SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 10-K/A
(AMENDMENT NO. 1)
------------------
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 2002
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
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None.
SECURITIES REGISTERED PURSUANT TO SECTION 12 (G) OF THE ACT:
Common Stock, par value $0.01 per share.
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 if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the Registrant's knowledge in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. | |
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes | | No |X|
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|
The shares of the registrant's voting stock outstanding on March 29, 2002,
the last business day of the registrant's most recently completed second fiscal
quarter, were cancelled on April 25, 2002 in connection with the registrant's
bankruptcy. Accordingly, the registrant does not believe that a calculation of
the aggregate market value of the shares of its voting stock held by
non-affiliates of the registrant as of March 29, 2002 would be relevant to
investors. As of March 10, 2003, the aggregate market value of the registrant's
voting stock held by non-affiliates of the registrant, based upon the closing
sales price for the registrant's common stock as reported on the OTC Bulletin
Board, was approximately $23.2 million.
Number of shares of the registrant's common stock deemed to be outstanding
as of March 24, 2003 was 16,460,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
This Amendment No. 1 amends the registrant's annual report on Form 10-K
(the "Form 10-K") for the fiscal year ended September 30, 2002, filed with the
Securities and Exchange Commission on March 26, 2003, (i) to include conformed
signatures of PricewaterhouseCoopers LLP on the Reports of Independent
Accountants appearing on pages F-2 through F-4 of the Form 10-K and (ii) to
include the date of the Report of Independent Accountants issued by Arthur
Andersen LLP, the registrant's former independent accountants, appearing on page
F-5 of the Form 10-K, both of which were inadvertently omitted from the Form
10-K. These pages comprise part of Part II, Item 8, "Financial Statements and
Supplementary Data." Accordingly, pursuant to Rule 12b-15 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), the complete
text of Item 8, as amended (including pages F-6 through F-39 and page S-1 of the
Form 10-K), is set forth below.
This Amendment No. 1 also amends the Form 10-K to delete from Part III,
Item 14 the subsection entitled "Limitations on the Effectiveness of Disclosure
Controls and Internal Controls." Pursuant to Rule 12b-15, the complete text of
Part III, Item 14, as amended, is set forth below.
In addition, pursuant to Rule 12b-15 our principal executive officer and
principal financial officer are providing the certifications required by Rule
13a-14 promulgated under the Exchange Act and are also furnishing, but not
filing, written statements pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
Except as described above, no other changes have been made to the Form
10-K. This Amendment No. 1 continues to speak as of the date of the Form 10-K,
and the registrant has not updated the disclosures contained therein to reflect
any events which occurred at a date subsequent to the filing of the Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements are set forth herein beginning on page F-1.
ITEM 14. 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 annual 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:
- our transactions are properly authorized;
- assets are safeguarded against unauthorized or improper use; and
- 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.
Within the 90-day period prior to the filing of this annual 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:
- the design and operation of our Disclosure Controls were effective
to ensure that material information related to our company which is
required to be disclosed in reports filed under the Securities
Exchange Act of 1934 is recorded processed, summarized and reported
within the time periods specified in SEC rules and forms.
- our Internal Controls are effective to provide reasonable assurance
that our financial statements are fairly presented in conformity
with U.S. generally accepted accounting principles.
No significant changes were made to our Internal Controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation.
1
EXHIBIT INDEX
-------------
Exhibit
Number Document Description
------ --------------------
99.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(filed herewith).
99.2 Certification of Acting Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002 (filed herewith).
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) 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.
Date: April 11, 2003 GLOBIX CORPORATION
/s/ Peter K. Stevenson
-----------------------------------------------
Peter K. Stevenson
President and Chief Executive Officer
CERTIFICATIONS
I, Peter K. Stevenson, certify that:
1. I have reviewed this annual report on Form 10-K/A of Globix
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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;
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: April 11, 2003
/s/ Peter K. Stevenson
------------------------------
Name: Peter K. Stevenson
Title: President and Chief
Executive Officer
I, John D. McCarthy, certify that:
1. I have reviewed this annual report on Form 10-K/A of Globix
Corporation;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual 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 annual 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 annual
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 annual report (the "Evaluation Date"); and
(c) presented in this annual 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;
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
annual 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: April 11, 2003
/s/John D. McCarthy
--------------------------------------
Name: John D. McCarthy
Title: Acting Chief Financial Officer
C-2
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Public Accountants ....................................................................... F-2
Consolidated Balance Sheets--As of September 30, 2002 (Successor Company) and September 30, 2001
(Predecessor Company)............................................................................................ F-6
Consolidated Statements of Operations--for the Five Months Ended September 30, 2002 (Successor Company),
Seven Months Ended April 30, 2002 (Predecessor Company) and for the Fiscal Years Ended
September 30, 2001 and September 30, 2000 (Predecessor Company) ................................................. F-7
Consolidated Statements of Changes in Stockholders' (Deficit) Equity and Comprehensive Income (Loss)--for the Five
Months Ended September 30, 2002 (Successor Company), Seven Months Ended April 30, 2002 (Predecessor Company) and
for the Fiscal Years Ended September 30, 2001 and September 30, 2000 (Predecessor Company)....................... F-8
Consolidated Statements of Cash Flows--for the Five Months Ended September 30, 2002 (Successor Company),
Seven Months Ended April 30, 2002 (Predecessor Company) and for the Fiscal Years Ended September 30, 2001 and
September 30, 2000 (Predecessor Company)......................................................................... F-9
Notes to Consolidated Financial Statements ...................................................................... F-10
Schedule II - Valuation and Qualifying Accounts.................................................................. S-1
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated balance sheet as of September 30,
2002 and the related consolidated statements of operations, cash flows and
changes in stockholders' equity present fairly, in all material respects, the
consolidated financial position of Globix Corporation and its subsidiaries (the
Successor Company) at September 30, 2002 and the consolidated results of their
operations and their consolidated cash flows for the five months ended September
30, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule as of and for the five months ended September 30, 2002 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2, the United States Bankruptcy Court for the District of
Delaware confirmed the Company's Prepackaged Plan of Reorganization (the "plan")
on April 8, 2002. Confirmation of the plan substantially alters rights and
interests of equity security holders as provided for in the plan. The plan was
substantially consummated on April 25, 2002 and the Company emerged from
bankruptcy. In connection with its emergence from bankruptcy, the Company
adopted fresh start accounting as of May 1, 2002.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
February 3, 2003 (except with respect to the matters discussed in Note 24, in
the fifth paragraph as of February 6, 2003, in the sixth paragraph as of
February 24, 2003, in the seventh and eighth paragraphs as of March 14, 2003,
and in the ninth paragraph as of March 19, 2003).
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated statements of operations, cash
flows and changes in stockholders' deficit for the seven months ended April 30,
2002 present fairly, in all material respects, the consolidated results of
operations and cash flows of Globix Corporation and its subsidiaries (the
Predecessor Company) for the seven months ended April 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule for the seven
months ended April 30, 2002 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The consolidated financial
statements of Globix Corporation and its subsidiaries (the Predecessor Company)
as of September 30, 2001, and for the years ended September 30, 2001 and 2000,
prior to the adjustments discussed in Notes 3 and 4, were audited by other
independent accountants who have ceased operations. Those independent
accountants expressed an unqualified opinion on those financial statements in
their report (which included an explanatory paragraph indicating factors that
raise substantial doubt about the Company's ability to continue as a going
concern and an explanatory paragraph emphasizing a change in the Company's
method of accounting for revenue recognition) dated December 31, 2001.
As discussed in Note 2, the Company filed a petition on March 1, 2002 with the
United States Bankruptcy Court for the District of Delaware for reorganization
under the provisions of Chapter 11 of the Bankruptcy Code. The Company's
Prepackaged Plan of Reorganization was substantially consummated on April 25,
2002 and the Company emerged from bankruptcy. In connection with its emergence
from bankruptcy, the Company adopted fresh start accounting.
As discussed in Note 4, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
on May 1, 2002.
F-3
As discussed above, the consolidated financial statements of Globix and its
subsidiaries (the Predecessor Company) as of September 30, 2001, and for the
years ended September 30, 2001 and 2000, were audited by other independent
accountants who have ceased operations. As described in Note 3, these financial
statements have been revised to include the transitional disclosures required by
SFAS No. 142, "Goodwill and Other Intangible Assets", which was adopted by the
Successor Company as of May 1, 2002. In addition, as described in Note 4, the
Company adopted SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment
of SFAS 13, and Technical Corrections as of April 2002," as of May 1, 2002. As
a result, the consolidated financial statements for the year ended September 30,
2000 have been restated to classify the loss on extinguishment of debt in
accordance with SFAS No. 145. We audited the transitional disclosures in Note
3. We also audited the adjustments described in Note 4 which were applied to
restate the consolidated financial statements for the year ended September 30,
2000. In our opinion, the transitional disclosures are appropriate and the
adjustments referred to above are appropriate and have been properly applied.
However, we were not engaged to audit, review, or apply any procedures to the
September 30, 2001 or 2000 consolidated financial statements of the Predecessor
Company other than with respect to such transitional disclosures and adjustments
and accordingly, we do not express an opinion or any other form of assurance on
the September 30, 2001 or 2000 financial statements taken as a whole.
/s/ PRICEWATERHOUSECOOPERS LLP
New York, New York
February 3, 2003 (except with respect to the matters discussed in Note 24, in
the fifth paragraph as of February 6, 2003, in the sixth paragraph as of
February 24, 2003, in the seventh and eighth paragraphs as of March 14, 2003,
and in the ninth paragraph as of March 19, 2003).
F-4
This report is a copy of a report previously issued by Arthur Andersen LLP,
which has not been reissued by Arthur Andersen LLP. The consolidated balance
sheet at September 30, 2000 and the consolidated statements of operations,
stockholders' (deficit) equity and cash flows for the year ended September 30,
1999 are not required to be presented in this Form 10-K. The note references in
the opinion below are to the financial statements included in the Form 10-K for
the year ended September 30, 2001. As discussed in Note 3 to the consolidated
financial statements, the Company has revised its consolidated financial
statements for the years ended September 30, 2001 and 2000 to include the
transitional disclosures required by Statement of Financial Accounting
Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets", and as
discussed in Note 4 to the consolidated financial statements, to reclassify
losses on the extinguishment of debt in compliance with SFAS No. 145,
"Rescission of SFAS Nos. 4, 44 and 64, Amendment of SFAS 13 and Technical
Corrections as of April 2002," which was adopted by the Company as of May 1,
2002. The Arthur Andersen LLP report does not extend to these changes. The
revisions related to these transitional disclosures and reclassifications were
reported on by PricewaterhouseCoopers LLP, as stated in their report appearing
herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (a Delaware corporation) and Subsidiaries as of September 30, 2001
and 2000, and the related consolidated statements of operations, stockholders'
(deficit) equity and cash flows for each of the three years in the period ended
September 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Globix Corporation and
Subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to
the consolidated financial statements, the Company has incurred recurring net
losses and net operating cash deficiencies and has a significant stockholders'
deficiency. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plans in regard to these matters
are described in Note 1. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for revenue recognition effective October 1,
2000.
/S/ ARTHUR ANDERSEN LLP
New York, New York
December 31, 2001
F-5
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF SEPTEMBER 30, 2002 AND 2001
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
September September
30, 2002 30, 2001
(SUCCESSOR (PREDECESSOR
COMPANY) COMPANY)
---------- -----------
ASSETS
Current assets:
Cash and cash equivalents ......................................................... $ 47,562 $ 111,502
Short-term investments ............................................................ 5,392 --
Marketable securities ............................................................. 1,327 1,610
Accounts receivable, net of allowance for doubtful accounts of $2,565 and $8,052,
respectively ................................................................. 7,060 13,809
Prepaid expenses and other current assets ......................................... 7,735 7,785
Restricted cash ................................................................... 1,760 6,984
--------- ---------
Total current assets .................................................... 70,836 141,690
Investments, restricted ........................................................... 7,337 26,886
Property, plant and equipment, net ................................................ 174,710 356,149
Debt issuance costs, net of accumulated amortization of $1,896 .................... -- 19,006
Intangible assets, net of accumulated amortization of $543 and $2,485, respectively 9,612 4,362
Other assets ...................................................................... 225 4,895
--------- ---------
Total assets ............................................................ $ 262,720 $ 552,988
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Current portions of capital lease obligations and mortgage payable ................ $ 1,520 $ 6,687
Accounts payable .................................................................. 8,971 14,022
Accrued liabilities ............................................................... 16,096 20,950
Accrued restructuring ............................................................. 1,828 9,191
Accrued interest - 12.5% Senior Notes ............................................. -- 12,500
--------- ---------
Total current liabilities ............................................... 28,415 63,350
Capital lease obligations, net of current portion ................................. 2,807 10,309
Mortgage Payable .................................................................. 20,186 20,441
12..5% Senior Notes ............................................................... -- 600,000
11% Senior Notes .................................................................. 120,000 --
Accrued Interest - 11% Senior Notes ............................................... 5,681 --
Other long term liabilities ....................................................... 13,084 7,577
--------- ---------
Total liabilities ....................................................... 190,173 701,677
Commitments and contingencies (Note 17):
Minority interest in subsidiary ................................................... -- 5,406
Mandatory Redeemable convertible preferred stock .................................. -- 83,230
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000 and
41,920,229 shares issued and outstanding, respectively ....................... 165 419
Additional paid-in capital ........................................................ 93,112 171,176
Deferred compensation ............................................................. -- (7,097)
Accumulated other comprehensive income (loss) ..................................... 401 (2,703)
Accumulated deficit ............................................................... (21,131) (399,120)
--------- ---------
Total stockholders' equity (deficit) .................................... 72,547 (237,325)
--------- ---------
Total liabilities and stockholders' equity (deficit) .................... $ 262,720 $ 552,988
========= =========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
----------------- -------------
FIVE MONTHS SEVEN MONTHS
ENDED ENDED
SEPTEMBER 30, APRIL 30,
2002 2002
------------ ------------
Revenue ................................................................... $ 30,723 $ 51,273
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization, payroll
and occupancy shown below)....................................... 10,458 22,123
Selling, general and administrative ............................. 29,313 57,206
Loss on impairment of assets .................................... -- 2,578
Restructuring and other charges ................................. -- 24,834
Depreciation and amortization ................................... 6,060 28,115
------------ ------------
Total operating costs and expenses ..................... 45,831 134,856
Loss from operations ...................................................... (15,108) (83,583)
Interest and financing expense .................................. (6,653) (34,511)
Interest income ................................................. 787 2,024
Other income ................................................... 275 352
Other expense .................................................. (432) (861)
Gain (loss) on discharge of debt ................................ -- 427,066
Minority interest in subsidiary ................................. -- 5,778
Reorganization items ............................................ -- (7,762)
Fresh start accounting adjustments .............................. -- (148,569)
------------ ------------
(Loss) Income before cumulative effect of a change in accounting
principle ................................................................. (21,131) 159,934
Cumulative effect of a change in accounting principle, net of tax -- --
------------ ------------
Net (loss) income ......................................................... (21,131) 159,934
Dividends and accretion on preferred stock ................................ -- (3,178)
------------ ------------
Net (loss) income attributable to common stockholder ...................... $ (21,131) $ 156,756
============ ============
(Loss) earnings per common share:
Basic: Before cumulative effect of a change in accounting
principle ................................................................. $ (1.28) $ 3.96
Cumulative effect of a change in accounting principle ..................... -- --
------------ ------------
Basic (loss) income per share attributable to common stockholders ......... $ (1.28) $ 3.96
============ ============
Weighted average common shares outstanding--basic ......................... 16,460,000 39,618,856
Diluted: Before cumulative effect of a change in accounting principle ..... $ (1.28) $ 3.30
Cumulative effect of a change in accounting principle ..................... -- --
------------ ------------
Diluted (loss) income per share attributable to common stockholder ........ $ (1.28) $ 3.30
============ ============
Weighted average common shares outstanding--diluted ....................... 16,460,000 48,507,456
PREDECESSOR COMPANY
----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ -------------
Revenue ................................................................... $ 104,210 $ 81,287
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization, payroll
and occupancy shown below)....................................... 40,609 42,513
Selling, general and administrative ............................. 124,821 98,113
Loss on impairment of assets .................................... 3,500
Restructuring and other charges ................................. 56,109 --
Depreciation and amortization ................................... 36,657 18,228
------------ ------------
Total operating costs and expenses ..................... 261,696 158,854
Loss from operations ...................................................... (157,486) (77,567)
Interest and financing expense .................................. (65,128) (57,831)
Interest income ................................................. 13,282 24,749
Other income .................................................... 2,147 2,816
Other expense ................................................... (3,526) (1,037)
Gain (loss) on discharge of debt ................................ -- (17,577)
Minority interest in subsidiary ................................. -- --
Reorganization items ............................................ -- --
Fresh start accounting adjustments .............................. -- --
------------ ------------
(Loss) Income before cumulative effect of a change in accounting
principle ................................................................. (210,711) (126,447)
Cumulative effect of a change in accounting principle, net of tax (2,332) --
------------ ------------
Net (loss) income ......................................................... (213,043) (126,447)
Dividends and accretion on preferred stock ................................ (7,104) (5,768)
------------ ------------
Net (loss) income attributable to common stockholders ..................... $ (220,147) $ (132,215)
============ ============
(Loss) earnings per common share:
Basic: Before cumulative effect of a change in accounting
principle ................................................................. $ (5.66) $ (3.73)
Cumulative effect of a change in accounting principle ..................... (0.06) --
------------ ------------
Basic (loss) income per share attributable to common stockholder .......... $ (5.72) $ (3.73)
============ ============
Weighted average common shares outstanding--basic ......................... 38,476,909 35,484,040
Diluted: Before cumulative effect of a change in accounting principle ..... $ (5.66) $ (3.73)
Cumulative effect of a change in accounting principle ..................... (0.06) --
------------ ------------
Diluted (loss) income per share attributable to common stockholder ........ $ (5.72) $ (3.73)
============ ============
Weighted average common shares outstanding--diluted ....................... 38,476,909 35,484,040
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ADDITIONAL
COMMON STOCK PAID-IN DEFERRED
SHARES AMOUNT CAPITAL COMPENSATION
----------- ----------- ----------- ------------
Balance, October 1, 1999 (Predecessor
Company) ................................ 33,300,020 $ 333 $ 155,423 --
Issuance of common stock in conjunction
with acquisition ........................ 241,236 2 6,180 --
Issuance of common stock upon exercise of
options and warrants, net ............... 3,766,059 38 10,055 --
Dividends and accretion on preferred
stock ................................... -- -- (5,768) --
Comprehensive Income (Loss):
Net loss ............................ -- -- -- --
Unrealized holding losses ........... -- -- -- --
Foreign Currency translation
adjustment .............................. -- -- -- --
Total Comprehensive Loss ................ -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 2000 (Predecessor
Company) ................................ 37,307,315 373 165,890 --
Issuance of common stock in conjunction
with acquisition ........................ 80,000 1 1,199 --
Issuance of common stock upon exercise of
options ................................. 1,559,424 15 2,486 --
Issuance of restricted stock ............ 3,063,490 31 8,968 (8,999)
Amortization of deferred
compensation ............................ -- -- -- 1,638
Cancellation of restricted stock ........ (90,000) (1) (263) 264
Dividends and accretion on preferred
stock ............................... -- -- (7,104) --
Comprehensive Income (Loss):
Net loss ............................ -- -- -- --
Unrealized holding losses ............... -- -- -- --
Foreign Currency translation
adjustment ...................... -- -- -- --
Total Comprehensive Loss ................ -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 2001 (Predecessor
Company) ................................ 41,920,229 419 171,176 (7,097)
Amortization of deferred compensation ... -- -- -- 7,027
Cancellation of restricted stock ........ (23,750) -- (70) 70
Dividends and accretion on preferred
stock ................................... -- -- (3,178) --
Comprehensive Income (Loss):
Net income .......................... -- -- -- --
Unrealized holding gains ............ -- -- -- --
Foreign Currency
translation adjustment .................. -- -- -- --
Total Comprehensive Income .............. -- -- -- --
Fresh start accounting adjustments ...... (25,436,479) (254) (74,816) --
----------- ----------- ----------- -----------
Balance, May 1, 2002 (Successor
Company) .............................. 16,460,000 165 93,112 --
Comprehensive Income Loss:
Net loss ............................ -- -- -- --
Unrealized holding losses ........... -- -- -- --
Foreign Currency
translation adjustment .................. -- -- -- --
Total Comprehensive Loss ................ -- -- -- --
----------- ----------- ----------- -----------
Balance, September 30, 2002 (Successor
Company) ................................ 16,460,000 $ 165 $ 93,112 $ --
=========== =========== =========== ===========
ACCUMULATED
OTHER TOTAL
COMPREHENSIVE STOCKHOLDERS'
(LOSS) ACCUMULATED (DEFICIT)
INCOME DEFICIT EQUITY
------------ ----------- -------------
Balance, October 1, 1999 (Predecessor
Company) ................................ $ 10,279 $ (59,630) $ 106,405
Issuance of common stock in conjunction
with acquisition ........................ -- -- 6,182
Issuance of common stock upon exercise of
options and warrants, net ............... -- -- 10,093
Dividends and accretion on preferred
stock ................................... -- -- (5,768)
Comprehensive Income (Loss):
Net loss ............................ -- (126,447) --
Unrealized holding losses ........... (5,763) -- --
Foreign Currency translation
adjustment .............................. (2,732) -- --
Total Comprehensive Loss ................ -- -- (134,942)
----------- ----------- -----------
Balance, September 30, 2000 (Predecessor
Company) ................................ 1,784 (186,077) (18,030)
Issuance of common stock in conjunction
with acquisition ........................ -- -- 1,200
Issuance of common stock upon exercise of
options ................................. -- -- 2,501
Issuance of restricted stock ............ -- -- --
Amortization of deferred
compensation ............................ -- -- 1,638
Cancellation of restricted stock ........ -- -- --
Dividends and accretion on preferred
stock ............................... -- -- (7,104)
Comprehensive Income (Loss):
Net loss ............................ -- (213,043) --
Unrealized holding losses ............... (5,539) -- --
Foreign Currency translation
adjustment ...................... 1,052 -- --
Total Comprehensive Loss ................ -- -- (217,530)
----------- ----------- -----------
Balance, September 30, 2001 (Predecessor
Company) ................................ (2,703) (399,120) (237,325)
Amortization of deferred compensation ... -- -- 7,027
Cancellation of restricted stock ........ -- -- --
Dividends and accretion on preferred
stock ................................... -- -- (3,178)
Comprehensive Income (Loss):
Net income .......................... -- 159,934 --
Unrealized holding gains ............ 1,185 -- --
Foreign Currency
translation adjustment .................. (1,807) -- --
Total Comprehensive Income .............. -- -- 159,312
Fresh start accounting adjustments ...... 3,325 239,186 167,441
----------- ----------- -----------
Balance, May 1, 2002 (Successor
Company) .............................. -- -- 93,277
Comprehensive Income Loss:
Net loss ............................ -- (21,131) --
Unrealized holding losses ........... (1,430) -- --
Foreign Currency
translation adjustment .................. 1,831 -- --
Total Comprehensive Loss ................ -- -- (20,730)
----------- ----------- -----------
Balance, September 30, 2002 (Successor
Company) ................................ $ 401 $ (21,131) $ 72,547
=========== =========== ===========
The accompanying notes are an integral part of these
consolidated financial statements.
F-8
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------- -----------------------------------------------
SEVEN MONTHS
FIVE MONTHS ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, APRIL 30, SEPTEMBER SEPTEMBER
2002 2002 30, 2001 30, 2000
----------------- ------------ --------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) Income ......................................... $ (21,131) $ 159,934 $(213,043) $(126,447)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ......................... 6,060 28,115 36,657 18,228
Provision for uncollectible receivables ............... 1,904 4,284 14,119 2,701
Services contributed to minority-owned subsidiary .... -- 372 --
Gain on debt discharge ................................ -- (427,066) -- 17,577
Cumulative effect of a change in accounting principle . -- -- 2,332 --
Restructuring and other charges (net of cash payments). -- 8,233 22,889 --
Gain on sale of short-term investments ................ -- -- (1,459) (1,238)
Unrealized loss on short- term investment ............. 57 -- -- --
Loss on impairment of investment ...................... -- 490 3,250 --
Loss on impairment of operating assets ................ -- 2,578 3,500 --
Gain on sale of marketable securities ................. -- (27) (663) (601)
Amortization of debt issuance costs ................... -- 650 1,177 1,022
Amortization of deferred compensation ................. -- 7,027 1,638 --
Write-off of note receivable .......................... 4,078 -- --
Minority interest in subsidiary ....................... -- (5,778) -- --
Fresh start accounting adjustment ..................... -- 148,569 -- --
Changes in operating assets and liabilities:
Accounts receivable ....................................... 3,565 (3,449) (6,526) (15,922)
Prepaid expenses and other current assets ................. 4,210 (4,574) (3,309) (227)
Other assets .............................................. 16 54 (3,567) 366
Accounts payable .......................................... 1,362 (5,181) 2,303 (1,270)
Accrued liabilities ....................................... (468) 1,950 947 7,827
Accrued restructuring ..................................... (1,294) (7,117) -- --
Accrued interest .......................................... 5,500 31,431 (2) 3,539
Other ..................................................... (180) (179) (786) 127
--------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ....... 3,679 (59,684) (140,543) (94,318)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in short-term investments (5,449) -- -- --
Proceeds from sale of short-term investments .............. -- -- 10,180 --
Use of (investment in) restricted cash and investments .... 166 24,235 9,308 (7,628)
Proceeds from sale of marketable securities ............... -- 64 1,426 1,125
Return of (investment in) strategic investments ........... 51 193 -- (1,033)
Purchases of property, plant and equipment ................ (1,229) (18,650) (134,185) (142,589)
Purchase of Comstar.net, Inc., net of cash acquired ....... -- -- -- 186
--------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (6,461) 5,842 (113,271) (149,939)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options and warrants, net . -- -- 2,501 10,093
Capital contribution in minority-owned subsidiary ......... -- -- 5,406 --
Proceeds from 12.5% Senior Notes offering, net of offering
expenses .................................................. -- -- -- 580,000
Repayments on 13% Senior Notes ............................ -- -- -- (170,400)
Proceeds from issuance of preferred stock, net ............ -- -- -- 75,250
Payments of dividends on preferred stock .................. -- -- (1,500) (3,475)
Proceeds from mortgage payable, net ....................... -- -- -- 20,064
Repayments of mortgage payable and capital lease
obligations ............................................... (2,279) (4,946) (6,020) (2,137)
--------- --------- --------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES ....... (2,279) (4,946) 387 509,395
--------- --------- --------- ---------
EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH
EQUIVALENTS ............................................... (99) 8 1,052 (2,732)
--------- --------- --------- ---------
NET (DECREASES) INCREASES IN CASH AND CASH EQUIVALENTS (5,160) (58,780) (252,375) 262,406
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 52,722 111,502 363,877 101,471
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 47,562 $ 52,722 $ 111,502 $ 363,877
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest .................................... $ 975 $ 2,101 $ 78,289 $ 55,260
Cash paid for income taxes ................................ -- -- $ 34 $ 72
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations . $ -- $ 1,036 $ 19,475 --
Capital expenditures included in accounts payable,
accrued liabilities and other long term liabilities ....... $ 168 $ 273 $ 12,557 $ 8,287
Cumulative dividends and accretion on preferred
stock ..................................................... $ -- $ 3,178 $ 7,104 $ 2,293
Mandatorily redeemable convertible preferred
stock ..................................................... $ -- $ 83,230 -- --
Restructuring of debt ..................................... $ -- $ 427,066 -- --
F-9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. BASIS OF PRESENTATION
Globix Corporation and its subsidiaries ("Globix", the "Company" or the
"Successor Company") is a provider of Internet solutions to businesses. The
solutions include secure and fault-tolerant Internet data centers with network
services providing network connectivity to the Internet and Internet-based
managed and application services, which include co-location, dedicated hosting,
streaming media, and messaging services. The Company currently offers services
from facilities in New York City, New York, Santa Clara, California, Atlanta,
Georgia and London, England.
The financial statements presented have been prepared by the Company in
accordance with generally accepted accounting principles in the United States
and the rules and regulations of the Securities and Exchange Commission. As a
result of the application of fresh start accounting under the American Institute
of Certified Public Accountants Statement of Position No. 90-7 ("SOP 90-7")
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
as of May 1, 2002 the Company's financial results for the fiscal year ended
September 30, 2002 include two different bases of accounting and, accordingly,
the operating results and cash flows of the Successor Company and the
Predecessor Company 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. Although April 25, 2002 was
the Effective Date of our emergence from bankruptcy, for financial reporting
convenience purposes, we accounted for the consummation of the Plan as of April
30, 2002, which is our normal financial closing period for the month of April.
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 its revenue and achieve further operating
efficiencies. For the five month period ended September 30, 2002, the Company
had a net loss of approximately $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 by the Company pursuant to the Plan, including company downsizing,
headcount reductions and other cost reductions, as well as cost control measures
and the restructuring of its 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 12 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 the
Company's restructuring, it 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.
The following table describes the periods presented in the financial
statements and related notes thereto:
PERIOD REFERRED TO AS
------ --------------
From May 1, 2002 through September 30, 2002 "Successor Company"
From October 1, 2001 through April 30, 2002 "Predecessor Company"
and for the fiscal years ended
September 30, 2001 and 2000
2. REORGANIZATION AND EMERGENCE FROM CHAPTER 11
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"), all conditions necessary for the Plan to become
effective were satisfied or waived and the Company emerged from Chapter 11
bankruptcy protection.
F-10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of the Effective Date of the Plan, all of the Company's existing
securities were cancelled and:
- each holder of the Company's 12.5% Senior Notes due 2010 (the "12.5%
Senior Notes"), became entitled to receive, in exchange for
its claims in respect of the 12.5% Senior Notes, its pro rata share
of:
- $120,000 in aggregate principal amount of the Company's 11%
Senior Secured Notes due 2008 (the "11% Senior Notes"), and
- 13,991,000 shares of the Company's common stock, representing
85% of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan;
- each holder of shares of the Company's preferred stock outstanding
immediately prior to the Effective Date of the Plan became entitled
to receive, in exchange for its claims in respect of these shares of
preferred stock, its pro rata share of 2,304,400 shares of the
Company's common stock, representing 14% of the shares of the
Company's common stock issued and outstanding following the
Effective Date of the Plan; and
- each holder of shares of the Company's common stock outstanding
immediately prior to the Effective Date of the Plan became entitled
to receive, in exchange for its claims in respect of these shares of
common stock, its pro rata share of 164,600 shares of the Company's
common stock, representing 1% of the shares of the Company's common
stock issued and outstanding following the Effective Date of the
Plan.
All of the shares of the Company's common stock issued pursuant to
the Plan are subject to dilution by the exercise of management incentive stock
options, representing up to 10% of the shares of the Company's issued and
outstanding common stock on a fully-diluted basis following the Effective Date
of the Plan.
A total of 16,460,000 shares of the Company's common stock and $120,000 in
aggregate principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date 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 17, 229,452 of these shares of common stock and $1,968
in aggregate principal amount of these 11% Senior Notes were placed in reserve
in escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires the Company to pay an amount in excess of its liability insurance, then
the Company will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10,000 or greater) or a portion
of (in the event that this excess is less than $10,000) of the shares of common
stock and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date, which
are allocable under the terms of the Plan to the holders of the Company's common
stock outstanding immediately prior to the Effective Date of the Plan, will
occur following the resolution of the shareholder derivative suit against the
Company and certain of former officers and directors described in Note 17.
F-11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management Estimates
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States requires
management to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenue and expenses and
related disclosures of contingent assets and liabilities.
Significant estimates include estimates of the collectibility of accounts
receivable, the useful lives and ultimate realizability of property, equipment,
intangible assets, deferred tax assets and restructuring reserves. The market
for the Company's services is characterized by intense competition and could
impact the future realizability of the Company's assets. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. Actual results may vary
from these estimates under different assumptions or conditions.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Included in the Company's consolidated results is a 0.01%
owned subsidiary, 415 Greenwich GC Tenant, LLC. The Company controls all
financial aspects of this entity. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Revenue Recognition
Revenue consists primarily of managed hosting and dedicated Internet
access fees, sales of systems administration and application services such as
streaming media, network security and administration and network monitoring.
The Company recognizes revenue in accordance with the Securities and
Exchange Commission's Staff Accounting Bulletin, or SAB, No. 101 "Revenue
Recognition in Financial Statements," as amended. SAB No. 101 expresses the view
of the Securities and Exchange Commission's staff in applying U.S. generally
accepted accounting principles to certain revenue recognition issues. Under the
provisions of SAB No. 101, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of the Company's business is approximately 36 months. Prior to April 30,
2002, the estimated length of the customer relationship was 12-18 months.
Effective October 1, 2000, the Company changed its revenue recognition method
for set up and service installation fees upon the adoption of SAB No. 101. Prior
to the Company's adoption of SAB No. 101, the Company recognized revenue
immediately upon completion of set up or installation. The change in accounting
principle resulted in a revenue deferral and cumulative effect charge totaling
$2,332, or $0.06 per share, which was reflected in the Company's consolidated
statements of operations for the fiscal year ended September 30, 2001. The
Company's adoption of SAB No. 101 decreased the Company's net loss by $547 for
the fiscal year ended September 30, 2001. The effect of the Company's adoption
of SAB No. 101 for the fiscal year ended September 30, 2000 was not material.
Monthly service revenue related to managed hosting and Internet access is
recognized over the period that services are provided. Revenue derived from
application services is recognized at the completion of a project. Projects are
generally completed within a month. Payments received in advance of providing
services are deferred until the period that these services are provided.
The Company provided $802 and purchased $551 of data center services from
a telecommunications operator during the year ending September 30, 2002. $318 of
the transactions billed were settled monetarily, with the balance of $445
settled by offsetting or netting the remainder
Cost of Revenue
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting
F-12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
and includes the cost of hardware and software purchased for resale to
customers. Cost of revenue excludes payroll, occupancy and depreciation and
amortization. Telecommunications costs include the cost of providing local loop
for connecting dedicated access customers to the Company's network, leased line
and associated costs related to connecting with the Company's peering partners
and costs associated with leased lines connecting the Company's facilities to
its backbone and aggregation points of presence.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist primarily of salaries
and occupancy costs for executive, financial, operational and administrative
personnel and related operating expenses associated with network operations,
customer service and field services as well as marketing expenses, professional
fees and bad debt expense.
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, restricted cash and investments, marketable securities
and accounts receivable. The Company maintains cash and cash equivalents,
short-term investments and restricted cash and investments with various major
financial institutions, which invest primarily in U.S. Government instruments,
high quality corporate obligations, certificates of deposit and commercial
paper.
The Company believes that concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number and geographic
dispersion of the Company's customers. The Company performs ongoing credit
evaluations of its customers and maintains reserves for potential losses. The
Company's management makes estimates of the uncollectibility of its trade
accounts receivable on a monthly basis. No single customer of the Company
individually comprised more than 10% of the Company's revenues in the seven
month period ended April 30, 2002 and in the five month period ended September
30, 2002.
In December 2000, the Company received a note for $4,100 relating to the
settlement of a lease of a data center property. This note was to be paid on
either the sale of the property, the lease of at least 95% of the property, or
two years from the date of the note. The obliger has indicated that it has
insufficient funds to satisfy the debt and does not intend to make payment.
While the Company has made demand and intends to vigorously pursue legal remedy,
in light of the financial condition of the obliger, the Company has written off
the entire amount.
Cash, Cash Equivalents and Restricted Cash
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
Included in restricted cash are funds held in escrow related to a mortgage
on the Company's property located at 139 Centre Street, collateral funds for the
Company's corporate credit card and required share capital held in escrow for
the Company's European subsidiaries. These funds are primarily invested in
highly liquid investments with an original maturity of three months or less. The
classification is determined based on the expected term of the collateral
requirement and not the maturity date of the underlying securities.
Marketable Securities
Investments in marketable securities are reported at fair value.
Unrealized gains and losses from those securities, which are classified as
available-for-sale, are reported as "unrealized holding gains and losses" as a
separate component of stockholders' equity. At September 30, 2002, marketable
securities had a cost basis of approximately $2,800.
Investments
Short-term investments consist of an investment in a limited partnership
which invests in fixed income securities and certain investments which do not
meet the requirements to be reported as cash and cash equivalents. The limited
partnership is accounted for on a "mark-to-market" basis. At September 30, 2002
the limited
F-13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
partnership had a cost basis of $5,000 and the unrealized loss from the "mark to
market" adjustment of $57 was recorded in the Company's consolidated statement
of operations.
Also included in short-term investments are investments in mortgage and
asset backed securities which do not meet the requirements to be reported as
cash and cash equivalents. These investments are classified as available for
sale securities and reported at fair value, with unrealized gains and losses
excluded from earnings and reported in other comprehensive income or loss in
stockholders' equity. At September 30, 2002, these investments had a cost and
fair value of $449.
Included in restricted investments as of September 30, 2002 are collateral
funds for the note payable of $2,600, collateralized funds for the Rabbi Trust
obligation of $2,756 described in Note 11 which is included in other long-term
liabilities and amounts held in escrow related to the lease of the Company's
facility located at Prospect House, 80 New Oxford Street, London, United Kingdom
of $1,981. These funds are primarily invested in highly liquid investments with
an original maturity of three months or less. The classification is determined
based on the expected term of the collateral requirement and not the maturity
date of the underlying securities.
Included in restricted investments as of September 30, 2001 are collateral
funds for the note payable of $2,600, collateralized funds for the Rabbi Trust
obligation of $2,292 described in Note 9 which is included in accrued
liabilities, amounts held in escrow related to the lease of the Company's
facility located at Prospect House, 80 New Oxford Street, London, United Kingdom
of $1,872, amounts held in escrow related to the lease of the Company's facility
located at 1 Oliver's Yard, 55-71 City Road, London, United Kingdom of $18,406
and amounts held in escrow related to the lease of the Company's other
facilities of $1,716. These funds are primarily invested in highly liquid
investments with an original maturity of three months or less. The
classification is determined based on the expected term of the collateral
requirement and not the maturity date of the underlying securities.
Property, Plant and Equipment
Property, plant and equipment are stated at depreciated historical cost
for the Predecessor Company adjusted for impairment and include fresh start
adjustments for the Successor Company . All identifiable assets recognized in
accordance with fresh start accounting were recorded at the Effective Date of
the Plan based upon an independent appraisal. Depreciation is provided using the
straight-line method for financial reporting purposes and accelerated methods
for income tax purposes. The estimated useful lives of property are as follows:
Buildings and building improvements 10 to 44 years
Computer hardware and software and network equipment two to seven years
Office furniture and equipment three to seven years
Leasehold improvements are amortized over the term of the lease or life of
the asset, whichever is shorter. Maintenance and repairs are charged to expense
as incurred. The cost of additions and betterments are capitalized. The cost and
related accumulated depreciation of property retired or sold are removed from
the applicable accounts and any gain or loss is taken into income.
INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standard No. 142, "Goodwill and other Intangible Assets "("SFAS 142") at the
Effective Date of the Plan. SFAS 141 requires all business combinations to be
accounted for using the purchase method of accounting and that certain
intangible assets acquired in a business combination must be recognized as
assets separate from goodwill. SFAS 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 also addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination whether acquired
individually or with a group of other assets. This statement provides that
intangible assets with indefinite lives and goodwill will not be amortized but,
will be tested at least annually for impairment. If an impairment is indicated
then the asset will be written down to its fair value typically based upon its
future expected discounted cash flows.
For the seven month period ended April 30, 2002 and the fiscal years ended
September 30, 2001 and 2000, goodwill amortization amounted to $1,141, $2,604
and $190, respectively. If the Company had adopted SFAS 142 as of October 1,
1999 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
----------------------------------------------------------
SEVEN MONTHS YEAR YEAR
ENDED ENDED ENDED
APRIL 30, 2002 SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
-------------- ------------------ ------------------
Net income (loss) $ 159,934 $(213,043) $(126,447)
Addback of goodwill amortization 1,141 2,604 190
Adjusted net income (loss) 161,075 (210,439) (126,257)
Dividends and accretion on preferred stock (3,178) (7,104) (5,768)
--------- --------- ---------
Adjusted net income (loss) attributable to common stockholders $ 157,897 $(217,543) $(132,025)
========= ========= =========
Adjusted earnings (loss) per common share:
Basic earnings (loss) per share attributable to common stockholders $ 3.99 $ (5.65) $ (3.72)
========= ========= =========
Diluted earnings (loss) per share attributable to common stockholders $ 3.32 $ (5.65) $ (3.72)
========= ========= =========
F-14
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Intangible assets of the Successor Company are as follows:
- trademark and trade name;
- network build-out/know-how; and
- customer contracts.
The trademark and trade name and 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 identifiable assets 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.
Long-Lived Assets
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets", on the Effective Date of the Plan. SFAS No. 144
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
of Long-Lived Assets to be Disposed Of", and portions of Accounting Principles
Board Opinion No. 30, "Reporting the Results of Operations -- Reporting the
Effects of Disposal of a Segment of Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions", and amends Accounting Research
Bulletin No. 51, "Consolidated Financial Statements". SFAS No. 144 generally
conforms, among other things, impairment accounting for assets to be disposed
of, including those in discontinued operations.
At September 30, 2001, in accordance with SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of",
the Company recorded an estimated loss on impairment of operating assets of
$3,500. In the seven month period ended April 30, 2002, the Company determined
that impaired assets previously held for disposal were to be used in operations
and, accordingly, $643 of this charge was not impaired. In addition, the Company
recorded a loss on the impairment of intangible assets in the amount of $3,221
for the seven month period ended April 30, 2002. The impairment was due to the
acquisition of Comstar.net, Inc., which ceased operations.
The Company reviews the carrying amount of long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. An impairment loss is indicated if the
sum of the expected net cash flows is less than the carrying amount of the
long-lived assets being evaluated. Measurement of any impairment is calculated
as the difference between the carrying amount of the long-lived assets being
evaluated and the fair value. The Company determines the estimated fair market
value of the assets based on the anticipated future cash flows discounted at
rates commensurate with the risks involved.
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that these assets will not be realized. Certain tax
benefits existed as of the Effective Date of the Plan but were offset by
valuation allowances. The utilization of these benefits to reduce income taxes
paid to U.S. Federal and state and foreign jurisdictions does not reduce the
Company's income tax expense. Realization of net operating loss, tax credits and
other deferred tax benefits from pre-emergence attributes will first reduce
intangible assets until exhausted, and thereafter will be credited to additional
paid in capital.
Comprehensive Income
SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting method that
F-15
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
includes amounts that historically have not been recognized in the calculation
of net income. Comprehensive Income and Accumulated Other Comprehensive Income
(Loss) includes net income, foreign currency translation, and unrealized gain
(loss) on financial instruments and is included in the Consolidated Statements
of Stockholders' Equity (Deficit).
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with SFAS No. 52, "Foreign Currency Translation". These
subsidiaries' assets and liabilities are translated into U.S. Dollars at the
year-end rate of exchange. Income and expense items are translated at the
average exchange rate for the year. The resulting foreign currency translation
adjustment is included in stockholders' equity as a component of accumulated
other comprehensive income. Transaction gains and losses are recorded in the
consolidated statement of operations.
Stock-Based Compensation
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" ("APB No. 25") for recognizing
stock-based compensation expense for financial statement purposes. Under APB No.
25, the Company applied the intrinsic value method of accounting and therefore
does not recognize compensation expense for options granted to employees,
because options are only granted at a price equal to or higher than 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.
PREDECESSOR COMPANY
-----------------------------------------------
SEVEN MONTH
PERIOD ENDED
--------------
APRIL 30, 2002 2001 2000
-------------- ----------- -----------
Pro forma net income (loss) attributable to
common stockholders $ 151,621 $ (228,599) $ (139,340)
=========== =========== ===========
Pro forma basic earnings (loss) per share
attributable to common stockholders $ 3.83 $ (5.94) $ (3.93)
=========== =========== ===========
Pro forma diluted earnings (loss) per share
attributable to common stockholders $ 3.19 $ (5.94) $ (3.93)
=========== =========== ===========
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, and awards prior to the Effective Date have been cancelled.
Earnings (Loss) Per Share
Basic earnings or 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 earnings or loss per share
is calculated by dividing net loss attributable to common shareholders by the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities. The following table summarizes the equivalent number of
common shares assuming the related securities that were outstanding for each of
the periods presented had been converted, but not included in the calculation of
diluted loss per share because such shares are antidilutive:
F-16
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR COMPANY
-------------------
SEVEN MONTHS SEPTEMBER 30,
ENDED --------------------------
APRIL 30, 2002 2001 2000
-------------- ---------- ----------
Convertible preferred stock -- 8,617,300 8,000,000
Stock Options 10,021,258 10,394,781 10,298,692
Warrants 194,797 194,797 194,797
---------- ---------- ----------
10,216,055 19,206,878 18,493,489
========== ========== ==========
All options and warrants outstanding on the Effective Date of the Plan
were cancelled as of the Effective Date of the Plan. At September 30, 2002 there
were no dilutive securities outstanding. Although the Successor Company's common
stock was not distributed until after September 30, 2002, the Plan provides that
the 16,460,000 shares of the Company's common stock issuable under the Plan were
deemed to be issued and outstanding as of the Effective Date of the Plan.
Accordingly, for purposes of these financial statements 16,460,000 shares of the
Company's common stock are deemed to have been issued and outstanding as of
September 30, 2002.
In April 1998, the Company completed a $160.0 million debt financing
consisting of 160,000 units, each unit consisting of a note in the principal
amount of one thousand dollars and one warrant to purchase 14.08 shares of
common stock (total of 2,252,800 shares of common stock) at a purchase price of
$3.51 per share. Of the 2,252,800 shares underlying the original 160,000
warrants, 194,797 shares remained, until the Effective Date.
The following is a reconciliation of basic earnings per share to diluted
earnings per share:
F-17
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Predecessor Company
---------------------------------------------
Seven months ended April 30, 2002
---------------------------------------------
Numerator Denominator Per Share
Income or (loss) Shares Amount
--------------- ----------- ----------
Basic earnings per share
Net income $ 159,934
Dividends and accretion on preferred stock (3,178)
---------- ----------
Net income attributable to common stockholders 156,756 39,618,856 $ 3.96
========== ==========
Addback of dividends on preferred stock 3,178 8,888,600
Diluted earnings per share
---------- ----------
Net income attributable to common stockholders $ 159,934 48,507,456 $ 3.30
========== ========== ==========
Recent Accounting Pronouncements
In November 2002, the FASB issued FASB Interpretation No. 45 ("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. Under current operations, adoption of FIN 45 is not expected to have
a material impact on the Company's results of operations or financial position.
FIN 45 will be effective for the Company's fiscal year ending September 30,
2003.
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, SFAS No. 148 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.
Consequently, the Company does not expect this standard to have a material
impact on its consolidated financial position or results of operations.
4. FRESH START ACCOUNTING
Although April 25, 2002 was the effective date of the Company's emergence
from bankruptcy, for financial reporting purposes the Company accounted for the
consummation of the Plan as of April 30, 2002. The Company employed an
independent third party to determine the enterprise value of the Company as of
the emergence date. The third party determined the enterprise value to be
$240,000. This amount was based upon several generally accepted valuation
methodologies including discounted cash flows, comparable public company
analysis and comparable mergers and acquisitions analysis. The assigned equity
values are based upon the reorganized value of the ongoing business and include
significant estimates made by management based on information available as of
the Effective Date. Valuation methodologies require the input of highly
subjective assumptions. Actual future results and events could differ
substantially from current estimates and assumptions. Any changes in valuation
could affect the Company's balance sheet.
In accordance with the principles of fresh start accounting, the Company
has adjusted the value of its assets and liabilities to their fair values as of
April 30, 2002. The equity value of the Successor Company at May 1, 2002 was
calculated as follows:
Enterprise Value $ 240,000
11% Senior Notes (120,000)
Mortgage Payable (20,536)
Capitalized Leases (6,187)
---------
Equity value of Successor Company $ 93,277
=========
F-18
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
We engaged the services of an independent third party to perform a
valuation analysis of certain tangible and intangible assets. The valuation of
the subject assets was performed following standards promulgated by the
American Society of Appraisers and is in compliance with the Uniform Standards
of Professional Appraisal Practices. The tangible assets were valued using the
costs and market comparables methods. The intangible assets were valued using
the income approach and the cost approach methods.
The net effect of all fresh start accounting adjustments resulted in a
charge of $148,569 which is reflected in the Predecessor Company's statement of
operations for the seven month period ended April 30, 2002. The interest of
$11,507 on the 12.5% Senior Notes for the period March 1, 2002 through the
Effective Date was not accrued in accordance with SOP 90-7.
On the Effective Date of Plan, the Company recognized a gain of $427,066
associated with the exchange of the 12.5% Senior Notes for the 11% Senior Notes
and shares of the Company's common stock under the Plan. The Successor Company's
gain on discharge of debt at April 30, 2002 was calculated as follows:
Carrying value of 12.5% Senior Notes $ 600,000
Carrying value of related accrued interest 43,750
Carrying value of 11% Senior Notes (120,000)
Carrying value of capitalized costs associated with 12.5% Senior Notes (17,398)
85% of equity value of Successor Company (79,286)
---------
Gain on discharge of debt $ 427,066
=========
The effects of the transactions contemplated by the Plan and the application of
fresh start accounting on the Company's consolidated balance sheet are as
follows:
F-19
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Successor
Predecessor Company
Company Debt Fresh Start April 30,
April 30, 2002 Discharge Adjustment(1) 2002
-------------- ----------- ---------- ----------
ASSETS
Cash and cash equivalents $ 52,722 $ -- $ -- $ 52,722
Marketable securities 2,757 -- -- 2,757
Accounts receivable, net 11,959 -- -- 11,959
Prepaid expenses and other current assets 17,264 -- (2,024) 15,240
Restricted cash 4,018 -- -- 4,018
--------- --------- --------- ---------
Total current assets 88,720 -- (2,024) 86,696
Investments, restricted 5,114 -- -- 5,114
Property, plant and equipment, net 333,063 -- (155,693) 177,370
Debt issuance costs, net 18,250 (17,398)(a) (852) --
Intangible assets, net -- -- 10,155 10,155
Other assets 500 -- (208) 292
--------- --------- --------- ---------
TOTAL ASSETS $ 445,647 $ (17,398) $(148,622) $ 279,627
========= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portions of capital lease obligations
and mortgage payable $ 5,239 $ -- $ (1,690) $ 3,549
Accounts payable 7,782 -- (110) 7,672
Accrued liabilities 26,067 (2,713)(b) (2,264) 21,090
Accrued restructuring 3,122 -- -- 3,122
--------- --------- --------- ---------
Total current liabilities 42,210 (2,713) (4,064) 35,433
Liabilities not subject to compromise:
Capital lease obligations, net of current portion 6,383 -- (3,499) 2,884
Mortgage payable 20,291 -- -- 20,291
11% Senior Notes -- 120,000(c) -- 120,000
Other long term liabilities 232 -- 7,510 7,742
--------- --------- --------- ---------
Total liabilities not subject to compromise 69,116 117,287 (53) 186,350
Liabilities subject to compromise 643,750 (643,750)(c),(d) -- --
--------- --------- --------- ---------
Total liabilities 712,866 (526,463) (53) 186,350
Mandatorily Redeemable Convertible Preferred Stock 83,695 (83,695)(e) -- --
Total stockholders' (deficit) equity (350,914) 592,760 (148,569) 93,277
--------- --------- --------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY $ 445,647 $ (17,398) $(148,622) $ 279,627
========= ========= ========= =========
(a) To remove debt issuance cost associated with the 12.5% Senior Notes.
(b) To remove accrued dividends payable on mandatorily redeemable convertible preferred stock.
(c) To exchange 12.5% Senior Notes for 11.0% Senior Notes.
(d) To remove accrued interest on 12.5% Senior Notes.
(e) To remove mandatorily redeemable convertible preferred stock.
(1) To adjust assets and liabilities to fair value.
F-20
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Pursuant to the requirements of SOP 90-7, which requires entities subject
to fresh start accounting to adopt, in the fresh start reporting period, new
accounting principles that will be required in the financial statements of the
emerging entity within 12 months of the fresh start reporting period. The
Company adopted the provisions of new accounting standards upon emergence from
bankruptcy.
In July 2001,the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 141 "Business Combinations". SFAS No. 141 requires that the
purchase method of accounting be used for business combinations, establishes
specific criteria for the recognition of intangible assets separately from
goodwill, and requires that unallocated negative goodwill be written off
immediately as an extraordinary gain instead of being deferred and amortized.
The Company adopted SFAS No 141 on May 1, 2002, which had no impact on the
Company's results of operations or financial condition.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." The Company adopted the requirements of SFAS No. 142 effective May 1,
2002. SFAS No. 142 requires companies to cease amortization of certain assets
and provides a methodology to test these assets for impairment on a periodic
basis. The company adopted SFAS No. 142 on May 1, 2002, which had no impact on
the company's results of operations or financial condition.
On April 30, 2002, SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64,
Amendment of SFAS 13, and Technical Corrections as of April 2002" was issued.
SFAS No. 145 is effective for transactions occurring after May 15, 2002. In
rescinding SFAS No. 4, Reporting Gains and Losses from Extinguishment of Debt",
and SFAS No. 64, "Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements", SFAS No. 145 eliminates the requirement that gains and losses
from the extinguishment of debt be aggregated and, if material, classified as an
extraordinary item, net of the related income tax effect. However, pursuant to
SFAS No. 145, an entity would not be prohibited from classifying such gains and
losses as extraordinary items so long as they meet the criteria in paragraph 20
of APB No. 30, "Reporting the Results of Operations -- Reporting the Effects of
Disposal of a Segment of Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions". Further, SFAS No. 145 amends paragraph 14(a)
of SFAS No. 13, "Accounting for Leases", to eliminate an inconsistency between
the accounting for sale-leaseback transactions and certain lease modifications
that have economic effects that are similar to sale-leaseback transactions. The
amendment requires that a lease modification (1) results in recognition of a
gain or loss in the financial statements, (2) is subject to SFAS No. 66,
"Accounting for Sales of Real Estate", if the leased asset is real estate
(including integral equipment), and (3) is subject (in its entirety) to the
sale-leaseback rules of SFAS No. 98, "Accounting for Leases: Sale-Leaseback
Transactions Involving Real Estate, Sales-Type Leases of Real Estate, Definition
of the Lease Term, and Initial Direct Costs of Direct Financing Leases". The
adoption of SFAS No. 145, on the Effective Date, resulted in the classification
of the $427,066 gain on extinguishment of debt in the Predecessor Company's
seven month period ended April 30, 2002 Statement of Operations as a component
of other income as gain on discharge of debt and not as an extraordinary items
as had been previously required under SFAS No. 4. Additionally, in accordance
with SFAS 145, the $17,577 loss on the extinguishment of debt previously
recorded in fiscal year 2000 as an extraordinary item has been reclassified to
loss on discharge of debt.
In July 2002, FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities". SFAS No. 146 requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by the standard include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The Company
adopted SFAS 146 upon the Effective Date and it did not have an effect
on the Company's consolidated financial position, results of operations or
liquidity. Prior to adoption of SFAS No. 146 the Company accounted for these
activities under Emerging Issues Task Force No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" (EITF 94-3).
5. REORGANIZATION ITEMS
Reorganization expenses are expenses incurred by the Predecessor Company
in connection with its reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization items included in the Predecessor Company's statement of
operations include professional fees directly related to the Predecessor
Company's bankruptcy. Reorganization expenses included in the Statement of
Operations were approximately $7,762 for the
F-21
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
seven month period ended April 30, 2002 and zero for the five month period ended
September 30, 2002. No amounts were incurred in years ended September 30, 2001
and 2000.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------
SEPTEMBER 30, 2002 SEPTEMBER 30, 2001
------------------ ------------------
Land ............................................... $ 2,713 $ 1,997
Building and building improvements ................. 84,094 108,216
Leasehold improvements ............................. 71,322 145,617
Computer hardware and software and network equipment 15,607 134,767
Furniture and equipment ............................ 3,660 9,693
--------- ---------
177,396 400,290
Less: Accumulated depreciation and amortization .... (5,549) (54,499)
Add: Construction in progress ...................... 2,863 10,358
--------- ---------
Property, plant and equipment, net ................. $ 174,710 $ 356,149
========= =========
Certain computer and network equipment are recorded under capital leases
that aggregated approximately $4,466 and $23,545 as of September 30, 2002 and
2001, respectively. Accumulated amortization on the assets recorded under these
capital leases aggregated $465 and $6,566 as of September 30, 2002 and 2001,
respectively.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the Company
owns the land and building located at 139 Centre Street, New York, New York. The
nine-story building, 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 139 Centre Street
property is entitled to additional consideration if the Company sells the
property in an amount 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) and (b) 10% of the gross sales price of the property if the sales
price is greater than $17,500.
7. 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 remaining balance of the
capital contribution is due from the Investor in annual installments as follows:
YEAR ENDING SEPTEMBER 30, CONTRIBUTION
-------------------------- ------------
2004 ............................................................ 1,557
2005 ............................................................ 1,479
2006 ............................................................ 1,400
2007 ............................................................ 241
======
Total ........................................................... $4,677
======
F-22
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Although the Company's ownership of the LLC is 0.1%, the Company has
consolidated the financial statements of the LLC since inception, due to
effective control of the LLC by the Company resulting in a minority interest in
subsidiary in the accompanying consolidated financial statements. The following
table reflects the summary statement of operations data for the LLC for the five
months ended September 30, 2002, the seven months ended April 30, 2002, and for
the period from inception to September 30, 2001:
SUCCESSOR COMPANY PREDECESSOR COMPANY
-------------------- --------------------------------------------
PERIOD FROM INCEPTION
FIVE MONTH PERIOD SEVEN MONTH PERIOD (JUNE 11, 2001) TO
ENDED SEPT. 30, 2002 ENDED APRIL 30, 2002 SEPTEMBER 30, 2001
-------------------- -------------------- ---------------------
Revenue .............................. $3,208 $4,492 $2,331
Net Loss ............................. (195) (7,374) (701)
====== ====== ======
Basic and diluted loss per share
attributable to common stockholders .. $(0.01) $(0.19) $(0.02)
====== ====== ======
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.
The Put Option that the Company has written has been recorded at its fair
value and will be marked to fair value through earnings. At September 30,
2002, the fair value of this option is negligible.
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.
F-23
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. INTANGIBLE ASSETS
Intangible assets consist of the following components at September 30,
2002:
Estimated Successor Company
Useful Lives September 30, 2002
------------ ------------------
Finite-lived intangible assets:
Network Build-out/Know-how 8 years $ 7,453
Customer Contracts 3 years 1,118
--------
$ 8,571
Indefinite-lived intangible assets:
Trademarks and trade name -- 1,584
--------
$ 10,155
Less: Accumulated amortization (543)
--------
Intangible assets, net $ 9,612
========
Amortization expense, including Predecessor Company goodwill amortization,
was $1,141 for the seven months ended April 30, 2002 and $543 for the five
months ended September 30, 2002, respectively. Estimated future annual
amortization expense of intangibles is as follows:
Year Ending September 30,
2003 $1,304
2004 1,304
2005 1,149
2006 932
2007 932
Thereafter 2,407
------
Total $8,028
======
9. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
SEPTEMBER 30,
-------------
2002 2001
------- -------
Franchise tax, sales tax and property tax ... 2,177 1,048
Salaries, benefits and commissions .......... 1,636 1,284
Rabbi Trust Obligation ...................... -- 2,378
Telecommunications accrual .................. 1,706 993
Technology licenses and maintenance contracts 1,205 114
Deferred revenue ............................ 1,503 2,692
Accrued construction costs .................. 147 6,175
Other ....................................... 7,722 6,266
------- -------
$16,096 $20,950
======= =======
F-24
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. RESTRUCTURING AND OTHER
The Company has announced a number of restructuring actions to reduce
expenses and streamline operations. These actions included a workforce reduction
and rationalization of data center and sales locations. The Company recorded
restructuring charges of $56,109 in fiscal 2001. The Company recorded net
restructuring of $24,834 in the seven month period ended April 30, 2002. This
amount is comprised of $28,395, offset by reversals of $3,561, related to
revised estimates and a $1,184 vendor settlement related to an asset impaired in
the prior year. The Company believes these actions will result in ongoing annual
operating expense savings of approximately $24,000.
During the quarter ended December 31, 2000, the Company's board of
directors approved a restructuring plan to modify its Internet data center
expansion plan to delay, scale back and eliminate certain facilities. The
restructuring plan included the termination of certain lease obligations,
associated surplus power and environmental equipment related to the proposed
expansion of Globix Internet data centers in Boston, MA; Seattle, WA; and Los
Angeles, CA. When initiated, the restructuring plan was expected to take
approximately one year to complete. The Company recorded a $38,109 charge
associated with this restructuring plan in the fiscal quarter ending December
31, 2000. Approximately $18,460 of this charge was recorded as a write-off of
construction in progress, which included capitalized interest, consulting and
legal fees, construction and pre-construction related costs previously
capitalized. Approximately $17,019 was recorded for landlord contract
settlements and $2,630 for facilities closings.
During the quarter ending September 30, 2001, the Company further modified
its business plan to eliminate certain additional Internet data center and sales
office facilities, resulting in the termination of certain employees, lease
obligations and write-off of certain equipment, leasehold improvements and
intangible assets and other costs. In connection with this modification,
additional restructuring charges of $18,000 were recorded, of which $9,947 was a
write-off of equipment, leasehold improvements and intangible assets, $4,150 for
landlord contract settlements, $2,703 for facility closings and $1,200
associated with employee terminations (106 employees).
During the quarter ended March 31, 2002, the Company made an additional
modification to its business plan pursuant to the Plan, in order to reduce
certain Internet data center lease obligations and close certain network access
points and network aggregation points, resulting in the termination of certain
employees, lease obligations and write-off of certain equipment, leasehold
improvements and other costs. In connection with this modification, the Company
recorded a restructuring charge of $28,395, of which $16,407 was for the
write-off of previously escrowed lease deposit and landlord inducement and legal
payments, $6,922 was for the write-off of equipment and leasehold improvements,
$2,120 for facilities closings and $2,946 was associated with employee
terminations (148 employees).
Reversals related to fiscal 2001 contract settlement charges and facility
closings were primarily for settling certain facility contracts and purchase
commitments for amounts lower than originally planned. Reversals related to
fiscal 2001 asset write downs were primarily related to adjustments to
estimated Plant, Property and Equipment impairment. Actual impairment amounts
were less than the original estimates.
The following table displays the activity and balances of the
restructuring reserve account from inception to September 30, 2002:
F-25
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Restructuring Other
-------------------------------------- -----
Employee Contract Facility Asset
Terminations Settlements Closings Write-Down Total
------------ ----------- -------- ---------- -----
Restructure Charge 1,200 21,169 5,333 28,407 56,109
Deductions-Non-Cash -- -- -- (22,889) (22,889)
Deductions-Cash (194) (17,119) (3,380) (3,336) (24,029)
------- ------- ------- ------- -------
September 30, 2001 Balance (Predecessor Company) 1,006 4,050 1,953 2,182 9,191
Additional Restructure Charge 2,946 16,407 2,120 6,922 28,395
Deductions-Non-Cash (889) -- (422) (6,922) (8,233)
Deductions-Cash (2,520) (18,480) (1,669) -- (22,669)
Reversal to Fiscal 2001 Plan -- (678) (701) (2,182) (3,561)
------- ------- ------- ------- -------
April 30, 2002 Balance (Predecessor Company) 543 1,299 1,281 -- 3,123
Deductions-Cash (400) -- (895) -- (1,295)
------- ------- ------- ------- -------
September 30, 2002 Balance (Successor Company) 143 1,299 386 -- 1,828
The remaining liability is expected to be settled in cash.
11. OTHER LONG-TERM LIABILITIES
Other long-term liabilities consist of the following:
SUCCESSOR PREDECESSOR
COMPANY COMPANY
--------- -----------
SEPTEMBER 30,
-------------
2002 2001
------- -------
Note Payable $ 2,600 $ 2,600
Rabbi Trust Obligation 2,777 --
Negative Leasehold Liability 7,607 --
Contractual Obligation -- 3,900
Deferred Rent 100 1,077
------- -------
$13,084 $ 7,577
======= =======
The Company has a $2,600 note payable, due January 15, 2004. The note
bears interest, payable monthly, at 4.75%. The note is collateralized by an
irrevocable standby letter of credit. The related funds are included in
restricted investments on the accompanying consolidated balance sheet.
On July 21, 1999, the Company established a trust (the "Rabbi Trust") for
the benefit of a former executive. The trust agreement was for three years
beginning in April 1999 through March 1, 2002. The agreement was amended on
March 21, 2001, and provided for payments from the Rabbi Trust commencing April
2001. Payments were made from the Trust until March 1 2002, when Globix and two
of its wholly-owned subsidiaries filed for Chapter 11. The Company is currently
in litigation over the Trust, as described further in Note 17.
In connection with fresh start accounting at the Effective Date, the
Company recorded a Negative Leasehold Liability associated with three of its
Internet data centers. The Negative Leasehold Liability amount was determined by
independent appraisal and based upon research of the local market conditions in
each market and estimation of the net effective market rental rates in
comparison to the Globix contractual lease rates through expiration of the
lease. Such liability will be amortized to reduce lease expense over the
remaining life of the lease as follows:
YEAR ENDING SEPTEMBER 30
2003 ................................................................. $653
2004 ................................................................. 653
2005 ................................................................. 653
2006 ................................................................. 653
F-26
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2007 .................................................. 653
Thereafter ............................................ 4,994
-------
Total ................................................. 8,259
Less: Current Portion ................................ (652)
-------
Long-term Portion ..................................... $ 7,607
=======
12. 12.5% SENIOR NOTES AND 11% SENIOR NOTES
In February 2000, the Company issued $600,000 in aggregate principal
amount of its 12.5% Senior Notes in a private placement resulting in net
proceeds of approximately $580,000, after underwriting fees and offering
expenses. In March 2000 the Company completed a tender offer to purchase all of
its outstanding 13% Senior Notes due 2005, $160,000 in aggregate principal
amount. The purchase price in the tender offer for the 13% Senior Notes was
106.5% of the principal amount, plus accrued and unpaid interest.
In connection with the offer of the 12.5% Senior Notes the Company
incurred costs of approximately $20,000 that were being amortized over ten years
using the effective interest method.
As of the Effective Date, 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, subject to dilution
by the exercise of management incentive options representing up to 10% of the
Company's issued and outstanding common stock on a fully-diluted basis following
the Effective Date. The interest of $11,507 on the 12.5% Senior Notes for the
period March 1, 2002 through the Effective Date was not accrued in accordance
with SOP 90-7.
The Company is deemed to have issued the 11% Senior Notes on the Effective
Date in one series that is initially limited to $120,000 aggregate principal
amount of 11% Senior Notes. However, none of the 11% Senior Notes had been
distributed as of September 30, 2002. In October 2002, the Company distributed
$120,000 in aggregate principal amount of the 11% Senior Notes, which included
$1,968 in aggregate principal amount of Notes placed in reserve in escrow
pursuant to a Stipulation and Order entered into with the lead plaintiffs in the
class action lawsuit described in Note 17.
The 11% Senior Notes will mature on December 31, 2008. The 11% Senior
Notes will bear interest at 11% per annum, payable annually in May of each year,
commencing on May 1, 2003. Interest on the 11% Senior Notes for the first two
year period following the initial date of issuance is, payable in kind by the
issuance of additional notes with terms identical to the 11% Senior Notes (other
than the date of issuance) in a principal amount equal to the interest payment
then due. For the two year period thereafter, interest is payable in cash or, at
the Company's option when authorized by its board of directors, in additional
notes with terms identical to the 11% Senior Notes (other than the date of
issuance), or in any combination of cash and additional notes. For the remaining
two years until maturity, interest is payable in cash.
The 11% Senior Notes were issued under an indenture dated as of April 23,
2002 (the "Indenture"), among the Company, HSBC Bank USA, as trustee (the
"Trustee") and Bluestreak Digital, Inc., Gamenet Corporation, NAFT Computer
Service Corporation, NAFT International Ltd., PFM Communications, Inc., GRE
Consulting, Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415
Greenwich GC MM, LLC, Comstar.net, Inc. and Comstar Telecom & Wireless, Inc., as
the initial Subsidiary Guarantors. See Note 21 for additional disclosures
related to the Subsidiary Guarantors.
In the event that:
- subject to certain exceptions, any person, entity or group of
persons or entities becomes the beneficial owner, directly or
indirectly, of 50% or more of the Company's outstanding voting
securities;
- at any time during the two-year period following the distribution
of the 11% Senior Notes, the individuals that comprise a majority
of the Company's board of directors on the date of distribution of
the 11% Senior Notes, plus any new directors elected to the
Company's board of directors during this two-year period, cease to
comprise a majority of the Company's board of directors;
- subject to certain exceptions, the Company consolidates with or
merges with or into another entity, the Company sells or leases
all or substantially all of its assets to another entity or any
entity consolidates with or merges with or into the Company, in
each case pursuant to a transaction in which the Company's
outstanding voting securities are changed into or exchanged for
cash, securities or other property, unless no person, entity or
group of persons or entities owns, immediately after the
transaction, more than 50% of the Company's outstanding voting
stock,
then each holder of the 11% Senior Notes will have the right to require the
Company to repurchase all or a portion of its 11% Senior Notes for a purchase
price equal to 101% of the principal amount of that holder's 11% Senior Notes
plus accrued and unpaid interest to the date of repurchase.
The indenture governing the 11% Senior Notes (the "Indenture") contains a
number of covenants that impose significant operating and financial restrictions
on the Company and its subsidiaries. These restrictions significantly limit, and
in some cases prohibit, among other things, the ability of the Company and
certain of its subsidiaries to incur additional indebtedness, create liens on
assets, enter into business combinations or engage in certain activities with
subsidiaries.
As of September 30, 2002, the Company was in compliance with the material
operating and financial restrictions imposed upon the Company contained in the
Indenture. However, as of the date of these financial statements, the Company
was not in compliance with the provisions of the Indenture which require the
Company to:
- file reports and documents with the Securities and Exchange
Commission pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934, as amended; specifically the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002,
Annual Report on Form 10-K for the fiscal year ended September 30,
2002 and Quarterly Report on Form 10-Q for the quarter ended
December 31, 2002;
- file copies of these reports with the Indenture trustee
(the "Trustee");
- cause these reports to be mailed to the holders of the 11% Senior
Notes;
- deliver to the Trustee a certificate from the Company's public
accountants related to the Company's compliance with certain
provisions of the Indenture; and
- deliver to the Trustee an officer's certificate with respect to
the Company's failure to satisfy the obligations set forth above.
The Company's failure to comply with each of the obligations
described above constitutes a default, but not an event of default, under the
Indenture. See Note 24 for a description of events related to these defaults
which occurred subsequent to September 30, 2002.
F-27
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. 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.
14. REDEEMABLE CONVERTIBLE PREFERRED STOCK
On December 3, 1999, the Company sold 80,000 shares of preferred stock
(the "Preferred Stock") to affiliates of Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") for a purchase price of $80,000. The Company used the proceeds
from the sale to expand the build-out of its Internet data centers and other
facilities. The Preferred Stock paid a dividend of 7.5%.
The Preferred Stock was recorded in the Company's consolidated balance
sheet outside of the stockholders' equity section due to its mandatory
redemption feature. The Company incurred approximately $4,750 of issuance costs
in connection with the sale of the Preferred Stock. These costs were recorded as
a reduction of the carrying amount of the Preferred Stock and were being
accreted through a charge to additional paid in capital over the five-year
period to the earliest redemption date.
As of the Effective Date of the Plan each holder of shares of the
Preferred 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 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, 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.
15. STOCKHOLDERS' EQUITY
As of the Effective Date of the Plan, all of the outstanding shares of the
Company's common stock were cancelled, and each holder of shares of the
Company's common stock outstanding immediately prior to the Effective Date of
the Plan became entitled to receive, in exchange for its claims in respect of
such shares, its pro rata share of 164,400 shares of the Company's common stock,
representing 1% of the shares of the Company's common stock issued and
outstanding following the Effective Date of the Plan, subject to dilution by the
exercise of management incentive options representing up to 10% of the Company's
issued and outstanding common stock on a fully-diluted basis following the
Effective Date.
F-28
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 17. 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 the Predecessor Company's
common stock, will occur following the resolution of the shareholder derivative
suit described in Note 17 against the Company and certain of its present and
former officers and directors.
Restricted Stock Grant
In December 2000, the Company granted 3,063,490 shares of restricted stock
to certain employees and directors. The restricted stock awards vested 25% per
year over a four-year period on the anniversary date of the grant. In connection
with this restricted stock grant, the Company recorded a deferred compensation
charge of $8,999 in stockholders' equity. This deferred compensation was to be
recorded as compensation expense over the four-year vesting period. In April
2002, the Company's board of directors approved the vesting of 100% of the
remaining unvested restricted shares. This resulted in a non-cash charge to
compensation expense of $5,100 in April 2002. Compensation expense recorded in
the seven month period ended April 30, 2002 was $7,027.
Stock Splits
On December 10, 1999, the Company announced a two-for-one stock split of
its outstanding shares of common stock, which was completed on December 30,
1999. On January 10, 2000, the Company announced an additional two-for-one stock
split of its outstanding shares of common stock on January 31, 2000.
Stockholders' equity has been restated to give retroactive recognition to both
stock splits for all periods presented in the accompanying financial statements
by reclassifying from additional paid-in-capital to common stock the par value
of the additional shares arising from the splits. In addition, all references to
number of shares, per share amounts and stock options data have been restated to
reflect the stock splits.
16. EMPLOYEE BENEFITS PLAN
Stock Option Plans (Successor Company)
As of September 30, 2002, no stock option plan has been approved by the
Successor Company's board of directors or stockholders. Accordingly, no stock
options were issued or outstanding as of September 30, 2002. As a result of the
Company's reorganization, effective April 25, 2002 all unexercised options and
warrants were canceled.
Stock Option Plans (Predecessor Company)
In April 2001, the Company's stockholders approved, the 2001 Stock Option
Plan (the "2001 Option Plan"), which provided for the grant of stock options to
purchase up to 2,000,000 shares of common stock to any employee, non-employee
director, or consultant at the discretion of the Company's board of directors
(the "Board"). Under the 2001 Option Plan, these options could not be exercised
after ten years from the date of grant. Options issued to employees were
exercisable ratably over a five-year period.
In April 2000, the Company's stockholders approved the 2000 Stock Option
Plan (the "2000 Option Plan"), which provided for the grant of stock options to
purchase up to 1,675,000 shares of the Company's common stock to any employee,
non-employee director or consultant at the Board's discretion. Under the 2000
Option Plan, these options could not be exercised after ten years from the date
of grant. Options issued to employees were exercisable ratably over a five-year
period.
F-29
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In April 1999, the Company's stockholders approved the 1999 Stock Option
Plan (the "1999 Option Plan"), which provided for the grant of stock options to
purchase up to 6,000,000 shares of the Company's common stock to any employee,
non-employee director or consultant at the Board's discretion. Under the 1999
Option Plan, these options could not be exercised after ten years from the date
of grant. Options issued to employees were exercisable ratably over a five-year
period.
In April 1998, the Company's stockholders approved the 1998 Stock Option
Plan (the "1998 Option Plan"), which provided for the grant of stock options to
purchase up to 4,800,000 shares of the Company's common stock to any employee,
non-employee director, or consultant at the Board's discretion. Under the 1998
Option Plan, these options could not be exercised after ten years from the date
of grant. Options issued to employees were exercisable ratably over a five-year
period.
Under the 2001, 2000, 1999 and 1998 Option Plans, options were granted to
non-employee directors upon election at the annual meeting of stockholders at a
purchase price equal to the fair market value on the date of grant. In addition,
the non-employee director stock options were exercisable in full twelve months
after the date of grant unless determined otherwise by the compensation
committee of the Board.
In 1995, the Company's stockholders approved the 1995 Stock Option Plan
(the "1995 Option Plan"), which reserved 1,440,000 shares of common stock for
issuance under the 1995 Option Plan. Under the 1995 Option Plan, the term of the
options issued were determined by the stock option committee and ranged from
five to ten years from the date of the grant. Options issued to directors were
immediately exercisable and options issued to employees were exercisable ratably
over a three-year period.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each option
grant was estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions:
PREDECESSOR COMPANY
SEVEN MONTH PERIOD FISCAL YEAR ENDED FISCAL YEAR ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
APRIL 30, 2002 2001 2000
------------------ ----------------- -----------------
Expected life (in years) .......... 6.0 6.0 6.0
Risk-free interest rate ........... 4.7% 5.0% 6.3%
Volatility ........................ 133% 133.0% 122.0%
Dividend yield .................... 0.0% 0.0% 0.0%
Utilizing these assumptions, the weighted average fair value of options
granted is $2.83 and $20.80 for the years ended September 30, 2001 and 2000,
respectively, and $0.41 for the seven months ended April 30, 2002.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
SUMMARY STOCK OPTION ACTIVITY
The following table summarizes stock option information with respect to
all stock options for the two years ended September 30, 2001 and seven months
ended April 30, 2002:
F-30
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Weighted
Average
Number of Exercise
Shares Price
Options outstanding, September 30, 1999 10,723,580 $ 6.33
Granted 1,864,150 23.37
Canceled (834,403) 12.55
Exercised (1,454,635) 1.79
-----------
Options outstanding, September 30, 2000 10,298,692 $ 9.54
Granted 2,784,160 3.11
Canceled (1,128,647) 12.77
Exercised (1,559,424) 1.61
-----------
Options outstanding, September 30, 2001 10,394,781 $ 8.66
Granted 3,219,200 0.45
Canceled (3,592,723) 5.83
Exercised -- --
-----------
Options outstanding, April 30, 2002 10,021,258 $ 7.03
Canceled (10,021,258) $ 7.03
-----------
Options outstanding, May 1, 2002 -- --
===========
401(k) Plan
The Company offers its eligible U.S. employees the opportunity to
participate in a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code ("the 401(k) Plan").
Each employee is eligible to contribute, on a tax-deferred basis, a portion of
annual earnings not to exceed certain federal income tax limitations. The
Company made discretionary contributions for all eligible employees who
contribute to the 401(k) Plan in an amount not exceeding 50% of each
participant's first 4% of compensation contributed as elective deferrals for the
Plan year. The Company contributed approximately $110 and $390 to the 401(k)
Plan during the periods ended April 30, 2002 and September 30, 2001,
respectively. The Company contributed approximately $110 to the 401(k) Plan
during the three-months ended December 31, 2001. The Company ceased making
contributions to the 401(k) Plan effective January 1, 2002.
F-31
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
17. COMMITMENTS AND CONTINGENCIES
Leases
The Company has minimum monthly usage/maintenance levels with certain of
its telecommunications carriers expiring in various years through 2008. The
Company also leases certain of its facilities and various equipment under
non-cancelable operating leases expiring in various years through 2030. Total
lease expense for all operating leases for the fiscal year ended September 30,
2001 and 2000 was $7,128 and $4,075, respectively. Total lease expense for all
operating leases for the seven months-ended April 30, 2002 and five months-ended
September 30, 2002 was $6,101 and $2,993, respectively.
Future minimum payments due under these operating leases and
telecommunications carrier usage commitments are as follows:
YEAR ENDING SEPTEMBER 30, TELECOM LEASES TOTAL
------------------------- ------- ------ -----
2003 .................. $ 13,606 $ 5,810 $ 19,416
2004 .................. 13,943 5,198 19,141
2005 .................. 11,171 4,054 15,225
2006 .................. 7,830 6,046 13,876
2007 .................. 4,288 6,093 10,381
Thereafter ............ 4,203 48,348 52,551
-------- -------- --------
Total ................. $ 55,041 $ 75,549 $130,590
======== ======== ========
Capital Lease Obligations
Future minimum lease payments due under capital leases are as follows:
YEAR ENDING SEPTEMBER 30,
2003 ...................................... $ 1,551
2004 ...................................... 1,667
2005 ...................................... 1,210
2006 ...................................... 268
Less: Amount representing interest ........ (624)
-------
Present value of net minimum lease payments $ 4,072
Less: Current ............................ (1,551)
-------
Total Long-term ........................... $ 2,521
=======
Letters of Credit
As of September 30, 2002 the Company had collateralized letters of credit
aggregating $2,600. The related funds are included in restricted investments on
the accompanying consolidated balance sheet.
Employment and Other Contractual Agreements
Peter K. Stevenson
Effective April 15, 2002, the Company entered into an employment
agreement with Peter K. Stevenson for his services as the Company's President
and Chief Executive Officer. Mr. Stevenson's employment agreement expires in
July 2003, and may be extended with the mutual consent of the Company and Mr.
Stevenson for successive six-month periods thereafter. Mr. Stevenson's base
salary is $280,000 per year. Mr. Stevenson is also eligible for an annual bonus
equal to up to 50% of his base salary which is contingent upon the Company
meeting certain performance targets and a bonus equal to between 1.75% and 2.0%
of the proceeds from the disposition of certain of the Company's assets,
including the 415 Greenwich Street and 139 Centre Street facilities located in
New York City, New York. In addition, under the terms of Mr. Stevenson's
employment agreement, we agreed to grant
F-32
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
to Mr. Stevenson options to acquire approximately 548,667 shares of the
Company's common stock, or 3% of the outstanding shares of the Company's common
Stock on a fully diluted basis (including shares of the Company's common stock
underlying options eligible for grant under the 2003 Stock Option Plan, but
excluding shares of the Company's common stock underlying any other outstanding
convertible securities). Fifty percent of these options vest based on the length
of time that the options are held by Mr. Stevenson and 50% of these options
vest if certain performance targets specified in Mr. Stevenson's employment
agreement are met. However, as of September 30,2002 these options had not yet
been granted.
Mr. Stevenson's employment agreement provides that in the event that the
Company terminates his employment for any reason other than cause, if Mr.
Stevenson terminates his employment for good reason or if Mr. Stevenson's
employment terminates as a result of his death or permanent disability, then Mr.
Stevenson is entitled to six months' salary.
In connection with employment arrangements with certain other employees,
the Company is also committed to minimum compensation obligations for severance
of approximately $200.
The Company is also committed as of September 30, 2002 for other non
employment-related obligations totaling approximately $600. These obligations
relate primarily to marketing expenses.
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 the Company's business,
financial condition, results of operations or cash flows.
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York titled In re Globix Corp
Securities Litigation, No.02-CV-00082. This lawsuit names as defendants the
Company and the Company's former officers Marc Bell, Peter Herzig (who remains a
director of the Company) and Brian Reach, and asserts claims under sections
10(b) and 20(a) of the Securities Exchange Act and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased the Company's
securities between November 16, 2000 and December 27, 2001.
On June 25, 2002, the Company entered into a Stipulation and Order with
the lead plaintiffs in the class action lawsuit. The Stipulation and Order
provides that 229,452 shares of the Company's common stock and $1,968 in
aggregate principal amount of the 11% Senior Notes will be held in reserve in
escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires the Company to pay an amount in excess of its liability insurance, the
Company will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10,000 or greater) or a portion
of (in the event that this excess is less than $10,000) of 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 this the ultimate liabilities (if any) resulting
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. The Rabbi Trust is
described in more detail in Note 11. 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.
F-33
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 ordinary 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)
resulting from any such legal proceedings would have a material adverse impact
on the Company's financial condition, results of operations or cash flows.
18. INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for
Income Taxes". This statement applies an asset and liability approach that
requires the recognition of deferred tax assets and liabilities with respect to
the expected future tax consequences of events that have been recognized in the
consolidated financial statements and the Company's tax returns.
The provision for income taxes for the periods below differs from the
amount computed by applying the federal statutory rate due to the following:
Successor Company Predecessor Company
----------------- -------------------
For The Five For The Seven For The For The
Months Ended Months Ended Fiscal Year Ended Fiscal Year Ended
September 30, 2002 April 30, 2002 September 30, 2001 September 30, 2000
------------------ -------------- ------------------ ------------------
% %
Statutory federal income tax rate (35)% 35% (34)% (34)%
State and local taxes, net of federal benefit (10)% 14% (11)% (11)%
Other -- 5% -- --
Valuation Allowance 45% (54)% 45% 45%
Effective income tax rate -- -- -- --
Significant components of the deferred tax assets and liabilities are as
follows:
F-34
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For The Five For The
Months Ended Fiscal Year Ended
September 30, 2002 September 30, 2001
------------------ ------------------
Net deferred tax assets:
Net operating loss carryforwards $ 32,717 $ 158,666
Restructuring reserve 823 3,670
Allowance for doubtful accounts 477 2,395
Depreciation and amortization 53,893 1,316
Deferred rent 1,403 174
Deferred compensation 429 916
Deferred revenue 52 284
Other 383 --
----------- -----------
90,177 167,421
Less: Valuation allowance (90,177) (167,421)
----------- -----------
Total Net deferred tax assets -- --
=========== ===========
The Company is in an accumulated loss position for both financial and
income tax reporting purposes. The Company has U.S. Federal income tax loss
carryforwards of approximately $42,000 at September 30, 2002. These income tax
loss carryforwards expire through 2021. The U.S. Federal income tax loss
carryforwards were reduced upon emergence from bankruptcy due to the Internal
Revenue Code's rules and regulations related to cancellation of indebtedness
income that is excluded from taxable income. Since the Plan provided for
substantial changes in the Company's ownership, the Company's use of its net
operating loss carryforwards may be limited. The Company has not yet determined
the impact, if any, that changes in the Company's ownership have on net
operating loss carryforwards. As of September 30, 2002 the Company also had net
operating loss carryforwards of approximately $46,000 from its United Kingdom
subsidiaries, which do not expire under U.K. tax rules. For financial reporting
purposes, income tax benefits through September 30, 2002 related to both U.S.
Federal and U.K. income tax loss carryforwards are fully offset by a valuation
allowance due to the uncertainty of the Company's ability to realize income tax
benefits by generating taxable income in the future.
The Company's emergence from bankruptcy in fiscal 2002 did not create a
new tax reporting entity. Accordingly, the adjustments required to adopt fresh
start accounting are not applicable for the Company's tax reporting and
therefore, deferred tax items were recognized concurrently with the recognition
of the respective fresh start accounting adjustments. In addition pursuant to
SOP 90-7, reversals of the valuation allowance recorded against deferred tax
assets that existed as of the emergence date will first reduce intangibles,
until exhausted, and thereafter are reported as additional paid in capital as
opposed to income tax expense. The balance of the valuation allowance for which
this treatment is required was approximately $80,400 at September 30, 2002.
19. 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 and Europe. Each Internet
data center provides the same internet related services to similar type of
customers. Effective April 1, 2001 and for the fiscal year ended September 30,
2001, Globix reports its results of operations in one operating segment under
the provisions of SFAS No. 131. Previously the Company reported under two
operating segments.
F-35
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR
COMPANY PREDECESSOR COMPANY
------------------- ----------------------------------------------------
FIVE MONTH SEVEN MONTH
PERIOD PERIOD YEAR ENDED SEPTEMBER 30,
ENDED ENDED
SEPTEMBER 30, 2002 APRIL 30, 2002 2001 2000
Revenue:
United States ...... $ 20,410 $ 37,747 $ 82,020 $ 73,697
Europe ............. 10,313 13,526 22,190 7,590
--------- --------- --------- ---------
Consolidated ....... $ 30,723 $ 51,273 $ 104,210 $ 81,287
========= ========= ========= =========
Operating loss:
United States ...... $ (15,069) $ (54,433) $(142,713) $ (64,477)
Europe ............. (39) (29,150) (14,773) (13,090)
--------- --------- --------- ---------
Consolidated ....... $ (15,108) $ (83,583) $(157,486) $ (77,567)
========= ========= ========= =========
Tangible assets:
United States ...... $ 210,521 $ 439,667
Europe ............. 42,587 89,953
--------- ---------
Consolidated ....... $ 253,108 $ 529,620
========= =========
The tangible assets reflected in the table above exclude intangible assets.
20. RELATED PARTY TRANSACTIONS
Consulting Agreement with Communication Technology Advisors
The Company and Communication Technology Advisors LLC ("CTA"), are party
to a consulting agreement dated as of April 19, 2002. Jared E. Abbruzzese, a
member of the Company's board of directors, is the Founder and Chairman of CTA
and is actively engaged in all aspects of CTA's business.
Under this agreement, the Company engaged CTA to act as the Office of the
Chief Restructuring Officer, providing the Company with a wide range of business
advisory services. The initial term of the agreement ended on October 31, 2002.
On November 1, 2002, the Company extended the CTA consulting agreement through
January 31, 2003 and on February 1, 2003 the Company further extended the CTA
consulting agreement through April 30, 2003. As consideration for the services
provided by CTA, the Company pays CTA a monthly fee of $65. The Company also
reimburses CTA for its out-of-pocket expenses incurred in connection with
rendering services to the Company during the term of the agreement. In addition
to the monthly fee and expense reimbursement, CTA is also entitled to a success
fee in the amount of $1,500 upon the achievement of certain success milestones.
CTA was originally introduced to the Company as a financial advisor to the
unofficial committee of holders of the 12.5% Senior Notes prior to the
commencement of the Company's Chapter 11 case. CTA received a total of $594 in
fees in connection with its service as financial advisor to the unofficial
committee and to the Company and was reimbursed a total of $46 for out-of-pocket
expenses through September 30, 2002. As a result of this engagement, the Company
was introduced to Peter K. Stevenson, currently the Company's president and
Chief Executive Officer, who was among several CTA representatives providing
advisory services to the unofficial committee and to several other clients of
CTA unrelated to the Company. Mr. Stevenson does not own an equity interest in
CTA, nor is he actively consulting for or employed by CTA.
Neither CTA, nor any of its principals or affiliates as of September 30,
2002 was a stockholder of the company, nor does it hold any debt of the Company
(other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under its existing agreement
with the Company).
From September 2002 through December 2002, CTA subleased office space from
Net One Group, Inc., a company founded by Mr. Stevenson. CTA paid a total of
$4.8 in rent to Net One Group under the sublease.
CTA has advised the Company that in connection with the conduct of its
business in the ordinary course it routinely advises clients in, and appears in
restructuring cases involving, telecommunications companies
F-36
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
throughout the country. CTA has also advised us that certain holders of the
Company's common stock and/or debt securities and/or certain of their respective
affiliates or principals are current clients of CTA in matters unrelated to the
Company, former clients of CTA in matters unrelated to the Company and
affiliates of clients who are (or were) represented by CTA in matters unrelated
to the Company.
The consulting services described above were approved by a majority of the
Company's disinterested directors. The Company's board of directors believes
that these consulting services are at rates and on terms that are at least as
favorable as those that would have been available to the Company from
unaffiliated third parties under the circumstances.
Life Insurance and Disability for Peter K. Stevenson
Peter K. Stevenson, the Company's President and Chief Executive Officer,
receives life insurance and disability insurance benefits in excess of the
benefits that are offered to the Company's other employees. These benefits are
payable to an entity controlled by Mr. Stevenson. The premiums for these
benefits totaled $6.3 for the five month period ended September 30, 2002. These
benefits were approved by a majority of the Company's disinterested directors.
21. SUBSIDIARY GUARANTORS
Under the terms of the indenture governing the 11% Senior Notes, the
following subsidiaries of the Company have fully and unconditionally and jointly
and severally guaranteed the full and prompt performance of the Company's
obligations under the 11% Senior Notes and the Indenture, including the payment
of principal of and premium, if any, on and interest on the 11% Senior Notes:
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. The Company is in
the process of merging each of these subsidiary guarantors, other than 415
Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC and 415 Greenwich GC MM, LLC,
with and into the Company.
22. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value and estimated fair values of cash, cash equivalents,
restricted cash, investments, receivables, payables, debt maturing within one
year, and the mortgage payable contained in the consolidated balance sheets
approximates fair value.
The fair market value of the 11% Senior Notes are approximately $92,400
based on the Company's repurchase of $9,100 in principle value notes for $7,000
in December 2002 (see Note 24).
F-37
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
23. SELECTED INTERIM FINANCIAL DATA (UNAUDITED)
PREDECESSOR COMPANY
-------------------------------------------------------
(RESTATED)
THREE MONTHS THREE MONTHS ONE MONTH
ENDED ENDED ENDED
DECEMBER 31, 2001 MARCH 31, 2002 APRIL 30, 2002
----------------- -------------- --------------
Revenue $ 23,379 $ 21,389 $ 6,505
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization,
payroll and occupancy shown below) 9,663 9,737 2,723
Selling, general and administrative 24,748 21,401 11,057
Loss (gain) on impairment of assets -- 3,221 (643)
Restructuring charges -- 24,834 --
Depreciation and amortization 12,012 12,174 3,929
------------ ------------ ------------
Total operating costs and expenses 46,423 71,367 17,066
------------ ------------ ------------
Loss from operations: (23,044) (49,978) (10,561)
Interest and financing expense, net (19,058) (13,161) (268)
Other income (expense) 110 (506) (113)
Gain on debt discharge -- -- 427,066
Minority interest in subsidiary 389 955 4,434
Reorganization items -- (5,598) (2,164)
Fresh start accounting adjustments -- -- (148,569)
------------ ------------ ------------
Net (loss) income (41,603) (68,288) 269,825
Dividends and accretion on preferred stock (1,848) (1,329) --
------------ ------------ ------------
Net (loss) income attributable to common stockholders $ (43,451) $ (69,617) $ 269,825
============ ============ ============
Earnings (loss) per common share:
Basic (loss) earnings per share attributable to common stockholders $ (1.11) $ (1.75) $ 6.52
============ ============ ============
Weighted average common shares outstanding - basic 38,979,005 39,668,862 41,395,781
============ ============ ============
Diluted (loss) earnings per share attributable to common stockholders $ (1.11) $ (1.75) $ 5.37
============ ============ ============
Weighted average common shares outstanding - diluted 38,979,005 39,688,862 50,284,381
============ ============ ============
Successor Company
----------------------------------------------------
Two months Three months
Ended Ended
June 30, 2002 September 30, 2002
------------------------ ------------------------
Revenue $ 12,702 $ 18,201
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization,
payroll and occupancy shown below) 4,505 5,953
Selling, general and administrative 10,749 18,564
Loss (gain) on impairment of assets -- --
Restructuring charges -- --
Depreciation and amortization 2,454 3,606
------------------------ ------------------------
Total operating costs and expenses 17,708 28,123
------------------------ ------------------------
Loss from operations (5,006) (10,102)
Interest and financing expense, net (2,363) (3,503)
Other income/(expense) (145) (12)
Gain on debt discharge -- --
Minority interest in subsidiary -- --
Reorganization items -- --
Fresh start accounting adjustments -- --
------------------------ -------------------------
Net (loss) income (7,514) (13,617)
Dividends and accretion on preferred stock -- --
------------------------ -------------------------
Net (loss) income attributable to common stockholders $ (7,514) $ (13,617)
======================== =========================
Earnings (loss) per common share:
Basic (loss) earnings per share attributable to common stockholders $ (0.46) $ (0.83)
======================== =========================
Weighted average common shares outstanding - basic 16,460,000 16,460,000
======================== =========================
Diluted (loss) earnings per share attributable to common stockholders $ (0.46) $ (0.83)
======================== =========================
Weighted average common shares outstanding - diluted 16,460,000 16,460,000
======================== =========================
The following is a reconciliation of the net loss attributable to common
stockholders from the three months ended March 31, 2002 previously filed to the
restated three months ended March 31, 2002.
THREE MONTHS
ENDED
MARCH 31, 2002
--------------
Net loss attributable to common stockholders (previously filed) $(87,598)
Change in restructuring and other charges 23,612(1)
Adjustments to reorganization items (5,631)(2)
--------
Net loss attributable to common stockholders (restated) $(69,617)
========
(1) The change in restructuring and other charge was comprised of the following:
o The reversal of $22,428 of asset impairments that were not recorded in
compliance with the requirements of SFAS No. 121.
o A reversal of $1,184 related to assets previously written-off by the
Company for which the Company received a subsequent settlement payment from
the vendor. The Company had previously increased the restructuring accrual
in connection with the settlement payment.
(2) The adjustment to reorganization items included the following:
o $6,181 write-off of deferred reorganization costs the Company subsequently
determined should have been expensed as incurred in conformity with SOP
90-7.
o A gain of $550 related to a settlement of an obligation under a software
purchase agreement that had not been previously recorded.
PREDECESSOR COMPANY
------------------------------------------------------------------
THREE MONTHS THREE MONTHS THREE MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED
DECEMBER 31, 2000 MARCH 31, 2001 JUNE 30, 2001 SEPTEMBER 30, 2001
----------------- -------------- -------------- ------------------
Revenue $ 26,237 $ 26,782 $ 26,239 $ 24,952
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization,
payroll and occupancy shown below) 10,468 10,480 9,774 9,887
Selling, general and administrative 31,014 28,308 31,994 33,755
Loss on impairment of assets -- -- -- 3,500
Restructuring charges 38,109 -- -- 18,000
Depreciation and amortization 7,597 7,951 8,526 12,583
------------ ------------ ------------ -------------
Total operating costs and expenses 87,188 46,739 50,294 77,725
------------ ------------ ------------ -------------
Loss from operations: (60,951) (19,957) (24,055) (52,773)
Interest and financing expense, net (10,004) (11,679) (11,465) (18,698)
Other income/(expense) -- (330) (480) (319)
------------ ------------ ------------ -------------
Loss before cumulative effect of a change in
accounting principle (70,955) (31,966) (36,000) (71,790)
Cumulative effect of a change in accounting principle (2,332) -- -- --
------------ ------------ ------------ -------------
Net loss (73,287) (31,966) (36,000) (71,790)
Dividends and accretion on preferred stock (1,735) (1,761) (1,789) (1,819)
------------ ------------ ------------ -------------
Loss attributable to common stockholders $ (75,022) $ (33,727) $ (37,789) $ (73,609)
============ ============= ============ ==============
Basic and diluted loss per share attributable to
common stockholders before cumulative effect of a
change in accounting principle $ (1.95) $ (0.87) $ (0.97) $ (1.89)
Cumulative effect of a change in accounting principle (0.06) -- -- --
------------ ------------ ------------ -------------
Basic and diluted loss per share attributable to
common stockholders $ (2.01) $ (0.87) $ (0.97) $ (1.89)
============ ============ =========== ============
Weighted average common shares outstanding --
basic and diluted 37,328,496 38,709,658 38,933,135 38,946,043
============ ============ =========== ============
24. SUBSEQUENT EVENTS
On November 5, 2002, the compensation committee of the Company's board of
directors approved the Company's 2003 Stock Option Plan and set the fair value
strike price of options granted under the 2003 Stock Option Plan at $3.04.
In December 2002, the Company repurchased in the open market for $7,030 a
portion of its outstanding 11% Senior Notes, which had a principal value of
approximately $9,130 and associated accrued interest of $627. The repurchase
resulted in a gain on the discharge of debt of approximately $2,727. This gain
will be included in the Company's Consolidated Statement of Operations for the
quarter ending December 31, 2002.
F-38
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 7, 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 of the 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.
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.
On February 24, 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 included in the Company's Consolidated Statement of Operations
for the quarter ended March 31, 2003.
On March 14, 2003, the Company's board of directors approved the sale to
CTA of a warrant exercisable for 500,000 shares of the Company's common stock at
an exercise price of $3.00 per share. 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 expressed in the quarter
ended March 31, 2003.
The Plan provides for the grant of up to 1,828,889 stock options to be
issued pursuant to the Company's 2003 Stock Option Plan. On March 14, 2003, the
Company's board of directors approved the 2003 Stock Option Plan as submitted by
the Compensation Committee, authorized 1,828,889 shares for distribution, and
granted 1,128,976 shares.
On March 19, 2003, holders of approximately 58% of the outstanding 11%
Senior Notes (excluding 11% Senior Notes repurchased by the Company) waived the
defaults under the Indenture described in Note 12.
F-39
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
------------------------------------------------------- -------- ------------------------ -------- --------
ADDITIONS
------------------------
BALANCE AT CHARGES TO CHARGES TO BALANCE AT
BEGINNING OF COSTS AND OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
Allowance for Doubtful Accounts:
-------------------------------
Predecessor Company (October 1, 2001 to April 30, 2002) 8,052 4,284 94 (9,618) 2,812
Successor Company (May 1, 2002 to September 30, 2002) 2,812 1,904 80 (2,231) 2,565
Deferred Tax Valuation Allowance:
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Predecessor Company (October 1, 2001 to April 30, 2002) 167,421 40,400 66,021 (193,402) 80,440
Successor Company (May 1, 2002 to September 30, 2002) 80,440 9,737 -- -- 90,177
S-1