SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
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|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NO. 1-14168
GLOBIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 13-3781263
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
139 CENTRE STREET, NEW YORK, NEW YORK 10013
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (212) 334-8500
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Securities Exchange Act). Yes |_| No X
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No |_|
Number of shares of the Registrant's common stock outstanding as of May
13, 2005 was 48,678,461.
GLOBIX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
----
Part I Financial Information
Item 1 Consolidated Balance Sheets -- As of March 31, 2005 and September 30, 2004............................... 1
Interim Consolidated Statements of Operations -- For the Three and Six Months Ended
March 31, 2005 and for the Three and Six Months Ended March 31, 2004 .................................. 2
Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Income
(Loss) for the Six Months Ended March 31, 2005 ........................................................ 3
Interim Consolidated Statements of Cash-Flows -- For the Six Months Ended March 31, 2005
and for the Six Months Ended March 31, 2004 ........................................................... 4
Notes to the Interim Unaudited Consolidated Financial Statements......................................... 6
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 15
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................... 24
Item 4 Controls and Procedures.................................................................................. 24
Part II Other Information
Item 1. Legal Proceedings........................................................................................ 25
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......................... 25
Item 3. Defaults Upon Senior Securities.......................................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 25
Item 5. Other Information ....................................................................................... 26
Item 6. Exhibits................................................................................................. 26
Signatures ........................................................................................................... 26
Certifications
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
MARCH 31, SEPTEMBER 30,
2005 2004
------------- -------------
(Unaudited)
-------------
ASSETS
Current assets:
Cash and cash equivalents ..................................................... $ 9,140 $ 12,075
Short-term investments ........................................................ 6,756 7,625
Marketable securities ......................................................... 15 458
Accounts receivable, net of allowance for doubtful accounts
of $1,646 and $2,248, respectively .......................................... 10,461 6,157
Prepaid expenses and other current assets ..................................... 5,525 5,101
Restricted cash ............................................................... 2,401 2,413
------------- -------------
Total current assets ................................................ 34,298 33,829
Investments ................................................................... 1,318 1,988
Investments, restricted ....................................................... 9,952 2,324
Property, plant and equipment, net ............................................ 208,202 90,822
Intangible assets, net of accumulated amortization
of $4,610 and $3,699, respectively .......................................... 11,245 7,656
Other assets .................................................................. 4,030 1,923
------------- -------------
Total assets ........................................................ $ 269,045 $ 138,542
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation and mortgage payable .............. $ 764 $ 555
Accounts payable .............................................................. 12,427 6,599
Accrued liabilities ........................................................... 16,786 8,357
Deferred revenue .............................................................. 5,949 2,852
------------- -------------
Total current liabilities ........................................... 35,926 18,363
Capital lease obligations, net of current portion ............................. 215 121
Mortgage payable .............................................................. 19,434 19,606
11% Senior Notes .............................................................. 60,770 72,202
Accrued interest - 11% Senior Notes ........................................... 6,135 3,349
Other long term liabilities ................................................... 24,858 8,026
------------- -------------
Total liabilities ................................................... 147,338 121,667
------------- -------------
Commitments and contingencies (Note 7)
CUMULATIVE CONVERTIBLE PREFERRED STOCK (NOTE 9) ............................... 12,639 --
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 500,000,000 shares authorized;
48,675,461 and 16,460,000 issued and outstanding, as of
March 31, 2005 and September 30, 2004 ....................................... 487 165
Additional paid-in capital .................................................... 207,192 100,012
Deferred compensation ......................................................... (7) (8)
Accumulated other comprehensive income ........................................ 6,736 4,498
Accumulated deficit ........................................................... (105,340) (87,792)
------------- -------------
Total stockholders' equity .......................................... 109,068 16,875
------------- -------------
Total liabilities, cumulative convertible preferred
stock and stockholders' equity .................................... $ 269,045 $ 138,542
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
------------------------------- -------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 (*) 2005 2004 (*)
------------ ------------ ------------ ------------
Revenue, net .................................... $ 20,030 $ 15,029 $ 36,561 $ 29,414
Operating costs and expenses:
Cost of revenue (excluding depreciation
and amortization shown below) ............... 11,418 8,689 21,117 17,127
Selling, general and administrative ........... 9,203 7,025 16,507 14,407
Loss on impairment of assets .................. -- 659 -- 17,972
Depreciation and amortization ................. 4,472 3,473 8,015 6,844
------------ ------------ ------------ ------------
Total operating costs and expenses ........ 25,093 19,846 45,639 56,350
------------ ------------ ------------ ------------
Loss from operations ............................ (5,063) (4,817) (9,078) (26,936)
Interest and financing expense ................ (2,355) (3,058) (4,843) (6,511)
Interest income ............................... 102 137 228 316
Other (expense) income, net ................... (785) 899 (673) 1,196
Gain (loss) on discharge of debt .............. (3,182) -- (3,182) 1,747
------------ ------------ ------------ ------------
Loss before income taxes ........................ (11,283) (6,839) (17,548) (30,188)
Income tax expense .............................. -- 35 -- 35
------------ ------------ ------------ ------------
Net loss ........................................ $ (11,283) $ (6,874) $ (17,548) $ (30,223)
============ ============ ============ ============
Basic and diluted loss per share ................ $ (0.45) $ (0.42) $ (0.85) $ (1.84)
============ ============ ============ ============
Weighted average common shares outstanding
--basic and diluted ........................... 25,048,634 16,460,000 20,707,127 16,460,000
============ ============ ============ ============
(*) Restated - see Note 2 "Reclassifications and Restatement".
The accompanying notes are an integral part of these consolidated financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK PAID-IN DEFERRED INCOME ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) DEFICIT (DEFICIT)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, September 30, 2004 ............ 16,460,000 $ 165 $ 100,012 $ (8) $ 4,498 $ (87,792) $ 16,875
Deferred stock-based compensation ...... -- -- 25 (25) -- -- --
Amortization of deferred
compensation ......................... -- -- -- 23 -- -- 23
Comprehensive Income (loss):
Net loss ............................. -- -- -- -- -- (6,265) --
Unrealized holding gains ............. -- -- -- -- 242 -- --
Foreign currency translation
adjustments ........................ -- -- -- -- 1,879 -- --
Total Comprehensive Income ............. -- -- -- -- -- -- (4,144)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, December 31, 2004 ............. 16,460,000 165 100,037 (10) 6,619 (94,057) 12,754
Amortization of deferred
compensation ......................... -- -- -- 3 -- -- 3
Neon acquisition - common
stock issued ......................... 27,573,006 276 83,231 -- -- -- 83,507
Neon acquisition - stock options
and warrants issued .................. -- -- 7,928 -- -- -- 7,928
Debt for equity swap (note 8) .......... 4,545,455 45 15,636 -- -- -- 15,681
Binford litigation settlement .......... 97,000 1 360 -- -- -- 361
Comprehensive Income (loss):
Net loss ............................. -- -- -- -- -- (11,283) --
Unrealized holding losses ............ -- -- -- -- 804 -- --
Foreign currency translation
adjustments ........................ -- -- -- -- (687) -- --
Total Comprehensive Loss ............... -- -- -- -- -- -- (11,166)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance, March 31, 2005 ................ 48,675,461 $ 487 $ 207,192 $ (7) $ 6,736 $ (105,340) $ 109,068
========== ========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
3
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
FOR THE SIX MONTHS ENDED
--------------------------------------
MARCH 31, 2005 MARCH 31, 2004
---------------- ----------------
Cash Flows From Operating Activities
Net Loss ........................................................................ $ (17,548) $ (30,223)
Operating activities:
Depreciation and amortization .................................................. 8,015 6,844
Provision for uncollectible receivables ........................................ 49 438
Loss (gain) on debt discharge .................................................. 3,182 (1,747)
Loss on impairment of assets ................................................... -- 17,972
Loss on sale of marketable securities .......................................... 913 249
Amortization of deferred compensation and issuance of
common stock in litigation settlement ........................................ 386 13
Changes in assets and liabilities (net of acquisition):
Decrease (increase) in accounts receivable ..................................... (2,184) 429
Decrease (increase) in prepaid expenses and other current assets ............... 911 (1,390)
Decrease (increase) in other assets ............................................ (49) (279)
Increase (decrease) in accounts payable ........................................ 2,345 (1,767)
Increase (decrease) in accrued liabilities ..................................... (1,249) (160)
Increase in accrued interest ................................................... 3,854 5,450
Other .......................................................................... (363) (218)
---------------- ----------------
Net Cash Used in Operating Activities ........................................... (1,738) (4,389)
---------------- ----------------
Cash Flows From Investing Activities
Proceeds from (investments in) short-term and long-term investments ............ 1,689 (4,900)
Proceeds from (used in) restricted cash and investments ........................ (6) (130)
Proceeds from sale of marketable securities .................................... 594 1,000
Proceeds from sale of property plant and equipment ............................. -- 48,694
Net cash proceeds from Neon acquisition (note 3) .............................. 2,726 --
Payment for business acquired from Aptegrity (Appendix A) ...................... -- (2,287)
Purchase of property, plant and equipment ...................................... (6,160) (1,782)
---------------- ----------------
Net Cash (Used in) Provided by Investing Activities ............................. (1,157) 40,595
---------------- ----------------
Cash Flows From Financing Activities
Repurchase of 11% Senior Notes ................................................. -- (49,573)
Proceeds from exercising of warrants ........................................... -- 25
Capital contribution (distribution) in minority-owned subsidiary, net .......... -- (202)
Capital lease termination payment .............................................. -- (439)
Repayment of mortgage payable and capital lease obligation ..................... (307) (294)
---------------- ----------------
Net Cash Used in Financing Activities ........................................... (307) (50,483)
---------------- ----------------
Effect of Exchange Rates Changes on Cash and Cash Equivalents ................... 267 492
---------------- ----------------
Decrease in Cash and Cash Equivalents ........................................... (2,935) (13,785)
Cash and Cash Equivalents, Beginning of Period .................................. 12,075 24,503
---------------- ----------------
Cash and Cash Equivalents, End Period ........................................... $ 9,140 $ 10,718
================ ================
Supplemental disclosure of cash flow information:
Cash paid for interest .......................................................... $ 978 $ 4,710
================ ================
Non cash financing activities:
Capital leases entered into ................................................... $ 327 --
================ ================
Put-option .................................................................... -- $ 2,968
================ ================
The accompanying notes are an integral part of these consolidated financial statements.
4
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(UNAUDITED)
APPENDIX A - PAYMENT FOR BUSINESS ACQUIRED FROM APTEGRITY:
FOR THE SIX MONTHS ENDED
--------------------------------------
MARCH 31, 2005 MARCH 31, 2004
--------------- ---------------
Current assets ....................... $ -- $ (696)
Property, plant and equipment ........ -- (738)
Current liabilities .................. -- 347
Other intangible assets .............. -- (1,200)
--------------- ---------------
$ -- $ (2,287)
=============== ===============
The accompanying notes are an integral part of these
consolidated financial statements.
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - GENERAL
We are a provider of application, media and infrastructure management
services. We provide flexible business solutions which combine skills,
support, technology and experience to enable our customers to use the
Internet as a way to provide business benefits and sustain a
competitive advantage. By managing complex applications, media and
infrastructure environments, we help our clients protect Internet
revenue streams, improve user satisfaction and reduce technology
operating costs and risks. Our clients include operating divisions of
Fortune 100 companies as well as mid-sized enterprises in a number of
vertical markets including media and publishing, technology, financial
services, health care and government.
Through our wholly owned subsidiary, NEON Communications, Inc.
("Neon"), we own and operate a high bandwidth fiber optic network,
extending from Portland, ME to Washington, DC. Through this network we
provide metro and intercity telecommunications coverage, as well as
co-location space, to local, long distance and wireless communications
carriers and a small number of non-carrier customers, including
universities, colleges and financial institutions, in various markets
in the Northeast and mid-Atlantic regions, including Boston, New York,
Philadelphia, Newark, Baltimore, Washington, DC, Portland, Portsmouth,
Springfield, Worcester, Albany, White Plains, Providence, Hartford,
Hackensack, Reston, Virginia and smaller communities along our network
routes. We acquired Neon on March 7, 2005 as further described in Note
3.
We, and our subsidiaries, have operations in New York, NY, London, UK,
Boston, MA, Santa Clara, CA, Fairfield, NJ, and Atlanta, GA. Our common
stock is traded on the American Stock Exchange under the symbol "GEX".
The Company has historically experienced negative cash flow from
operations and has incurred net losses. For the six-month period ended
March 31, 2005 the Company had a net loss of $17,548 and an accumulated
deficit at March 31, 2005 of $105,340. Our ability to generate positive
cash flows from operations and achieve profitability is dependant upon
our ability to grow our revenue while maintaining our current cost
structure and network efficiencies. Our management believes that steps
taken as part of our restructuring efforts to reduce facilities and
personnel, combined with ongoing efforts to derive efficiencies from
our network, have reduced our expenses to a level that meets our
current revenue rate. The Company believes that its cash and
investments are sufficient to meet its fiscal 2005 anticipated
day-to-day operating expenses, commitments, working capital and capital
expenditures. In addition, the Company's Board of Directors elected on
April 25, 2005 to pay interest of $6,685 on its 11% senior notes with
the issuance of additional senior notes in lieu of cash. However, there
can be no assurance that we will be successful in achieving sufficient
profitability, attracting new customers, maintaining our existing
revenue levels or reducing our outstanding indebtedness. In addition,
in the future, the Company may make acquisitions or repurchase its
indebtedness, which, in turn, may adversely affect the Company's
liquidity. In such cases management will have to take drastic steps to
reduce its operating expenses to meet its then revenue base and
liquidity needs. Such steps may include further reduction of our
headcount, consolidation or elimination of facilities, termination of
low margin customers and negotiating with our creditors to restructure
our indebtedness, mainly, but not limited to our 11% senior notes.
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Globix Corporation and its
subsidiaries ("Globix" or the "Company") have been prepared by the
Company according to U.S. generally accepted accounting principles for
interim financial information, and the rules and regulations of the
Securities and Exchange Commission for interim consolidated financial
statements. Accordingly, they do not include all of the information and
notes required by U.S. generally accepted accounting principles for
complete financial statements. In the opinion of management, the
unaudited interim consolidated financial statements furnished herein
include all of the adjustments necessary for a fair presentation of the
Company's financial position at March 31, 2005 and the three month and
six month periods then ended. All such adjustments are of a normal
recurring nature. The consolidated financial statements should be read
in conjunction with the consolidated financial statements and notes
thereto, contained in our 2004 Form 10-K. The results of operations for
the three-month and six-month periods ended March 31, 2005 are not
necessarily indicative of the results for the entire fiscal year ending
September 30, 2005.
MANAGEMENT ESTIMATES
The preparation of the Company's financial statements in accordance
with U.S. generally accepted accounting principles requires management
to make estimates and assumptions. Such estimates and assumptions
affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities.
Significant estimates include estimates of the allowance for doubtful
accounts, credit reserve, the useful lives and ultimate realizability
of property, plant, equipment, intangible assets, deferred tax
valuation allowance and payroll and occupancy cost allocations between
cost of revenue and selling, general and administrative expenses.
Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the period that they are determined to be
necessary. Actual results may vary from these estimates.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", which establishes a fair value based method of
accounting for stock-based compensation plans, the Company has elected
to follow Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" for recognizing stock-based compensation
expense for financial statement purposes. For companies that choose to
continue applying the intrinsic value method, SFAS No. 123 mandates
certain pro forma disclosures as if the fair value method had been
utilized. The Company accounts for stock based compensation to
consultants in accordance with EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services" and SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123", which provides optional transition guidance
for those companies electing to voluntarily adopt the accounting
provisions of SFAS No. 123. In addition, SFAS No. 148 mandates certain
new disclosures that are incremental to those required by SFAS No. 123.
The Company continued to account for stock-based compensation in
accordance with APB No. 25.
The following table illustrates the effect on loss attributable to
common stockholders and loss per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- --------- --------- ---------
Net loss as reported ............................... $ (11,283) $ (6,874) $(17,548) $(30,223)
Add: Stock-based employee compensation expense
included in reported net loss ................. 3 (21) 26 13
Deduct: Amortization of stock-based employee
compensation expense determined under
fair value based method .................... 122 127 237 235
========== ========= ========= =========
Pro-forma net loss attributed to common
stockholders ................................. $ (11,402) $ (7,022) $(17,759) $(30,445)
========== ========= ========= =========
Basic and diluted - as reported .................... $ (0.45) $ (0.42) $ (0.85) $ (1.84)
========== ========= ========= =========
Basic and diluted - Pro-forma ...................... $ (0.46) $ (0.43) $ (0.86) $ (1.85)
========== ========= ========= =========
Under SFAS No. 123 the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
-------------------------- -------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
---------- --------- --------- ---------
Expected life (in years).......................... 3 5.0 3 5.0
Risk-free interest rate........................... 4.3% 3.2% 4.3% 3.2%
Volatility........................................ 93% 120% 93% 120%
Dividend yield.................................... 0.0% 0.0% 0.0% 0.0%
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued
No. SFAS 123 (revised 2004), "Share-Based Payment", which is a revision
of SFAS 123. SFAS 123(R) supersedes APB 25, Accounting for Stock Issued
to Employees, and amends SFAS 95, Statement of Cash Flows. Generally,
the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. This revised
standard will be effective for our reporting period beginning October
1, 2005.
As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25 intrinsic value method
and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)'s fair value
method will have an impact on our result of operations, although it
will have no impact on our overall financial position. The impact of
the modified prospective adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted SFAS 123(R) in prior
periods, the impact of that standard would have approximated the impact
of SFAS 123 as described in the disclosure of pro forma net income and
earnings per share as shown in the table above.
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECLASSIFICATIONS AND RESTATEMENT
Certain prior period balances have been reclassified to conform to
current period presentation.
The Company restated its previous presentation of cost of revenue and
selling, general and administrative costs for fiscal year 2004. The
effect of the restatement on the Company's consolidated statement of
operations is as follows:
Three Months Ended Six Months Ended
March 31, 2004 March 31, 2004
-------------------------- ----------------------------
Previously Previously
Restated Reported Restated Reported
-------- ---------- --------- ----------
Cost of Revenue ................................. $ 8,689 $ 4,974 $ 17,127 $ 9,850
Selling, general and administrative ............. 7,025 10,740 14,407 21,684
Total operating costs and expenses .............. 19,846 19,846 56,350 56,350
Loss from operations ............................ (4,817) (4,817) (26,936) (26,936)
Net loss ........................................ (6,874) (6,874) (30,223) (30,223)
Basic and diluted loss per share ................ (0.42) (0.42) (1.84) (1.84)
NOTE 3 - ACQUISITION OF NEON COMMUNICATIONS, INC.
On March 7, 2005, Globix completed its acquisition of Neon by
purchasing all of the capital stock of Neon. The purchase price of
$112,562 consisted of $5,349 in cash, the issuance of 27,573 shares of
common stock with a fair value of $83,507 (based on the average share
price during the three day period before and after the announcement of
the merger), the issuance of 2,972 shares of cumulative convertible
preferred stock with a fair market value of $12,639, the issuance of
3,381 shares of stock options and warrants with a fair value of $7,928
and approximately $3,139 of other direct acquisition costs. Neon owns
and operates a high bandwidth fiber optic network, extending from
Portland, ME to Washington, DC. Through this network Neon provides
metro and intercity communications coverage, as well as co-location
space, to local and long distance telecommunications carriers and a
small number of non-carrier customers, including universities, colleges
and financial institutions, in various markets in the Northeast and
mid-Atlantic regions, including Boston, New York, Philadelphia, Newark,
Baltimore, Washington, DC, Portland, Portsmouth, Springfield,
Worcester, Albany, White Plains, Providence, Hartford, Hackensack,
Reston, Virginia and smaller communities along our network routes. The
estimate allocation of the purchase price is summarized below:
Cash and cash equivalents acquired .............................. $ 8,116
Accounts receivable assumed...................................... 1,976
Prepaid and other assets assumed................................. 1,558
Restricted cash and investments.................................. 7,501
Fair value of property, plant and equipment assumed.............. 116,846
Identifiable intangible assets assumed........................... 4,500
Other assets..................................................... 3,625
Accounts payable and accrued liabilities assumed................. (12,133)
Deferred revenue assumed......................................... (17,363)
Other liabilities assumed........................................ (2,064)
---------
$ 112,562
=========
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma combined results of operations assume
that the acquisition occurred on October 1, 2003. This unaudited
information should not be relied upon as necessarily being indicative
of future results.
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenue ............................................ $ 29,117 $ 26,585 57,905 $ 51,722
Net loss before extraordinary items ................ (12,014) (8,231) (18,486) (32,437)
============ ============ ============ ============
Basic and diluted net income per common share
Pro-forma .......................................... $ (0.25) $ (0.17) $ (0.38) $ (0.67)
============ ============ ============ ============
Weighted average common shares
outstanding - basic and diluted .................. 48,602,172 48,578,461 48,590,186 48,578,461
============ ============ ============ ============
The following unusual and non-recurring items were included in the pro
forma results:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Loss on impairment of fixed assets (Globix) $ -- $ 659 $ -- $ 17,972
Gain (loss) on debt discharge (Globix) (3,182) -- (3,182) 1,747
NOTE 4 - RELATED PARTIES
Effective May 15, 2005, Globix entered into an Agreement with
Communication Technology Advisors LLC ("CTA"), pursuant to which CTA
has agreed to provide certain advisory services to Globix, including
assistance with the integration of the Neon acquisition, financing and
acquisitions, in exchange for a monthly fee of $120. In the event that
Globix consummates an acquisition, Globix has agreed to consider
whether CTA is entitled to an additional success fee. Wayne Barr, Jr.,
a principal of CTA, joined the Board of Directors of Globix on March 7,
2005. CTA previously provided advisory services to Globix and Neon in
exchange for a monthly fee of $65 and $35, respectively.
Neon Optica, Inc., a wholly owned subsidiary of Neon, is a party to two
Agreements for the Provision of Fiber Optic Facilities and Services
(Phases I and II), pursuant to which certain subsidiaries of Northeast
Utilities have agreed to grant to Neon the right to use transmission
structures, other facilities and fiber filaments in the their fiber
optic cable network in exchange for annual payments and other fees.
Payment under these agreements and a fee reimbursement agreement are
expected to amount to approximately $2,500 per year. In calendar years
2003 and 2004, Neon made certain payments under these agreements by
issuing shares of its common stock to Mode 1 Communications, Inc.
("Mode 1"), a wholly owned subsidiary of Northeast Utilities. Mode 1
held approximately 13.2% of the common stock of Neon prior to the
merger and as a result of the merger became the holder of approximately
5.6% of the Globix common stock. In connection with the merger, Globix
agreed to guarantee the obligations of Neon Optica, Inc. under these
agreements. John H. Forsgren, who was a director of Neon prior to the
merger and became a director of Globix in connection with the merger,
was the Vice Chairman and Chief Financial Officer of Northeast
Utilities until his retirement as of December 31, 2004.
10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 5 - SEGMENT INFORMATION
Historically the Company has evaluated its results of operations based
on one operating segment in accordance with SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information". As a result
of the acquisition of Neon on March 7, 2005 the Company now has two
operating segments to evaluate.
Operating results and assets information by segment:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
Globix...................................... $ 16,807 $ 15,029 $ 33,338 $ 29,414
Neon........................................ 3,223 -- 3,223 --
------------ ------------ ------------ ------------
Consolidated................................ $ 20,030 $ 15,029 $ 36,561 $ 29,414
============ ============ ============ ============
Operating loss:
Globix..................................... $ (4,582) $ (4,817) $ (8,597) $ (26,936)
Neon....................................... (481) -- (481) --
------------ ------------ ------------ ------------
Consolidated............................... $ (5,063) $ (4,817) $ (9,078) $ (26,936)
============ ============ ============ ============
MARCH 31, SEPTEMBER 30,
2005 2004
--------------- -------------
Total assets:
Globix........................................ $ 127,329 138,542
Neon......................................... 141,716 --
--------------- -------------
Consolidated................................. $ 269,045 $ 138,542
============== =============
MARCH 31, SEPTEMBER 30,
2005 2004
--------------- -------------
Fixed assets:
Globix........................................ $ 90,052 90,822
Neon......................................... 118,150 --
--------------- -------------
Consolidated................................. $ 208,202 $ 90,822
============== =============
11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Operating results and assets information by geographic area:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues:
United States............................... $ 12,626 $ 8,625 $ 21,508 $ 17,113
Europe...................................... 7,404 6,404 15,053 12,301
------------ ------------ ------------ ------------
Consolidated................................ $ 20,030 $ 15,029 $ 36,561 $ 29,414
============ ============ ============ ============
Operating loss:
United States.............................. $ (5,926) $ (5,753) $ (10,790) $ (28,639)
Europe .................................... 863 936 1,712 1,703
------------ ------------ ------------ ------------
Consolidated............................... $ (5,063) $ (4,817) $ (9,078) $ (26,936)
============ ============ ============ ============
MARCH 31, SEPTEMBER 30,
2005 2004
--------------- -------------
Total assets:
United States................................. $ 230,453 $ 98,388
Europe....................................... 38,592 40,154
--------------- -------------
Consolidated................................. $ 269,045 $ 138,542
=============== =============
MARCH 31, SEPTEMBER 30,
2005 2004
--------------- -------------
Fixed assets:
United States................................. $ 181,587 $ 64,978
Europe....................................... 26,615 25,844
--------------- -------------
Consolidated................................. $ 208,202 $ 90,822
=============== =============
Although the Company operates in two operating segments, there are 6
major service lines as listed below with Co-location services being
offered in both segments. The breakdown of revenues for each service
line is as follows:
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Internet Hosting and Co-Location ................. $ 6,438 $ 5,793 12,508 $ 11,748
Managed Services ................................. 5,546 4,632 10,972 8,804
Network Services and Internet Access ............. 4,036 4,508 8,014 8,732
Lit fiber services................................ 2,777 -- 2,777 --
Dark fiber services............................... 343 -- 343 --
Hardware and Software Sales, DSL and Other........ 890 96 1,947 130
------------ ------------ ------------ ------------
Revenue, net ..................................... $ 20,030 $ 15,029 $ 36,561 $ 29,414
============ ============ ============ ============
12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 6 - COMPREHENSIVE LOSS
FOR THE THREE MONTHS ENDED FOR THE SIX MONTHS ENDED
----------------------------- ------------------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss ............................................ $ (11,283) $ (6,874) $ (17,548) $ (30,223)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities available for sale ................. 804 (47) 1,047 262
Foreign currency translation adjustment ......... (687) 720 1,191 2,434
------------ ------------ ------------ ------------
Comprehensive loss .................................. $ (11,166) $ (6,201) $ (15,310) $ (27,527)
============ ============ ============ ============
NOTE 7 - COMMITMENTS AND CONTINGENT LIABILITIES
From time to time, the Company is involved in legal proceedings in the
ordinary course of our business operations. Although there can be no
assurance as to the outcome or effect of any legal proceedings to which
the Company is a party, the Company does not believe, based on
currently available information, that the ultimate liabilities, if any,
arising from any such legal proceedings would have a material adverse
impact on our business, financial condition, results of operations or
cash flows.
On November 12, 2003, we were served with a complaint filed in the
United States Court for Southern District of New York, entitled Alfred
G. Binford v. Globix Corporation, alleging breach of contract claims
related to the failure to make payments under an employment letter, as
amended, seeking damages in the amount of $2,113. On March 4, 2005, we
entered into a settlement agreement with Mr. Binford pursuant to which
we paid him $750 in cash, $100 of which was reimbursed by our insurance
carrier, and agreed to issue him 100,000 shares of common stock
resulting in approximately $800 of expense in the quarter ended March
31, 2005.
On August 12, 2004, the United States District Court for the Southern
District of New York approved the settlement of a class action lawsuit
entitled In re Globix Corp Securities Litigation, No. 02-CV-00082. This
lawsuit named as defendants Globix and our former officers Marc Bell,
Peter Herzig (who remains a director of Globix) and Brian Reach, and
asserted claims under sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 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. The lawsuit alleged that the defendants
had failed to disclose the true state of the Company's financial
condition during this period. Under the settlement, the Company paid
$3,500,000 (all of which was covered by insurance) to settle all claims
against it. A motion for reconsideration of the fee award filed by
those plaintiffs' law firms whose fees were not included in the
settlement was rejected by the court in February 2005.
On November 9, 2004, NEON Transcom, Inc. ("Transcom"), a wholly owned
subsidiary of NEON, filed a suit against the Washington Metropolitan
Area Transit Authority ("WMATA") in the United States District Court
for the District of Columbia seeking a declaratory judgment that the
annual fees provided for under a license agreement violate the
Telecommunications Act of 1996 and further seeking an injunction
preventing WMATA from requiring payment of the fees and holding
Transcom in default under its License Agreement, dated October 5, 1999.
On February 11, 2005, the court granted a motion filed by WMATA to
dismiss Transcom's claim. However, Transcom and WMATA have entered into
and are continuing settlement negotiations to resolve the ongoing
dispute. As of March 31, 2005 an accrual of $409 has been recorded on
the balance sheet reflecting the current amount owed to WMATA under the
license agreement.
13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 8 - DEBT FOR EQUITY EXCHANGE
As a condition to the closing of the acquisition of Neon, Globix
exchanged $12.5 million in principal and accrued interest on its 11%
senior notes in exchange for 4,545,455 shares of its common stock in
private transactions pursuant to separate securities exchange
agreements with certain holders of the 11% senior notes. LC Capital
Master Fund Ltd., an entity affiliated with Steven Lampe, a member of
the Board of Directors of Globix, exchanged $1.25 million in 11% senior
notes for 454,545 shares of common stock. This exchange resulted in a
loss of $3.2 million in the quarter ended March 31, 2005. Globix has
agreed to file a registration statement covering the sale of the common
stock issued in the debt for equity exchange.
NOTE 9- PREFERRED STOCK
Globix has designated 4,500,000 shares of 6% Series A Cumulative
Convertible Preferred Stock ("preferred stock"), of which 2,971,753
shares were issued in the acquisition of Neon. Each share of preferred
stock is convertible into one share of common stock at the option of
the holder, is entitled to one vote, has a liquidation preference of
$3.60 per share plus accrued dividends, and is senior to the common
stock of Globix. Dividends are payable semi-annually at a rate of $0.11
per share when and if declared by the Board of Directors. At the option
of Globix, dividends are payable in cash or additional shares of
preferred stock. At the option of Globix, shares of preferred stock can
be redeemed in whole or in part at $3.82 per share, plus accrued
dividends, in 2006, $3.71 per share, plus accrued dividends, in 2007
and $3.60 per share, plus accrued dividends, thereafter. In the event
of a change of control, as defined, each holder of preferred stock can
require Globix to purchase such holder's shares of preferred stock for
a price equal to $3.64 plus accrued and unpaid dividends to the
purchase date.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Form 10-Q, under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Quantitative and Qualitative Disclosures about Market Risk," and "Legal
Proceedings," constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve risks, uncertainties and other factors, which may cause the
actual results of the Company to differ materially from the results anticipated
by such forward-looking statements. Forward-looking statements are identified by
the use of forward looking words or phrases such as "anticipates," "intends,"
"expects," "believes," "estimates," or words or phrases of similar import.
Statements looking forward beyond fiscal 2005 are subject to greater uncertainty
because of the increased likelihood of changes in underlying factors and
assumptions. Actual results could differ materially from those anticipated by
the forward-looking statements. Among these factors are the Company's high
degree of leverage and history of operating losses, its ability to retain
existing customers and attract new customers, its ability to achieve
cost-savings and generate positive cash flow, its ability to integrate
successfully the operations of Neon and achieve synergies through the
combination of the two companies, and the ability of Neon to operate its fiber
optic network in a cost effective manner, as well as risks associated with
potential acquisitions and divestitures and other factors affecting the
Company's business generally. Such factors are more fully described herein and
in the Company's Annual Report on Form 10-K for the year ended September 30,
2004, which should be considered in connection with a review of this report.
Additional risk factors that should be considered concerning the Company and its
wholly-owned subsidiary, Neon, are described in the section entitled "Risk
Factors" in the Company's Registration Statement on Form S-4 filed with respect
to the acquisition of Neon. For a general discussion of risks affecting the
business of the Company and Neon, see "Risk Factors" in the Company's Annual
Report on Form 10-K for the year ended September 30, 2004 and the Company's
Registration Statement on Form S-4 filed with respect to the acquisition of
Neon.
OVERVIEW: OUR BUSINESS STRATEGY
We are a provider of Internet services for small to large size businesses in a
broad range of industries. Through our wholly owned Neon subsidiary, we also own
and operate a high bandwidth fiber optic network, extending from Portland, ME to
Washington, DC.
Globix was founded in 1989 and in 1998 undertook a major expansion plan in order
to pursue opportunities resulting from the growth of the Internet. On March 1,
2002, Globix filed a voluntary petition under Chapter 11 of the United States
Bankruptcy Code, together with a 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. For additional information
about our reorganization, see "Our Chapter 11 Bankruptcy Reorganization" under
Part I in our Annual Report on Form 10-K for the year ended September 30, 2004.
Since Globix emerged from bankruptcy reorganization in April 2002, its
management has actively reviewed various strategies for increasing stockholder
value. A key objective has been to redress the imbalance between revenues and
costs that has historically been a feature of Globix's business, by increasing
the revenue base and by cutting costs. A second objective has been to reduce
leverage by buying back or paying off higher cost indebtedness.
Globix has attempted to address customer churn, industry-wide price competition
and price decreases in its traditional offerings of hosting and network services
by broadening the range of services it offers through the addition of value
added services as part of its managed services business. By focusing on
providing value added services Globix believes it will be able to increase its
monthly recurring revenue per customer or average revenue per unit (ARPU). We
calculate ARPU by dividing our average contracted monthly recurring revenue for
the period by our average number of contracted customers during the period. In
the Globix business segment, during the three-month period ended March 31, 2005
our total number of customers remained stable, while our ARPU increased to
approximately $3.7 thousand as of March 31, 2005 compared to approximately $3.4
15
thousand as of September 30, 2004. In the Globix segments, our monthly positive
change in contract rate (negative churn) averaged 0.9% during the three month
period ended March 31, 2005 compared to a monthly average negative churn rate of
0.3% in the fiscal year ended September 30, 2004. These improvements in ARPU and
churn reflect the continuation during fiscal 2005 of the business trends we
experienced in fiscal 2004. We define churn as contractual revenue losses as a
percentage of total contractual revenue due to customer cancellations and
downgrades, net of upgrades, and additions of new services.
Growth through acquisition offers the possibility of revenue growth and the
expansion of service offerings, to enable Globix to offer a broader range of
services to compete more effectively, while providing a larger revenue base to
support Globix's existing indebtedness. The ability to achieve operating
efficiencies by combining administrative or other functions has also been a
consideration in reviewing possible acquisitions. In addition, market conditions
have made it possible to acquire related businesses at what are perceived to be
relatively low prices. In pursuing its acquisition strategy, Globix has reviewed
potential transactions involving smaller companies, like Aptegrity, Inc., whose
acquisition gradually expands the range of services that Globix provides, as
well as larger companies, such as Neon, that could significantly increase the
size of Globix's business and enhance its ability to compete against much larger
competitors.
In order to increase its operating flexibility and address concerns about its
long term financial viability, Globix has also attempted to decrease its
indebtedness through the repurchase of its 11% senior notes and the repurchase
or early payment of other financial obligations.
On March 7, 2005, Globix completed its acquisition of all of the capital stock
of Neon in exchange for common and preferred stock of Globix and approximately
$5.3 million in cash. Simultaneously with the closing of the acquisition, we
exchanged $12.5 million in principal and interest on our 11% senior notes for
4,545,455 shares of common stock.
Neon owns and operates a high bandwidth fiber optic network, extending from
Portland, ME to Washington, DC. Through this network Neon provides metro and
intercity communications coverage, as well as co-location space, to local and
long distance telecommunications carriers and a small number of non-carrier
customers, including universities, colleges, and financial institutions, in
various markets in the Northeast and mid-Atlantic regions.
The quarter ended March 31, 2005 reflects $3.2 million of revenue associated
with the Neon segment from the date of the acquisition. On a pro-forma basis,
Neon's revenue for the full month of March was $4.2 million. Neon's revenue for
the six month period ended March 31, 2005 was $24.6 million an increase of 10.3%
or $2.3 million from $22.3 million for the six-month period ended March 31,
2004. Neon's revenue for the three month period ended March 31, 2005 was $12.3
million an increase of 6% or $.7 million from $11.6 million for the three month
period ended March 31, 2004.
Although the acquisition of Neon and the debt-for-equity exchange have increased
our revenues and asset base and reduced the total amount of our indebtedness, we
remain highly leveraged. On May 1, 2005, we elected to pay annual accrued
interest of approximately $6.7 million on the 11% senior notes through the
issuance of additional notes.
Like Globix, Neon has a history of operating losses. In addition, Neon may need
to expand its network and invest in its infrastructure in order to take
advantage of opportunities in the telecommunications industry. Accordingly, we
may need to seek additional financing and achieve greater efficiencies in
operations in order to attain our goals.
OVERVIEW: OUR MAJOR SERVICE LINES
Although the Company operates in two operating segments, there are 6 major
service lines as follows:
INTERNET HOSTING AND CO-LOCATION - We offer co-location solutions for
customers who choose to own and maintain their own servers and or optronics, but
require the physically secure, climate-controlled environment provided by our
data centers and connectivity to our network. We offer hosting services in a
dedicated server environment. This service includes providing hardware usage,
bandwidth and managed services to meet customer-specific needs.
MANAGED SERVICES - We provide managed application, system, network and
media services to our hosting and co-location customers. Such services include a
wide variety of maintenance, administration and problem resolution services for
many popular operating systems, Internet network devices, software security
solutions, web-based applications, as well as streaming media delivered in a
streaming or continuous fashion over the Internet or over a company's intranet.
16
NETWORK SERVICES AND INTERNET ACCESS - We provide access to our network
for our hosting and co-location customers located inside of our Internet data
centers as well as Internet access services which provide businesses with
high-speed continuous access to the Internet from their own premises. In
addition, we provide other services, such as domain name registration, local
loop provisioning, Internet address assignment, router configuration, e-mail
configuration and management and technical consulting services.
LIT FIBER SERVICES (TRANSPORT SERVICES) - Lit Fiber Services (Transport
Services) - We provide dedicated, point-to-point services provided over fiber
optic transmission lines that have electronic or optronic equipment installed
and maintained by Neon. Specific service offerings include: SONET Private Line
services at bandwidth levels including DS-3, OC-3, OC-12 and OC-48; Wavelength
(DWDM) services enabling flexible and scalable high capacity transport at 2.5
and 10 Gbps, configured as either protected or unprotected wavelengths; and
Ethernet services via dedicated, point-to-point connectivity offered as Fast
Ethernet (FastE) at 50 or 100 Mbps and Gigabit Ethernet (GigE) at 600 or 1000
Gbps.
DARK FIBER SERVICES We lease fiber cable in our fiber optic network
running from Portland, ME to Washington, DC. The fiber cable is leased without
electronic or optronic equipment installed by Neon.
OTHER - Hardware and software sales and other non-recurring revenue
from our Globix segment. Hardware and software sales are typically tied to
agreements to provide a customer recurring services such as hosting, network
services, managed services and etc.
For a more detailed description of these service lines see "Business" section in
our 2004 Form 10-K and "Information about NEON" in the registration statement on
Form S-4 filed with respect to the acquisition of Neon.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our interim consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of our financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities. We base
our accounting estimates on historical experience and other factors that are
believed to be reasonable under the circumstances. However, actual results may
vary from these estimates under different assumptions or conditions. The
following is a summary of our critical accounting policies and estimates:
REVENUE RECOGNITION
Revenue consists primarily of Internet hosting, co-location, managed services,
network services, internet access, lit fiber services and dark fiber services
We recognize revenue in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin ("SAB"), No. 104 "Revenue Recognition" which revises
and rescinds certain sections of SAB No. 101, "Revenue Recognition". The changes
noted in SAB 104 did not have a material effect on Globix's consolidated
financial statements.
The Globix business segment (Internet services) recognizes revenue when delivery
has occurred, persuasive evidence of an agreement exists, the fee is fixed or
determinable and collectability is probable. SAB No. 104 expresses the view of
the Securities and Exchange Commission's staff in applying accounting principles
generally accepted in the United States of America to certain revenue
recognition issues. Under the provisions of SAB No. 104, set up and installation
revenue are deferred and recognized over the estimated length of the customer
relationship, which in the case of our Globix segment is approximately 36
months. Prior to April 30, 2002, the estimated length of the customer
relationship was 12-18 months. Monthly service revenue under recurring
agreements related to Internet hosting, co-location, network services, Internet
access and managed services is recognized over the period that service is
provided. Revenue derived from project or event type managed service engagements
is recognized over the life of the engagement. Payments received in advance of
providing services are deferred until the period that these services are
provided.
The Neon business segment (primarily fiber optic network services) offers leases
of lit fiber (fixed amounts of capacity on fiber optic transmission lines that
use optronics equipment installed by us) and longer term leases of dark fiber
(fiber optic transmission lines leased without optronics equipment installed by
us) at fixed cost pricing over multi year terms. Revenues from fiber optic
network services are recognized ratably over the term of the applicable lease
agreements with customers, which range from one to 20 years, provided there
17
exists persuasive evidence of an arrangement, the fee is fixed or determinable
and collectbility of the related receivables is reasonably assured. Amounts
billed in advance of the service provided are recorded as deferred revenue. We
also lease space to customers at our co-location facilities. Revenues from
nonrecurring installation charges and design, engineering and construction
services are recognized ratably over the multi-year network services terms to
which the nonrecurring charges relate provided there exists persuasive evidence
of an arrangement, the fee is fixed or determinable and collectability of the
related receivables is reasonably assured.
COST OF REVENUE
Cost of revenue for Internet services consists primarily of telecommunications
costs for Internet access and managed hosting, payroll and occupancy which we
incur in support of our network operations, systems and customer services and
the cost of hardware and software purchased for resale to customers. Payroll
costs allocated to cost of revenue are based on the primary activity of the
department such as maintaining the network, customer support and systems
operations. Occupancy costs allocated to cost of revenue are based primarily on
the square footage of our various facilities. Cost of revenue excludes
depreciation and amortization. Telecommunications costs include the cost of
providing local loop for connecting dedicated access customers to Globix's
network, leased line and associated costs related to connecting with Globix's
peering partners and costs associated with leased lines connecting Globix's
facilities to its backbone and aggregation points of presence.
Cost of revenue for Fiber services consists primarily of right of way fees, dark
fiber leases, real estate and collocation leases, last mile circuit leases and
network operations and maintenance costs. Right of way fees are paid primarily
to utilities and public and private entities for the right to place fiber optic
cable on their structures and property. Fiber leases are fees paid to other
telecommunications providers for the use of their dark fiber over which we
provide transport services. We lease real estate and collocation space to allow
placement of optronics equipment to power our network. Last mile circuit leases
consist of services from other carriers and local phone companies to extend
transport services beyond our network to a customer location. Network operations
and maintenance consists primarily of labor, contractor services and utility
costs.
INTANGIBLE ASSETS
We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets" when we emerged from bankruptcy in April 2002. SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS No. 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. SFAS
No. 142 provides that intangible assets with indefinite lives and goodwill will
not be amortized but, will be tested at least annually for impairment. If an
impairment is indicated then the asset will be written down to its fair value
typically based upon its future expected discounted cash flows.
Our intangible assets are as follows
o trademarks and trade name;
o backlog
o network build-out/know-how; and
o customer contracts and relationships.
We amortize intangible assets by the straight-line method over their estimated
useful lives. Trademarks and trade name are amortized over a period of 7-15
years, backlog over a period of 10 years, network build-out/know-how is
amortized over 8 years and the customer contracts and relationships are
amortized over 2-10 years.
ESTIMATES
The preparation of financial statements in accordance with U.S. generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amount of assets, liabilities, revenue and expenses and
related disclosure of contingent assets and liabilities. Use of estimates and
assumptions include, but is not limited to, purchase price allocation, allowance
for doubtful accounts, credit reserve, the useful lives and ultimate
18
realizability of property, equipment, intangible assets, deferred tax valuation
allowance and payroll and occupancy cost allocation between cost of revenue and
selling, general and administrative expenses. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. Actual results may vary from these
estimates under different assumptions or conditions.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CREDIT RESERVE
At each reporting period we evaluate on a specific basis the economic condition
of our customers and their ability and intent to pay their debt. If such
evaluation shows that it is probable that a customer will not settle his full
obligation, a reserve against accounts receivable in general and administrative
expense is recorded for the questionable amount. We also maintain a general bad
debt reserve, which is based on the aging of our customers' receivables. In
addition, during each reporting period we must make estimates of potential
future credits, which will be issued in respect of current revenues. We analyze
historical credits and changes in customer demands regarding our current
billings when evaluating credit reserves. If such analysis shows that it is
probable that a credit will be issued, we reserve the estimated credit amount
against revenues in the current period. As of March 31, 2005 and September 30,
2004 the balance of bad debt reserve amounted to approximately $1.6 million and
$2.2 million, respectively.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial statements we are
required to estimate our income tax expense in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as accruals and reserves, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. Management currently estimates that it is more
likely than not that these assets will not be realized in the foreseeable future
and accordingly a 100% valuation allowance is recorded against the deferred tax
assets.
RESTATEMENT
The Company restated its previous presentation of cost of revenue and selling,
general and administrative costs for fiscal year 2004 by allocating certain
payroll and occupancy expenses previously included under selling general and
administrative expenses to cost of revenue. See Note 2 to our financial
statements.
QUARTER ENDED MARCH 31, 2005 COMPARED TO THE QUARTER ENDED MARCH 31, 2004
(RESTATED)
REVENUE, NET. Revenue for the three-month period ended March 31, 2005 increased
33.3% or approximately $5.0 million to $20.0 million from $15.0 million for the
three-month period ended March 31, 2004. Excluding $3.2 million of revenue
generated as a direct result of the Neon acquisition, revenue for the
three-month period ended March 31, 2005 increased by 11.9% or approximately $1.8
million compared to the three-month period ended March 31, 2004.
During the quarter ended March 31, 2005 (excluding the impact of the Neon
acquisition) our monthly positive change in contract rate (negative churn)
averaged 0.9% compared to a monthly average negative change in contract rate
(churn) of 1.3% in the quarter ended March 31, 2004. Excluding the impact of the
Neon acquisition, during the quarter ended March 31, 2005, new contracts
averaged 1.3% per month and contract upgrades averaged 2.8% per month, offset by
a 2.2% monthly average in contract downgrades and a 1.0% average in contract
cancellations per month. We define churn as contractual revenue losses as a
percentage of total contractual revenue due to customer cancellations and
downgrades, net of upgrades, and additions of new services. Cancellations refer
to customers that have either stopped using our services completely or remained
a customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price.
Excluding the impact of the Neon acquisition, during the quarter ended March 31,
2005, our monthly recurring revenue per customer (ARPU) averaged approximately
$3.6 thousand compared to an average ARPU of approximately $3.3 thousand in the
quarter ended March 31, 2004, despite a decrease of approximately 83 customers
or 6% from 1,418 customers in March 31, 2004 to 1,335 at March 31, 2005. This is
due mainly to our focus on higher-revenue managed services customers following
the acquisition of Aptegrity. We calculate ARPU by dividing our average
contracted monthly recurring revenue for the period by our average number of
contracted customers during the period.
19
Revenue breakdown for the major service lines are as follows. Revenue from
Internet Hosting and Co-Location increased by $645 thousand or 11.1% to $6.4
million in the quarter ended March 31, 2005 compared to $5.8 million in the same
period in fiscal year 2004. Revenue from Network Services and Internet Access
decreased by $472 thousand or 10% to $4.0 million in second fiscal quarter of
2005 compared to $4.5 million in the second fiscal quarter of 2004. The changes
in these two major service lines are mainly due to churn and the inclusion of
Neon's Co-Location revenue in month of March 2005. Revenue from Hardware and
Software Sales and Other increased by $794 thousand to $0.9 million in the
three-month period ended March 31, 2005 compared to $96 thousand in the same
period in fiscal year 2004, primarily due to an increase in Hardware sales.
Revenue from Managed Services increased by $914 thousand or 19.7% to $5.5
million in the three-month period ended March 31, 2005 compared to $4.6 million
in the same period in fiscal 2004. This increase is the direct result of our
continued focus on adding value-added services through our Managed Services line
of business. The above analysis includes the positive effect of foreign exchange
rates between the U.S. dollar and the British Pound in the amount of
approximately $190 thousand on our revenue for the quarter ended March 31, 2005
over the quarter ended March 31, 2004.
Revenue from Lit and Dark Fiber Services was $2.8 million and $343 thousand
respectively for the quarter ended March 31, 2005.
COST OF REVENUE. Cost of revenue for the quarter ended March 31, 2005 increased
to $11.4 million from $8.7 million in the quarter ended March 31, 2004. $1.8
million of the increase is the direct result of our acquisition of Neon on March
7, 2005. The remaining increase of approximately $0.9 million was directly
attributable to our increase in hardware sales quarter over quarter. In
addition, our cost of revenue increased by approximately $360 thousand during
the quarter ended March 31, 2005 compared to the quarter ended March 31, 2004
due to higher occupancy costs as a result of higher utility costs. These
increases were offset partly by approximately $150 thousand decrease in our
network cost resulting from our continued focus on deriving efficiencies and
cost savings from our network. Our gross margins including the impact of the
Neon acquisition for the three month period ended March 31, 2005 and 2004 were
43.0% and 42.2% respectively. Foreign exchange rates between the U.S. dollar and
the British Pound did not have a material effect on the aforementioned analysis.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $9.2 million as compared to $7.0 million for the quarters ended
March 31, 2005 and 2004 respectively. This increase included $1.1 million of
selling, general and administrative expenses for Neon. The remaining increase of
$1.1 million is primarily the result of a litigation settlement resulting in
$0.8 million of expense in the quarter ended March 31, 2005. In addition as a
result of our increased sales, commission expense increased by approximately
$200 thousand in the quarter ended March 31, 2005. These increases were offset
in part by a $202 thousand decrease in bad debt expenses to $39 thousand for the
quarter ended March 31, 2005, as a result of our continuing improvement in
collections, reduction in the number of high risk customer account receivable
balances and as a result of collection of previously written-off balances.
Foreign exchange rates between the U.S. dollar and the British Pound did not
have a material effect on the aforementioned analysis.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the
three month period ended March 31, 2005 were $4.5 million compared to $3.5
million in the same quarter in fiscal year 2004. This increase of $1.0 million
is primarily the result of the acquisition of Neon. For the quarter ended March
31, 2005 $846 thousand of depreciation and amortization expense was recorded as
a result of the Neon acquisition.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the quarter
ended March 31, 2005 was $2.4 million, compared to $3.1 million for the quarter
ended March 31, 2004, as a result of our lower average outstanding balance of
the 11% senior notes during the three month period ended March 31, 2005 compared
to the same period in 2004.
INTEREST INCOME. Interest income for the quarter ended March 31, 2005 was $102
thousand, compared to $137 thousand for the quarter ended March 31, 2004. The
decrease was primarily due to a decrease in our cash and investments.
OTHER INCOME/EXPENSE, NET. Other expense for the quarter ended March 31, 2005
was $784 thousand, compared to other income of $899 thousand for the quarter
ended March 31, 2004. The expense in the quarter ended March 31, 2005 is
primarily the result of the recognition of a loss of $913 thousand on the sale
of marketable securities during the quarter.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors
described above, we reported net loss of $11.3 million, or $0.45 basic and
diluted loss per share for the three month period ended March 31, 2005, as
compared to a net loss of $6.9 million, or $0.42 basic and diluted loss per
share for the same period in 2004.
SIX MONTHS ENDED MARCH 31, 2005 COMPARED TO THE SIX MONTHS ENDED MARCH 31, 2004
(RESTATED)
20
REVENUE, NET. Revenue for the six-month period ended March 31, 2005 increased
24.3% or approximately $7.2 million to $36.6 million from $29.4 million for the
six-month period ended March 31, 2004. Excluding $3.2 million of revenue as a
direct result of the Neon acquisition, revenue for the three-month period ended
March 31, 2005 increased by 13.3% or approximately $3.9 million compared to the
six-month period ended March 31, 2004.
During the six-months ended March 31, 2005 (excluding the affect of the Neon
acquisition) our monthly positive change in contract rate (negative churn)
averaged 1.0% compared to a monthly average positive change in contract rate
(negative churn) of 0.6% in the six-months ended March 31, 2004. During the
six-months ended March 31, 2005, new contracts averaged 1.3% per month and
contract upgrades averaged 2.6% per month, offset by a 1.6% monthly average in
contract downgrades and a 1.0% average in contract cancellations per month. We
define churn as contractual revenue losses as a percentage of total contractual
revenue due to customer cancellations and downgrades, net of upgrades, and
additions of new services. Cancellations refer to customers that have either
stopped using our services completely or remained a customer but terminated a
particular service. Downgrades are a result of customers taking less of a
particular service or renewing their contract for identical services at a lower
price.
Excluding revenue associated with the Neon acquisition during the six-months
ended March 31, 2005, our monthly recurring revenue per customer (ARPU) averaged
approximately $3.6 thousand compared to an average ARPU of approximately $3.2
thousand in the six-months ended March 31, 2004, despite a decrease of
approximately 83 customers or 6% from 1,418 customers in March 31, 2004 to 1,335
at March 31, 2005. This is due mainly to our focus on higher-revenue managed
services customers following the acquisition of Aptegrity. We calculate ARPU by
dividing our average contracted monthly recurring revenue for the period by our
average number of contracted customers during the period.
Revenue breakdown for the major service lines are as follows. Revenue from
Internet Hosting and Co-Location increased by $760 thousand or 6.5% to $12.5
million in the six-months ended March 31, 2005 compared to $11.7 million in the
same period in fiscal year 2004. Revenue from Network Services and Internet
Access decreased by $718 thousand or 8.2% to $8.0 million in the six-months
ended March 31, 2005 compared to $8.7 million in the same period of fiscal year
2004. The changes in these two major service lines are mainly due to churn and
the inclusion of Neon's Co-Location revenue in the month of March 2005. Revenue
from Hardware and Software Sales and Other increased by $1.8 million to $1.9
million in the six-month period ended March 31, 2005 compared to $130 thousand
in the same period in fiscal year 2004, which resulted primarily from an
increase in Hardware sales. Revenue from Managed Services increased by $2.2
million or 24.6% to $11.0 million in the six-month period ended March 31, 2005
compared to $8.8 million in the same period in fiscal 2004. This increase is the
direct result of the acquisition of Aptegrity, which was included in our
statement of operation from November 1, 2003 and our continued focus on adding
value-added services through our Managed Services line of business. The above
analysis includes the positive effect of foreign exchange rates between the U.S.
dollar and the British Pound in the amount of approximately $743 thousand on our
revenue for the six-months ended March 31, 2005 over the six-months ended March
31, 2004.
Revenue from Lit and Dark Fiber Services were $2.8 million and $343 thousand
respectively for the six months ended March 31, 2005.
COST OF REVENUE. Cost of revenue for the six-months ended March 31, 2005,
increased to $21.1 million from $17.1 million in the six-months ended March 31,
2004. $1.8 million of the increase is the direct result of our acquisition of
Neon on March 7, 2005. The remaining increase of approximately $2.2 million was
primarily attributable to our increase in hardware sales period over period
resulting in a $1.6 million increase in expense. In addition, our cost of
revenue increased by approximately $640 thousand due to increased occupancy
expenses as a result of higher utility costs during the six-months ended March
31, 2005 compared to the quarter ended March 31, 2004. Labor costs were also up
by approximately $220 thousand in comparison to the prior year, mainly due to
the acquisition of Aptegrity, which occurred on October 31, 2003, and due to our
continued focus on managed services. These increases were offset partly by
approximately $580 thousand decrease in our network cost resulting from our
continued focus on deriving efficiencies and cost savings from our network. Our
gross margins including the impact of the Neon acquisition for the six-month
period ended March 31, 2005 and 2004 were 42.2% and 41.8% respectively. Foreign
exchange rates between the U.S. dollar and the British Pound did not have a
material effect on the aforementioned analysis.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $16.5 million as compared to $14.4 million for the six-months
ended March 31, 2005 and 2004 respectively. This increase included $1.1 million
of selling, general and administrative expenses for Neon. The remaining increase
of $1.0 million is primarily the result of a litigation settlement resulting in
$0.8 million of expense in the six-months ended March 31, 2005. In addition as a
result of our increased sales, commission expense increased by approximately
$567 thousand in the six-months ended March 31, 2005. These increases were
offset in part by a $544 thousand decrease in bad debt expenses in the
six-months ended March 31, 2005 compared to the six-months need March 31, 2004,
as a result of our continuing improvement in collections, reduction in the
21
number of high risk customer account receivable balances and as a result of
collection of previously written-off balances. The above analysis includes the
negative effect of foreign exchange rates between the U.S. dollar and the
British Pound in the amount of approximately $394 thousand on our selling,
general and administrative expenses for the six-months ended March 31, 2005 over
the six-months ended March 31, 2004.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the
six-month period ended March 31, 2005 were $8.0 million compared to $6.8 million
in the same period in fiscal year 2004. This increase of $1.2 million is
primarily the result of the acquisition of Neon. For the six months ended March
31, 2005 $846 thousand of depreciation and amortization expense was recorded as
a result of the Neon acquisition.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the six
months ended March 31, 2005 was $4.8 million, compared to $6.5 million for the
six-months ended March 31, 2004, as a result of our lower average outstanding
balance of the 11% senior notes during the six-month period ended March 31, 2005
compared to the same period in 2004.
INTEREST INCOME. Interest income for the six months ended March 31, 2005 was
$228 thousand, compared to $316 thousand for the six-months ended March 31,
2004. The decrease was primarily due to a decrease in our cash and investments.
OTHER INCOME/EXPENSE, NET. Other expense for the six-months ended March 31, 2005
was $673 thousand, compared to other income of $1.2 million for the six-months
ended March 31, 2004. This difference is primarily the result of the recognition
of a loss of $913 thousand on the sale of marketable securities during the
six-month period ended March 31, 2005.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors
described above, we reported net loss of $17.5 million, or $0.85 basic and
diluted loss per share for the six-month period ended March 31, 2005, as
compared to a net loss of $30.2 million, or $1.84 basic and diluted loss per
share for the same period in 2004.
LIQUIDITY AND CAPITAL RESOURCES
Historically our cost structure exceeded our revenue base mainly due to high
labor costs resulting from higher than necessary head count, significant level
of overhead due to numerous locations and overlapping within our network. This
has led us historically to experience negative cash flows from operations and
incur net losses. Our management believes that steps taken as part of our
restructuring efforts to reduce facilities and personnel, combined with our
ongoing efforts to derive efficiencies from our network, have reduced our cash
outflows to a level that meets our current revenue rate. Our ability to generate
positive cash flows from operations and achieve profitability is dependent upon
our ability to grow our revenue while maintaining our current cost structure and
network efficiencies. Management believes that by maintaining a monthly positive
change in contract rate (negative churn), by continuing to focus on providing
managed services solutions and by keeping close control over costs and
expenditures it will be able to meet its revenue and profitability targets.
Additionally, since emerging from bankruptcy our management has taken several
significant steps to reduce our level of outstanding indebtedness and is
committed to further reducing our financial obligations by settling them in
cash, exchange them for equity instruments, refinancing or any other manner that
may be beneficial to us. The indenture governing our 11% senior notes permits
interest to be paid in kind in 2005 and 2006 at the discretion of our board of
directors. On April 25, 2005 the Globix Board of Directors elected to pay
interest in kind for 2005.
As of March 31, 2005 our cash and cash equivalent, short-term and long-term
investments amounted to approximately $17.2 million. In addition during the
six-month period ended March 31, 2005 we used approximately $1.7 million in
operating activities, an improvement of approximately $2.7 million in comparison
to cash used in operations of $4.4 million in the same period in 2004. We
believe that the aforementioned cash outflow represents our recurring cash-flow
activities following the complete consummation of our plan of reorganization and
under our current cost structure. We further believe that this cash and
investments are sufficient to meet our fiscal 2005 anticipated day to day
operating expenses, commitments, working capital and capital expenditures.
However, in the longer term there can be no assurance that we will be successful
in achieving sufficient profitability, attracting new customers, maintaining our
existing churn levels or reducing our outstanding indebtedness. In addition, in
the future, we may make acquisitions or repurchase indebtedness of our company,
which, in turn, may adversely affect our liquidity. In such cases management
will have to take drastic steps to reduce the Company's operating expenses to
meet its revenue base and liquidity needs. Such steps may include further
reduction of our headcount, consolidation or elimination of facilities,
termination of low margin customers and negotiating with our creditors to
restructure our indebtedness, mainly but not limited to our 11% senior notes.
22
OPERATING ACTIVITIES:
During the six month period ended March 31, 2005, net cash used in operating
activities was approximately $1.7 million in comparison to $4.4 million, which
was used in operating activities during the same period in 2004. The improvement
in our cash outflow is due mainly to the decrease in our loss from operations
excluding depreciation and amortization and loss on impairment of assets. As
part of our normal course of doing business we experienced changes in our
accounts receivable, accounts payable, accrued liabilities and accrued interest,
which in the aggregate did not have a material effect on our first six months of
fiscal 2005 operating cash-flow.
INVESTING ACTIVITIES:
Net cash used in investing activities during the six month period ended March
31, 2005 was $1.2 million. Approximately $6.2 million was used for capital
expenditures, offset by proceeds of $2.7 million from the acquisition of Neon
along with proceeds of $2.3 million from the sale and maturity of certain
marketable securities and financial investments.
FINANCING ACTIVITIES:
Net cash used in financing activities during the six month period ended March
31, 2005 was $307 thousand and was used for paying our scheduled mortgage and
capital lease payments.
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At March 31, 2005, investments consisted of primarily a limited partnership that
invests in fixed income securities and fixed rate investment grade and
government securities denominated in U.S. dollars. At March 31, 2005, the
majority of our investments were due to mature within twelve months and the
carrying value of these investments approximated fair value.
At March 31, 2005, $12.4 million of our cash and investments were restricted in
accordance with the terms of certain collateral obligations.
We are also subject to market risk associated with foreign currency
exchange rates. To date, we have not utilized financial instruments to minimize
our exposure to foreign currency fluctuations. We will continue to analyze risk
management strategies to minimize foreign currency exchange risk in the future.
The Company believes that an immediate increase or decrease of 5% of the U.S.
Dollar in comparison to the British Pound would not have a material impact on
its operating results or cash flows.
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 changes in interest rates due
mainly to the short-term nature of the majority of our investment portfolio. An
increase or decrease in interest rates would not significantly increase or
decrease interest expense on debt obligations, due to the fixed nature of the
substantial majority of our debt obligations.
ITEM 4. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our reports under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of March 31, 2005. Based upon that
evaluation and subject to the foregoing, our Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of our disclosure
controls and procedures provided reasonable assurance that the disclosure
controls and procedures are effective to accomplish their objectives.
INTERNAL CONTROLS. In February 2005, the Company determined to reclassify
certain payroll and occupancy expense incurred in support of the Company's
network operations, network operations, systems and customer services as cost of
revenue rather than selling, general and administrative expenses for fiscal year
2003 and thereafter, as explained in Note 2 to the financial statements. On
March 7, 2005, Globix completed its acquisition of Neon. As a result of the
acquisition the Company is in the process of integrating Neon and its processes
into Globix's operations and system of internal controls. There were no other
changes in the Company's internal control over financial reporting that occurred
during the Company's most recent fiscal quarter that materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
24
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
>From time to time, the Company is involved in legal proceedings in the ordinary
course of our business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which the Company is a party, the
Company does not believe, based on currently available information, that the
ultimate liabilities, if any, arising from any such legal proceedings would have
a material adverse impact on our business, financial condition, results of
operations or cash flows.
On November 12, 2003, we were served with a complaint filed in the United States
Court for Southern District of New York, entitled Alfred G. Binford v. Globix
Corporation, alleging breach of contract claims related to the failure to make
payments under an employment letter, as amended, seeking damages in the amount
of $2,113. On March 4, 2005, we entered into a settlement agreement with Mr.
Binford pursuant to which we paid him $750 in cash, $100 of which was reimbursed
by our insurance carrier, and agreed to issue him 100,000 shares of common stock
resulting in approximately $800 of expense in the quarter ended March 31, 2005.
On August 12, 2004, the United States District Court for the Southern District
of New York approved the settlement of a class action lawsuit entitled In re
Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as
defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a
director of Globix) and Brian Reach, and asserted claims under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 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. The lawsuit alleged that the
defendants had failed to disclose the true state of the Company's financial
condition during this period. Under the settlement, the Company paid $3,500,000
(all of which was covered by insurance) to settle all claims against it. A
motion for reconsideration of the fee award filed by those plaintiffs' law firms
whose fees were not included in the settlement was rejected by the court in
February 2005.
On November 9, 2004, NEON Transcom, Inc. ("Transcom"), a wholly owned subsidiary
of NEON, filed a suit against the Washington Metropolitan Area Transit Authority
("WMATA") in the United States District Court for the District of Columbia
seeking a declaratory judgment that the annual fees provided for under a license
agreement violate the Telecommunications Act of 1996 and further seeking an
injunction preventing WMATA from requiring payment of the fees and holding
Transcom in default under its License Agreement, dated October 5, 1999. On
February 11, 2005, the court granted a motion filed by WMATA to dismiss
Transcom's claim. However, Transcom and WMATA have entered into and are
continuing settlement negotiations to resolve the ongoing dispute. As of March
31, 2005 an accrual of $409 has been recorded on the balance sheet reflecting
the current amount owed to WMATA under the license agreement.
Other than as described above, there have been no developments since the prior
descriptions in Note 18 to the Consolidated Financial Statements in the 2004
Form 10-K, and the "Legal Proceedings" section thereto.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
On March 9, 2005, Globix issued to Alfred G. Binford 97,000 shares of common
stock in a private transaction exempt from registration under Section 4(2) of
the Securities Act of 1933 in partial settlement of litigation brought by Mr.
Binford against Globix.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 7, 2005, Globix held a special meeting of stockholders for the purpose
of voting on a proposal to issue shares of common stock in exchange for common
stock of Neon in accordance with the Agreement and Plan of Merger between Globix
and Neon. The following shares were voted at the meeting:
Shares voted in favor of the issuance of common stock in the merger: 12,146,582
Shares voted against the issuance of common stock in the merger: 0
25
Abstentions: 0
Shares not voted: 3,919,366
ITEM 5. OTHER INFORMATION
Effective May 15, 2005, Globix entered into an Agreement with Communications
Technology Advisors LLC ("CTA"), pursuant to which CTA has agreed to provide
certain advisory services to Globix, including assistance with the integration
of the Neon acquisition, financing and acquisitions, in exchange for a monthly
fee of $120,000. In the event that Globix consummates an acquisition, Globix has
agreed to consider whether CTA is entitled to an additional success fee. Wayne
Barr, Jr., a principal of CTA, is a member of the Board of Directors of Globix.
A copy of the Agreement with CTA is included as Exhibit 10.1 hereto and
incorporated herein by reference.
ITEM 6. EXHIBITS
(a) Exhibits
Exhibit Description
------- -----------
10.1 Agreement, effective May 15, 2005, between Globix and
Communications Technology Advisors LLC
31.1 Certification of Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOBIX CORPORATION
By: /s/ Peter K. Stevenson
--------------------------------------------
Peter K. Stevenson, President,
Chief Executive Officer
Date: May 13 , 2005
By: /s/ Robert M. Dennerlein
--------------------------------------------
Robert M. Dennerlein,
Chief Financial Officer
(principal financial and accounting officer)
Date: May 13, 2005
26