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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 December 31, 2003
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 and
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 January
31, 2004 was 16,460,000.
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GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Page
----
Part I Financial Information
Item 1 Consolidated Balance Sheets -- As of December 31, 2003 and September 30, 2003............................ 1
Interim Consolidated Statements of Operations -- For the Three Months Ended December 31, 2003 and for
the Three Months Ended December 31, 2002 ............................................................... 2
Interim Consolidated Statements of Cash-Flows -- For the Three Months Ended December 31, 2003 and for
the Three Months Ended December 31, 2002 ............................................................... 3
Notes to the Interim Unaudited Consolidated Financial Statements......................................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................... 14
Item 4 Controls and Procedures.................................................................................. 14
Part II Other Information........................................................................................
Item 1. Legal Proceedings........................................................................................ 15
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......................... 15
Item 3. Defaults Upon Senior Securities.......................................................................... 15
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 15
Item 5. Other Information ....................................................................................... 15
Item 6. Exhibits and Reports on Form 8-K ........................................................................ 15
Signatures................................................................................................................ 16
Certifications............................................................................................................ 17-20
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
December 31, September 30,
2003 2003
------------ -------------
(Unaudited)
------------
Assets
Current assets:
Cash and cash equivalents ................................................................ $ 9,358 $ 24,503
Short-term investments ................................................................... 10,706 7,226
Marketable securities .................................................................... 1,162 1,531
Accounts receivable, net of allowance for doubtful accounts of $2,793 and
$2,646, respectively .................................................................... 7,141 6,012
Prepaid expenses and other current assets ................................................ 5,819 4,497
Property held for sale ................................................................... 48,920 --
Restricted cash .......................................................................... 2,063 2,195
--------- ---------
Total current assets ........................................................... 85,169 45,964
Investments .............................................................................. 1,452 697
Investments, restricted .................................................................. 4,875 4,733
Property, plant and equipment, net ....................................................... 95,394 162,630
Intangible assets, net of accumulated amortization of $2,403 and $1,997, respectively .... 8,952 8,158
Other assets ............................................................................. 311 100
--------- ---------
Total assets ................................................................... $ 196,153 $ 222,282
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligation and mortgage payable ......................... $ 742 $ 1,510
Accounts payable ......................................................................... 5,606 5,846
Accrued liabilities ...................................................................... 10,892 10,159
--------- ---------
Total current liabilities ...................................................... 17,240 17,515
Capital lease obligations, net of current portion ........................................ 308 374
Mortgage payable ......................................................................... 19,837 19,912
11% Senior Notes ......................................................................... 105,321 112,321
Accrued interest - 11% Senior Notes ...................................................... 7,780 5,182
Other long term liabilities .............................................................. 10,842 10,659
Put-option liability ..................................................................... 2,968 2,968
--------- ---------
Total liabilities .............................................................. 164,296 168,931
Commitments and contingencies (Note 5)
Stockholders' Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000
issued and outstanding, for both periods presented ................................... 165 165
Additional paid-in capital ............................................................... 97,166 97,191
Accumulated other comprehensive income ................................................... 4,424 2,401
Deferred compensation .................................................................... (143) --
Accumulated deficit ...................................................................... (69,755) (46,406)
--------- ---------
Total stockholders' equity...................................................... 31,857 53,351
--------- ---------
Total liabilities and stockholders' equity ..................................... $ 196,153 $ 222,282
========= =========
The accompanying notes are an integral part of these condensed 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
----------------------------
December 31, December 31,
2003 2002
------------ ------------
Revenue, net ......................................................................... $ 14,385 $ 16,480
Operating costs and expenses:
Cost of revenue (excluding depreciation, amortization, and certain payroll and
occupancy shown below) ......................................................... 4,876 5,624
Selling, general and administrative .............................................. 10,944 11,891
Loss on impairment of property held for sale ..................................... 17,313 --
Depreciation and amortization .................................................... 3,371 3,727
------------ ------------
Total operating costs and expenses ................................ 36,504 21,242
Loss from operations ................................................................. (22,119) (4,762)
Interest and financing expense ................................................... (3,453) (3,904)
Interest income .................................................................. 179 388
Other (expense) income, net ...................................................... 297 182
Gain on discharge of debt ........................................................ 1,747 2,727
Minority interest in subsidiary .................................................. -- 108
------------ ------------
Net loss ............................................................................. $ (23,349) $ (5,261)
============ ============
Basic and diluted loss per share ..................................................... $ (1.42) $ (0.32)
============ ============
Weighted average common shares outstanding - basic and diluted ....................... 16,460,000 16,460,000
============ ============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
For the Three Months Ended
-----------------------------
December 31, December 31,
2003 2002
------------ ------------
Cash Flows From Operating Activities
Net Loss ............................................................................... $(23,349) $ (5,261)
Operating activities:
Depreciation and amortization ........................................................ 3,371 3,727
Provision for uncollectible receivables .............................................. 202 624
Gain on debt discharge ............................................................... (1,747) (2,727)
Gain on sale of short-term investments ............................................... -- (138)
Loss on impairment of property held for sale ......................................... 17,313 --
Gain on sale of marketable securities ................................................ 142 --
Amortization of deferred compensation ................................................ 34 --
Minority interest in subsidiary ...................................................... -- (108)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ........................................... (486) 594
Decrease (increase) in prepaid expenses and other current assets ..................... (590) 2,702
Decrease (increase) in other assets .................................................. (211) --
Increase (decrease) in accounts payable .............................................. (457) 332
Increase (decrease) in accrued liabilities ........................................... 12 (3,812)
Decrease in accrued interest ......................................................... 2,927 3,263
Other ................................................................................ (121) (111)
-------- --------
Net Cash Used in Operating Activities .................................................. (2,960) (915)
-------- --------
Cash Flows From Investing Activities
Investments in short-term and long-term investments .................................. (4,269) (3,234)
Proceeds from restricted cash and investments ........................................ 146 306
Proceeds from sale of marketable securities .......................................... 570 --
Payment for business acquired from Aptegrity (Appendix A) ............................ (2,287)
Purchase of property, plant and equipment ............................................ (438) (555)
-------- --------
Net Cash Used in Investing Activities .................................................. (6,278) (3,483)
-------- --------
Cash Flows From Financing Activities
Repurchase of 11% Senior Notes ....................................................... (5,583) (7,030)
Capital contribution (distribution) in minority-owned subsidiary, net ................ (202) 4,361
Capital lease termination payment .................................................... (319) --
Repayment of mortgage payable and capital lease obligation ........................... (171) (286)
-------- --------
Net Cash Used in Financing Activities .................................................. (6,275) (2,955)
-------- --------
Effects of Exchange Rates Changes on Cash and Cash Equivalents ......................... 368 275
-------- --------
Decrease in Cash and Cash Equivalents .................................................. (15,145) (7,078)
Cash and Cash Equivalent, Beginning of Period .......................................... 24,503 47,562
-------- --------
Cash and Cash Equivalent, End Period ................................................... $ 9,358 $ 40,484
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest ................................................................. $ 477 $ 570
======== ========
Non-cash financing activities:
Capital expenditures included in accounts payable, accrued liabilities and
other long-term liabilities ........................................................ $ -- $ 215
======== ========
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
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 Three Months Ended
----------------------------
December 31, December 31,
2003 2002
------------ ------------
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 condensed consolidated
financial statements.
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 1 - GENERAL
Globix Corporation and its subsidiaries ("Globix" or, the "Company") is a
provider of Internet solutions to businesses. The solutions include secure and
fault-tolerant Internet data centers with network services providing network
connectivity to the Internet and Internet-based managed and application
services, which include co-location, dedicated hosting, streaming media, and
messaging services. The Company currently offers services from facilities in New
York City, New York, Santa Clara, California, Fairfield, New Jersey, Atlanta,
Georgia and London, England.
On October 31, 2003, Globix acquired for cash the business, substantially all of
the assets and assumed certain liabilities of Aptegrity, Inc. ("Aptegrity"), a
provider of web application and operations management services for a total net
cash consideration of approximately $2,300, subject to final settlement.
The acquisition was accounted for as a purchase; accordingly, the purchase price
has been allocated to the assets acquired. The allocation of the purchase price
among the identifiable intangible assets was based upon the Company's estimates
of fair value of those assets. The Company has recorded $800 in respect of
acquired trademarks and trade names which are being amortized on a straight-line
basis over 7 years and $400 was recorded in respect of customer contracts which
are being amortized on a straight-line basis over 2 years. The operations of
Aptegrity are included in the consolidated statements from November 1, 2003.
Pro forma information has not been provided due to immateriality of Aptegrity's
results of operations.
During October 2003 the Company reached an agreement to sell the property
located at 415 Greenwich Street, New York, NY ("the Property") for total cash
consideration of approximately $60,000. In connection with the sale the Company
recorded an impairment charge of $17,313 to write-down the Property to its
market value less cost to sell of approximately $11,500,reflecting a $7,000
payment required to be made to a third party investor in the Property,
approximately $1,800 of property taxes due in connection with the sale and other
related expenses. The sale of the Property was completed on January 22, 2004. On
January 26, 2004 the Company announced that it was using approximately $44,000
of the net proceeds from the sale to commence a tender offer for up to $40,274
in principal amount of its outstanding 11% Senior Notes Due 2008 at par value
plus accrued interest. The Company intends to use the remaining balance of the
net proceeds from the sale for working capital purposes. As of December 31, 2003
the Property is classified under current assets as property held for sale in
accordance with SFAS No. 144.
On October 3, 2003, the Company repurchased in the open market for $5,583 a
portion of its outstanding 11% Senior Notes, which had a principal value of
$7,000 and associated accrued interest of $330. As a result of the repurchase
the Company recorded a gain on discharge of debt in the amount of $1,747.
The Company has historically experienced negative cash flow from operations and
has incurred net losses. The Company's ability to generate positive cash flow
from operations and achieve profitability is dependent upon its ability to
reduce its indebtedness and operating expenses or increase its revenue base. For
the three months ended December 31, 2003, the Company had a net loss of $23,349
and an accumulated deficit for December 31, 2003 of $69,755. The Company is
dependent upon its cash on hand and cash generated from operations to support
its capital requirements. Although no assurances can be given, the Company's
management believes that actions taken by the Company pursuant to its Plan of
Reorganization (the "Plan") from April 30, 2002, including company downsizing,
headcount reductions and other cost reductions, as well as cost control measures
and the restructuring of its outstanding debt in connection with the Plan, have
positioned the Company to maintain sufficient cash flows from operations to meet
its operating, capital and debt service requirements for the next 12 months.
There can be no assurance, however, that the Company will be successful in
executing its business plan, achieving profitability, in attracting new
customers, or in maintaining its existing customer base. Moreover, despite the
Company's restructuring, it has continued to experience significant decreases in
revenue and low levels of new customer additions in the period following its
restructuring. In the future, the Company may make acquisitions or repurchase
indebtedness of the Company which, in turn, may adversely affect the Company's
liquidity.
5
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 condensed consolidated financial statements of Globix Corporation and its
subsidiaries (the "Company") have been prepared by the Company according to
accounting principles generally accepted in the United States of America for
interim financial information, and the rules and regulations of the Securities
and Exchange Commission for interim condensed consolidated financial statements.
Accordingly, they do not include all of the information and notes required by
generally accepted accounting principles in the United States of America for
complete financial statements. In the opinion of management, the unaudited
interim condensed consolidated financial statements furnished herein include all
of the adjustments necessary for a fair presentation of the Company's financial
position at December 31, 2003 and the three month period then ended. All such
adjustments are of a normal recurring nature. The condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto, contained in the 2003 Form 10-K. The
results of operations for the three month period ended December 31, 2003 are not
necessarily indicative of the results for the entire fiscal year ending
September 30, 2004.
Management Estimates
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities.
Significant estimates include estimates of the collectibility of accounts
receivable, the useful lives and ultimate realizability of property, equipment,
intangible assets and deferred tax assets. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the period
that they are determined to be necessary. Actual results may vary from these
estimates under different assumptions or conditions.
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 earnings (loss) per share if the Company had applied the fair
value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
6
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
-------------------------------
December 31, December 31,
2003 2002
------------ ------------
Net loss, as reported attributable to common
stockholders ............................................................. $(23,349) $ (5,261)
Add: Stock-based employee compensation expense included
in reported net loss ................................................. 34 --
Deduct: Amortization of stock-based employee compensation
expense determined under fair value based method.................... (108) (69)
-------- ---------
Pro-forma net loss attributed to common
stockholders ............................................................. $(23,423) $ (5,330)
======== =========
Earning (loss) per share attributable
to common stockholders
Basic and diluted - as reported ............................................ $ (1.42) $ (0.32)
======== =========
Basic and diluted - Pro-forma .............................................. $ (1.42) $ (0.32)
======== =========
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
--------------------------------
December 31, December 31,
2003 2002
------------ ------------
Expected life (in years) ........................................ 4.2 4.0
Risk-free interest rate ......................................... 2.7% 2.5%
Volatility ...................................................... 128% 133%
Dividend yield .................................................. 0.0% 0.0%
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51", which
relates to the identification of, and financial reporting for, variable-interest
entities (VIEs). FIN No. 46 requires that if an entity is the primary
beneficiary of a variable interest entity, the assets, liabilities and results
of operations of the variable interest entity should be included in the
consolidated financial statements of the entity. The provisions of FIN No. 46
are effective immediately for all arrangements entered into after January 31,
2003. For those arrangements entered into prior to February 1, 2003, the
provisions of FIN No. 46 are required to be adopted at the beginning of the
first interim or annual period beginning after June 15, 2003. In October 2003,
FASB Staff Position deferred the effective date for existing VIE arrangements
created before February 1, 2003 to the first interim or annual reporting period
that ends after December 15, 2003. The adoption of this standard did not have a
material impact on the Company's consolidated financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to current
period presentation.
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 3 - SEGMENT INFORMATION
The Company evaluates its results of operations based on one operating segment
in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information".
For the Three Months Ended
-----------------------------
December 31, December 31,
2003 2002
------------ ------------
Revenues:
United States .......................................... $ 8,488 $ 10,581
Europe ................................................. 5,897 5,899
-------- --------
Consolidated ........................................... $ 14,385 $ 16,480
======== ========
Operating income (loss):
United States .......................................... $(22,991) $ (5,580)
Europe ................................................. 872 818
-------- --------
Consolidated ........................................... $(22,119) $ (4,762)
======== ========
December 31, September 30,
2003 2002
------------ -------------
Tangible assets:
United States ........................................ $156,179 $175,864
Europe ............................................... 39,974 38,260
-------- --------
Consolidated ......................................... $196,153 $214,124
======== ========
Although the Company operates in one operating segment, there are 4 major
service lines as follows:
For the Three Months Ended
------------------------------
December 31, December 31,
2003 2002
------------ ------------
Internet Hosting and Co-Location ............................ $ 5,955 $ 6,997
Managed Services ............................................ 4,172 3,610
Network Services and Internet Access ........................ 4,224 4,849
Hardware and Software Sales, DSL and Other .................. 34 1,024
------- -------
Revenue, net ................................................ $14,385 $16,480
======= =======
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 4 - COMPREHENSIVE INCOME
For the Three Months Ended
-----------------------------
December 31, December 31,
2003 2002
------------ ------------
Net loss ................................... $(23,349) $ (5,261)
Other comprehensive income (loss):
Unrealized gain on marketable securities
available for sale ................... 309 129
Foreign currency translation adjustment 1,714 826
-------- --------
Comprehensive loss ......................... $(21,326) $ (4,306)
======== ========
NOTE 5 - 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. There have been no developments since the prior
descriptions in Note 18 to the Consolidated Financial Statements in the 2003
Form 10-K, and the "Legal Proceedings" section thereto.
9
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 unknown and uncertain risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied 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. These
forward-looking statements are subject to numerous assumptions, risks, and
uncertainties and the statements looking forward beyond 2004 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, 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 December 31, 2003, which should be
considered in connection with a review of this report. For a general discussion
of risks affecting the Company's business, see "Risk Factors" in the Company's
Annual Report on Form 10-K for the year ended September 30, 2003.
Overview
Globix Corporation is a provider of Internet services for small to large size
business in a broad range of industries. Our Company 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, the Company filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code, together with a
prepackaged Plan of Reorganization, which we refer to as the "Plan," with the
United States Bankruptcy Court for the District of Delaware. We continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay our employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed
the Plan. Effective April 25, 2002, all conditions necessary for the Plan to
become effective were satisfied or waived and we emerged from Chapter 11
bankruptcy protection. 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, 2003.
Although the Company operates in one operating segment, there are 4 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, but require the physically
secure, climate-controlled environment provided by our Internet data centers and
connectivity to our network. We offer hosting services in a dedicated server
environment. This service includes providing bandwidth and 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.
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.
Other- Is comprised of hardware and software sales and other non-recurring
revenue. For the quarter ended December 31, 2003 other includes also revenue
from DSL customer accounts which were sold during the fiscal year 2003.
10
For a more detailed description of these service lines see "Business" section in
our 2003 Form 10-K.
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 accounting principles generally accepted
in the United States. The preparation of our financial statements requires us to
make estimates that affect the reported amounts of assets, liabilities, revenue
and expenses and related disclosures of contingent assets and liabilities.
Our significant accounting policies are described in the notes to the
consolidated financial statements for the fiscal year ended September 30, 2003
and critical accounting policies are discussed in Management's Discussion and
Analysis of Financial Condition and Results of Operations of our Annual Report
on Form 10-K for the fiscal year ended September 30, 2003.
11
Quarter Ended December 31, 2003 Compared To The Quarter Ended December 31, 2002
Revenue, net. Revenue for the quarter ended December 31, 2003 decreased 12.7% or
$2.1 million to $14.4 million from $16.5 million for the three month period
ended December 31, 2002. Customer churn accounted for $2.2 million of the net
decrease in revenue for the quarter ended December 31, 2003 over the same
quarter for 2002. In addition the Company experienced a $347 thousand decrease
in lower margin hardware and software sales to $24 thousand, as a result of our
shift away from lower margin hardware and software revenue and a decrease of
$456 thousand from DSL services as a result of the sale of our DSL customer
accounts during the fiscal year 2003. These decreases were offset in part by our
new revenue stream of approximately $780 thousand resulting from the Aptegrity
acquisition and from a positive effect of foreign exchange rate of approximately
$500 thousand. We define churn as contractual revenue losses due to customer
cancellations and downgrades, net of upgrades, and additions of new services.
Cancellations refer to customers that have either stopped using our services
completely or remained a customer but terminated a particular service.
Downgrades are a result of customers taking less of a particular service or
renewing their contract for identical services at a lower price. During the
quarter ended December 31, 2003 our monthly churn rate excluding the Aptegrity
contribution averaged 0.2%. Of this average monthly churn rate, 1.6% was related
to downgrades and 1.7% was related to cancellations. These were offset by
increases of 1.7% in new contracts and 1.4% in contract upgrades. Monthly
positive change in contracts (negative churn rate) including the Aptegrity
contribution averaged 2.6% for the quarter ended December 31, 2003 compared to a
monthly averaged churn rate of 2.1% for the quarter ended December 31, 2002.
Cost of Revenue. Cost of revenue for the quarter ended December 31, 2003,
decreased to $4.9 million from $5.6 million for the quarter ended December 31,
2002. A decrease of $935 thousand was realized within non-hardware related
costs. This was offset by additional costs of $489 thousand associated with the
business acquired from Aptegrity. This net decrease of approximately $446
thousand, representing 59.6% of the total decrease in cost of revenue was
primarily attributable to our continued focus on deriving efficiencies and cost
savings from our network. Decreases of $302 thousand, representing 40.4% of the
total decrease in cost of revenue, was attributable to lower hardware costs as a
result of our shift away from lower margin hardware sales. Gross margin remained
flat at 66.1% for the quarter ended December 31, 2003 compared to 65.9% for the
quarter ended December 31, 2002.
Selling, General and Administrative. Selling, general and administrative
expenses were $10.9 million as compared to $11.9 million for the quarter ended
December 31, 2002. The decrease in selling, general and administrative expenses
was in part due to a decrease of $900 thousand in salaries and benefits to $4.9
million in the quarter ended December 31, 2003 compared to $5.8 million in the
quarter ended December 31, 2002, which resulted from our restructuring efforts
that focused on significant reduction in facilities and personnel. In addition,
bad debt expenses decreased $287 thousand to $337 thousand for the quarter ended
December 31, 2003, compared to $624 thousand in the same quarter last year, as a
result of improvement in collections and a reduction in the number of high risk
customer account receivable balances.
Loss on Impairment of property held for sale. Impairment charges for the quarter
ended December 31, 2003 amounted to $17.3 million resulting from the write-down
of the cost basis of the Company's property located at 415 Greenwich Street in
New York, NY ("the Property") to its market value less cost to sell of
approximately $11.5 million. The sale of the Property was consummated on January
22, 2004 for total cash consideration of $60 million.
Depreciation and Amortization. Depreciation and amortization decreased to $3.4
million for the quarter ended December 31, 2003, as compared to $3.7 million in
the quarter ended December 31, 2002. The decrease resulted from lower capital
spending and from not depreciating the Property classified as held for sale,
offset by amortization of intangible assets resulting from the acquisition of
Aptegrity in the amount of $26 thousand.
Interest and Financing Expenses. Interest and financing expense for the quarter
ended December 31, 2003 was $3.5 million, compared to $3.9 million, for the
quarter ended December 31, 2002. The decrease is attributable to the repurchase
of approximately $16.8 million of our 11% Senior Notes during the calendar year
2003, offset by a an increase in the balance of the 11% Senior Notes of
approximately $11.3 resulting from a payment in kind of the related accrued
interest as of May, 2003.
Interest Income. Interest income for the quarter ended December 31, 2003 was
$179 thousand, compared to $388 million, for the quarter ended December 31,
2002. The decrease is primarily due to a decrease in our cash and investments.
12
Other Income, net. Other income for the quarter ended December 31, 2003 was $297
thousand, compared to $182 thousand, for the quarter ended December 31, 2002.
The increase is primarily due to higher rental income from leasing office space
in our 139 Centre Street facility.
Gain on Debt Discharge. Gain on debt discharge was $1.7 million for the quarter
ended December 31, 2003, as compared to $2.7 million for the quarter ended
December 31, 2002. These gains resulted from our repurchase of $7.0 million and
$9.1 million in aggregate principal amount of the 11% Senior Note and the
associated accrued interest of $329 thousand and $627 thousand for a total cash
consideration of $5.6 million and $7.0 million during the three month periods
ended December 31, 2003 and 2002 respectively.
Liquidity and Capital Resources
As of December 31, 2003 the Company had cash and cash equivalents of
approximately $9.4 million compared to approximately $24.5 million on September
30, 2003. The decrease of approximately $15.1 million is mainly attributable to
operating activities, investing activities and financing activities as described
bellow. Since December 31, 2003, the Company has completed the sale of its
Property for approximately $48.5 million in net proceeds, of which approximately
$44 million is expected to be used to purchase a portion of our 11% Senior
Notes and the remainder is expected to be used for working capital.
Operating activities:
Net cash used in operating activities during the three month period ended
December 31, 2003 was approximately $3.0 million. This was attributable mainly
to the net loss of $23.3 million and a non-cash gain on debt discharge of $1.7
million resulting from the repurchase of portion of our 11% Senior Notes, offset
by non-cash depreciation and amortization expenses of $3.4 million and a
non-cash impairment charge of $17.3 million resulting from a write-down of the
Property to its fair market value less cost for sale. Changes in assets and
liabilities resulted in an increase to operating cash-flow of approximately $1.1
million.
Investing activities:
Net cash used in investing activities during the three month period ended
December 31, 2003 was $6.3 million. Approximately $2.3 million was used for the
acquisition of Aptegrity, $3.6 million, net resulted from changes in our
investments and securities and $438 thousand was used for capital expenditures.
Financing activities:
Net cash used in financing activities during the three month period ended
December 31, 2003 was $6.3 million. Approximately $5.6 million of the cash used
in financing activities was attributed to the repurchase of a portion of our 11%
Senior Notes in the open market. The remaining $0.7 million were used for
payment and settlement of certain contractual obligations.
We historically have experienced negative cash flows from operations and have
incurred net losses. Our ability to generate positive cash flows from operations
and achieve profitability is dependent upon our ability to grow our revenue and
achieve further operating efficiencies while reducing our outstanding
indebtedness and other fixed obligations. We are dependent upon our cash on hand
and cash generated from operations to support our capital requirements. Our
management believes that we are positioned to maintain sufficient cash flows
from operations to meet our operating, capital and debt service requirements for
at least the next 12 months. There can be no assurance, however, that we will be
successful in executing our business plan, achieving profitability, or in
attracting new customers or maintaining our existing customer base. Moreover, we
have continued to experience significant decreases in revenue and low levels of
new customer additions in the period following our restructuring. In the future,
we may make acquisitions or repurchase indebtedness of our company which, in
turn, may adversely affect our liquidity.
13
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2003, investments consisted of an investment in a limited
partnership that invests in fixed income securities and investments in fixed
rate investment grade and government securities denominated in U.S. dollars. At
December 31, 2003, the majority of our investments were due to mature within
twelve months and the carrying value of these investments approximated fair
value.
Marketable securities include our investments in two publicly-traded entities,
EDGAR Online Inc. and Globecomm Systems Inc., which are recorded at fair market
value. We do not hedge our exposure to fluctuations in the value of our
investments in equity securities.
At December 31, 2003, $6.9 million of our cash and investments were restricted
in accordance with the terms of certain collateral obligations.
We are also subject to market risk associated with foreign currency exchange
rates. To date, we have not utilized financial instruments to minimize our
exposure to foreign currency fluctuations. We will continue to analyze risk
management strategies to minimize foreign currency exchange risk in the future.
We believe that we have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by 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
Based on their evaluation of the Company's disclosure controls and procedures as
of the end of the period covered by this report, the Chief Executive Officer and
Chief Financial Officer have concluded that such controls and procedures are
effective. There were no 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.
14
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. There have been no developments since the prior
descriptions in Note 18 to the Consolidated Financial Statements in the 2003
Form 10-K, and the "Legal Proceedings" section thereto.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
------- -----------
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
(b) Reports on Form 8-K
Current Report on Form 8-K , Item 5, filed October 7, 2003
Current Report on Form 8-K, Item 5, filed October 10, 2003
Current Report on Form 8-K, Item 5, filed October 20, 2003
Current Report on Form 8-K, Item 5, filed November 4, 2003
Current Report on Form 8-K, Item 12, filed December 24, 2003
15
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: February 4, 2004
By: /S/ Robert M. Dennerlein
-------------------------------------------
Robert M. Dennerlein, Chief Financial
Officer (principal financial and accounting
officer)
Date: February 4, 2004
16