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 AND EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2000
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
Commission File No. 0-25615
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 ____
APPLICABLE ONLY TO CORPORATE ISSUERS
Number of shares of the Registrant's common stock outstanding as of
February 8, 2001 was 41,791,000.
GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Part I Financial Information Page
----
Item 1. Consolidated Balance Sheets - As of December 31, 2000
and September 30, 2000.................................... 1
Consolidated Statements of Operations - For the Three
Months Ended December 31, 2000 and 1999................... 2
Consolidated Statements of Cash Flows - For the Three Months
Ended December 31, 2000 and 1999.......................... 3
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk........ 15
Part II Other Information 15
Item 1. Legal Proceedings.............................................
Item 2. Changes in Securities and Use of Proceeds.....................
Item 3. Defaults upon Senior Securities...............................
Item 4. Submission of Matters to a Vote of Security Holders...........
Item 5. Other Information.............................................
Item 6. Exhibits and Reports on Form 8-K..............................
Signatures 16
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollars in Thousands, Except Share and Per Share Data)
December 31, September 30,
2000 2000
---- ----
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 318,125 $ 363,877
Short-term investments 10,110 9,948
Marketable securities 1,572 4,685
Accounts receivable, net of allowance for doubtful accounts of $4,208 and $4,072,
respectively 22,707 21,403
Inventories 43 38
Prepaid expenses and other current assets 5,047 4,403
Restricted cash 6,977 7,093
--------- ---------
Total current assets 364,581 411,447
Investments, restricted 31,101 36,085
Property, plant and equipment, net 259,199 248,424
Debt issuance costs, net of accumulated amortization of $995 and $719, respectively 19,803 20,217
Goodwill, net of accumulated amortization of $774 and $197, respectively 6,073 6,650
Other assets. 10,862 6,768
--------- ---------
Total assets $ 691,619 $729,591
========= =========
Liabilities and Stockholders' Deficit Equity
Current liabilities:
Capital lease and other obligations $ 3,097 $ 2,173
Accounts payable 20,257 16,964
Accrued liabilities 26,818 13,669
Accrued interest 31,250 12,502
--------- ---------
Total current liabilities 81,422 45,308
Capital lease obligations, net of current portion 2,698 1,135
Mortgage payable 20,616 20,674
Senior Notes 600,000 600,000
Other long term liabilities 3,847 4,462
--------- ---------
Total liabilities 708,583 671,579
Redeemable convertible preferred stock 77,861 76,042
Stockholders' Deficit:
Common stock, $.01 par value; 500,000,000 shares authorized;
40,397,081 and 37,307,315 shares issued and outstanding, respectively 404 373
Additional paid-in capital 173,186 165,890
Deferred compensation (8,999) --
Accumulated other comprehensive income (55) 1,784
Accumulated deficit (259,361) (186,077)
--------- ---------
Total stockholders' deficit (94,825) (18,030)
--------- ---------
Total liabilities and stockholders' deficit $ 691,619 $729,591
========= =========
The accompanying notes are an integral part of these consolidated financial statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollars in Thousands, Except Share and Per Share Data)
Three months ended
--------------------
December 31,
------------
2000 1999
---- ----
(Unaudited)
-----------
Revenue $ 26,237 $ 16,145
Operating costs and expense:
Cost of revenue 10,468 10,056
Selling, general and administrative 31,014 19,695
Non-recurring lease termination and other related expenses 38,109 --
Depreciation and amortization 7,597 3,357
---------- ----------
Total operating costs and expenses 87,188 33,108
---------- ----------
Loss from operations (60,951) (16,963)
Interest and financing expense (16,480) (5,469)
Interest income 6,479 1,621
---------- ----------
Loss before cumulative effect of a change in accounting principle (70,952) (20,811)
Cumulative effect of a change in accounting principle (2,332) --
---------- ----------
Net loss (73,284) (20,811)
Dividends and accretion on preferred stock (1,735) (531)
---------- ----------
Net loss attributable to common stockholders' $ (75,019) $ (21,342)
========== ==========
Basic and diluted loss per share attributable to common
stockholders' before cumulative effect of a change in accounting principle $ (1.95) $ (0.64)
Cumulative effect of a change in accounting principle (0.06) --
---------- ----------
Basic and diluted net loss per share attributable to common
stockholders' $ (2.01) $ (0.64)
========== ==========
Weighted average common shares outstanding - basic and diluted 37,328,496 33,557,678
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollars in Thousands, Except Share and Per Share Data)
Three months ended
--------------------
December 31,
------------
2000 1999
---- ----
Cash flows from operating activities
Net loss $(73,284) $(20,811)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 7,597 3,357
Cumulative effect of a change in accounting principle 2,332 --
Non-recurring lease termination and other related expenses 20,094 --
Amortization of debt discount and issuance costs 276 225
Changes in operating assets and liabilities:
Accounts receivable, net (1,304) (2,174)
Inventories (4) (111)
Prepaid expenses and other current assets (644) (183)
Other assets (3,538) (48)
Accounts payable (1,621) 4,228
Accrued liabilities 7,978 681
Accrued interest 18,748 (5,200)
Other (615) 4
-------- --------
Net cash used in operating activities (23,985) (20,032)
Cash flows from investing activities
Use of restricted cash and investments 5,099 7,689
Purchases of property, plant and equipment (27,463) (10,031)
-------- --------
Net cash used in investing activities (22,364) (2,342)
3
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWSN(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Three months ended,
----------------------
December 31,
----------------------
2000 1999
-------- --------
Cash flows from financing activities
Proceeds from issuance of redeemable convertible preferred stock, net $ -- $ 75,750
Proceeds from exercise of stock options and warrants, net 63 1,082
Repayments of mortgage payable and capital lease obligations (577) (624)
-------- --------
Net cash (used in) provided by financing activities (514) 76,208
Effects of exchange rate changes on cash and cash equivalents 1,111 (212)
-------- --------
Net (decrease) increase in cash and cash equivalents (45,752) 53,622
Cash and cash equivalents, beginning of period 363,877 101,471
-------- --------
Cash and cash equivalents, ending of period $318,125 $155,093
======== ========
Supplemental disclosure of cash flow information
Cash paid for interest $ 612 $ 10,446
Cash paid for income taxes $ 24 --
Non-cash financing activities:
Equipment acquired under capital lease obligations $ 3,005 --
Capital expenditures included in accounts payable and accrued liabilities $ 7,975 --
Cumulative dividends and accretion on preferred stock $ 1,735 $ 531
The accompanying notes are an integral part of these consolidated financial statements.
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
notes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, the unaudited interim
financial statements furnished herein include all adjustments necessary for a
fair presentation of the Company's financial position at December 31, 2000 and
the results of its operations for the three-month periods ended December 31,
2000 and 1999 and cash flows for the three-month periods ended December 31, 2000
and 1999. All such adjustments are of a normal recurring nature. Interim
financial statements are prepared on a basis consistent with the Company's
annual financial statements. Results of operations for the three-month periods
ending December 31, 2000 are not necessarily indicative of the operating results
that may be expected for future periods.
The consolidated balance sheet as of September 30, 2000 has been derived
from the audited financial statements at that date but does not include all of
the information and notes required by generally accepted accounting principles
for complete financial statements.
For further information, refer to the consolidated financial statements and
notes thereto included in the Company's Annual Report on Form 10-K for the
fiscal year ended September 30, 2000 on file with the Securities and Exchange
Commission.
2. Property, Plant and Equipment
Property, plant and equipment consist of the following:
December 31, September 30,
------------- --------------
2000 2000
---- ----
Land $ 1,997 $ 1,997
Building and building improvements 55,416 55,416
Leasehold improvements 32,424 30,927
Computer hardware and software and network equipment 77,434 67,552
Furniture and equipment 7,796 7,198
-------- --------
175,067 163,090
Less: Accumulated depreciation and amortization (31,717) (25,731)
Add: Construction in progress 115,849 111,065
-------- --------
Property, plant and equipment, net $259,199 $248,424
-------- --------
Certain computer and network equipment are recorded under capital leases
that aggregated approximately $9.0 and $6.0 million as of December 31, 2000 and
September 30, 2000, respectively. Accumulated amortization on the assets
recorded under capital leases aggregated approximately $3.7 and $3.2 million as
of December 31, 2000 and September 30, 2000, respectively.
Costs incurred prior to completion of construction of Internet data centers
and network are reflected as construction in progress in the accompanying
consolidated balance sheets and will be recorded as property, plant and
equipment at the date each Internet data center or network segment becomes
operational. Construction in progress includes direct expenditures for
construction of the Internet data center facilities and related network
equipment and is stated at cost. Capitalized costs include costs incurred under
the construction contract, advisory, consulting and legal fees, labor and
interest incurred during the construction phase. Capitalized interest is
included in construction in progress under the provisions of SFAS No. 34 and
totals approximately $3.2 million and zero for the three-month periods ended
December 31, 2000 and 1999, respectively. In connection with the Company's
decision to scale back the build-out of its Internet data centers the Company
recorded a $38.1 million non-recurring charge associated with the termination of
certain leases and the reduction of certain commitments for surplus power and
environmental equipment related to the Internet data center expansion.
Approximately $20.1 million of this charge was recorded as a write off of
construction in progress associated with equipment, capitalized interest,
consulting and legal fees, construction and pre-construction related costs
previously capitalized.
5
The Company owns the land and building located at 139 Centre Street, New
York, New York. The nine-story building with approximately 160,000 square feet
of floor space houses the Company's corporate headquarters and Internet data
center facility. A former owner of the right to purchase the Centre Street
property is entitled to additional consideration if Globix sells the property.
Such amount will be equal to the greater of (a) $1.0 million (subject to
increase after June 1, 2018 by ten percent and an additional ten percent every
fifth year thereafter), or (b) ten percent of the gross sales price of the
property if such sales price is greater than $17.5 million.
3. Senior Notes
In April 1998, the Company completed a $160.0 million debt financing (the
"13% Senior Notes") consisting of 160,000 units, each unit consisting of a note
in the principal amount of one thousand dollars and one warrant to purchase
14.08 shares of common stock (total of 2,252,800 shares of common stock) at a
purchase price of $3.51 per share. The 13% Senior Notes were to mature on May 1,
2005. Interest on the 13% Senior Notes accrued at a rate of 13% per annum and
was payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998. Globix deposited $57.0 million with an escrow agent
at closing, which amount, with interest, was sufficient to pay, when due, the
first six interest payments under the 13% Senior Notes. The 13% Senior Notes
were collateralized by a first priority security interest in the escrow account.
The 13%
Senior Notes were unsecured obligations of the Company and ranked pari
passu in right of payment with all existing and unsecured and unsubordinated
indebtedness and rank senior in right of payment to any future subordinated
indebtedness. In connection with the warrants issued with the 13% Senior Notes,
the Company had assigned an original issue discount of approximately $2.3
million.
On January 28, 2000, the Company announced that it had entered into an
agreement to sell $600.0 million 12.5% senior notes (the "12.5% Senior Notes")
due 2010 in a private placement to a group of initial purchasers and in March
2000 completed a tender offer to purchase all of the outstanding 13% Senior
Notes, $160.0 million in principal amount. The purchase price in the tender
offer was 106.5% of the principal amount, plus accrued and unpaid interest. On
February 8, 2000 the Company closed on its offering for the $600.0 million 12.5%
Senior Notes due 2010, resulting in net proceeds of approximately $580.0
million, after underwriting fees and offering expenses. The tender offer and
related redemption of the outstanding 13% Senior Notes also resulted in a one
time charge of $17,577 or $0.50 per share which has been recorded as an
extraordinary item in the statement of operations. As a result of the redemption
of the 13% Senior Notes all restrictions related to the escrow deposit were
released and such funds are no longer restricted as to use.
The 12.5% Senior Notes mature on February 1, 2010. Interest on the 12.5%
Senior Notes is payable semiannually on February 1 and August 1 of each year,
commencing August 1, 2000. The 12.5% Senior Notes are unsecured obligations of
the Company and rank pari passu in right of payment with all existing and future
unsecured and unsubordinated indebtedness and rank senior in right of payment to
any future subordinated indebtedness. In connection with the offering the
Company incurred costs of approximately $20.0 million that are being amortized
over ten years using the effective interest method.
4. Mortgage Payable
On January 25, 2000, the Company borrowed $21.0 million from a financial
institution pursuant to a mortgage note secured by the Company's property at 139
Centre Street, New York. Interest is payable at 9.16% (subject to adjustment on
February 11, 2010) based on a 25 year amortization schedule. Principal and
interest payments of $178.5 are payable monthly and any balance of the principal
and all accrued and unpaid interest is due and payable in February 2025.
5. Redeemable Convertible Preferred Stock
During November 1999 the Company designated 250,000 shares of its
authorized Preferred Stock, $0.01 par value, as a Series A. At December 31,
2000, there were 81,501 Series A Preferred Shares outstanding and 168,499 Series
A Preferred Shares reserved for issuance. On April 4, 2000 the shareholders of
the Company voted to amend the Company's certificate of incorporation to
increase the Company's authorized preferred stock to 5,000,000 shares.
On December 3, 1999, the Company issued $80.0 million (80,000 shares) in
Series A Convertible Preferred Stock (the "Series A Preferred Stock") to
affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") to expand
the build-out of its Internet data centers and other facilities. The Series A
Preferred Stock is convertible into common stock at $10.00 per share at any time
and may not be called for redemption by the Company for five years. Under the
agreement, the Series A Preferred Stock is subject to mandatory redemption in
2014 and yields an annual dividend of 7.5% payable quarterly in cash or
additional Series A Preferred Stock, at the option of the Company. The holders
of the Series A Preferred Stock have a liquidation preference of $1,000 per
share and are entitled to cumulative dividends.
6
The Series A Preferred Stock is recorded in the accompanying
consolidated balance sheet outside the stockholders equity section due to its
mandatory redemption feature. The Company incurred approximately $4,750 of
issuance costs in connection with the Series A Preferred Stock transaction. Such
costs have been recorded as a reduction of the carrying amount of the Series A
Preferred Stock and are being accreted through a charge to additional paid in
capital over the five-year period to the earliest redemption date.
During the three-month period ended December 31, 2000 the Company
declared and paid a dividend in the form of a stock dividend to the holders of
the Series A Preferred Stock. The Holders of record of the Series A Preferred
Stock at December 15, 2000 received a total of 1,501 shares of Series A
Preferred Stock on December 31, 2000.
6. Stockholders' Equity
Issuance of Restricted Stock
In December 2000, Globix granted approximately 3.1 million restricted stock
awards to certain employees and directors. The restricted stock awards vest 25%
per year over a four-year period on the anniversary date of the grant. In
connection with this restricted stock grant the Company has recorded a deferred
compensation charge of $8,999 in stockholders equity. This deferred compensation
will be recorded as compensation expense over the four-year vesting period.
Compensation expense recorded in the three-month period ended December 31, 2000
was not material.
7. Segment Information
The Company reports segment information under SFAS No. 131, which
establishes standards for reporting information about operating segments in
annual financial statements, and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for disclosures about products and services and geographic
areas. Operating segments are components of an enterprise for which separate
financial information is available and which is evaluated regularly by the
Company's chief operating decision-maker, or decision-making group, in deciding
how to allocate resources and assess performance. Operating segments are managed
separately and represent strategic business units that offer different products
and serve different markets.
The Company's activities fall within two operating segments: the Internet
Division and the Server Sales and Integration Division. The following table sets
forth industry segment information for the three-month period ended December 31,
2000 and 1999:
Three-month period ended
------------------------
December 31,
------------
2000 1999
---- ----
Revenue:
Internet $ 23,604 $ 6,956
Server sales and integration 2,633 9,189
-------- --------
Consolidated $ 26,237 $ 16,145
======== ========
Operating income (loss):
Internet $ (4,172) $ (8,618)
Server sales and integration 616 1,043
Corporate (57,395) (9,388)
-------- --------
Consolidated $(60,951) $(16,963)
======== ========
Identifiable assets:
Internet $237,070 $ 56,899
Server sales and integration 2,322 7,068
Corporate 452,227 293,750
-------- --------
Consolidated $691,619 $357,717
======== ========
7
The following table sets forth geographic segment information for the three-
month period ended December 31, 2000 and 1999:
Three-month period ended
------------------------
December 31,
------------
2000 1999
---- ----
Revenue:
United States $ 21,397 $ 15,650
Europe 4,840 495
-------- --------
Consolidated $ 26,237 $ 16,145
======== ========
Operating income (loss):
United States $(58,193) $(14,015)
Europe (2,758) (2,948)
-------- --------
Consolidated (60,951) $(16,963)
======== ========
Identifiable assets:
United States $634,973 $337,938
Europe 56,646 19,779
-------- --------
Consolidated $691,619 $357,717
======== ========
8. Loss Per Share
Basic loss per share is calculated by dividing net loss attributable to common
shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common shareholders by the weighted average number of
common shares outstanding, adjusted for potentially dilutive securities. Diluted
loss per share has not been presented since the inclusion of outstanding
convertible preferred stock, stock options and warrants would be antidilutive.
The following table summarizes the equivalent number of common shares assuming
the related securities that were outstanding as of December 31, 2000 and 1999
had been converted, but not included in the calculation of diluted loss per
share because such shares are antidilutive:
December 31,
------------
2000 1999
---- ----
Convertible preferred stock 8,150,100 8,000,000
Stock options 12,105,100 10,416,500
Unvested restricted stock 3,063,500 --
Warrants 194,800 2,436,500
---------- ----------
23,513,500 20,853,000
========== ==========
The following is a reconciliation of net loss attributable to common
stockholder's for the three-month period ended December 31, 2000 and 1999:
Three-month period ended
------------------------
December 31,
------------
2000 1999
---- ----
Numerator:
Loss before cumulative effect of a change in accounting principle $ (70,952) $ (20,811)
Dividend and accretion on preferred stock (1,735) (531)
----------- -----------
Net loss attributable to common stockholders' before cumulative effect of a change in
accounting principle (72,687) (21,342)
Cumulative effect of a change in accounting principle (2,332) --
----------- -----------
Net loss attributable to common stockholders' $ (75,019) $ (21,342)
=========== ===========
Denominator:
Weighted average shares outstanding-basic and diluted 37,328,496 33,557,678
=========== ===========
8
9. Comprehensive Loss
The Company reports comprehensive loss under the provisions of SFAS No. 130.
Accumulated other comprehensive loss is reported as a component of stockholders
equity in the consolidated balance sheets. The Company primarily has two
components of comprehensive loss: cumulative translation adjustments from the
Company's operations in foreign countries and unrealized gains and losses on
marketable securities classified as available for sale. The components of other
comprehensive loss were as follows:
Three-month period ended
------------------------
December 31,
------------
2000 1999
---- ----
Net loss $(73,284) $(20,811)
Other comprehensive income (loss):
Unrealized gain on marketable securities available for sale (2,950) 243
Foreign currency translation adjustment 1,111 (212)
-------- --------
Comprehensive loss: $(75,123) $(20,780)
======== ========
10. Revenue Recognition
Monthly service revenue related to web hosting, co-location and Internet
access is recognized over the period services are provided. Service and
equipment installation revenue is recognized at completion of installation and
upon commencement of service. Revenue derived from application services is
recognized as the project progresses. Projects are generally completed within
less than one year. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation revenue is recognized when installation is completed.
Effective October 1, 2000, the Company changed its revenue recognition
method for set up and service installation fees upon the adoption of SAB No. 101
"Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No. 101
expresses the view of the SEC Staff in applying generally accepted accounting
principles to certain revenue recognition issues. Under the provisions of SAB
No. 101 set up and installation revenue are deferred and recognized over the
estimated life of the underlying service contacts, which range from twelve to
thirty six months. Previously, the Company recognized revenue immediately upon
completion of set up or installation. The change in accounting principle
resulted in a revenue deferred and cumulative effect charge totaling $2.3
million or $0.06 per share which was reflected in the statements of operations
for the three-month period ended December 31, 2000. The adoption of SAB No. 101
increased net income $188 for the three-month period ended December 31, 2000.
9
PART I
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward Looking Information
This Report on Form 10-Q contains certain forward-looking statements
concerning, among other things, the Company's plans and objectives for future
operations, planned products and services, potential expansion into new markets,
and anticipated customer demand for our existing and future products and
services. The Private Securities Litigation Reform Act of 1995 provides a "safe
harbor" for forward-looking statements to encourage the inclusion of prospective
information so long as those statements are accompanied by meaningful cautionary
statements identifying factors that could cause actual results to differ
materially. Among the factors that could cause actual results, performance or
achievement to differ materially from those described or implied in the forward-
looking statements are:
. potential marketplace or technology changes, rendering existing products
and services obsolete,
. changes in or the lack of anticipated changes in the regulatory
environment in various countries, including potential legislation
increasing our exposure to content distribution and intellectual
property liability
. changes in customer purchasing policies and practices,
. Globix's ability to recruit and retain sufficient and qualified
personnel needed to staff our expanding operations,
. the ability of Globix to raise additional capital to finance expansion,
. the sufficiency of existing cash and cash flow to complete our business
plan and fund our working capital and debt service,
. Globix's large existing debt obligations and history of operating
losses,
. the ability of Globix to integrate, operate and further expand and
upgrade our network, and
. the continued growth, use and improvement of the Internet, along with
the risks inherent in new product and service introductions and the
entry into new geographic markets.
The following discussion and analysis should be read together with the
consolidated financial statements and notes to the financial statements included
in Part II Item 8 of the Company's Annual Report on Form 10-K. The following
discussion contains forward-looking statements based on Globix's current
expectations, assumptions, estimates and projections about Globix and its
industry. Globix's results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including the
risks and uncertainties appearing in our other periodic reports and documents
filed with the Securities and Exchange Commission. The results shown herein are
not necessarily indicative of the results to be expected in any future periods.
Overview
We are a leading full-service provider of sophisticated Internet solutions
to businesses. Our solutions include field operations, which provide secure, and
fault-tolerant Internet data centers, high performance network services, which
provide connectivity to the Internet and complex Internet-based application
services, which include hosting, streaming media and GlobixMail. These three
major elements of our total Internet solution combine to provide our customers
with the ability to create, operate and scale their increasingly complex
Internet operations in a cost-efficient manner.
Our customers primarily use our products and services to maintain complex
computer equipment in a secure fault-tolerant environment with connectivity to a
high-speed, high-capacity, direct link to the Internet and to support complex
Internet applications. We currently offer our products and services from our
Internet data centers facilities in New York City, London and Santa Clara,
California. Our teams of account managers, computer system and network engineers
and customer support specialists are based at each of these locations. We also
maintain Internet data centers in Atlanta and the Washington D.C. suburb of
McLean, Virginia. Our strong local market presence enables us to evaluate the
needs of our customers and quickly respond with tailored solutions. We also
provide our customers the ability to outsource the systems administration and
technical management of their Internet presence. Our products are flexible and
scaleable, allowing us to modify the size and breadth of the
10
services we provide. We believe that our ability to offer a broad range of
Internet products and services, combined with our local sales and support
professionals and high performance Internet data center facilities and network,
differentiates us from our competitors.
Globix was founded in 1989 as a value-added reseller primarily focused on
providing custom computer hardware and software solutions for desktop
publishing. By 1995, Globix recognized the growing demand by businesses for
electronic information delivery and began to re-shape its corporate strategy to
focus on offering Internet products and services. In early 1996, Globix raised
net proceeds of approximately $7.4 million through an initial public offering of
its common stock and subsequently began to offer Internet access products and
services to business customers. In 1997, Globix expanded its product and service
offerings beyond Internet access and began to offer a range of end-to-end
Internet solutions designed to enable its customers to more effectively
capitalize on the Internet as a business tool.
In 1998, Globix undertook a major expansion plan in order to more
aggressively pursue opportunities resulting from the tremendous growth of the
Internet. In April 1998, Globix completed a $160.0 million offering of 13%
senior notes. In June and July 1999, Globix completed construction of its
current Internet data center facilities in New York City, London and Santa
Clara, California and began operations at each facility.
In March 1999, Globix completed a public offering of 16,000,000 shares of
its common stock, resulting in net proceeds to Globix of approximately $136.6
million.
In December 1999, Globix completed the private placement of 80,000 shares
of Series A Preferred Stock to affiliates of Hicks, Muse, Tate & Furst
Incorporated, resulting in net proceeds of $75.3 million.
In February 2000, Globix completed a $600.0 million debt financing to fund
(a) the continued expansion of its facilities and network and (b) the tender
offer to purchase all of the outstanding 13% Senior Notes, $160.0 million
principal amount. The purchase price of the tender, completed on February 8,
2000, was 106.5% of principal amount plus all accrued and unpaid interest.
For fiscal periods ending on or before December 31, 2000 Globix reports its
results of operations in two operating segments: the "Internet Division" and the
"Server Sales and Integration Division." The Internet Division provides
dedicated Internet access, web-hosting, co-location and application services,
(such as, streaming media, network security and server administration and
network monitoring). The Server Sales and Integration Division provides
Internet-related hardware and software, systems and network integration. Revenue
from the Internet Division has grown significantly as a percentage of total
revenue, increasing from 6% in 1996 to 90% in the three month period ended
December 31, 2000. Globix expects that Internet Division revenues will continue
to grow both absolutely and as a percentage of total revenues.
Globix continues to derive a portion of its total revenue from sales of
third-party hardware and software, including workstation, web and database
servers, network equipment, and server and application software licenses. Globix
intends to continue to offer higher-margin workstation, server and software
components as a complement to its Internet solutions. Globix maintains a limited
inventory of hardware and software and typically purchases such products from
third-party vendors only upon receipt of a customer order. The second largest
component of Globix's total revenue is hosting and co-location services and its
customers' associated Internet bandwidth requirements, including charges for
fixed amounts of bandwidth availability and incremental fees for additional
bandwidth use. In addition to fees based on bandwidth, Globix charges its co-
location customer's monthly fees for the use of its physical facilities.
Globix's hosting and co-location contracts typically range from one to two
years. The third largest component of Globix's total revenue is from dedicated
Internet access services to business customers. GLobix's Internet access
customers typically sign one or two-year contracts that provide for fixed,
monthly-recurring service fees and a one-time installation fee. Application
services are charged on a monthly, fixed price or time and materials basis.
Cost of revenue for the Internet Division consists primarily of
telecommunications costs for Internet access, hosting and co-location customers.
Telecommunications costs include the cost of providing local loop costs for
connecting dedicated access customers to the Globix network, leased line and
associated costs related to connecting with our peering partners, and costs
associated with leased lines connecting our facilities to our backbone and
aggregation points of presence. Cost of revenue for the Server Sales and
Integration Division consist primarily of acquisition costs of third-party
hardware and software.
Selling, general and administrative expenses consist primarily of sales and
marketing personnel and related occupancy costs; advertising costs; salaries and
occupancy costs for executive, financial, personnel recruitment and
administrative personnel and related operating expenses associated with network
operations, customer service and field services. Globix continues to hire a
significant number of additional personnel to staff its facilities and Internet
data centers and to expand its sales and marketing, network operations, customer
service and field services personnel. Accordingly, Globix expects selling,
general and administrative expenses to continue to increase for the foreseeable
future.
11
Globix depreciates its capital assets on a straight-line basis over the
useful life of the assets, ranging from 3 to 40 years. Globix began to recognize
depreciation expense in the year ended September 30, 1999 for its Internet data
centers in New York, London and Santa Clara, California upon commencement of
operations at each of these facilities. In addition, Globix amortizes debt
issuance costs associated with its debt financings over the term of those
obligations using the effective interest method.
Globix historically has experienced negative cash flow from operations
and has incurred net losses. Globix's ability to generate positive cash flow
from operations and achieve profitability is dependent upon Globix's ability to
continue to grow its revenue base and achieve further operating efficiencies.
For the three months ended December 31, 2000 and 1999, Globix generated negative
cash flows from operations of approximately $24.0 million and $20.0 million,
respectively, and incurred net losses of approximately $73.3 million and $20.8
million, respectively. Globix expects to continue to experience negative cash
flow from operations and to incur net losses as a result of its significant
investment in the expansion of its network and facilities, the hiring of
additional personnel and interest expense related to the 12.5% senior notes. As
of December 31, 2000, Globix had an accumulated deficit of approximately $259.4
million.
Three Months Ended December 31, 2000 As Compared To The Three-Months Ended
December 31, 1999
Revenue. Total revenue for the three-month period ended December 31,
2000 increased 62.5% to $26.2 million from $16.1 million for the three month
period ended December 31, 1999. Revenue from the Internet Division for the
three-month period ended December 31, 2000 increased 239.3% to $23.6 million
from $7.0 million for the three-month period ended December 31, 1999. This
increase was primarily attributable to availability of new data center space,
which provided the growing number of account managers with an opportunity to
increase the number of customers and upsell existing accounts. Revenue from the
Server Sales and Integration Division decreased 71.3% to $2.6 million for the
three-month period ended December 31, 2000 from $9.2 million for the three-month
period ended December 31, 1999. This decrease was primarily attributable to a
planned shift in product mix toward recurring revenue streams with higher
margins.
Cost of Revenue. Cost of revenue for the three-month period ended
December 31, 2000 was $10.5 million or 39.9% of total revenue as compared to
$10.1 million or 62.3% of total revenue for the three-month period ended
December 31, 1999. The increase in cost of revenue was primarily attributable to
an increase in data transmission costs because of higher network operating and
maintenance expenses associated with the expansion of the network backbone. As
utilization of the network increases in future years, we expect to realize a
reduction in this cost as a percent of revenue due to the network's scalability
and fixed cost structure.
Selling, General and Administrative. Selling general and administrative
expenses for the three-month period ended December 31, 2000 were $31.0 million
or 118.2% of total revenue as compared to $19.7 million or 122.0% of total
revenue for the three-month period ended December 31, 1999. Approximately $6.8
million or 60.2% of the increase was attributable to an increase in sales and
marketing, engineering, recruiting, finance and administrative personnel
necessitated by the growth in Internet-related operations. The number of
employees increased from approximately 520 as of December 31, 1999 to
approximately 840 as of December 31, 2000. Approximately $2.4 million or 21.2%
of the increase was attributable to an increase in bad debt expense necessitated
by the recent deterioration in the business environment, particularly as it
relates to the dot.com sector.
Non-Recurring Lease Termination and Other Related Expenses. This charge
of approximately $38.1 million is attributable to the non-recurring lease
termination and other equipment related expenses associated with the execution
of our revised business plan, whereby we plan to construct fewer Internet data
centers and have taken an estimated charge associated with the termination of
certain leases and reduction of certain commitments for surplus power and
environmental equipment related to the Internet data center expansion. This
charge includes estimated lease termination costs in addition to a write off of
construction in progress associated with equipment, capitalized interest,
consulting and legal fees, construction and pre-construction related costs
previously capitalized.
Depreciation and Amortization. Depreciation and amortization increased
to $7.6 million for the three-month period ended December 31, 2000 as compared
to $3.4 million for the three-month period ended December 31, 1999. The increase
was primarily related to the increase in construction costs and equipment
purchases related to the network infrastructure enhancements of the Internet
data centers in New York, London and Santa Clara.
Interest and Financing Expense and Interest Income. Interest and
financing expense increased to $16.5 million for the three-month period ended
December 31, 2000 as compared to $5.5 million for the three-month period ended
December 31, 1999. The increase is a result of interest costs associated with
the $600 million 12.5% senior notes and the interest costs associated with the
$21 million mortgage for the three-month period ended December 31, 2000 compared
to only the interest cost associated with the
12
$160 million 13% senior notes for the three-month period ended December 31,
1999. The increase in interest income to $6.5 million for the three-month period
ended December 31, 2000 reflects the increased cash position derived from the
net proceeds of the February 2000 debt financing and the December 1999 issuance
of the Series A Convertible Preferred Stock.
Net Loss and Net Loss Attributable To Common Stockholders. As a result of
the above, Globix reported a net loss of $73.3 million and net loss attributable
to common stockholders of $75.0 million for the three-month period ended
December 31, 2000 or $2.01 per share (including the cumulative effect change of
accounting principle associated with the adoption of SAB No. 101 of $2.3 million
or $0.06 per share impact from the cumulative effect change of accounting
principle) as compared to a net loss and a net loss attributable to common
stockholders of $21.3 million or $0.64 loss per share for the three month period
ended December 31, 1999.
Liquidity and Capital Resources
Globix has historically had losses from operations, which have been funded
primarily through the issuance of debt and equity securities. In fiscal 1999, we
received net proceeds of approximately $136.6 million from equity financings.
In December 1999 Globix issued $80.0 million in new Series A Convertible
Preferred Stock to affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") to expand our build-out of Internet data centers and other facilities.
The Company incurred approximately $4.75 million of issuance costs associated
with the Series A Convertible Preferred Stock transaction, of which $3.2 million
was a fee paid to Hicks Muse. The preferred stock is convertible into common
stock at any time and cannot be called for redemption for five years. Under the
agreement, the Series A Convertible Preferred Stock is subject to mandatory
redemption in 2014 and yields an annual dividend rate of 7.5% payable quarterly
in cash or additional preferred stock at the option of Globix.
In January 2000, Globix obtained a $21.0 million loan secured by a first
mortgage on the building at 139 Centre Street housing Globix's New York Internet
data center. The loan accrues interest at a rate of 9.16% (subject to adjustment
on February 11, 2010) annually using a 25-year amortization schedule and is due
February 2010.
In February, 2000, the Company closed on its offering for $600.0 million
12.5% Senior Notes due 2010 in a private placement resulting in net proceeds of
approximately $580.0 million. In March 2000 Globix completed its tender offer to
purchase for cash all of its outstanding 13% Senior Notes due 2005, $160.0
million in principal amount. The purchase price in the tender offer was 106.5%
of the principal amount, plus accrued and unpaid interest.
Cash flows used in operating activities were $24.0 and $20.0 million for
the three months ended December 31, 2000 and 1999, respectively. Cash flows from
operating activities can vary significantly from period to period depending upon
the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets, and accounts payable and accrued
liabilities. In both periods, our net losses were the primary component of cash
used in operating activities, offset in 2000 by non-cash charges related to the
lease termination and other related equipment expenses, the cumulative effect of
the adoption of SAB No. 101 and in both periods depreciation and amortization
expenses relating to our build out of our network and facilities and non-cash
amortization of debt discount and issuance costs.
Cash flows used in investing activities were $22.4 and $2.3 million for the
three-months ended December 31, 2000 and 1999, respectively. Investments in
capital expenditures related to our network and facilities were $38.4 and $10.0
million for the three-months ended December 31, 2000 and 1999, respectively. Of
this amount, $27.5 and $10.0 million for the three-months ended December 31,
2000 and 1999, respectively was expended in cash and the balance was financed
under financing arrangements or remained in accounts payable and accrued
liabilities at each period-end.
Cash flows (used in) provided by financing activities were ($0.5) and $76.2
million for the three-months ended December 31, 2000 and 1999, respectively. In
1999, Globix received net proceeds of $75.3 million from issuance of preferred
stock partially offset by the use of cash associated with the repayment of notes
payable and capital lease obligations. In 2000 and 1999, Globix received net
proceeds from the exercise of stock options and warrants.
As of December 31, 2000, we had $367.9 million of cash, cash equivalents,
short-term investments, restricted cash, restricted investments and marketable
securities. At December 31, 2000, we had working capital of approximately $283.2
million, as compared to working capital of approximately $154.2 million at
December 31, 1999. Working capital increased $129.0 million primarily because of
the net proceeds from financing activities offset by the operating losses.
Certain computer and network equipment has been financed through vendors
and financial institutions under capital and operating lease arrangements.
Capital lease obligations total approximately $5.6 million at December 31, 2000.
As of December
13
31, 2000, Globix has various agreements to lease facilities and equipment and is
obligated to make future minimum lease payments of approximately $282.5 million
on operating leases expiring in various years through 2020. In addition, Globix
has issued collateralized letters of credit aggregating approximately $22.6
million. The related funds are included in restricted cash and investments on
the consolidated balance sheet at December 31, 2000. We intend to continue to
make significant capital expenditures during the next twelve-months as we expand
our Internet data centers and network. We expect to finance such capital
expenditures primarily through existing cash and vendor financing and a mortgage
or sale-leaseback with respect to our new Greenwich Street, New York property.
Since our September 30, 2000 fiscal year-end, Globix has secured commitments for
equipment financing arrangements from several vendors totaling approximately
$40.0 million. At December 31, 2000 approximately $37.0 million of such
commitments are unused.
Due to recent developments in the capital markets, we have determined that
Globix cannot rely upon obtaining additional funding from these markets on an
acceptable basis within the near future. Consequently, we have modified our
expansion plan to delay, scale-back and eliminate certain facilities and the
purchase of related equipment. Although the full details of this plan have not
been finalized or fully negotiated, it provides for certain anticipated costs
associated with these modifications. The plan assumes that Globix will be able
to obtain additional financing from its suppliers and to refinance its new
Greenwich Street, New York property, which is currently debt free. The plan also
assumes certain costs and cost savings as we reduce the number of facilities
under construction. There can be no assurance that these assumptions will prove
correct. Based on these assumptions, our plan is fully funded to fiscal 2003
when Globix expects to become free cash flow positive. We will continue to
monitor the capital markets with a view towards obtaining additional funding to
accelerate the growth of our business.
Conversion to the Euro
On January 1, 1999, eleven of the fifteen member countries of the European
Union established a fixed conversion rate between their existing sovereign
currencies and a new currency called the "Euro." These countries have agreed to
adopt the Euro as their common legal currency on that date. The Euro trades on
currency exchanges and is available for non-cash transactions. Thereafter and
until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries.
Globix does not anticipate that the implementation of the Euro will have a
material adverse effect on its business operations as the operations of Globix
expands into other European countries. However there are no assurances that the
implementation of the Euro will not have a material adverse affect on Globix's
business, financial condition and results of operations. In addition, Globix
cannot predict the impact the Euro will have on currency exchange rates or
Globix's currency exchange risk.
Recent Technical Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities,"("SFAS No. 133"), as amended, which is
effective for all quarters of the fiscal year beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging securities. Globix expects the adoption of SFAS No.
133 will not have a material impact on Globix's consolidated financial position,
results of operations and cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation-An Interpretation of APB Opinion No. 25". The interpretation
clarifies the application of APB Opinion No. 25 in specified events. The
interpretation was effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998 and prior to the effective date. To
the extent that events covered by this interpretation occurred during the period
after December 15, 1998, but prior to the effective date, the effects of
applying this interpretation would be recognized on a prospective basis from the
effective date. Accordingly, upon initial application of the final
interpretation, (a) no adjustments would be made to the financial statements for
periods before the effective date and (b) no expense would be recognized for any
additional compensation cost measured that is attributable to periods before the
effective date. Globix expects that the adoption of this interpretation will not
have a material impact on its consolidated financial position, results of
operations and cash flows.
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At December 31, 2000, we had financial instruments consisting of fixed
rate debt, mortgage payable marketable securities, short-term investments and
other investments. The substantial majority of our debt obligations consist of
the Senior Notes, which bear interest at 12.5% and mature May 1, 2010. The
mortgage interest is payable at 9.16% (subject to adjustment on February 11,
2010) based on a 25 year amortization schedule. Principal and interest payments
of $178.5 are payable monthly and any balance of the principal and all accrued
and unpaid interest is due and payable in February 2025. Annual maturities for
our capital lease obligations in each of the next twelve-months are as follows:
$3.1 million in 2001, $1.7 million in 2002, $1.2 million in 2003, $0.1 million
in 2004 and thereafter.
Marketable securities include Globix's strategic investment in Edgar On-
Line, a publicly traded entity, which is recorded at its fair market value.
Globix does not hedge its exposure to fluctuations in the value of its equity
securities.
Our other investments are generally fixed rate investment grade and
government securities denominated in U.S. dollars. At December 31, 2000, all of
our investments are due to mature within twelve months except $31.1 million and
the carrying value of such investments approximates fair value. At December 31,
2000, $38.1 million of our cash and investments were restricted in accordance
with the terms of certain collateral obligations.
We actively monitor the capital and investing markets in analyzing our
capital raising and investing decisions.
Globix is also subject to market risk associated with foreign currency
exchange rates. Globix's business plan includes the expansion of the U.K.
operation. To date, Globix has not utilized financial instruments to minimize
its exposure to foreign currency fluctuations. Globix will continue to analyze
risk management strategies to minimize foreign currency exchange risk in the
future.
Globix believes it has limited exposure to financial market risks,
including changes in interest rates. The fair value of our investment portfolio
or related income would not be significantly impacted by a 100 basis point
increase or decrease in interest rates due mainly to the short-term nature of
the major portion 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.
PART II
Item 1. Legal Proceedings
We are not party to any material legal proceedings.
Item 2. Changes in Securities and Use of Proceeds
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 2000 there were no matters submitted
to a vote of security holders.
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits-Not Applicable
(b) Reports on Form 8-K-Not Applicable
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/ MARC H. BELL
-------------------------------------------------
Marc H. Bell, President,
Chief Executive Officer and Chairman
Date: February 13, 2001
By: /s/ BRIAN L. REACH
-------------------------------------------------
Brian L. Reach, Senior Vice President and
Chief Financial Officer
Date: February 13, 2001
By: /s/ SHAWN P. BROSNAN
-------------------------------------------------
Shawn P. Brosnan, Vice President,
Corporate Controller and Chief Accounting Officer
Date: February 13, 2001
16