As filed with the Securities and Exchange Commission on July 25, 2002
Registration No. 333-_________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------------------------
Globix Corporation*
(Exact Name of Registrant as Specified in Its Charter)
Delaware 7389 13-3781263
(State or Other (Primary standard industrial (I.R.S. Employer
Jurisdiction of classification code number) Identification Number)
Incorporation or
Organization)
------------------------------------
139 Centre Street, New York, New York 10013
Telephone: (212) 334-8500
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Peter K. Stevenson
139 Centre Street, New York, New York 10013
Telephone: (212) 334-8500
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code,
of Agent for Service)
------------------------------------
With a copy to:
Stephen E. Older, Esq.
Akin, Gump, Strauss, Hauer & Feld, L.L.P.
590 Madison Avenue
New York, New York 10022
Telephone: (212) 872-1000
Approximate date of commencement of proposed sale to the public: As soon as
practicable on or after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_] _____________
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
------------------------------------
CALCULATION OF REGISTRATION FEE
====================================================================================================================================
Proposed Maximum Proposed Maximum
Amount to be Aggregate Offering Aggregate Offering Amount of
Title of Each Class of Securities to be Registered Registered Price Per Security Price Registration Fee
------------------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $0.01 per share .............. 4,327,499 $1.00 (1) $ 4,327,499 $ 398.13
------------------------------------------------------------------------------------------------------------------------------------
11% Senior Secured Notes due 2008(3) ................. $26,341,558 100% (2) $26,341,558 $2,423.42
------------------------------------------------------------------------------------------------------------------------------------
Guarantees of the 11% Senior Secured Notes due
2008(4)* ............................................. - - - -
------------------------------------------------------------------------------------------------------------------------------------
Total ................................................ $30,669,057 $2,821.55
====================================================================================================================================
(1) No exchange or over-the-counter market exists for our common stock. To the
best of our knowledge, no shares of our common stock have been sold from
one investor to another since the shares were deemed to have been issued by
our company on April 25, 2002 pursuant to the terms of the prepackaged plan
of reorganization filed in connection with our bankruptcy proceedings. We
believe that the price set forth for our common stock represents a bona
fide estimate of the maximum offering price solely for the purpose of
calculating the registration fee pursuant to Rule 457(a) of the Securities
Act of 1933, as amended (the "Securities Act").
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) of the Securities Act.
(3) Includes $17,352,000 aggregate principal amount of our 11% Senior Secured
Notes due 2008, or the notes, initially deemed to have been issued by our
company pursuant to the terms of the prepackaged plan of reorganization
filed in connection with our bankruptcy proceedings, plus $8,989,558 in
aggregate principal amount of additional notes to be issued in lieu of cash
interest payments on the notes (assuming that interest is paid in
additional notes for a period of four years from the date of initial
issuance of the notes).
(4) No separate consideration will be received for the Guarantees. Pursuant to
Rule 457(n) under the Securities Act, no separate fee is payable for the
Guarantees.
* Includes certain subsidiaries of Globix Corporation identified on the
following page.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
================================================================================
BLUESTREAK DIGITAL, INC.
(Exact name of registrant as specified in its charter)
New York 7389 13-3725362
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
GAMENET CORPORATION
(Exact name of registrant as specified in its charter)
New York 7389 13-3805181
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
NAFT COMPUTER SERVICE CORPORATION
(Exact name of registrant as specified in its charter)
New York 7389 13-3789872
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
NAFT INTERNATIONAL LTD.
(Exact name of registrant as specified in its charter)
New York 7389 13-3576046
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
PFM COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
New York 7389 13-3832901
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
GRE CONSULTING, INC.
(Exact name of registrant as specified in its charter)
New York 7389 13-4121508
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
415 GREENWICH GC, LLC
(Exact name of registrant as specified in its charter)
New York 7389 06-1602498
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
415 GREENWICH GC TENANT, LLC
(Exact name of registrant as specified in its charter)
New York 7389 13-4177134
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
415 GREENWICH GC MM, LLC
(Exact name of registrant as specified in its charter)
New York 7389 Pending
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
COMSTAR.NET, INC.
(Exact name of registrant as specified in its charter)
Georgia 7389 58-2235514
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
COMSTAR TELECOM & WIRELESS, INC.
(Exact name of registrant as specified in its charter)
Georgia 7389 58-2505263
(State or other jurisdiction of (primary standard industrial classification code) (I.R.S. Employer
incorporation or organization) Identification No.)
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and we are not soliciting an offer to buy these+
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Dated July 25, 2002
[GLOBIX LOGO]
Globix Corporation
4,327,499 Shares of Common Stock
$26,341,558 11% Senior Secured Notes due 2008
-------------------
Shares of our common stock and 11% senior secured notes due 2008, which
we refer to in this prospectus as the notes, are being offered from time to time
by the selling holders named in this prospectus under the caption "Selling
Holders." We will not receive any proceeds from the sale of shares of our common
stock or notes by the selling holders.
Upon effectiveness of the registration statement of which this
prospectus is a part, our common stock and the notes will not be immediately
listed on any national or regional securities exchange or inter-dealer quotation
service.
Pursuant to the terms of the prepackaged plan of reorganization filed
in connection with our bankruptcy proceedings, which we refer to in this
prospectus as the plan of reorganization, the notes and our common stock were
deemed to be issued on April 25, 2002, which we refer to in this prospectus as
the effective date of the plan of reorganization.
To the best of our knowledge, none of our securities have been transferred
since they were deemed to have been issued by us on the effective date of the
plan of reorganization. We estimate that the initial offering price for our
common stock will be approximately $___ per share. We estimate that the notes
will trade at par value.
--------------------
Investing in our common stock and the notes involves risks. See "Risk
Factors" beginning on page 11.
--------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined whether
this prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is , 2002
TABLE OF CONTENTS
Page Page
---- ----
Prospectus Summary ...................................... 1 Principal Stockholders ........................... 58
Risk Factors ............................................ 11 Selling Holders .................................. 59
Cautionary Statement Regarding Forward-Looking Certain Relationships and Related Transactions ... 61
Statements .......................................... 20 Description of Securities ........................ 62
Use of Proceeds ......................................... 21 Plan of Distribution ............................. 105
Dividend Policy ......................................... 21 Legal Matters .................................... 107
Selected Consolidated Financial Data .................... 22 Experts ......................................... 107
Pro Forma Financial Data ................................ 24 Where You Can Find More Information .............. 107
Management's Discussion and Analysis of Index to Consolidated Financial Statements ....... F-1
Financial Condition and Results of
Operations .............................................. 28
Business ................................................ 43
Management .............................................. 51
------------------------
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this
prospectus. You should read the following summary together with the more
detailed information and our consolidated financial statements and the notes to
these statements appearing elsewhere in this prospectus. In this prospectus,
"we," "us," "our company" and "our" refer to Globix Corporation, unless the
context otherwise requires.
Our Company
We are a full-service provider of sophisticated Internet solutions to
businesses. Our solutions include:
. secure and fault-tolerant Internet data centers;
. premium network services, which provide high performance network
connectivity to the Internet; and
. complex Internet based managed and application services, which
include co-location dedicated hosting, streaming media, content
delivery services and messaging services.
We believe that these elements of our total Internet solution combine
to provide our customers with the ability to create, operate and scale their
increasingly complex Internet operations in a cost efficient manner.
Our target market for our services is small to medium size businesses
in a variety of industries such as media and publishing, financial services,
retail, healthcare, governmental agencies and technology.
We currently offer our services from our Internet data center
facilities in New York City, New York, London, England and Santa Clara,
California. Our teams of sales consultants and computer system and network
administrators are located at each of these locations. We also maintain an
Internet data center in Atlanta.
Our network infrastructure is designed to meet the service and quality
requirements of businesses with mission critical Internet-based operations. Our
network infrastructure is designed for high availability and low latency and
utilizes a single autonomous system number globally performing "cold-potato"
routing. Cold potato routing is a technique whereby our network equipment
monitors and interprets additional routing information supplied by its peers. By
using this information, our infrastructure carries the traffic on our network to
common peering or traffic exchange points closest to the point of origin of the
traffic request.
We offer hosting solutions on both the NT and UNIX platforms, in a
dedicated server environment. Dedicated hosting is designed to meet a customer's
price point and business requirements. This service includes providing bandwidth
and application requests and hardware and software to meet customer-specific
needs. In addition, we are a provider of streaming media services to
corporations who are utilizing this application as a business communications
tool. Streaming media is a process by which audio, video or other multimedia is
delivered in a streaming or continuous fashion over the Internet or over a
company's intranet. Our core streaming media services are encoding, hosting and
collaboration solutions, which are the mainstays of streaming media technology.
We believe that our Internet content delivery network, which we market under the
name EarthCache, complements our existing network infrastructure and provides
businesses with improved web site and application performance, faster content
delivery times and better customer content management. EarthCache, which has
caching servers deployed across the edges of our Internet backbone network, also
improves download performance as a result of the proximity of the content on
these caching servers. Our messaging service offers a robust set of messaging
and collaboration features including e-mail, calendaring and instant messaging.
1
Our principal executive offices are located at 139 Centre Street, New York,
New York 10013, and our telephone number at that location is (212) 334-8500.
Although we maintain a website at www.globix.com, we do not intend that the
information available through our website be incorporated into this prospectus.
The name "Globix" and the Globix logo are trademarks and service marks of
Globix. Each trademark, trade name or service mark of any other company
appearing in this prospectus belongs to its respective owner.
Our Chapter 11 Bankruptcy Reorganization
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the prepackaged plan
of reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection.
As of the effective date of the plan of reorganization, all of our existing
securities were deemed cancelled and:
. each holder of our 12.5% senior notes due 2010, which we refer to in
this prospectus as the 12.5% notes, became entitled to receive, in
exchange for its 12.5% notes, its pro rata share of:
. $120 million in aggregate principal amount of the notes; and
. 13,991,000 shares of our common stock, representing approximately
85% of the shares of our common stock issued and outstanding
following the effective date of the plan of reorganization, subject
to dilution by the exercise of management incentive options
representing up to 10% of the shares of our issued and outstanding
common stock on a fully-diluted basis following the effective date
of the plan of reorganization;
. each holder of shares of our preferred stock outstanding immediately
prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for its shares of preferred stock, its
pro rata share of 2,304,400 shares of our common stock, representing
approximately 14% of the shares of our common stock issued and
outstanding following the effective date of the plan of reorganization,
subject to dilution by the exercise of management incentive options
representing up to 10% of the shares of our issued and outstanding
common stock on a fully-diluted basis following the effective date of
the plan of reorganization; and
. each holder of shares of our common stock outstanding immediately prior
to the effective date of the plan of reorganization became entitled to
receive, in exchange for these shares of common stock, its pro rata
share of 164,600 shares of our common stock, representing approximately
1% of the shares of our common stock issued and outstanding following
the
2
effective date of the plan of reorganization, subject to dilution by
the exercise of management incentive options representing up to 10% of
the shares of our issued and outstanding common stock on a
fully-diluted basis following the effective date of the plan of
reorganization.
Our reorganization reduced the principal amount of our outstanding
indebtedness by approximately $480 million and converted a substantial portion
of our indebtedness into our common stock. Further, under the terms of the notes
we are permitted to satisfy interest payments in kind for at least two years
and, at the discretion of our board of directors, for up to four years, thereby
significantly reducing liquidity concerns arising from our pre-Chapter 11 debt
service obligations. We believe that our reorganization substantially reduces
uncertainty with respect to our future and better positions us to attract and
maintain new customers. There can be no assurance, however, that we will be
successful in executing our business plan.
We are filing the registration statement of which this prospectus forms a
part pursuant to the terms of a registration rights agreement with respect to
our common stock and the notes that we entered into in connection with the plan
of reorganization. Under the registration rights agreement, we agreed to file
the registration statement of which this prospectus forms a part on or before
the 90th day following the effective date of the plan of regorganization.
3
The Offerings
Common Stock
Common stock offered by the selling holders.... Up to 4,327,499 shares.
Notes
Notes offered by the selling holders........... Up to $26,341,558 aggregate
principal amount of notes.
Maturity date.................................. May 1, 2008.
Interest....................................... Payable annually in arrears on
May 1, commencing on May 1,
2003:
. in additional notes until
the second anniversary of
the date, which we refer to
in this prospectus as the
closing date, on which we
first make distributions of
the notes and our common
stock;
. in cash or, at the election
of our board of directors,
in additional notes (or any
combination of additional
notes and cash) from the
second anniversary of the
closing date to the fourth
anniversary of the closing
date; and
. in cash from the fourth
anniversary of the closing
date until the maturity date
of the notes.
Guarantees..................................... Our wholly owned direct and
indirect subsidiaries,
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. have fully and
unconditionally and jointly and
severally guaranteed all
amounts payable under the
notes, including principal and
interest.
Ranking........................................ The notes are our senior
secured obligations and rank on
parity with, or senior to, all
of our existing and future debt
and liabilities. The notes are
secured by our assets and the
assets of the subsidiary
guarantors so that claims of
the holders of the notes will
rank ahead of
4
unsecured claims of our creditors to the
extent of the value, priority and validity of
the liens securing the notes and the
subsidiary guaranties. However, since we and
our subsidiary guarantors may incur up to $20
million of debt in the aggregate which may be
secured by liens superior to, or in lieu of,
those securing the notes and the subsidiary
guarantees, this debt will effectively rank
ahead of the notes and subsidiary guarantees.
The subsidiary guarantees will be senior
secured obligations of the subsidiary
guarantors and will rank on parity with, or
senior to, all existing and future debt and
liabilities of the subsidiary guarantors.
However, our company and the subsidiary
guarantors may collectively incur up to $20
million of debt in the aggregate and the
subsidiary guarantees will be subordinated to
this debt. In addition, this debt may be
secured by liens superior to, or in lieu of,
the liens securing the subsidiary guarantees.
Security........................ Our obligations under the notes are secured
by a first priority security interest in all
of the otherwise unencumbered tangible and
intangible assets of our company and of each
subsidiary guarantor, subject to agreed upon
permitted liens. The liens securing the notes
may also be released or subordinated in
priority to liens securing up to $20 million
of debt under credit facilities, so long as
the fair market value of the assets subject
to these liens does not exceed to any
material extent 1.5 times the amount of the
debt secured by these liens.
Change of control............... In the event of a "Change of Control" (as
defined in the indenture governing the notes)
of our company, each holder of notes may
require us to repurchase, in whole or in
part, all of that holder's notes for a cash
payment equal to 101% of the aggregate
principal amount of that holder's notes, plus
accrued and unpaid interest, if any, to the
redemption date.
Optional redemption............. We may redeem the notes at our option, in
whole or in part, at any time and from time
to time, upon notice mailed not less than 15
days but not more than 60 days prior to the
date of redemption, at a redemption price
equal to 100% of the principal amount of the
notes being redeemed plus accrued and unpaid
interest up to, but excluding, the redemption
date. However, in the event that a
5
Change of Control of our company has occurred
and we have not offered to purchase all of the
notes in connection with the Change of
Control, the redemption price will be equal to
101% of the aggregate principal amount of the
notes being redeemed plus accrued and unpaid
interest up to, but excluding, the redemption
date.
Certain covenants ........... The indenture governing the notes among other
things, restricts, with certain exceptions,
the ability of our company and our
subsidiaries to:
. sell assets;
. incur indebtedness;
. create or incur liens;
. pay dividends on or redeem or repurchase
the capital stock of our company or our
subsidiaries, or make investments; and
. engage in transactions with affiliates.
Use of proceeds ............. We will not receive any of the proceeds from
the sale of the shares of our common stock and
the notes offered by the selling holders.
Governing Law ............... New York.
6
As of the date of this prospectus, we had 16,460,000 shares of common stock
outstanding.
------------
Risk Factors
You should carefully consider all of the information contained in this
prospectus before making an investment in our common stock or the notes. In
particular, you should consider the risk factors described under "Risk Factors"
beginning on page 11.
7
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary financial information has been derived from our
historical financial statements and should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and related notes that are
included elsewhere in this prospectus. The consolidated statement of operations
data as of and for the fiscal years ended September 30, 2001, September 30, 2000
and September 30, 1999 have been derived from our consolidated financial
statements and related notes that are included elsewhere in this prospectus,
which have been audited by Arthur Andersen LLP as stated in the report of Arthur
Andersen LLP presented elsewhere in this prospectus. The selected financial data
for the six months ended March 31, 2002 and March 31, 2001 have been derived
from our unaudited consolidated financial statements which, in our opinion,
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial condition, results of operations and
cash flows for these periods. Historical results of operations may not be
indicative of results to be expected for any future period.
Fiscal Year Ended September 30,
-------------------------------
Six Months Six Months
Ended March Ended March
31, 2002 31, 2001 2001 2000 1999
-------- -------- ---- ---- ----
(in millions, except share and per share amounts)
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue .......................................... $ 44,767 $ 53,018 $ 104,210 $ 81,287 $ 33,817
Operating costs and expenses:
Cost of revenue .......................... 19,399 20,948 40,609 42,513 22,184
Selling, general and administrative ...... 46,150 59,072 128,321 98,113 36,495
Restructuring charges .................... 48,447 38,109 56,109 - -
Impairment of intangible assets .......... 3,220 - - - -
Depreciation and amortization ............ 24,186 15,547 36,657 18,228 6,329
---------- ---------- ---------- ---------- ---------
Total operating costs and expenses ....... 141,402 133,676 261,696 158,854 65,008
Loss from operations ............................. (96,635) (80,658) (157,486) (77,567) (31,191)
Interest and financing expense ........... (34,060) (32,598) (65,128) (57,831) (18,386)
Interest income .......................... 1,840 10,915 13,282 24,749 6,192
Other income ............................. 328 1,488 2,147 2,816 -
Other expense ............................ (690) (2,065) (3,526) (1,037) -
Minority interest in subsidiary .......... 1,344 - - - -
---------- ---------- ---------- ---------- ---------
Loss before extraordinary loss and
cumulative effect of a change in
accounting principle ............................ (127,873) (102,918) (210,711) (108,870) (43,385)
Extraordinary loss on early
extinguishment of debt ................... - - - (17,577) -
Cumulative effect of a change in
accounting principle ..................... - (2,332) (2,332) - -
---------- ---------- ---------- ---------- ---------
Net Loss ......................................... (127,873) (105,250) (213,043) (126,447) (43,385)
Dividends and accretion on
preferred stock .......................... (3,178) (3,496) (7,104) (5,768) -
---------- ---------- ---------- ---------- ---------
Net loss attributable to common stockholders $ (131,051) $ (108,746) $ (220,147) $ (132,215) $ (43,385)
=========== =========== =========== =========== ==========
Basic and diluted loss per share
attributable to common stockholders before
extraordinary loss and effect of a change
in accounting principle $ (3.33) $ (2.80) $ (5.66) $ (3.23) $ (1.73)
Extraordinary loss per share - - - (0.50) -
Cumulative effect of a change in
accounting principle - (0.06) (0.06) - -
---------- ---------- ---------- ---------- ---------
Basic and diluted loss per share
attributable to common stockholders $ (3.33) $ (2.86) $(5.72) $ (3.73) $ (1.73)
=========== =========== =========== =========== ==========
8
Weighted average common shares outstanding 39,330,033 38,011,488 38,476,909 35,484,040 25,116,800
=========== =========== =========== ========== ===========
OTHER CONSOLIDATED FINANCIAL DATA:
Cash flows provided by (used in) operating
activities $ (35,027) $ (69,474) $ (140,543) $ (94,318) $ (36,897)
Cash flows used in investing activities 12,949 75,342 113,271 149,939 58,774
Cash flows (used in) provided by financing
activities (4,211) 391 388 509,395 135,589
Capital expenditures 21,395 104,811 166,303 150,876 98,110
Depreciation and amortization 24,186 15,547 36,657 18,228 6,329
EBITDA (1) (20,782) (27,002) (64,720) (59,339) (24,862)
Deficiency of earnings to fixed charges (2) $ (131,538) $ (115,258) $ (228,999) $ (116,014) $ (47,152)
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents, short term
investments and marketable
securities $ 59,385
Restricted cash and investments 26,831
Working capital 1,680
Total assets 450,475
Current portion of long term debt 6,299
Long term debt, less current portion 627,394
Stockholders' (deficit) equity $ (367,907)
--------
(1) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included in our financial statements because our
management believes that it is a useful tool for measuring our ability to
service our debt. However, EBITDA does not represent cash flows from
operations, as defined by U.S. generally accepted accounting principles. In
addition, EBITDA should not be considered a substitute for net income or
net loss as an indicator of our operating performance or cash flows as a
measure of our liquidity. EBITDA as presented may not be comparable to
similarly titled measures reported by other companies because not all
companies calculate EBITDA in an identical manner.
(2) Deficiency of earnings to fixed charges is defined as the difference
between the pre-tax loss and the total of fixed charges and preferred stock
dividends. Fixed charges consist of interest charges and amortization of
debt discount and offering costs, whether expensed or capitalized, and
one-third of rental expense, which we believe to be representative of
interest.
9
----------------------
You should rely only on the information contained in this prospectus.
We have not, and the selling holders have not, authorized any other person to
provide you with information that is different from that contained in this
prospectus. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of our common stock or the notes.
10
RISK FACTORS
In considering whether to purchase the notes and the shares of our common
stock, you should carefully consider all of the information we have included or
incorporated by reference in this prospectus. In particular, you should
carefully consider the risk factors described below. The risks and uncertainties
set forth below are not the only risks and uncertainties that we face.
Additional risks and uncertainties not presently known to us or that we
currently deem immaterial may also impair our business and results of
operations.
Risks Related to the Notes and Our Common Stock
Our outstanding debt obligations may adversely affect our financial and
operating flexibility.
After giving effect to the transactions contemplated by the plan of
reorganization, we have $255.9 million of outstanding indebtedness, which
consists of the notes and mortgages and capital lease obligations. Our
indebtedness could:
. limit our ability to obtain additional financing to operate or grow
our business;
. limit our financial flexibility in planning for and reacting to
industry changes;
. place us at a competitive disadvantage as compared to less leveraged
companies;
. after the fourth anniversary of the issuance of the notes, require us
to dedicate a substantial portion of our cash flow to payments on our
debt, reducing the availability of our cash flow for other purposes.
Our ability to meet our debt service obligations depends on our future
performance
Historically, we have not generated positive cash flows from operations.
Our ability to pay principal, premium, if any, and interest on the notes and on
our other indebtedness depends on our future operating performance. Future
operating performance is subject to market conditions and business factors that
are often beyond our control. Consequently, we cannot assure you that we will
have sufficient cash flows to pay the principal, premium, if any, and interest
on our indebtedness. If our cash flows and capital resources are insufficient to
allow us to make scheduled payments on our indebtedness, we may have to reduce
or delay capital expenditures, sell assets, seek additional capital or
restructure or refinance our indebtedness. We cannot assure you that the terms
of our indebtedness will allow these alternative measures or that these measures
would satisfy our scheduled debt service obligations. If we cannot make
scheduled payments on our indebtedness, we will be in default and, as a result:
. our debt holders could declare all outstanding principal and
interest to be due and payable; and
. we could be forced into bankruptcy or liquidation.
Covenants in the indenture governing the notes restrict our ability to borrow
and invest, which could impair our ability to expand or finance our future
operations.
The indenture governing the notes contains a number of covenants that
impose significant operating and financial restrictions on us and our
subsidiaries. These restrictions significantly limit, and in some cases
prohibit, among other things, our and certain of our subsidiaries' ability to
incur more debt, create liens on assets, enter into business combinations or
engage in certain activities with our
11
subsidiaries. A failure to comply with these restrictions, if not cured or
waived, would constitute a default under the indenture governing the notes and
the notes could become immediately due and payable, which would harm our
business and our results of operations, and we could be forced into bankruptcy
or liquidation.
Fraudulent conveyance laws may result in the subordination or avoidance of the
subsidiary guarantees of the notes.
Our obligations under the notes are fully and unconditionally and jointly
and severally guaranteed to the extent described in this prospectus by
substantially all of our direct and indirect wholly-owned subsidiaries.
Various federal and state fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by a court of competent jurisdiction
to subordinate or avoid all or part of the guarantees issued by our
subsidiaries.
To the extent that a court of competent jurisdiction were to find that
any of the subsidiary guarantors incurred a guaranty with the intent to hinder,
delay or defraud any present or future creditor or did not receive fair
consideration or reasonably equivalent value for issuing its guaranty and:
. was insolvent or rendered insolvent because of the issuance of its
guaranty;
. was engaged or about to engage in a business or transaction for which
its remaining assets constituted unreasonably small capital to carry
on its business; or
. intended to incur, or believed that it would incur, debts beyond its
ability to pay such debts as they matured,
then the court could subordinate or avoid all or part of its guaranty in favor
of its other creditors. To the extent that a subsidiary guaranty is voided as a
fraudulent conveyance or held unenforceable for any other reason, the holders of
the notes guaranteed by that subsidiary may no longer have a claim against the
subsidiary and would only be creditors of our company and any other subsidiary
guarantors. If any subsidiary guarantees were voided as fraudulent conveyances
and our company and the subsidiaries whose guarantees were not voided had
insufficient assets to repay the notes, holders of the notes would not receive
all payments of principal and interest on the notes.
We and our subsidiaries that have guaranteed the notes believe that the
issuance of the guarantees will not be a fraudulent conveyance. We cannot assure
you, however, that a court passing on this question would reach the same
conclusion.
We may be unable to finance a change of control offer for the notes.
Upon the occurrence of certain kinds of change of control events, each
holder of notes may require us to repurchase all or part of that holder's notes.
It is possible, however, that we will not have sufficient funds at the time of
the change of control event to make the required repurchase of these notes.
We cannot assure you that an active market will develop for our common stock and
the notes.
Our common stock and the notes were recently issued and we cannot assure
you that an active market for our common stock or the notes will develop or, if
such a market develops, that this market will be liquid.
Although in the future we may apply to have our common stock quoted on
the Nasdaq National Market upon satisfaction of the Nasdaq National Market's
minimum listing requirements, we cannot
12
assure you as to when, if at all, we will satisfy these listing requirements or
if our application will ultimately be approved.
The notes are not currently listed on any national securities exchange
or inter-dealer quotation service, and we do not anticipate doing so in the
future. Accordingly, we cannot assure you that a holder of the notes will be
able to sell these notes in the future or as to the price at which any sale of
the notes may occur. The liquidity of the market for the notes and the prices at
which the notes trade will depend upon the amount of notes outstanding, the
number of holders of the notes, the interest of securities dealers in
maintaining a market in the notes and other factors beyond our control. The
liquidity of, and the trading market for, the notes may also be adversely
affected by general declines in the market for high yield securities.
Risks Related to Operations
Our reorganization has negatively impacted, and may continue to negatively
impact, some of our relationships with customers, suppliers and employees.
The effect, if any, which our Chapter 11 case and the plan of
reorganization may have upon the continued operations of our company cannot be
accurately predicted or quantified. Our recent emergence from bankruptcy may
adversely affect our ability to negotiate favorable terms with vendors. Our
recent emergence from bankruptcy may also adversely affect our ability to retain
existing customers and to obtain new customers. Our failure to obtain favorable
terms from vendors or to retain existing customers or to obtain new customers
may harm our business, financial condition and results of operations.
We have a history of operating losses which we expect to continue and increase
for the near future.
We have experienced significant losses since we began operations and
expect to continue to incur significant losses for the foreseeable future. We
have incurred net losses attributable to common stockholders of approximately
$220.1 million, $132.2 million and $43.4 million for the fiscal years ended
September 30, 2001, September 30, 2000 and September 30, 1999, respectively, and
$131.1 million for the six months ended March 31, 2002. We cannot assure you
that our revenues will increase. If revenue grows more slowly than we
anticipate, or if operating expenses exceed our expectations, we may not become
profitable. Even if we become profitable, we may be unable to sustain our
profitability. In either of these cases, our business, financial condition,
results of operations and cash flows will be negatively impacted.
Our independent auditors have expressed doubt about our ability to continue as a
going concern, which may have a negative impact on our business.
In their report dated December 31, 2001, our independent auditors
stated that our financial statements for the fiscal year ended September 30,
2001 were prepared assuming that we would continue as a going concern, and noted
that these financial statements raised substantial doubt about our ability to
continue as a going concern. Our ability to continue as a going concern is
subject to our ability to generate positive cash flow from operations to support
our ongoing development and operating activities. The going concern
qualification in our independent auditor's report may negatively impact our
ability to do so and, as a result, harm our business and results of operations.
There can be no assurance that we will retain customers.
We have experienced rapid growth and development in a relatively short
period. One of our biggest challenges as we have grown has been to limit our
customer churn, and the successful implementation of our business plan depends
upon a reduction in the percentage of our customers that stop using our
services. Customer churn increased following our bankruptcy filing, and failure
to reduce customer churn in the future could harm our business, financial
condition and results of operations.
Our success will depend on our ability to integrate, operate and maintain and
upgrade our network and facilities.
A key element of our business strategy is the maintenance and upgrading
of our facilities and network, which has required, and will continue to require,
management time and the expenditure of periodic amounts of capital. Any
interruption in our ability to deliver services over our network due to market
disruptions or third party insolvencies may make us less attractive to future
customers and may hamper our ability to retain our current customers which, in
turn, could adversely affect our entire business.
We cannot assure you that our telecommunications providers will continue to
service us or that we could replace them on comparable terms or at all.
Our existing network relies entirely on 16 third party data
communications and telecommunications providers, 10 of whom are located in the
United States and six of whom are located in Europe. These carriers are subject
to price constraints, including tariff controls, that in the future may
13
be relaxed or lifted. In addition, certain of these providers, including
WorldCom and Global Crossing, have recently filed for protection under Chapter
11 under the U.S. Bankruptcy Code, which may affect the availability and quality
of the services that these entities provide. Price increases or the lack of
service availability and quality could adversely affect the costs of maintaining
our network and our ability to maintain or grow our business.
Our operating costs will increase if we fail to maintain adequate peering
relationships.
The Internet includes a number of Internet service providers that
operate their own networks and connect with each other at various points under
arrangements known as "peering" arrangements. It is more costly and less
efficient to operate a network without peering arrangements. Consequently, we
must maintain peering relationships to maintain high network performance levels
without having to pay excessive amounts for the transmission of data. These
arrangements are not subject to regulation and the terms, conditions and costs
can be changed or canceled by the provider over time. While we currently have
agreements to peer with a number of entities, we may not be able to maintain a
favorable cost structure for data transmission with our peering partners and,
consequently, our business and results of operations may be negatively impacted.
We may not be able to obtain computer hardware and software on the scale and at
the times we need at an affordable cost.
We rely on outside vendors to supply us with computer hardware,
software and networking equipment. We primarily buy these products from Cisco,
Compaq, Juniper Networks and Sun Microsystems. Consequently, our expertise is
concentrated in products from these manufacturers. We also rely on Cisco for
network design and installation services. If we are unable over an extended
period of time to obtain the products and services that we need on a timely
basis and at affordable prices, it will harm our business, financial condition
and results of operations.
We may make investments or acquisitions that are not successful.
We may make investments in or acquire complementary businesses,
products, services or technologies. Consequently, we are subject to the
following risks:
. we may not be able to make investments or acquisitions on terms
which prove advantageous;
. acquisitions may cause a disruption in our ongoing business,
distract our management and other resources and make it difficult to
maintain the operations, organization and procedures of our company
or the acquired business; and
. we may not be able to retain key employees of the acquired business
or to maintain good relations with its customers or suppliers.
14
Because we are dependent on computer systems, a systems failure would cause a
significant disruption to our business.
Our business depends on the efficient and uninterrupted operation of
our computer and communications hardware systems and infrastructure. We
currently maintain most of our computer systems in our facilities in New York
City, New York, London, England and Santa Clara, California. While we have taken
precautions against systems failure, interruptions could result from natural
disasters as well as power loss, our inability to acquire fuel for our backup
generators, telecommunications failure, terrorist attacks and similar events. We
also lease telecommunications lines from local, regional and national carriers,
whose service may be interrupted. Our business, financial condition and results
of operations could be harmed by any damage or failure that interrupts or delays
our operations.
If our security measures are inadequate, our ability to attract and retain
customers may be adversely affected.
We have taken measures to protect the integrity of our infrastructure
and the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. Security breaches that result in
access to confidential information could damage our reputation and expose us to
a risk of loss or liability.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to contractually limit our
liability in such instances, the occurrence of these problems may result in
claims against us or liability on our part. These claims, regardless of their
ultimate outcome, could result in costly litigation and could harm our business
and reputation and impair our ability to attract and retain customers for our
services.
Our business depends on the continued growth, use and improvement of the
Internet.
Our services are targeted toward businesses which use the Internet. The
Internet is subject to a high level of uncertainty and is characterized by
rapidly changing technology, evolving industry standards and frequent new
service introductions. Accordingly, you should consider the risks and
difficulties frequently encountered in new and rapidly evolving markets.
Critical issues concerning the commercial use of the Internet remain
unresolved and may affect the growth of Internet use, especially in the market
we target. Despite growing interest in the many commercial uses of the Internet,
many businesses have been deterred from purchasing Internet services for a
number of reasons, including:
. inadequate protection of the confidentiality of stored data and
information moving across the Internet;
. inconsistent quality of service;
. inability to integrate business applications on the Internet;
. the need to deal with multiple vendors, whose products are
frequently incompatible;
15
. lack of availability of cost-effective, high-speed services; and
. concern over the financial viability of Internet service providers.
Capacity constraints caused by growth in Internet usage may, unless
resolved, impede further growth in Internet use. If the number of users on the
Internet does not increase and commerce over the Internet does not become more
accepted and widespread, demand for our services may decrease and, as a result,
our business would be harmed.
Significant technological changes could render our existing services obsolete.
We must adapt to our rapidly changing market by continually improving
the responsiveness, functionality and features of our services to meet our
customers' needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, our
business, financial condition and results of operations will be harmed.
Competition for the Internet services that we provide is intense and we expect
that competition will continue to intensify.
Because we offer a broad range of services, we encounter competition
from numerous other businesses which provide one or more similar services.
Our competitors include other Internet service providers with a
significant national or global presence that focus on business customers, such
as IBM, Loudcloud/EDS, Genuity, DIGEX, NaviSite and UUNet. Our competitors also
include telecommunications companies, such as AT&T, British Telecom, Cable &
Wireless, Level 3, WorldCom, Qwest and Sprint. Many of our existing competitors,
as well as a number of potential new competitors, have:
. longer operating histories;
. greater name recognition;
. larger customer bases;
. larger networks;
. more and larger facilities; and
. significantly greater financial, technical and marketing resources.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in the industry, we could encounter
significant pricing pressures. These pricing pressures could result in
significantly lower average selling prices for our services. For example,
telecommunications companies may be able to provide customers with reduced
communications costs in connection with their Internet access services,
significantly increasing pricing pressures on us. We may not be able to offset
the effects of any price reductions with an increase in the number of our
customers, higher revenue from value-added services, cost reductions or
otherwise. In addition, Internet access service businesses are likely to
encounter consolidation in the near future, which could result in increased
price and other competition.
16
We are dependent upon and may be unable to retain our executive officers, and if
we lose any one of them, our business may suffer.
We depend upon the continued contributions of our executive officers.
Our senior management team is important because of its extensive experience in,
and knowledge of, our industry. The loss or unavailability to us of any member
of our senior management team could significantly harm us.
Competition for qualified personnel is intense and we may not be able to attract
or retain the personnel we need in each of the critical areas of our business.
Our future success depends on our ability to attract and retain key
personnel for management, technical, sales and marketing and customer support
positions. The failure to attract or retain qualified personnel in each of these
critical areas could adversely affect the ability of our business to perform its
functions.
Changes in government regulations related to the Internet could restrict our
activities, expose us to liability or otherwise adversely affect our business.
There are an increasing number of laws and regulations pertaining to
the Internet. These laws or regulations relate to liability for content and
information received from or transmitted over the Internet, user privacy and
security, taxation, enforcing online contracts, consumer protection and other
issues concerning services. The government may also seek to regulate some
aspects of our activities as basic telecommunications services. Moreover, the
applicability to the Internet of existing laws governing copyright, trademark,
trade secret, obscenity, libel, consumer protection, personal privacy and other
issues is uncertain and developing. We cannot predict the impact, if any, that
future regulation or regulatory changes may have on our business.
We may be liable for violating the intellectual property rights of third
parties.
We do not believe that the intellectual property important to the
operation of our business, whether owned by us or licensed to us by a third
party, infringes or violates the intellectual property rights of any other
party. Nonetheless, a third party may bring a claim of infringement against us
or any of our material suppliers and we may be forced to pay for a license to
continue using the intellectual property. There is no guarantee that we could
obtain such a license, or that it would be available on reasonable terms.
Alternatively, we may be forced to defend ourselves against infringement claims
in litigation, which would be costly and could result in us having to pay
damages to third parties. We have taken steps to contractually limit our
liability for the use of intellectual property licensed to us by third parties.
However, there can be no guarantee that we have adequate protection.
We may be liable for the material that our customers distribute over the
Internet.
The law relating to the liability of online service providers, private
network operators and Internet service providers for content and information
carried on or disseminated through their networks is currently unsettled. While
we have taken steps to contractually limit our liability in these areas, we may
become subject to legal claims relating to the content of the web sites we host.
For example, lawsuits may be brought against us claiming that material
inappropriate for viewing by young children can be accessed from the web sites
that we host. Claims could also involve matters such as defamation, invasion of
privacy, copyright and trademark infringement. Internet service providers have
been sued in the past, sometimes successfully, based on the material
disseminated over their networks. We may take additional measures to reduce our
exposure to these risks, which could be costly or result in some
17
customers not doing business with us. In addition, defending ourselves against
claims, or paying damage awards to third parties, could strain our management
and financial resources.
Our results of operations fluctuate on a quarterly and annual basis and we
expect to continue experiencing fluctuations in our future quarterly and annual
results of operations.
Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing fluctuations in our future quarterly and annual
results of operations due to a variety of factors, many of which are outside our
control, including:
. demand for and market acceptance of our services;
. introductions of new services by us and our competitors;
. capacity utilization of our data centers and assets;
. timing of customer installations;
. our mix of services sold;
. customer retention;
. the timing and magnitude of our capital expenditures;
. changes in our pricing policies and those of our competitors;
. fluctuations in bandwidth used by customers;
. our retention of key personnel;
. reliable continuity of service and network availability;
. costs related to the acquisition of network capacity;
. arrangements for interconnections with third-party networks;
. the provision of customer discounts and credits;
. the introduction by third parties of new Internet and networking
technologies;
18
. licenses and permits required to construct facilities, deploy
networking infrastructure or operate in the United States and
foreign countries; and
. other general economic factors.
For these and other reasons, in some future fiscal periods our results
of operations may fall below the expectations of securities analysts or
investors, which could negatively affect the market price of our securities.
We may not be successful in international markets.
Because we have limited experience operating in markets outside the
United States and the United Kingdom, we may have difficulty adapting our
services to different international market needs. We may also be unsuccessful in
our efforts to market and sell these services to customers abroad. In addition,
we may find it more difficult and expensive to hire and train employees and to
manage international operations together with our United States operations. If
we fail to successfully address these risks, our international operations may be
materially and adversely affected.
You may be unable to recover against Arthur Andersen LLP.
Arthur Andersen LLP was previously our independent accountant. As
permitted by Rule 437a of the Securities Act of 1933, as amended, we have not
filed with the registration statement of which this prospectus is a part the
written consent of Arthur Andersen LLP. Because Arthur Andersen LLP has not
consented to the inclusion of their report with respect to our audited financial
statements for the fiscal years ended September 30, 2001, September 30, 2000 and
September 30, 1999 included in this prospectus, you will be unable to recover
against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for
any untrue statements of a material fact contained in our financial statements
or any omission to state a material fact required to be stated therein.
19
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains both historical and forward-looking
statements. All statements other than statements of historical fact are, or may
be deemed to be, forward-looking statements. These forward-looking statements
are not based on historical facts, but rather reflect our current expectations
concerning future results and events. These forward-looking statements generally
can be identified by the use of statements that include phrases such as
"believe," "expect," "anticipate," "intend," "plan," "foresee," "likely," "will"
or other similar words or phrases. Similarly, statements that describe our
objectives, plans or goals are or may be forward-looking statements. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors which may cause our actual results, performance or achievements to
be different from any future results, performance and achievements expressed or
implied by these statements. You should carefully review all information,
including the financial statements and the notes to the financial statements
included in this prospectus.
In addition to the risk factors described in "Risk Factors" beginning
on page 11 of this prospectus, the following important factors could affect
future results, causing these results to differ materially from those expressed
in our forward-looking statements:
. our ability to maintain and increase revenue by retaining existing
customers and attracting new customers;
. our ability to match our operating cost structure with revenue to
achieve positive cash flow, including possible cost reductions, if
necessary;
. our ability to conduct business with critical vendors on acceptable
terms;
. the sufficiency of existing cash and cash flow to complete our
business plan and fund our working capital requirements;
. the insolvency of vendors and other parties critical to our
business;
. our existing debt obligations and history of operating losses;
. our ability to integrate, operate and upgrade/downgrade our network;
. our ability to recruit and retain sufficient and qualified personnel
needed to staff our operations;
. the accuracy of the assumptions on which our pro forma financial
statements are based;
. our ability to raise additional capital, if necessary;
. potential marketplace or technology changes, rendering existing
products and services obsolete; and
. changes in or the lack of anticipated changes in the regulatory
environment, including potential legislation increasing our exposure
to content distribution and intellectual property liability.
These factors and the other risk factors described in this prospectus are
not necessarily all of the important factors that could cause our actual results
to differ materially from those expressed in any of our forward-looking
statements. Other unknown or unpredictable factors also could harm our future
results. The forward-looking statements included in this prospectus are made
only as of the date of this prospectus and we cannot assure you that projected
results or events will be achieved. We do not assume any responsibility for
updating the forward-looking information contained in this prospectus.
20
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
our common stock and the notes offered by the selling holders.
DIVIDEND POLICY
Other than payment of dividends on our preferred stock exchanged for
common stock pursuant to the plan of reorganization, we have not historically
paid dividends, and we do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance operations and the expansion of our business. Any future determination
to pay cash dividends will be at the discretion of our board of directors and
will be dependent upon our financial condition, operating results, capital
requirements and other factors that our board of directors deems relevant. In
addition, the indenture governing the notes restricts our ability to pay
dividends.
21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected historical consolidated financial information has
been derived from our historical financial statements and should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the consolidated financial statements and related
notes that are included elsewhere in this prospectus. The consolidated balance
sheet data and consolidated statement operations data as of and for the fiscal
years ended September 30, 2001, September 30, 2000, September 30, 1999,
September 30, 1998 and September 30, 1997 have been derived from our
consolidated financial statements and related notes which have been audited by
Arthur Andersen LLP, including our consolidated financial statements and related
notes for each of the three years in the period ended September 30, 2001
included elsewhere in this prospectus, as stated in the report of Arthur
Andersen LLP presented elsewhere in this prospectus. The selected financial data
for the six months ended March 31, 2002 and March 31, 2001 have been derived
from our unaudited consolidated financial statements which, in our opinion,
contain all adjustments, consisting of normal recurring adjustments, necessary
for a fair presentation of the financial condition, results of operations and
cash flows for these periods. Historical results of operations may not be
indicative of results to be expected for any future period.
Six Months Six Months
Ended March Ended March Fiscal Year Ended September 30,
31, 2002 31, 2001 2001 2000 1999 1998 1997
-------- -------- ---- ---- ---- ---- ----
(in millions, except share and per share amounts)
STATEMENT OF OPERATIONS DATA:
Revenue .................................. $ 44,767 $ 53,018 $ 104,210 $ 81,287 $ 33,817 $ 20,595 $ 17,400
Operating costs and expenses:
Cost of revenue ....................... 19,399 20,948 40,609 42,513 22,184 13,322 13,699
Selling, general and administrative ... 46,150 59,072 128,321 98,113 36,495 10,696 6,036
Restructuring charges ................. 48,447 38,109 56,109 -- -- -- --
Impairment of intangible assets ....... 3,220 -- -- -- -- -- --
Depreciation and amortization ......... 24,186 15,547 36,657 18,228 6,329 1,310 675
----------- ----------- ----------- ----------- ----------- ----------- ----------
Total operating costs and
expenses .......................... 141,402 133,676 261,696 158,854 65,008 25,328 20,410
Loss from operations ..................... (96,635) (80,658) (157,486) (77,567) (31,191) (4,733) (3,010)
Interest and financing expenses ....... (34,060) (32,598) (65,128) (57,831) (18,386) (8,376) (177)
Interest income ....................... 1,840 10,915 13,282 24,749 6,192 1,953 72
Other income .......................... 328 1,488 2,147 2,816 -- -- --
Other expense ......................... (690) (2,065) (3,526) (1,037) -- -- --
Minority interest in subsidiary ....... 1,344 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Loss before extraordinary loss and
cumulative effect of a change
in accounting principle .................. (127,873) (102,918) (210,711) (108,870) (43,385) (11,156) (3,115)
Extraordinary loss on early
extinguishment of debt ................ -- -- -- (17,577) -- -- --
Cumulative effect of a change in
accounting principle .................. -- (2,332) (2,332) -- -- -- --
Net loss ................................. (127,873) (105,250) (213,043) (126,447) (43,385) (11,156) (3,115)
Dividends and accretion on
preferred stock ....................... (3,178) (3,496) (7,104) (5,768) -- -- --
Net loss attributable to common
stockholders ............................. (131,051) (108,746) (220,147) (132,215) (43,385) (11,156) (3,115)
----------- ----------- ----------- ----------- ----------- ----------- ----------
Basic and diluted loss per share
attributables to common stockholders'
before extraordinary loss and effect
of a change in accounting principle ... (3.33) (2.80) (5.66) (3.23) (1.73) (0.77) (0.25)
Extraordinary loss per share .......... -- -- -- (0.50) -- -- --
Cumulative effect of a change
in accounting principle ............. -- (0.06) (0.06) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- ----------
Basic and diluted loss per share
attributable to common stockholders ...... $ (3.33) $ (2.86) $ (5.72)$ (3.73) $ (1.73) $ (0.77) $ (0.25)
=========== =========== =========== =========== =========== =========== ==========
Weighted average common shares
outstanding--basic and diluted ........... 39,330,033 38,011,488 38,476,909 35,484,040 25,116,800 14,503,176 12,300,840
=========== =========== =========== =========== =========== =========== ==========
22
OTHER FINANCIAL DATA:
Cash flows provided by (used in)
operating activities ................... $ (35,027) (69,474) $(140,543) $ (94,318) $(36,897) $ 115 $ 2,532
Cash flows used in investing
activities ............................. 12,949 75,342 113,271 149,939 58,774 97,387 1,542
Cash flows (used in) provided by
financing activities ................... (4,211) 391 388 509,395 135,589 156,344 4,133
Capital expenditures ................... 21,395 104,811 166,303 150,876 98,110 31,085 2,082
EBITDA (1) ............................. (20,782) (27,002) (64,720) (59,339) (24,862) (3,423) (2,335)
Deficiency of earnings to fixed
charges (2) ............................ $(131,538) $(115,258) $(228,999) $(116,014) $(47,152) $(12,254) $(3,115)
BALANCE SHEET DATA:
Cash, cash equivalents, short term
investments and marketable
securities ............................. $ 59,385 $ 218,577 $ 113,112 $ 378,510 $111,412 $ 76,111 $ 2,401
Restricted cash and investments 26,831 37,430 33,870 43,178 45,039 60,480 325
Working capital ........................ 1,680 192,621 78,340 366,139 101,216 75,859 1,980
Total assets ........................... 450,475 641,277 552,988 729,591 302,518 182,226 11,025
Current portion of long term debt....... 6,299 4,299 6,687 2,173 2,088 2,398 2,336
Long-term debt, less current
portion ................................ 627,394 626,191 630,750 621,809 161,005 159,091 923
Stockholders' (deficit) equity ......... $(367,907) $(130,545) $(237,325) $ (18,030) $106,405 $ 2,719 $ 5,014
___________
(1) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included in our financial statements because our
management believes that it is a useful tool for measuring our ability to
service our debt. However, EBITDA does not represent cash flows from
operations, as defined by U.S. generally accepted accounting principles. In
addition, EBITDA should not be considered a substitute for net income or
net loss as an indicator of our operating performance or cash flows as a
measure of our liquidity. EBITDA as presented may not be comparable to
similarly titled measures reported by other companies because not all
companies calculate EBITDA in an identical manner.
(2) Deficiency of earnings to fixed charges is defined as the difference
between the pre-tax loss and the total of fixed charges and preferred stock
dividends. Fixed charges consist of interest charges and amortization of
debt discount and offering costs, whether expensed or capitalized, and
one-third of rental expense, which we believe to be representative of
interest.
23
PRO FORMA FINANCIAL DATA
The following unaudited pro forma financial data have been derived by the
application of pro forma adjustments to the consolidated financial statements
included elsewhere in this prospectus. The unaudited pro forma condensed
consolidated balance sheet at March 31, 2002 give effect to our reorganization
as if it had occurred on March 31, 2002. The unaudited pro forma consolidated
statement of operations data for the fiscal year ended September 30, 2001 give
effect to our reorganization as if it had occurred on October 1, 2000. The
unaudited pro forma consolidated statement of operations data for the six month
period ended March 31, 2002 gives effect to our reorganization as if it had
occurred on October 1, 2001.
The pro forma adjustments are described in the accompanying notes. The pro
forma financial data does not purport to represent what our results of
operations actually would have been if our reorganization had been consummated
on the date or for the periods indicated, or what such results will be for any
future date or for any future period. The assigned equity values are based upon
the reorganized value of the ongoing business and include significant estimates
made by management based on facts and circumstances currently available.
Valuation methodologies require the input of highly subjective assumptions.
Actual future results and events could differ substantially from current
estimates and assumptions. Any changes in valuation could affect our balance
sheet. The unaudited pro forma financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the consolidated financial statements and the notes thereto
included elsewhere in this prospectus.
Unaudited Pro Forma Condensed Consolidated Balance Sheet
March 31, 2002
Actual Pro forma Pro forma
March 31, 2002 Adjustments March 31, 2002
-------------- ----------- --------------
(in millions)
Assets:
Total current assets .................................... $101,476 -- $101,476
Property, plant and equipment, net ...................... 316,396 -- 316,396
Debt issuance costs, net ................................ 24,436 $ (23,581)(1)(2) 855
Other assets ............................................ 8,167 -- 8,167
-------- --------- --------
Total assets ......................................... $450,475 $ (23,581) $426,894
======== ========= ========
Liabilities and Stockholders' (Deficit) Equity:
Capital lease and other obligations ..................... $ 6,299 $ -- $ 6,299
Accounts payable ........................................ 5,694 -- 5,694
Accrued liabilities ..................................... 44,053 (2,713)(3) 41,340
Accrued interest ........................................ 43,750 (43,750)(4) --
-------- --------- --------
Total current liabilities ............................... 99,796 (46,463) 53,333
Capital lease obligations, net of current portion ....... 7,085 -- 7,085
Mortgage payable ........................................ 20,309 -- 20,309
Senior Notes ............................................ 600,000 (600,000)(5) --
Senior Secured Notes .................................... -- 120,000(6) 120,000
Other long term liabilities ............................. 3,062 -- 3,062
-------- --------- --------
Total liabilities ....................................... $730,252 $(526,463) $203,789
======== ========= ========
24
Minority interest in subsidiary ............................. 4,435 -- 4,435
Redeemable Convertible Preferred Stock ...................... 83,695 (83,695)(7) --
Stockholders' (Deficit) Equity:
Common stock ................................................ 419 -- 419
Additional paid-in capital .................................. 167,929 173,664(3)(7)(8) 341,593
Deferred compensation ....................................... (5,056) -- (5,056)
Accumulated other comprehensive income ...................... (4,206) -- (4,206)
Accumulated deficit ......................................... (526,993) 412,913(9) (114,080)
--------- --------- ---------
Total stockholders' (deficit) equity ........................ (279,777) 502,882 223,105
--------- --------- ---------
Total liabilities and stockholders' equity .................. $ 450,475 $ (23,581) $ 426,894
========= ========= =========
__________
(1) Adjustment to eliminate the deferred costs amortization expense at
March 31, 2002 associated with the 12.5% notes.
(2) Write-off of deferred costs associated with the 12.5% notes and
restructuring-related expenses.
(3) Adjustment to eliminate preferred stock dividends as a result of
cancellation of preferred stock in connection with the plan of
reorganization.
(4) Adjustment to eliminate accrued interest on the 12.5% notes.
(5) Adjustment to eliminate the 12.5% notes.
(6) Adjustment to record the notes.
(7) Adjustment to eliminate preferred stock as a result of cancellation of
preferred stock in connection with the plan of reorganization.
(8) Adjustment to record the equity value of our company following the
effective date of the plan of reorganization.
(9) Adjustment to record the extraordinary gain on cancellation of the 12.5%
notes.
25
Unaudited Pro Forma Consolidated Statement of Operations
For The Fiscal Year Ended September 30, 2001
Actual Pro forma Pro forma
September 30, 2001 Adjustments September 30, 2001
------------------ ----------- ------------------
(dollars in millions, except share and per share amounts)
Revenue ............................................... $ 104,210 -- $ 104,210
Operating costs and expenses:
Cost of revenue ............................... 40,609 -- 40,609
Selling, general and administrative ........... 128,321 -- 128,321
Restructuring charges ......................... 56,109 -- 56,109
Depreciation and amortization ................. 36,657 (1,139)(1) 35,518
----------- ------- -----------
Total operating costs and expenses ......... 261,696 (1,139) 260,557
Loss from operations: ................................. (157,486) (156,347)
Interest and financing expense ................ (65,128) 49,368(2)(3) (15,760)
Interest income ............................... 13,282 -- 13,282
Other income .................................. 2,147 -- 2,147
Other expense ................................. (3,526) -- (3,526)
----------- ------- -----------
Loss before cumulative effect of a change
in accounting principle ............................... (210,711) 50,507 (160,204)
=========== ======= ===========
Basic and diluted loss per share attributable to
common stockholders before cumulative effect of
change in accounting principle (4) .................... $ (5.66) $ (8.76)
=========== ===========
Weighted average common shares outstanding-basic
and diluted ........................................... 38,476,909 18,288,889
=========== ===========
________
(1) Adjustment to remove amortization expense of deferred costs.
(2) Adjustment to reverse interest expense on 12.5% notes.
(3) Adjustment to record interest expense on the notes.
(4) The calculation of basic and diluted loss per share attributable to
common stockholders for the fiscal year ended September 30, 2001
includes $7,104 of dividends and accretion on preferred stock which, on
a pro forma basis, is eliminated.
26
Unaudited Pro Forma Condensed Consolidated Statement of Operations
For the Six Months Ended March 31, 2002
Pro forma
Actual Six Months
Six Months Ended Pro forma Ended March
March 31, 2002 Adjustments 31,2002
---------------- ----------- -------------
(dollars in millions, except per share amounts)
Revenue ........................................... $ 44,767 -- $44,767
Operating costs and expenses:
Cost of revenue ................................ 19,399 -- 19,399
Selling, general and administrative ............ 46,150 -- 46,150
Restructuring charges .......................... 48,447 -- 48,447
Impairment of intangible assets ................ 3,220 -- 3,220
Depreciation and amortization .................. 24,186 (629)(1) 23,557
-------- ------- -------
Total operating costs and expenses ................ 141,402 (629) 140,773
Loss from operations .............................. (96,635) -- (96,006)
Interest and financing expense: ................... (34,060) 24,650(2)(3) (9,410)
Interest income ................................ 1,840 -- 1,840
Other income ................................... 328 -- 328
Other expense .................................. (690) -- (690)
Minority interest .............................. 1,344 -- 1,344
-------- ------- -------
Net loss .......................................... ($127,873) 25,279 ($102,594)
======== ======= ========
Basic and diluted loss per share attributable to
common stockholders (4) ........................... $ (3.33) $ (5.61)
======= =======
Weighted average common shares outstanding-basic
and diluted ....................................... 39,330,033 18,288,889
========== ==========
__________
(1) Adjustment to remove amortization expense of deferred costs.
(2) Adjustment to reverse interest expense on 12.5% notes.
(3) Adjustment to record interest on the notes.
(4) The calculation of basic and diluted loss per share attributable to
common stockholders for the six months ended March 31, 2002 includes
$3,178 of dividends and accretion on preferred stock which, on a pro
forma basis, is eliminated.
27
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and the accompanying notes and "Selected Consolidated
Financial Data" included elsewhere in this prospectus. This discussion contains
forward-looking statements that involve risks and uncertainties. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of numerous factors, including the risks discussed in
"Risk Factors" and elsewhere in this prospectus.
Introduction
Our company was founded in 1989 and undertook a major expansion plan in
1998 in order to more aggressively pursue opportunities resulting from the
growth of the Internet. In April 1998, we completed a $160.0 million offering of
13% senior notes, which we refer to in this prospectus as the 13% notes. In June
and July 1999, we completed construction of our initial Internet data center
facilities in New York City, New York, London, England and Santa Clara,
California and began operations at each facility.
In March 1999, we completed a public offering of 16,000,000 shares of
common stock, resulting in net proceeds to our company of approximately $136.6
million.
In December 1999, we completed the private placement of 80,000 shares
of preferred stock to affiliates of Hicks, Muse, Tate & Furst Incorporated,
resulting in net proceeds to our company of $75.3 million.
In February 2000, we completed a $600.0 million debt financing to fund
the continued expansion of our facilities and network and a tender offer to
purchase all of the outstanding 13% notes. The purchase price of the tender,
completed on February 8, 2000, was 106.5% of the $160.0 million principal amount
of the 13% notes, plus all accrued and unpaid interest.
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the plan of
reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection.
For fiscal periods ended on or before March 31, 2001, we reported our
results of operations in two operating segments: the Internet Division and the
Server Sales and Integration Division. The Internet Division provides complex
managed hosting, dedicated Internet access and application services, such as
streaming media, network security and server administration and network
monitoring. The Server Sales and Integration Division provides Internet-related
hardware and software, systems and network integration. Revenue from the
Internet Division has grown significantly as a percentage of total revenue,
increasing from 6% in 1996 to 94% in the three-month period ended March 31,
2001. Effective April 1, 2001 we reported our results of operations in one
operating segment under the provisions of Statement of Financial Accounting
Standards, or SFAS, No. 131.
28
The largest component of our total revenue is complex hosting services
and connectivity, including both minimum committed amounts and overages. In
addition to fees based on bandwidth usage, we charge certain customers monthly
fees for the use of our physical facilities, which we refer to in this
prospectus as complex hosting. Our complex hosting contracts typically range
from one to three years. The second largest component of our total revenue is
dedicated Internet access services to business customers. Our dedicated access
customers typically sign one or two-year contracts that provide for fixed,
monthly-recurring service fees and a one-time installation fee. Application
services are charged on a monthly fixed price or time and materials basis.
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.
We depreciate our capital assets on a straight-line basis over the
useful life of the assets, ranging from three to 40 years. We amortize our
identifiable intangible assets, primarily customer lists, on a straight-line
basis over periods ranging up to 36 months. In addition, we amortize debt
issuance costs associated with our debt financings over the term of those
obligations using the effective interest method.
We historically have experienced negative cash flow from operations and
have incurred net losses. Our ability to generate positive cash flow from
operations and achieve profitability is dependent upon our ability to continue
to grow our revenue base and achieve further operating efficiencies. For the six
months ended March 31, 2002 and March 31, 2001, we generated negative cash flows
from operations of approximately $ 35.0 million and $69.5 million, respectively,
and incurred net losses of approximately $127.9 million and $105.3 million,
respectively. As of March 31, 2002, we had an accumulated deficit of
approximately $527.0 million.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of
operations are based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of our financial statements requires us to
make estimates that affect the reported amounts of assets, liabilities, revenue
and expenses and related disclosures of contingent assets and liabilities. We
base our accounting estimates on historical experience and other factors that
are believed to be reasonable under the circumstances. However, actual results
may vary from these estimates under different assumptions or conditions. The
following is a summary of our critical accounting policies and estimates:
Going Concern Assumption
Our financial statements have been prepared on a going concern basis,
which assumes the realization of assets and liquidation of liabilities in the
ordinary course of business. The application of the going concern assumption is
dependent upon our ability to generate profitable operations to support our
ongoing development and operating activities. Our financial statements do not
include any adjustments that would be necessary if the going concern assumption
was not appropriate, because our management is of the opinion that sufficient
working capital will be obtained from operations to meet our liabilities and
commitments as they become payable.
29
Revenue Recognition
We recognize 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 term of the underlying service contracts and/or
the customer relationship which, in the case of our company, range from 12 to 36
months.
Revenue consists primarily of managed hosting and dedicated Internet
access fees, sales of systems administration and application services such as
streaming media, network security and administration and network monitoring.
Monthly service revenue related to managed hosting and Internet access
is recognized over the period that services are provided. Revenue derived from
application services is recognized as the project progresses. Projects are
generally completed within less than one year. Payments received in advance of
providing services are deferred until the period that these services are
provided.
Cost of Revenue
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting customers. Telecommunications costs include
the cost of providing local loop costs for connecting dedicated access customers
to our network, leased line and associated costs related to connecting with our
peering partners and costs associated with leased lines connecting our
facilities to our backbone and aggregation points of presence.
Concentrations of Credit Risk
Financial instruments that potentially subject us to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, restricted cash and investments, marketable securities and accounts
receivable. We maintain 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.
We believe that concentrations of credit risk with respect to trade
accounts receivable are limited due to the large number and geographic
dispersion of our customers. We perform ongoing credit evaluations of our
customers and maintain reserves for potential losses. Our management makes
estimates of the uncollectibility of our trade accounts receivable on a monthly
basis.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, subject to adjustment
for impairment, less accumulated depreciation or amortization computed on the
straight-line method. Buildings and building improvements are depreciated over
their estimated useful life of up to 40 years. Computer hardware and software,
network equipment and furniture and equipment are depreciated over their
estimated useful lives, ranging from three to seven years. Leasehold
improvements are amortized over the term of the lease or life of the asset,
whichever is shorter.
30
Long-Lived Assets
We review the carrying amount of long-lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount may not be
recoverable. Measurement of any impairment would include a comparison of
estimated future operating cash flows anticipated to be generated during the
remaining life of the asset to the net carrying value of the asset.
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. We
provide a valuation allowance on net deferred tax assets when it is more likely
than not that these assets will not be realized.
Six Months Ended March 31, 2002 As Compared To The Six-Months Ended March 31,
2001
Revenue
Total revenue for the six-month period ended March 31, 2002 decreased 15.6%
to $44.8 million from $53.0 million for the six-month period ended March 31,
2001. This decrease was primarily attributable to the decrease in lower margin
hardware sales, the increase in customer churn and the reluctance of new
customers to contract with us during our bankruptcy proceedings.
Cost of Revenue
Cost of revenue for the six-month period ended March 31, 2002 was $19.4
million, or 43.3% of total revenue, as compared to $20.9 million, or 39.5% of
total revenue, for the six-month period ended March 31, 2001. The decrease in
cost of revenue was primarily attributable to a decrease in revenue. Cost of
revenue as a percentage of total revenue increased during the six month period
ended March 31, 2002 as a result of the fixed cost nature of our network.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six-month period ended
March 31, 2002 were $46.2 million, or 103.1% of total revenue, as compared to
$59.1 million, or 111.5% of total revenue, for the six-month period ended March
31, 2001. Approximately $9.6 million, or 74.4% of this decrease, was
attributable to a decrease in salaries and benefits which resulted from the
decrease in the number of our employees from approximately 860 as of March 31,
2001 to approximately 380 as of March 31, 2002. Approximately $4.7 million of
this decrease resulted from a decrease in marketing and professional expenses.
Also related to this decrease was the $1.0 million decrease in employees, travel
and entertainment expense and a decrease in bad debt expense of $1.0 million.
These decreases were offset by an increase in rent expense of $3.3 million and
an increase in technology license expense of $0.9 million.
Restructuring Charges
We recorded a charge of approximately $48.4 million in the six-month period
ended March 31, 2002, which was attributable to lease termination and other
equipment related expenses associated with the execution of the plan of
reorganization, pursuant to which we took an estimated charge associated with
the reduction of certain lease obligations and write-off of leasehold
improvements and equipment related
31
to certain Internet data center lease obligations and the closure of certain
network access points and network aggregation points.
We recorded a charge of approximately $38.1 million in the six-month period
ended March 31, 2001, which was attributable to the restructuring associated
with the execution of our revised business plan, pursuant to which we plan to
construct fewer Internet data centers, and have taken an estimated charge
associated with the termination of certain leases and reduction of certain
commitments for surplus power and environmental equipment related to the
Internet data center expansion. This charge includes estimated lease termination
costs in addition to a write-off of the costs of construction in progress
associated with equipment, capitalized interest, consulting and legal fees and
construction and pre-construction related costs previously capitalized.
Depreciation and Amortization
Depreciation and amortization increased to $24.2 million for the six-month
period ended March 31, 2002 as compared to $15.5 million for the six-month
period ended March 31, 2001. The increase in depreciation and amortization was
primarily related to the increase in construction costs and equipment purchases
related to the network infrastructure enhancements of our Internet data centers
in New York City, New York, London, England and Santa Clara.
Interest and Financing Expense and Interest Income
Interest and financing expense increased to $34.1 million for the six-month
period ended March 31, 2002 as compared to $32.6 million for the six-month
period ended March 31, 2001. The increase in interest and financing expense was
due to capitalized interest on the build-out of our U.S. and U.K. Internet data
centers through March 31, 2001. The decrease in interest income to $1.8 million
for the six-month period ended March 31, 2002 from $10.9 million for the six
month period ended March 31, 2001 reflected the reduced cash position derived
from the net proceeds of our February 2000 debt financing, our December 1999
issuance of preferred stock and the impact of declining interest rates compared
to the six-month period ended March 31, 2001.
Minority Interest in Subsidiary.
Minority interest credit during the six months ended March 31, 2002
resulted from the consolidation of a minority owned subsidiary with our results
of operations due to our effective control of this subsidiary.
Net Loss and Net Loss Attributable to Common Stockholders
As a result of the factors described above, we reported a net loss of
$127.9 million and net loss attributable to common stockholders of $131.1
million, or $3.33 per share, for the six-month period ended March 31, 2002 as
compared to a net loss of $105.3 million and a net loss attributable to common
stockholders of $108.7 million, or $2.86 per share, for the six-month period
ended March 31, 2001.
Fiscal Year Ended September 30, 2001 As Compared To The Fiscal Year Ended
September 30, 2000
Revenue
Revenue for the fiscal year ended September 30, 2001 increased 28.2% to
$104.2 million from $81.3 million for the fiscal year ended September 30, 2000.
This increase was primarily attributable to availability of data center space,
which provided our account managers with an opportunity to increase the number
of customers and to sell additional products and services to existing accounts.
32
Cost of Revenue
Cost of revenue for the fiscal year ended September 30, 2001 was $40.6
million, or 39.0% of total revenue, as compared to $42.5 million, or 52.3% of
total revenue, for the fiscal year ended September 30, 2000. The decrease in
cost of revenue was primarily attributable to a shift in product mix toward
recurring revenue streams with higher margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year ended
September 30, 2001 were $128.3 million, or 123.1% of total revenue, as compared
to $98.1 million, or 120.6% of total revenue, for the fiscal year ended
September 30, 2000. Approximately $15.0 million, or 49.5% of this increase, was
attributable to an increase in salaries and benefits necessitated by the
anticipated growth of our business. However, the downturn in the
telecommunications and technology sectors during the last half of the fiscal
year ended September 30, 2001 required a reduction in facilities and personnel
and, consequently, we decreased the number of our employees from approximately
850 as of September 30, 2000 to approximately 650 as of September 30, 2001. The
majority of the headcount reductions occurred in the fourth quarter of the
fiscal year ended September 30, 2001. Approximately $3.1 million, or 10.1% of
the increase in selling, general and administrative expenses, was attributable
to an increase in rent expense associated with additional Internet data center
and sales office facilities. In addition, approximately $11.4 million, or 37.8%,
of this increase was attributable to an increase in bad debt expense
necessitated by the deterioration in the business environment and increased
customer churn throughout the second half of the fiscal year ended September 30,
2001. Selling, general and administrative expenses for the fiscal year ended
September 30, 2001 also included a one-time non-cash charge of $3.5 million
associated with the write-off of certain operating assets associated with an
indefeasible right to use, or IRU, capacity on a wavelength ring purchased from
a supplier whose financial viability impaired the recoverability of these
assets. The increase in selling, general and administrative expenses was offset
by a $5.1 million reduction in marketing expenses and a $3.0 million reduction
in professional fees for the fiscal year ended September 30, 2001 as compared to
the fiscal year ended September 30, 2000.
Restructuring Charges
Restructuring charges during the fiscal year ended September 30, 2001
totaling approximately $56.1 million were attributable to the expenses
associated with the execution of our revised business plan, pursuant to which we
plan to construct fewer Internet data centers and have taken estimated charges
associated with the termination of certain Internet data center and sales office
facilities, and the reduction of certain commitments for surplus power and
environmental equipment related to the Internet data center expansion and which
includes estimated lease termination costs, employee termination costs,
write-off of equipment, capitalized interest, consulting and legal fees,
construction and pre-construction related costs previously capitalized,
leasehold improvements, intangible assets and other costs.
Depreciation and Amortization
Depreciation and amortization increased to $36.7 million for the fiscal
year ended September 30, 2001 as compared to $18.2 million for the fiscal year
ended September 30, 2000. This increase was primarily related to the increase in
construction costs and equipment purchases related to the construction and
renovation of Internet data centers and network infrastructure enhancements.
33
Interest and Financing Expense and Interest Income
Interest and financing expense increased to $65.1 million for the fiscal
year ended September 30, 2001 as compared to $57.8 million for the fiscal year
ended September 30, 2000. This increase was a result of interest costs
associated with the 12.5% notes and $21 million owed by our subsidiary ATC
Merger Corp. pursuant to a mortgage note secured by our property at 139 Centre
Street being included in our financial results for all of fiscal 2001, compared
to the interest costs associated with this debt being included in our financial
results for only a portion of fiscal 2000, offset by increased capitalized
interest in connection with the build-out of our network infrastructure and
Internet data centers totaling $12.4 million for the fiscal year ended September
30, 2001 as compared to $2.2 million for the fiscal year ended September 30,
2000. The decrease in interest income to $13.3 million for the fiscal year ended
September 30, 2001 from $24.7 million for the fiscal year ended September 30,
2000, reflected the reduced cash position derived from the net proceeds of the
February 2000 issuance of the 12.5% notes and the December 1999 issuance of
preferred stock and the impact of declining interest rates compared to the same
period in the prior fiscal year.
Other Income
The decrease in other income to $2.1 million for the fiscal year ended
September 30, 2001 as compared to $2.8 million for the fiscal year ended
September 30, 2000 resulted from decreased gains realized on the sale of
short-term investments and marketable securities.
Other Expense
The increase in other expense to $3.5 million for the fiscal year ended
September 30, 2001 from $1.0 million in the fiscal year ended September 30, 2000
resulted from a loss recognized on the impairment of certain strategic
investments.
Net Loss and Net Loss Attributable To Common Stockholders
As a result of the factors described above, we reported a net loss of
$213.0 million and net loss attributable to common stockholders of $220.1
million, or $5.72 per share, for the fiscal year ended September 30, 2001,
including the cumulative effect change of accounting principle associated with
the adoption of SAB No. 101 of $2.3 million, or $0.06 per share, as compared to
a net loss before extraordinary item of $108.8 million, or $3.23 per share, and
a net loss attributable to common stockholders of $132.2 million, or $3.73 per
share, including the extraordinary loss associated with the $17.6 million, or
$0.50 per share, impact of the early extinguishment of the 13% notes, for the
fiscal year ended September 30, 2000.
Fiscal Year Ended September 30, 2000 As Compared To The Fiscal Year Ended
September 30, 1999
Revenue
Total revenue for the fiscal year ended September 30, 2000 increased 140.4%
to $81.3 million from $33.8 million for the fiscal year ended September 30,
1999. Revenue from the Internet Division for the fiscal year ended September 30,
2000 increased 307.3% to $53.1 million from $13.0 million for the fiscal year
ended September 30, 1999. This increase was primarily attributable to having a
full year of operations for three Internet data centers opened that were only
open for a portion of the prior fiscal year. Availability of new Internet data
center space provided our account managers with an opportunity to increase the
number of customers and to sell additional products and services to existing
accounts. Revenue from the Server Sales and Integration Division increased 35.7%
to $28.2 million for the fiscal year ended
34
September 30, 2000 from $20.8 million for the fiscal year ended September 30,
1999. This increase was primarily attributable to a planned shift in product mix
toward higher priced and higher margin products.
Revenue from the Internet Division as a percentage of total revenue
increased to 65.3% in the fiscal year ended September 30, 2000 from 38.5% for
the fiscal year ended September 30, 1999, which reflected our continued shift in
product mix toward Internet-related sales.
Revenue from the Server Sales and Integration Division as a percentage of
total revenue decreased to 34.7% in the fiscal year ended September 30, 2000
from 61.5% for the fiscal year ended September 30, 1999, which reflected our
continued shift in product mix toward Internet-related sales.
Cost of Revenue
Cost of revenue for the fiscal year ended September 30, 2000 was $42.5
million, or 52.3% of total revenue, as compared to $22.2 million, or 65.6% of
total revenue, for the fiscal year ended September 30, 1999. The increase in
cost of revenue was primarily attributable to an increase in data transmission
costs because of higher network operating and maintenance expenses associated
with the expansion of our network backbone. The decrease in cost of revenue as a
percentage of total revenue during the fiscal year ended September 30, 2000 was
due to the increase of the higher margin Internet revenue from 38.5% of total
revenue for the fiscal year ended September 30, 1999 to 65.3% of total revenue
for the fiscal year ended September 30, 2000.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the fiscal year ended
September 30, 2000 were $98.1 million, or 120.7% of total revenue, as compared
to $36.5 million, or 107.9% of total revenue, for the fiscal year ended
September 30, 1999. Approximately $37.6 million, or 61.0%, of this increase was
attributable to an increase in sales and marketing, engineering, recruiting,
finance and administrative personnel necessitated by the growth in our
Internet-related operations. The number of our employees increased from
approximately 450 as of September 30, 1999 to approximately 850 as of September
30, 2000. Marketing expenses increased to $11.5 million for the fiscal year
ended September 30, 2000 from $4.8 million for the fiscal year ended September
30, 1999, primarily as a result of costs related to a branding and advertising
campaign.
Depreciation and Amortization
Depreciation and amortization increased to $18.2 million for the fiscal
year ended September 30, 2000 from $6.3 million for the fiscal year ended
September 30, 1999. This increase was primarily related to the increase in
construction costs and equipment purchases related to the network infrastructure
enhancements of our Internet data centers during the fiscal year ended September
30, 2000.
Interest and Financing Expense and Interest Income
Interest and financing expense increased to $57.8 million for the fiscal
year ended September 30, 2000 from $18.4 million for the fiscal year ended
September 30, 1999. This increase resulted from interest costs associated with
the 13% notes being recorded for six months of fiscal 2000 until the tender
offer for the 13% notes in March 2000, in addition to the interest costs
associated with the 12.5% notes from the date of issuance of these notes in
February 2000 through the end of fiscal 2000. The increase in interest income to
$24.7 million for the fiscal year ended September 30, 2000 reflects the
increased cash position derived from the net proceeds of the issuance of the
12.5% notes in February 2000 and shares of preferred stock in December 1999.
35
Other Income
The increase in other income to $1.8 million for the fiscal year ended
September 30, 2000 from zero other income for the fiscal year ended September
30, 1999 resulted from a gain realized on the sale of investments and marketable
securities.
Net Loss and Net Loss Attributable To Common Stockholders
As a result of the factors described above, we reported a net loss of
$126.4 million and a net loss attributable to common stockholders of $132.2
million, or $3.73 per share, for the fiscal year ended September 30, 2000,
including an extraordinary loss of $17.6 million, or $0.50 per share, from the
early redemption of the 13% notes, as compared to a net loss and a net loss
attributable to common stockholders of $43.4 million, or $1.73 per share, for
the fiscal year ended September 30, 1999.
36
Liquidity and Capital Resources
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the plan of
reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing. Our financial
reporting following the filing of the Chapter 11 petitions is governed by the
American Institute of Certified Public Accountants Statement of Position, or
SOP, No. 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code." SOP 90-7 provides guidance for companies that have filed
petitions pursuant to, and expect to reorganize under, Chapter 11 of the
Bankruptcy Code. We implemented the guidance of SOP 90-7 upon our initial filing
with the bankruptcy court on March 1, 2002.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection.
As of the effective date of the plan of reorganization, all of our existing
securities were deemed cancelled and:
. each holder of the 12.5% notes became entitled to receive, in exchange
for its 12.5% notes, its pro rata share of:
. $120 million in aggregate principal amount of the notes; and
. 13,991,000 shares of our common stock, representing approximately
85% of the shares of our common stock issued and outstanding
following the effective date of the plan of reorganization,
subject to dilution by the exercise of management incentive
options representing up to 10% of the shares of our issued and
outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization;
. each holder of shares of our preferred stock outstanding immediately
prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for its shares of preferred stock,
its pro rata share of 2,304,400 shares of our common stock,
representing approximately 14% of the shares of our common stock
issued and outstanding following the effective date of the plan of
reorganization, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of our issued
and outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization; and
. each holder of shares of our common stock outstanding immediately
prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for these shares of common stock, its
pro rata share of 164,600 shares of our common stock, representing
approximately 1% of the shares of our common stock issued and
outstanding following the effective date of the plan of
reorganization, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of our issued
and outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization.
37
Our reorganization reduced the principal amount of our outstanding
indebtedness by approximately $480 million and converted a substantial portion
of our indebtedness into our common stock. Further, under the terms of the notes
we are permitted to satisfy interest payments in kind for at least two years
and, at the discretion of our board of directors, for up to four years, thereby
significantly reducing liquidity concerns arising from our pre-Chapter 11 debt
service obligations. We believe that our reorganization substantially reduces
uncertainty with respect to our future and better positions us to attract and
maintain new customers. There can be no assurance, however, that we will be
successful in executing our business plan.
Cash flows used in operating activities were $35.0 million and $69.5
million for the six-months ended March 31, 2002 and March 31, 2001,
respectively. Cash flows provided by or used in operating activities can vary
significantly from period to period depending upon the timing of operating cash
receipts and payments, particularly accounts receivable, prepaid expenses and
other assets and accounts payable and accrued liabilities. In both periods, our
net loss was the primary component of cash flows used in operating activities,
offset by non-cash interest charges as well as depreciation and amortization
expenses, provisions for uncollectible accounts receivable and non-cash
restructuring charges and, in the six months ended March 31, 2001, a cumulative
effect of a change in accounting principle and an impairment on investments.
Cash flows used in operating activities were $140.5 million in fiscal 2001,
$94.3 million in fiscal 2000 and $36.9 million in fiscal 1999.
Cash flows used in investing activities were $12.9 million and $75.3
million for the six-months ended March 31, 2002 and March 31, 2001,
respectively. Investments in capital expenditures related to our network and
facilities were $18.7 million and $104.8 million for the six-months ended March
31, 2002 and 2001, respectively. Of these amounts, we paid $20.1 million in the
six-month period ended March 31, 2001 and $91.3 million in the six month period
ended March 31, 2000 in cash, and the balance was financed under financing
arrangements or remained in accounts payable, accrued liabilities and other long
term liabilities at each period-end.
Cash flows used in investing activities were $113.3 million for fiscal
2001, $149.9 million for fiscal 2000 and $58.8 million for fiscal 1999.
Investments in capital expenditures related to our network and facilities were
$166.4 million for fiscal 2001, $150.9 million for fiscal 2000, $98.1 million
for fiscal 1999. Of these amounts, we paid $134.2 million in fiscal 2001, $142.6
million in fiscal 2000 and $83.4 million in fiscal 1999 in cash, and the balance
was financed under financing arrangements or remained in accounts payable and
accrued liabilities at each fiscal year-end.
Cash flows used in (provided by) financing activities were $4.2 million and
$(0.4) million for the six-months ended March 31, 2002 and March 31, 2001,
respectively. In fiscal 2002 and fiscal 2001, we repaid certain mortgage and
capital lease obligations totaling $4.6 million and $2.1 million, respectively.
In fiscal 2002, we received a capital contribution from a minority interest
subsidiary of approximately $0.4 million and in fiscal 2001 we received proceeds
from the exercise of stock options and warrants totaling $2.5 million.
Cash flows provided by financing activities were $0.39 million for fiscal
2001, $509.4 million for fiscal 2000 and $135.6 million for fiscal 1999. In
fiscal 2001, we received net proceeds of $2.5 million from the exercise of stock
options and a $5.4 million capital contribution in a minority owned subsidiary,
partially offset by principal payments on mortgage and lease obligations and
cash dividends on our preferred stock. In fiscal 2000, we received $580.0
million in net proceeds from the sale of the 12.5% notes, $75.3 million in net
proceeds from the issuance of preferred stock, $20.1 million in net proceeds
from mortgage financing and $10.1 million in net proceeds from the exercise of
stock options and warrants, partially offset by the use of cash of $170.4
million associated with the tender offer for the
38
13% notes, principal payments on mortgage and lease obligations and cash
dividends on preferred stock. In fiscal 1999, we received $136.6 million in net
proceeds from the issuance of common stock and $1.9 million in net proceeds from
the exercise of stock options and warrants.
As of March 31, 2002, we had $86.2 million of cash, cash equivalents,
restricted cash, restricted investments and marketable securities, including
$59.4 million without restrictions as to use.
We have also issued collateralized letters of credit aggregating
approximately $2.6 million. The related collateral funds are included in
restricted cash and investments on our consolidated balance sheet at March 31,
2002.
In addition, we have financed certain computer and network equipment
through vendors and financial institutions under capital and operating lease
arrangements. Capital lease obligations totaled approximately $12.2 million at
March 31, 2002. Subsequent to March 31, 2002, we made cash payments of
approximately $2.8 million in settlement of approximately $6.8 million of these
capital lease obligations. This resulted in a gain from the early extinguishment
of debt of approximately $4.0 million. As of March 31, 2002, we had various
agreements to lease facilities and equipment and are obligated to make future
minimum lease payments of approximately $72.2 million on operating leases
expiring in various years through 2017. At March 31, 2002 there were no unused
equipment financing arrangements with vendors or financial institutions.
Net cash used in operating activities decreased to $35.0 million from $69.5
million for the periods ended March 31, 2002 and March 31, 2001, respectively.
Operating losses are expected to continue to decrease during the course of
fiscal 2002 versus fiscal 2001 due principally to reductions in headcount and
other cost savings initiatives. Capital expenditures in fiscal 2002 are also
expected to be significantly less than in prior fiscal years.
We are dependent on our cash on hand and cash generated from operations to
support our capital requirements. Although no assurances can be given, our
management believes that actions taken by our company over the last several
months, including company downsizing, headcount reductions and other cost
reductions, as well as cost control measures and the restructuring of our
outstanding debt in connection with our reorganization, have positioned us to
achieve profitability and maintenance of sufficient cash flows from operations
to meet our operating, capital and debt service requirements for the foreseeable
future.
Segment Information
For fiscal periods ended on or before March 31, 2001, we reported our
results of operations in two operating segments: the Internet Division and the
Server Sales and Integration Division. The Internet Division provides complex
managed hosting, dedicated Internet access and application services, such as
streaming media, network security and server administration and network
monitoring. The Server Sales and Integration Division provides Internet-related
hardware and software, systems and network integration. Revenue from the
Internet Division has grown significantly as a percentage of total revenue,
increasing from 6% in 1996 to 94% in the three-month period ended March 31,
2001. Effective April 1, 2001 we reported our results of operations in one
operating segment under the provisions of SFAS No. 131. The following table sets
forth geographic segment information for the fiscal years ended September 30,
1999, September 30, 2000 and September 30, 2001:
39
Fiscal Year Ended September 30,
-------------------------------
1999 2000 2001
---- ---- ----
Revenue:
United States ....................... $ 33,674 $ 73,697 $ 82,020
Europe .............................. 143 7,590 22,190
--------- --------- ---------
Consolidated ................... $ 33,817 $ 81,287 $ 104,210
========= ========= =========
Operating loss:
United States ....................... $ (27,590) $ (64,477) $(142,713)
Europe .............................. (3,601) (13,090) (14,773)
--------- --------- ---------
Consolidated ................... $ (31,191) $ (77,567) $(157,486)
========= ========= =========
Tangible assets:
United States ....................... $ 276,896 $ 692,075 $ 436,262
Europe .............................. 20,039 10,649 89,953
--------- --------- ---------
Consolidated ................... $ 296,935 $ 702,724 $ 526,215
========= ========= =========
Income Taxes
We are in an accumulated loss position for both financial and income tax
reporting purposes. At September 30, 2001, we had U.S. Federal income tax loss
carryforwards of approximately $350 million. These income tax loss carryforwards
expire between 2011 and 2021. Pursuant to Section 382 of the Internal Revenue
Code, the use of these net operating loss carryforwards may be limited due to
changes in ownership that have occurred. We are evaluating the impact, if any,
that changes in ownership could have on net operating loss carryforwards. As of
September 30, 2001, we also had net operating loss carryforwards of
approximately $31 million from our United Kingdom subsidiaries, which do not
expire under U.K. tax rules.
For financial reporting purposes, income tax benefits through March 31,
2002 related to both U.S. Federal and foreign income tax losses were fully
offset by a valuation allowance due to the uncertainty of our ability to realize
income tax benefits by generating taxable income in the future.
Capital Structure
On a pro forma basis after giving effect to our reorganization, our
capital structure consists of the notes, mortgage and capital lease obligations
and our common stock. On a pro forma basis, total borrowings are $255.9 million
as of March 31, 2002.
40
Commitments
As of March 31, 2002 we have contractual obligations due in future periods
as follows:
Payments Due by Period
Contractual Obligations Total Less than 1 year 1-3 years 4-5 years After 5 years
----- ---------------- --------- --------- -------------
Long-Term Debt (1) $600,000 $ -- $ -- $ -- $600,000
Mortgage Payable 20,552 243 554 672 19,083
Capital Lease Obligations 13,141 6,056 6,649 436 --
Operating Leases 72,211 4,292 9,199 10,741 47,979
Other Long-Term Obligations 2,600 -- 2,600 -- --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations $708,504 $ 10,591 $ 19,002 $ 11,849 $667,062
======== ======== ======== ======== ========
__________
(1) Long term debt on a pro forma basis as of March 31, 2002 after giving effect
to our reorganization totals $120 million.
As of March 31, 2002, we had no material commitments for capital
expenditures. Our management believes that the funds necessary to meet our
current capital requirements and our capital requirements for the foreseeable
future will come from cash on hand and operating cash flows.
Recent Technical Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board, or FASB, issued
SFAS No. 144 entitled "Accounting for the Impairment or Disposal of Long-Lived
Assets." This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 will be effective for
financial statements for fiscal years beginning after December 15, 2001. We do
not expect that the adoption of SFAS No. 144 will have a material impact on our
consolidated financial position, results of operations or cash flows.
In June 2001, the FASB issued SFAS Nos. 141 entitled "Business
Combinations" and SFAS No. 142 entitled "Goodwill and Other Intangible Assets."
SFAS No. 141, among other things, eliminates the pooling of interests method of
accounting for business acquisitions entered into after June 30, 2001. SFAS No.
142 requires companies to use a fair-value approach to determine whether there
is an impairment of existing and future goodwill. SFAS No. 142 is effective for
our company beginning October 1, 2002. We do not expect that the adoption of
SFAS No. 141 or SFAS No. 142 will have a material impact on our consolidated
financial position, results of operations or cash flows.
Quantitative and Qualitative Disclosures About Market Risk
Subsequent to March 31, 2002, we settled certain long-term capital lease
obligations, which had a carrying value of approximately $6.8 million at March
31, 2002. After these settlements, annual maturities for our capital lease
obligations (including interest) in each of the next twelve-months were as
follows: $2.9 million in 2003, $2.4 million in 2004, $0.5 million in 2005 and
$0.3 million in 2006 and thereafter.
Marketable securities include our strategic investments in two
publicly-traded entities, Edgar On-Line and Globecomm Systems Inc., which are
recorded at fair market value. We do not hedge our exposure to fluctuations in
the value of our equity securities.
Our other investments are generally fixed rate investment grade and
government securities denominated in U.S. dollars. At March 31, 2002, all of our
investments were due to mature within twelve
41
months and the carrying value of these investments approximated fair value. At
March 31, 2002, $26.8 million of our cash and investments were restricted in
accordance with the terms of certain collateral obligations. In April 2002,
$17.8 million of this restricted cash was paid to settle these collateral
obligations.
We actively monitor the capital and investing markets in analyzing our
investing decisions.
We are also subject to market risk associated with foreign currency
exchange rates. Our business plan includes the expansion of our U.K. operations.
To date, we have not utilized financial instruments to minimize our exposure to
foreign currency fluctuations. We will continue to analyze risk management
strategies to minimize foreign currency exchange risk in the future.
We believe that we have limited exposure to financial market risks,
including changes in interest rates. The fair value of our investment portfolio
or related income would not be significantly impacted by a 100 basis point
increase or decrease in interest rates, due mainly to the short-term nature of
the majority of our investment portfolio and the current interest rates for
short to medium term investments. An increase or decrease in interest rates
would not significantly increase or decrease interest expense on debt
obligations, due to the fixed nature of the substantial majority of our debt
obligations.
42
BUSINESS
General
We are a full-service provider of sophisticated Internet solutions to
businesses. Our solutions include:
. secure and fault-tolerant Internet data centers;
. high performance network services, which provide high performance
network connectivity to the Internet; and
. complex Internet based managed and application services, which include
dedicated hosting, streaming media, content delivery services and
messaging services.
We believe that these elements of our total Internet solution combine to
provide our customers with the ability to create, operate and scale their
increasingly complex Internet operations in a cost efficient manner.
Our target market for our services is small to medium size businesses in a
variety of industries such as media and publishing, financial services, retail,
healthcare, governmental agencies and technology.
Our customers primarily use our services to maintain complex computer
equipment in a secure, fault-tolerant environment with connectivity to a
high-speed, high-capacity, direct link to the Internet and to support complex
Internet applications. We currently offer our services from our Internet data
center facilities in New York City, New York, London, England and Santa Clara,
California. Our teams of account managers, computer system and network
administrators and customer support specialists are located at each of these
locations. We also maintain an Internet data center in Atlanta. Our local market
presence enables us to evaluate the needs of our customers and attempt to
quickly respond with tailored solutions. We also provide our customers with the
ability to outsource the systems administration and technical management of
their Internet presence. Our products are flexible and scalable, allowing us to
modify the size and breadth of the services we provide.
Our Chapter 11 Bankruptcy Reorganization
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the prepackaged plan
of reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade, and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection.
As of the effective date of the plan of reorganization, all of our existing
securities were deemed cancelled and:
. each holder of the 12.5% notes became entitled to receive, in exchange
for its 12.5% notes, its pro rata share of:
43
. $120 million in aggregate principal amount of the notes; and
. 13,991,000 shares of our common stock, representing approximately
85% of the shares of our common stock issued and outstanding
following the effective date of the plan of reorganization,
subject to dilution by the exercise of management incentive
options representing up to 10% of the shares of our issued and
outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization;
. each holder of shares of our preferred stock outstanding immediately
prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for its shares of preferred stock,
its pro rata share of 2,304,400 shares of our common stock,
representing approximately 14% of the shares of our common stock
issued and outstanding following the effective date of the plan of
reorganization, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of our issued
and outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization; and
. each holder of shares of our common stock outstanding immediately
prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for these shares of common stock, its
pro rata share of 164,600 shares of our common stock, representing
approximately 1% of the shares of our common stock issued and
outstanding following the effective date of the plan of
reorganization, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of our issued
and outstanding common stock on a fully-diluted basis following the
effective date of the plan of reorganization.
Our reorganization reduced the principal amount of our outstanding
indebtedness by approximately $480 million and converted a substantial portion
of our indebtedness into our common stock. Further, under the terms of the notes
we are permitted to satisfy interest payments in kind for at least two years
and, at the discretion of our board of directors, for up to four years, thereby
significantly reducing liquidity concerns arising from our pre-Chapter 11 debt
service obligations. We believe that our reorganization substantially reduces
uncertainty with respect to our future and better positions us to attract and
maintain new customers. There can be no assurance, however, that we will be
successful in executing our business plan.
Our Solutions
We provide our customers with a comprehensive range of Internet solutions.
Many of our customers do not have the network infrastructure or Internet
expertise to build, maintain and support critical Internet operations. Our range
of services attempt to enable our customers to address their needs
cost-effectively without having to assemble services from different suppliers,
Internet service providers and information technology firms, thereby increasing
the customer's ability to take advantage of the Internet on a timely basis. Key
components of our solutions are:
44
Internet Data Centers
We operate six Internet data centers in the following locations:
. approximately 340,000 gross square feet of facilities located in New
York City;
. an approximately 60,000 gross square feet facility located in Santa
Clara, California;
. approximately 100,000 gross square feet of facilities located in
London, England; and
. an approximately 5,000 gross square foot facility located in Atlanta,
Georgia.
Our Internet data centers in New York City, New York, Santa Clara,
California and London, England have state-of-the-art facilities. Those
facilities include electrical infrastructures, precision environmental control
systems, fire suppression systems and comprehensive security systems.
Co-Location
We offer co-location solutions for customers who choose to own and maintain
their own servers, but require the physically secure, climate-controlled
environment of our Internet data centers and connectivity to our network. A
customer can choose to co-locate in a cabinet, a cage or a GLOBOX, our
proprietary secured cage. A data cabinet, the smallest co-location service
offering, can house multiple servers. The cabinet is locked and outfitted for
multiple, redundant network hand-offs and two power feeds. A cage serves the
needs of a larger customer usually deploying more complex solutions. The GLOBOX
co-location offering is identical to the cage except that its walls are solid,
two-ply steel and is available with a variety of security devices for the
customer demanding a high level of security and anonymity.
Internet Server and Software Sales
Internet server and software sales are an integral part of providing our
customers with a sophisticated end-to-end solution. As part of our integrated
approach through our strategically located Internet data centers, we offer our
customers both the servers and the software they need in order to operate and
expand their Internet presence. We also provide the integration services to
configure both servers and software to customer needs.
Network Services
Network Infrastructure. Our network infrastructure is designed to meet the
service and quality requirements of businesses with mission critical
Internet-based operations. Our network infrastructure is designed for high
availability and low latency, and utilizes a single autonomous system number
globally performing "cold-potato" routing. Cold potato routing is a technique
whereby our network equipment monitors and interprets additional routing
information supplied by its peers. By using this information, our infrastructure
carries the traffic on our network to common peering or traffic exchange points
nearest the origination point of the traffic request. This way, traffic is
carried on a network controlled by our company to the greatest extent possible
and therefore does not suffer from the congestion or high latency of public
networks, which causes communications on the Internet to slow. In fact, the
design and performance of the global network allows us to offer high quality
commitments and applications like our EarthCache Internet content delivery
network.
45
Backbone. The domestic Globix backbone is a Packet over Synchronous
Optical Network, or SONET, which provides a mechanism for using the speed and
efficient management capabilities of SONET to optimize data transport.
Essentially, it provides a method for efficiently carrying data packets in SONET
frames that will operate at speeds up to OC-48 (2.4Gbs). The OC-48 Globix
domestic backbone connects to our New York City, New York and Santa Clara,
California data centers and our backbone points of presence, or POPs, in
Atlanta, Boston, Chicago, Los Angeles, Seattle and Washington, D.C.
Our European backbone is a Packet over SONET currently connecting
London, Amsterdam, Frankfurt and Paris. The domestic and European networks are
connected by two OC-3 transatlantic crossings.
Our U.S. and European network sections interconnect to numerous network
access points, commercial Internet exchanges and other Internet, application and
network service providers.
Peering. We have established numerous peering relationships with other
Internet, application and network service providers. These peering relationships
take the form of either public or private peering connections. Public peering
takes place at a network access point or commercial Internet exchange, designed
for the exchange of traffic between service providers. Private peering involves
an agreement between service providers allowing traffic to pass between each
other's networks using connections that do not have to traverse either the
public Internet or public peering points.
Network Operations. We have constructed a global operations center
located at our Internet data center in New York City, New York. Our global
operations center serves as the command, control and communications center for
all of our network operations, customer support centers and POPs.
Our global operations center is staffed 24 hours a day, seven days a
week by teams dedicated to maintaining the highest quality of service. Network
administrators located in our global operations center monitor our entire
network infrastructure. Our network administrators are able to identify and
correct network problems either themselves or by dispatching system engineers
located at our customer support centers. Our global operations center utilizes
state-of-the-art equipment and technologies, including custom applications and
commercial software for the monitoring and management of network and systems
services, a suite of commercial tools customized for problem identification and
resolution.
Customer Support Center. Our customer support center's call center is
operated 24 hours a day, seven days a week, and is equipped with advanced
telecommunications systems capable of automatic call distribution, automatic
number identification, quality assurance recording and archiving, and
intelligent call routing. A trouble ticketing and knowledge database of customer
information and history aids to attempt to ensure that our customer base is well
serviced.
Dedicated Internet Access
We offer a variety of dedicated Internet access solutions, which
provide businesses with high-speed continuous access to the Internet. We provide
dedicated Internet access services to customers at transmission speeds up to
155Mbps. Many of our Internet access customers purchase 1.5Mbps or higher levels
of bandwidth. In addition, we provide other valuable services, such as domain
name registration, local loop provisioning, Internet address assignment, router
configuration, e-mail configuration and management and technical consulting
services. We also provide Internet-access technologies, such as
46
digital subscriber lines, and intend to deploy additional connectivity-related
enhanced services as these services become commercially viable.
Managed Services
We provide full-life-cycle system and network administration. At
project inception, we install and configure applications and equipment designed
by our solutions architects, as specified by the customer. Generally, Internet
business strategies require dedicated, highly-skilled technical resources
available 24 hours a day, seven days a week. Most of our customers do not have
these resources available internally. We offer administration, maintenance and
problem resolution services for a variety of popular operating systems
databases, Internet-based applications, Internet network devices and hardware
and software security solutions.
Application Services
Dedicated Hosting. We offer hosting solutions on both the NT and UNIX
platforms, in a dedicated server environment. Dedicated hosting is designed to
meet a customer's price point and business requirements. This service includes
providing hardware, software, bandwidth and application requests to meet
customer-specific needs. Our dedicated hosting services are tailored to Internet
presences that require high availability and scalability without significant
infrastructure and related overhead costs.
Streaming Media. We have been a provider of comprehensive streaming
media solutions for approximately five years. Streaming media is a process by
which audio, video or other multimedia is delivered in a streaming or continuous
fashion over the Internet or over a company's intranet. Our Streaming Media
Group offers end-to-end streaming services, including production, encoding,
hosting and delivery. Our core streaming media services are encoding, hosting
and collaboration solutions, which are the mainstays of streaming media
technology. This technology involves capturing video and/or audio recordings of
an event, such as a music performance, conference calls, sports competitions or
business meetings, converting the recorded or live audio/visual signal content
into a format that can be transmitted over the Internet and provides hosting
services which enable Internet users on the web to access the live or on-demand
encoded content. We are certified at the highest level of the RealNetworks
partnership program and are a certified Microsoft Windows Media Service
Provider.
EarthCache. We believe that EarthCache, our Internet content delivery
network, complements our existing network infrastructure and provides businesses
with improved web site and application performance, faster content delivery
times and better customer content management. EarthCache, which has caching
servers deployed across the edges of our Internet backbone network, also
improves download performance as a result of the proximity of the content on
these caching servers. We believe that EarthCache has several advantages over
other Internet content delivery networks because of its ability to leverage the
network infrastructure that we have built along with our extensive worldwide
peering network. With the source content being transmitted over our network
infrastructure, we are able to maintain better control over the quality of
service and the network's ability to redirect and manage customer content.
Messaging Services
We offer a broad set of messaging solutions to meet our customers'
needs. Our Messaging Services product line consists of GlobixMail, Microsoft
Hosted Exchange and Value Added Services. GlobixMail is an open-standard
compliant email application with a low cost of ownership. The GlobixMail service
is designed to perform as a high availability application on a Globix-managed
infrastructure. We launched our Microsoft Hosted Exchange service in June 2001
targeting the needs of
47
our enterprise accounts. This service offers a robust set of messaging and
collaboration features including e-mail, calendaring and instant messaging.
Sales and Marketing
Our sales and marketing objective is to achieve broad market
penetration within our target market of businesses that depend upon the Internet
for mission-critical operations. We and our resellers sell our services to
businesses directly through our sales force and indirectly through our alliance
partners.
Our sales force consists of field sales, strategic accounts,
alliance sales and telesales, which are organized geographically to ensure that
each customer's services are implemented properly and efficiently. In addition,
we utilize referral, reseller and other indirect sales channels. We are
currently working with Communication Technology Advisors, or CTA, a consulting
and private advisory firm that we have engaged to act as the office of the
Chief Restructuring Officer, to evaluate our sales efforts and sales commission
structure in an effort to enhance revenue opportunities.
Our marketing organization is responsible for product marketing
management, public relations and marketing communications. Product marketing
management includes defining the product roadmap and bringing to market the
portfolio of services and programs to address customer needs. These activities
include product strategy and definition, pricing, competitive analysis, product
launches, channel program management and product lifecycle management. Public
relations focus on cultivating industry analyst and media relationships.
Customers
We have established a diversified base of customers in a variety of
industries, such as media and publishing, financial services, retail,
healthcare, governmental agencies and technology.
Focus on Cost Management
We have made a concerted effort to reduce our network costs by reducing
network infrastructure and operation costs through contract renegotiation and
more efficient routing of traffic. In addition, in connection with our emergence
from bankruptcy we developed a broad-based action plan to reduce costs
company-wide. We have begun to implement this action plan to further reduce
ongoing costs by:
. consolidating operational functions;
. revamping our sales commission structure;
. increasing our collection capabilities;
. exiting from certain real estate locations; and
. reducing personnel.
We will continue to monitor our costs and implement timely and
reasonable measures to reduce them. In addition, CTA continues to assist us with
our cost management focus and to evaluate potential strategic relationships that
may enhance our cost management initiatives.
Facilities
In July 1998, we purchased the land and the approximately 155,000 gross
square foot building located at 139 Centre Street, New York, New York.
Construction at this facility was completed in July
48
1999 and the building houses an Internet data center and offices for our
executive, technical, sales and administrative personnel.
In September 2000 we purchased the land and the approximately 187,000
gross square foot building located at 415 Greenwich Street, New York, New York.
Construction at this facility was recently completed and the building houses our
second New York Internet data center and additional office space.
In July 1998, we signed a lease commencing January 15, 1999 for
approximately 60,000 gross square feet of space in Santa Clara, California. In
October 1998, we signed a lease for the rental of approximately 38,000 gross
square feet of space at Prospect House, 80 New Oxford Street, London, England.
Construction at both of these facilities was completed in July 1999 and each
houses an Internet data center and offices for technical, sales and
administrative personnel.
In July 2000, we entered into a lease for our second London Internet
data center, containing approximately 206,000 gross square feet of space.
Construction and fit-out of one floor of Internet data center space has been
completed and the facility became operational in June 2001. In April 2002 we
renegotiated our lease for this Internet data center, resulting in us retaining
a total of 60,000 gross square feet of space.
In August 2000, we acquired our existing leases for Internet data
centers in Atlanta containing approximately 5,000 gross square feet of space.
We believe that these facilities are adequate for our current and
foreseeable needs and that additional space will be available when needed.
Employees and Employee Relations
As of June 30, 2002, we had approximately 300 full-time employees:
approximately 200 in the United States and 100 outside the United States. In
addition to our full-time employees, we also employ part-time personnel from
time to time in various departments. None of our employees are covered by a
collective bargaining agreement. We believe that our current relations with our
employees are satisfactory.
Competition
Our competitors include other Internet service providers with a
significant national or global presence that focus on business customers, such
as IBM, Loudcloud/EDS, Genuity, DIGEX, NaviSite and UUNet. Our competitors also
include telecommunications companies, such as AT&T, British Telecom, Cable &
Wireless, Level 3, WorldCom, Qwest and Sprint. We believe that competition is
based upon a number of factors, including price, quality of service and
financial stability.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in our industry, we could encounter
significant pricing pressures. These pricing pressures could result in
significantly lower average selling prices for our services.
Trademarks and Patents
We currently have 8 trademarks applications and one patent application
pending in the United States Patent and Trademark Office.
49
Legal Proceedings
On March 1, 2002, our company and two of our wholly-owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the U.S. Bankruptcy Code, together with the prepackaged plan
of reorganization, with the United States Bankruptcy Court for the District of
Delaware. On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection.
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York titled In re Globix Corp
Securities Litigation, No. 02-CV-00082. A consolidated amended complaint was
filed in this lawsuit on June 28, 2002. This lawsuit names as defendants our
company and former Globix officers Marc Bell, Peter Herzig and Brian Reach, and
asserts claims under sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder on behalf of all persons or entities who purchased our
securities between November 16, 2000 and December 27, 2001. We have not yet
responded to the consolidated amended complaint, and expect to file a motion to
dismiss this lawsuit. We believe that the allegations in this lawsuit are
without merit and we intend to vigorously defend against them. We cannot give
any assurance, however, that this lawsuit will not harm our business, financial
condition or results of operations.
We are from time to time involved in legal actions in the ordinary
course of our business. Other than as set forth above, we are not aware of any
pending or threatened litigation, arbitration or administrative proceedings
involving claims or amounts that, individually or in the aggregate, we believe
are likely to significantly harm our business, financial condition or future
results of operations. Any litigation, however, involves risk and potentially
significant litigation costs, and therefore we cannot give any assurance that
any litigation which may arise in the future will not significantly harm our
business, financial condition or future results of operations.
50
MANAGEMENT
Set forth below is the name, age as of July 25, 2002, and a brief
account of the business experience of each person who is, or was at July 25,
2002, a director or officer of our company.
Name Age Position
---- --- --------
Peter K. Stevenson ..................... 42 President and Chief Executive Officer and Director
Shawn P. Brosnan ....................... 40 Senior Vice President and Corporate Controller
Gregory P. Leahy ....................... 36 General Counsel and Corporate Secretary
John D. McCarthy ....................... 38 Acting Chief Financial Officer
Anthony L. Previte ..................... 37 Senior Vice President and Chief Technology Officer
Lord Anthony St. John .................. 45 President of Global Sales and Marketing
Jared E. Abbruzzese .................... 47 Director
Marc H. Bell ........................... 34 Chairman of the Board of Directors
Peter S. Brodsky ....................... 31 Director
Peter L. Herzig ........................ 39 Vice Chairman of the Board of Directors
Steven Lampe ........................... 43 Director
Steven G. Singer ....................... 41 Director
Brandon Stranzl ........................ 28 Director
Peter K. Stevenson joined our company as President and Chief Executive
Officer in April 2002 and also serves as a member of our board of directors. Mr.
Stevenson has over 20 years of experience in the communications industry. Mr.
Stevenson is founder and currently Chief Executive Officer of Net One Group,
Inc., a Northern Virginia based telecom investment and management company
involved in developing and operating next generation broadband service networks.
Prior to joining Globix, Mr. Stevenson was a senior consultant to Communication
Technology Advisors LLC, an investment advisory company focused on restructuring
companies in the communications sector from February 2002 to April 2002. Mr.
Stevenson is a co-founder of Net Uno, one of the largest cable television,
connective local exclusive carriers and ISP carriers in Venezuela and has been
serving as a Strategic Advisor to Net Uno's board of directors since January
2001. From January 1998 to February 2002, Mr. Stevenson was a corporate officer
of Net Uno and President and Chief Operating Officer of Net Uno's Data and
Telephone Group. From February 1996 to June 1998, Mr. Stevenson was Partner and
Vice President for Wave International, an international telecom investment and
management firm focused on developing companies in international markets. Mr.
Stevenson graduated with a Bachelor of Science degree from Saint Francis
College.
Shawn P. Brosnan has served as Senior Vice President and Corporate
Controller of our company since August 2001. Prior to that, he served as Vice
President and Corporate Controller since joining our company in November 1999.
Prior to joining our company, Mr. Brosnan spent over 15 years with Ernst &
Young LLP. During his tenure at Ernst & Young, he was a business advisor with
extensive experience in the areas of accounting, finance, financial reporting,
mergers and acquisitions and process improvement. Mr. Brosnan is a certified
public accountant and received his Bachelor of Science degree in accounting from
Providence College.
Gregory P. Leahy joined our company in July 1999 as Associate General
Counsel and became General Counsel and Corporate Secretary of our company in
February 2002. Prior to joining our
51
company, Mr. Leahy was an attorney in private practice with Morrison, Mahoney &
Miller, where he provided counsel to a variety of clients with respect to
corporate matters. His primary area of practice was advising technology/new
media companies as well as the banking community. Mr. Leahy began his career as
a litigation attorney representing corporations in general litigation and
employment matters. He has also served as a lobbyist on behalf of corporate
clients. Mr. Leahy holds a Bachelor of Arts degree in American History from
Columbia University and received his Juris Doctorate degree from Boston
University.
John D. McCarthy has served as Acting Chief Financial Officer since
April 2002. Prior to holding this position, Mr. McCarthy served as Vice
President of Financial Planning and Analysis from August 2001 through April 2002
and as Managing Director of Finance for the Application Services Group from the
time he joined our company in March 2001 through August 2001. Prior to joining
our company in March 2001, Mr. McCarthy served as Vice President, Finance for
LC39, a New York based technology incubator and venture capital fund, from March
2000 to March 2001. Prior to his employment with LC39, Mr. McCarthy served as
Vice President of Finance of Brandsforless.com from November 1998 through July
1999. Prior to that, he served as Vice President and Director of Business
Affairs for the advertising and direct marketing units of Young & Rubicam, Inc.
Prior to Young & Rubicam, Mr. McCarthy held finance and operating positions with
United Technologies. Mr. McCarthy received a Masters in Business Administration
degree from The Wharton School of Business of the University of Pennsylvania and
a Masters degree in International Studies from Wharton's Lauder Institute. Mr.
McCarthy received his undergraduate degree in History and Asian Studies from
Connecticut College.
Anthony L. Previte joined our company as Chief Technology Officer in
October 1998. Between July 1991 and October 1998, Mr. Previte served as the Vice
President of Special Projects for Emcor Group Inc., a publicly traded electrical
and mechanical engineering and construction firm. At Emcor Group, Mr. Previte
was involved in the design and construction of more than one million square feet
of secure data center facility space for companies such as Prudential
Securities, Morgan Stanley and Nomura Securities. Mr. Previte has a degree in
aerospace engineering from Polytechnic Institute of New York.
Anthony St. John, Lord St. John of Bletso has served as President of
Global Sales and Marketing of our company since August 2001. Prior to that he
served as Vice President, Business Development from September 1999 through
August 2001. Since 1978, Lord St. John has served as a sitting member of the
House of Lords of the Parliament of the United Kingdom and an Extra
Lord-in-Waiting to Her Majesty the Queen. He is also a member of The House of
Lords' European Union Sub-Committee on Economic and Financial Affairs, Trade and
External Relations. Since 1993, he has served as a consultant to Merrill Lynch
and is a Registered Representative of the London Stock Exchange. Lord St. John
is also the Director of Business Development of our U.K. subsidiary. He received
Bachelor of Arts and Bachelor of Science degrees from Capetown University, a
Bachelor of Laws degree from the University of South Africa and a Masters of Law
degree from the London School of Economics.
Jared E. Abbruzzese has been a director of our company since April
2002. Mr. Abbruzzese is the founder and Chairman of Communication Technology
Advisors LLC, a restructuring boutique focusing on distressed telecommunications
companies through the provision of strategic planning advice, restructuring
assistance and overall business advice. Mr. Abbruzzese is also the founder and
chairman of TechOne Capital Group LLC, a private investment and consulting
company concentrating in the technology and telecommunications sectors. Mr.
Abbruzzese is currently the Chairman of the Board of Motient Corporation,
a publicly-traded corporation, and is Chairman and acting Chief Executive
Officer of WSNet Holdings, Inc., a provider of satellite television programming.
Until August 1999, Mr. Abbruzzese was chairman and chief executive officer of
CAI
52
Wireless Systems, Inc., a wireless cable operator founded by Mr.
Abbruzzese in 1991. Mr. Abbruzzese sits on several other boards of directors,
including DualStar Technologies Corporation, a public corporation and provider
of broadband access services and construction company and Evident Technologies,
Inc., a start-up technology company located in Albany, N.Y. for which he is
Co-Chairman of the Board.
Marc H. Bell has been non-executive Chairman of our board of directors
since August 1, 2001. Prior to that, Mr. Bell served as Chairman of our board of
directors since he founded our company in 1989. In addition, Mr. Bell served as
Chief Executive Officer of our company from 1989 through August 1, 2001. Mr.
Bell has a Bachelor of Science degree in accounting from Babson College and a
Masters degree in real estate development and finance from New York University.
Peter S. Brodsky has been a director of our company since October 2001.
Mr. Brodsky is a partner of Hicks, Muse, Tate & Furst Incorporated and has been
with Hicks Muse since 1995. At Hicks Muse, Mr. Brodsky has focused on Hicks
Muse's media investments, specifically in radio, television, sports and
software, and serves as a director of several of Hicks Muse's portfolio
companies. In addition to our company, Mr. Brodsky is a director of two other
publicly-traded companies, RCN Corporation and Cooperative Computing, Inc.
Mr. Brodsky received a Bachelor of Arts degree from Yale University.
Peter L. Herzig has served as Vice Chairman of our board of directors
since May 2002. From August 2001 through May 2002, Mr. Herzig served as our
Chief Executive Officer. Mr. Herzig joined our company in October 2000, served
as Chief Operating Officer from March 2001 through August 2001 and served as
Senior Vice President and Chief Operating Officer-Application Services Group
from October 2000 through March 2001. Prior to joining our company, Mr. Herzig
served as Executive Vice President and Chief Financial Officer at iWon.com from
March 2000 to October 2000, where his responsibilities included managing iWon's
relationship with our company. Prior to joining iWon.com, Mr. Herzig was a
Senior Managing Director and Head of Global Capital Markets Services for Bear,
Stearns & Co. Inc. from February 1998 through March 2000, where he provided
strategic capital-structure advisory services to a broad spectrum of domestic
and international clients, including many new media technology companies
experiencing growth with the expansion of the Internet. Prior to Bear Stearns,
Mr. Herzig worked at Goldman Sachs & Co. from July 1989 through February 1998.
Mr. Herzig has a Bachelor of Arts degree from Dartmouth College and a Masters
degree in Business Administration from Columbia University.
Steven Lampe has been a director of our company since April 2002. Mr.
Lampe is a Managing Member of Lampe, Conway & Co. LLC, an investment management
company which he co-founded in June 1999. Prior to his work at Lampe, Conway,
Mr. Lampe managed Lone Star Securities Fund, a distressed investment fund, from
June 1997 through June 1999. Prior to his employment with Lone Star, Mr. Lampe
worked at Smith Management, a private investment company, from February 1988
through June 1997. Mr. Lampe has a Bachelor of Arts degree from Middlebury
College and a Masters in Business Administration degree from Harvard University.
Steven G. Singer has been a director of our company since April 2002.
Mr. Singer is the Chairman and Chief Executive Officer of American Banknote
Corporation, a publicly-traded corporation and 200 year-old global security
printer of documents of inherent value, including currency, passports, credit
cards, stock and bond certificates, and related products and services, and the
Chairman and Chief Executive Officer of Pure 1 Systems, a manufacturer and
distributor of water treatment products. Mr. Singer is also a director of
Motient Corporation, a publicly-traded corporation, and the Chapter 7 Trustee of
American Pad & Paper Company. Until November 2000, Mr. Singer was also the
Executive Vice President and Chief Operating Officer of Romulus Holdings, Inc.,
a family-owned investment vehicle.
53
Brandon Stranzl has been a director of our company since April 2002.
Mr. Stranzl is a research analyst for Third Avenue Funds, where he focuses on
distressed debt and value equities. Mr. Stranzl is also a director of Motient
Corporation, a publicly-traded corporation. Prior to joining Third Avenue in
March 2002, Mr. Stranzl was employed by Morgan Stanley Asset Management from
March 1999 through March 2002. From September 1997 through March 1999, he worked
for Fidelity Investments. Mr. Stranzl received a Bachelor of Arts degree from
Vassar College. He is a Chartered Financial Analyst and a member of the New York
Society of Security Analysts.
Our Board of Directors and Executive Officers
Our board of directors currently consists of eight members. Our
directors are elected at each annual stockholders' meeting, and serve until the
next annual stockholders' meeting and the election and qualification of their
respective successors. Seven of the current members of our board of directors
were selected in accordance with the terms of the plan of reorganization to
serve as the directors of our company following the effective date of the plan
of reorganization.
Committees
Our bylaws provide that our board of directors may create, by the
affirmative vote of at least a majority of the directors then in office, an
executive committee and any other committees which our board of directors deems
necessary or desirable to create. The current committees of our board of
directors are the audit committee and the compensation committee. Our audit
committee is comprised of Messrs. Brodsky, Lampe and Stranzl. Our compensation
committee is comprised of Messrs. Abbruzzese, Lampe, Singer and Stranzl.
54
Executive Compensation
The following Summary Compensation Table sets forth the total
compensation for the fiscal years ended September 30, 2001, September 30, 2000
and September 30, 1999 for our former Chief Executive Officer and our four most
highly compensated executive officers (other than the Chief Executive Officer),
which we refer to in this prospectus as the named executive officers:
Summary Compensation Table
Annual Compensation Long-Term Compensation
------------------- ----------------------
Awards Payouts
------ -------
Securities
Other Annual Restricted Underlying All Other
Name and Principal Position Year Salary($) Bonus($) Compensation($) Stock Awards($) Award(#) LTIP Payouts($) Compensation($)
--------------------------- ---- --------- -------- --------------- --------------- -------- --------------- ---------------
Marc H. Bell(1) 2001 323,563 -- -- 6,016,852 -- -- --
President and Chief 2000 367,500 831,125 -- -- -- -- --
Executive Officer 1999 350,000 331,875 -- -- 4,788,244 -- --
Peter L. Herzig (2) 2001 200,000 100,000 -- -- 200,000 -- --
Chief Executive Officer
Marc Jaffe (3) 2001 250,000 -- -- 705,000 120,000 -- --
Chief Operating Officer 2000 250,000 -- -- -- -- -- --
1999 215,685 -- -- -- 480,000 -- --
Anthony L. Previte 2001 200,000 -- -- 528,750 90,000 -- --
Chief Technology 2000 200,000 -- -- -- -- -- --
Officer 1999 141,585 -- -- -- 400,000 -- --
Brian L. Reach (4) 2001 250,000 -- -- 587,500 100,000 -- --
Chief Financial Officer 2000 250,000 50,000 -- -- -- -- --
1999 20,000 -- -- -- 400,000 -- --
Richard Rose (5) 2001 247,292 49,500 -- 73,438 12,500 -- --
Senior Vice President, 2000 91,456 -- -- -- 50,000 -- --
Technology and
Application Services
----------
(1) Mr. Bell resigned as Chief Executive Officer on August 1, 2001 and became
non-executive Chairman of our board of directors.
(2) Mr. Herzig became Chief Executive Officer on August 1, 2001, and resigned as
Chief Executive Officer and became Vice-Chairman of our board of directors
on May 14, 2002. Mr. Herzig joined our company on October 16, 2000.
(3) Mr. Jaffe resigned from our company on April 8, 2002.
(4) Mr. Reach joined our company on September 1, 1999 and resigned on April 8,
2002.
(5) Mr. Rose joined our company on May 9, 2000 and resigned on June 17, 2002.
Options
In connection with the plan of reorganization, all options to acquire
shares of our common stock that were outstanding immediately before the
effective date of the plan or reorganization were cancelled. The plan of
reorganization provides for the grant of up to 1,828,889 stock options to be
issued pursuant to a 2002 Stock Option Plan. We expect that the compensation
committee of our board of directors will adopt the 2002 Stock Option Plan within
90 days of the date of this prospectus.
55
Employment Agreements
Marc H. Bell
Effective June 1, 1998, we entered into a seven year employment
agreement with Marc H. Bell. In connection with our financial restructuring and
Mr. Bell's resignation as Chief Executive Officer, our company and Mr. Bell
agreed in principle to a three year employment agreement that, among other
things, reduces his base salary to $12,000 per year effective August 1, 2001 for
his services as non-executive chairman of our board of directors and provides
that he will be entitled to participate in all employee benefit plans offered by
our company, including group health insurance.
Peter L. Herzig
Effective October 2, 2001, we entered into an employment agreement with
Peter L. Herzig. Under the terms of Mr. Herzig's employment agreement, Mr.
Herzig's base salary for the fiscal year ended September 30, 2002 is $250,000.
In addition, Mr. Herzig is entitled to quarterly and annual performance bonuses
and stock option grants to purchase shares of our common stock.
Mr. Herzig's employment agreement provides that in the event that we
terminate Mr. Herzig's employment with our company for any reason other than
cause, if Mr. Herzig terminates his employment with our company for good reason
or if Mr. Herzig's employment with our company terminates as a result of his
death or permanent disability, then Mr. Herzig is entitled to:
. receive his current salary for a period of one year following
termination;
. receive certain medical benefits for a period of one year
following termination; and
. exercise, for a period of one year following termination, any
then-unvested rights, warrants or options to purchase our capital
stock held by Mr. Herzig which would vest during such one year
period.
56
In addition, in the event that Mr. Herzig's employment with our company
is terminated for any reason other than good reason or death or disability, or
for cause, Mr. Herzig is entitled to receive any portion of his annual and/or
quarterly bonus that he has earned but not yet received.
Mr. Herzig vacated his position as chief executive officer of our
company and became vice chairman of our board of directors on May 14, 2002.
Marc Jaffe
Effective October 2, 2001, we entered into an employment agreement with
Marc Jaffe. Under the terms of this agreement, Mr. Jaffe's base salary for the
fiscal year ended September 30, 2002 was $250,000. Pursuant to the terms of Mr.
Jaffe's employment agreement, Mr. Jaffe was also entitled to an annual
performance bonus and stock option grants to purchase shares of our common
stock.
Mr. Jaffe resigned from our company on April 8, 2002. Under the terms
of Mr. Jaffe's employment agreement, Mr. Jaffe will continue to be paid his base
salary until April 8, 2003.
Compensation Committee Interlocks and Insider Participation
None.
Directors Compensation
Effective April 25, 2002, the effective date of the plan of
reorganization, we implemented a cash compensation program for our directors.
Pursuant to this program, directors are entitled to receive:
. $2,000 per month;
. an additional $250 per month for service on the compensation
committee of our board of directors;
. an additional $500 per month for service on the audit committee of
our board of directors; and
. an additional $1,000 for each board of directors or committee
meeting in excess of four per year.
Indemnification of Directors and Executive Officers and Limitation on Liability
Our amended and restated certificate of incorporation and amended and
restated bylaws provide that we will indemnify our directors and executive
officers to the fullest extent permitted by Delaware law for damages resulting
from conduct as a director or executive officer. In addition, we carry an
insurance policy for the protection of our directors and executive officers
against any liability asserted against them in their official capacities. To the
extent that indemnification for liabilities under the Securities Act may be
permitted to directors or executive officers of our company, we have been
informed that in the opinion of the Securities and Exchange Commission, this
indemnification is against public policy as expressed in the Securities Act, and
is therefore unenforceable.
57
PRINCIPAL STOCKHOLDERS
The following table and the accompanying notes set forth certain
information, as of July 22, 2002, concerning the beneficial ownership of our
common stock by: (1) each person who is known by us to beneficially own more
than five percent of our common stock, (2) each director of our company, (3)
each named executive officer and (4) all directors and named executive officers
as a group.
Name and Address
of Beneficial Owner Number of Shares (1)(2) Percent of Class
------------------- ----------------------- ----------------
Morgan Stanley Investment Management
One Tower Bridge
Suite 1100
W. Conshohoken, Pennsylvania 19428 2,023,099(3) 12.29%
HM4 Globix Qualified Fund, LLC
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court
Dallas, Texas 75201............................... 2,092,487 12.71%
Jared E. Abbruzzese.......................... 0 *
Marc H. Bell(4).............................. 247,295 1.50%
Peter S. Brodsky(5).......................... 0 *
Peter L. Herzig.............................. 0 *
Steven Lampe(6).............................. 0 *
Steven G. Singer............................. 0 *
Peter K. Stevenson........................... 0 *
Brandon Stranzl.............................. 0 *
Marc Jaffe................................... 1,251 *
Anthony L. Previte........................... 708 *
Brian L. Reach............................... 823 *
Richard Rose................................. 99 *
All directors and named executive officers
as a group (12 people)..................... 250,176 1.52%
________
* Less than 1% of our outstanding shares of common stock.
(1) The information regarding beneficial ownership of our common stock has been
presented in accordance with the rules of the Securities and Exchange
Commission and is not necessarily indicative of beneficial ownership for
any other purpose. Under these rules, beneficial ownership of our common
stock includes any shares of our common stock as to which a person,
directly or indirectly, has or shares voting power or investment power and
also any shares of our common stock as to which a person has the right to
acquire such voting or investment power within 60 days through the exercise
of any stock option or other right. The percentage of beneficial ownership
as to any person as of a particular date is calculated by dividing (a) (i)
the number of shares beneficially owned by such person plus (ii) the number
of shares as to which such person has the right to acquire voting or
investment power within 60 days by (b) the total number of shares
outstanding as of such date. On July 22, 2002, the total number of shares
of our common stock deemed to be outstanding pursuant to the terms of the
plan of reorganization was 16,460,000. As used in this prospectus, "voting
power" is the power to vote or direct the voting of shares and "investment
power" is the power to dispose or direct the disposition of shares. Except
as noted, each stockholder listed has sole voting and investment power with
respect to the shares shown as beneficially owned by such stockholder.
(2) On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit described in the section of this
prospectus entitled "The Company--Legal Proceedings." The Stipulation and
Order provides that 229,452 shares of our common stock and $1.968 million
in aggregate principal amount of the notes will be held in reserve in
escrow pending the outcome of the class action lawsuit. In the event that
any settlement entered into in connection with the class action lawsuit
requires us to pay an amount in excess of our liability insurance, we will
be required to issue to the class action litigants and their attorneys all
(in the event that this excess is $10 million or greater) or a portion of
(in the event that this excess is less than $10 million) of the shares of
our common stock and the notes being held in escrow. We have assumed for
purposes of the above calculations, however, that our liability insurance
will be sufficient to cover any settlement in the class action lawsuit and
that the shares of our common stock and the notes being held in escrow will
be distributed in accordance with the plan of reorganization rather than to
the class action litigants and their attorneys.
(3) According to information provided to us by Morgan Stanley Investment
Management, the pecuniary interests in these shares are held by a number of
institutional investors for whom Morgan Stanley Investment Management is
the discretionary investment advisor. Morgan Stanley Investment Management
has voting and investment power over these shares and, accordingly, is
deemed to beneficially own these shares.
(4) Includes 233,650 shares of our common stock issued in exchange for
$10,000,000 in aggregate principal amount of the 12.5% notes owned by Mr.
Bell or entities controlled by Mr. Bell.
(5) Peter S. Brodsky is a partner of Hicks, Muse, Tate & Furst Incorporated.
Mr. Brodsky is also an officer of the selling holders HM4 Globix Qualified
Fund, LLC, HM4 Globix Private Fund, LLC, HM PG-IV Globix, LLC, HM 4-EQ
Globix Coinvestors, LLC and HM 4-SBS Globix Coinvestors, LLC and,
accordingly, may be deemed to beneficially own all or a portion of the
shares of common stock owned by these entities. Mr. Brodsky disclaims
beneficial ownership of all shares of our common stock not owned by him of
record (except to the extent of any pecuniary interest therein).
(6) Mr. Lampe is affiliated with LC Capital, which is the beneficial owner of
778,832 shares, or approximately 4.73%, of the outstanding shares of our
common stock.
58
SELLING HOLDERS
The following table and accompanying notes set forth certain
information, as of July 22, 2002, regarding the selling holders. Under this
prospectus, the selling holders and any of their respective transferees,
assignees, donees, distributees, pledgees or other successors-in-interest may
offer and sell from time to time an aggregate of 4,327,499 shares of our common
stock and an aggregate of $26,341,558 in aggregate principal amount of the
notes. The securities listed below are being registered to permit public sales
of these securities by the selling holders, and the selling holders may offer
all, some or none of these securities.
Certain of the selling holders owned the 12.5% notes prior to the
effective date of the plan of reorganization, when the 12.5% notes were
exchanged for shares of our common stock and the notes. These selling holders
owned various amounts of the 12.5% notes and may have engaged in open market and
off-market transactions involving purchases and sales of the 12.5% notes in the
period prior to the effective date of the plan of reorganization.
Common Stock
The table below sets forth the names of the selling holders of shares of
our common stock and the number of shares of our common stock beneficially owned
by these selling holders as of July 22, 2002. On July 22, 2002, the number of
shares of our common stock deemed to be outstanding pursuant to the terms of our
plan of reorganization was 16,460,000. Except as otherwise indicated, each
person listed in the table below has informed us that it has (1) voting and
investment power with respect to its shares of our common stock and (2) record
and beneficial ownership with respect to its shares of our common stock.
If all of the shares of our common stock listed below are sold pursuant
to this prospectus, then the selling holders will sell 4,327,499 shares of our
common stock, or 26.2% of the total number of shares of our common stock
outstanding.
The information set forth in the table below was provided to us by the
selling holders listed below.
Beneficial Ownership Beneficial Ownership
Prior to the Offerings After the Offerings
---------------------- --------------------
Number of Number of Shares Number of
Shares of of Common Stock Shares of
Name and Address of Common Offered by this Common
Beneficial Owner Stock(1) Percent Prospectus Stock Percent
---------------- -------- ------- ---------- ----- -------
Morgan Stanley Investment Management (2)
One Tower Bridge
Suite 1100
W. Conshohocken, Pennsylvania 19428 .... 2,023,099 12.29% 2,023,099 0 *
HM4 Globix Qualified Fund, LLC (3)
c/o Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court
Dallas, Texas 75201..................... 2,092,487 12.71% 2,092,487 0 *
HM4 Globix Private Fund, LLC (3)
c/o Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court
Dallas, Texas 75201..................... 14,831 0.09% 14,831 0 *
HM PG-IV Globix, LLC (3)
c/o Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court
Dallas, Texas 75201..................... 111,430 0.68% 111,430 0 *
HM 4-EQ Globix Coinvestors, LLC (3)
c/o Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court
Dallas, Texas 75201..................... 34,177 0.21% 34,177 0 *
HM 4-SBS Globix Coinvestors, LLC (3)
c/o Hicks, Muse, Tate & Furst
Incorporated
200 Crescent Court
Dallas, Texas 75201..................... 51,475 0.31% 51,475 0 *
--------
* Less than 1%.
(1) On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit described in the section of this
prospectus entitled "The Company -- Legal Proceedings." The Stipulation
and Order provides that 229,452 shares of our common stock and $1.968
million in aggregate principal amount of the notes will be held in reserve
in escrow pending the outcome of the class action lawsuit. In the event
that any settlement entered into in connection with the class action
lawsuit requires us to pay an amount in excess of our liability insurance,
we will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10 million or greater) or
a portion of (in the event that this excess is less than $10 million) of
the shares of our common stock and the notes being held in escrow. We have
assumed for purposes of the above calculations, however, that our liability
insurance will be sufficient to cover any settlement in the class action
lawsuit and that the shares of our common stock and the notes being held
in escrow will be distributed in accordance with the plan of reorganization
rather than to the class action litigants and their attorneys.
(2) Morgan Stanley Investment Management is a discretionary investment advisor
of a number of institutional investors and has voting and investment
control over the shares of our common stock held by these institutional
investors. Accordingly, Morgan Stanley Investment Management is deemed to
beneficially own 2,023,099 shares of our common stock.
(3) Each of these selling holders is an affiliate of Hicks, Muse, Tate & Furst
Incorporated. Peter S. Brodsky, a partner of Hicks, Muse, Tate & Furst
Incorporated, is a director of the Company, and as of July 25, 2002, did
not hold of record any shares of common stock. Mr. Brodsky is also an
officer of each of these selling holders and, accordingly, may be deemed
to beneficially own all or a portion of the shares of our common stock
owned by these entities. Mr. Brodsky disclaims beneficial ownership of all
shares not owned by him of record (except to the extent of any pecuniary
interest therein).
59
The Notes
The table below sets forth the name of the selling holder of the notes
and the aggregate principal amount of notes beneficially owned by this selling
holder as of July 22, 2002. On July 22, 2002, $120 million in aggregate
principal amount of the notes was deemed to be outstanding pursuant to the terms
of the plan of reorganization. The information set forth in the table below was
provided to us by the selling holder listed below.
Beneficial Ownership Beneficial Ownership
Prior to the Offerings After the Offerings
---------------------- -------------------
Aggregate
Principal
Aggregate Amount of Notes Aggregate
Name and Address of Principal Offered by this Principal Amount
Beneficial Owner Amount of Notes(1) Prospectus of Notes
---------------- ------------------ ---------- --------
Morgan Stanley Investment
Management (2)
One Tower Bridge
Suite 1100
W. Conshohocken, Pennsylvania
19428 .......................... $26,341,558 $26,341,558 $ 0
------
(1) On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit described in the section of
this prospectus entitled "The Company--Legal Proceedings." The
Stipulation and Order provides that 229,452 shares of our common stock
and $1.968 million in aggregate principal amount of the notes will be
held in reserve in escrow pending the outcome of the class action
lawsuit. In the event that any settlement entered into in connection
with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class
action litigants and their attorneys all (in the event that this
excess is $10 million or greater) or a portion of (in the event that
this excess is less than $10 million) of the shares of our common
stock and the notes being held in escrow. We have assumed for purposes
of the above calculations, however, that our liability insurance will
be sufficient to cover any settlement in the class action lawsuit and
that the shares of our common stock and the notes being held in escrow
will be distributed in accordance with the plan of reorganization
rather than to the class action litigants and their attorneys.
(2) Morgan Stanley Investment Management is a discretionary investment
advisor of a number of institutional investors and has voting and
investment control over the notes held by these institutional investors.
Accordingly, Morgan Stanley Investment Management is deemed to
beneficially own $26,341,558 aggregate principal amount of the notes.
This amount includes $17,352,000 aggregate principal amount of the notes
initially deemed to have been issued by our company pursuant to the
terms of the plan of reorganization, plus $8,989,558 in aggregate
principal amount of additional notes to be issued in lieu of cash
interest payments on the notes, assuming that interest is paid in
additional notes for a period of four years from the date of the initial
issuance of the notes.
60
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Described below are certain transactions that we have entered into with
parties that are related to our company.
Registration Rights Agreement
On April 23, 2002, we entered into a registration rights agreement with
respect to our common stock and the notes. Under the registration rights
agreement, we agreed to file the registration statement of which this prospectus
forms a part on or before the 90th day following the effective date of the plan
of reorganization, relating to the offer and sale of our notes, including
additional notes paid or payable as interest on the notes, and shares of our
common stock.
Subject to certain adjustments, we are required to bear all expenses
incident to the registration of the notes and our common stock. We agreed to
indemnify the holders of the restricted securities against all liabilities,
whether under the securities laws or otherwise, arising out of disclosure
deficiencies in the registration statement. Our indemnity obligation does not,
however, extend to liability for information pertaining to a holder and
furnished to our company by or on behalf of such holder for inclusion in the
registration statement.
Subject to certain adjustments, we are obligated to keep the registration
statement continuously effective, supplemented and amended for a period ending
on the earlier of:
. the date on which all of the notes and the shares of our common
stock have been sold pursuant to the registration statement or
pursuant to Rule 144 under the Securities Act;
. the three year anniversary of the date on which the Securities
and Exchange Commission declares the registration statement
effective; and
. the date on which there are no longer any shares of our common
stock or notes outstanding.
Consulting Agreement with Communication Technology Advisors LLC
The company and Communication Technology Advisors LLC, or CTA, are party to
a consulting agreement dated as of April 19, 2002. CTA is a consulting and
private advisory firm specializing in the technology and telecommunications
sectors. Jared E. Abbruzzese, a member of our board of directors, is the Founder
and Chairman of CTA and is actively engaged in all aspects of CTA's business.
Under this agreement, we engaged CTA to act as the Office of the Chief
Restructuring Officer, providing our senior management with a wide range of
business advisory services. The initial term of the agreement ends on October
31, 2002. As consideration for the services provided by CTA, we agreed to pay to
CTA a monthly fee of $65,000. We also agreed to reimburse CTA for its
out-of-pocket expenses incurred in connection with rendering services to us
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 $1,500,000
upon the achievement of certain success milestones.
CTA was originally introduced to our company as a financial advisor to the
unofficial committee of holders of the 12.5% notes prior the commencement of our
Chapter 11 case. CTA received a total of $247,500 in fees in connection with its
service as financial advisor to the unofficial committee and was reimbursed a
total of $20,568 for out-of-pocket expenses. As a result of this engagement, we
were introduced to Peter K. Stevenson, currently our 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 CTA on other matters. A non-executive employee of our
company is also affiliated with CTA. Under the arrangement he has with the
company, this employee is required to devote 90% of his professional time to our
company.
Neither CTA, nor any of its principals or affiliates is 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 our company). CTA has advised us 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 throughout the country; and
. certain stockholders and bondholders of the company and/or certain of
their respective affiliates or principals may be considered to be
current clients of CTA in matters unrelated to our company, former
clients of CTA in matters unrelated to our company and affiliates of
clients who are (or were) represented by CTA in matters unrelated to
our company.
61
DESCRIPTION OF SECURITIES
Description of Our Common Stock
The following summary is a description of the material terms of our
common stock, does not purport to be complete and is subject in all respects to
the applicable provisions of Delaware law and of our constituent documents and
of the constituent documents of our subsidiaries. Our Amended and Restated
Certificate of Incorporation and Bylaws are filed as exhibits to the
registration statement of which this prospectus is a part.
General
Our company is authorized to issue 500,000,000 shares of common stock
with a par value of $0.01 per share. We are also authorized to issue 5,000,000
shares of preferred stock with a par value of $0.01 per share. As of July 24,
2002, 16,460,000 shares of common stock were deemed to be outstanding pursuant
to the terms of the plan of reorganization and no shares of our preferred stock
were outstanding. Our board of directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of preferred stock in
one or more series and to fix or alter the dividend rate, voting rights,
redemption price, liquidation preference and any other rights, powers and
preferences as our board of directors may determine from time to time.
All shares of our common stock are identical and entitle the holders
thereof to the same rights and privileges. The issued and outstanding shares of
our common stock are validly issued, fully paid and non-assessable. The holders
of outstanding shares of our common stock are entitled to receive dividends out
of assets legally available therefor at such times and in such amounts as our
board of directors may from time to time determine in its discretion. The
holders of our common stock have no preemptive rights to purchase any of our
securities. Upon liquidation, dissolution or winding up of our company, the
holders of our common stock are entitled to receive pro rata our assets which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of any preferred
stock then outstanding. Each outstanding share of our common stock is entitled
to one vote on all matters submitted to a vote of stockholders.
Delaware Anti-Takeover Law
We are subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
. prior to that date, the Board of Directors of the corporation
approved either the business combination or the transaction which
resulted in the stockholder becoming an interested stockholder;
. upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors and
also officers and by employee stock plans in which employee
participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a
tender or exchange offer; or
62
. on or subsequent to that date, the business combination is
approved by the Board of Directors of the corporation and is
authorized at an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of holders of at
least 66 2/3% of the outstanding shares of voting stock which are
not owned by the interested stockholder.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is Mellon
Investor Services.
Description of the Notes
General
The notes were issued under an indenture dated as of April 23, 2002
(the "Indenture"), among the Company, HSBC Bank USA, as trustee (the "Trustee")
and Bluestreak Digital, Inc., Gamenet Corporation, Naft Computer Service
Corporation, Naft International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.Net, Inc. and Comstar Telecom & Wireless, Inc., as the initial
Subsidiary Guarantors.
The following is a summary of certain provisions of the Indenture, the
notes and the Security Documents. It does not state these provisions in their
entirety. Holders should read the Indenture, the Security Documents and the form
of notes, because these documents, and not this summary, define the rights of
the Holders of the notes. Because this is only a summary, it is not complete and
does not describe every aspect of the Indenture, the Security Documents and the
Forms of notes. Whenever there is a reference to particular sections or defined
terms of the Indenture, the sections or defined terms are incorporated by
reference, and the statement is qualified in its entirety by that reference.
Copies of the Indenture, the Security Documents and the form of notes in
substantially the form in which they have been executed have been filed as an
exhibit to the registration statement of which this prospectus is a part.
Capitalized terms used herein and not otherwise defined have the meanings set
forth in the section "--Certain Definitions". The capitalized terms defined in
this section have the definitions ascribed to them in this section for purposes
of this section only. In this description, we refer to "we" and "our company" as
Globix Corporation and not to our subsidiaries.
Terms of the Notes
We are deemed to have issued the notes on the effective date of the
plan of reorganization in one series that is initially limited to $120 million
aggregate principal amount of 11% Senior Notes due 2008, which we refer to as
the initial notes. The notes will mature on December 31, 2008.
Each initial note and Additional Note will bear interest at 11% per
annum from the date of its issuance (or the closing date in the case of the
initial notes), or from the most recent date to which interest has been paid or
provided for, payable annually on May 1 in each year, commencing May 1, 2003, in
the case of the initial notes. Interest will be computed on the basis of a
360-day year consisting of twelve 30-day months. Interest so payable shall be:
. for the two-year period following the closing date, payable in
kind by the issuance of additional notes with terms identical to
the notes (other than date of issuance) in such principal amount
as shall equal the interest payment then due ("Additional
Notes");
63
. for the two-year period thereafter, payable in cash or, at our
option when authorized by a Board Resolution, in Additional Notes
or in any combination of cash and Additional Notes; and
. thereafter payable in cash.
The notes will be issued only in fully registered form, without
coupons, in denominations of $1.00 and any integral multiple of $1.00. No
service charge shall be made for any registration of transfer or exchange of
notes, but we may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith.
Redemptions
Optional Redemption
Unless a Change of Control has occurred and we have not completed the
required Offer to Purchase, the notes are redeemable, at our option, in whole or
in part, at any time or from time to time, upon not less than 15 nor more than
60 days' prior notice mailed by first-class mail to each Holder's registered
address at a redemption price equal to 100% of the aggregate principal amount,
plus accrued and unpaid interest to but excluding the redemption date (subject
to the right of Holders of record on the relevant record date to receive
interest due on or prior to the relevant interest payment date).
If a Change of Control has occurred and the required Offer to Purchase
has not been completed, we may redeem the notes as described above, but the
Redemption Price will be 101% of the aggregate principal amount of notes being
redeemed plus accrued and unpaid interest up to but excluding the date of
redemption.
All accrued and unpaid interest must be paid in cash.
Selection of Notes for Redemption.
In the case of any partial redemption provided for in "--Optional
Redemption," selection of the notes for redemption will be made by the Trustee
in compliance with the requirements of the principal national securities
exchange, if any, on which the notes are listed or, if not so listed, on a pro
rata basis, by lot or by such other method as the Trustee in its sole discretion
shall deem to be fair and appropriate, although no note of $1,000 in then
outstanding principal amount or less shall be redeemed in part. If any note is
to be redeemed in part only, the notice of redemption relating to such note
shall state the portion of the principal amount thereof to be redeemed. A new
note in principal amount equal to the unredeemed portion thereof will be issued
in the name of the Holder thereof upon cancellation of the original note.
Change of Control
If a Change of Control occurs at any time, then each Holder of notes
shall have the right to require that we purchase such Holder's notes in whole or
in part in integral multiples of $1,000, at a purchase price in cash, in an
amount equal to 101% of the principal amount of such notes or portion thereof,
plus accrued and unpaid interest, to the date of purchase, pursuant to the Offer
to Purchase and in accordance with the other procedures set forth in the
Indenture. Within 30 days following the Change of Control, we are required to
mail an Offer to Purchase to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to purchase
notes on the date specified in the Offer to Purchase. We are required to comply
with the requirements of Rule 14e-1 under the
64
Exchange Act and the rules and regulations promulgated thereunder to the extent
such rules and regulations are applicable in connection with the purchase of the
notes pursuant to the Offer to Purchase.
We are required to perform our obligations specified in the Offer to
Purchase and the Trustee is required to perform its obligations arising under
the Indenture in connection therewith. Prior to the Purchase Date, we are
required to:
. accept for payment notes or portions thereof tendered pursuant to
the Offer;
. deposit with the paying agent (or, if we are acting as our own
paying agent, segregate and hold in trust) money sufficient to
pay the purchase price of all notes or portions thereof so
accepted; and
. deliver or cause to be delivered to the Trustee all notes so
accepted together with an officers' certificate stating the notes
or portions thereof accepted for payment by our company.
The paying agent shall promptly mail or deliver to Holders of notes so
accepted payment in an amount equal to the purchase price, and the Trustee will
promptly authenticate and mail or deliver to such Holders a new note or notes
equal in principal amount to any unpurchased portion of the note surrendered as
requested by the Holder. We are required to promptly mail or deliver any note
not accepted for payment to the Holder thereof. Upon surrender of a Global Note
that is purchased in part pursuant to an Offer to Purchase, the paying agent
will forward such Global Note to the Trustee who will make a notation in its
records to reduce the principal amount of such Global Note to an amount equal to
the unpurchased portion of such Global Note. We will publicly announce the
results of the Offer on or as soon as practicable after the Purchase Date.
Notwithstanding the foregoing, we are not required to make an Offer to
Purchase upon a Change of Control if a third party makes the Offer to Purchase
in the manner, at the times and otherwise in compliance with the requirements
set forth in the "Change of Control" covenant and the Indenture applicable to
the Offer to Purchase made by us and purchases all notes validly tendered and
not withdrawn under such Offer to Purchase.
We do not have any present intention to engage in a transaction
involving a Change of Control, although it is possible that we could decide to
do so in the future. Subject to the limitations discussed below, we could, in
the future, enter into certain transactions, including acquisitions,
refinancings or other capitalizations, that would not constitute a Change of
Control under the Indenture, but that could increase the amount of Debt
outstanding at such time or otherwise affect our capital structure or credit
ratings. Restrictions on the ability of our company and our Restricted
Subsidiaries to incur additional Debt are contained in the covenants described
under "--Certain Covenants--Limitation on Debt," "--Certain
Covenants--Limitation on Liens" and "--Certain Covenants--Limitation on Sale
Leaseback Transactions." These restrictions can only be waived with the consent
of the Holders of a majority in aggregate principal amount of the notes then
outstanding. These provisions may not necessarily afford the Holders of the
notes protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving our
company that may adversely affect the Holders, because such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition Change of
Control to require us to make a Change of Control offer. In addition, the
existence of the Holder's right to require us to repurchase such Holder's notes
upon the occurrence of a Change of Control may or may not deter a third party
from seeking to acquire our company in a transaction that would constitute a
Change of Control.
65
Our ability to repurchase notes pursuant to a Change of Control offer
may be limited by a number of factors. Future Debt of our company or our
Restricted Subsidiaries may contain prohibitions on the occurrence of certain
events that would constitute a Change of Control or require such Debt to be
repurchased upon a Change of Control. Moreover, the exercise by the Holders of
their right to require us to repurchase the notes could cause a default under
such Debt, event if the Change of Control itself does not, due to the financial
effect of such repurchase on us and our Subsidiaries. Finally, our ability to
purchase notes following the occurrence of a Change of Control may also be
limited by our then existing financial resources. There can be no assurance that
sufficient funds will be available when necessary to make any required
repurchases. In the event that a Change of Control offer occurs at a time when
we do not have sufficient available funds to pay the purchase price for all
notes validly tendered pursuant to such an offer or at a time when we are
prohibited from making a Change of Control offer (and we are unable either to
obtain the consent of the holders of the relevant Debt or to repay such Debt),
an Event of Default would occur under the Indenture. Our failure to purchase
tendered notes would constitute a breach of the Indenture which could, in turn,
constitute a default under other Debt and could lead to the acceleration of such
other Debt.
Collateral
In order to secure our obligations under the Indenture, the notes and
the applicable Security Documents, our company and the Subsidiary Guarantors
have pledged to the Collateral Agent in favor of the Trustee, their interest in
the Collateral. The Collateral will consist of substantially all of the
unencumbered assets of the Company and its domestic Restricted Subsidiaries,
including up to 66 2/3% of the Capital Stock of each first tier subsidiary and a
nine-story office building located at 415 Greenwich Street, New York, New York.
The Security Documents contain covenants pursuant to which our company
and the Subsidiary Guarantors are, among other things, prohibited from selling,
further mortgaging or transferring any interest in such Collateral (other than
as permitted under the Indenture and the Security Documents).
The Indenture and the Security Documents provide that the Collateral
may be released from the Liens created by the Security Documents in accordance
with the provisions of the Indenture and Security Documents regarding:
. the use, sale or other disposal of equipment and inventory in the
ordinary course of business;
. payment in full of the notes in accordance with the terms of the
notes and the Indenture and the other obligations then due and
owing under the Notes, the Indenture and the Security Documents;
. the sale or other disposition of Collateral constituting an Asset
Disposition or otherwise allowed by the definition of Asset Sale;
and
. in connection with the release of a Subsidiary Guarantor as
described in "--Subsidiary Guarantors."
The Collateral Agent may also release a portion of the Collateral from
the Lien of the Security Documents or subordinate its Lien on such Collateral so
that we may use it to secure Permitted Senior Secured Debt or Designated Secured
Debt (collectively, "Senior Obligations") in the following circumstances. Our
company and our Restricted Subsidiaries are permitted to have Senior Obligations
in
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an aggregate principal amount not to exceed $20 million at any one time
outstanding. Such Senior Obligations may be secured by Liens on Collateral
either senior to or in lieu of the Liens of the Security Documents.
However, at the time Liens are granted with respect to Senior
Obligations, such Liens may not extend to assets in excess of assets having a
fair market value equal to or as close as practicable to 1.5 multiplied by the
specific Senior Obligations then being advanced or made available. Until such
time as the Senior Obligations are paid in full, the Collateral Agent may not
demand or sue for any right or remedy in respect of the Collateral used to
secure such Senior Obligations.
Upon receiving a written request by the administrative agent and/or
collateral agent for the Permitted Senior Secured Debt (the "Senior Debt
Administrative Agent"), the Collateral Agent will release its Liens and security
interests in any Collateral upon any sale, lease, transfer or other disposition
of such Collateral pursuant to the terms of the agreements governing the
Permitted Senior Secured Debt (but subject to the rights of the Collateral Agent
in and to such Collateral and any proceeds thereof to the extent of any excess
thereof over the amount of the Senior Obligations).
In addition, the Collateral Agent will refrain from contesting,
bringing or joining any action or proceeding contesting the validity, perfection
or priority of the security interest of the Senior Debt Administrative Agent in
the Collateral to the extent of the Senior Obligations.
The release of any Collateral from the terms of the Security Documents,
or the release, in whole or in part, of the Liens created by the Security
Documents, or the termination of the Security Documents, will not be deemed to
impair the Lien on the Collateral under the Indenture in contravention of the
provisions thereof and of the Security Documents if and to the extent that the
Collateral is released or the Security Documents are terminated pursuant to the
Indenture and the applicable Security Documents. In connection with the release
of Collateral, the Trustee will determine whether it has received all
documentation required by Section 314(d) of the Trust Indenture Act and the
terms of the Indenture.
Subsidiary Guarantors
The Restricted Subsidiaries listed as Subsidiary Guarantors in
"--General" are the initial Subsidiary Guarantors; however, other Restricted
Subsidiaries may in the future incur Subsidiary Guaranties of the Notes as
described in "--Certain Covenants--Future Subsidiary Guarantors." Each
Subsidiary Guarantor unconditionally guarantees jointly and severally, to each
holder of Notes and the Trustee the full and prompt performance of our
obligations under the Indenture and the notes, including the payment of
principal of and premium, if any, on and interest on the notes pursuant to its
Subsidiary Guaranty. The obligations of each Subsidiary Guarantor will be
limited to the maximum amount as will, after giving effect to all other
contingent and fixed liabilities of such Subsidiary Guarantor and after giving
effect to any collections from or payments made by or on behalf of any other
Subsidiary Guarantor in respect of the Obligations of such other Subsidiary
Guarantor under its Subsidiary Guaranty or pursuant to its contribution
obligations under the Indenture, result in the Obligations of such Subsidiary
Guarantor under the Subsidiary Guaranty not constituting a fraudulent conveyance
or fraudulent transfer under any applicable federal, state or foreign bankruptcy
law or not otherwise being void, voidable or unenforceable under such applicable
foreign law. Each Subsidiary Guarantor that makes a payment or distribution
under a Subsidiary Guaranty shall be entitled to a contribution from each other
Subsidiary Guarantor in a pro rata amount based on the Adjusted Net Assets of
each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to us
or to a Restricted Subsidiary. Each Subsidiary
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Guarantor may consolidate with or merge into or sell all or substantially all of
its properties and assets to a Person other than our company or a Restricted
Subsidiary:
. if the transaction constitutes an Asset Sale made in compliance
with the Asset Sale provisions of the Indenture or
. if:
. the surviving Person is not the Subsidiary Guarantor, the
surviving Person must be a corporation organized and existing
under the laws of the United States of America, any State
thereof or the District of Columbia or if the Subsidiary
Guarantor was a Foreign Restricted Subsidiary, the jurisdiction
of organization of such Subsidiary Guarantor;
. the surviving Person is not the Subsidiary Guarantor, the
surviving Person must agree to assume the Subsidiary Guarantor's
Subsidiary Guaranty and all its obligations pursuant to the
Indenture (except to the extent the following paragraph would
result in the release of such Subsidiary Guaranty); and
. in the case of a transfer or other disposition of all or
substantially all the assets of such Subsidiary Guarantor, such
assets shall have been transferred as virtually an entirety to
one Person and all Liens on such assets created by the Security
Documents remain valid, enforceable and perfected.
Upon the sale or other disposition (by merger or otherwise) of a
Subsidiary Guarantor (or all or substantially all of its properties and assets)
to a Person other than our company or another Subsidiary Guarantor and pursuant
to a transaction that is otherwise in compliance with the Indenture (as
described in clause (a) of the foregoing paragraph), such Subsidiary Guarantor
shall be deemed released from its Subsidiary Guaranty and the related
obligations set forth in the Indenture. However, any such release shall occur
only to the extent that all obligations of such Subsidiary Guarantor under all
of its guarantees of, and under all of its pledges of assets or other security
interests which secure, other Indebtedness of our company or any other
Restricted Subsidiary shall also terminate upon such sale or other disposition.
Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Subsidiary Guaranty and
related obligations set forth in the Indenture for so long as it remains an
Unrestricted Subsidiary.
Any Subsidiary Guaranty by a Foreign Restricted Subsidiary shall be
automatically and unconditionally released and discharged, as evidenced by a
supplemental indenture executed by us and the Subsidiary Guarantors and the
Trustee, upon the release or discharge of the Guarantee which resulted in the
creation of such Foreign Restricted Subsidiary's Subsidiary Guaranty and all
other Guarantees of the Obligations of any obligor on the notes, except a
discharge or release by, or as a result of, payment under such Guarantee.
The Obligations of Subsidiary Guarantors are secured by the Liens of
the Security Documents. However, such Liens may be required to be released when
a Subsidiary Guarantor is released or in connection with Incurrence of Permitted
Senior Secured Debt or Designated Senior Debt, or such Liens may be required to
be subordinated to Liens securing such Senior Obligations as described in
"--Collateral." The Obligations of each Subsidiary Guarantor under its
Subsidiary Guaranty are subordinated to the prior payment in full of such
Subsidiary Guarantor's Designated Senior Debt.
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Only Debt of each Subsidiary Guarantor that is Designated Senior Debt
will rank senior to its Subsidiary Guaranty in accordance with the provisions of
the Indenture. The Subsidiary Guaranties will in all respects rank equally with
all other senior Debt of the Subsidiary Guarantors, and will effectively rank
senior as to security over pari passu debt.
Upon any payment or distribution of the assets of any Subsidiary
Guarantor to creditors upon a total or partial liquidation or a total or partial
dissolution of such Subsidiary Guarantor or in a bankruptcy, reorganization,
insolvency, receivership or similar proceeding relating to such Subsidiary
Guarantor or its property:
. holders of Designated Senior Debt of such Subsidiary Guarantor
shall be entitled to receive payment in full in cash of such
Designated Senior Debt before Holders shall be entitled to receive
any payment pursuant to any Obligations of such Subsidiary
Guarantor; and
. until the Designated Senior Debt of any Subsidiary Guarantor is
paid in full in cash, any distribution made by or on behalf of such
Subsidiary Guarantor to which Holders would be entitled but for the
subordination of such Subsidiary Guaranty shall be made to holders
of the Designated Senior Debt as their interests may appear, except
that all Holders may receive and retain shares of stock and any
debt securities of such Subsidiary Guarantor that are subordinated
to Designated Senior Debt of such Subsidiary Guarantor to at least
the same extent as the Obligations of such Subsidiary Guarantor are
subordinated to Designated Senior Debt of such Subsidiary
Guarantor.
A Subsidiary Guarantor may not pay principal of, premium, if any, or
interest on, or other payment obligations in respect of, the Obligations may not
otherwise purchase, redeem or retire any notes (collectively, "pay its
Subsidiary Guarantee") if:
. any of its Designated Senior Debt is not paid when due; or
. any other default on any of its Designated Senior Debt occurs
and the maturity of such Designated Senior Debt is accelerated
in accordance with its terms unless, in either case, the default
has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Debt has been paid in full
in cash.
A Subsidiary Guarantor also will not be permitted to pay the
Obligations for a Payment Blockage Period (as defined below) during the
continuance of any default (a "Non-Payment Default"), on any of its Designated
Senior Debt that permits the holders of such Designated Senior Debt to
accelerate its maturity immediately without either further notice (except such
notice as may be required to effect such acceleration) or the expiration of any
applicable grace periods.
A "Payment Blockage Period" commences on the receipt by the Trustee and
such Subsidiary Guarantor of written notice (a "Payment Blockage Notice") of a
default of the kind described in the immediately preceding paragraph from the
representative of the holders of such Designated Senior Debt specifying an
election to effect a Payment Blockage Period and ends 179 days thereafter. The
Payment Blockage Period will end earlier if such Payment Blockage Period is
terminated:
. by written notice to the Trustee and such Subsidiary Guarantor
from the Person or Persons who gave such Payment Blockage
Notice;
. because the default giving rise to such Payment Blockage Notice
is no longer continuing;
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or
. because such Designated Senior Debt has been repaid in full in
cash.
The Subsidiary Guarantor may resume payments on the Obligations after
the end of the Payment Blockage Period, unless the holders of such Designated
Senior Debt or the representative of such holders have accelerated the maturity
of such Designated Senior Debt and not rescinded such acceleration. Not more
than one Blockage Notice may be given in any consecutive 360-day period,
irrespective of the number of defaults with respect to Designated Senior Debt
during such period.
Ranking
The Debt evidenced by the notes is a senior secured obligation of our
company, ranks pari passu in right of payment with all of our existing and
future Debt and other liabilities that are not expressly subordinated by their
express terms to the notes and is senior in right of payment to all of our Debt
that is so subordinated. The notes will be secured by the Collateral in which we
have an interest. Accordingly, claims of the Holders of the notes will rank
ahead of unsecured claims of our creditors to the extent of the value, priority
and validity of the Liens securing the notes in such Collateral.
Any Subsidiary Guarantee issued pursuant to the Indenture will be a
senior subordinated secured obligation of the applicable Subsidiary Guarantor. A
Subsidiary Guarantee will be subordinated in priority of payment to Designated
Senior Debt, but will rank pari passu in priority of payment with all other Debt
and other liabilities of such Subsidiary Guarantor that are not subordinated by
their express terms to such Subsidiary Guarantee, and senior in priority of
payment to all other Debt or such Subsidiary Guarantor that by its terms is
subordinated or junior in right of payment to such Subsidiary Guarantee. The
Subsidiary Guarantee of each Subsidiary Guarantor will be secured by the
Collateral in which such Subsidiary Guarantor has an interest. Accordingly,
claims of the Holders of Notes will rank ahead of unsecured claims of creditors
of such Subsidiary Guarantors (other than holders of Designated Senior Debt) to
the extent of the value, priority and validity of the Liens securing such
Subsidiary Guarantor's Subsidiary Guarantee. In addition, the Indenture permits
under limited circumstances the creation of, or the designation of existing
Restricted Subsidiaries as, Unrestricted Subsidiaries. Such Unrestricted
Subsidiaries will not generally be subject to the covenants applicable to us and
to our Restricted Subsidiaries under the Indenture.
Although the Indenture limits the incurrence of Debt by our company or
any Restricted Subsidiary, such limitation is subject to a number of significant
qualifications. The notes and Subsidiary Guarantees will be, however,
effectively subordinated to certain secured indebtedness of our company and the
Subsidiary Guarantors (including the Permitted Senior Secured Debt) to the
extent of the value, priority and validity of the Liens on the Collateral
securing such indebtedness. In this regard, the Indenture permits any Permitted
Senior Secured Debt to be secured by a first priority Lien on the assets of our
company and/or our Restricted Subsidiaries. Moreover, the Indenture does not
impose any limitation on the incurrence by us or our Restricted Subsidiaries of
liabilities that are not considered Debt under the Indenture. Under certain
circumstances, we will be able to designate additional Subsidiaries as
Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to many
of the restrictive covenants set forth in the Indenture.
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Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Debt.
We will not, and will not permit any of our Restricted Subsidiaries to,
Incur any Debt; provided that we may Incur Debt and its Restricted Subsidiaries
may Incur Debt if, after giving effect to the Incurrence of such Debt and the
receipt and application of the proceeds therefrom, the Consolidated Debt to
EBITDA Ratio would be greater than zero and less than 6:1.
Notwithstanding the foregoing limitation, the following Debt may be
Incurred:
(i) Permitted Senior Secured Debt;
(ii) Debt owed (A) by a Restricted Subsidiary of our company
which is evidenced by a promissory note, or (B) to any
Restricted Subsidiary which is evidenced by a promissory
note; provided that (x) if we are the obligor, such Debt
is expressly subordinated to the prior payment in full in
cash of all obligations with respect to the notes and (y)
in each case any event which results in any such
Restricted Subsidiary ceasing to be a Restricted
Subsidiary or any subsequent transfer of such Debt (other
than to our company or another Restricted Subsidiary)
shall be deemed, in each case, to constitute the
Incurrence of such Debt not permitted by this clause
(ii);
(iii) Debt: (A) in respect of performance, surety or appeal
bonds or letters of credit in the ordinary course of
business, (B) under Permitted Interest Rate Agreements or
Currency Protection Agreements, or (C) arising under, or
arising from, agreements providing for indemnification,
adjustment of purchase price or similar obligations, or
from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of that we
Incurred in connection with the disposition of any
business, assets or Restricted Subsidiary (other than
Guarantees of Debt Incurred by any Person acquiring all
or any portion of such business, assets or Restricted
Subsidiary for the purpose of financing such
acquisition), in a principal amount not to exceed the
gross proceeds actually received by our company or any
Restricted Subsidiary in connection with such
disposition;
(iv) Debt which is exchanged for or the proceeds of which are
used to replace, refinance or refund, or any extension or
renewal (including as a result of an amendment or
restatement) of (each, a "refinancing"), Debt Incurred
pursuant to clause (vi) of this second paragraph and this
clause (iv), in each case in an aggregate principal
amount not to exceed the principal amount of the Debt so
refinanced (together with any accrued interest and any
premium and other payment required to be made with
respect to the Debt being refinanced or refunded, and any
fees, costs, expenses, underwriting discounts or
commissions and other payments paid or payable with
respect to the Debt Incurred pursuant to this clause
(iv)); provided, however, that (A) Debt, the proceeds of
which are used to replace, refinance or refund the notes,
or Debt which is pari passu with or subordinate in right
of payment to the notes, shall only be permitted if (x)
in the case of any refinancing of the notes or Debt which
is pari passu to the notes,
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the refinancing Debt is Incurred by us and made pari
passu to the notes or subordinated to the notes, and (y)
in the case of any refinancing of Debt which is
subordinated to the notes, the refinancing Debt is
Incurred by us and is subordinated to the notes in a
manner that is at least as favorable to the Holders as
that of the Debt refinanced; (B) the replacement,
refinancing or refunding Debt by its terms, or by the
terms of any agreement or instrument pursuant to which
such Debt is issued, does not have a final maturity prior
to the final maturity of the notes and has an Average
Life longer than the Average Life of the notes
refinanced; and (C) in the case of any refinancing of
Debt Incurred by our company, the refinancing of Debt may
be Incurred only by us, and in the case of any
refinancing of Debt Incurred by a Restricted Subsidiary,
the refinancing Debt may be Incurred only by such
Restricted Subsidiary or our company;
(v) Debt of our company or of Restricted Subsidiaries not to
exceed, at any time outstanding, 2.0 times the Net Cash
Proceeds received by us after the Closing Date (A) from
the issuance and sale of our Capital Stock (other than
Disqualified Stock) or (B) from the issuance and sale of
convertible Debt upon the conversion of that Debt into
Capital Stock, other than Disqualified Stock, in each
case to a Person that is not a Subsidiary of our company,
to the extent that such Net Cash Proceeds have not been
used pursuant to clause (iv)(C)(3) of the Restricted
Payment Basket calculation in the first paragraph of the
section entitled "--Limitation on Restricted Payments" or
clauses (iii), (iv) or (vi) of the second paragraph of
the section entitled "--Limitation on Restricted
Payments" to make a Restricted Payment; provided that
such Debt does not have a final maturity prior to the
final maturity of the Notes and has an Average Life
longer than the Average Life of the notes;
(vi) Existing Debt;
(vii) Debt, including, but not limited to, Capital Lease
Obligations and Purchase Money Secured Debt, Incurred to
finance the purchase or other acquisition of any
property, inventory, asset or business, directly or
indirectly, by our company or any Restricted Subsidiary
used in, or to be used in, the Internet Service Business,
provided, that the amount of Debt Incurred pursuant to
this clause (vii) does not exceed $15 million in any one
year and the total amount of Debt outstanding at any one
time under this clause (vii) does not exceed $60 million;
and
(viii) Debt not to exceed $15.0 million in an aggregate
principal amount outstanding at any time.
Notwithstanding the prior two paragraphs of this "Limitation on Debt"
covenant, we may not Incur any Debt if the proceeds thereof are used, directly
or indirectly, to repay, prepay, redeem, defease, retire, refund or refinance
any Subordinated Obligations unless such Debt shall be subordinated to the notes
and the Subsidiary Guarantees to at least the same extent as such Subordinated
Obligations.
For purposes of determining compliance with this "Limitation on Debt"
covenant, in the event that an item of Debt meets the criteria of more than one
of the types of Debt described in the above clauses, or is permitted in part
under the first paragraph of this "Limitation on Debt" covenant and in part
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under one or more of the above clauses, we shall, in our sole discretion,
classify, and from time to time may reclassify, such item of Debt in whole or in
part.
For purposes of determining any particular amount of Debt under the
"Limitation on Debt" covenant, Guarantees, Liens or obligations with respect to
letters of credit supporting Debt otherwise included in the determination of
such particular amount shall not be included.
Limitation on Restricted Payments.
We will not, and will not permit any Restricted Subsidiary to, directly
or indirectly:
(i) declare or pay any dividend or make any distribution on
or with respect to our or its Capital Stock to Persons
other than our company or any of our Restricted
Subsidiaries (other than (x) dividends or distributions
payable solely in shares of our Capital Stock (other than
Disqualified Stock), or in options, warrants or other
rights to acquire shares of such Capital Stock; (y) pro
rata dividends or distributions on Common Stock of
Restricted Subsidiaries held by minority stockholders; or
(z) dividends in respect of Disqualified Stock);
(ii) purchase, redeem, retire or otherwise acquire for value
any shares of Capital Stock of (A) our company or any
Unrestricted Subsidiary (including options, warrants or
other rights to acquire such shares of Capital Stock)
held by any Person or (B) a Restricted Subsidiary
(including options, warrants or other rights to acquire
such shares of Capital Stock) held by any Person other
than our company or a Wholly Owned Restricted Subsidiary
of our company, provided, however, that this clause (ii)
shall not prohibit an Investment which would be
considered a Permitted Investment under clause (i) of the
definition of Permitted Investment;
(iii) make any voluntary or optional principal payment, or
voluntary or optional redemption, repurchase, defeasance,
or other acquisition or retirement for value, of
Subordinated Obligations; or
(iv) make any Investment, other than a Permitted Investment,
in any Person, (such payments or any other actions
described in clauses (i) through (iii) above being
collectively "Restricted Payments") if, at the time of,
and after giving effect to, the proposed Restricted
Payment:
(A) a Default or Event of Default has occurred and is
continuing;
(B) our company could not Incur at least $1.00 of Debt
under the first paragraph of the "Limitation on
Debt" covenant; or
(C) the aggregate amount of all Restricted Payments
(which amount, if other than cash, is to be
determined in good faith by the Board of Directors,
whose determination shall be conclusive and
evidenced by a Board Resolution) made after the
Closing Date exceeds the sum (the "Restricted
Payment Basket") of: (1) cumulative Consolidated
EBITDA since the first full fiscal quarter after the
fiscal quarter during which the Closing Date occurs
through the last day of the last full fiscal quarter
ending immediately preceding the date of such
Restricted Payment for
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which quarterly or annual financial statements are
available; minus (2) 1.5 times our cumulative
Consolidated Interest Expense since the Closing Date
of the Notes through the last day of the last full
fiscal quarter ending immediately preceding the date
of such Restricted Payment for which quarterly or
annual financial statements are available; plus (3)
the aggregate Net Cash Proceeds received by our
company after the Closing Date from the issuance and
sale of its Capital Stock (other than Disqualified
Stock) to a Person who is not a Subsidiary of the
Company, including an issuance or sale permitted by
the Indenture of convertible Debt of our company for
cash subsequent to the Closing Date upon the
conversion of such Debt into Capital Stock (other
than Disqualified Stock) of our company, or from the
issuance to a Person who is not a Subsidiary of our
company of any options, warrants or other rights to
acquire Capital Stock (other than Disqualified
Stock) of our company exclusive of any options,
warrants or other rights that are redeemable at the
option of the holder, or are required to be
redeemed, prior to the stated final maturity date of
the Notes), in each case except to the extent such
Net Cash Proceeds are used to Incur Debt pursuant to
clause (v) of the second paragraph of the
"Limitation on Debt" covenant; plus (4) an amount
equal to the net reduction in Investments (other
than reductions in Permitted Investments) in any
Person resulting from payments of interest on Debt,
dividends, repayments of loans or advances, or other
transfers of assets, in each case to our company or
any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment
(except, in each case, to the extent any such
payment or proceeds are included in the calculation
of Consolidated EBITDA), or from redesignations of
Unrestricted Subsidiaries as Restricted
Subsidiaries, not to exceed, in each case, the
amount of Investments previously made by our company
or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
The foregoing shall not be violated by reason of:
(i) the payment of any dividend within 60 days after the date
of declaration thereof if, at said date of declaration,
such payment would comply with the foregoing paragraph;
(ii) the redemption, repurchase, repayment, prepayment,
defeasance or other acquisition or retirement for value
of Subordinated Obligations, including premium, if any,
and accrued and unpaid interest, with the proceeds of,
Subordinated Obligations which are permitted to be
Incurred under the "Limitation on Debt" covenant;
(iii) the repurchase, redemption or other acquisition of our
company's Capital Stock or the Capital Stock of any of
our Subsidiaries (or options, warrants or other rights to
acquire such Capital Stock) in exchange for (including
upon exercise of a conversion right), or out of the
proceeds of a capital contribution or a substantially
concurrent offering of, shares of Capital Stock (other
than Disqualified Stock) of our company (or options,
warrants or other rights to acquire such Capital Stock,
other than Disqualified Stock);
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(iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition
for value of Subordinated Obligations in exchange for, or
out of the proceeds of, a capital contribution or a
substantially concurrent offering of, shares of the
Capital Stock (other than Disqualified Stock) of our
company (or options, warrants or other rights to acquire
such Capital Stock other than Disqualified Stock);
(v) payments or distributions to dissenting stockholders
pursuant to applicable law, pursuant to or in connection
with a consolidation, merger or transfer of assets that
complies with the provisions of the Indenture applicable
to mergers, consolidations and transfers of all or
substantially all of the property and assets of our
company, and payments of cash in lieu of fractional
shares;
(vi) Investments in any Person provided that the aggregate
amount of Investments made pursuant to this clause (vi)
does not exceed the sum of: (A) the amount of Net Cash
Proceeds received by our company after the Closing Date
from the sale of our Capital Stock (other than
Disqualified Stock) to a Person who is not a Subsidiary
of our company, except to the extent such Net Cash
Proceeds are used to Incur Debt pursuant to clause (v) of
the second paragraph of the "Limitation on Debt" covenant
or to make Restricted Payments pursuant to clause
(iv)(C)(3) of the Restricted Payment Basket calculation
set forth in the first paragraph of this section or
clauses (iii) or (iv) of this paragraph of this section,
plus (B) the net reduction in Investments made pursuant
to this clause (vi), other than reductions in Permitted
Investments, resulting from distributions on or
repayments of such Investments or from the Net Cash
Proceeds from the sale of any such Investment (except in
each case to the extent any such payment or proceeds is
included in the calculation of Consolidated EBITDA) or
from such Person becoming a Restricted Subsidiary;
provided that the net reduction in any Investment shall
not exceed the amount of such Investment;
(vii) Investments acquired in exchange for our Capital Stock
(other than Disqualified Stock);
(vii) the purchase, redemption or other acquisition or
retirement of our Common Stock or any warrant, option or
other right to acquire shares of our Common Stock from
employees of our company or our Subsidiaries in an amount
not to exceed $2.0 million in any fiscal year; provided
that, amounts not paid for any such purchase, redemption
or other acquisition or retirement in any fiscal year may
be accumulated and paid in any subsequent fiscal year;
(ix) additional Restricted Payments not to exceed $10.0
million in the aggregate; or
(x) our acquisition of our Capital Stock in connection with
the cashless exercise of any options, warrants or similar
rights issued by our company.
Each Restricted Payment permitted pursuant to the preceding paragraph
(other than the Restricted Payment referred to in clause (ii) thereof and an
exchange of Capital Stock for Capital Stock or Debt referred to in clause (iii)
or (iv) thereof), and the Net Cash Proceeds from any issuance of Capital Stock
referred to in clauses (iii), (iv) and (vi), shall be included in calculating
whether any subsequent Restricted Payment would exceed the Restricted Payment
Basket set forth in clause (iv)(C) of the first
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paragraph of this section. In the event that the proceeds of an issuance of our
Capital Stock are used for the redemption, repurchase or other acquisition of
the notes, or Debt that is pari passu with the notes, then the Net Cash Proceeds
of such issuance shall be included in clause (iv)(C) of the first paragraph of
this "Limitation on Restricted Payments" covenant only to the extent that such
proceeds are not used for such redemption, repurchase or other acquisition of
such Debt.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries.
We may not, and may not permit any Restricted Subsidiary to, directly
or indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary (i)
to pay dividends (in cash or otherwise) or make any other distributions in
respect of its Capital Stock owned by our company or any other Restricted
Subsidiary or pay any Debt or other obligation owed to our company or any other
Restricted Subsidiary; (ii) to make loans or advances to our company or any
other Restricted Subsidiary; or (iii) to transfer any of its property or assets
to our company or any other Restricted Subsidiary. Notwithstanding the
foregoing, we may, and may permit any Restricted Subsidiary to, suffer to exist
any such encumbrance or restriction:
(i) pursuant to any agreement in effect on the Closing Date,
and any amendments, extensions, refinancings, refundings,
renewals, restatements or replacements of such
agreements, provided that the amendments, encumbrances
and restrictions in any such extensions, refinancings,
renewals, restatements or replacements are no less
favorable in any material respect to the Holders, than
those encumbrances or restrictions that are then in
effect and that are being extended, refinanced, renewed,
restated or replaced;
(ii) existing under or by reason of applicable law;
(iii) existing or arising in connection with any Permitted
Senior Secured Debt or any Acquisition Debt;
(iv) pursuant to an agreement entered into in connection with
Debt Incurred under clause (iv) of the second paragraph
of the "Limitation on Debt" covenant; provided, however,
that the provisions contained in such agreement related
to such encumbrance or restriction are no more
restrictive in any material respect than the provisions
contained in the agreement that is the subject of the
refinancing;
(v) contained in any agreement relating to a Lien on any
property or assets of a Restricted Subsidiary or our
company otherwise permitted under the Indenture, but only
to the extent such restrictions restrict the transfer of
the property subject to such Lien;
(vi) pursuant to customary nonassignment provisions entered
into in the ordinary course of business in leases,
licenses and other contracts to the extent such
provisions restrict the transfer, sublicensing or any
such license or subletting of any such lease or the
assignment of rights under any such contract;
(vii) with respect to a Restricted Subsidiary imposed pursuant
to an agreement which has been entered into for the sale
or disposition of all or substantially all of the Capital
Stock or assets of such Restricted Subsidiary; provided
that consummation of such transaction would not result in
an Event of Default or an
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event that, with the passing of time or the giving of
notice, or both, would constitute an Event of Default,
that such restriction terminates if such transaction is
closed or abandoned and that the closing or abandonment
of such transaction occurs within one year of the date
such agreement was entered into;
(viii) imposed pursuant to contracts for the sale of assets with
respect to the transfer of the assets to be sold pursuant
to such contract;
(ix) arising or agreed to in the ordinary course of business,
not relating to any Debt, and that do not, individually,
or in the aggregate, detract from the value of property
or assets of our company or any Restricted Subsidiary in
any manner material to our company or any Restricted
Subsidiary; or
(x) if such encumbrance or restriction is contained in the
terms of any agreement entered into in connection with
the Incurrence of Debt if (A) the encumbrance or
restriction applies only in the event of a payment
default or a default with respect to a financial covenant
contained in such Debt or agreement, (B) the encumbrance
or restriction is not materially more disadvantageous to
the Holders of the notes than is customary in comparable
financings, and (C) we determine that any such
encumbrance or restriction will not materially affect our
ability to make principal or interest payments on the
notes.
Limitation on Liens.
We may not, and may not permit any Restricted Subsidiary to, Incur or
suffer to exist any Lien on or with respect to any property or assets now owned
or hereafter acquired to secure any Debt without making, or causing such
Restricted Subsidiary to make, effective provision for securing the notes (i)
equally and ratably with such Debt as to such property or assets for so long as
such Debt will be so secured or (ii) in the event such Debt is Debt of our
company which is subordinate in right of payment to the notes, prior to such
Debt as to such property or assets for so long as such Debt will be so secured.
The foregoing restrictions shall not apply to:
(i) Liens in existence on the Closing Date;
(ii) Liens securing only the notes or the Subsidiary
Guarantees and any Lien in favor of the Collateral Agent
for the benefit of the Trustee and the Holders arising
under the provisions in the Indenture or the Security
Documents;
(iii) Liens granted by a Restricted Subsidiary in favor of our
company or any other Restricted Subsidiary;
(iv) Liens to secure Permitted Senior Secured Debt;
(v) Liens securing Purchase Money Secured Debt;
(vi) Liens on property existing immediately prior to the time
of acquisition thereof (and not Incurred in anticipation
of the financing of such acquisition), provided that such
Lien extends only to the acquired property;
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(vii) Liens on property of a Person existing at the time such
Person becomes a Restricted Subsidiary and not incurred
in anticipation of becoming a Restricted Subsidiary,
provided that such Lien extends only to the acquired
property;
(viii) any interest in or title of a lessor to any property
subject to a Capital Lease Obligation which is permitted
under the Indenture;
(ix) Liens on the property or assets of a Restricted
Subsidiary securing Debt of such Subsidiary, which Debt
is permitted under the Indenture; or
(x) Liens to secure Debt Incurred pursuant to clause (iv) of
the second paragraph of the "Limitation on Debt"
covenant; provided that such Lien does not extend to any
property other than the property securing the Debt being
replaced, refunded or refinanced pursuant to clause (iv)
of the second paragraph of the "Limitation on Debt"
covenant.
Limitation on Issuance of Capital Stock of Restricted Subsidiaries.
We will not issue or sell, and will not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell, any shares of Capital
Stock of a Restricted Subsidiary (including options, warrants or other rights to
purchase shares of such Capital Stock) except: (i) to our company or a Wholly
Owned Restricted Subsidiary of our company; (ii) issuances of director's
qualifying shares or sales to foreign nationals of shares of Capital Stock of
foreign Restricted Subsidiaries, to the extent required by applicable law; or
(iii) issuances or sales of Common Stock of a Restricted Subsidiary, provided
that (x) the proceeds therefrom shall be treated as proceeds from an Asset Sale
in accordance with the covenant described under "--Asset Sales" and (y) if,
immediately after giving effect to the issuance or sale, the Restricted
Subsidiary would no longer constitute a Restricted Subsidiary, any Investment in
any Person remaining after giving effect to the issuance or sale would have been
permitted to be made under the covenant described under "--Limitation on
Restricted Payments" if made on the date of the issuance or sale.
Asset Sales.
We will not, and will not permit any Restricted Subsidiary to,
consummate an Asset Sale unless:
. our company or the applicable Restricted Subsidiary, as the case
may be, receives consideration at the time of such Asset Sale at
least equal to the fair market value of the assets sold or
otherwise disposed of (as evidenced by a Board Resolution); and
. at least 75% of the consideration received by our company or the
Restricted Subsidiary, as the case may be, from such Asset Sale
shall be cash or other Qualified Consideration.
Our company or any Restricted Subsidiary may, within 365 days of the
Asset Sale, invest the Net Cash Proceeds of such Asset Sale (a) in property or
assets used, or to be used, in the Internet Service Business, or in a company
engaged primarily in the Internet Service Business (if and to the extent
otherwise permitted under the Indenture), (b) permanently to repay Permitted
Senior Secured Debt, Designated Senior Debt or other Debt that is pari passu
with the notes or the Subsidiary Guarantees, as applicable, and is secured by
Liens that are prior to the Liens of the Security Documents, or (c) permanently
to repay Debt of our company or of a Restricted Subsidiary (in each case other
than Subordinated Obligations) provided that notes are redeemed on a pro rata
basis with such Debt. The
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amount of such Net Cash Proceeds not used or invested within 365 days of the
Asset Sale in the manner described in clauses (a), (b) or (c) above shall
constitute "Excess Proceeds."
In the event that Excess Proceeds exceed $10.0 million, we are required
to make an Offer to Purchase that amount of notes equal to the amount of Excess
Proceeds at a price equal to 100% of the principal amount of the notes to be
purchased, plus accrued and unpaid interest to the date of purchase and, to the
extent required by the terms thereof, any other Debt of our company that is pari
passu with the notes or Debt of a Restricted Subsidiary. Each Offer to Purchase
shall be mailed within 30 days following the date that we become obligated to
purchase notes with any Excess Proceeds. Following the completion of an Offer to
Purchase, the amount of Excess Proceeds shall be deemed to be reset at zero and,
to the extent there are any remaining Excess Proceeds, we may use such Excess
Proceeds for any use which is not otherwise prohibited by the Indenture.
We are required to comply with the requirements of Rule 14e-1 under the
Exchange Act and the rules and regulations promulgated thereunder to the extent
that such rules and regulations are applicable in connection with the purchase
of notes pursuant to such Offer to Purchase.
Not later than the date of the Offer with respect to an Offer to
Purchase pursuant to the covenant described in this section, we are required to
deliver to the Trustee an officers' certificate as to (A) the Purchase Amount,
(B) the allocation of the Net Cash Proceeds from the Asset Sale(s) pursuant to
which such Offer is being made, including, if amounts are invested in assets
related to our business, the actual assets acquired and a statement indicating
the relationship of such assets to our business and (C) the compliance of such
allocation with the provisions of the covenant described in this section.
On or prior to the Purchase Date, we are required to:
. accept for payment (on a pro rata basis, if necessary) notes or
portions thereof tendered pursuant to the Offer;
. deposit with the paying agent (or, if we are acting as our own
paying agent, segregate and hold in trust) money sufficient to pay
the purchase price of all notes or portions thereof so accepted;
and
. deliver or cause to be delivered to the Trustee all notes so
accepted together with an officers' certificate stating that the
notes or portions thereof were accepted for payment by us.
The paying agent (or our company, if we are acting as paying agent)
will promptly mail or deliver to Holders of notes so accepted, payment in an
amount equal to the purchase price for the notes, and the Trustee will promptly
authenticate and mail or deliver to such Holders a new note equal in principal
amount to any unpurchased portion of the note surrendered. We are required to
promptly mail or deliver any note not accepted for payment to the Holder
thereof. Upon surrender of a Global Note that is purchased in part pursuant to
an Offer to Purchase, the paying agent shall forward such Global Note to the
Trustee who shall make a notation in its records to reduce the principal amount
of such Global Note to an amount equal to the unpurchased portion of such Global
Note. We are required to publicly announce the results of the Offer on or as
soon as practicable after the Purchase Date.
Limitation on Sale-Leaseback Transactions.
We will not, and will not permit any Restricted Subsidiary to, enter
into any sale-leaseback transaction involving any of the assets or properties of
our company or such Restricted Subsidiary, whether now owned or hereafter
acquired, whereby our company or such Restricted Subsidiary sells or
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transfers such assets or properties and subsequently leases such assets or
properties or any part thereof or any other assets or properties that the
Company or such Restricted Subsidiary, as the case may be, intends to use for
substantially the same purpose or purposes as the assets or properties sold or
transferred.
This restriction does not apply to any sale-leaseback transaction if
(i) the lease is for a period, including renewal rights, of not in excess of
three years; (ii) the sale-leaseback transaction is consummated within 180 days
after the purchase of the assets subject to such transaction; (iii) the
transaction is solely between our company and any Wholly Owned Restricted
Subsidiary of our company or solely between Wholly Owned Restricted Subsidiaries
of our company; or (iv) our company or such Restricted Subsidiary, within 12
months after the sale or transfer of any assets or properties is completed,
applies an amount no less than the Net Cash Proceeds received from such sale in
accordance with the "Asset Sale" covenant.
Limitation on Guarantees of Debt of the Company or a Subsidiary
Guarantor by Foreign Restricted Subsidiaries.
We may not permit any Foreign Restricted Subsidiary, directly or
indirectly, to Guarantee, assume or in any other manner become liable for the
payment of any Debt of our company or any Subsidiary Guarantor unless: (i) (A)
such Foreign Restricted Subsidiary simultaneously executes and delivers a
supplemental indenture providing for a Subsidiary Guarantee of payment of the
notes by such Foreign Restricted Subsidiary; and (B) with respect to any
Guarantee of Debt of our company or a Subsidiary Guarantor that is subordinate
in right of payment to the notes or such Subsidiary Guarantor's Subsidiary
Guarantee, such Guarantee shall be subordinated to such Restricted Subsidiary's
Subsidiary Guarantee with respect to the notes at least to the same extent as
such Debt is subordinated to the notes or such Subsidiary Guarantor's Subsidiary
Guarantee, and (ii) such Restricted Subsidiary waives, and will not in any
manner whatsoever claim or take the benefit or advantage of, any rights of
reimbursement, indemnity or subrogation or any other rights against our company
or any other Restricted Subsidiary as a result of any payment by such Foreign
Restricted Subsidiary under its Guarantee until the notes have been paid in full
or otherwise satisfied or discharged.
Notwithstanding the foregoing, any Subsidiary Guarantee by a Foreign
Restricted Subsidiary may provide by its terms that it shall be automatically
and unconditionally released and discharged in the event such Foreign Restricted
Subsidiary is sold or disposed of (whether by merger, consolidation, the sale of
its Capital Stock or the sale of all or substantially all of its assets (other
than by lease) and whether or not such Foreign Restricted Subsidiary is the
surviving corporation in such transaction) to a Person which is not an Affiliate
of our company if the sale or other disposition, including the application of
the proceeds therefrom, is in compliance with the Indenture, or in the event of
the release or discharge of the Guarantee which resulted in the creation of such
Foreign Restricted Subsidiary's Subsidiary Guarantee with respect to the notes,
except a discharge or release by or as a result of payment under such Guarantee.
Transactions with Affiliates and Related Persons.
We may not, and may not permit any Restricted Subsidiary to, directly
or indirectly enter into any transaction (or series of related transactions) not
in the ordinary course of business with an Affiliate or Related Person of our
company (other than our company or a Wholly Owned Restricted Subsidiary of our
company) involving aggregate consideration in excess of $2.0 million, including
any Investment, unless such transaction is on terms no less favorable to our
company or such Restricted Subsidiary than those that could be obtained in a
comparable arm's-length transaction with an entity that is not an Affiliate or
Related Person and is in the best interests of our company or such Restricted
Subsidiary. For
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any transaction (or series of related transactions) that involves aggregate
consideration in excess of $2.0 million but less than or equal to $10.0 million,
our Chief Executive Officer, President, Chief Financial Officer, or Chief
Operating Officer shall determine that the transaction satisfies the above
criteria and shall evidence such a determination by an Officer's Certificate
filed with the Trustee. For any transaction that involves aggregate
consideration in excess of $10.0 million (i) a majority of the disinterested
members of the Board of Directors is required to determine that the transaction
satisfies the above criteria and evidence such determination in a Board
Resolution or (b) we are required to obtain a written opinion of a nationally
recognized investment banking or appraisal firm stating that the transaction is
fair to our company or such Restricted Subsidiary.
The foregoing limitation does not apply to: (i) any transaction solely
between our company and any Wholly Owned Restricted Subsidiary of our company or
solely between any of our Wholly Owned Restricted Subsidiaries, (ii) the payment
of reasonable and customary regular fees to directors of our Company or our
Restricted Subsidiaries who are not employees of our company or our Restricted
Subsidiaries, (iii) licensing or sublicensing or the use of any intellectual
property by our company or any Wholly Owned Restricted Subsidiary of our company
to our company or any Wholly Owned Restricted Subsidiary of our company; (iv)
any transaction entered into for the purpose of granting or altering
registration rights with respect to any of our Capital Stock, (v) any Restricted
Payments not prohibited by the "Limitation on Restricted Payments" covenant,
(vi) indemnification or insurance provided to our officers or directors, (vii)
sales of our Capital Stock to Affiliates of our company or (viii) compensation,
severance and employee benefit arrangements with any officer, director or
employee of our Company or any Restricted Subsidiary, including under any stock
option or stock incentive plans, in the ordinary course of business or in
connection with the Plan.
Unrestricted Subsidiaries.
We may designate any Subsidiary of our company to be an "Unrestricted
Subsidiary" as provided below, in which event such Subsidiary will be deemed to
be an Unrestricted Subsidiary. "Unrestricted Subsidiary" means (i) any
Subsidiary designated as such by the Board of Directors as set forth below where
(A) no default with respect to any Debt of such Subsidiary or any Subsidiary of
such Subsidiary (including any right which the holders thereof may have to take
enforcement action against such Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Debt in a principal amount in excess of
$10.0 million of our Company and our Subsidiaries (other than another
Unrestricted Subsidiary) to declare a default on such other Debt or cause the
payment thereof to be accelerated or payable prior to its final scheduled
maturity and (B) our company could make a Restricted Payment in an amount equal
to the greater of the fair market value and book value of such Subsidiary at the
time of designation pursuant to the "Limitation on Restricted Payments"
covenant, and such amount is thereafter treated as a Restricted Payment for the
purpose of calculating the aggregate amount available for Restricted Payments
thereunder and (ii) any Subsidiary of an Unrestricted Subsidiary. The Board of
Directors may not designate a Subsidiary to be an Unrestricted Subsidiary if
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, any other Subsidiary of our company which is not a Subsidiary of
the Subsidiary to be so designated or otherwise an Unrestricted Subsidiary. The
Board of Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary and shall be deemed to have made such designation if at such time the
condition set forth in clause (A) in the definition of "Unrestricted Subsidiary"
shall cease to be true, in which case any Debt of such Subsidiary shall be
deemed to be Incurred as of such date.
The Board of Directors may designate any Unrestricted Subsidiary to be
a Restricted Subsidiary; provided that immediately after giving effect to such
designation, no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof and we could incur at least
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$1.00 of additional Debt under the "Limitation on Debt" covenant on a pro forma
consolidated basis taking into account such designation.
Provision of Financial Information.
Whether or not we are subject to Section 13(a) or 15(d) of the Exchange
Act, we are required to file with the Commission the annual reports, quarterly
reports and other documents required to be filed pursuant to Section 13(a) or
15(d) of the Exchange Act, on or prior to the respective dates set forth in such
provisions (each a "Required Filing Date," and collectively, the "Required
Filing Dates"). We are also required (i) within 15 days of each Required Filing
Date to (A) transmit by mail to all Holders, as their names and addresses appear
in the Security Register, without cost to such Holders and (B) file with the
Trustee, copies of such annual reports, quarterly reports and other documents
and (ii) in the event that we are not permitted by the Commission to file such
annual reports, quarterly reports and other documents, to furnish promptly upon
written request copies of such annual reports, quarterly reports and other
documents to any prospective Holder.
Statement by Officers as to Default; Compliance Certificates.
Our company and each Subsidiary Guarantor are required to deliver to
the Trustee, within 90 days after the end of the fiscal year of our company and
each Subsidiary Guarantor, which initially shall be September 30, and within 60
days after the end of each fiscal quarter (other than the fourth fiscal quarter)
of our company and each Subsidiary Guarantor ending after the date hereof, an
officers' certificate stating whether or not to the best knowledge of the
signers thereof our company or any Subsidiary Guarantor is in default in the
performance and observance of any of the terms, provisions and conditions of the
Indenture or the Security Documents, and if our company or any Subsidiary
Guarantor is in Default, specifying all such Defaults and Events of Default and
the nature and status thereof of which they may have knowledge.
We are also required to deliver to the Trustee:
. as soon as possible, and in any event within 10 days after we
become aware of the occurrence of a Default or an Event of Default,
an officers' certificate setting forth the details of such Event of
Default or Default, and the action which we propose to take with
respect to such Event of Default or Default.
. within 90 days after the end of each fiscal year a written
statement by our independent public accountants stating (i) that
such accountants' audit examination has included a review of the
terms of the Indenture and the notes as they relate to accounting
matters and (ii) whether, in connection with their audit
examination, any event which, with notice or the lapse of time or
both, would constitute an Event of Default under the "Limitation on
Debt" covenant and the "Limitation on Restricted Payments" covenant
has come to their attention and, if such an event has come to their
attention, specifying the nature and period of the existence
thereof.
Waiver of Certain Covenants.
We may omit in any particular instance to comply with any covenant or
condition set forth in certain covenants including those described in the
sections entitled "--Mergers, Consolidations and Certain Sales of Assets,"
"--Limitation on Debt," "--Limitation on Sale-Leaseback Transactions,"
"--Limitation on Guarantees of Debt of the Issuer or a Subsidiary Guarantor by
Foreign Restricted Subsidiaries," "--Limitation on Restricted Payments,"
"--Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries," "--Limitation on Liens," "--Asset Sales," "--Change of
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Control," "--Transactions with Affiliates and Related Persons" and
"--Unrestricted Subsidiaries," if before the time for such compliance the
Holders of at least a majority in principal amount of the outstanding notes, by
act of such Holders, either waive such compliance in such instance or generally
waive compliance with such covenant or condition. No such waiver shall extend to
or affect such covenant or condition except to the extent so expressly waived,
and, until such waiver shall become effective, our obligations and the duties of
the Trustee in respect of any such covenant or condition will remain in full
force and effect; provided, however, that with respect to an Offer to Purchase
relating to a Change of Control, no such waiver may be made or shall be
effective against any Holder not consenting to such waiver, and we may not omit
to comply with the terms of such Offer as to such Holder.
Perfection of Security Interests.
We are required to preserve the security interests granted under the
Security Documents and undertake all actions which are required by applicable
law or necessary or appropriate in the reasonable judgment of the Trustee to (i)
maintain the Trustee's security interest in the Collateral in full force and
effect at all times (including the priority thereof) and (ii) preserve and
protect the Collateral and protect and enforce our rights and title and the
rights of the Trustee to the Collateral, including, without limitation, the
making or delivery of all filings and recordations, the payment of fees and
other charges and the issuance of supplemental documentation for such purposes.
Consummation of Plan of Reorganization.
No provision of the Indenture restricts us from consummating the plan
of reorganization and the transactions contemplated by the plan of
reorganization.
Future Subsidiary Guarantors.
We are required to cause each Person that becomes a Domestic Restricted
Subsidiary following the Closing Date to become a Subsidiary Guarantor by
causing such Person to execute and deliver to the Trustee a supplemental
indenture as provided in the Indenture at the time such Person becomes a
Domestic Restricted Subsidiary. In addition, we are required to cause each
Person that is a Domestic Restricted Subsidiary on the date hereof and who is
not a party to the Indenture to (i) become a Subsidiary Guarantor by causing
such Person to execute and deliver to the Trustee a supplemental indenture as
provided in the Indenture and (ii) to execute such Security Documents as
necessary to secure the due and punctual payment of principal of (and premium,
if any) and interest on the notes as provided in the Indenture, in each case as
soon as practicable following the date on which such Domestic Restricted
Subsidiary is no longer party or subject to any Debt or other agreements or
arrangements existing on the date of the Indenture which restrict or limit such
Domestic Restricted Subsidiary's ability to guarantee the notes or secure the
due and punctual payment of principal of (and premium, if any) and interest on
the notes; provided, however, that in no event shall any such Domestic
Restricted Subsidiary be required to become a Subsidiary Guarantor solely as a
result of any extension, renewal, amendment, refinancing or refunding or any
such Debt in accordance with the terms of the Indenture.
Mergers, Consolidations and Certain Sales of Assets.
We may not, in a single transaction or a series of related
transactions, (i) consolidate or merge with or into any other Person or permit
any other Person to consolidate or merge with or into our company or (ii)
directly or indirectly, transfer, sell, lease or otherwise dispose of all or
substantially all of our assets, unless: (1) in a transaction in which we do not
survive or in which we transfer, sell, lease or otherwise dispose of all or
substantially all of our assets, the successor entity to our company (a
"Successor Entity") is organized and validly existing under the laws of any
state of the United States of
83
America or the District of Columbia, and expressly assumes by supplemental
indenture executed and delivered to the Trustee, in form satisfactory to the
Trustee, all of our obligations under the Indenture, the notes and the Security
Documents; (2) immediately before and after giving effect to such transaction
and treating any Debt which becomes an obligation of our company or a Restricted
Subsidiary as a result of such transaction as having been Incurred by our
company or such Restricted Subsidiary at the time of the transaction, no Event
of Default shall have occurred and be continuing; (3) except in the case of any
such consolidation or merger of our company with or into, or any such transfer,
sale, lease or other disposition of assets to, a Wholly Owned Restricted
Subsidiary of our company, immediately after giving effect to such transaction
and treating any Debt which becomes an obligation of our company or a Restricted
Subsidiary as a result of such transaction as having been Incurred by our
company or such Restricted Subsidiary at the time of the transaction, our
company (including any Successor Entity) (a) could Incur at least $1.00 of
additional Debt pursuant to the provisions of the first paragraph of the
"Limitation on Debt" covenant or (b) our company (including any Successor
Entity) would have a Consolidated Debt to EBITDA Ratio immediately after giving
effect to the transaction that is (x) less than or equal to our Consolidated
Debt to EBITDA Ratio immediately prior to the transaction, if the ratio
immediately prior to the transaction is positive, or (y) greater than or equal
to our Consolidated Debt to EBITDA Ratio immediately prior to the transaction,
if the ratio immediately prior to the transaction is negative and (4) we have
delivered to the Trustee an officer's certificate and an opinion of counsel,
each stating that such amalgamation, consolidation, merger, conveyance,
transfer, sale, lease or disposition and, if a supplemental indenture is
required in connection with such transaction, such supplemental indenture,
complies with the covenant discussed in this section and that all conditions
precedent therein provided for relating to such transaction have been complied
with, and, with respect to such officer's certificate, setting forth the manner
of determination of our ability to Incur Debt in accordance with clause (3) of
this covenant, or, if applicable, of the successor entity as required pursuant
to the foregoing.
Upon any consolidation of our company with, or merger of our company
into, any other Person or any transfer, conveyance, sale, lease or other
disposition of all or substantially all of our properties and assets as an
entirety in accordance with the covenant described in this section, the
Successor Entity will succeed to, and be substituted for, and may exercise every
right and power of, our company under the Indenture, and thereafter, except in
the case of a lease, the predecessor Person shall be relieved of all obligations
and covenants under the Indenture and the notes.
Defaults
An Event of Default is defined in the Indenture as
(i) failure to pay the principal of (or premium, if any, on) any
note when due (whether at Stated Maturity or upon acceleration,
optional or mandatory redemption, required repurchase or
otherwise);
(ii) failure to pay interest on any note when due, and in the case of
cash interest, such default continues for a period of 30 days;
(iii) default in the payment of principal and interest on notes
required to be purchased pursuant to an Offer to Purchase under
"--Certain Covenants--Asset Sales" or "Change of Control" when
due and payable;
(iv) failure to perform or comply with the provisions contained in
"--Certain Covenants--Mergers, Consolidations and Certain Sales
of Assets";
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(v) failure to perform any other covenant or agreement under the
Indenture, the notes or the Security Documents and such failure
continues for 60 days after written notice to our company by the
Trustee or to our company and the Trustee by the Holders of at
least 25% in aggregate principal amount of outstanding notes;
(vi) (1) any default by our company or any Restricted Subsidiary in
the payment of the principal, premium, if any, or interest has
occurred with respect to amounts in excess of $10.0 million
under any agreement, indenture or instrument evidencing Debt
when the same becomes due and payable in full and such default
has continued after any applicable grace period and has not been
cured or waived and, if not already matured at its final
maturity in accordance with its terms, the holders of such Debt
have the right to accelerate such Debt, or (2) any event of
default as defined in any agreement, indenture or instrument of
our company or any Restricted Subsidiary evidencing Debt in
excess of $10.0 million has occurred and the Debt thereunder, if
not already matured at its final maturity in accordance with its
terms, has been accelerated;
(vii) the rendering of a final judgment or judgments against our
company or any Restricted Subsidiary in an amount in excess of
$5.0 million which remains undischarged or unstayed for a period
of 60 days after the date on which the right to appeal has
expired;
(viii) certain events of bankruptcy or insolvency with respect to our
company or any of our Significant Subsidiaries;
(ix) the Liens created by the Security Documents at any time do not
constitute a valid and perfected Lien on the Collateral intended
to be covered thereby (to the extent perfection by filing,
registration, recordation or possession is required herein or
therein) in favor of the Collateral Agent, free and clear of all
other Liens (other than Permitted Liens), or, except for
expiration in accordance with its terms or amendment,
modification, waiver, termination or release in accordance with
the terms of the Indenture, any of the Security Documents shall
for whatever reason be terminated or cease to be in full force
and effect, if in either case, such default continues for 15
days or the enforceability thereof is contested by our company
or any Subsidiary Guarantor;
(x) any Subsidiary Guarantee ceases to be in full force and effect
(other than in accordance with the terms of the Indenture and
such Subsidiary Guarantee) or a Subsidiary Guarantor denies or
disaffirms its obligations under its Subsidiary Guarantee;
(xi) we fail to make when due, any transfer, delivery, pledge,
assignment or grant of Collateral required to be made by us and
such failure continues unremedied for three business days after
notice of such failure is given to us by the Trustee or to us
and the Trustee by the Holders of at least 25% in aggregate
principal amount of the Outstanding Notes; or
(xii) we fail or refuse to perform, or breach or violate, any of the
terms, obligations, covenants or warranties of any Security
Document other than those specified in clause (xi) above, and
such failure or refusal continues unremedied for three business
days after the applicable cure period has expired.
If an Event of Default occurs and is continuing (other than certain
events of bankruptcy, insolvency or reorganization), a Trustee or the Holders of
not less than 25% in principal amount of the notes outstanding may declare the
principal of and premium, if any, and accrued but unpaid interest on
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all the notes due and payable. Upon such a declaration, such principal, premium,
if any, and interest will be due and payable immediately.
If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization occurs and is continuing, the principal of and
premium, if any, and interest on the notes will become and be immediately due
and payable without any declaration or other act on the part of either Trustee
or any Holders.
The amount due and payable on the acceleration of any note will be
equal to 100% of the principal amount of such note, plus accrued and unpaid
interest to the date of payment.
Under certain circumstances, the Holders of a majority in principal
amount of the outstanding notes may rescind any such acceleration with respect
to the notes and its consequences.
No Holder of a Note may pursue any remedy under the Indenture unless:
(1) the Trustee has received written notice of a continuing Event of
Default,
(2) the Trustee has received a request from Holders of at least 25%
in principal amount of outstanding notes to pursue such remedy,
(3) the Trustee has been offered indemnity reasonably satisfactory
to it,
(4) the Trustee has failed to act for a period of 60 days after
receipt of such notice and offer of indemnity, and
(5) the Trustee has received no inconsistent direction during such
60-day period from Holders of a majority in principal amount of
outstanding notes.
provided, however, that the foregoing does not affect the right of a Holder of a
note to sue for enforcement of any overdue payment thereon.
Subject to certain restrictions, the Holders of a majority in aggregate
principal amount of the outstanding notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that would involve the Trustee in personal liability. Subject
to the provisions of the Indenture relating to the duties of the Trustee in case
an Event of Default, the Trustee will be under no obligation to exercise any of
the rights or powers under the Indenture or the Security Documents at the
request or direction of any of the Holders of the notes unless such Holders
offer the Trustee reasonable indemnity or security against any loss, liability
or expense.
The Indenture provides that if a Default occurs and is continuing and
the Trustee has actual knowledge of such Default, the Trustee will give to each
Holder of the notes notice of such Default within 90 days after it occurs.
Except in the case of an Event of Default in payment of principal of (premium,
if any) or interest on any Note, the Trustee may withhold notice if and so long
as a committee of its Responsible Officers in good faith determines that
withholding the notice is in the interests of the Holders.
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Amendments and Waivers
Subject to certain exceptions, our company, the Collateral Agent and the
Trustee may amend the Indenture and the Security Documents with the consent of
the Holders of a majority in aggregate principal amount of the notes then
outstanding and any past Default or Event of Default or compliance with any
provisions may also be waived with the consent of the Holders of a majority in
aggregate principal amount of the notes then outstanding. However, without the
consent of each Holder of an outstanding note affected thereby, no amendment
may, among other things, (i) reduce the amount of notes whose Holders must
consent to an amendment, (ii) reduce the rate of or extend the time for payment
of interest on any note, (iii) reduce the principal of or extend the Stated
Maturity of the principal of, or any instalment of interest on, any note, (iv)
reduce the premium payable upon the redemption of any note or change the time at
which any note may be or is required to be redeemed, as described under "--
Redemptions" above, (v) modify our obligations to make mandatory repayments, as
described under "-- Redemptions" above, (vi) modify any provisions of the
Indenture requiring us to make any Offer to Purchase for the notes after the
occurrence of a Change of Control , (vii) make any note payable in money other
than that stated in the note, (viii) impair the right of any Holder of the notes
to receive payment of principal of and interest on such Holder's Notes on or
after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such Holder's notes, (viii) make any change in the
amendment provisions which require each Holder's consent or in the waiver
provisions, (ix) make any change in the Indenture, the notes or any of the
Security Documents relating to Collateral in any manner adverse to the notes,
(x) subordinate in right of payment the notes or the Subsidiary Guarantees to
any Debt other than Designated Senior Debt or (xi) make any change in any
Subsidiary Guaranty that would adversely affect the Holders of the notes.
Without the consent of any Holder of the notes, our company, the Subsidiary
Guarantors and the Trustee may amend the Indenture and the Security Documents to
cure any ambiguity, omission, defect or inconsistency, to provide for the
assumption by a successor corporation of the obligations of our company or a
Subsidiary Guarantor under the Indenture and the Security Documents, to add
additional guarantees with respect to the notes, to provide additional security
for the notes, to add Events of Default and add to the covenants of our company
for the benefit of the Holders or to surrender any right or power conferred upon
our company, to provide for a successor Trustee or to comply with any
requirement of the Commission in connection with the qualification of the
Indenture under the Trust Indenture Act.
The consent of the Holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture or the Security Documents becomes effective, we are required to mail
to the Holders a notice briefly describing such amendment. However, our failure
to give such notice to all Holders, or any defect in such notice, will not
impair or affect the validity of the amendment.
Ability to Realize on Collateral
The proceeds of any sale of the Collateral in whole pursuant to the
Indenture and the Security Documents following an Event of Default under the
Indenture may not be sufficient to provide sufficient funds to permit us to make
payments due on the notes. In addition, the ability of the Holders to realize
upon the Collateral may be limited in the event of a bankruptcy or insolvency or
pursuant to applicable laws, including securities laws.
If an Event of Default occurs and is continuing and the notes become
payable in full, the Trustee, on behalf of the Holders, in addition to any other
rights or remedies available to it under the Indenture and the Security
Documents, may take such action as it deems advisable to protect and enforce its
rights
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in the Collateral, including the institution of sale or foreclosure proceedings.
The proceeds received by the Trustee from any such sale or foreclosure will be
applied by the Trustee first to pay the expenses of such sale or foreclosure and
fees and other amounts then payable to the Trustee under the Indenture, and
thereafter to pay amounts due and payable with respect to the notes and the
balance, if any, to our company.
The right of the Trustee to repossess and dispose of the Collateral, upon
acceleration of the notes is likely to be significantly impaired by applicable
bankruptcy or insolvency law if a bankruptcy or insolvency proceeding were to be
commenced by or against us prior to or possibly even after the Trustee has
repossessed and disposed of the Collateral. Under the United States Bankruptcy
Code, a secured creditor such as the Trustee is prohibited from repossessing its
security from a debtor in a bankruptcy case, or from disposing of security
repossessed from such debtor, without bankruptcy court approval. Moreover,
applicable U.S. bankruptcy law generally permits the debtor to continue to
retain and to use collateral (and the proceeds, products, offspring, rents or
profits of such collateral) even though the debtor is in default under the
applicable debt instruments, provided generally that the secured creditor is
given "adequate protection". The meaning of the term "adequate protection" may
vary according to circumstances, but it is intended in general to protect the
value of the secured creditor's interest in the collateral and may include, if
approved by the court, cash payments or the granting of additional or
replacement security for any diminution in the value of the collateral as a
result of the stay of repossession or disposition or any use of the collateral
by the debtor during the pendency of the bankruptcy case. In view of the lack of
a precise definition of the term "adequate protection" and the broad
discretionary powers of a bankruptcy court, it is impossible to predict how long
payments under the notes could be delayed following commencement of a bankruptcy
case, whether or when the Trustee would repossess or dispose of the Collateral
or whether, or to what extent holders of the notes would be compensated for any
delay in payment or loss of value of the Collateral through the requirements of
"adequate protection". Furthermore, in the event that the bankruptcy court
determines that the value of the Collateral is not sufficient to repay all
amounts due on the notes, the Holders would have "undersecured claims".
Applicable U.S. bankruptcy laws do not permit the payment and/or accrual of
interest, costs and attorneys' fees for "undersecured claims" during the
debtor's bankruptcy case.
Defeasance
At any time we may terminate all of our obligations under the notes, the
Indenture and the Security Documents and the obligations of any Subsidiary
Guarantor under its Subsidiary Guarantee ("legal defeasance"), except for
certain obligations, including those respecting the defeasance trust and
obligations to register the transfer or exchange of the notes, to replace
mutilated, destroyed, lost or stolen notes and to maintain a registrar and
paying agent in respect of the notes and except for our optional redemption
rights. At any time we may also terminate our mandatory redemption and
repurchase obligations under the covenants described under "-- Certain
Covenants" (other than the covenant described under "-- Limitation on Mergers,
Consolidations and Certain Sales of Assets"), the operation of the cross
acceleration provision, the valid and perfected Lien on the Collateral
requirement, the termination of a Subsidiary Guaranty, and the judgment default
provisions described under "-- Defaults" above and the limitations contained in
clauses (3) and (4) of the first paragraph under "-- Certain Covenants --
Limitation on Mergers, Consolidations and Certain Sales of Assets" above
("covenant defeasance").
We may exercise our legal defeasance option notwithstanding our prior
exercise of our covenant defeasance option. If we exercise our legal defeasance
option, payment of the notes may not be accelerated because of an Event of
Default with respect thereto. If we exercise our covenant defeasance option,
payment of the notes may not be accelerated because of an Event of Default
specified in clause
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(iv) (other than the covenant described under "-- Limitation on Mergers,
Consolidations and Certain Sales of Assets") or (v) under "-- Defaults" above or
because of our failure to comply with clauses (3) and (4) of the first paragraph
under "-- Certain Covenants-Limitation on Mergers, Consolidations and Certain
Sales of Assets" above.
In order to exercise either defeasance option, we must irrevocably deposit
in trust (the "defeasance trust") with the Trustee money or U.S. Government
Securities for the payment of principal, premium, if any, and interest on the
notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an opinion of
counsel to the effect that Holders will not recognize income, gain or loss for
United States income tax purposes as a result of such deposit and defeasance and
will be subject to such federal income tax on the same amounts and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred (and, in the case of legal defeasance only, such
opinion of counsel must be based on a ruling of the Internal Revenue Service or
other change in applicable federal income tax law). The Trustee will also
receive an opinion of counsel to the effect that such deposit shall not cause
the Trustee or the trust so created to be subject to the U.S. Investment Company
Act of 1940, as amended.
Concerning the Trustee
HSBC Bank USA is the Trustee under the Indenture. HSBC Bank USA is also the
Collateral Agent under the Security Documents. We have appointed the Trustee as
registrar and paying agent with regard to the notes.
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee will in accordance with the terms of the Indenture and
applicable law perform only such duties as are specifically set forth in the
Indenture. During the existence of an Event of Default, the Trustee will
exercise such rights and powers vested in it under the Indenture and the Trustee
will use the same degree of care and skill in its exercise as a prudent person
would exercise under the circumstances in the conduct of such person's own
affairs.
The Trustee is permitted to engage in other transactions with our company
or any Affiliate of our company, provided, however, that if the Trustee acquires
any conflicting interest (as defined in the Indenture) it must eliminate such
conflict or resign.
The Indenture is subject to the provisions of the U.S. Trust Indenture Act
of 1939, as amended, upon registration.
Governing Law
The Indenture provides that the Indenture, the notes and the Subsidiary
Guarantees are governed by, and construed in accordance with, the laws of the
State of New York without giving effect to applicable principles of conflicts of
law, except to the extent that the application of the law of another
jurisdiction would be required thereby.
Certain Definitions
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms, as well as any other terms used herein for which no definition is
provided.
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"Acquisition Debt" means Debt of a Person existing at the time such Person
becomes a Restricted Subsidiary or assumed in connection with an Asset
Acquisition, and not incurred in connection with, or in anticipation of, such
Person becoming a Restricted Subsidiary or such Asset Acquisition.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date means the
amount by which the fair value of the assets and property of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such
date.
"Affiliate" of any Person means any other Person directly or indirectly
controlling or controlled by or under direct or indirect common control with
such Person. For the purposes of this definition, "control" when used with
respect to any Person means the power to direct the management and policies of
such Person, directly or indirectly, whether through the ownership of Voting
Stock, by contract or otherwise; and the terms "controlling" and "controlled"
have meanings correlative to the foregoing.
"Asset Acquisition" means an acquisition by us or any of our Restricted
Subsidiaries of the property and assets of any Person other than our company or
any of our Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are to be used in the Internet Service Business.
"Asset Sale" by any Person means any transfer, conveyance, sale, lease,
license or other disposition by such Person or any of its Restricted
Subsidiaries (including a consolidation or merger or other sale of any such
Restricted Subsidiary with, into or to another Person in a transaction in which
such Restricted Subsidiary ceases to be a Restricted Subsidiary) (collectively a
"transfer") of (i) shares of Capital Stock (other than directors' qualifying
shares) or other ownership interests of a Restricted Subsidiary of such Person,
(ii) all or substantially all of the assets of, or any division or line of
business of, such Person or any of its Restricted Subsidiaries or (iii) any
other property, assets or rights (including intellectual property rights) of
such Person or any of its Restricted Subsidiaries outside of the ordinary course
of business; provided that the term "Asset Sale" shall not include (A) any
transfer of all or substantially all of our assets in a transaction that is made
in compliance with the requirements of provisions of the covenant described in "
--Certain Covenants--Mergers, Consolidations and Certain Sales of Assets," (B)
any transfer by us to any of our Wholly Owned Restricted Subsidiaries or by any
of our Wholly Owned Restricted Subsidiaries to any other of our Wholly Owned
Restricted Subsidiaries or to us in a manner that does not otherwise violate the
terms of the Indenture, (C) transfers made in compliance with the requirements
of the covenant described in "--Certain Covenants--Limitation on Restricted
Payments," (D) transfers constituting the granting of a Permitted Lien, (E)
exchanges of equipment used in the Internet Service Business for other equipment
to be used in the Internet Service Business; provided any such exchange for
equipment with a fair market value in excess of $2.0 million must be approved by
the Board of Directors, and (F) transfers of assets, property or other rights
(including intellectual property rights) with a fair market value at the date of
transfer of less than $2.0 million.
"Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (A)
the number of years from the date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the amount
of such principal payment by (ii) the sum of all such principal payments.
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"Board of Directors" means either the board of directors of our company or
any duly authorized committee thereof.
"Board Resolution" means a copy of a resolution certified by the Secretary
or an Assistant Secretary of our company to have been duly adopted by the Board
of Directors and to be in full force and effect on the date of such
certification, and delivered to the Trustee.
"Capital Lease Obligation" of any Person means the obligation to pay rent
or other payment amounts under a lease of (or other Debt arrangements conveying
the right to use) real or personal property of such Person which is required to
be classified and accounted for as a capital lease or a liability on the face of
a balance sheet of such Person in accordance with GAAP. The principal amount of
such obligation shall be the capitalized amount thereof that would appear on the
face of a balance sheet of such Person in accordance with GAAP.
"Capital Stock" of any Person means any and all shares, interests,
participations or other equivalents (however designated) of corporate stock or
other equity participations, including partnership interests, whether general or
limited, of such Person.
"Cash Equivalents" means (i) securities issued or directly and fully
guaranteed or insured by the United States government or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States is pledged in support thereof) having maturities of six months or less
from the date of acquisition, (ii) certificates of deposit with maturities of
not more than six months from the date of acquisition, bankers' acceptances with
maturities not exceeding six months and overnight bank deposits, in each case
with any domestic commercial bank having capital and surplus in excess of $500.0
million and a Thompson Bank Watch Rating of "B" or better, (iii) repurchase
obligations with a term of not more than seven days for underlying securities of
the types described in clauses (i) and (ii) above entered into with any
financial institution meeting the qualifications specified in clause (ii) above,
(iv) municipal securities having the highest rating obtainable from Moody's
Investors Service, Inc. (or any successor thereto) or Standard & Poor's Ratings
Group (or any successor thereto) and in each case maturing within 60 days or
less after the date of acquisition, (v) commercial paper having the highest
rating obtainable from Moody's Investors Service, Inc. (or any successor
thereto) or Standard & Poor's Ratings Group (or any successor thereto) and in
each case maturing within six months after the date of acquisition and (vi)
money market funds at least 95% of the assets of which constitute Cash
Equivalents of the kinds described in clauses (i) through (v) of this
definition.
"Change of Control" means the occurrence of one or more of the following
events: (i) any "person" or "group" (as such terms are used in Sections 13(d)
and 14(d) of the Exchange Act), other than a Permitted Holder or Permitted
Group, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5
under the Exchange Act, except that a Person shall be deemed to have beneficial
ownership of all shares that such Person has the right to acquire, whether such
right is exercisable immediately or only after the passage of time), directly or
indirectly, of more than 50% of our total outstanding Voting Stock, (ii) during
any period of two consecutive years commencing with the Closing Date,
individuals who at the beginning of such period constituted the Board of
Directors (together with any new directors whose election to such board or whose
nomination for election by our stockholders was approved by a vote of a majority
of the directors then still in office who were either directors at the beginning
of such period or whose election or nomination for election was previously so
approved), cease for any reason to constitute a majority of such Board of
Directors then in office; (iii) we consolidate with or merge with or into any
Person or convey, transfer or lease all or substantially all of our assets to
any Person, or any corporation consolidates with or merges into or with our
company, in any such event, pursuant to a transaction in which our outstanding
Voting Stock is changed into or exchanged for cash, securities or other
property,
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except (x) to the extent necessary to reflect a change in our jurisdiction of
incorporation or (y) where no "person" or "group"(as such terms are used in
Sections 13(d) and 14(d) of the Exchange Act) owns, other than a Permitted
Holder or a Permitted Group, immediately after such transaction, directly or
indirectly, more than 50% of the total outstanding Voting Stock of the surviving
corporation, or (iv) we are liquidated or dissolved or adopt a plan of
liquidation or dissolution.
"Collateral" means the collective reference to all assets, whether now
owned or hereafter acquired, upon which a Lien is created or granted from time
to time pursuant to any Security Documents.
"Collateral Agent" means the Trustee, in its capacity as collateral
agent under the Collateral Agency Agreement, until a successor collateral agent
shall have become such pursuant to the Security Documents, and thereafter
"Collateral Agent" shall mean such successor collateral agent.
"Commission" means the Securities and Exchange Commission, as from time
to time constituted, created under the Exchange Act, or, if at any time after
the execution of this instrument such Commission is not existing and performing
the duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Common Stock" of any Person means Capital Stock of such Person that
does not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Debt to EBITDA Ratio" means the ratio of (i) the total
consolidated Debt as of the date of calculation (the "Determination Date") to
(ii) four times (or if not based on a fiscal quarter, annualized as determined
in good faith by the Board of Directors) the Consolidated EBITDA for the latest
fiscal quarter completed after the Closing Date (and if no such fiscal quarter
shall have been completed, the most recently available financial information as
determined in good faith by the Board of Directors) for which financial
information is available immediately preceding such Determination Date (the
"Measurement Period"). For purposes of calculating Consolidated EBITDA for the
Measurement Period immediately prior to the relevant Determination Date, (x) any
Person that is a Restricted Subsidiary on the Determination Date (or would
become a Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated EBITDA) will be
deemed to have been a Restricted Subsidiary at all times during such Measurement
Period, (y) any Person that is not a Restricted Subsidiary on such Determination
Date (or would cease to be a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Consolidated EBITDA) will be deemed not to have been a Restricted Subsidiary at
any time during such Measurement Period and (z) if we or any Restricted
Subsidiary have in any manner (1) acquired (through an acquisition or the
commencement of activities constituting such operating business) or (2) disposed
of (by an Asset Sale or the termination or discontinuance of activities
constituting such operating business) any operating business during such
Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if all such transactions had been consummated prior to
the first day of such Measurement Period, including, if such Measurement Period
includes any portion of the fiscal quarter during which the Closing Date occurs
or the four fiscal quarters after the fiscal quarter during which the Closing
Date occurs, the Incurrence of any Debt and cost savings resulting from employee
termination, facilities consolidations and closings, standardization of employee
benefits and compensation practices, consolidation of property, casualty and
other insurance coverage and policies, standardization of sales representation
commissions and other contract rates, and reductions in taxes other than income
taxes or other cost saving measures (collectively, "Cost Savings Measures"),
which
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cost savings we reasonably believe in good faith could have been achieved during
the Measurement Period as a result of such transaction, less the amount of any
additional expenses that we reasonably estimate would result from anticipated
replacement of any items constituting Cost Savings Measures in connection with
such transaction (it being understood that in calculating Consolidated EBITDA
the exclusions set forth in clauses (i) through (iv) of the definition of
Consolidated Net Income shall apply to any Person acquired as if it were a
Restricted Subsidiary).
"Consolidated EBITDA" means, with respect to any period, Consolidated
Net Income for such period increased (without duplication), to the extent
deducted in calculating such Consolidated Net Income, by (i) Consolidated Income
Tax Expense for such period, (ii) Consolidated Interest Expense for such period
without regard to the proviso therein and (iii) depreciation, amortization and
any other non-cash items for such period, less any non-cash items to the extent
they increase Consolidated Net Income (including the partial or entire reversal
of reserves taken in prior periods) for such period, of our company and any
Restricted Subsidiary, including, without limitation, amortization of
capitalized debt issuance costs for such period, all of the foregoing determined
on a consolidated basis for our company and our Restricted Subsidiaries in
accordance with GAAP; provided that, if any Restricted Subsidiary is not a
Wholly Owned Restricted Subsidiary of our company, Consolidated EBITDA shall be
reduced (to the extent not otherwise reduced in accordance with GAAP) by an
amount equal to (x) the amount of Consolidated EBITDA attributable to such
Restricted Subsidiary multiplied by (y) the percentage ownership interest in
such Restricted Subsidiary not owned on the last day of such period by our
company or any of our Restricted Subsidiaries.
"Consolidated Income Tax Expense" for any period means the consolidated
provision for income taxes of our company and our Restricted Subsidiaries for
such period calculated on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means for any period the consolidated
interest expense included in the consolidated income statement of our company
and our Restricted Subsidiaries for such period calculated on a consolidated
basis in accordance with GAAP, including without limitation or duplication (or,
to the extent not so included, with the addition of), (i) the amortization of
Debt discounts; (ii) any payments or fees with respect to letters of credit,
bankers' acceptances or similar facilities; (iii) fees (net of any amounts
received) with respect to any Interest Rate Agreement or Currency Protection
Agreement; (iv) interest on Debt guaranteed by us and our Restricted
Subsidiaries, to the extent paid by us or any Restricted Subsidiary; and (v) the
portion of any Capital Lease Obligation allocable to interest expense; provided
that, if any Restricted Subsidiary is not our Wholly Owned Restricted
Subsidiary, Consolidated Interest Expense shall be reduced (to the extent not
otherwise reduced in accordance with GAAP) by an amount equal to (x) the amount
of Consolidated Interest Expense attributable to such Restricted Subsidiary
multiplied by (y) the percentage ownership interest in such Restricted
Subsidiary not owned on the last day of such period by us or any of our
Restricted Subsidiaries.
"Consolidated Net Income" for any period means the consolidated net
income (or loss) of our company and our Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP; provided that there
shall be excluded therefrom (i) the net income (or loss) of any Person acquired
by our company or any Restricted Subsidiary of our company in a
pooling-of-interests transaction for any period prior to the date of such
transaction, (ii) the net income (or loss) of any Person that is not a
Restricted Subsidiary of our company except to the extent of the amount of
dividends or other distributions actually paid to our company or a Restricted
Subsidiary of our company by such Person during such period, (iii) gains or
losses on Asset Sales by us or our Restricted Subsidiaries, (iv) all
extraordinary gains and extraordinary losses, (v) the cumulative effect of
changes in accounting principles, (vi) any gain or loss, realized on the
termination of any employee pension benefit
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plan, (vii) the net income (but not net loss) of any Foreign Restricted
Subsidiary of such specified Person to the extent that the transfer to that
Person of that income is not at the time permitted, directly or indirectly, by
any means (including by dividend, distribution, advance or loan or otherwise),
or by operation of the terms of its charter or any agreement with a Person other
than with such specified Person, instrument held by a Person other than by such
specified Person, judgment, decree, order, statute, law, rule or governmental
regulations applicable to such Subsidiary or its stockholders, except for any
dividends or distributions actually paid by such Subsidiary to such Person, and
(viii) the tax effect of any of the items described in clauses (i) through (vii)
above.
"Consolidated Net Worth" of any Person means the consolidated
stockholders' equity of such Person, determined on a consolidated basis in
accordance with GAAP, less amounts attributable to Disqualified Stock of such
Person.
"Corporation" means a corporation, association, company, joint-stock
company, limited liability company, partnership or business trust.
"Debt" means (without duplication), with respect to any Person, whether
recourse is to all or a portion of the assets of such Person and whether or not
contingent, (i) every obligation of such Person for money borrowed, (ii) every
obligation of such Person evidenced by bonds, debentures, notes or other similar
instruments, including obligations incurred in connection with the acquisition
of property, assets or businesses, (iii) every reimbursement obligation of such
Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person (including reimbursement
obligations with respect thereto, but excluding obligations with respect to
trade letters of credit securing obligations entered into in the ordinary course
of business to the extent such letters of credit are not drawn upon or, if drawn
upon, to the extent such drawing is reimbursed no later than the third business
day following receipt by such Person of a demand for reimbursement), (iv) every
obligation of such Person issued or assumed as the deferred purchase price of
property or services (including securities repurchase agreements), (v) every
Capital Lease Obligation of such Person, (vi) all Disqualified Stock issued by
such Person, (vii) if such Person is a Restricted Subsidiary, all Preferred
Stock issued by such Person, (viii) every obligation under Interest Rate
Agreement or Currency Protection Agreements of such Person and (ix) every
obligation of the type referred to in clauses (i) through (viii) of another
Person and all dividends of another Person the payment of which, in either case,
such Person has Guaranteed or is responsible or liable, directly or indirectly,
as obligor, Guarantor or otherwise. The "amount" or "principal amount" of Debt
at any time of determination as used herein represented by (w) any contingent
Debt, shall be the maximum principal amount thereof, (x) any Debt issued at a
price that is less than the principal amount at maturity thereof, shall be the
amount of the liability in respect thereof determined in accordance with GAAP,
(y) any Disqualified Stock, shall be the maximum fixed redemption or repurchase
price in respect thereof, and (z) any Preferred Stock, shall be the maximum
voluntary or involuntary liquidation preference plus accrued and unpaid
dividends in respect thereof, in each case as of such time of determination. In
no event shall "Debt" include any trade payable or accrued expenses arising in
the ordinary course of business which are not more than 180 days past due or
which are being contested in good faith and by appropriate proceedings.
"Default" means any event that is, or with the passage of time or the
giving of notice, or both, would be an Event of Default.
"Designated Senior Debt" of any Subsidiary Guarantor means all
obligations under Permitted Senior Secured Debt Incurred by such Subsidiary
Guarantor which has been designated by such Subsidiary Guarantor as "Designated
Senior Debt" in the instrument or agreement pursuant to which such Designated
Senior Debt is issued.
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"Disqualified Stock" of any Person means any Capital Stock of such
Person that by its terms, or by the terms of any security into which it is
convertible, or for which it is exchangeable, is, in whole or in part,
redeemable at the option of the holder thereof or otherwise matures or is
required to be redeemed (pursuant to any sinking fund obligation or otherwise,
but other than as a result of the death or disability of the holder thereof or
the termination of the employment with us or one of our Subsidiaries of the
holder thereof) or is convertible into or exchangeable (in each case at the
option of the holder) for Debt, at any time prior to the final maturity of the
notes; provided, however, that any Capital Stock which would not constitute
Disqualified Stock but for provisions thereof giving holders thereof the right
to require the Company or its Restricted Subsidiary to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or a "change of control"
occurring prior to the final maturity date of the notes shall not constitute
Disqualified Stock if such provisions applicable to such Capital Stock provide
that our company and our Restricted Subsidiaries will not repurchase or redeem
any such stock pursuant to such provisions prior to the repurchase of such notes
as are required to be repurchased pursuant to the Indenture upon an Asset Sale
or a Change of Control.
"Domestic Restricted Subsidiary" means any Restricted Subsidiary other
than (i) a Foreign Restricted Subsidiary or (ii) a Subsidiary of a Foreign
Restricted Subsidiary.
"Existing Debt" shall mean Debt of our company and our Restricted
Subsidiaries in existence on the Closing Date, including the notes and the
Subsidiary Guarantees.
"Foreign Restricted Subsidiary" means any Restricted Subsidiary which
is not organized under the laws of the United States of America, any State
thereof or the District of Columbia.
"GAAP" means generally accepted accounting principles in the United
States which are in effect on the Closing Date, consistently applied.
"Global Note" means a note that is registered in a note register in the
name of a depositary or a nominee thereof.
"Guarantee" by any Person means any obligation, contingent or
otherwise, of such Person guaranteeing, or having the economic effect of
guaranteeing, any Debt of any other Person (the "primary obligor") in any
manner, whether directly or indirectly, and including, without limitation, any
obligation of such Person (i) to purchase or pay (or advance or supply funds for
the purchase or payment of) such Debt or to purchase (or to advance or supply
funds for the purchase of) any security for the payment of such Debt, (ii) to
purchase property, securities or services for the purpose of assuring the holder
of such Debt of the payment of such Debt, or (iii) to maintain working capital,
equity capital or other financial statement condition or liquidity of the
primary obligor so as to enable the primary obligor to pay such Debt (and
"Guaranteed", "Guaranteeing" and "Guarantor" shall have meanings correlative to
the foregoing); provided, however, that the Guaranty by any Person shall not
include endorsements by such Person for collection or deposit, in either case,
in the ordinary course of business.
"Holder" means a Person in whose name a note is registered in the
security register.
"Incur" means, with respect to any Debt or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), assume,
Guarantee or otherwise become liable in respect of such Debt or other obligation
including by acquisition of Restricted Subsidiaries or the recording, as
required pursuant to GAAP or otherwise, of any such Debt or other obligation on
the balance sheet of such Person (and "Incurrence", "Incurred", "Incurrable" and
"Incurring" shall have meanings correlative to the foregoing); provided,
however, that a change in GAAP that results in an obligation of such Person that
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exists at such time becoming Debt shall not be deemed an Incurrence of such
Debt. For the avoidance of doubt, the accretion of original issue discount shall
not be deemed an Incurrence.
"Interest Rate Protection Agreement" or "Currency Protection Agreement"
of any Person means any forward contract, futures contract, swap, option or
other financial agreement or arrangement (including, without limitation, caps,
floors, collars and similar agreements) relating to, or the value of which is
dependent upon, interest rates or currency exchange rates or indices.
"Internal Revenue Code" means the Internal Revenue Code of 1986 and any
successor thereto.
"Internet Service Business" means: (i) any business principally engaged
in (A) the operation of an internet connectivity or internet enhancement service
as it exists from time to time, including, without limitation, dial up or
dedicated internet service, web hosting or co-location services, security
solutions, the provision and development of software in connection therewith,
configuration services, electronic commerce, intranet solutions, data backup and
restoral, business content and collaboration, communications tools or network
equipment, products or services or (B) the supply, provision, broadcast,
delivery, distribution, collection or retrieval of information or content
reasonably believed suitable for dissemination through the business, facilities
or capacity of our company or (ii) any business or property reasonably related
to any of the foregoing. A good faith determination by a majority of the Board
of Directors as to whether a business meets the requirements of this definition
shall be conclusive, absent manifest error.
"Investment" by any Person means any direct or indirect loan, advance
or other extension of credit or capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) to, or purchase or acquisition of
Capital Stock, bonds, notes, debentures or other securities or evidence of Debt
issued by, any other Person, including any payment on a Guarantee of any
obligation of such other Person. Notwithstanding the foregoing, "Investment"
shall not include (i) deposits, partial payments or "earnest money" made in
anticipation of a purchase or acquisition that would be a Permitted Investment
when consummated, (ii) security deposits or prepayments with respect to
operating leases or (iii) payments made in connection with the renewals or
exercise of any option to renew an operating lease. For purposes of the
definition of "Restricted Payment," the covenant described in "--Certain
Covenants--Limitation on Restricted Payments" and the covenant described in
"--Certain Covenants--Unrestricted Subsidiary," the term "Investment" shall
include the portion (proportionate to our equity interest in such Subsidiary) of
the fair market value of the net assets of any Subsidiary of our company at the
time that such Subsidiary is designated an Unrestricted Subsidiary, provided,
however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, we shall be deemed to continue to have a permanent "Investment" in
such Subsidiary at the time of such redesignation equal to (x) the amount of
such Investment immediately prior to such redesignation less (y) the portion
(proportionate to our equity interest in such Subsidiary) of the fair market
value of the net assets of such Subsidiary at the time of such redesignation.
Any property transferred to or from an Unrestricted Subsidiary shall be valued
at its fair market value at the time of such transfer, in each case as
determined in good faith by the Board of Directors.
"Lien" means, with respect to any property or assets, any mortgage or
deed of trust, pledge, hypothecation, assignment, deposit arrangement, security
interest, lien, charge, easement (other than any easement not materially
impairing usefulness or marketability), encumbrance, preference, priority or
other security agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such property or assets (including, without
limitation, any conditional sale or other title retention agreement having
substantially the same economic effect as any of the foregoing).
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"Mortgages" means the mortgages granted pursuant to the Security
Documents on certain of the real property owned by certain Subsidiary
Guarantors.
"Net Cash Proceeds" means (i) with respect to any Asset Sale by any
Person, cash or Cash Equivalents received (including by way of sale or
discounting of a note, installment receivable or other receivable, but excluding
any other consideration received in the form of assumption of Debt or other
obligations relating to such properties or assets) therefrom by such Person, net
of (A) all legal, title and recording tax expenses, commissions and other fees
and expenses Incurred and all federal, state, foreign and local taxes required
to be accrued as a liability as a consequence of such Asset Sale, (B) all
payments made by such Person or its Restricted Subsidiaries on any Debt which is
secured by such assets in accordance with the terms of any Lien upon or with
respect to such assets or which must by the terms of such Lien, or in order to
obtain a necessary consent to such Asset Sale or by applicable law, be repaid
out of the proceeds from such Asset Sale, (C) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person or joint ventures as a result of such Asset Sale and (D) appropriate
amounts to be provided by such Person or any Restricted Subsidiary thereof, as
the case may be, as a reserve in accordance with GAAP against any liabilities
associated with such assets and retained by such Person or any Restricted
Subsidiary thereof, as the case may be, after such Asset Sale, including,
without limitation, liabilities under any indemnification obligations and
severance and other employee termination costs associated with such Asset Sale,
in each case as determined by the Board of Directors, in its reasonable good
faith judgment evidenced by a Board Resolution; provided, however, that any
reduction in such reserve within twelve months following the consummation of
such Asset Sale will be treated for all purposes of the Indenture and the Notes
as a new Asset Sale at the time of such reduction with Net Cash Proceeds equal
to the amount of such reduction, (ii) with respect to the issuance or sale of
Capital Stock, or options, warrants or rights to purchase Capital Stock, or debt
securities or Disqualified Stock that has been converted into or exchanged for
Capital Stock, the proceeds of such issuance or sale in the form of cash or Cash
Equivalents, including payments in respect of deferred payment obligations, net
of attorney's fees, accountant's fees and brokerage, consultation, underwriting
and other fees and expenses actually incurred in connection with such issuance
or sale, conversion or exchange and net of any Consolidated Interest Expense
attributable to any debt securities paid to the holders thereof prior to the
conversion or exchange and net of taxes paid or payable as a result thereof.
"Obligations" means, with respect to our company and each Subsidiary
Guarantor, (i) the full and punctual payment of the principal of, and premium,
if any, and interest on the notes when due, whether at maturity, by
acceleration, by redemption or otherwise, and all other monetary obligations of
our company and such Subsidiary Guarantor, as applicable, under the Indenture,
the notes and the Security Documents and (ii) the full and punctual performance
within applicable grace periods of all other obligations of our company and such
Subsidiary Guarantor, as applicable, under the Indenture, the notes and the
Security Documents.
"Offer" has the meaning specified in the definition of Offer to
Purchase.
"Offer Expiration Date" has the meaning specified in the definition of
Offer to Purchase.
"Offer to Purchase" means a written offer (the "Offer"), a copy of
which shall be delivered to the Trustee, sent by us by first class mail, postage
prepaid, to each Holder at his address appearing in the notes register on the
date of the Offer offering to purchase up to the principal amount of notes
specified in such Offer at the purchase price specified in such Offer (as
determined pursuant to the Indenture). Unless otherwise required by applicable
law, the Offer shall specify an expiration date (the "Offer Expiration Date") of
the Offer to Purchase, which shall be, subject to any contrary requirements of
applicable law, not less than 30 days or more than 60 days after the date of
such Offer, and a settlement
97
date (the "Purchase Date") for purchase of notes within five business days after
the Offer Expiration Date. We are required to notify the Trustee at least 15
business days (or such shorter period as is acceptable to the Trustee) prior to
the mailing of the Offer of our obligation to make an Offer to Purchase, and the
Offer will be mailed by us or, at our Company's request, by the Trustee in our
name and at our expense. The Offer shall contain information concerning the
business of our company and our Restricted Subsidiaries which we in good faith
believe will enable such Holders to make an informed decision with respect to
the Offer to Purchase. At a minimum, the Offer will include (i) the most recent
annual and quarterly financial statements and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in the
documents required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in our business subsequent
to the date of the latest of such financial statements referred to in clause (i)
(including a description of the events requiring us to make the Offer to
Purchase), (iii) if applicable, appropriate pro forma financial information
concerning the Offer to Purchase and the events requiring us to make the Offer
to Purchase and (iv) any other information required by applicable law to be
included therein). The Offer will contain all instructions and materials
necessary to enable such Holders to tender notes pursuant to the Offer to
Purchase. The Offer must also state:
. the covenant of the Indenture pursuant to which the Offer to Purchase
is being made;
. the Offer Expiration Date and the Purchase Date;
. the aggregate principal amount of the outstanding notes offered to be
purchased by us pursuant to the Offer to Purchase including, if less
than 100%, the manner by which such has been determined pursuant to
the provision of the Indenture requiring the Offer to Purchase (the
"Purchase Amount");
. the purchase price to be paid by us for each $1,000 aggregate
principal amount of notes accepted for payment, as specified pursuant
to the Indenture (the "Purchase Price");
. that the Holder may tender all or any portion of the notes registered
in the name of such Holder and that any portion of a note tendered
must be tendered in an integral of $1,000 principal amount;
. the place or places where notes are to be surrendered for tender
pursuant to the Offer to Purchase;
. that any notes not tendered or tendered but not purchased by us
pursuant to the Offer to Purchase will continue to accrue or accrete
in value, as applicable;
. that on the Purchase Date the Purchase Price will become due and
payable upon each note being accepted for payment pursuant to the
Offer to Purchase (and duly paid for pursuant to the Offer to
Purchase) and that such note shall cease to accrue or accrete in
value, as applicable, on and after the Purchase Date;
. that each Holder electing to tender a note pursuant to the Offer to
Purchase will be required to surrender such note at the place or
places specified in the Offer prior to the close of business on the
Offer Expiration Date (such note being, if we or the Trustee so
require, duly endorsed by, or accompanied by a written instrument of
transfer in form satisfactory to us
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and the Trustee duly executed by, the Holder thereof or his
attorney duly authorized in writing);
. that Holders will be entitled to withdraw all or any portion of
notes tendered if we (or our paying agent) receive, not later
than the close of business on the Offer Expiration Date, a
telegram, telex, facsimile transmission or letter setting forth
the name of the Holder, the principal amount of the notes the
Holder tendered, the certificate number of the note the Holder
tendered and a statement that such Holder is withdrawing all or a
portion of his tender;
. that (i) if notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn
pursuant to the Offer to Purchase, we will purchase all such
notes and (ii) if notes in an aggregate principal amount in
excess of the Purchase Amount are tendered and not withdrawn
pursuant to the Offer to Purchase, we will purchase notes having
an aggregate principal amount equal to the Purchase Amount on a
pro rata basis (with such adjustments as may be deemed
appropriate so that only notes in denominations of $1,000 or
integral multiples thereof shall be purchased); and
. that in the case of any Holder whose notes are purchased only in
part, we will execute, and the Trustee shall authenticate and
deliver to the Holder of such note without service charge, a new
note or notes, of any authorized denomination as requested by
such Holder, in an aggregate principal amount equal to and in
exchange for the unpurchased portion of the note or notes so
tendered.
Any Offer to Purchase shall be governed by and effected in accordance
with the Offer for such Offer to Purchase.
"pari passu", when used with respect to the ranking of any Debt of any
Person in relation to other Debt of such Person, means that each such Debt (i)
either (A) is not subordinated in right of payment to any other Debt of such
Person or (B) is subordinate in right of payment to the same Debt of such Person
as is the other and is so subordinate to the same extent and (ii) is not
subordinate in right of payment to the other or to any Debt of such Person as to
which the other is not so subordinate.
"Permitted Group" means any "person" or "group" (as such terms are used
in Section 13(d) and 14(d) of the Exchange Act) if the Permitted Holders have
both the voting power and the dispositive power relating to more than 50% of the
shares of our Voting Stock beneficially owned by such person or group.
"Permitted Holder" means (i) AIG/SUN America Investments, Inc., (ii)
American General, (iii) AIM Capital Management, (iv) American Express Financial
Advisors, (v) Goldman, Sachs & Co. Special Situations Investing, (vi) LC Capital
Partners, LP, (vii) Lehman Brothers, (viii) Lord Abbett, (ix) Mackay Shields,
(x) Morgan Stanley Asset Management, (xi) Oppenheimer Funds, (xii) Putnam
Investments, (xiii) Romulus Holdings, Inc., (xiv) Triage Capital Management and
(xv) with respect to each of the foregoing, any majority-owned Affiliate
thereof.
"Permitted Interest Rate Agreement" or "Currency Protection Agreement"
of any Person means any Interest Rate Agreement or Currency Protection Agreement
entered into with one or more financial institutions that is designed to protect
such Person against fluctuations in interest rates or currency exchange rates
with respect to Debt Incurred and which shall have a notional amount no greater
than the payments due with respect to the Debt being hedged thereby and not for
purposes of speculation.
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"Permitted Investment" means (i) an Investment in our company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with or
into or transfer or convey all or substantially all its assets to, our company
or a Restricted Subsidiary; provided that such Person's primary business or the
assets to be transferred or conveyed are reasonably related, ancillary or
complementary to the Internet Service Business, (ii) Cash Equivalents, (iii)
payroll, travel, relocation and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses in
accordance with GAAP, (iv) stock, obligations or securities received (A) in
satisfaction of judgments or (B) in connection with the sale or disposition of a
Person, assets or business, (v) Investments in prepaid expenses, negotiable
instruments held for collection and lease, utility and worker's compensation,
performance and other similar deposits, (vi) Permitted Interest Rate or Currency
Agreements, (vii) loans or advances to officers or employees of our company or
any Restricted Subsidiary that do not in the aggregate exceed $5.0 million at
any time outstanding, (viii) Strategic Investments, provided that the aggregate
amount of Investments made pursuant to this clause does not exceed $15.0 million
and (ix) accounts receivable in the ordinary course of business (and Investments
obtained in exchange or settlement of accounts receivable for which we have
determined that collection is not likely or as a result of bankruptcy or
insolvency proceedings or upon the foreclosure, perfection or enforcement of any
Lien in favor of us or any Restricted Subsidiary, in each case as to debt owing
to us or any Restricted Subsidiary that arose in the ordinary course of business
of our company or such Restricted Subsidiary).
"Permitted Lien" means any Lien on the assets of our company or any
Restricted Subsidiary permitted under the covenant described under "--Certain
Covenants--Limitation on Liens".
"Permitted Senior Secured Debt" means Debt (i) Incurred by us and/or
any Restricted Subsidiary (A) pursuant to one or more senior commercial term
loan and/or revolving credit facilities (including any letter of credit
subfacility) entered into principally with commercial banks and/or other
financial institutions typically party to commercial loan agreements, (B) in the
form of, or represented by, bonds or other securities or (C) with respect to any
Restricted Subsidiary, consisting of a Guarantee of Debt of our company which is
Debt incurred pursuant to clause (A) or (B) above, and in each case any
replacement, extension, renewal, amendment, restatement, refinancing or
refunding thereof; provided that the aggregate principal amount of all Permitted
Senior Secured Debt, at any one time outstanding, shall not exceed $20.0
million, less any amounts derived from Asset Sales and applied to the permanent
reduction of Permitted Senior Secured Debt (and a permanent reduction of the
related commitment to lend or amount to be reborrowed in the case of a revolving
credit facility) under such credit facilities as contemplated by the covenant
described in "--Certain Covenants--Asset Sales" and (ii) which may be secured by
Liens having the same or senior priority to the Liens securing the Notes.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, limited
liability company, government or any agency or political subdivision thereof or
any other entity.
"Preferred Stock" of any Person means Capital Stock of such Person of
any class or classes (however designated) that ranks prior, as to the payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class of such Person.
"Purchase Money Secured Debt" of any Person means Debt (whether
provided by a vendor or a third party) of such Person secured by a Lien on real
or personal property of such Person which Debt (i) constitutes all or a part of
the purchase price or construction cost of such property or (ii) is Incurred
prior to, at the time of or within 180 days after the latter of the acquisition
or the substantial completion of
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such property for the purpose of financing all or any part of the purchase price
or construction cost thereof; provided, however, that (w) the Debt so incurred
does not exceed 100% of the purchase price or construction cost of such property
and related expenses, (x) such Lien does not extend to or cover any property
other than such item of property and any improvements on such item and proceeds
thereof, (y) the purchase price or construction cost for such property is or
should be included in "addition to property, plant and equipment" in accordance
with GAAP and (z) the purchase or construction of such property is not part of
any acquisition of a Person or business unit or line of business.
"Qualified Consideration" means: (i) cash, (ii) Cash Equivalents, (iii)
any securities or other obligations that are converted into or exchanged for
cash or Cash Equivalents within 90 days after the Asset Sale or (iv)
unsubordinated liabilities of our company or the liabilities of a Restricted
Subsidiary assumed by the transferee (or its designee) such that our company or
such Restricted Subsidiary has no further liability therefor, the amount of the
liability to be determined in accordance with GAAP.
"Related Person" of any Person means any other Person directly or
indirectly owning (i) 10% or more of the outstanding Common Stock of such Person
(or, in the case of a Person that is not a corporation, 10% or more of the
equity interest in such Person) or (b) 10% or more of the combined voting power
of the Voting Stock of such Person.
"Responsible Officer", when used with respect to the Trustee, means any
officer of the Trustee with responsibility for the administration of the
Indenture and also means, with respect to a particular corporate trust matter,
any other officer to whom such matter is referred because of his knowledge of
and familiarity with the particular subject.
"Restricted Subsidiary" means any Subsidiary of our company, whether
existing on or after the date of the Indenture, unless such Subsidiary is an
Unrestricted Subsidiary.
"Security Agreement" means the Security Agreement, dated as of the
Closing Date, by and between our company and the Collateral Agent.
"Security Documents" means the Security Agreement, any Subsidiary
Security Agreements, the Mortgages and any other document or agreement that
secures the notes or the Subsidiary Guarantees.
"Significant Subsidiary" means any Subsidiary Guarantor and any other
Restricted Subsidiary that would be a "Significant Subsidiary" of our company
within the meaning of Rule 1-02 under Regulation S-X promulgated by the SEC. For
purposes of the Default described under clauses (viii) or (ix) of the section
entitled "--Defaults", only the term "Significant Subsidiary" shall also include
any group of Restricted Subsidiaries that, taken as a whole as of the latest
audited consolidated financial statements for our company and our Subsidiaries,
would constitute a Significant Subsidiary.
"Stated Maturity," when used with respect to any note or any
installment of interest thereon, means the date specified in such note as the
fixed date on which the principal of such note or such installment of interest
is due and payable.
"Strategic Investment" means an Investment in any Person (other than an
Unrestricted Subsidiary of our company) whose primary business is reasonably
related, ancillary or complementary to the Internet Service Business, and such
Investment is determined by the Board of Directors to promote or significantly
benefit the businesses of our company and our Restricted Subsidiaries on the
date of such Investment.
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"Subordinated Obligation" means any Debt of our company or a Subsidiary
Guarantor, as the case may be (whether outstanding on the Closing Date or
thereafter Incurred), which is subordinate or junior in right of payment to the
notes or the Subsidiary Guarantees, as applicable, whether pursuant to a written
agreement to that effect or by operation of law; provided, however, that any
Debt which would constitute a Subordinated Obligation but for provisions thereof
giving holders thereof the right to require us or a Restricted Subsidiary to
repurchase or redeem such Subordinated Obligation upon the occurrence of an
asset sale or a change of control occurring prior to the final maturity of the
notes shall constitute a Subordinated Obligation if such provisions applicable
to such Subordinated Obligation are no more favorable to the holders of such
Debt than the provisions applicable to the notes contained in the covenant
described in "--Certain Covenants--Asset Sales" and the section entitled
"--Change of Control," respectively, and such provisions applicable to such Debt
specifically provide that our company and our Restricted Subsidiaries will not
repurchase or redeem any such Debt pursuant to such provisions prior to the
repurchase of such notes as are required to be repurchased pursuant to the
covenant described in "--Certain Covenants--Asset Sales" and the provisions
described in the section entitled "--Change of Control," as the case may be.
"Subsidiary" of any Person means (i) a corporation more than 50% of the
combined voting power of the outstanding Voting Stock of which is owned,
directly or indirectly, by such Person or by one or more other Subsidiaries of
such Person or by such Person and one or more Restricted Subsidiaries thereof,
or (ii) any other Person (other than a corporation) in which such Person, or one
or more other Subsidiaries of such Person or such Person and one or more other
Subsidiaries thereof, directly or indirectly, has at least a majority ownership
and power to direct the policies, management and affairs thereof.
"Subsidiary Guarantor" means each Domestic Restricted Subsidiary other
than ATC Merger Corp., a New York corporation, and any other Person that becomes
a Subsidiary Guarantor pursuant to the covenant described in "--Certain
Covenants--Future Subsidiary Guarantors."
"Subsidiary Guaranty" means a Guarantee on the terms set forth in the
Indenture by a Subsidiary Guarantor of the Company's obligations with respect to
the Notes.
"Subsidiary Security Agreement" means a Security Agreement by and
between a Subsidiary Guarantor and the Collateral Agent, in which such
Subsidiary Guarantor grants liens on its assets to secure the notes and its
Subsidiary Guaranty.
"U.S. Government Securities" means securities that are direct
obligations of the United States of America, direct obligations of the Federal
Home Loan Mortgage Corporation, direct obligations of the Federal National
Mortgage Association, securities which the timely payment of whose principal and
interest is unconditionally guaranteed by the full faith and credit of the
United States of America, trust receipts or other evidence of a direct claim
upon the instruments described above and money market mutual funds that invest
solely in such securities. Such securities may not be callable at the option of
the issuer thereof.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) at such Person, whether at all times or only so long as no
senior class of securities has such voting power by reason of any contingency.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned by such Person or by one or more Wholly Owned Restricted
102
Subsidiaries of such Person or by such Person and one or more Wholly
Owned Restricted Subsidiaries of such Person.
Additional Information
Holders of our securities may obtain a copy of the indenture, the
Registration Rights Agreement and the Collateral Documents without charge by
writing to Globix Corporation, 139 Centre Street, New York, New York 10013,
Attention: Secretary.
Book-Entry, Delivery and Form
The notes were initially issued in the form of one or more Global
Notes. Global Notes will be deposited with, or on behalf of, The Depository
Trust Company, which we refer to in this prospectus as the Depositary, and
registered in the name of Cede & Co., as nominee of the Depositary.
The Depositary is a limited-purpose trust company that was created to
hold securities for its participating organizations and to facilitate the
clearance and settlement of transactions in such securities between participants
through electronic book-entry changes in accounts of its participants. The
Depositary's participants include securities brokers and dealers, banks and
trust companies, clearing corporations and certain other organizations. Access
to the Depositary's system is also available to other entities such as banks,
brokers, dealers and trust companies that clear through or maintain a custodial
relationship with a participant, either directly or indirectly. Persons who are
not participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
indirect participants.
Pursuant to procedures established by the Depositary:
. upon deposit of the Global Note, the Depositary credited the
accounts of participants designated by the initial Holder with
portions of the principal amount of the Global Note and;
. ownership of the Notes evidenced by the Global Note are shown on,
and the transfer of ownership thereof will be affected only
through, records maintained by the Depositary (with respect to
the interests of the Depositary's participants), the Depositary's
participants and the Depositary's indirect participants.
Prospective purchasers are advised that the laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer notes evidenced by the
Global Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any notes,
the Global Note Holder will be considered the sole Holder under the Indenture of
any notes evidenced by the Global Note. Beneficial owners of notes evidenced by
the Global Note will not be considered the owners or Holders thereof under the
Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the trustee thereunder. Neither our
company nor the trustee will have any responsibility or liability for any aspect
of the records of the Depositary or for maintaining, supervising or reviewing
any records of the Depositary relating to the notes.
Payments in respect of the principal of or premium and interest, if
any, on any notes registered in the name of the Global Note Holder on the
applicable record date will be payable by the trustee to or at the direction of
the Global Note Holder in its capacity as the registered Holder under the
Indenture.
103
Under the terms of the Indenture, our company and the Trustee may treat the
persons in whose names notes, including the Global Note, are registered as the
owners thereof for the purpose of receiving such payments. Consequently, neither
our company nor the Trustee has or will have any responsibility or liability for
the payment of such amounts to beneficial owners of notes. We believe, however,
that is currently the Depositary's policy to immediately credit the accounts of
the relevant participants with such payments, in amounts proportionate to their
respective holdings of beneficial interests in the relevant security as shown on
the records of the Depositary. Payments by the Depositary's participants and the
Depositary's indirect participants to the beneficial owners of notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's participants or the Depositary's indirect
participants.
Exchange of Book-Entry Notes for Certificated Notes.
If:
. we notify the Trustee in writing that the Depositary is no longer
willing or able to act as a depositary and we are unable to
locate a qualified successor within 120 days; or
. our company, at our option, notifies the Trustee in writing that
we elect to cause the issuance of notes in certificated form,
then, upon surrender by the Global Note Holder of its Global Note, notes in
certificated form will be issued to each person that the Global Note Holder and
the Depositary identify as being the beneficial owner of the related notes.
Neither our company nor the Trustee will be liable for any delay by the
Depositary in identifying the beneficial owners of notes and our company and the
Trustee may conclusively rely on, and will be protected in relying on,
instructions from the Depositary for all purposes.
Same-Day Settlement and Payment.
The Indenture requires that payments in respect of the notes
represented by the Global Note (including principal and premium and interest, if
any) be made by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the notes represented by the Global Note are
expected to be eligible to trade in the Depositary's Same-Day Funds Settlement
System and any permitted secondary market trading activity in such notes will,
therefore, be required by the Depositary to be settled in immediately available
funds. We expect that secondary trading in the certificated notes will also be
settled in immediately available funds.
104
PLAN OF DISTRIBUTION
We are registering the shares of our common stock and notes on behalf
of the selling holders. A selling holder is a person named on pages 59 through
60 and also includes any donee, pledgee, transferee or other successor-in-
interest selling shares of our common stock or notes received after the date of
this prospectus from a selling holder as a gift, pledge, partnership
distribution or other non-sale related transfer. All costs, expenses and fees in
connection with the registration of the shares of our common stock and notes
offered by this prospectus will be borne by our company, other than brokerage
commissions and similar selling expenses, if any, attributable to the sale of
shares of our common stock and notes, which will be borne by the selling
holders. Sales of shares of our common stock and notes may be effected by
selling holders from time to time in one or more types of transactions (which
may include block transactions) in the over-the-counter market, in negotiated
transactions, through put or call options transactions relating to the shares of
our common stock, through short sales of shares of our common stock, or a
combination of these methods of sale, at market prices prevailing at the time of
sale, or at negotiated prices. These transactions may or may not involve brokers
or dealers. We are not aware of any agreements, understandings or arrangements
among the selling holders and any underwriters or broker-dealers regarding the
sale of the shares of our common stock or notes held by the selling holders, nor
is there an underwriter or coordinated broker acting in connection with the
proposed sale of shares of our common stock and notes by the selling holders.
The selling holders may enter into hedging transactions with
broker-dealers or other financial institutions. In connection with these
transactions, broker-dealers or other financial institutions may engage in short
sales of the shares of our common stock in the course of hedging positions they
assume with selling holders. The selling holders may also enter into options or
other transactions with broker-dealers or other financial institutions which
require the delivery to these broker-dealers or other financial institutions of
shares of our common stock or notes, which shares of our common stock or notes
these broker-dealer or other financial institution may resell pursuant to this
prospectus (as amended or supplemented to reflect such transaction). The selling
holders may also engage in short sales of shares and, in those instances, this
prospectus may be delivered in connection with the short sales and the shares
offered under this prospectus may be used to cover the short sales.
The selling holders may make these transactions by selling shares of
our common stock or notes directly to purchasers or to or through
broker-dealers, which may act as agents or principals. These broker-dealers may
receive compensation in the form of discounts, concessions or commissions from
selling holders and/or the purchasers of shares of our common stock or notes for
whom these broker-dealers may act as agents or to whom they sell as principal,
or both (which compensation as to a particular broker-dealer might be in excess
of customary commissions).
The selling holders and any broker-dealers that act in connection with
the sale of shares of our common stock or notes may be deemed to be
"underwriters" within the meaning of Section 2(11) of the Securities Act, and
any commissions received by these broker-dealers or any profit on the resale of
the shares of our common stock or notes sold by them while acting as principals
might be deemed to be underwriting discounts or commissions under the Securities
Act. The selling holders may agree to indemnify any agent, dealer or
broker-dealer that participates in transactions involving sales of shares of our
common stock or notes against certain liabilities, including liabilities arising
under the Securities Act.
Because selling holders may be "underwriters" within the meaning of
Section 2(11) of the Securities Act, the selling holders may be subject to the
prospectus delivery requirements of the Securities Act. The rules and
regulations set forth in Regulation M promulgated under the Exchange Act
105
provide that during the period that any person is engaged in a distribution of
the shares within the meaning of Regulation M, that person usually may not
purchase the shares. The selling holders are subject to the rules and
regulations of the Securities Act and the Exchange Act, including Regulation M,
which may limit the timing of purchases and sales of shares by the selling
holders. Regulation M's prohibition on purchases may include purchases to cover
short positions by the selling holders, and a selling shareholder's failure to
cover a short position at a lender's request and subsequent purchases by the
lender in the open market of shares to cover such short positions, may
constitute an inducement to buy shares which is prohibited by Regulation M.
Consequently, this may affect the marketability of the shares. Our company has
informed the selling holders that the anti-manipulative provisions of Regulation
M may apply to their sales in the market.
Selling holders also may resell all or a portion of the shares of our
common stock or notes in open market transactions in reliance upon Rule 144
under the Securities Act, provided that they meet the criteria and conform to
the requirements of Rule 144.
Upon our company being notified by a selling holder that any material
arrangement has been entered into with a broker-dealer for the sale of shares of
our common stock or notes through a block trade, special offering, exchange
distribution or secondary distribution or a purchase by a broker or dealer, a
supplement to this prospectus will be filed, if required, pursuant to Rule
424(b) under the Securities Act, disclosing:
. the name of each such selling holder and of the participating
broker-dealer(s);
. the number of shares of our common stock and/or notes involved;
. the initial price at which these shares and/or notes were sold;
. the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
. that such broker-dealer(s) did not conduct any investigation to
verify the information set out or incorporated by reference in
this prospectus; and
. other facts material to the transactions.
In addition, upon our company being notified by a selling holder that a
donee, pledgee, transferee or other successor-in-interest intends to sell more
than 500 shares of our common stock, a supplement to this prospectus will be
filed.
106
LEGAL MATTERS
The validity of the shares of our common stock and the notes offered
hereby will be passed upon for our company by Akin, Gump, Strauss, Hauer & Feld,
L.L.P., New York, New York.
EXPERTS
Our consolidated financial statements as of September 30, 2001 and
September 30, 2000, and for each of the years in the three-year period ended
September 30, 2001 have been included in this prospectus in reliance upon the
report of Arthur Andersen LLP, independent certified public accountants set
forth herein, and upon the authority of said firm as experts in accounting and
auditing.
After reasonable efforts, however, we have been unable to obtain Arthur
Andersen's written consent to the inclusion of our consolidated financial
statements into the registration statement of which this prospectus is a part.
Accordingly, we have omitted Arthur Andersen's consent in reliance upon Rule
437a of the Securities Act.
Section 11(a) of the Securities Act provides that if any part of a
registration statement at the time it becomes effective contains an untrue
statement of a material fact or an omission to state a material fact required to
be stated therein or necessary to make the statements therein not misleading,
any person acquiring a security pursuant to such registration statement (unless
it is proved that at the time of acquisition that such person knew of such
untruth or omission) may sue, among others, every accountant who has consented
to be named as having prepared or certified any part of the registration
statement or as having prepared or certified any report or valuation which is
used in connection with the registration statement with respect to the statement
in such registration statement, report or valuation which purports to have been
prepared or certified by the accountant. Since Arthur Andersen LLP has not
consented to the inclusion of our consolidated financial statements into the
registration statement of which this prospectus is a part, you will not be able
to recover against Arthur Andersen LLP under Section 11 of the Securities Act
for any untrue statements of a material fact contained in our consolidated
financial statements or any omissions to state a material fact required to be
stated therein.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form S-1 under the Securities Act for the shares of
our common stock and the notes being sold pursuant to this prospectus. This
prospectus constitutes a part of that registration statement. This prospectus
does not contain all of the information set forth in the registration statement
and the accompanying exhibits and schedules because some parts have been omitted
in accordance with the rules and regulations of the Securities and Exchange
Commission. For further information about us and our shares of common stock and
notes, we refer you to the registration statement and the accompanying exhibits
and schedules. Whenever a reference is made in this prospectus regarding the
contents of any agreement, contract or any other document, please be aware that
the reference is only a summary of all material terms of the agreement, contract
or other document. In each case, reference is made to the copy of the agreement,
contract or other document filed as an exhibit to the registration statement,
and each statement is qualified in all respects by that reference.
We file annual, quarterly and current reports and other information
with the Securities and Exchange Commission. You may read and copy any document
we file with the Securities and Exchange
107
Commission at the Securities and Exchange Commission's public reference
facilities located in Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549 and also at the regional offices of the Securities and
Exchange Commission located at the Northwestern Atrium Center at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511 and at 233 Broadway,
New York, New York. Please call the Securities and Exchange Commission at
1-800-SEC-0330 for further information on the operation of its public reference
facilities. Our Securities and Exchange Commission filings will also be
available to the public from commercial document retrieval services and at the
Securities and Exchange Commission's web site at http://www.sec.gov.
You may request a copy of any of our filings with the Securities and
Exchange Commission, or any of the agreements or other documents that constitute
exhibits to those filings, at no cost, by writing or telephoning us at the
following address or phone number:
Globix Corporation
139 Centre Street
New York, New York 10013
Phone Number: (212) 334-8500
You should rely only on the information provided in this prospectus. No
person has been authorized to provide you with different information. The
information in this prospectus is accurate as of the date on the front cover.
You should not assume that the information contained in this prospectus is
accurate as of any other date.
108
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
----
Consolidated Balance Sheets as of March 31, 2002 (unaudited) and September 30, 2001 ......... F-2
Unaudited Consolidated Statements of Operations for the Six Months and Three Months Ended
March 31, 2002 and March 31, 2001 ........................................................... F-3
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 2002
and March 31, 2001........................................................................... F-4
Notes to Consolidated Financial Statements .................................................. F-5
Report of Independent Public Accountants .................................................... F-17
Consolidated Balance Sheets as of September 30, 2001 and September 30, 2000 ................. F-18
Consolidated Statements of Operations for the fiscal years ended September 30, 2001,
September 30, 2000 and September 30, 1999 ................................................... F-19
Consolidated Statements of Changes in Stockholders' (Deficit) Equity for the Fiscal
Years ended September 30, 2001, September 30, 2000 and September 30, 1999 ................... F-20
Consolidated Statements of Cash Flows for the Fiscal Years ended September 30, 2001,
September 30, 2000 and September 30, 1999 ................................................... F-21
Notes to Consolidated Financial Statements .................................................. F-22
F-1
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollars in Thousands, Except Share and Per Share Data)
March 31, September 30,
2002 2001
---- ----
Assets (unaudited)
Current assets:
Cash and cash equivalents ................................................................... $ 56,511 $111,502
Marketable securities ....................................................................... 2,874 1,610
Accounts receivable, net of allowance for doubtful accounts of $2,129 and
$6,852, respectively ...................................................................... 11,476 13,809
Prepaid expenses and other current assets ................................................... 11,450 7,785
Restricted cash ............................................................................. 19,165 6,984
-------- --------
Total current assets .................................................................... 101,476 141,690
Investments, restricted .......................................................................... 7,666 26,886
Property, plant and equipment, net ............................................................... 316,396 356,149
Debt issuance costs, net of accumulated amortization of $2,543 and $1,896,
respectively .................................................................................. 24,436 19,006
Intangible assets, net of accumulated amortization of $0 and $2,485,
respectively .................................................................................. - 4,362
Other assets ..................................................................................... 501 4,895
-------- --------
Total assets ..................................................................................... $450,475 $552,988
======== ========
Liabilities and Stockholders' Deficit
Current liabilities:
Capital lease and other obligations ......................................................... $ 6,299 $6,687
Accounts payable ............................................................................ 5,694 14,022
Accrued liabilities ......................................................................... 44,053 30,141
Accrued interest ............................................................................ 43,750 12,500
-------- --------
Total current liabilities ............................................................... 99,796 63,350
Capital lease obligations, net of current portion ................................................ 7,085 10,309
Mortgage payable ................................................................................. 20,309 20,441
Senior Notes (see Note 5) ........................................................................ 600,000 600,000
Other long term liabilities ...................................................................... 3,062 7,577
-------- --------
Total liabilities ....................................................................... 730,252 701,677
Minority interest in subsidiary .................................................................. 4,435 5,406
Redeemable convertible preferred stock (see Note 7) .............................................. 83,695 83,230
Stockholders' Deficit:
Common stock, $.01 par value; 500,000,000 shares authorized; 41,896,479 and
41,920,229 shares issued and outstanding, respectively ........................................ 419 419
Additional paid-in capital ....................................................................... 167,929 171,176
Deferred compensation ............................................................................ (5,056) (7,097)
Accumulated other comprehensive income ........................................................... (4,206) (2,703)
Accumulated deficit .............................................................................. (526,993) (399,120)
-------- --------
Total stockholders' deficit ...................................................................... (367,907) (237,325)
-------- --------
Total liabilities and stockholders' deficit ...................................................... $450,475 $552,988
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollars in Thousands, Except Share and Per Share Data)
(unaudited)
Three Months Ended March 31, Six Months Ended March 31,
2002 2001 2002 2001
---- ---- ---- ----
Revenue ............................................................... $ 21,389 $ 26,782 $ 44,767 $ 53,018
Operating costs and expense:
Cost of revenue .................................................. 9,737 10,480 19,399 20,948
Selling, general and administrative .............................. 21,402 28,308 46,150 59,072
Restructuring expenses ........................................... 48,447 -- 48,447 38,109
Impairment of intangible assets .................................. 3,220 -- 3,220 --
Depreciation and amortization .................................... 12,174 7,951 24,186 15,547
----------- ----------- ---------- -----------
Total operating costs and expenses .................................... 94,980 46,739 141,402 133,676
----------- ----------- ---------- -----------
Loss from operations .................................................. (73,591) (19,957) (96,635) (80,658)
Interest and financing expense ................................... (14,036) (16,118) (34,060) (32,598)
Interest income .................................................. 875 4,439 1,840 10,915
Other income/(expense) ........................................... (472) (330) (362) (577)
Minority interest in subsidiary .................................. 955 -- 1,344 --
----------- ----------- ---------- -----------
Loss before cumulative effect of a change in accounting principle ..... (86,269) (31,966) (127,873) (102,918)
Cumulative effect of a change in accounting principle ................. -- -- -- (2,332)
----------- ----------- ---------- -----------
Net loss .............................................................. (86,269) (31,966) (127,874) (105,250)
Dividends and accretion on preferred stock ....................... (1,329) (1,761) (3,178) (3,496)
----------- ----------- ---------- -----------
Net loss attributable to common stockholders' ......................... $ (87,598) $ (33,727) $ (131,051) $ (108,746)
========== ========== =========== ===========
Basic and diluted loss per share attributable to common
stockholders' before cumulative effect of a change in
accounting principle ............................................... $ (2.21) $ (0.87) $ (3.33) $ (2.80)
Cumulative effect of a change in accounting principle -- -- -- (0.06)
Basic and diluted net loss per share attributable to common
stockholders' ...................................................... $ (2.21) $ (0.87) $ (3.33) $ (2.86)
----------- ----------- ---------- -----------
Weighted average common shares outstanding--basic and diluted ......... 39,688,862 38,709,658 39,330,033 38,011,488
=========== =========== ========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollars in Thousands, Except Share and Per Share Data)
Six months ended
March 31,
---------
2002 2001
---- ----
(Unaudited)
Cash flows from operating activities:
Net loss ......................................................................................... $(127,873) $(105,250)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................................... 24,186 15,547
Provision for uncollectible accounts receivable .................................................. 3,534 2,557
Cumulative effect of a change in accounting principle ............................................ -- 2,332
Restructuring expenses ........................................................................... 48,447 17,094
Minority interest in subsidiary .................................................................. (1,344) --
Gain on sale of short term investment ............................................................ -- (1,459)
Gain on sale of marketable securities ............................................................ (27) --
Loss on impairment of intangible assets .......................................................... 3,220 --
Loss on impairment of investments ................................................................ 490 1,950
Amortization of debt issuance costs .............................................................. 647 568
Amortization of deferred compensation ............................................................ 1,083 562
Changes in operating assets and liabilities:
Accounts receivable .............................................................................. (2,236) (1,517)
Prepaid expenses and other current assets ........................................................ (126) (4,618)
Other assets ..................................................................................... (5,921) (4,274)
Accounts payable ................................................................................. (7,371) (1,481)
Accrued liabilities .............................................................................. 555 9,253
Accrued interest ................................................................................. 31,250 (2)
Other ............................................................................................ (3,541) (736)
--------- ---------
Net cash used in operating activities ............................................................ (35,027) (69,474)
--------- ---------
Cash flows from investing activities:
Proceeds from sale of short term investments ..................................................... -- 10,180
Use of restricted cash and investments ........................................................... 7,038 5,747
Proceeds from sale of marketable securities ...................................................... 64 --
Purchases of property, plant and equipment ....................................................... (20,051) (91,269)
--------- ---------
Net cash used in investing activities ............................................................ (12,949) (75,342)
--------- ---------
Cash flows from financing activities:
Proceeds from exercise of stock options and warrants, net ........................................ -- 2,456
Capital contribution in minority-owned subsidiary ................................................ 372 --
Repayments of mortgage payable and capital lease obligations ..................................... (4,583) (2,065)
--------- ---------
Net cash (used in) provided by financing activities .............................................. (4,211) 391
Effects of exchange rate changes on cash and cash equivalents .................................... (2,804) (2,157)
--------- ---------
Net decrease in cash and cash equivalents ........................................................ (54,991) (146,582)
Cash and cash equivalents, beginning of period ................................................... 111,502 363,877
--------- ---------
Cash and cash equivalents, end of period ......................................................... $ 56,111 $ 217,295
========= =========
Supplemental disclosure of cash flow information:
Cash paid for interest ........................................................................... $ 1,814 $ 38,907
Cash paid for income taxes ....................................................................... $ -- $ 34
Non-cash financing activities:
Equipment acquired under capital lease obligations ............................................ $ 1,036 $ 8,573
Capital expenditures included in accounts payable, accrued liabilities and other long
term liabilities ............................................................................ $ 308 $ 4,969
Cumulative dividends and accretion on preferred stock ............................................ $ 3,178 $ 3,496
The accompanying notes are an integral part of these consolidated financial
statements
F-4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
consolidated financial statements furnished herein include all adjustments
necessary for a fair presentation of the financial position of Globix
Corporation (the "Company" or "Globix") at March 31, 2002 and the results of its
operations for the three-month and six-month periods ended March 31, 2002 and
2001 and its cash flows for the six- month period ended March 31, 2002 and 2001.
All such adjustments are of a normal recurring nature. Interim financial
statements are prepared on a basis consistent with the Company's annual
financial statements. Results of operations for the three-month and six-month
periods ending March 31, 2002 are not necessarily indicative of the operating
results that may be expected for future periods.
The consolidated balance sheet as of September 30, 2001 has been
derived from the audited consolidated financial statements at that date but does
not include all of the information and notes required by generally accepted
accounting principles for complete financial statements.
For further information and factors to consider, refer to the other
consolidated financial statements and notes thereto included in this prospectus.
2. Financial Restructuring Plan and Reorganization
On March 1, 2002, the Company and two of its wholly owned domestic
subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code, together with a prepackaged plan of reorganization (the "Plan"), with the
United States Bankruptcy Court for the District of Delaware. The Company
continued to operate in Chapter 11 in the ordinary course of business. The
Company received from the Bankruptcy Court authority to pay its employees,
trade, and certain other creditors in full and on time, regardless of whether
such claims arose prior to or after the Chapter 11 filing. The financial
reporting of the Company following the filing of the Chapter 11 petitions is
governed by the American Institute of Certified Public Accountants Statement of
Position No. 90-7 "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code" ("SOP 90-7"). SOP 90-7 provides guidance for companies that
have filed petitions with the Bankruptcy Court and expect to reorganize under
Chapter 11 of the Bankruptcy Code. The Company implemented the guidance of SOP
90-7 upon the initial filing on March 1, 2002, pursuant to SOP 90-7.
On April 8, 2002, the United States Bankruptcy Court confirmed the
joint pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the Company's issued and outstanding
new Common Stock on a fully-diluted basis; (b) each holder of Preferred Stock,
in exchange for such Preferred Stock (which, as stated above, is deemed
cancelled as of
F-5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
the effective date), is entitled to receive, in exchange for such Preferred
Stock, its pro rata share of shares of new Common Stock representing
approximately 14% of the initial shares of new Common Stock, subject to dilution
by the exercise of management incentive options; and (c) each holder of an old
Common Stock equity interest (which, as stated above, is deemed cancelled as of
the effective date) is entitled to receive, in exchange for such old Common
Stock equity interest, its pro rata share of shares of new Common Stock
representing approximately 1% of the initial shares of new Common Stock, subject
to dilution by the exercise of management incentive options.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
The reorganization reduced significantly the principal amount of the
Company's outstanding indebtedness by reducing outstanding indebtedness by
approximately $480 million and converting a substantial portion of the Company's
indebtedness into new Common Stock. Moreover, the new debt issued under the Plan
permits the Company to satisfy interest payments in kind for at least two years
and, at the discretion of the Company's board of directors, up to four years,
thereby significantly reducing liquidity concerns arising from pre-Chapter 11
bankruptcy debt service obligations. The Company believes that the restructuring
substantially reduces uncertainty with respect to its future and better
positions it to attract and maintain new customers. There can be no assurance
that the Company will be successful in executing its business plan and there is
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Upon the consummation of the Chapter 11 filing and emergence from
bankruptcy in April 2002, the Company will record a gain on the exchange of the
Senior Notes and preferred stock for the Senior Secured Notes and new common
stock. Such gain includes the extinguishment of the Senior Notes and the
cancellation of associated accrued interest and will be offset by the write-off
of previously deferred costs associated with the Senior Notes and reorganization
related expenses.
The following table sets forth the Company's unaudited pro forma
consolidated balance sheet as of March 31, 2002 upon exchange of the Senior
Notes and Preferred Stock for the Senior Secured Notes and new common equity
under the Plan. The assigned equity values are based upon the reorganized value
of the ongoing business and include significant estimates made by management
based on facts and circumstances currently available. Valuation methodologies
require the input of highly subjective assumptions. Actual future results and
events could differ substantially from current estimates and assumptions. Any
changes in valuation could affect the Company's balance sheet.
F-6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Actual Pro forma
March 31, 2002 Debit Credit March 31, 2002
-------------- ----- ------ --------------
Assets
Total current assets ....................................... $ 101,476 $ -- $ -- $ 101,476
Property, plant and equipment, net ......................... 316,396 -- -- 316,396
Debt issuance costs, net ................................... 24,436 -- 23,581 (a) 855
Other assets ............................................... 8,167 -- -- 8,167
------------ ------------ ----------- -----------
Total assets ............................................... $ 450,475 $ -- $ 23,581 $ 426,894
========== ========== =========== ===========
Liabilities and Stockholders' (Deficit) Equity
Capital lease and other obligations ........................ $ 6,299 $ -- $ -- $ 6,299
Accounts payable ........................................... 5,694 -- -- 5,694
Accrued liabilities ........................................ 44,053 2,713 (b) -- 41,340
Accrued interest ........................................... 43,750 43,750 (c) -- --
------------ ------------ ----------- -----------
Total current liabilities .................................. 99,796 46,463 -- 53,333
Capital lease obligations, net of current portion .......... 7,085 -- -- 7,085
Mortgage payable ........................................... 20,309 -- -- 20,309
Senior Notes ............................................... 600,000 600,000 (c) -- --
Senior Secured Notes ....................................... -- -- 120,000 (d) 120,000
Other long term liabilities ................................ 3,062 -- -- 3,062
------------ ------------ ----------- -----------
Total liabilities .......................................... 730,252 646,463 120,000 203,789
Minority interest in subsidiary ............................ 4,435 -- -- 4,435
Redeemable Convertible Preferred Stock ..................... 83,695 83,695 (b) -- --
Stockholders' (deficit) equity
Common stock ............................................... 419 -- -- 419
Additional paid-in capital ................................. 167,929 -- 173,664 (b),(e) 341,593
Deferred compensation ...................................... (5,056) -- -- (5,056)
Accumulated other comprehensive income ..................... (4,206) -- -- (4,206)
Accumulated deficit ........................................ (526,993) -- 412,913 (f) (114,080)
------------ ------------ ----------- -----------
Total stockholders' (deficit) equity ....................... (279,777) 83,695 586,577 233,105
------------ ------------ ----------- -----------
Total liabilities and stockholders' (deficit) equity ....... $ 450,475 $ 730,158 $ 730,158 $ 426,894
============ ============ =========== ===========
Explanation of the above adjustment columns are as follows:
a) Write-off of deferred costs associated with Senior Notes and restructuring related expenses.
b) To eliminate Preferred Stock and the associated accrued dividends.
c) To eliminate the 12.5% Senior Notes and associated accrued interest.
d) To reflect the issuance of the 11% Senior Secured Notes.
e) The equity value of the reorganized Globix is calculated as follows:
Enterprise value ........................................ $ 240,000
New Senior Secured Notes ................................ (120,000)
Mortgage Payable ........................................ (20,552)
Capitalized leases ...................................... (12,192)
------------
Equity value of reorganized Globix .................. $ 87,256
============
f) The extraordinary gain on extinguishment of debt and associated costs is calculated as follows:
Carrying value of Senior Notes 12.5% .................... $ 600,000
Carrying value of related accrued interest .............. 43,750
Carrying value of Senior Secured Notes 11% .............. (120,000)
Equity value of reorganized Globix ...................... (87,256)
Carrying value of related capitalized costs ............. (23,581)
------------
Extraordinary gain on extinguishment of debt ........ $ 412,913
============
F-7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
March 31, September 30,
2002 2001
---- ----
Land $ 1,997 $ 1,997
Building and building improvements ................................ 102,810 108,216
Leasehold improvements ............................................ 139,267 145,617
Computer hardware and software and network equipment .............. 129,694 134,767
Furniture and equipment ........................................... 9,866 9,693
-------- --------
383,634 400,290
Less: Accumulated depreciation and amortization ................... (75,671) (54,499)
Add: Construction in progress ..................................... 8,433 10,358
-------- --------
Property, plant and equipment, net ................................ $316,396 $356,149
======== ========
Certain computer and network equipment are recorded under capital
leases that aggregated approximately $23.1 million and $23.5 million as of March
31, 2002 and September 30, 2001, respectively. Accumulated amortization on the
assets recorded under capital leases aggregated approximately $9.8 million and
$6.6 million as of March 31, 2002 and September 30, 2001, respectively.
Costs incurred prior to completion of construction of Internet data
centers and network infrastructure upgrades are reflected as construction in
progress in the accompanying consolidated balance sheets and are recorded as
property, plant and equipment at the date each Internet data center or network
segment becomes operational. Construction in progress includes direct
expenditures for construction of the Internet data center facilities, related
network equipment and network upgrade projects and is stated at cost.
Capitalized costs include costs incurred under the construction contract,
advisory and consulting fees incurred during the construction phase. Capitalized
interest is included in property, plant and equipment under the provision of
SFAS No. 34 and totals zero and $7.1 million for the periods ended March 31,
2002 and 2001, respectively. Included in the construction in progress at March
31, 2002 and September 30, 2001 are capital projects currently in progress
related to the completion of the New York and London Internet data centers and
certain equipment associated with these facilities, which has not been placed in
service.
ATC Merger Corp. ("ATC Corp."), a wholly-owned subsidiary of the
Company, owns the land and building located at 139 Centre Street, New York, New
York. The nine-story building houses the Company's corporate headquarters and
one of its Internet data center facilities. A former owner of the right to
purchase the Centre Street property may be entitled to additional consideration
if the Company sells the property. Such amount will be equal to the greater of
(a) $1.0 million (subject to increase after June 1, 2018 by ten percent and an
additional 10 percent every fifth year thereafter), or (b) 10 percent of the
gross sales price of the property if such sales price is greater than $17.5
million.
In September 2000, the Company purchased the land and the eight-story
building located at 415 Greenwich Street, New York, New York (the "Property").
The Property, which serves as the Company's second New York City Internet Data
Center, is a certified historic structure eligible for historic tax credits
("Tax Credits") based on qualified expenditures, as defined in the Internal
Revenue Code.
In June 2001, the Company entered into an agreement whereby the Tax
Credits generated from the renovation of the Property will be utilized by a
third party (the "Investor") via a Globix minority-owned subsidiary (the "LLC")
in consideration for up to approximately $14 million capital contribution to the
LLC. As of March 31, 2002, approximately $5.4 million of such capital
contribution has been received by the LLC. The balance of the funding
F-8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
under the capital contribution is based upon the completion of future project
related events, as defined in the LLC agreement. The Company has consolidated
the financial statements of the LLC since inception, due to effective control of
the LLC by the Company resulting in a minority interest in subsidiary in the
accompanying consolidated financial statements.
4. Accrued Liabilities
Accrued liabilities consist of the following:
March 31, September 30,
2002 2001
---- ----
Restructuring reserves ............... $22,471 $ 9,191
Deferred revenue ..................... 2,681 2,692
Accrued construction costs ........... -- 6,490
Accrued dividends payable ............ 2,713 --
Other ................................ 16,251 11,768
------- -------
$44,053 $30,141
======= =======
During the quarter ended December 31, 2000 the Company modified its
Internet data center expansion plan to delay, scale back and eliminate certain
facilities. During November 2000, management's plan to terminate certain lease
obligations, associated surplus power and environmental equipment related to the
proposed expansion of Globix Internet data centers in Boston, MA; Seattle, WA;
and Los Angeles, CA was completed and approved by the Company's board of
directors. When initiated, the restructuring plan was expected to take
approximately one year to complete. The Company recorded a $38.1 million charge
associated with this restructuring plan in the fiscal quarter ending December
31, 2000. Approximately $15.7 million of this charge was recorded as a write-off
of construction in progress, which included capitalized interest, consulting and
legal fees, construction and pre-construction related costs previously
capitalized.
During the quarter ending September 30, 2001, the Company further
modified its business plan to eliminate certain additional Internet data center
and sales office facilities, resulting in the termination of certain employees,
lease obligations and write-off of certain equipment, leasehold improvements and
intangible assets and other costs. In connection with this modification,
additional restructuring charges of $18.0 million were recorded, of which $10.0
million was a write-off of equipment, leasehold improvements and intangible
assets and $1.2 million was associated with employee terminations.
During the quarter ending March 31, 2002, the Company made an
additional modification to its business plan, under the Plan of Reorganization,
to reduce certain Internet data center lease obligations 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, a restructuring charge of $48.4 million was recorded, of which
$17.1 million was for the write-off of previously escrowed lease deposit and
landlord inducement and legal payments, $28.4 million was a write-off of
equipment and leasehold improvements and $2.9 million was associated with
employee terminations.
F-9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
As of March 31, 2002, restructuring charges totaling $82.1 million were
charged against the established restructuring reserve, resulting in a remaining
reserve balance of $22.4 million. The following table displays the activity and
balances of the restructuring reserve account from inception to March 31, 2002:
Restructuring Charge Activity Amount
----------------------------- --------
Initial charge-- November 2000 (balance) ...... $ 38,109
Additions ..................................... 0
Deductions .................................... (27,667)
--------
Balance, December 31, 2000 .................... 10,442
Additions ..................................... 0
Deductions .................................... (2,662)
--------
Balance, March 31, 2001 ....................... 7,780
Additions ..................................... 0
Deductions .................................... (1,610)
--------
Balance, June 30, 2001 ........................ 6,170
Additions ..................................... 18,000
Deductions .................................... (14,979)
--------
Balance, September 30, 2001 ................... 9,191
Additions ..................................... 0
Deductions .................................... (1,647)
--------
Balance, December 31, 2001 7,544
Additions ..................................... 48,447
Deductions .................................... (33,520)
--------
Balance, March 31, 2002 ....................... $ 22,471
========
The above deductions to the restructuring reserve represent primarily
cash payments and write-offs of previously capitalized costs.
5. Senior Notes
In January 2000, the Company agreed to sell $600.0 million 12.5% senior
notes (the "Senior Notes") due 2010 in a private placement to a group of initial
purchasers and in March 2000 completed a tender offer to purchase all of the
outstanding 13% Senior Notes, $160.0 million in principal amount. The purchase
price in the tender offer was 106.5% of the principal amount, plus accrued and
unpaid interest. On February 8, 2000 the Company closed its offering for the
$600.0 million 12.5% Senior Notes due 2010, resulting in net proceeds of
approximately $580.0 million, after underwriting fees and offering expenses.
The Senior Notes were to mature on February 1, 2010. Interest on the
Senior Notes was payable semiannually on February 1 and August 1 of each year,
commencing August 1, 2000. The Senior Notes were unsecured obligations of the
Company and ranked pari passu in right of payment with all existing and future
unsecured and unsubordinated indebtedness and ranked senior in right of payment
to any future subordinated indebtedness. In connection with the offering the
Company incurred costs of approximately $20.0 million that was being amortized
over ten years using the effective interest method.
On February 1, 2002, the Company did not make its scheduled interest
payment on the Senior Notes in anticipation of commencing Chapter 11 cases under
the U.S. Bankruptcy Code. The Company filed its voluntary prepackaged bankruptcy
petition under Chapter 11 of the U.S. Bankruptcy Code on March 1, 2002 and in
accordance
F-10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
with SOP 90-7, upon entering Chapter 11 of the U.S. Bankruptcy Code, accrued
interest on the 12.5% Senior Notes was discontinued.
On April 8, 2002, the United States Bankruptcy Court confirmed the
joint pre-packaged Plan of Reorganization filed by the Company and certain
subsidiaries and the Company emerged from Chapter 11 bankruptcy protection and
all conditions necessary for the Plan to become effective were satisfied or
waived effective April 25, 2002.
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of the Company's issued
and outstanding new Common Stock on a fully-diluted basis; (b) each holder of
Preferred Stock, in exchange for such Preferred Stock (which, as stated above,
is deemed cancelled as of the effective date), is entitled to receive, in
exchange for such Preferred Stock, its pro rata share of shares of new Common
Stock representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
The 11% Senior Secured Notes mature on May 1, 2008. Interest on the 11%
Senior Secured Notes shall accrue and for the first two years after the closing
date in kind by the issuance of additional 11% Senior Secured Notes in such
principal amount as shall equal the interest payment that is then due. For the
two year period thereafter, interest is payable in cash or, at the Company's
option when authorized by the board of directors, in additional 11% Senior
Secured Notes, or in any combination of cash and securities. For the remaining
years interest is payable in cash.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
6. Mortgage Payable
On January 25, 2000, ATC Corp. borrowed $21.0 million from a financial
institution pursuant to a mortgage note secured by the property at 139 Centre
Street, New York. Interest is payable at 9.16% (subject to adjustment on
February 11, 2010) based on a 25 year amortization schedule. Principal and
interest payments of $178.5 are payable monthly and any balance of the principal
and all accrued and unpaid interest is due and payable in February 2025.
7. Redeemable Convertible Preferred Stock
The Company had designated 250,000 shares of its authorized 5,000,000
shares of Preferred Stock, $0.01 par value, as Series A 7.5% Convertible
Preferred Stock. At March 31, 2002, there were 89,435 shares of Preferred Stock
outstanding and 160,565 shares of Preferred Stock reserved for issuance.
F-11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
On December 3, 1999, the Company issued $80.0 million (80,000 shares)
in Preferred Stock to affiliates of Hicks, Muse, Tate & Furst Incorporated
("Hicks Muse") to expand the build-out of its Internet data centers and other
facilities. The Preferred Stock was convertible into common stock at $10.00 per
share at any time and could not be called for redemption by the Company for five
years. Under the agreement, the Preferred Stock is subject to mandatory
redemption in 2014 and yielded an annual dividend of 7.5% payable quarterly in
cash or additional shares of Preferred Stock, at the option of the Company. The
holders of the Preferred Stock had a liquidation preference of $1,000 per share
and were entitled to cumulative dividends.
The Preferred Stock is recorded in the accompanying consolidated
balance sheet outside the stockholders equity section due to its mandatory
redemption feature. The Company incurred approximately $4.75 million of issuance
costs in connection with the Preferred Stock transaction. Such costs have been
recorded as a reduction of the carrying amount of the Preferred Stock and were
being accreted through a charge to additional paid in capital over the five-year
period to the earliest redemption date.
The Company did not declare or pay dividends for the three-month
periods ended March 31, 2002 and December 31, 2001. Cumulative dividends payable
for such period totaling $2.7 million have been accrued at March 31, 2002 and
are included in accrued liabilities. On March 1, 2002, the Company and two of
its wholly owned domestic subsidiaries filed Chapter 11 petitions in the United
States Bankruptcy Court for the District of Delaware. In accordance with SOP
90-7, upon entering Chapter 11 of the U. S. Bankruptcy Code, the Preferred Stock
dividend accrual was discontinued as of March 1, 2002. On April 8, 2002, the
United States Bankruptcy Court confirmed the joint pre-packaged Plan of
Reorganization filed by the Company and certain subsidiaries and the Company
emerged from Chapter 11 bankruptcy protection and all conditions necessary for
the Plan to become effective were satisfied or waived effective April 25, 2002.
Under the Plan and as of the effective date all existing securities of
the Company are deemed cancelled and: (a) each holder of Senior Notes is
entitled to receive, in exchange for such Senior Notes, its pro rata share of
(i) $120 million principal amount of new 11% Senior Secured Notes due 2008, and
(ii) shares of new Common Stock representing approximately 85% of the initial
shares of new Common Stock, subject to dilution by the exercise of management
incentive options representing up to 10% of the shares of Company's issued and
outstanding new Common Stock on a fully-diluted basis; (b) each holder of
Preferred Stock, in exchange for such Preferred Stock (which, as stated above,
is deemed cancelled as of the effective date), is entitled to receive, in
exchange for such Preferred Stock, its pro rata share of shares of new Common
Stock representing approximately 14% of the initial shares of new Common Stock,
subject to dilution by the exercise of management incentive options; and (c)
each holder of an old Common Stock equity interest (which, as stated above, is
deemed cancelled as of the effective date) is entitled to receive, in exchange
for such old Common Stock equity interest, its pro rata share of shares of new
Common Stock representing approximately 1% of the initial shares of new Common
Stock, subject to dilution by the exercise of management incentive options.
Although the Plan has become effective, distributions of Senior Secured
Notes and new Common Stock to holders of existing common stock and notes under
the Plan have not yet been made. Such distributions will be made as soon as
practicable after adequate distribution reserves are established to accommodate
valid securities claims, if any. The Company believes that the securities claims
are without merit and intends to object to the allowance of such claims. Under
the Plan, any recovery for such security holder claims must be satisfied from
the new Senior Secured Notes and shares of new Common Stock available for
distribution to existing Senior Note holders and common stockholders. The
Company expects to petition the Bankruptcy Court to establish a minimum reserve
of the Senior Secured Notes and new Common Stock for such securities claims in
order to allow for the prompt distribution of the remaining Senior Notes and new
Common Stock to holders of existing common stock and notes under the Plan.
8. Stockholder's Equity
F-12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
In December 2000, the Company granted approximately 3.1 million shares
of restricted stock to certain employees and directors. The restricted stock
awards vest 25% per year over a four-year period on the anniversary date of the
grant. In connection with this restricted stock grant the Company recorded a
deferred compensation charge of $8,999 in stockholders equity. This deferred
compensation will be recorded as compensation expense over the four-year vesting
period. Compensation expense recorded in the six-month period ended March 31,
2002 was $2,041, including $889 associated with officers terminated in
connection with the restructuring charge discussed in Note 4. During the
six-month period ended March 31, 2002, 1,072,123 of such restricted shares were
vested. Since the initial restricted stock grant in December 2000, approximately
113,750 restricted shares have been canceled.
Effective April 26, 2002, the Company's new Board of Directors approved
the vesting of 100% of the remaining unvested restricted shares of common stock.
This will result in a non-cash charge to compensation expense of $5.1 million in
the month of April 2002.
9. Segment Information
The Company reports segment information under SFAS No. 131, which
establishes standards for reporting information about operating segments in
annual financial statements, and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for disclosures about products and services and geographic
areas. Operating segments are components of an enterprise for which separate
financial information is available and which is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and assess performance. The Company is a full service
provider of sophisticated Internet solutions. The Company operates several
Internet data centers throughout the United States and the United Kingdom. Each
Internet data center provides the same internet related services to similar type
of customers. Effective April 1, 2001 and for the fiscal quarter ended June 30,
2001, the Company reported its results of operations in one operating segment
under the provisions of SFAS No. 131. Previously the Company reported under two
operating segments. The following table sets forth geographic segment
information for the three-month and six-month periods ended March 31, 2002 and
2001:
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Revenue:
United States .................................... $15,499 $ 21,138 $ 33,050 $ 42,785
Europe ........................................... 5,890 5,644 11,717 10,233
---------- --------- --------- ----------
Consolidated ..................................... $21,389 $ 26,782 $ 44,767 $ 53,018
======= ======== ======== ========
Operating income (loss):
United States .................................... $ (27,476) $(17,008) $(46,042) $ (74,701)
Europe ........................................... (46,115) (2,949) (50,593) (5,957)
---------- --------- --------- ----------
Consolidated ..................................... $ (73,591) $(19,957) $(96,635) $ (80,658)
========== ========= ========= ==========
Identifiable assets:
United States .................................... $361,684 $566,239 $361,684 $566,239
Europe ........................................... 64,355 75,038 64,355 75,038
---------- --------- --------- ----------
Consolidated ..................................... $426,039 $641,277 $426,039 $641,277
========== ========= ========= ==========
10. Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted
F-13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
average number of shares of common stock outstanding during the period. Diluted
loss per share is calculated by dividing net loss attributable to common
shareholders by the weighted average number of common shares outstanding,
adjusted for potentially dilutive securities. Diluted loss per share has not
been presented since the inclusion of outstanding convertible preferred stock,
stock options and warrants would be antidilutive.
The following table summarizes the equivalent number of common shares
assuming the related securities that were outstanding as of March 31, 2002 and
2001 had been converted, but not included in the calculation of diluted loss per
share as such shares are antidilutive:
March 31,
---------
2002 2001
---- ----
Convertible preferred stock ......... 8,617,300 8,303,000
Stock options ....................... 12,356,158 10,398,400
Unvested restricted stock ........... 1,767,600 3,063,500
Warrants ............................ 194,800 194,800
---------- ----------
22,935,858 21,959,700
As a result of the Chapter 11 reorganization, effective April 25, 2002,
all unexercised options and warrants were cancelled.
The following is a reconciliation of net loss attributable to common
stockholders' for the three-month periods and six-months ended March 31, 2002
and 2001:
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Numerator:
Loss before cumulative effect of a change in accounting
principle ...................................................... $ (86,269) $ (31,966) $ (127,873) $ (102,918)
Dividend and accretion on preferred stock ...................... (1,329) (1,761) (3,178) (3,496)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders' before
cumulative effect of a change in accounting principle .......... (87,598) (33,727) (131,051) (106,414)
Cumulative effect of a change in accounting principle .......... -- -- -- (2,332)
------------ ------------ ------------ ------------
Net loss attributable to common stockholders' .................. $ (87,598) $ (33,727) $ (131,051) $ (108,746)
============ ============ ============ ============
Denominator:
Weighted average shares outstanding--basic and diluted ......... 39,688,862 38,709,658 $ 39,330,033 38,011,488
============ ============ ============ ============
11. Comprehensive Loss
The Company reports comprehensive loss under the provisions of SFAS No.
130. Accumulated other comprehensive loss is reported as a component of
stockholders' equity in the consolidated balance sheets. The Company primarily
has two components of comprehensive loss: cumulative translation adjustments
from the Company's operations in foreign countries and unrealized gains and
losses on marketable securities classified as available for sale. The following
table summarizes the components of other comprehensive loss for the three-month
and six-month periods ended March 31, 2002 and 2001:
F-14
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Three-month period ended Six-month period ended
March 31, March 31,
--------- ---------
2002 2001 2002 2001
---- ---- ---- ----
Net loss .......................................................... $ (86,269) $ (31,966) $ (127,873) $ (105,250)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities available
for sale .......................................................... 226 (290) 1,301 (3,403)
Foreign currency translation adjustment ........................... (1,576) (3,268) (2,804) (2,156)
---------- ---------- ---------- -----------
Comprehensive loss: ............................................... $ (87,619) $ (35,524) $ (129,376) $ (110,809)
========== ========== ========== ===========
12. Recent Technical Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144 entitled "Accounting for the Impairment or Disposal of
Long-Lived Assets." This statement addresses financial accounting and reporting
for the impairment or disposal of long-lived assets. SFAS No. 144 will be
effective for financial statements of fiscal years beginning after December 15,
2001. The Company expects the adoption of SFAS No. 144 will not have a material
impact on its consolidated financial position results of operations or cash
flows.
In June 2001, the FASB issued SFAS Nos. 141 and 142 entitled, "Business
Combinations" and "Goodwill and Other Intangible Assets," respectively. SFAS No
141, among other things, eliminates the pooling of interests method of
accounting for business acquisitions entered into after June 30, 2001. SFAS No.
142 requires companies to use a fair-value approach to determine whether there
is an impairment of existing and future goodwill. SFAS No. 142 is effective
beginning October 1, 2002. The Company does not expect that the adoption of SFAS
Nos. 141 or 142 will have a material impact on its consolidated financial
position, results of operations or cash flows.
13. Contingencies
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management and
counsel, it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
In January 2002, the Company and Marc Bell (Non-Executive Chairman),
Peter Herzig (Chief Executive Officer) and Brian Reach (former Chief Financial
Officer) were named as defendants in purported class action lawsuits filed in
the United States District Court for the Southern District of New York. The
complaints have been consolidated into a single proceeding under the caption
George Schirripa, et al., v. Globix Corporation, et al., No. 02 CV 0082. Since
January 4, 2002, several additional substantially identical lawsuits, including
a purported class action filed on behalf of purchasers of the Company's 12.5%
Senior Notes, captioned Lance Brofman, et al. v. Globix Corp., et al., No. 02 CV
01063, have been filed in the same court, each naming the same group of
defendants.
Additionally, on January 30, 2002, a derivative action was filed in the
United States District Court for the Southern District of New York. The action
is captioned Susan Bonney, Plaintiff vs. Marc Bell, Anthony St. John, Robert
Bell, Martin Fox, Jack Furst, Michael Levitt, Sid Patterson, Harshad Shah,
Richard Videbeck, Peter Herzig and Brian Reach, Defendants vs. Globix
Corporation, Nominal Defendant. This action is substantially identical to the
above-mentioned lawsuit.
Except for the Brofman complaint, which was brought on behalf of
purchasers of the Company's 12.5% Senior Notes between November 16, 2000 and
December 27, 2001, these complaints are all brought on behalf of purchasers of
the Company's common stock between November 16, 2000 and December 27, 2001 and
allege essentially identical violations of the Securities Exchange Act of 1934,
as amended. The complaints have been brought as purported bondholder or
stockholder class actions under Sections 10(b) and 20(a) and Rule 10b-5 of the
Securities Exchange Act. In general, the complaints allege that the Company and
the individual defendants misrepresented the Company's financial condition and
business prospects to inflate the value of the Company's 12.5% Senior Notes or
common stock, as the case may be. The complaints seek unspecified monetary
damages for the alleged inflated price of the Senior Notes or common stock, as
the case may be, purchased by all class members, attorneys' fees and costs of
litigation. On April 17, 2002 the complaints were consolidated into a single
proceeding.
F-15
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
The Company has not yet responded to any of these lawsuits, and no discovery has
been conducted. The Company believes that the allegations in each of these
actions are without merit and intends to defend against these actions
vigorously. However, there can be no assurance that this litigation will not
have a material adverse effect on the Company, its financial position, results
of operations or cash flows.
14. Subsequent Events
On April 25, 2002, the Company emerged from Chapter 11 bankruptcy
protection after the United States Bankruptcy Court confirmed the plan of
reorganization, and all conditions necessary for the plan to become effective
were satisfied or waived.
In April and May of 2002, the Company expects to settle certain
long-term lease obligations with various vendors, which had a carrying value of
approximately $6.8 million at March 31, 2002. These settlements will result in a
gain on early extinguishment of debt of approximately $4.1 million. Such gain
will be recorded in the Statement of Operations in the quarter ending June 30,
2002.
Effective with the emergence from bankruptcy on April 25, 2002, the
Company negotiated a new 15 year lease for its second London Internet data
center and significantly reduced the leased square footage and associated
operating costs. This transaction resulted in the payment of certain escrow
amounts and inducement payments, which were recorded as part of the
restructuring charge recorded in the three-months ended March 31, 2002. These
payments include $15.1 million of previously escrowed funds recorded as
restricted cash in the accompanying March 31, 2002 Balance Sheet.
F-16
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.
ARTHUR ANDERSEN LLP
New York, New York
December 31, 2001
F-17
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollars in Thousands, Except Share and Per Share Data)
September 30,
--------------------
2001 2000
--------- ---------
Assets
Current assets:
Cash and cash equivalents............................................................ $ 111,502 $ 363,877
Short-term investments............................................................... -- 9,948
Marketable securities................................................................ 1,610 4,685
Accounts receivable, net of allowance for doubtful accounts of $6,852 and $4,072,
respectively....................................................................... 13,809 21,403
Prepaid expenses and other current assets............................................ 7,785 4,441
Restricted cash...................................................................... 6,984 7,093
--------- ---------
Total current assets.......................................................... 141,690 411,447
Investments, restricted.............................................................. 26,886 36,085
Property, plant and equipment, net................................................... 356,149 248,424
Debt issuance costs, net of accumulated amortization of $1,896 and $719, respectively 19,006 20,217
Intangible assets, net of accumulated amortization of $2,485 and $197, respectively.. 4,362 6,650
Other assets......................................................................... 4,895 6,768
--------- ---------
Total assets.................................................................. $ 552,988 $ 729,591
========= =========
Liabilities and Stockholders' Deficit
Current liabilities:
Capital Lease and other obligations.................................................. $ 6,687 $ 2,173
Accounts payable..................................................................... 14,022 16,964
Accrued liabilities.................................................................. 30,141 13,669
Accrued interest..................................................................... 12,500 12,502
--------- ---------
Total current liabilities..................................................... 63,350 45,308
Capital Lease obligations, net of current portion.................................... 10,309 1,135
Mortgage Payable..................................................................... 20,441 20,674
Senior Notes......................................................................... 600,000 600,000
Other long term liabilities.......................................................... 7,577 4,462
--------- ---------
Total liabilities............................................................. 701,677 671,579
Minority interest in subsidiary...................................................... 5,406 --
Redeemable convertible preferred stock............................................... 83,230 76,042
Stockholders' Deficit:
Common stock, $.01 par value; 500,000,000 shares authorized; 41,920,229 and
37,307,315 shares issued and outstanding, respectively............................. 419 373
Additional paid-in capital........................................................... 171,176 165,890
Deferred compensation................................................................ (7,097) --
Accumulated other comprehensive (loss) income........................................ (2,703) 1,784
Accumulated deficit.................................................................. (399,120) (186,077)
--------- ---------
Total stockholders' deficit................................................... (237,325) (18,030)
--------- ---------
Total liabilities and stockholders' deficit................................... $ 552,988 $ 729,591
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-18
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollars in Thousands, Except Share and Per Share Data)
Year ended September 30,
-------------------------------------
2001 2000 1999
----------- ----------- -----------
Revenue............................................................. $ 104,210 $ 81,287 $ 33,817
Operating costs and expense:........................................
Cost of revenue.................................................. 40,609 42,513 22,184
Selling, general and administrative.............................. 128,321 98,113 36,495
Restructuring charges............................................ 56,109 -- --
Depreciation and amortization.................................... 36,657 18,228 6,329
----------- ----------- -----------
Total operating costs and expenses........................... 261,696 158,854 65,008
----------- ----------- -----------
Loss from operations................................................ (157,486) (77,567) (31,191)
Interest and financing expense................................... (65,128) (57,831) (18,386)
Interest income.................................................. 13,282 24,749 6,192
Other Income..................................................... 2,147 2,816 --
Other Expense.................................................... (3,526) (1,037) --
Loss before extraordinary loss and cumulative effect of a change in
accounting principle.............................................. (210,711) (108,870) (43,385)
Extraordinary loss on early extinguishment of debt............... -- (17,577) --
Cumulative effect of a change in accounting principle............ (2,332) -- --
----------- ----------- -----------
Net loss............................................................ (213,043) (126,447) (43,385)
Dividends and accretion on preferred stock....................... (7,104) (5,768) --
----------- ----------- -----------
Net loss attributable to common stockholders'....................... $ (220,147) $ (132,215) $ (43,385)
=========== =========== ===========
Basic and diluted loss per share attributable to common
stockholders' before extraordinary loss and cumulative effect of
change in accounting principle.................................... $ (5.66) $ (3.23) $ (1.73)
Extraordinary loss............................................... -- (0.50) --
Cumulative effect of a change in accounting principle............ (0.06) -- --
----------- ----------- -----------
Basic and diluted loss per share attributable to common stockholders $ (5.72) $ (3.73) $ (1.73)
=========== =========== ===========
Weighted average common shares outstanding--basic and diluted....... 38,476,909 35,484,040 25,116,800
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-19
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(All Dollars in Thousands, Except Share and Per Share Data)
Common Stock
-----------------
Accumulated Total
Additional Other Stockholders'
Paid-in Deferred Comprehensive Accumulated (Deficit)
Shares Amount Capital Comp. (Loss) Income Deficit Equity
---------- ------ ---------- -------- ------------- ----------- -------------
Balance, October 1, 1998................ 16,560,464 $166 $ 17,122 $ -- $ 1,676 $ (16,245) $ 2,719
Issuance of common stock in conjunction
with public offering, net of offering
costs of $11,915...................... 16,000,000 160 136,458 -- -- -- 136,618
Issuance of common stock upon exercise
of options and warrants, net.......... 739,556 7 1,843 -- -- -- 1,850
Comprehensive Income (Loss):............
Net loss............................. -- -- -- -- -- (43,385) --
Unrealized holding gains............. -- -- -- -- 8,523 -- --
Foreign Currency translation
adjustment......................... -- -- -- -- 80 -- --
Total Comprehensive Loss................ -- -- -- -- -- -- (34,782)
---------- ---- -------- ------- ------- --------- ---------
Balance, September 30, 1999............. 33,300,020 333 155,423 -- 10,279 (59,630) 106,405
Issuance of common stock in conjunction
with acquisition...................... 241,236 2 6,180 -- -- -- 6,182
Issuance of common stock upon exercise
of options and warrants, net.......... 3,766,059 38 10,055 -- -- -- 10,093
Dividends and accretion on preferred
stock................................. -- -- (5,768) -- -- -- (5,768)
Comprehensive Income (Loss):............
Net loss............................. -- -- -- -- -- (126,447) --
Unrealized holding losses............ -- -- -- -- (5,763) -- --
Foreign Currency translation
adjustment......................... -- -- -- -- (2,732) -- --
Total Comprehensive Loss................ -- -- -- -- -- -- (134,982)
---------- ---- -------- ------- ------- --------- ---------
Balance, September 30, 2000............. 37,307,315 373 165,890 -- 1,784 (186,077) (18,030)
Issuance of common stock in conjunction
with acquisition...................... 80,000 1 1,199 -- -- -- 1,200
Issuance of common stock upon exercise
of options............................ 1,559,424 15 2,486 -- -- 2,501
Issuance of restricted stock............ 3,063,490 31 8,968 (8,999) -- -- --
Amortization of deferred compensation... -- -- -- 1,638 -- -- 1,638
Cancellation of restricted stock........ (90,000) (1) (263) 264 -- -- --
Dividends and accretion on preferred
stock................................. -- -- (7,104) -- -- -- (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............. 41,920,229 $419 $171,176 $(7,097) $(2,703) $(399,120) $(237,325)
========== ==== ======== ======= ======= ========= =========
The accompanying notes are an integral part of these consolidated
financial statements.
F-20
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollars in Thousands, Except Share and Per Share Data)
Year ended September 30,
------------------------------
2001 2000 1999
--------- --------- --------
Cash flows from operating activities
Net loss................................................................... $(213,043) $(126,447) $(43,385)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization........................................... 36,657 18,228 6,329
Provision for uncollectible receivables................................. 14,119 2,701 460
Cumulative effect of a change in accounting principle................... 2,332 -- --
Restructuring charges................................................... 22,889 -- --
Amortization of debt discount and issuance costs........................ 1,177 1,022 849
Amortization of deferred compensation................................... 1,638 -- --
Extraordinary loss on early extinguishment of debt...................... -- 17,577 --
Gain on sale of short term investments.................................. (1,459) (1,238) --
Gain on sale of marketable securities................................... (663) (601) --
Loss on impairment of investment........................................ 3,250 -- --
Loss on impairment of operating assets.................................. 3,500 -- --
Changes in operating assets and liabilities:
Accounts receivable..................................................... (6,526) (15,922) (3,397)
Inventories............................................................. -- 1,244 (890)
Prepaid expenses and other current assets............................... (3,309) (1,471) (950)
Other assets............................................................ (3,567) 366 (766)
Accounts payable........................................................ 2,303 (1,270) 3,911
Accrued liabilities..................................................... 947 7,827 904
Accrued interest........................................................ (2) 3,539 --
Other................................................................... (786) 127 38
--------- --------- --------
Net cash used in operating activities...................................... (140,543) (94,318) (36,897)
Cash flows from investing activities:
Proceeds from sale of short term investments............................... 10,180 -- --
Use of restricted cash and investments..................................... 9,308 17,374 22,269
Investment in restricted cash and investments.............................. -- (25,002) (6,247)
Proceeds from sale of marketable securities................................ 1,426 1,125 14,638
Investment in strategic investments........................................ -- (1,033) (6,000)
Purchases of property, plant and equipment................................. (134,185) (142,589) (83,434)
Purchase of Comstar.net, Inc., net of cash acquired........................ -- 186 --
--------- --------- --------
Net cash used in investing activities...................................... (113,271) (149,939) (58,774)
Cash flows from financing activities:
Repayments of mortgage payable and capital lease obligations............... (6,020) (2,137) (3,179)
Proceeds from exercise of stock options and warrants, net.................. 2,501 10,093 1,850
Capital contribution in minority-owned subsidiary.......................... 5,406 -- --
Proceeds from 12.5% Senior Notes offering, net of offering expenses........ -- 580,000 --
Proceeds from issuance of preferred stock, net............................. -- 75,250 --
Proceeds from issuance of common stock, net................................ -- -- 136,618
Repayment of 13% Senior Notes.............................................. -- (170,400) --
Payments of dividends on preferred stock................................... (1,500) (3,475) --
Shareholder loan repayment................................................. -- -- 300
Proceeds from mortgage payable, net........................................ -- 20,064 --
--------- --------- --------
Net cash provided by financing activities.................................. 387 509,395 135,589
Effects of exchange rate changes on cash and cash equivalents.............. 1,052 (2,732) 80
--------- --------- --------
Net (decrease) increase in cash and cash equivalents....................... (252,375) 262,406 39,998
Cash and cash equivalents, beginning of year............................... 363,877 101,471 61,473
--------- --------- --------
Cash and cash equivalents, ending of year.................................. $ 111,502 $ 363,877 $101,471
========= ========= ========
Supplemental disclosure of cash flow information:
Cash paid for interest..................................................... $ 78,289 $ 55,260 $ 21,256
Cash paid for income taxes................................................. $ 34 $ 72 $ 38
Non-cash investing and financing activities:
Equipment acquired under capital lease obligations...................... $ 19,475 $ -- $ 4,566
Capital expenditures included in accounts payable, accrued liabilities
and other long term liabilities....................................... $ 12,557 $ 8,287 $ 10,110
Cumulative dividends and accretion on preferred stock................... $ 7,104 $ 2,293 $ --
The accompanying notes are an integral part of these consolidated financial
statements.
F-21
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
1. Basis of Presentation and Management's Plan
Globix Corporation (together with its subsidiaries, "Globix" or the
"Company") has incurred net losses and net operating cash deficiencies and has a
significant stockholders' deficiency. With regards to these matters, the Company
is currently exploring debt restructuring alternatives. However, there can be no
assurance that the Company will be successful in executing a viable
restructuring alternative. These factors raise substantial doubt about the
Company's ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
On December 27, 2001, the Company announced that it is in discussions
with an informal committee of bondholders representing approximately 48% of the
Company's outstanding $600 million issuance of 12.5% Senior Notes. The
discussions concern a financial reorganization of the Company through a
pre-packaged bankruptcy proceeding that would be aimed at significantly reducing
the Company's debt burden. The Company is in similar discussions with its
preferred stockholders. While there can be no assurance that these discussions
will lead to an agreement, it is likely that any such agreement would result in
the bondholders and preferred stockholders owning nearly all of the equity in
the reorganized company, resulting in a near total dilution of the existing
common stockholders' interest in the Company.
2. Organization and Significant Accounting Policies
Organization and Nature of Operations
The Company is a leading full-service provider of sophisticated
Internet solutions to businesses. The Company's solutions include secure and
fault-tolerant Internet data centers, high performance network connectivity to
the Internet and complex Internet-based application services. These three major
elements of the total Internet solution combine to provide customers with the
ability to create, operate and scale their increasingly complex Internet
operations in a cost efficient manner. The Company's customers primarily use
these services to maintain complex computer equipment in a secure fault-tolerant
environment with connectivity to a high-speed, high-capacity, direct link to the
Internet and support complex Internet applications. The Company currently offers
its services from facilities in New York City, Santa Clara, California, Atlanta,
Georgia and London, England.
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its subsidiaries. All significant intercompany accounts and
transactions have been eliminated in consolidation.
Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results may differ from those estimates.
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).
F-22
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Monthly service revenue related to managed hosting and Internet access
is recognized over the period services are provided. Revenue derived from
application services is recognized as the project progresses. Projects are
generally completed within less than one year. Payments received in advance of
providing services are deferred until the period such services are provided.
Effective October 1, 2000, the Company changed its revenue recognition
method for set up and service installation fees upon the adoption of Staff
Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial
Statements" ("SAB No. 101"). SAB No. 101 expresses the view of the SEC Staff in
applying generally accepted accounting principles to certain revenue recognition
issues. Under the provisions of SAB No. 101 set up and installation revenue are
deferred and recognized over the estimated life of the underlying service
contracts, which range from twelve to thirty six months. Prior to the 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 $2.3 million or $0.06 per share,
which was reflected in the accompanying consolidated statements of operations.
The adoption of SAB No. 101 decreased the net loss $547 for the year ended
September 30, 2001. The effect of the adoption of SAB No. 101 for the years
ended September 30, 2000 and 1999 was not material.
Cost of Revenue
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting customers. Telecommunications costs include
the cost of providing local loop costs for connecting dedicated access customers
to the Globix network, leased line and associated costs related to connecting
with our peering partners, and costs associated with leased lines connecting our
facilities to our backbone and aggregation points of presence.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
Investments
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, 2001 marketable
securities have a cost basis of approximately $2.7 million.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation or amortization computed on the straight-line method. Buildings and
building improvements are depreciated over their estimated useful life of up to
forty years. Computer hardware and software, network equipment and furniture and
equipment are depreciated over their estimated useful lives, ranging from three
to seven years. Leasehold improvements are amortized over the term of the lease
or life of the asset, whichever is shorter.
Intangible Assets and Unaudited Proforma Results of Operations
On August 30, 2000, the Company acquired all the outstanding shares of
Comstar.net, Inc., a Georgia Corporation, for a purchase price of approximately
$6.9 million (including transaction costs) in stock and cash.
F-23
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
In connection with the acquisition, the Company assumed liabilities of
approximately $3.4 million and acquired assets of approximately $9.8 million.
The acquisition was recorded under the purchase method of accounting. Results of
operations for the acquired business have been included in the consolidated
statements of operations beginning August 31, 2000. The acquisition resulted in
identifiable intangible assets (customer list) totaling approximately $6.8
million. These intangible assets are amortized over a three-year period using
the straight line method.
The following unaudited pro forma consolidated statements of operations
data for the twelve months ended September 30, 2000 and 1999, gives effect to
the acquisition of Comstar.net, Inc. as if this acquisition had occurred on
October 1, 1998:
Twelve months ended
September 30,
-------------
2000 1999
---- ----
Revenue ................................................ $ 85,600 $ 36,783
Net Loss ............................................... $(135,082) $(50,687)
Net loss attributable to common stockholders ........... $(140,850) $(50,687)
Basic and diluted, loss per share attributable to common
stockholders ...................................... $ (3.97) $ (2.02)
The above-unaudited pro forma consolidated result of operations data
gives effect to purchase accounting adjustments. These pro forma results have
been prepared for comparative purposes only and do not purport to be indicative
of what operating results would have been had the acquisition actually taken
place on October 1, 1998, and may not be indicative of future operating results.
The following table reconciles the net cash acquired in this acquisition:
Fair value of net assets acquired ............................ $ 9,833
Liabilities assumed .......................................... (3,441)
Common stock issued .......................................... (6,182)
---------
Net cash paid for acquisition ................................ 210
Cash acquired in acquisition ................................. (396)
---------
Net cash acquired in acquisition ............................. $ (186)
---------
Long-Lived Assets
The Company reviews the carrying amount of long lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount may not be recoverable. Measurement of any impairment would
include a comparison of estimated future operating cash flows anticipated to be
generated during the remaining life of the asset to the net carrying value of
the asset.
Deferred Issuance Costs
Costs incurred to obtain financing through the issuance of long term
debt have been reflected as an asset in the accompanying consolidated balance
sheets. Costs incurred to obtain financing through the issuance of preferred
stock have been reflected as a reduction in the carrying value of the issued
preferred stock. These costs are amortized over the term of the related
financing. In 2000, certain debt was redeemed at which time the remaining
balance of unamortized discount and issuance costs were written off and included
in extraordinary loss on early extinguishment of debt (See note 5).
F-24
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have
been translated in accordance with Statement of Financial Accounting Standard
No. 52, "Foreign Currency Translation". The 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.
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax rates
in effect in the years in which the differences are expected to reverse. The
Company provides a valuation allowance on net deferred tax assets when it is
more likely than not that such assets will not be realized.
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement
No. 123, "Accounting or Stock-Based Compensation" ("SFAS No. 123"), which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principal 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 applies the intrinsic value method of accounting and therefore
does not recognize compensation expense for options granted, because options are
only granted at a price equal to market 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. See Note 9 for the additional disclosures required under SFAS No. 123.
Loss per Share
Basic loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common shareholders by the weighted average number of
common shares outstanding, adjusted for potentially dilutive securities. Diluted
loss per share has not been presented since the inclusion of outstanding
convertible preferred stock, stock options and warrants would be antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of September 30, 2001 and 2000
had been converted, but not included in the calculation of diluted loss per
share because such shares are antidilutive:
September 30,
--------------------
2001 2000
----- ----
Convertible preferred stock .................. 8,617,300 8,000,000
Stock Options ................................ 10,392,800 10,298,100
Warrants ..................................... 194,800 194,800
------------- ------------
19,204,900 18,492,900
============= ============
F-25
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
The following is a reconciliation of net loss attributable to common
stockholders for the years ended September 30, 2001, 2000 and 1999:
2001 2000 1999
---- ---- ----
Numerator:
Loss before extraordinary loss and cumulative effect of change in
accounting principle ............................................ $ (210,711) $ (108,870) $ (43,385)
Dividend and accretion on preferred stock ............................ (7,104) (5,768) --
=========== =========== ===========
Net loss attributable to common stockholders before extraordinary
loss and cumulative effect of a change in accounting principle .. (217,815) (114,638) (43,385)
=========== =========== ===========
Extraordinary loss on early extinguishment of debt ................... -- (17,577)
Cumulative effect of a change in accounting principle ................ (2,332) -- --
----------- ----------- -----------
Net loss attributable to common stockholders ......................... $ (220,147) $ (132,215) $ (43,385)
=========== =========== ===========
Denominator:
Weighted average shares outstanding--basic and diluted ............... 38,476,909 35,484,040 25,116,800
=========== =========== ===========
Concentrations of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
short-term investments, restricted cash and investments, marketable securities
and accounts receivable. The Company maintains cash and cash equivalents,
short-term investments, and restricted cash and investments with various major
financial institutions, which invest primarily in U.S. Government instruments,
high quality corporate obligations, certificates of deposit and commercial
paper. The Company believes that concentrations of credit risk with respect to
trade accounts receivable are limited due to the large number and geographic
dispersion of customers comprising the Company's customer base. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential losses.
Fair Value of Financial Instruments
For cash and cash equivalents, restricted cash and investments,
marketable securities and accounts receivable, the carrying amount approximates
fair value.
Reclassifications
Certain prior year information has been reclassified to conform with
fiscal 2001 presentation.
Recent Technical Accounting Pronouncements
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived
Assets". This statement addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS No. 144 will be effective for
financial statements of fiscal years beginning after December 15, 2001. The
Company does not expect that the adoption of SFAS No. 144 will have a material
impact on its consolidated financial position, results of operations or cash
flows.
In June 2001, the FASB issued SFAS Nos. 141 and 142 entitled,
"Business Combinations" and "Goodwill and Other Intangible Assets",
respectively, SFAS No. 141, among other things, eliminates the pooling of
interests method of accounting for business acquisitions entered into after June
30, 2001. SFAS No. 142 requires companies to use a fair-value approach to
determine whether there is an impairment of existing and future goodwill. SFAS
No. 142 is effective beginning October 1, 2002. The Company does not expect that
the adoption of SFAS Nos. 141 and 142 will have a material impact on its
consolidated financial position, results of operations or cash flows.
F-26
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
3. Property, Plant and Equipment
Property, plant and equipment consist of the following:
September 30,
------------------------
2001 2000
---- ----
Land ........................................................... $ 1,997 $ 1,997
Building and building improvements ............................. 108,216 55,416
Leasehold improvements ......................................... 145,617 30,927
Computer hardware and software and network equipment ........... 134,767 67,552
Furniture and equipment ........................................ 9,693 7,198
--------- ---------
400,290 163,090
Less: Accumulated depreciation and amortization ................ (54,499) (25,731)
Add: Construction in progress .................................. 10,358 111,065
--------- ---------
Property, plant and equipment, net ............................. $ 356,149 $ 248,424
========= =========
Certain computer and network equipment are recorded under capital
leases that aggregated approximately $23.5 million and $6.0 million as of
September 30, 2001 and 2000, respectively. Accumulated amortization on the
assets recorded under capital leases aggregated approximately $6.6 million and
$3.2 million as of September 30, 2001 and 2000, respectively.
Costs incurred prior to completion of construction of Internet data
centers and network infrastructure upgrades are reflected as construction in
progress in the accompanying consolidated balance sheets and will be recorded as
property, plant and equipment at the date each Internet data center or network
segment becomes operational. Construction in progress includes direct
expenditures for construction of the Internet data center facilities and related
network equipment and network upgrade projects and is stated at cost.
Capitalized costs include costs incurred under the construction contract,
advisory, consulting and legal fees as well as, labor and interest incurred
during the construction phase. Capitalized interest is included in property,
plant and equipment under the provisions of SFAS No. 34 totaling approximately
$12.4 million, $2.2 million and $3.8 million at September 30, 2001, 2000 and
1999, respectively. During the year ended September 30, 2001 certain projects
including two new Internet data centers, expansion projects at several existing
facilities and network infrastructure upgrades became operational. Accordingly,
such assets were placed into service and recorded as a component of the
respective depreciable asset category.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the
Company owns the land and building located at 139 Centre Street, New York, New
York. The nine-story building with approximately 160,000 square feet of floor
space houses the Company's corporate headquarters and one of its Internet data
center facilities. A former owner of the right to purchase the Centre Street
property is entitled to additional consideration if the Company sells the
property. Such amount will be equal to the greater of (a) $1.0 million (subject
to increase after June 1, 2018 by ten percent and an additional ten percent
every fifth year thereafter), or (b) ten percent of the gross sales price of the
property if such sales price is greater than $17.5 million.
F-27
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
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 has 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
approximately $14.1 million capital contribution to the LLC. As of September 30,
2001, approximately $5.4 million of such capital contribution has been received
by the LLC. The Company has consolidated the financial statements of the LLC at
September 30, 2001 and for the period from inception to September 30,2001,
resulting in a minority interest in subsidiary in the accompanying consolidated
balance sheet. The LLC's results of operations for the period ending September
30, 2001 were not material.
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 or December 31, 2002, whichever is earlier (the "Certification
Date") the Investor may require the Company to purchase its interest in the LLC
for an amount equal to 25% of the Investor's capital contribution in the LLC. If
the Investor does not exercised 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, taxes payable by
the Investor upon the sale of its investment.
Upon certain events including the sale of the Property at any time
after 2007, (to the extent the above mentioned put/call options have not been
exercised), the Company is obligated to pay the Investor 30% of any proceeds
received in excess of cost. Upon 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 Investors capital contributions up to the
termination date and the Investors actual return up to the termination date.
4. Accrued Liabilities
Accrued liabilities consist of the following:
September 30,
-----------------
2001 2000
---- ----
Restructuring reserves .................. $ 9,191 --
Deferred revenue ........................ 2,692 601
Accrued construction costs .............. 6,490 3,172
Other ................................... 11,768 9,896
--------- ---------
$ 30,141 $ 13,669
========= =========
F-28
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
During the quarter ended December 31, 2000 the Company modified its
Internet data center expansion plan to delay, scale back and eliminate certain
facilities. During November 2000, management's plan to terminate certain lease
obligations, associated surplus power and environmental equipment related to the
proposed expansion of Globix Internet data centers in Boston, MA; Seattle, WA;
and Los Angeles, CA were completed and approved by the Board of Directors. When
initiated, the restructuring plan was expected to take approximately one year to
complete. The Company recorded a $38.1 million charge associated with this
restructuring plan in the fiscal quarter ending December 31, 2000. Approximately
$15.7 million of this charge was recorded as a write-off of construction in
progress, which included capitalized interest, consulting and legal fees,
construction and pre-construction related costs previously capitalized.
During the quarter ending September 30, 2001, the Company further
modified its business plan to eliminate certain additional Internet data center
and sales office facilities, resulting in the termination of certain employees
(approximately 106 employees), lease obligations and write-off of certain
equipment, leasehold improvements and intangible assets and other costs. In
connection with this modification, additional non-recurring restructuring
charges of $18.0 million were recorded, of which $10.0 million was a write-off
of equipment, leasehold improvements and intangible assets and $1.2 million
associated with employee terminations.
As of September 30, 2001, restructuring charges totaling $46.9 million
were charged against the established restructuring reserves, resulting in a
remaining reserve balance of $9.2 million. The following table displays the
activity and balances of the restructuring reserve account from inception to
September 30, 2001:
Restructuring Charge Activity Amount
------------------------------ ------
Initial charge--November 2000 (balance) ........... $ 38,109
Additions ............................... --
Deductions .............................. (27,667)
----------
Balance, December 31, 2000 ........................ 10,442
Additions ............................... --
Deductions .............................. (2,662)
----------
Balance, March 31, 2001 ........................... 7,780
Additions ............................... --
Deductions .............................. (1,610)
----------
Balance, June 30, 2001 ............................ 16,170
Additions ............................... 18,000
Deductions .............................. (14,979)
----------
Balance, September 30, 2001 ....................... $ 9,191
==========
The above deductions to the restructuring reserve represent primarily
cash payments and write-offs of previously capitalized costs.
5. Senior Notes
In April 1998, the Company completed a $160.0 million debt financing
(the"13% Senior Notes") 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. The 13% Senior Notes were to mature on May 1,
2005. Interest on the 13% Senior notes accrued at a rate of 13% per annum and
was payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998. The Company deposited $57.0 million with an escrow
agent at closing, which amount, with
F-29
interest, was sufficient to pay, when due, the first six interest payments under
the 13% Senior Notes. The 13% Senior Notes were collateralized by a first
priority security interest in the escrow account. The 13% Senior Notes were
unsecured obligations of the Company and ranked pari passu in right of payment
with all existing and unsecured an unsubordinated indebtedness and rank senior
in right of payment to any future subordinated indebtedness. In connection with
the warrants issued with the 13% Senior Notes, the Company had assigned an
original issue discount of approximately $2.3 million.
F-30
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
On January 28, 2000, the Company announced that it had entered into an
agreement to sell $600.0 million 12.5% senior notes (the "12.5% Senior Notes")
due 2010 in a private placement to a group of initial purchasers and in March
2000 completed a tender offer to purchase all of the outstanding 13% Senior
Notes, $160.0 million in principal amount. The purchase price in the tender
offer was 106.5% of the principal amount, plus accrued and unpaid interest. On
February 8, 2000 the Company closed on its offering for the $600.0 million 12.5%
Senior Notes due 2010, resulting in net proceeds of approximately $580.0
million, after underwriting fees and offering expenses. The tender offer and
related redemption of the outstanding 13% Senior Notes also resulted in a one
time charge of $17,577 or $0.50 per share which has been recorded as an
extraordinary item in the statement of operations. As a result of the redemption
of the 13% Senior Notes all restrictions related to the escrow deposit were
released and such funds are no longer restricted as to use.
The 12.5% Senior Notes mature on February 1, 2010. Interest on the
12.5% Senior Notes is payable semiannually on February 1 and August 1 of each
year, commencing August 1, 2000. The 12.5% Senior Notes are unsecured
obligations of the Company and rank pari passu in right of payment with all
existing and future unsecured and unsubordinated indebtedness and rank senior in
right of payment to any future subordinated indebtedness. In connection with the
offering the Company incurred costs of approximately $20.0 million that are
being amortized over ten years using the effective interest method. See footnote
No. 1 for further discussion and impact of management's plan on Senior Notes.
6. Mortgage Payable
On January 25, 2000, the Company borrowed $21.0 million 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.
7. Redeemable Convertible Preferred Stock
During November 1999 the Company designated 250,000 shares of its
authorized Preferred Stock, $0.01 par value, as a Series A. At September 30,
2001, there were 86,173 Series A Preferred Shares outstanding and 163,827 Series
A Preferred Shares reserved for issuance. On April 4, 2000 the shareholders of
the Company voted to amend the Company's certificate of incorporation to
increase the Company's authorized preferred stock to 5,000,000 shares.
On December 3, 1999, the Company issued $80.0 million (80,000 shares)
in Series A Convertible Preferred Stock (the "Series A Preferred Stock") to
affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") to expand
the build-out of its Internet data centers and other facilities. The Series A
Preferred Stock is convertible into common stock at $10.00 per share at any time
and may not be called for redemption by the Company for five years. Under the
agreement, the Series A Preferred Stock is subject to mandatory redemption in
2014 and yields an annual dividend of 7.5% payable quarterly in cash or
additional Series A Preferred Stock, at the option of the Company. The holders
of the Series A Preferred Stock have a liquidation preference of $1,000 per
share and are entitled to cumulative dividends.
The Series A Preferred Stock is recorded in the accompanying
consolidated balance sheet outside the stockholders equity section due to its
mandatory redemption feature. The Company incurred approximately $4,750 of
issuance costs in connection with the Series A Preferred Stock transaction. Such
costs have been recorded as a reduction of the carrying amount of the Series A
Preferred Stock and are being accreted through a charge to additional paid in
capital over the five-year period to the earliest redemption date.
F-31
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
During the year ended September 30, 2001, the Company's Board of
Directors decreased payment of in kind dividends aggregating 6,173 Series A
Preferred Stock valued at $6,173.
8. Stockholders' Equity
Restricted Stock Grant
In December 2000, the Company granted approximately 3.1 million shares
of restricted stock to certain employees and directors. The restricted stock
awards vest 25% per year over a four-year period on the anniversary date of the
grant. In connection with this restricted stock grant the Company has recorded a
deferred compensation charge of $8,999 in stockholders equity. This deferred
compensation will be recorded as compensation expense over the four-year vesting
period. Compensation expense recorded in the year ended September 30, 2001 was
$1,638.
Stock Splits
On December 10, 1999 the Company announced a two-for-one stock split of
its outstanding shares of common stock, which was paid 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, payable 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.
Secondary Public Offering
In March 1999,the Company completed a public offering of 16,000,000
shares of the Company's common stock. The Company received proceeds, net of
expenses, from thepublic offering of approximately $136.6 million. In addition,
the Company received proceeds of $0.9 million resulting from the exercise of
80,790 warrants to purchase 323,160 shares of common stock.
9. Employee Benefits Plan
Stock Option Plans
In April 2001, the Company's stockholders approved, the 2001 Stock
Option Plan (the "2001 Option Plan"), which provides 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 Board's discretion. Under the 2001
Option Plan, these options may not be exercised after ten years from the date of
grant. Options issued to employees are 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 provides for the grant of stock
options to purchase up to 1,675,000 shares of common stock to any employee,
non-employee director, or consultant at the Board's discretion. Under the 2000
Option Plan, these options may not be exercised after ten years from the date of
grant. Options issued to employees are exercisable ratably over a five-year
period.
In April 1999, the Company's stockholders approved, the 1999 Stock
Option Plan (the "1999 Option Plan"), which provides for the grant of stock
options to purchase up to 6,000,000 shares of common stock to any employee,
non-employee director, or consultant at the Board's discretion. Under the 1999
Option Plan, these options may not be exercised after ten years from the date of
grant. Options issued to employees are exercisable ratably over a five-year
period.
F-32
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
In April 1998, the Company's stockholders approved, the 1998 Stock
Option Plan (the "1998 Option Plan"), which provides for the grant of stock
options to purchase up to 4,800,000 shares of common stock to any employee,
non-employee director, or consultant at the Board's discretion. Under the 1998
Option Plan, these options may not be exercised after ten years from the date of
grant. Options issued to employees are exercisable ratably over a five-year
period.
Under the 2001, 2000, 1999 and 1998 Option Plans, options are 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 shall be exercisable in full
twelve months after the date of grant unless determined otherwise by the
compensation committee.
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 are determined by the stock option committee and range from
five to ten years from the date of the grant. Options issued to directors are
immediately exercisable and options issued to employees are exercisable ratably
over a three-year period.
There were 6,289,812 options available for future grant at September
30, 2001.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each
option grant is estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions:
2001 2000 1999
---- ---- ----
Expected life (in years) ............ 6.0 6.0 6.0
Risk-free interest rate ............. 5.0% 6.3% 5.4%
Volatility .......................... 133.0% 122.0% 94.0%
Dividend yield ...................... 0.0% 0.0% 0.0%
Utilizing these assumptions, the weighted average fair value of options
granted is $2.83, $20.80 and $6.49 for the years ended September 30, 2001, 2000
and 1999, respectively. Under the above model, the total value of stock options
granted would be amortized on a pro forma basis over the option-vesting period.
Had the Company determined compensation expense for these stock options under
the fair value method of SFAS No. 123, the Company's net loss attributable to
common stockholders and net loss per share attributable to common stockholders
would have been increased to the following pro forma amounts:
Year ended September 30,
------------------------
2001 2000 1999
---- ---- ----
Pro forma net loss attributable to common
stockholders ................................... $ (228,599) $ (139,340) $ (76,305)
---------- ---------- ---------
Pro forma basic and diluted, net loss per share
attributable to common stockholders ............ $ (5.94) $ (3.93) $ (3.04)
---------- ------------- ---------
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. The effects
F-33
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.
F-34
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Summary Stock Option Activity
The following table summarizes stock option information with respect to
all stock options for the three years ended September 30, 2001:
Weighted
Average
Number of Exercise
Shares Price
------ -----
Options outstanding, October 1, 1998 ..... 3,680,752 $1.60
Granted ................................ 7,839,844 8.21
Canceled ............................... (532,344) 3.58
Exercised .............................. (264,272) 1.52
-----------
Options outstanding, September 30, 1999 .. 10,723,980 6.33
Granted ................................ 1,864,150 23.30
Canceled ............................... (834,403) 12.54
Exercised .............................. (1,454,635) 1.79
-----------
Options outstanding, September 30, 2000... 10,298,692 9.54
Granted ................................ 2,784,160 3.10
Canceled ............................... (1,130,647) 12.78
Exercised .............................. (1,559,424) 1.61
-----------
Options outstanding, September 30, 2001 .. 10,392,781 $8.67
===========
F-35
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
The following table summarizes information about the outstanding and
exercisable options at September 30, 2001:
Options Outstanding Options Exercisable
------------------- --------------------
Number of Weighted Average Weighted Number of Weighted
Range of Options Remaining Average Options Average
Exercise Prices Outstanding Contractual Life Exercisable Price Outstanding Exercise Price
---------------- ------------ ---------------- ----------------- ------------ --------------
$ 0.42 - $ 1.50 916,249 7.24 $ 1.21 300,549 $ 1.29
$ 1.51 - $ 2.63 340,672 6.09 $ 1.74 200,872 $ 1.67
$ 2.64 - $ 9.24 2,628,810 8.78 $ 3.62 230,560 $ 6.05
$ 9.25 - $ 9.25 4,096,580 7.49 $ 9.25 4,096,580 $ 9.25
$ 9.26 - $12.02 1,682,170 7.87 $ 11.69 793,150 $ 11.66
$12.03 - $58.19 728,300 8.53 $ 29.12 217,820 $ 29.14
---------- ----- ------- --------- -------
10,392,781 7.96 $ 8.67 5,839,531 $ 9.52
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 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 makes
discretionary contributions for all eligible employees who contribute to the
Plan in an amount not to exceed 50% of each participant's first 4% of
compensation contributed as elective deferrals for the Plan year. The Company
contributed approximately $0.39 million and $0.27 million to the Plan during the
years ended September 30, 2001 and 2000, respctively.
10. Capital Lease Obligations
Future minimum lease payments due under capital leases are as follows:
Year Ending
September 30 Amount
------------ ------
2002 .......................................... $ 7,805
2003 .......................................... 6,804
2004 .......................................... 3,470
2005 .......................................... 802
2006 .......................................... 306
Less: Amount representing interest ............ (2,430)
--------
Present value of net minimum lease payments ... $ 16,757
========
11. Commitments and Contingencies
Leases
The Company has minimum monthly usage/maintenance levels with certain
of its telecommunications carriers expiring in various years through 2010. 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 year ended September 30, 2001,
2000 and 1999 was $7.1 million, $4.1 million and $1.3 million, respectively.
F-36
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Future minimum payments due under these operating leases and
telecommunications carrier usage commitments are as follows:
Year Ending
September 30 Telecom Leases
----------- ------- ------
2002 .......................................... $12,819 $ 7,733
2003 .......................................... 6,880 11,839
2004 .......................................... 5,664 14,008
2005 .......................................... 4,368 13,837
2006 .......................................... 2,622 13,967
Thereafter .................................... 3,940 188,223
------- --------
Total ......................................... $36,293 $249,607
======= ========
Equipment and Services
In connection with the construction of the Company's Internet data
centers the Company is contractually committed as of September 30, 2001 to
various equipment manufacturers and building contractors for equipment and
construction services totaling approximately $18.0 million.
Letters of Credit
As of September 30, 2001 the Company had collateralized letters of
credit aggregating $24.6 million. The related funds are included in restricted
cash and investments on the accompanying consolidated balance sheet.
Employment and Other Contractual Agreements
Effective June 1, 1998, the Company entered into a seven year
employment agreement, with an Officer and Director providing for a base salary
of $0.35 million per year, increasing annually at the rate of five percent
starting October 1, 1999. In addition, the individual will receive an annual
bonus equal to ten thousand times the increase, if any, of the fair market value
per share of the Company's common stock measured during the twelve month period
ending on June 30 of each year of the agreement, commencing with the year
beginning July 1, 1998. During the years ended September 30, 2001, 2000 and 1999
the individual received bonuses of approximately, $0, $0.85 million and $0.33
million, respectively under this provision of the employment agreement. The
employment agreement also provides that he may require the Company to lend such
officer up to a total of $0.155 million. Any loan taken there under will mature
five years after the date made and bear interest at the rate of eight percent
per annum. However, the interest accruing during the first two years is not
payable until the end of such two-year period. At September 30, 2001, 2000 and
1999 the individual had no outstanding borrowings under such loan arrangement.
Pursuant to the terms of the employment agreement, as amended, the individual is
also entitled to stock option grants to purchase shares of common stock. The
term of such option is ten years from the date of grant. During the years ended
September 30, 2001, 2000, 1999 and 1998 the individual was granted options to
purchase shares of common stock totaling 0, 0, 4,096,580, and 691,664,
respectively, under this agreement. In connection with the proposed financial
restructuring discussed in footnote No. 1, the above individual and the Company
have agreed in principle to a three year employment agreement that will, among
other things, reduce his base salary to $12,000 per year effective August 1,
2001 for his services as non-executive chairman.
F-37
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
In connection with employment arrangements with certain other employees
the Company is also committed to minimum compensation obligations under
employment arrangements expiring through 2002. Minimum payments due under these
arrangements aggregate approximately $1.0 million.
Contingencies
From time to time, the Company is a party to litigation arising in the
normal course of its business operations. In the opinion of management and
counsel, it is not anticipated that the settlement or resolution of any such
matters will have a material adverse impact on the Company's financial
condition, results of operations or cash flows.
12. Income Taxes
Significant components of the Company's deferred tax assets and
liabilities are as follows:
Year ended September 30,
------------------------
2001 2000 1999
---- ---- ----
Deferred tax assets (liabilities):
Tax depreciation and amortization (in excess) less than
depreciation and amortization ...................... $ 1,316 $ (209) $ (348)
Net operating loss carryforwards (U.S. Federal Tax) ... 158,666 78,622 23,375
Allowance for doubtful accounts ....................... 2,395 1,631 283
Deferred Rent ......................................... 174 149 149
Deferred compensation ................................. 916 641 --
Deferred Revenue ...................................... 284 -- --
Restructuring reserve ................................. 3,670 -- --
Valuation allowance ................................... (167,421) (80,834) (23,459)
--------- --------- ---------
Total net deferred tax liabilities ................ $ -- $ -- $ --
========= ========= =========
The provision for income taxes for the years ended September 30, 2001,
2000, and 1999 differs from the amount computed by applying the federal
statutory rate due to the following:
Year ended September 30,
------------------------
2001 2000 1999
----- ----- ----
Statutory federal income tax rate (34)% (34)% (34)%
State and local taxes, net of federal benefit (11)% (11)% (11)%
Valuation allowance 45 % 45 % 45 %
---- ---- ----
Effective income tax rate -- % -- % -- %
==== ==== ====
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 $350 million at September 30, 2001. These income
tax loss carryforwards expire between 2011 and 2021. Pursuant to Section 382 of
the Internal Revenue Code, the usage of these net operating loss carryforwards
may be limited due to changes in ownership that have occurred. The Company has
not yet determined the impact, if any, that changes in ownership have had
F-38
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
on net operating loss carryforwards. As of September 30, 2001, the Company also
has net operating loss carryforwards of approximately $31 million from its
United Kingdom Subsidiaries, which do not expire under U.K. tax rules. For
financial reporting purposes, income tax benefits through September 30, 2001
related to both U.S. Federal and foreign income tax losses 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.
13. Segment Information
The Company reports segment information under SFAS No. 131, which
establishes standards for reporting information about operating segments in
annual financial statements, and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for disclosures about products and services and geographic
areas. Operating segments are components of an enterprise for which separate
financial information is available and which is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and assess performance. The Company is a full service
provider of sophisticated Internet solutions. The Company 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, the Company reports its results of operations in one operating segment
under the provisions of SFAS No. 131. Previously the Company reported under two
operating segments.
The following table sets forth geographic segment information for the
years ended September 30, 2001, 2000 and 1999:
Year ended September 30,
---------------------------------------------
2001 2000 1999
--------- --------- ---------
Revenue:
United States ......... $ 82,020 $ 73,697 $ 33,674
Europe ................ 22,190 7,590 143
--------- --------- ---------
Consolidated .......... $ 104,210 $ 81,287 $ 33,817
========= ========= =========
Operating loss:
United States ......... $(142,713) $ (64,477) $ (27,590)
Europe ................ (14,773) (13,090) (3,601)
--------- --------- ---------
Consolidated .......... (157,486) $ (77,567) $ (31,191)
========= ========= =========
Tangible assets:
United States ......... $ 436,262 $ 692,075 276,896
Europe ................ 89,953 10,649 20,039
--------- --------- ---------
Consolidated .......... $ 526,215 $ 702,724 $ 296,935
========= ========= =========
14. Related Party Transactions
The Company utilizes an entity controlled by a Director of the Company,
as its agent to place the Company's advertisements in various print
publications. Amounts paid to this entity for the years ended September 30,
2001, 2000 and 1999 were $0, $0.1 million and $1.5 million, respectively. A
substantial portion of these amounts constitutes the pass-through of amounts
payable to the publishing companies for the Company's advertisements.
F-39
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
15. Selected Quarterly Financial Data (Unaudited)
Three Months Ended
December 31,
------------
2000 1999
----- ----
Revenue .............................................................. $ 26,237 $ 16,145
Loss from operations ................................................. (60,951) (16,963)
Loss before cumulative effect of a change in accounting principle .... (70,92) (20,811)
Cumulative effect of a change in accounting principle ................ (2,332) --
------------ --------------
Net loss ............................................................. (73,284) (20,811)
Dividends and accretion on preferred stock ........................... (1,735) (531)
------------- --------------
Net loss attributable to common stockholders ......................... $ (75,019) $ 21,342
Basic and diluted net loss per share attributable to common
stockholders before cumulative effect of a change in
accounting principle ............................................ $ (1,95) $ (0.64)
Cumulative effect of a change in accounting principle ................ (0.06) --
------------ --------------
Basic and diluted net loss per share attributable to common
stockholders .................................................... $ (2.01) $ (0.64)
------------ --------------
Weighted average common shares outstanding--basic and
diluted ......................................................... 37,328,496 33,557,678
============ ==============
Three Months Ended
March 31,
---------
2001 2000
----- ----
Revenue .............................................................. $ 26,782 $ 17,913
Loss from operations ................................................. (19,957) (19,984)
Loss before extraordinary loss ....................................... (31,966) (29,548)
Extraordinary loss on early extinguishment of debt ................... -- (17,577
----------- ---------------
Net loss ............................................................. (31,966) (47,125)
Dividends and accretion on preferred stock ........................... (1,761) (1,762)
----------- ---------------
Net loss attributable to common stockholders ......................... $ (33,727) $ (48,887)
=========== ================
Basic and diluted net loss per share attributable to common
stockholders before extraordinary loss .......................... $ (0.87) $ (0.90)
Extraordinary loss per share ......................................... -- (0.51)
----------- ---------------
Basic and diluted net loss per share attributable to common
stockholders .................................................... $ (0.87) $ (1.41)
=========== ===============
Weighted average common shares outstanding--basic and
diluted ......................................................... 38,709,658 34,617,361
=========== ===============
F-40
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Three Months Ended
June 30,
--------
2001 2000
----- ----
Revenue ............................................................. $ 26,239 $ 21,376
Loss from operations ................................................ (24,055) (19,773)
Net loss ............................................................ (36,000) (30,112)
---------------- ----------------
Dividends and accretion on preferred stock .......................... (1,790 (1,738)
---------------- ----------------
Net loss attributable to common stockholders ........................ $ (37,790) $ (31,850)
================ ================
Basic and diluted net loss per share attributable to common
stockholders ................................................... $ (0.97) $ (0.87)
================ ================
Weighted average common shares outstanding--basic and
diluted ........................................................ 38,933,135 36,672,360
================ ================
Three Months Ended
September 30,
-------------
2001 2000
----- -----
Revenue ............................................................. $ 24,952 $ 25,853
Loss from operations ................................................ (52,773) (20,847)
Net loss ............................................................ (71,793) (28,398)
---------------- ----------------
Dividends and accretion on preferred stock .......................... (1,818) (1,738)
----------------- ----------------
Net loss attributable to common stockholders ........................ $ (73,611) $ (30,136)
================ ================
Basic and diluted net loss per share attributable to common
stockholders ................................................... $ (1.89) $ (0.81)
================ ================
Weighted average common shares outstanding--basic and
diluted ........................................................ 38,946,043 37,085,711
================ ================
F-41
[GLOBIX LOGO]
GLOBIX CORPORATION
4,327,499 Shares of Common Stock
$26,341,558 11% Senior Secured Notes
--------------------------
PROSPECTUS
--------------------------
Until ___________, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to deliver
a prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the expenses payable by our company in
connection with this registration statement. All of these expenses are
estimates, other than the filing and quotation fees payable to the Securities
and Exchange Commission.
Filing fee-Securities and Exchange Commission ..................... $2821.55
Fees and expenses of legal counsel ................................ *
Printing expenses ................................................. *
Fees and expenses of accountants .................................. *
Miscellaneous expenses ............................................ *
-------
Total ...........................................................
=======
* To be provided.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or DGCL, empowers
a corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
or she was or is a director, officer, employee or agent of the corporation, or
was or is serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person identified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Section 145 of the
DGCL further empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she was or is a director,
officer, employee or agent of the corporation, or was or is serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person identified acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the court in which
such action or suit was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnity for such
expenses that the court shall deem proper. Section 145 further provides that to
the extent a director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith. The statute provides that indemnification pursuant
to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of stockholders or disinterested directors or otherwise.
Our Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, provide, in effect, that to the full extent and under the
circumstances permitted by Section 145 of the DGCL, we shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she was or is a director, officer, employee or agent of our company.
Our Amended and Restated Certificate of Incorporation relieves our
directors from monetary damages to our company or our stockholders for breach of
such director's fiduciary duty as a director to the fullest extent permitted by
the DGCL. Under Section 102(b)(7) of the DGCL, a corporation may relieve its
directors from personal liability to such corporation or its stockholders for
monetary damages for any breach of their fiduciary duty as directors except (i)
for any breach of the director's duty of loyalty to our company or our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit.
In addition, we carry an insurance policy for the protection of our
directors and executive officers against any liability asserted against them in
their official capacities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Effective April 25, 2002 all of our issued and outstanding securities
were cancelled by order of the U.S. Bankruptcy Court for the District of
Delaware and our company, in furtherance of the plan of reorganization, issued
new securities as follows: (a) each holder of the 12.5% notes became entitled to
receive, in exchange for its 12.5% notes, its pro rata share of (i) $120 million
in aggregate principal amount of the notes and (ii) 13,991,000 shares of our
common stock, representing approximately 85% of the shares of our common stock
issued and outstanding following the effective date of the plan of
reorganization, subject to dilution by the exercise of management incentive
options representing up to 10% of the shares of our issued and outstanding
common stock on a fully-diluted basis following the effective date of the plan
of reorganization; (b) each holder of shares of our preferred stock outstanding
immediately prior to the effective date of the plan of reorganization became
entitled to receive, in exchange for its shares of preferred stock, its pro rata
share of 2,304,400 shares of our common stock, representing approximately 14% of
the shares of our common stock issued and outstanding following the effective
date of the plan of reorganization, subject to dilution by the exercise of
management incentive options representing up to 10% of the shares of our issued
and outstanding common stock on a fully-diluted basis following the effective
date of the plan of reorganization and (c) each holder of shares of our common
stock outstanding immediately prior to the effective date of the plan of
reorganization became entitled to receive, in exchange for these shares of
common stock, its pro rata share of 164,600 shares of our common stock,
representing approximately 1% of the shares of our common stock issued and
outstanding following the effective date of the plan of reorganization, subject
to dilution by the exercise of management incentive options representing up to
10% of the shares of our issued and outstanding common stock on a fully-diluted
basis following the effective date of the plan of reorganization.
The foregoing issuances and sales were conducted without registration
of the securities under the Securities Act of 1933, as amended, in reliance upon
the exemption from registration afforded by Section 1145(a)(2) of the Bankruptcy
Code. Section 1145(a)(1) of the U.S. Bankruptcy Code exempts the offer
and sale of securities under a plan of reorganization from registration under
the Securities Act and state laws if:
. the securities are offered and sold under a plan of reorganization;
. the securities are of a debtor, of an affiliate participating in a
joint plan with the debtor, or of a successor to the debtor under
the plan; and
. the recipients of the securities are issued such securities
entirely in exchange for the recipient's claim against or interest
in the debtor or principally in such exchange and partly for cash
or property.
Section 1145(a)(2) of the U.S. Bankruptcy Code exempts the offer of a
security through any warrant, option or right to subscribe that was sold in the
manner specified in Section 1145(a)(1) of the U.S. Bankruptcy Code and the sale
of a security upon exercise of such warrant, option or right to subscribe.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
Exhibit Description
2.1 Amended Joint Prepackaged Plan of the Company and certain of the
Company's subsidiaries, dated April 8, 2002 (6)
3.1 Amended and Restated Certificate of Incorporation of the Company.
(7)
3.2 Amended and Restated Bylaws of the Company. (7)
4.1 Indenture, dated as of April 23, 2002, between the Company, as
issuer, the subsidiary guarantors of the Company named therein and
HSBC Bank USA, as trustee, relating to the Company's 11% Senior
Secured Notes due 2008. (7)
4.2 Form of Pledge and Security Agreement, dated as of April 23, 2002,
between each Subsidiary Guarantor of the Company and HSBC Bank
USA, as Collateral Agent/Trustee. (7)
4.3 Mortgage, Security Agreement and Fixture Filing, dated as of April
23, 2002, between 415 Greenwich GC, LLC, as mortgagor and HSBC Bank
USA, as Collateral Agent/Trustee. (7)
5.1 Form of opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
regarding the validity of the securities offered hereby.**
10.1 Purchase Agreement between Young Woo and the Company, dated as of
June 2, 1998. (1)+
10.2 Employment Agreement between Robert B. Bell and the Company, dated
as of July 21, 1999. (2)
10.3 Trust Agreement between the Company and Arnold N. Bressler, as
Trustee, dated as of July 21, 1999. (3)
10.4 Employment Agreement between Peter L. Herzig and the Company dated
as of October 2, 2001. (4)
10.5 Employment Agreement between Marc Jaffe and the Company dated as of
October 2, 2001. (4)
10.6 Form of Noteholders' and Preferred Stockholders' Lock-Up
Agreements, dated January 14, 2002 (5)
10.7 Form of letter agreement between the Company and Marc H. Bell. (5)
10.8 Consulting Agreement, dated as of April 19, 2002, between the
Company and Communication Technology Advisors LLC.*
12 Calculation of deficiency of earnings to fixed charges.*
21 List of Subsidiaries.*
23 Consent of Arthur Andersen LLP. (8)
25 Statement of Eligibility and Qualification of Trustee on Form T-1.*
---------
* Filed herewith.
** To be filed by amendment.
+ Confidential treatment granted for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(1) Incorporated by reference to the Company's Report on Form 8-K/A
filed September 18, 1998.
(2) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 16, 1999.
(3) Incorporated by reference to the Company's Annual Report on Form
10-K filed December 29, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K filed December 31, 2001.
(5) Incorporated by reference to the Company's Current Report on Form
8-K filed January 14, 2002.
(6) Incorporated by reference to the Company's Current Report on Form
8-K filed April 23, 2002.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2002.
(8) Omitted in reliance on Rule 437a of the Securities Act.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission, or
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
GLOBIX CORPORATION
By: /s/ Peter K. Stevenson
----------------------------------
Name: Peter K. Stevenson
Title: President and Chief Executive
Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of Globix Corporation, a Delaware corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson President and Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ Marc H. Bell Director July 25, 2002
----------------
Marc H. Bell
/s/ Peter L. Herzig Director July 25, 2002
-------------------
Peter L. Herzig
/s/ Jared Abbruzzese Director July 25, 2002
--------------------
Jared Abbruzzese
/s/ Peter S. Brodsky Director July 25, 2002
--------------------
Peter S. Brodsky
/s/ Steven Lampe Director July 25, 2002
----------------
Steven Lampe
/s/ Steven G. Singer Director July 25, 2002
--------------------
Steven G. Singer
/s/ Brandon Stranzl Director July 25, 2002
-------------------
Brandon Stranzl
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy
/s/ Shawn P. Brosnan Senior Vice President and Corporate July 25, 2002
-------------------- Controller (principal accounting officer)
Shawn P. Brosnan
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
BLUESTREAK DIGITAL, INC.
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of Bluestreak Digital, Inc., a New York corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
GAMENET CORPORATION
By: /s/ Peter K. Stevenson
----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of Gamenet Corporation, a New York corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
NAFT COMPUTER SERVICE CORPORATION
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of NAFT Computer Service Corporation, a New York corporation, which is
filing a registration statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of
1933, as amended, hereby constitute and appoint Peter K. Stevenson and Gregory
P. Leahy and each of them, the individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for the person
and in his or her name, place and stead, in any and all capacities, to sign such
registration statement and any or all amendments, including post-effective
amendments to the registration statement, including a prospectus or an amended
prospectus therein and any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933 as amended, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
NAFT INTERNATIONAL, LTD.
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and officers
of NAFT International, Ltd., a New York corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
PFM COMMUNICATIONS, INC.
By: /s/ Peter K. Stevenson
----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of PFM Communications, Inc., a New York corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
July 25, 2002
/s/ Shawn P. Brosnan Chief Accounting Officer
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
GRE CONSULTING, INC.
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of GRE Consulting, Inc., a New York corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
415 GREENWICH GC, LLC
By: /s/ Peter K. Stevenson
----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned member and
officers of 415 Greenwich GC, LLC, a New York limited liability company, which
is filing a registration statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of
1933, as amended, hereby constitute and appoint Peter K. Stevenson and Gregory
P. Leahy and each of them, the individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for the person
and in his or her name, place and stead, in any and all capacities, to sign such
registration statement and any or all amendments, including post-effective
amendments to the registration statement, including a prospectus or an amended
prospectus therein and any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this registration statement has been signed below by the following
persons in the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy
July 25, 2002
/s/ Shawn P. Brosnan Chief Accounting Officer
-------------------- (principal accounting officer)
Shawn P. Brosnan
Globix Corporation Sole Member July 25, 2002
By: /s/ Peter K. Stevenson
----------------------
Peter K. Stevenson
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25 day of July 2002.
415 GREENWICH GC TENANT, LLC
By: /s/ Peter K. Stevenson
----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned member and
officers of 415 Greenwich GC Tenant, LLC, a New York limited liability company,
which is filing a registration statement on Form S-1 with the Securities and
Exchange Commission, Washington, D.C. 20549 under the provisions of the
Securities Act of 1933, as amended, hereby constitute and appoint Peter K.
Stevenson and Gregory P. Leahy and each of them, the individual's true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for the person and in his or her name, place and stead, in any
and all capacities, to sign such registration statement and any or all
amendments, including post-effective amendments to the registration statement,
including a prospectus or an amended prospectus therein and any registration
statement for the same offering that is to be effective upon filing pursuant to
Rule 462(b) under the Securities Act of 1933, as amended, and all other
documents in connection therewith to be filed with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents, and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact as agents or any of them, or their
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy
July 25, 2002
/s/ Shawn P. Brosnan Chief Accounting Officer
-------------------- (principal accounting officer)
Shawn P. Brosnan
415 Greenwich GC MM, LLC Managing Member July 25, 2002
By: Globix Corporation
By: /s/ Peter K. Stevenson
----------------------
Peter K. Stevenson
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
415 GREENWICH GC MM, LLC
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned member and officers of
415 Greenwich GC MM, LLC, a New York limited liability company, which is filing
a registration statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of
1933, as amended, hereby constitute and appoint Peter K. Stevenson and Gregory
P. Leahy and each of them, the individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for the person
and in his or her name, place and stead, in any and all capacities, to sign such
registration statement and any or all amendments, including post-effective
amendments to the registration statement, including a prospectus or an amended
prospectus therein and any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy
/s/ Shawn P. Brosnan July 25, 2002
-------------------- Chief Accounting Officer
Shawn P. Brosnan (principal accounting officer)
Globix Corporation Sole Member July 25, 2002
By: /s/ Peter K. Stevenson
----------------------
Peter K. Stevenson
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
COMSTAR.NET, INC.
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and
officers of Comstar.net, Inc., a Georgia corporation, which is filing a
registration statement on Form S-1 with the Securities and Exchange Commission,
Washington, D.C. 20549 under the provisions of the Securities Act of 1933, as
amended, hereby constitute and appoint Peter K. Stevenson and Gregory P. Leahy
and each of them, the individual's true and lawful attorneys-in-fact and agents,
with full power of substitution and resubstitution, for the person and in his or
her name, place and stead, in any and all capacities, to sign such registration
statement and any or all amendments, including post-effective amendments to the
registration statement, including a prospectus or an amended prospectus therein
and any registration statement for the same offering that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act of 1933, as
amended, and all other documents in connection therewith to be filed with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact as
agents or any of them, or their substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- ----- ----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New York, New York, on
the 25th day of July 2002.
COMSTAR TELECOM & WIRELESS, INC.
By: /s/ Peter K. Stevenson
-----------------------
Name: Peter K. Stevenson
Title: Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that the undersigned directors and officers
of Comstar Telecom & Wireless, Inc., a Georgia corporation, which is
filing a registration statement on Form S-1 with the Securities and Exchange
Commission, Washington, D.C. 20549 under the provisions of the Securities Act of
1933, as amended, hereby constitute and appoint Peter K. Stevenson and Gregory
P. Leahy and each of them, the individual's true and lawful attorneys-in-fact
and agents, with full power of substitution and resubstitution, for the person
and in his or her name, place and stead, in any and all capacities, to sign such
registration statement and any or all amendments, including post-effective
amendments to the registration statement, including a prospectus or an amended
prospectus therein and any registration statement for the same offering that is
to be effective upon filing pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and all other documents in connection therewith to be filed
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact as agents or any of them, or their substitute or substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed below by the following persons in
the capacities and on the dates indicated below.
Name Title Date
---- -----
/s/ Peter K. Stevenson Chief Executive Officer July 25, 2002
---------------------- (principal executive officer)
Peter K. Stevenson and Director
/s/ John D. McCarthy Acting Chief Financial Officer July 25, 2002
------------------- (principal financial officer)
John D. McCarthy and Director
/s/ Shawn P. Brosnan Chief Accounting Officer July 25, 2002
-------------------- (principal accounting officer)
Shawn P. Brosnan and Director
EXHIBITS
Exhibit Description
2.1 Amended Joint Prepackaged Plan of the Company and certain of the
Company's subsidiaries, dated April 8, 2002 (6)
3.1 Amended and Restated Certificate of Incorporation of the Company.
(7)
3.2 Amended and Restated Bylaws of the Company. (7)
4.1 Indenture, dated as of April 23, 2002, between the Company, as
issuer, the subsidiary guarantors of the Company named therein and
HSBC Bank USA, as trustee, relating to the Company's 11% Senior
Secured Notes due 2008. (7)
4.2 Form of Pledge and Security Agreement, dated as of April 23, 2002,
between each Subsidiary Guarantor of the Company and HSBC Bank
USA, as Collateral Agent/Trustee. (7)
4.3 Mortgage, Security Agreement and Fixture Filing, dated as of April
23, 2002, between 415 Greenwich GC, LLC, as mortgagor and HSBC Bank
USA, as Collateral Agent/Trustee. (7)
5.1 Form of opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
regarding the validity of the securities offered hereby.**
10.1 Purchase Agreement between Young Woo and the Company, dated as of
June 2, 1998. (1)+
10.2 Employment Agreement between Robert B. Bell and the Company, dated
as of July 21, 1999. (2)
10.3 Trust Agreement between the Company and Arnold N. Bressler, as
Trustee, dated as of July 21, 1999. (3)
10.4 Employment Agreement between Peter L. Herzig and the Company dated
as of October 2, 2001. (4)
10.5 Employment Agreement between Marc Jaffe and the Company dated as of
October 2, 2001. (4)
10.6 Form of Noteholders' and Preferred Stockholders' Lock-Up
Agreements, dated January 14, 2002 (5)
10.7 Form of letter agreement between the Company and Marc H. Bell. (5)
10.8 Consulting Agreement, dated as of April 19, 2002, between the
Company and Communication Technology Advisors LLC.*
12 Calculation of deficiency of earnings to fixed charges.*
21 List of Subsidiaries.*
23 Consent of Arthur Andersen LLP. (8)
25 Statement of Eligibility and Qualification of Trustee on Form T-1.*
---------
* Filed herewith.
** To be filed by amendment.
+ Confidential treatment granted for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act.
(1) Incorporated by reference to the Company's Report on Form 8-K/A
filed September 18, 1998.
(2) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed August 16, 1999.
(3) Incorporated by reference to the Company's Annual Report on Form
10-K filed December 29, 2000.
(4) Incorporated by reference to the Company's Annual Report on Form
10-K filed December 31, 2001.
(5) Incorporated by reference to the Company's Current Report on Form
8-K filed January 14, 2002.
(6) Incorporated by reference to the Company's Current Report on Form
8-K filed April 23, 2002.
(7) Incorporated by reference to the Company's Quarterly Report on Form
10-Q filed May 15, 2002.
(8) Omitted in reliance on Rule 437a of the Securities Act.