective Date of the
Plan in one series that is initially limited to $120,000 aggregate principal
amount of 11% Senior Notes. However, none of the 11% Senior Notes had been
distributed as of September 30, 2002. In October 2002, the Company distributed
$120,000 in aggregate principal amount of the 11% Senior Notes, which included
$1,968 in aggregate principal amount of Notes placed in reserve in escrow
pursuant to a Stipulation and Order entered into with the lead plaintiffs in the
class action lawsuit described in Note 14.
The 11% Senior Notes will mature on December 31, 2008. The 11% Senior
Notes will bear interest at 11% per annum, payable annually in May of each year,
commencing on May 1, 2003. Interest on the 11% Senior Notes for the first two
year period following the initial date of issuance is payable in kind by the
issuance of additional notes with terms identical to the 11% Senior Notes (other
than the date of issuance) in a principal amount equal to the interest payment
then due. For the two year period thereafter, interest is payable in cash or, at
the Company's option when authorized by its board of directors, in additional
notes with terms identical to the 11% Senior Notes (other than the date of
issuance), or in any combination of cash and additional notes. For the remaining
two years until maturity, interest is payable in cash.
The 11% Senior Notes were issued under an indenture dated as of April
23, 2002 (the "Indenture"), among the Company, HSBC Bank USA, as trustee (the
"Trustee") and Bluestreak Digital, Inc., Gamenet Corporation, NAFT Computer
Service Corporation, NAFT International Ltd., PFM Communications, Inc., GRE
Consulting, Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415
Greenwich GC MM, LLC, Comstar.net, Inc. and Comstar Telecom & Wireless, Inc., as
the initial Subsidiary Guarantors. The Company is in the process of merging each
of these subsidiary guarantors, other than 415 Greenwich GC, LLC, 415 Greenwich
GC Tenant, LLC, 415 Greenwich GC MM, LLC, with and into the Company.
The indenture governing the 11% Senior Notes contains a number of
covenants that impose significant operating and financial restrictions on the
Company and its subsidiaries. These restrictions significantly limit, and in
some cases prohibit, among other things, the ability of the Company and certain
of its subsidiaries to incur additional indebtedness, create liens on assets,
enter into business combinations or engage in certain activities with the
Company's subsidiaries.
As of December 31, 2002, the Company was in compliance with the
material operating and financial restrictions imposed upon the Company contained
in the indenture governing the 11% Senior Notes. However, as of December 31,
2002, the Company was not in compliance with the provisions of the indenture
which require the Company to:
o file reports and documents with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; specifically the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
Annual Report on Form 10-K for the fiscal year ended September 30,
2002 and this quarterly report;
o file copies of these reports with the indenture trustee;
o cause these reports to be mailed to the holders of the 11% Senior
Notes;
o deliver to the indenture trustee a certificate from the Company's
public accountants related to the Company's compliance with
certain provisions of the indenture; and
o deliver to the indenture trustee an officer's certificate with
respect to the Company's failure to satisfy the obligations set
forth above
The Company's failure to comply with each of the obligations described
above constitutes a default, but not an event of default, under the indenture.
See Note 15 for a description of events related to these defaults which occurred
subsequent to December 31, 2002.
10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
On December 5, 2002, the Company repurchased in the open market for
$7,030 a portion of its outstanding 11% Senior Notes, which had a principal
value of approximately $9,130 and associated accrued interest of $627. The
repurchase resulted in a gain on the discharge of debt of approximately
$2,727. Such gain is included in the Consolidated Statement of Operations in the
quarter ended December 31, 2002.
9. Mortgage Payable
On January 25, 2000, the Company borrowed $21,000 from a financial
institution pursuant to a mortgage note secured by the Company's property at 139
Centre Street, New York. Interest is payable at 9.16% (subject to adjustment on
February 11, 2010) based on a 25 year amortization schedule. Principal and
interest payments of $178.5 are payable monthly and any balance of the principal
and all accrued and unpaid interest is due and payable in February 2025.
10. Stockholder's Equity
As of the Effective Date of the Plan, all of the outstanding shares of
the Company's common stock were cancelled, and each holder of shares of the
Company's common stock outstanding immediately prior to the Effective Date of
the Plan became entitled to receive, in exchange for its claims in respect of
such shares, its pro rata share of 164,400 shares of the Company's common stock,
representing 1% of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan, subject to dilution by the
exercise of management incentive options representing up to 10% of the Company's
issued and outstanding common stock on a fully-diluted basis following the
Effective Date of the Plan.
Pursuant to the terms of the Successor Company's Amended and Restated
Certificate of Incorporation, the Company is authorized to issue 500,000,000
shares of common stock with a par value of $0.01 per share. A total of
16,460,000 shares of the Company's common stock were deemed to be issued and
outstanding on the Effective Date of the Plan. As of September 30, 2002,
however, no shares of the Company's common stock had been distributed pursuant
to the terms of the Plan. In October 2002, a total of 16,295,400 shares of
common stock were distributed in accordance with the terms of the Plan. 229,452
of these shares were placed in reserve in escrow pursuant to a Stipulation and
Order entered into with the lead plaintiffs in the class action lawsuit
described in Note 14. Distribution of the remaining 164,600 shares of common
stock deemed to have been issued on the Effective Date of the Plan, which are
allocable under the terms of the Plan the holders the Predecessor Company's
common stock, will occur following the resolution of the shareholder derivative
suit described in Note 14 against the Company and certain of its present and
former officers and directors.
11. Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by
11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
dividing net loss attributable to common shareholders by the weighted average
number of common shares outstanding, adjusted for potentially dilutive
securities. In accordance with the requirements of Statement of Financial
Accounting Standard No. 128, common stock equivalents have been excluded from
the calculation of diluted net loss per common share as their inclusion would be
antidilutive.
The following table summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of December 31, 2002
and 2001 had been converted.
December 31,
Successor Predecessor
Company Company
--------------------------------
2002 2001
---- ----
Convertible preferred stock ..... -- 8,617,300
Stock Options.................... -- 13,439,900
Unvested Restricted Stock........ -- 2,207,600
Warrants ........................ -- 194,800
------------- -------
-- 24,459,600
============= ==========
In October 2002, a total of 16,295,400 shares of common stock were
distributed in accordance with the terms of the Plan. 164,600 shares of common
stock will be distributed following resolution of the shareholder derivative
suit discussed in Note 14. For purposes of these financial statements, however,
and consistent with the provisions of the Plan, a total 16,460,000 shares have
been treated as outstanding.
12. Segment Reporting
The Company reports segment information under SFAS No. 131, which
establishes standards for reporting information about operating segments in
annual financial statements, and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for disclosures about products and services and geographic
areas. Operating segments are components of an enterprise for which separate
financial information is available and which is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and assess performance. The Company is a full service
provider of sophisticated Internet solutions. The Company operates several
Internet data centers throughout the United States of America and Europe. Each
Internet data center provides the same internet related services to similar type
of customers.
The Company's activities fall within one operating segment. The
following table sets forth geographic segment information for three months ended
December 31, 2002 (Successor Company) and three months ended December 31, 2001
(Predecessor Company):
Successor Predecessor
Company Company
Three-month period ended
December 31,
2002 2001
---- ----
Revenue:
United States.................... $10,581 $17,552
Europe 5,899 5,828
----- -----
Consolidated..................... $ 16,480 $23,379
======== =======
Operating income (loss):
12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
United States...................... $ (5,580) $ (18,566)
Europe 818 (4,478)
--- ------
Consolidated....................... $ (4,762) $ (23,044)
========= =========
Tangible assets: as of December 31,
------------------
United States...................... $198,357
Europe 45,074
------
Consolidated....................... $243,431
========
The tangible assets reflected in the table above exclude intangible assets.
13. Comprehensive Loss
The Company reports comprehensive loss under the provisions of SFAS No.
130. Accumulated other comprehensive loss is reported as a component of
stockholders equity in the consolidated balance sheets. The Company primarily
has two components of comprehensive loss: cumulative translation adjustments
from the Company's operations in foreign countries and unrealized gains and
losses on marketable securities classified as available for sale. The following
table summarizes the components of other comprehensive loss for the three-month
periods ended December 31, 2002 and 2001:
Three-months ended
December 31,
2002 2001
---- ----
Successor Predecessor
Company Company
----------------- --------------
Net loss $ (5,261) $(41,603)
Other comprehensive income (loss):
Unrealized gain on marketable securities available for sale 129 1,075
Foreign currency translation adjustment 826 (1,228)
-------- --------
Total Comprehensive loss $(4,306) $(41,756)
======== ========
14. Contingencies
On January 28, 2002, a derivative suit was filed in the United States
District Court for the Southern District of New York against the Company, as
nominal defendant, and certain of the Company's current and former directors and
officers. The Company believes that the allegations in this lawsuit are without
merit and intends to vigorously defend against them. In addition, the plaintiff
in this lawsuit has not pursued her claims against the Company since the filing
of the lawsuit. Although there can be no assurance as to the outcome or effect
of this lawsuit, the Company's management does not believe, based on currently
available information, that the ultimate liabilities (if any) resulting from
this lawsuit will have a material adverse impact on its business, financial
condition, results of operations or cash flows.
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York titled In re Globix Corp
Securities Litigation, No.02-CV-00082. This lawsuit names as defendants the
Company and the Company's former officers Marc Bell, Peter Herzig (who remains a
director of the Company) and Brian Reach, and asserts claims under sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased the Company's
securities between November 16, 2000 and December 27, 2001.
On June 25, 2002, the Company entered into a Stipulation and Order with
the lead plaintiffs in the class action lawsuit. The Stipulation and Order
provides that 229,452 shares of the Company's common stock and $1,968 in
aggregate principal amount of the 11% Senior Notes will be held in reserve in
escrow pending the outcome of the
13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
class action lawsuit. In the event that any judgment or settlement entered into
in connection with the class action lawsuit requires the Company to pay an
amount in excess of its liability insurance, the Company will be required to
issue to the class action litigants and their attorneys all (in the event that
this excess is $10,000 or greater) or a portion of (in the event that this
excess is less than $10,000) the shares of the Company's common stock and the
11% Senior Notes being held in escrow.
A consolidated amended complaint was filed in this lawsuit on June 28,
2002. The Company has filed a motion to dismiss the consolidated amended
complaint. Briefing of that motion is not yet complete. If the motion is denied,
the case will proceed to the discovery stage. The Company believes that the
allegations in this lawsuit are without merit and intends to vigorously defend
against them. Although there can be no assurance as to the outcome or effect of
this lawsuit, the Company's management does not believe, based on currently
available information, that the ultimate liabilities (if any) arising from this
lawsuit will have a material adverse impact on the Company's business, financial
condition, results of operations or cash flows.
On June 12, 2002, Robert B. Bell, a former officer and director of the
Company, filed a complaint in the United States District Court for the Southern
District of New York entitled Robert B. Bell v. Arnold M. Bressler, as Trustee,
and Globix Corporation, alleging breach-of-contract claims related to the
failure to make payments under a trust (the "Rabbi Trust") that the Company
formed pursuant to an employment agreement with Mr. Bell. Mr. Bell is seeking
damages in excess of $2.0 million plus costs, disbursements and legal fees. This
action is currently being stayed pending resolution of the Company's lawsuit
against Mr. Bell and Arnold N. Bressler, the Trustee of the Rabbi Trust,
described below.
In addition, in connection with the same underlying issues, on July 24,
2002 the Company filed a complaint in the United States Bankruptcy Court for the
District of Delaware entitled Globix Corporation v. Arnold N. Bressler, as
Trustee of the Globix Corporation Rabbi Trust and Robert B. Bell. In this
action, the Company has requested that the assets of the Rabbi Trust be turned
over to the Company. The Company has also requested that Mr. Bressler, as
Trustee of the Rabbi Trust, be enjoined from dissipating the assets of the Rabbi
Trust pending resolution of the Company's claims by the court and has filed a
motion for a declaratory judgment to establish the maximum amount of Mr. Bell's
claims. Mr. Bressler has asserted counter claims in this action, and both Mr.
Bressler and Mr. Bell have submitted objections in this action, which is
currently in the discovery phase. The Company is vigorously pursing its claims
in this action and defending against Mr. Bressler's counterclaims.
The Company and Mr. Bell are currently in settlement discussions to
resolve both of these lawsuits.
From time to time, the Company is a party to legal proceedings arising
in the normal course of its business operations. Although there can be no
assurance as to the outcome or effect of any legal proceedings to which the
Company is a party, the Company's management does not believe, based on
currently available information, that the ultimate liabilities (if any) arising
from any such legal proceedings will have a material adverse impact on the
Company's financial condition, results of operations or cash flows.
15. Subsequent Events
In January 2003, the Company retained the services of a real estate
broker to explore the Company's options with respect to the land and eight story
building located at 415 Greenwich Street, New York, New York, including the sale
or lease of the facility. (See also Note 4, Minority Interest for further
discussion regarding certain obligations upon the sale of the property.) In
January 2003, the Company also retained the services of a real estate broker to
lease approximately one third of its facility located at 139 Centre Street.
In January 2003, the Company's board of directors concluded that Mr.
Stevenson had met certain performance targets set forth in his employment
agreement. However, for purposes of the provisions of Mr. Stevenson's employment
agreement related to Mr. Stevenson's bonus and the vesting of options granted to
Mr. Stevenson, the Company's board of directors deemed all of these performance
targets to have been met.
In February 2003, the Company repurchased in the open market for $4,913
a portion of its outstanding 11% Senior Notes, which had a principal value of
approximately $6,380 and associated accrued interest of $577. The repurchase
resulted in a gain on the discharge of debt of approximately $2,044. This gain
will be recorded in the Company's Consolidated Statement of Operations for the
quarter ended March 31, 2003.
On February 6, 2003, a putative derivative suit was filed in New York
State Supreme Court (County of New York) against the Company, as nominal
defendant, and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First
Boston Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon
Smith Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings,
LLC), the initial purchasers in the Company's February 2000 offering of the
12.5% Senior Notes. The suit alleges that the underwriting discount granted to
the initial purchasers of the 12.5% Notes violated Section 5-531 of the New York
General Obligations Law, which limits the amount that can be charged by a loan
broker. On March 6, 2003, the plaintiff and the initial purchasers entered into
a tolling agreement that would result in the dismissal of the action without
prejudice pending action on a motion to dismiss an amended complaint submitted
in a similar case involving debt securities issued by another corporation. On
March 13, 2003, the court dismissed this action without prejudice.
14
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in Thousands, Except Share and Per Share Data)
On March 14, 2003, the Company's board of directors approved the sale
to Communication Technology Advisors, LLC ("CTA") of a warrant exercisable for
500,000 shares of the Company's common stock at an exercise price of $3.00 per
share. CTA provides consulting services to the Company. CTA's Chairman, Jared
Abbruzzese, is currently a member of our board of directors. The purchase price
of the warrant is $25. Although CTA has not yet purchased this warrant, it
currently has the right to do so. If CTA elects to purchase this warrant, this
warrant will be immediately exercisable for a period of 10 years from the date
of issuance. CTA is a provider of services to the Company and as such, using the
Black Scholes valuation model, the fair value of the warrant will be expensed in
the quarter ended March 31, 2003.
On March 14, 2003, the Company's board of directors approved the 2003
Stock Option Plan, authorized the issuance of options to acquire 1,828,889
shares of the Company's common stock and granted options to acquire 1,128,976
shares of the Company's common stock. The compensation committee of the
Company's board of directors had previously approved the 2003 Stock Option Plan
on November 5, 2002, and set the fair value strike price of options granted
under the 2003 Stock Option Plan at $3.04.
On March 19, 2003 holders of approximately 58% of the outstanding 11%
Senior Notes (excluding 11% Senior Notes owned by the Company) waived the
defaults described in Note 8.
15
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
The following discussion and analysis of our financial condition and
results of operations should be read together with our consolidated financial
statements and the accompanying notes appearing elsewhere in this quarterly
report. The following discussion contains forward-looking statements based on
our current expectations, assumptions, estimates and projections about our
company and our industry. Our results could differ materially from those
anticipated in these forward-looking statements as a result of various factors,
including the risks and uncertainties discussed in our other periodic reports
and documents filed with the Securities and Exchange Commission. The results
shown herein are not necessarily indicative of the results to be expected in any
future periods. The following discussion and analysis should be read together
with the consolidated financial statements and notes to the financial statements
included in Part I of this quarterly report.
As is more fully discussed in Note 2 ("Basis of Presentation") to the
condensed consolidated financial statements included in this quarterly report,
we reported under fresh start accounting pursuant to American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") during the
third quarter of the fiscal year ended September 30, 2002 resulting in a change
in the basis of accounting in the underlying assets and liabilities of our
company at the effective date (the "Effective Date") of our prepackaged plan of
reorganization which we entered into in connection with our Chapter 11 filing
discussed below. Accordingly, the financial statements of the Successor Company
(as defined below) and the Predecessor Company (as defined below) are not
comparable. For purposes of this Management's Discussion and Analysis:
o references to the "Predecessor Company" are references to the Company
for periods prior to April 30, 2002 (the last day of the calendar month
in which the Company emerged from bankruptcy) and references to the
"Successor Company" are references to the Company for periods
subsequent to April 30, 2002.
o we have compared the results of the Predecessor Company quarter ending
December 31, 2001 with Successor Company quarter ending December 31,
2002
Overview
Our company was founded in 1989 and undertook a major expansion plan in
1998 in order to more aggressively pursue opportunities resulting from the
growth of the Internet. In April 1998, we completed a $160.0 million offering of
13.0% Senior Notes due 2005 (the "13.0% Senior Notes"). In July 1999, we
completed construction of our initial Internet data center facilities in New
York City, New York; London, England and Santa Clara, California and began
operations at each facility.
In March 1999, we completed a public offering of 16,000,000 shares of
common stock, resulting in net proceeds to our company of approximately $136.5
million.
In December 1999, we completed the private placement of 80,000 shares
of preferred stock to affiliates of Hicks, Muse, Tate & Furst Incorporated,
resulting in net proceeds to our company of $75.3 million.
In February 2000, we issued $600 million in aggregate principal amount
of 12.5% Senior Notes due 2010 (the "12.5% Senior Notes")
16
to fund the continued expansion of our facilities and network and to consummate
a tender offer to purchase all of the outstanding 13.0% Senior Notes. The
purchase price of the tender, completed on February 8, 2000, was 106.5% of the
$160.0 million in aggregate principal amount of the 13.0% Senior Notes
outstanding, plus all accrued and unpaid interest.
On March 1, 2002, our company and two of our wholly-owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with the Plan, in the United States
Bankruptcy Court for the District of Delaware. We continued to operate in
Chapter 11 in the ordinary course of business and received permission from the
bankruptcy court to pay our employees, trade and certain other creditors in full
and on time, regardless of whether these claims arose prior to or after the
Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective
April 25, 2002, all conditions necessary for the Plan to become effective were
satisfied or waived and we emerged from Chapter 11 bankruptcy protection.
The largest component of our total revenue is complex hosting services
and connectivity, including both minimum committed amounts and overages. In
addition to fees based on bandwidth usage, we charge certain customers monthly
fees for the use of our physical facilities, which we refer to as complex
hosting. Our complex hosting contracts typically range from one to three years.
The second largest component of our total revenue is dedicated Internet access
services to business customers. Our 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.
Critical Accounting Policies and Estimates
Our significant accounting policies are described in the notes to the
consolidated financial statements for the fiscal year ended September 30, 2002
and critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2002. This Management's
Discussion and Analysis of Financial Condition and Results of Operations is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of our financial statements requires us to make estimates that
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosures of contingent assets and liabilities. We base our accounting
estimates on historical experience and other factors that are believed to be
reasonable under the circumstances. However, actual results may vary from these
estimates under different assumptions or conditions.
Quarter Ended December 31, 2002 Compared To The Quarter Ended December 31, 2001
Revenue. Revenue for the quarter ended December 31, 2002 decreased
30.0% to $16.5 million from $23.4 million for the three-month period ended
December 31, 2001. This decrease was primarily attributable to increased
customer churn. Customer churn accounted for $6.2 million, or 89.4% of our
revenue decrease. We define churn as contractual revenue losses due to customer
cancellations and downgrades, net of upgrades, and additions of new services.
Cancellations refer to customers that have either stopped using our services
completely or remained a customer but terminated a particular service.
Downgrades are a result of customers taking less of a particular service or
renewing their contract for identical services at a lower price. During the
quarter ended December 31, 2002 our monthly churn averaged 2.1% as compared to
3.3% for the quarter ended September 30, 2002. Of this monthly churn, 1.5% was
related to downgrades, 3.8% was related to cancellations, offset by 1.5% and
1.7% related to new and upgraded contracts, respectively. For the quarter ended
December 31, 2002, cancellations constituted approximately 71.6% of our
17
monthly revenue losses and downgrades contributed approximately 28.4% of our
monthly revenue losses. Hardware and software sales decreased $731 thousand, or
67.6%, as a result of our shift away from lower margin hardware and software
revenue. This decrease accounted for 10.6% of our total revenue decline.
Cost of Revenue and Gross Margin. Cost of revenue for the quarter ended
December 31, 2002, decreased to $5.6 million from $9.7 million for the quarter
ended December 31, 2001. A decrease of $3.3 million, representing 80.8% of the
total decrease in cost of revenue, was realized within non-hardware related
costs. This decrease was primarily attributable to our continued focus on
network reconfiguration. Decreases of $775 thousand, representing 19.2% of the
total decrease in cost of revenue, was attributable to lower hardware costs as a
result of our shift away from lower margin hardware sales. Gross margin
increased from 58.7% for the quarter ended December 31, 2001 to 65.9% for the
quarter ended December 31, 2002, primarily as a result of the reduction in
network costs and our exit from the hardware business.
Selling, General and Administrative. Selling, general and
administrative expenses were $11.9 million, or 72.2% of revenue for the quarter
ended December 31, 2002, as compared to $24.7 million, or 105.9% of revenue for
the quarter ended December 31, 2001. The decrease in selling, general and
administrative expenses as a percentage of revenue was primarily attributable to
a decrease in salaries and benefits in connection with our restructuring
efforts, which focused on significant reductions in facilities and personnel. In
the quarter ended December 31, 2002, salaries and benefits were $5.7 million,
representing 34.9% of revenue, as compared with $14.2 million, or 60.7% of
revenue, in the quarter ended December 31, 2001. The number of our employees
decreased from 590 as of December 31, 2001 to 251 as of December 31, 2002. In
the quarter ended December 31, 2002, rent expense was $1.6 million, representing
10.0% of revenue, as compared to $3.1 million, or 13.1% of revenue, for the
quarter ended December 31, 2001. This decrease was the result of the mid 2002
lease renegotiation for Globix House, one of our data centers in London, and the
impact of negative leasehold adjustments. In the quarter ended December 31,
2002, bad debt expense was $624 thousand, representing 3.7% of revenue, as
compared to $1.5 million, or 6.4% of revenue, for the quarter ended December 31,
2001. This decrease was attributable to improvements in collections as well as
the impact of the deterioration in the internet business environment, which
resulted in our proactive reduction of the uncollectible customer accounts
receivable balances from 2001.
Depreciation and Amortization. Depreciation and amortization decreased
to $3.7 million for the quarter ended December 31, 2002, as compared to $12.0
million in the quarter ended December 31, 2001. The decrease was primarily
attributable to the impact of fresh start accounting, in particular the
revaluation of our property, plant and equipment as of April 30, 2002.
Interest and Financing Expense. Interest and financing expense for the
quarter ended December 31, 2002 was $3.9 million, or 23.7% of revenue, as
compared to $20.0 million, or 85.6% of revenue, for the quarter ended December
31, 2001. The decrease in interest and financing expense was primarily
attributable to the reduction in our outstanding indebtedness pursuant to the
Plan. As of the Effective Date of the Plan, quarterly interest expense was
reduced from $18.8 million to approximately $3.3 million before compounding.
Interest Income. The decrease in interest income to $388 thousand in
the quarter ended December 31, 2002 from $966 thousand in the quarter ended
December 31, 2001 reflected our reduced cash balance in the quarter ended
December 31, 2002 and the impact of declining interest rates as compared to the
same period of the prior year.
Other Income. Other income in the quarter ended December 31, 2002 was
$182 thousand, as compared to $110 thousand in the quarter ended December 31,
2001, an increase of $72 thousand, or 65.5%. This increase resulted from gains
on short term investments, offset by a decrease in rental income.
Gain on Debt Discharge. In the quarter ended December 31, 2002, we
recorded a non-cash gain of $2.7 million on the discharge of debt, which
includes both principal and accrued interest. This gain was related to our
repurchase of $9.1 million in aggregate principal amount of the 11.0% Senior
Notes for cash totaling $7.0 million, and the elimination of associated accrued
interest of $627 thousand. There was no gain on debt discharge in the quarter
ended December 31, 2001.
Net Loss and Net Loss Attributable To Common Stockholders. As a result
of the above, we reported a net loss of $5.3 million and a net loss attributable
to common stockholders of $5.3 million, or $0.32 per share, for the quarter
ended December 31, 2002, compared to a net loss of $41.6 million and a net loss
attributable to common stockholders of $43.5 million, or $1.11 per share, for
the quarter ended December 31, 2001. As a result of the cancellation of the
shares of our preferred stock outstanding immediately prior to the Effective
Date of the Plan pursuant to the terms of the Plan, dividends and accretion on
preferred stock decreased from $1.8 million in the
18
quarter ended December 31, 2001 to zero in the quarter ended December 31, 2002.
Liquidity and Capital Resources
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the Plan, with the
United States Bankruptcy Court for the District of Delaware. We continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay our employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective
April 25, 2002, all conditions necessary for the Plan to become effective were
satisfied or waived and we emerged from Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of our existing securities
were cancelled and:
o each holder of the 12.5% Senior Notes became entitled to receive, in
exchange for its claims in respect of the 12.5% Senior Notes, its pro
rata share of:
o $120 million in aggregate principal amount of our 11% Senior
Secured Notes, due 2008 (the "11% Senior Notes"); and
o 13,991,000 shares of our common stock, representing 85% of the
shares of our common stock issued and outstanding following
the Effective Date of the Plan; and
o each holder of shares of our preferred stock outstanding
immediately prior to the Effective Date of the Plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of 2,304,400
shares of our common stock, representing 14% of the shares of our
common stock issued and outstanding following the Effective Date
of the Plan; and
o each holder of shares of our common stock outstanding immediately
prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of its shares of
common stock, its pro rata share of 164,600 shares of our common
stock, representing 1% of the shares of our common stock issued
and outstanding following the Effective Date of the Plan.
All of the shares of our common stock issued pursuant to the Plan are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of our issued and outstanding common stock
on a fully-diluted basis following the Effective Date of the Plan.
A total of 16,460,000 shares of our common stock and $120 million in
aggregate principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date pursuant to the terms of the Plan. As of
September 30, 2002, however, no shares of our common stock or 11% Senior Notes
had been distributed. In October 2002, we distributed a total of 16,295,400
shares of common stock and $120 million in aggregate principal amount of 11%
Senior Notes. Pursuant to the terms of a Stipulation and Order that we entered
into with the lead plaintiffs in the class action lawsuit described in the
section of Part II of this quarterly report entitled "Item 1 - Legal
Proceedings", 229,452 of these shares of common stock and $1,968,000 in
aggregate principal amount of these 11% Senior Notes were placed in reserve in
escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires us to pay an amount in excess of our liability insurance, then we will
be required to issue to the class action litigants and their attorneys all (in
the event that this excess is $10 million or greater) or a portion of (in the
event that this excess is less than $10 million) of the shares of common stock
and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date, which
are allocable under the terms of the Plan to the holders of our common stock
outstanding immediately prior to the Effective Date of the Plan, will occur
following the resolution of the shareholder derivative suit against our company
and certain of our former officers and directors described in section of Part II
of this quarterly report entitled "Item 1 - Legal Proceedings"
19
Net cash used in operating activities was $915 thousand in the quarter
ended December 31, 2002, compared to $13.1 million in the quarter ending
December 31, 2001. The improvement in our cash flow from the quarter ended
December 31, 2002, compared with the quarter ended December 31, 2001, was
primarily the result of a decrease in net loss, excluding the non-cash impact of
depreciation and amortization and gain on debt discharge. The reduction in net
cash used in operating activities also reflects a $3.3 million decrease in
working capital attributable to reductions in prepaid expenses and accounts
receivable.
Net cash used in investing activities was $10.5 million in the quarter
ended December 31, 2002, compared to $6.5 million in the quarter ended December
31, 2001. On December 5, 2002 we repurchased in the open market for $7.0 million
a portion of our outstanding 11% Senior Notes, which had a principal value of
approximately $9.1 million and accrued interest of $627 thousand. $3.2 million
of our net cash used in investing activities was attributable to investments
made in fixed income securities. The use of restricted cash and investments of
$306 thousand was primarily attributable to the release of the collateral funds
for the Company's corporate credit card. Investments in capital expenditures
related to our network and facilities were $770 thousand. Of this amount, we
paid $555 thousand in cash, and the balance was financed under financing
arrangements or remained in accounts payable, accrued liabilities and other long
term liabilities at the period-end.
Net cash provided by financing activities was $4.1 million in the
quarter ended December 31, 2002, compared to net cash used in financing
activities of $1.6 million in the quarter ending December 31, 2001. In the
quarter ended December 31, 2002, we repaid certain mortgage and capital lease
obligations totaling $286 thousand. In the quarter ended December 31, 2002, we
received a capital contribution into a minority-owned subsidiary of
approximately $4.5 million.
As of December 31, 2002, we had $40.5 million of cash and cash
equivalents, $6.7 million of short-term investments and $1.5 million of
marketable securities.
We have also issued collateralized letters of credit aggregating
approximately $2.6 million. The related collateral funds are included in
restricted cash and investments on our consolidated balance sheet at December
31, 2002.
In addition, we have financed certain network equipment through vendors
and financial institutions under capital and operating lease arrangements.
Capital lease obligations totaled approximately $3.0 million at December 31,
2002. As of December 31, 2002, we had various agreements to lease facilities and
equipment and are obligated to make future minimum lease payments of
approximately $74.1 million on operating leases expiring in various years
through 2017. As of December 31, 2002, there were no available or unused
equipment financing arrangements with vendors or financial institutions.
In February 2003, we repurchased in the open market for $4.9 million a
portion of our outstanding 11% Senior Notes, which had a principal value of
approximately $6.4 million and associated accrued interest of $0.6 million. The
repurchase resulted in a gain on the discharge of debt of approximately $2.0
million. This gain will be included in our Consolidated Statement of Operations
for the quarter ended March 31, 2003.
We historically have experienced negative cash flow from operations and
has incurred net losses. Our ability to generate positive cash flow from
operations and achieve profitability is dependent upon its ability to continue
to grow the Company's revenue and achieve further operating efficiencies. We are
dependent upon our cash on hand and cash generated from operations to support
our capital requirements. Although no assurances can be given, our management
believes that actions taken pursuant to the Plan, including company downsizing,
headcount reductions and other cost reductions, as well as cost control measures
and the restructuring of our outstanding indebtedness in connection with the
Plan, have positioned us to maintain sufficient cash flows from operations to
meet our operating, capital and debt service requirements for the next 12
months. There can be no assurance, however, that we will be successful in
executing our business plan, achieving profitability, attracting new customers
or maintaining our existing customer base. Moreover, despite our restructuring
we have continued to experience significant decreases in revenue and low levels
of new customer additions in the period following our restructuring. In the
future, we may make acquisitions or repurchase indebtedness of our company
which, in turn, may adversely affect liquidity.
Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45, or FIN
45, "Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires a liability to
be recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements. Additional disclosures
about guarantee agreements are also required in the interim and annual financial
statements. FIN 45 is effective for our fiscal year ending September 30, 2003.
Adoption of FIN 45 did not have a material impact on our consolidated results of
operations or financial position.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of FASB
Statement No. 123", which provides optional transition guidance for those
companies electing to voluntarily adopt the accounting provisions of SFAS No.
123. In addition, the statement mandates certain new disclosures that are
incremental to those required by SFAS No. 123. We will continue to account for
stock-based compensation in accordance with APB No. 25. As such, this standard
did not have a material impact on our consolidated financial position or results
of operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2002, short-term investments consisted of an investment
in a limited partnership that invests in fixed income securities.
20
Marketable securities include our investments in two publicly-traded
entities, Edgar On-Line and Globecomm Systems Inc., which are recorded at fair
market value. We do not hedge our exposure to fluctuations in the value of our
investments in equity securities.
Our other investments are generally fixed rate investment grade and
government securities denominated in U.S. dollars. At December 31, 2002, all of
our investments were due to mature within twelve months and the carrying value
of these investments approximated fair value. At December 31, 2002, $8.9 million
of our cash and investments were restricted in accordance with the terms of
certain collateral obligations.
We are also subject to market risk associated with foreign currency
exchange rates. To date, we have not utilized financial instruments to minimize
our exposure to foreign currency fluctuations. We will continue to analyze risk
management strategies to minimize foreign currency exchange risk in the future.
We believe that we have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by a 100 basis point increase or
decrease in interest rates, due mainly to the short-term nature of the majority
of our investment portfolio and the current interest rates for short to medium
term investments. An increase or decrease in interest rates would not
significantly increase or decrease interest expense on debt obligations, due to
the fixed nature of the substantial majority of our debt obligations.
Item 4. Controls and Procedures
Our disclosure controls and procedures (as defined in Rule 13a-14(c)
under the Exchange Act) ("Disclosure Controls") are procedures that are designed
with the objective of ensuring that information required to be disclosed in our
reports filed under the Exchange Act, such as this quarterly report, is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and forms. Disclosure Controls are also designed with the
objective of ensuring that this information is accumulated and communicated to
our management, including our Chief Executive Officer and Acting Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.
Internal controls and procedures for financial reporting ("Internal Controls")
are procedures that are designed with the objective of providing reasonable
assurance that:
o our transactions are properly authorized;
o assets are safeguarded against unauthorized or improper use;
and
o transactions are properly recorded and reported,
in each case all to permit the preparation of our financial statements in
conformity with U.S. generally accepted accounting principles.
Limitations on the Effectiveness of Disclosure Controls and Internal Controls
Our management, including our Chief Executive Officer and Acting Chief
Financial Officer, does not expect that our Disclosure Controls or Internal
Controls will prevent all error and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within our company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or mistake. Additionally, controls
can be circumvented by the individual acts of some persons, by collusion of two
or more people or by management override of the control. The design of any
system of controls is also based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any control will
succeed in achieving its stated goals under all potential future conditions.
Over time, a control may become inadequate because of changes in conditions, or
the degree of compliance with the policies or procedures related to the control
may deteriorate. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
21
Evaluation of Disclosure Controls and Procedures
Within the 90-day period prior to the filing of this quarterly report,
an evaluation was carried out under the supervision and with the participation
of our management, including our Chief Executive Officer and Acting Chief
Financial Officer, of the effectiveness of the design and operation of our
Disclosure Controls and Procedures. Based upon that evaluation, our Chief
Executive Officer and Acting Chief Financial Officer concluded, subject to the
limitations noted above, that:
o the design and operation of our Disclosure Controls were
effective to ensure that material information related to our
company which is required to be disclosed in reports filed
under the Securities Exchange Act of 1934 is recorded
processed, summarized and reported within the time periods
specified in SEC rules and forms.
o our Internal Controls are effective to provide reasonable
assurance that our financial statements are fairly presented
in conformity with U.S. generally accepted accounting
principles.
No significant changes were made to our Internal Controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On January 28, 2002, a derivative suit was filed in the United States
District Court for the Southern District of New York against our company, as
nominal defendant, and certain of our current and former directors and officers.
We believe that the allegations in this lawsuit are without merit and we intend
to vigorously defend against them. In addition, the plaintiff has not pursued
her claims since the filing of the lawsuit. Although there can be no assurance
as to the outcome or effect of this lawsuit, we do not believe, based on
currently available information, that the ultimate liabilities, if any,
resulting from this lawsuit will have a material adverse impact on our business,
financial condition, results of operations or cash flows.
On March 1, 2002, our company and two of our wholly-owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with the Plan, with the United States
Bankruptcy Court for the District of Delaware. On April 8, 2002, the bankruptcy
court confirmed the Plan. Effective April 25, 2002, all conditions necessary for
the Plan to become effective were satisfied or waived and we emerged from
Chapter 11 bankruptcy protection.
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York entitled In re Globix Corp
Securities Litigation, No.02-CV-00082. This lawsuit names as defendants our
company and our former officers Marc Bell, Peter Herzig (who remains a director
of our company) and Brian Reach, and asserts claims under sections 10(b) and
20(a) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder on
behalf of all persons or entities who purchased our securities between November
16, 2000 and December 27, 2001.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968,000 in aggregate principal amount
of the notes will be held in reserve in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) of the shares of our common stock and the notes being held in escrow.
A consolidated amended complaint was filed in this lawsuit on June 28,
2002. We have filed a motion to dismiss the consolidated amended complaint.
Briefing of that motion is not yet complete. If the motion is denied, the case
will proceed to the discovery stage. We believe that the allegations in this
lawsuit are without merit and we intend to vigorously defend against them.
Although there can be no assurance as to the outcome or effect of this lawsuit,
we do not believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material adverse
impact on our business, financial condition, results of operations or cash
flows.
22
On June 12, 2002, Robert B. Bell, a former officer and director of the
Company, filed a complaint in the United States District Court for the Southern
District of New York, entitled Robert B. Bell v. Arnold M. Bressler, as Trustee,
and Globix Corporation, alleging breach-of-contract claims related to the
failure to make payments under a trust, (the "Rabbi Trust") that the Company
formed pursuant to an employment agreement with Mr. Bell. Mr. Bell is seeking
damages in excess of $2.0 million plus costs, disbursements and legal fees. This
action is currently being stayed pending resolution of the Company's lawsuit in
the United States Bankruptcy Court for the District of Delaware described below.
In addition, in connection with the same underlying issues, on July 24,
2002 the Company filed a complaint in the United States Bankruptcy Court for the
District of Delaware entitled Globix Corporation v. Arnold N. Bressler, as
Trustee of the Globix Corporation Rabbi Trust and Robert B. Bell. In this
action, the Company has requested that the assets of the Rabbi Trust be turned
over to the Company. The Company has also requested that Mr. Bressler, as
Trustee of the Rabbi Trust, be enjoined from dissipating the assets of the Rabbi
Trust pending resolution of the Company's claims by the court and has filed a
motion for a declaratory judgment to establish the maximum amount of Mr. Bell's
claims. Mr. Bressler has asserted counter claims in this action, and both Mr.
Bressler and Mr. Bell have submitted objections in this action, which is
currently in the discovery phase. The Company is vigorously pursing its claims
in this action and defending against Mr. Bressler's counterclaims.
The Company and Mr. Bell are currently in settlement discussions to
resolve both of these lawsuits.
On February 6, 2003, a putative derivative suit was filed in New York
State Supreme Court (County of New York) against our company, as nominal
defendant, and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First
Boston Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon
Smith Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings,
LLC), the initial purchasers in our February 2000 offering of the 12.5% Senior
Notes. The suit alleges that the underwriting discount granted to the initial
purchasers of the 12.5% Notes violated Section 5-531 of the New York General
Obligations Law, which limits the amount that can be charged by a loan broker.
On March 6, 2003, the plaintiff and the initial purchasers entered into a
tolling agreement that would result in the dismissal of the action without
prejudice pending action on a motion to dismiss an amended complaint submitted
in a similar case involving debt securities issued by another corporation. On
March 13, 2003 the court dismissed the action without prejudice.
We are from time to time involved in legal proceedings in the ordinary
course of our business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which we are a party, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from any such legal proceedings will have a
material adverse impact on our business, financial condition, results of
operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults upon Senior Securities
As of December 31, 2002, we were in compliance with the material
operating and financial restrictions imposed upon our company contained in the
indenture governing the 11% Senior Notes. However, as of December 31, 2002, we
were not in compliance with the provisions of the indenture which require us to:
o file reports and documents with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; specifically our Quarterly
Report on Form 10-Q for the quarter ended June 30, 2002, Annual
Report on Form 10-K for the fiscal year ended September 30, 2002
and this quarterly report;
o file copies of these reports with the indenture trustee;
o cause these reports to be mailed to the holders of the 11% Senior
Notes;
o deliver to the indenture trustee a certificate from our public
accountants related to our compliance with certain provisions of
the indenture; and
o deliver to the indenture trustee an officer's certificate with
respect to our failure to satisfy the obligations set forth above.
Our failure to comply with each of the obligations described above
constitutes a default, but not an event of default, under the indenture. On
March 19, 2003, holders of approximately 58% of the outstanding 11% Senior Notes
(excluding 11% Senior Notes owned by our company) waived these defaults.
23
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Report on Form 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
99.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of Acting Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
None
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/ PETER K. STEVENSON
-------------------------------------------
Peter K. Stevenson, Chief Executive Officer
Date: March 26, 2003
By: /S/ JOHN D. MCCARTHY
-------------------------------------------
John D. McCarthy, Acting Chief
Financial Officer (principal financial
officer and principal accounting officer)
Date: March 26, 2003
25
CERTIFICATIONS
I, Peter K. Stevenson, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globix
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/Peter K. Stevenson
--------------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
26
I, John D. McCarthy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Globix
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
quarterly report;
3. Based on my knowledge, the financial statements and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls.
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: March 26, 2003
/s/John D. McCarthy
------------------------------------------
Name: John D. McCarthy
Title: Acting Chief Financial Officer
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