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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 JUNE 30, 2004
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 August
3, 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 June 30, 2004 (Unaudited) and September 30, 2003......................... 1
Interim Unaudited Consolidated Statements of Operations -- For the Three Month Periods Ended June 30, 2004
and 2003 and For the Nine Month Periods Ended June 30, 2004 and 2003....................................... 2
Interim Unaudited Consolidated Statements of Cash-Flows -- For the Nine Month Periods Ended June 30, 2004
and 2003................................................................................................... 3
Notes to the Interim Unaudited Consolidated Financial Statements.............................................. 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk.................................................... 18
Item 4 Controls and Procedures....................................................................................... 18
Part II Other Information
Item 1. Legal Proceedings............................................................................................. 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.............................. 19
Item 3. Defaults Upon Senior Securities............................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders........................................................... 19
Item 5. Other Information ............................................................................................ 19
Item 6. Exhibits and Reports on Form 8-K ............................................................................. 20
Signatures .............................................................................................................. 21
Certifications .............................................................................................................. 22-25
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
JUNE 30, SEPTEMBER 30,
2004 2003
------------- -------------
(Unaudited)
-------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 10,954 $ 24,503
Short-term investments ..................................................... 8,501 7,226
Marketable securities ...................................................... 507 1,531
Accounts receivable, net of allowance for doubtful accounts of $2,163 and
$2,646, respectively .................................................... 5,964 6,012
Prepaid expenses and other current assets .................................. 6,083 4,497
Restricted cash ............................................................ 2,068 2,195
------------- -------------
Total current assets ............................................. 34,077 45,964
Investments ................................................................ 2,233 697
Investments, restricted .................................................... 2,335 4,733
Property, plant and equipment, net ......................................... 92,450 162,630
Intangible assets, net of accumulated amortization of $3,267 and $1,997,
respectively ............................................................ 8,088 8,158
Other assets ............................................................... 426 100
------------- -------------
Total assets ..................................................... $ 139,609 $ 222,282
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation and mortgage payable ........... $ 562 $ 1,510
Accounts payable ........................................................... 5,203 5,846
Accrued liabilities ........................................................ 9,657 10,159
------------- -------------
Total current liabilities ........................................ 15,422 17,515
Capital lease obligations, net of current portion .......................... 185 374
Mortgage payable ........................................................... 19,681 19,912
11% Senior Notes ........................................................... 72,202 112,321
Accrued interest - 11% Senior Notes ........................................ 1,347 5,182
Other long term liabilities ................................................ 8,153 10,659
Put-option liability ....................................................... -- 2,968
------------- -------------
Total liabilities ................................................ 116,990 168,931
------------- -------------
Commitments and contingencies (Note 6)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000
issued and outstanding, for all periods presented ...................... 165 165
Additional paid-in capital ................................................. 99,981 97,191
Accumulated other comprehensive income ..................................... 4,672 2,401
Accumulated deficit ........................................................ (82,199) (46,406)
------------- -------------
Total stockholders' equity........................................ 22,619 53,351
------------- -------------
Total liabilities and stockholders' equity ....................... $ 139,609 $ 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 FOR THE NINE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenue, net ......................................... $ 15,729 $ 14,519 $ 45,143 $ 46,367
Operating costs and expenses:
Cost of revenue (excluding depreciation,
amortization, certain payroll and occupancy
shown below) ................................... 4,935 4,601 14,785 15,499
Selling, general and administrative .............. 10,870 9,253 32,554 33,714
Loss on impairment of assets ..................... -- -- 17,972 --
Depreciation and amortization .................... 3,519 4,057 10,363 11,900
------------- ------------- ------------- -------------
Total operating costs and expenses ........... 19,324 17,911 75,674 61,113
Other operating income ........................... -- -- -- 345
------------- ------------- ------------- -------------
Loss from operations ................................. (3,595) (3,392) (30,531) (14,401)
Interest and financing expense ................... (2,466) (3,758) (8, 975) (11,223)
Interest income .................................. 100 295 415 1,030
Other (expense) income, net ...................... 412 220 1,607 606
Gain on discharge of debt ........................ -- 1,154 1,747 5,925
Minority interest in subsidiary .................. -- 105 -- 333
------------- ------------- ------------- -------------
Loss before income taxes ............................. (5,549) (5,376) (35,737) (17,730)
Income tax expense ................................... 21 -- 56 --
------------- ------------- ------------- -------------
Net loss ............................................. $ (5,570) $ (5,376) $ (35,793) $ (17,730)
============= ============= ============= =============
Basic and diluted loss per share ..................... $ (0.34) $ (0.33) $ (2.17) $ (1.08)
============= ============= ============= =============
Weighted average common shares outstanding--basic
and diluted ...................................... 16,460,000 16,460,000 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 NINE MONTHS ENDED
-----------------------------
JUNE 30, JUNE 30,
2004 2003
------------- -------------
Cash Flows From Operating Activities
Net Loss .................................................................. $ (35,793) $ (17,730)
Operating activities:
Depreciation and amortization ............................................ 10,363 11,900
Provision for uncollectible receivables .................................. 591 1,432
Gain on debt discharge ................................................... (1,747) (5,925)
Gain on sale of short-term investments ................................... -- --
Unrealized gain on investments ........................................... (477) (356)
Loss on impairment of assets ............................................. 17,972 --
Gain on sale of marketable securities .................................... 249 --
Amortization of deferred compensation and issuance of stock warrants ..... -- 1,050
Minority interest in subsidiary .......................................... -- (333)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ............................... 346 (336)
Decrease (increase) in prepaid expenses and other current assets ......... (942) 2,846
Increase in other assets ................................................. (326) --
Decrease in accounts payable ............................................. (972) (265)
Decrease in accrued liabilities .......................................... (1,330) (7,184)
Increase in accrued interest ............................................. 7,365 9,271
Other .................................................................... (283) (3,111)
------------- -------------
Net Cash Used in Operating Activities ..................................... (4,984) (8,741)
------------- -------------
Cash Flows From Investing Activities
Investments in short-term and long-term investments ...................... (2,641) (6,967)
Use of restricted cash and investments ................................... 2,710 2,727
Proceeds from sale of marketable securities .............................. 1,000 --
Proceeds from sale of property plant and equipment ....................... 48,694 --
Payment for business acquired from Aptegrity (Appendix A) ................ (2,287) --
Purchase of property, plant and equipment ................................ (3,179) (1,186)
------------- -------------
Net Cash Provided by (Used in) Investing Activities ....................... 44,297 (5,426)
------------- -------------
Cash Flows From Financing Activities
Proceeds from exercise of warrants ....................................... 25 --
Repurchase of 11% Senior Notes ........................................... (49,573) (14,612)
Repayment of long-term note payable ...................................... (2,666) --
Capital contribution (distribution) in minority-owned subsidiary, net .... (202) 5,997
Capital lease termination payment ........................................ (439) --
Repayment of mortgage payable and capital lease obligation ............... (424) (1,050)
------------- -------------
Net Cash Used in Financing Activities ..................................... (53,279) (9,665)
------------- -------------
Effects of Exchange Rates Changes on Cash and Cash Equivalents ............ 417 636
------------- -------------
Decrease in Cash and Cash Equivalents ..................................... (13,549) (23,196)
Cash and Cash Equivalent, Beginning of Period ............................. 24,503 47,562
------------- -------------
Cash and Cash Equivalent, End Period ...................................... $ 10,954 $ 24,366
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest .................................................... $ 5,261 $ 1,755
============= =============
Non-cash financing activities:
Issuance of 11% Senior Notes as payable interest in kind .................. $ 7,155 $ 11,298
============= =============
Put-option ................................................................ $ 2,968 $ --
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
3
APPENDIX A - PAYMENT FOR BUSINESS ACQUIRED FROM APTEGRITY:
FOR THE NINE MONTHS ENDED
-----------------------------------
JUNE 30, JUNE 30,
2004 2003
---------------- ----------------
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 UNAUDITEDCONSOLIDATED FINANACIAL 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 services 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.
During October 2003 the Company reached an agreement, which was subject
to various closing conditions, to sell the property located at 415
Greenwich Street, New York, NY ("the Property") for total cash
consideration of approximately $60,000. From October 2003 until the
completion of the sale on January 22, 2004 the Property was classified
under current assets as property held for sale in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" and accordingly was not depreciated during that period. In
connection with the sale the Company recorded during the period ended
June 30, 2004 an impairment charge of $17,972 to write-down the
Property to its market value less cost to sell of approximately $12,000
reflecting a $7,000 termination payment to a third party investor (the
"Investor") in the Property, approximately $1,800 of property taxes due
in connection with the sale and other related expenses. Also included
in the cost to sell were $450 of sale related bonuses to certain of the
Company's Executive Officers and employees, which included a $169
payment to the Chairman of the Board of Directors for his contributions
in connection with the sale. In connection with the $7,000 termination
payment, the Investor agreed to cancel the put-option it had with the
Company. The put option gave the Investor the right to require the
Company to purchase the Investor's interest in an LLC under various
circumstances for an amount equal to 25% of the Investor's capital
contribution in the LLC. Accordingly the Company reversed the
put-option liability in the amount of $2,968, which represented the
fair value of the put-option, through its stockholder's equity.
As part of the sale of the Property the Company guaranteed to indemnify
and hold the third party investor harmless from any adverse
consequences, that the Investor may suffer by reason of any
non-compliance by the Company, that directly impaired its ability to
use the Historic Tax Credits ("HTC"), associated with the Property. The
guaranty is limited to the amount of the HTC used by the Investor
estimated at approximately $10,160. The Company estimated the fair
value of the guaranty as immaterial based on a discounted cash-flow
model.
On March 3, 2004 the Company used approximately $44,000 of the net
proceeds from the sale to repurchase $40,274 in principal amount of its
outstanding 11% Senior Notes Due 2008 at par value plus accrued
interest in the amount of $3,716. The Company intends to use the
remaining balance of the net proceeds from the sale for working capital
purposes.
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.
During April 2004, the Company reached an agreement with the holder of
its $2,600 note payable to prepay the note prior to its maturity for a
total consideration of $2,666, representing the face value of the note,
accrued interest of $11 and a $55 settlement amount. Following the
settlement the $2,600 included in the Company's long-term restricted
investment were released from escrow.
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
The Company has historically experienced negative cash flow from
operations and has incurred net losses. For the nine months ended June
30, 2004, the Company had a net loss of $35,793 and an accumulated
deficit at June 30, 2004 of $82,199. Our ability to generate positive
cash flows from operations and achieve profitability is dependant upon
our ability to grow our revenue while maintaining our current cost
structure and network efficiencies. Our management believes that steps
taken as part of our restructuring efforts to reduce facilities and
personnel, combined with our ongoing efforts to derive efficiencies
from our network have reduced our expenses to a level that meets our
current revenue rate. The Company believes that its internally
generated funds, available cash and investments are sufficient to meet
its presently anticipated day-to-day operating expenses, commitments,
working capital, capital expenditure and interest payments under its
11% Senior Notes when required to be made in cash. However, there can
be no assurance that we will be successful in executing our business
plan, achieving profitability, attracting new customers or maintaining
our existing revenue levels or reducing our outstanding indebtedness.
In the future, the Company may make acquisitions or repurchase
indebtedness of the Company, which, in turn, may adversely affect the
Company's liquidity.
Approximately 27%, 21% (Unaudited) and 38% of the Company's cost of
revenue for the nine and three month periods ended June 30, 2004 and
for the fiscal year ended September 30, 2003, respectively is derived
from services provided by 2 major telecommunication carriers. While the
Company believes that most of these services can be obtained from other
alternative carriers, an interruption in services from one of these
carriers or other suppliers could limit the Company's ability to serve
its customers, which would adversely affect the Company's results of
operations. No single customer comprised more than 10% of the Company's
revenues for any of the periods presented.
NOTE 2 - MERGERS AND ACQUISITIONS
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. 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.
On July 19, 2004, Globix signed a definitive merger agreement with NEON
Communications, Inc. ("Neon"), a privately held provider of optical
networking services for customers in the Northeast and mid-Atlantic
markets. Neon's revenue for the year ended December 31, 2003 was
$41,600. Under the merger agreement, holders of Neon common stock,
options and warrants will receive 1.2748 shares of Globix common stock
for each share of common stock, options or warrants owned by the
holder. As a result of the merger, Neon will become a wholly owned
subsidiary of Globix, and holders of Neon common stock and warrants
will receive approximately 27.6 million shares of Globix common stock,
representing approximately 56.7% of the outstanding shares of common
stock of the combined entity. In addition at the closing, the combined
entity's cash will be used to redeem one third of Neon's preferred
stock and accrued dividends at closing and Globix will issue
convertible preferred stock for the balance. Assuming a September 30,
2004 closing, Neon preferred stockholders will receive in the aggregate
approximately $5,100 in cash and approximately 1,152,948 shares of a
class of Globix preferred stock to be created in the merger, having an
aggregate liquidation value of approximately $10,200. The new Globix
preferred stock will vote together with the common stock and will be
convertible into shares of Globix common stock. The Globix preferred
stock will accrue dividends at a rate of 12% per annum and will be
redeemable only at the option of Globix, and at the option of the
holders upon a change in control.
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Following the merger, the Board of Globix will include 4 members of the
Board of Directors of Neon, 4 members of the current Globix Board and 1
member who currently serves on both the Globix and the Neon Boards.
The transaction is subject to a number of conditions, including
approval of the merger by Neon stockholders, the registration of the
Globix common stock and preferred stock to be issued in the merger and
other regulatory approvals. The merger is also conditioned upon a debt
for equity exchange where, in a private transaction, certain of
Globix's senior secured note holders will exchange $12,500 in principal
and accrued interest of its 2008 11% Senior Notes for approximately
4,545,455 shares of Globix common stock.
NOTE 3 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The condensed consolidated financial statements of 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 accounting principles generally accepted 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 June 30, 2004 and for the three and nine month periods 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 and nine
month periods ended June 30, 2004 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.
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
The following table illustrates the effect on loss attributable to
common stockholders and loss per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------- ---------- ---------- ---------
Net loss as reported ............................. $ (5,570) $ (5,376) $ (35,793) $(17,730)
Add: Stock-based employee compensation expense
(income) included in reported net loss ..... (13) -- -- --
Deduct: Amortization of stock-based employee
compensation expense determined under fair
value based method ....................... 139 584 374 1,084
========= ========== ========== =========
Pro-forma net loss attributed to common
stockholders ............................... $ (5,696) $ (5,960) $ (36,167) $(18,814)
========= ========== ========== =========
Basic and diluted - as reported .................. $ (0.34) $ (0.33) $ (2.17) $ (1.08)
========= ========== ========== =========
Basic and diluted - Pro-forma .................... $ (0.35) $ (0.36) $ (2.20) $ (1.14)
========= ========== ========== =========
Under SFAS No. 123 the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
---------------------- ----------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
--------- ---------- ---------- ---------
Expected life (in years)............... -- 5.0 5.0 4.2
Risk-free interest rate................ -- 2.7% 3.2% 2.7%
Volatility............................. -- 142% 120% 128%
Dividend yield......................... -- 0.0% 0.0% 0.0%
For the nine-month and three month periods ended June 30, 2004, the
Company granted its employees 175,000 and 0 options, respectively.
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.
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 4 - 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 FOR THE NINE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues:
United States ............. $ 9,221 $ 8,785 $ 26,334 $ 28,764
Europe (mainly the U.K) ... 6,508 5,734 18,809 17,603
------------- ------------- ------------- -------------
Consolidated .............. $ 15,729 $ 14,519 $ 45,143 $ 46,367
============= ============= ============= =============
Operating income (loss):
United States ............. $ (4,807) $ (4,337) $ (33,446) $ (17,066)
Europe (mainly the U.K) ... 1,212 945 2,915 2,665
------------- ------------- ------------- -------------
Consolidated .............. $ (3,595) $ (3,392) $ (30,531) $ (14,401)
============= ============= ============= =============
JUNE 30, SEPTEMBER 30,
2004 2003
------------- -------------
Tangible assets:
United States............... $ 66,305 $ 137,279
U.K ........................ 26,145 25,351
------------- -------------
Consolidated............... $ 92,450 $ 162,630
============= =============
Although the Company operates in one operating segment, there are 4 major
service lines as follows:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Internet Hosting and Co-Location .............. $ 6,106 $ 6,372 $ 17,854 $20,088
Managed Services .............................. 4,917 3,194 13,721 10,089
Network Services and Internet Access .......... 4,465 4,874 13,197 14,643
Hardware and Software Sales, DSL and Other .... 241 79 371 1,547
------------- ------------- ------------- -------------
Revenue, net ............................. $ 15,729 $ 14,519 $ 45,143 $ 46,367
============= ============= ============= =============
NOTE 5 - COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net loss....................................... $ (5,570) $ (5,376) $ (35,793) $ (17,730)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities available for sale............. (122) 3 140 (316)
Foreign currency translation adjustment..... (303) 1,482 2,131 1,743
------------- ------------- ------------- -------------
Comprehensive loss ............................ $ (5,995) $ (3,891) $ (33,522) $ (16,303)
============= ============= ============= =============
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 6 - COMMITMENTS AND CONTINGENT LIABILITIES
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York entitled In re
Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit names
as defendants Globix and our former officers Marc Bell, Peter Herzig
(who remains a director of Globix) and Brian Reach, and asserts claims
under sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder on behalf of all persons or
entities who purchased our securities between November 16, 2000 and
December 27, 2001.
A consolidated amended complaint was filed in this lawsuit on June 28,
2002. The Company filed a motion to dismiss the consolidated amended
complaint, but withdrew this motion without prejudice in the course of
settlement discussions with the parties. On March 31, 2004, the parties
entered into an agreement in principle to settle all claims against the
defendants for $3,500, all of which would be covered by insurance. The
proposed settlement is subject to the approval of the court. If the
settlement is not approved by the court, the Company intends to re-file
our motion to dismiss. We believe that the allegations in this lawsuit
are without merit and we intend to vigorously defend against them.
Although there can be no assurance as to the outcome or effect of this
lawsuit, the Company does not believe, based on currently available
information, that the ultimate liabilities, if any, resulting from this
lawsuit will have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order
provides that 229,452 shares of our common stock and $1,968 in
aggregate principal amount of the 11% Senior Notes will be held in
escrow pending the outcome of the class action lawsuit. In the event
that any judgment or settlement entered into in connection with the
class action lawsuit requires us to pay an amount in excess of our
liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is
$10,000 or greater) or a portion of (in the event that this excess is
less than $10,000) the shares of our common stock and the 11% Senior
Notes being held in escrow. Based on the settlement discussions and
proposed settlement agreement, the Company does not believe that the
shares of common stock and 11% Senior Notes that are being held in
escrow are likely to be distributed to the class action litigants and
their attorneys.
On November 12, 2003, we were served with a complaint filed in the
United States Court for Southern District of New York, entitled Alfred
G. Binford v. Globix Corporation, alleging breach of contract claims
related to the failure to make payments under an employment letter, as
amended, seeking damages in the amount of $2,113. Although there can be
no assurance as to the outcome or effect of this lawsuit, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material
adverse impact on our business, financial condition, results of
operations or cash flows. Globix has accrued its estimated liability. A
court date of November 1, 2004 has been set.
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. Except for the information described above, 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.
10
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 September 30, 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
businesses 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 hardware usage, bandwidth and
managed services to meet customer-specific needs.
MANAGED SERVICES - We provide managed application, system, network and media
services to our hosting and co-location customers. Such services include a wide
variety of maintenance, administration and problem resolution services for many
popular operating systems, Internet network devices, software security
solutions, web-based applications, as well as streaming media delivered in a
streaming or continuous fashion over the Internet or over a company's intranet.
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.
11
OTHER - Is comprised of hardware and software sales and other non-recurring
revenue.
For the nine-month period ended June 30, 2003 other also includes revenue from
DSL customer accounts, which were sold during the second quarter of fiscal year
2003.
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 of America. The preparation of our financial statements
requires us to make estimates that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosures of contingent assets
and liabilities. We base our accounting estimates on historical experience and
other factors that are believed to be reasonable under the circumstances.
However, actual results may vary from these estimates under different
assumptions or conditions. The following is a summary of our critical accounting
policies and estimates:
REVENUE RECOGNITION
Revenue consists primarily of Internet Hosting, Co-Location, Managed Services,
Network Services and Internet Access.
We recognize revenue in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial
Statements," as amended when delivery has occurred, persuasive evidence of an
agreement exists, the fee is fixed or determinable and collectability is
probable. SAB No. 101 expresses the view of the Securities and Exchange
Commission's staff in applying accounting principles generally accepted in the
United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 101, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months. Effective
October 1, 2000, we changed our revenue recognition method for set up and
service installation fees upon the adoption of SAB No. 101. Prior to our
adoption of SAB No. 101, we recognized revenue immediately upon completion of
set up or installation. The change in accounting principle resulted in a revenue
deferral and cumulative effect charge totaling $2.3 million, or $0.06 per share,
which was reflected in our consolidated statements of operations for the fiscal
year ended September 30, 2001. Our adoption of SAB No. 101 decreased our net
loss by $0.5 million for the fiscal year ended September 30, 2001. The effect of
our adoption of SAB No. 101 for the fiscal year ended September 30, 2000 was not
material.
Monthly service revenue under recurring agreements related to Internet Hosting,
Co-Location, Network Services, Internet Access and Managed Services is
recognized over the period the service is provided. Revenue derived from project
or event type Managed Service engagements is recognized over the life of the
engagement. Payments received in advance of providing services are deferred
until the period that these services are provided. As of June 30, 2004 and
September 30, 2003 deferred revenue amounted to $1,637 and $1,924, respectively.
COST OF REVENUE
Cost of revenue consists primarily of telecommunications costs for Internet
access and managed hosting and includes the cost of hardware and software
purchased for resale to customers and payroll cost, which relates to certain
managed services. Cost of revenue excludes certain payroll, occupancy,
depreciation and amortization. Telecommunications costs include the cost of
providing local loop for connecting dedicated access customers to the Company's
network, leased line and associated costs related to connecting with the
Company's peering partners and costs associated with leased lines connecting the
Company's facilities to its backbone and aggregation points of presence.
INTANGIBLE ASSETS
We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets" when we emerged from bankruptcy in April 2002. SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS No. 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. SFAS
No. 142 provides that intangible assets with indefinite lives and goodwill will
not be amortized but will be tested at least annually for impairment. If
impairment is indicated then the asset will be written down to its fair value
typically based upon its future expected discounted cash flows.
12
Our intangible assets following bankruptcy are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
We amortize intangible assets by the straight-line method over their estimated
useful lives. Trademarks and trade name are amortized over a period of 7-15
years, network build-out/know-how is amortized over 8 years and the customer
contracts are amortized over 2-3 years.
ESTIMATES
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Use of
estimates and assumptions include, but are not limited to, allowance for
doubtful accounts, credit reserve and deferred tax valuation allowance.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CREDIT RESERVE
At each reporting period we evaluate on a specific basis the economic condition
of our customers and their ability and intent to pay their debt. If such
evaluation shows that it is probable that a customer will not settle his full
obligation, a reserve against accounts receivable in general and administrative
expense is recorded for the questionable amount. We also maintain a general bad
debt reserve, which is based on the aging of our customers receivables. In
addition during each reporting period we must make estimates of potential future
credits, which will be issued in respect of current revenues. We analyze
historical credits and changes in customer demands regarding our current
billings when evaluating credit reserves. If such analysis shows that it is
probable that a credit will be issued, we reserve the estimated credit amount
against revenues in the current period. As of June 30, 2004 and September 30,
2003 the balance of bad debt reserve amounted to approximately $2.2 million
(Unaudited) and $2.6 million, respectively.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial statements we are
required to estimate our income tax expense in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as accruals and reserves, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. Management currently estimates that it is more
likely than not that these assets will not be realized in the foreseeable future
and accordingly a 100% valuation allowance is recorded against the deferred tax
assets.
INTERIM FINANCIAL INFORMATION
The consolidated financial information as of June 30, 2004 and for the three and
nine months ended June 30, 2004 and 2003 is unaudited, but includes all
adjustments, consisting only of normal and recurring accruals, that management
considers necessary for a fair presentation of its combined results of
operations, financial position and cash flows. Results for the three and nine
months ended June 30, 2004 and 2003 are not necessarily indicative of results to
be expected for the entire fiscal year.
13
QUARTER ENDED JUNE 30, 2004 COMPARED TO THE QUARTER ENDED JUNE 30, 2003
REVENUE, NET. Revenue for the quarter ended June 30, 2004 increased 8.3% or $1.2
million to $15.7 million from $14.5 million for the three-month period ended
June 30, 2003. We analyze the change in our revenue by service lines as follows:
Revenue from Managed Services increased by $1.7 million to $4.9 million in the
quarter ended June 30, 2004 mainly due to the Aptegrity acquisition and our
continued growth in Managed Services. Revenue from Internet Hosting and
Co-Location and revenue from Network Services and Internet Access were down $266
thousand and $409 thousand, respectively to $6.1 million and $4.5 million,
respectively for the three month period ended June 30, 2004 mainly due to lower
revenue under recurring contracts. Hardware and software sales, DSL and Other
were up by $162 thousand to $241 thousand for the quarter ended June 30, 2004
mainly due to a non-recurring event and slightly higher hardware and software
sales. The aforementioned analysis includes the positive effect of foreign
exchange rates between the U.S. dollar and the British Pound in the amount of
approximately $675 thousand on our revenue quarter over quarter.
During the quarter ended June 30, 2004 our monthly positive change in contract
rate (negative churn) averaged 1.0% compared to a monthly averaged churn rate of
1.7% for the quarter ended June 30, 2003. New contracts increased 1.3% and
contract upgrades increased 1.7% offset by 1.0% increase in contract downgrades
and 1.0% increase in customer cancellations. 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.
COST OF REVENUE. Cost of revenue for the quarter ended June 30, 2004, increased
$334 thousand to $4.9 million from $4.6 million for the quarter ended June 30,
2003. This was mainly due to additional labor costs of $801 thousand associated
with the business acquired from Aptegrity and our continued focus on Managed
Services, offset by a decrease of approximately $460 thousand of costs
associated with our network cost resulting from our continued focus on deriving
efficiencies and cost savings from our network. The aforementioned analysis
includes the adverse effect of foreign exchange rates between the U.S dollar and
the British Pound in the amount of approximately $86 thousand on cost of revenue
quarter over quarter. As a result of the variances described above and as a
result of the increase in our revenue, gross margins increased to 68.6% for the
quarter ended June 30, 2004 compared to 68.3% for the quarter ended June 30,
2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased $1.6 million to $10.9 million as compared to $9.3 million for
the quarter ended June 30, 2003. The increase in selling, general and
administrative expenses was mainly due to a $1.7 million credit recorded during
the three month period ended June 30, 2003 as a result of the settlement of the
Rabbi Trust litigation as described in our Annual Report on Form 10-K. In
addition, salaries and benefits increased $439 thousand to $5.5 million in the
quarter ended June 30, 2004 compared to $5.0 million in the quarter ended June
30, 2003. Our marketing expenses were up by $283 thousand to $366 thousand as a
result of our increased efforts to enhance long-term growth and improve our
public relations. These were offset by a decrease in our bad debt expenses of
$136 thousand to $41 thousand for the quarter ended June 30, 2004, compared to
$177 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 and by other costs reductions in the amount of $374 thousand
arising from negotiating with our vendors and other service providers as part of
our efforts to reduce our costs.
The aforementioned analysis includes the adverse effect of foreign exchange rate
in the amount of approximately $356 thousand on selling, general and
administrative quarter over quarter.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased to $3.5
million for the quarter ended June 30, 2004, as compared to $4.1 million in the
quarter ended June 30, 2003. The decrease resulted from $434 thousand of
depreciation expenses recorded in the three month period ended June 30, 2003
related to the Property which was not depreciated during the same period in 2004
and from lower capital spending, offset by amortization of intangible assets
resulting from the acquisition of Aptegrity in the amount of $80 thousand.
14
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the quarter
ended June 30, 2004 was $2.5 million, compared to $3.8 million, for the quarter
ended June 30, 2003. This decrease was attributable to the repurchase of
approximately $16.8 million of our 11% Senior Notes during the calendar year
2003 and by the repurchase of approximately $40.3 million of our 11% Senior
Notes during March 2004. These were offset by an increase in the balance of the
11% Senior Notes of approximately $11.3 million and $7.2 million resulting from
the required payment in kind of the related accrued interest as of May, 2003 and
May 2004, respectively.
INTEREST INCOME. Interest income for the quarter ended June 30, 2004 was $100
thousand, compared to $295 thousand, for the quarter ended June 30, 2003. The
decrease was primarily due to a decrease in our cash and investments balances.
OTHER INCOME, NET. Other income for the quarter ended June 30, 2004 was $412
thousand, compared to $220 thousand, for the quarter ended June 30, 2003. The
increase was due primarily to rental income of $224 thousand from leasing office
space in our 139 Centre Street facility.
INCOME TAX EXPENSE. Income tax expenses for the quarter ended June 30, 2004 in
the amount of $21 thousand represent our estimated income taxes due in the U.K.
We did not record any income tax expense during the same period of 2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors
described above, we reported net loss of $5.6 million, or $0.34 basic and
diluted loss per share for the quarter ended June 30, 2004, as compared to a net
loss of $5.4 million, or $0.33 basic and diluted loss per share for the quarter
ended June 30, 2003.
NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2003
REVENUE, NET. Revenue for nine-month period ended June 30, 2004 decreased 2.6%
or $1.2 million to $45.1 million from $46.3 million for the nine-month period
ended June 30, 2003. By service lines, revenue from Internet Hosting and
Co-Location and revenue from Network Services and Internet Access were down $2.2
and $1.4 million, respectively to $17.9 million and $13.2 million, respectively
for the nine month period ended June 30, 2004 mainly due to lower revenue under
recurring contracts. Hardware and software sales, DSL and Other was down by $1.2
million to $371 thousand for the nine month period ended June 30, 2004 mainly
due to a decrease of $718 thousand from DSL services as a result of the sale of
our DSL customer accounts during the fiscal year 2003 and a decrease of
approximately $400 thousand in lower margin hardware and software sales. Revenue
from Managed Services increased by $3.6 million to $13.7 million in the
nine-month period ended June 30, 2004 mainly due to the Aptegrity acquisition
and our continued growth in Managed Services. The aforementioned analysis
includes the positive effect of foreign exchange rates between the U.S. dollar
and the British Pound in the amount of approximately $2.0 million on our revenue
period over period. During the nine-month period ended June 30, 2004 our monthly
positive change in contract rate (negative churn) averaged 0.7% compared to a
monthly averaged churn rate of 2.1% for the same period in 2003. New contracts
increased 2.3% and contract upgrades increased 1.5%, offset by 1.6% increase in
contract downgrades and a 1.5% increase in contract cancellations.
COST OF REVENUE. Cost of revenue for the nine-month period ended June 30, 2004,
decreased $714 thousand to $14.8 million from $15.5 million for the same period
in 2003. This was mainly due to $2.3 million decrease in our network cost
resulting from our continued focus on deriving efficiencies and cost savings
from our network. Additional decrease of approximately $400 thousand resulted
from lower hardware costs as a result of our shift away from lower margin
hardware sales. These decreases were offset in part by additional labor costs of
$2.0 million associated with the business acquired from Aptegrity and our
continued focus on Managed Services. The aforementioned analysis includes the
adverse effect of foreign exchange rates between the U.S dollar and the British
Pound in the amount of approximately $275 thousand on cost of revenue period
over period. As a result of the variances described above gross margins
increased to 67.2% for the nine month period ended June 30, 2004 compared to
66.6% for the same period ended June 30, 2003.
15
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses decreased $1.2 million to $32.6 million as compared to $33.7 million
for the nine-month period ended June 30, 2003. The decrease in selling, general
and administrative expenses was mainly due to a one time non-cash charge of $1.1
million in the second quarter of fiscal 2003 related to warrants granted to one
of the Company's consultants. In addition salaries and benefits decreased $686
thousand to $15.7 million in the nine-month period ended June 30, 2004 compared
to $16.4 million in the same period in 2003, which resulted from our
restructuring efforts that focused on significant reduction in facilities and
personnel. Bad debt expenses decreased $817 thousand to $615 thousand for the
nine-month period ended June 30, 2004, compared to $1.4 million in the same
period last year, as a result of improvement in collections and a reduction in
the number of high risk customer account receivable balances. Other cost savings
amounting to approximately $700 thousand resulting from our efforts to reduce
our operating cost. These were offset mainly by a $1.7 million credit recorded
during the nine-month period ended June 30, 2003 as a result of the settlement
of the Rabbi Trust litigation. In addition, our marketing expenses were up by
approximately $630 thousand to $955 thousand in the nine-month period ended June
30, 2004 as a result of our increased efforts to enhance long-term growth and
improving our public relations. The aforementioned analysis includes the adverse
effect of foreign exchange rate in the amount of approximately $1.1 million on
selling, general and administrative period over period.
LOSS ON IMPAIRMENT OF ASSETS. Impairment charges for the nine month period ended
June 30, 2004 amounted to $18 million as a result of 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 $1.5
million to $10.4 million for the nine-month period ended June 30, 2004, as
compared to $11.9 million in the same period in 2003. The decrease resulted from
$1.3 million of depreciation expenses recorded in the nine month period ended
June 30, 2003 related to the Property which was not depreciated during the same
period in 2004 and from lower capital spending, offset by amortization of
intangible assets resulting from the acquisition of Aptegrity in the amount of
$212 thousand.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the
nine-month period ended June 30, 2004 was $9.0 million, compared to $11.2
million for the same period in 2003. The decrease was attributable to the
repurchase of approximately $16.8 million of our 11% Senior Notes during the
calendar year 2003 and by the repurchase of approximately $40.3 million of our
11% Senior Notes during March 2004. These were offset by an increase in the
balance of the 11% Senior Notes of approximately $11.3 million and $7.2 million
resulting from the required payment in kind of the related accrued interest as
of May, 2003 and 2004, respectively.
INTEREST INCOME. Interest income for the nine-month period ended June 30, 2004
was $415 thousand, compared to $1,030 thousand, for the same period in 2003. The
decrease was primarily due to a decrease in our cash and investments.
OTHER INCOME, NET. Other income for the nine-month period ended June 30, 2004
was $1.6 million, compared to $606 thousand, for the same period in 2003. The
increase was due primarily to the receipt of a $450 thousand for an insurance
claim filed in connection with the September 11, 2001 terrorist attack, and $637
thousand from leasing office space in our 139 Centre Street facility.
INCOME TAX EXPENSE. Income tax expenses for the nine month period ended June 30,
2004 in the amount of $56 thousand represent our estimated income taxes due in
the U.K. We did not record any income tax expense during the same period of
2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors
described above, we reported net loss of $35.8 million, or $2.17 basic and
diluted loss per share for the nine-month period ended June 30, 2004, as
compared to a net loss of $17.7 million, or $1.08 basic and diluted loss per
share for the nine-month period ended June 30, 2003.
16
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2004 the Company had cash and cash equivalents, short-term and
long-term investments totaling to approximately $21.7 million compared to
approximately $32.4 million on September 30, 2003. This decrease of $10.7
million included a $13.5 million decrease in cash and cash equivalents to $11.0
million at June 30, 2004 from $24.5 million at September 30, 2003. This was
mainly attributable to operating activities, investing activities and financing
activities as described below. During the nine month period ended June 30, 2004,
the Company has completed the sale of the Property for approximately $48.7
million in net proceeds, of which approximately $44 million was used to purchase
a portion of our 11% Senior Notes including accrued interest and the remainder
was used for working capital.
OPERATING ACTIVITIES:
Net cash used in operating activities during the nine month period ended June
30, 2004 was approximately $5.1 million. This was attributed mainly to our net
loss of $35.8 million which included non-cash depreciation and amortization
expenses of $10.4 million and a non-cash impairment charge of $18.0 million
resulting from a write-down of the Property to its fair market value less cost
for sale offset by a non-cash gain on debt discharge of $1.7 million resulting
from the repurchase of portion of our 11% Senior Notes. Changes in assets and
liabilities resulted in an increase to operating cash flow of approximately $3.8
million. This was mainly attributed to a $7.4 million increase in accrued
interest on the 11% Senior Notes offset by $1.3 million decrease in accrued
liabilities, a $1.0 million decrease in accounts payable and by $0.9 million
increase in prepaid expenses and other current assets.
INVESTING ACTIVITIES:
Net cash provided by investing activities during the nine-month period ended
June 30, 2004 was $44.3 million. Approximately $48.7 million resulted from the
sale of the Property and approximately $1.0 million, net resulted from the sale
of our investment in Globecomm Systems, Inc. and other investments. This was
offset by the use of $2.3 million for the acquisition of Aptegrity and $3.2
million for capital expenditures.
FINANCING ACTIVITIES:
Net cash used in financing activities during the nine month period ended June
30, 2004 was $53.2 million. Approximately $49.6 million of the cash used in
financing activities was attributed to the repurchase of a portion of our 11%
Senior Notes and related accrued interest in the open market and as part of an
offer to the holders of the 11% Notes in connection with the sale of the
Property. $2.6 million was used to prepay a long-term note payable and the
remaining $1.1 million was used for payment and settlement of certain
contractual obligations.
Historically our cost structure exceeded our revenue base mainly due to high
labor costs resulting from higher then necessary head count, significant level
of overhead due to numerous locations and overlapping within our network. This
has led us to historically experience negative cash flows from operations and
incur net losses. Our management believes that steps taken as part of our
restructuring efforts to reduce facilities and personnel, combined with our
ongoing efforts to derive efficiencies from our network have reduced our
expenses to a level that meets our current revenue rate. Our ability to generate
positive cash flows from operations and achieve profitability is dependent upon
our ability to grow our revenue while maintaining our current cost structure and
network efficiencies. Management believes that by maintaining a monthly positive
change in contract rate (negative churn) and by continuing to focus on providing
managed services solutions it will be able to meet its revenue and profitability
targets. The Company also believes that its internally generated funds,
available cash and investments are sufficient to meet its presently anticipated
day-to-day operating expenses, commitments, working capital, capital expenditure
and interest payments under its 11% Senior Notes when required to be made in
cash. Additionally, since emerging from bankruptcy management has taken several
significant steps to reduce its level of outstanding indebtedness and it is
committed to further reduce its financial obligations by settling them in cash,
converting into equity instruments, refinancing or any other manner, which may
be beneficial to the Company. However, there can be no assurance that we will be
successful in executing our business plan, achieving profitability, attracting
new customers or maintaining our existing revenue levels or reducing our
outstanding indebtedness. In the future, we may make acquisitions or repurchase
indebtedness of our Company, which, in turn, may adversely affect our liquidity.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2004, 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
June 30, 2004, the majority of our investments were due to mature within twelve
months and the carrying value of these investments approximated fair value.
As of June 30, 2004 marketable securities included our investment in EDGAR
Online Inc., which is recorded at fair market value. We do not hedge our
exposure to fluctuations in the value of our investments in equity securities.
At June 30, 2004, $4.4 million of our cash and investments were restricted in
accordance with the terms of certain collateral obligations.
We are also subject to market risk associated with foreign currency exchange
rates. Approximately 42% of our revenues and approximately 28% of our operating
costs and expenses for the nine-month period ended June 30, 2004 were
denominated in British Pounds. To date, we have not utilized financial
instruments to minimize our exposure to foreign currency fluctuations. We will
continue to analyze risk management strategies to minimize foreign currency
exchange risk in the future. The Company believes that an immediate increase or
decrease of 5% of the Dollar in comparison to the British Pound would not have a
material impact on its operating results or cash flows.
We believe that we have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by changes in interest rates due
mainly to the short-term nature of the majority of our investment portfolio. An
increase or decrease in interest rates would not significantly increase or
decrease interest expense on debt obligations, due to the fixed nature of the
substantial majority of our debt obligations.
ITEM 4. CONTROLS AND PROCEDURES
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.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is a putative class action lawsuit pending in the United States District
Court for the Southern District of New York entitled In re Globix Corp
Securities Litigation, No. 02-CV-00082. This lawsuit names as defendants Globix
and our former officers Marc Bell, Peter Herzig (who remains a director of
Globix) and Brian Reach, and asserts claims under sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on
behalf of all persons or entities who purchased our securities between November
16, 2000 and December 27, 2001.
A consolidated amended complaint was filed in this lawsuit on June 28, 2002. We
filed a motion to dismiss the consolidated amended complaint, but withdrew this
motion without prejudice in the course of settlement discussions with the
parties. On March 31, 2004, the parties entered into an agreement in principle
to settle all claims against the defendants for $3.5 million, all of which would
be covered by insurance. The proposed settlement is subject to the approval of
the court. If the settlement is not approved by the court, we intend to re-file
our motion to dismiss. We believe that the allegations in this lawsuit are
without merit and we intend to vigorously defend against them. Although there
can be no assurance as to the outcome or effect of this lawsuit, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material adverse
impact on our business, financial condition, results of operations or cash
flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968,000 in aggregate principal amount
of the 11% senior notes will be held in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) the shares of our common stock and the 11% senior notes being held in
escrow. Based on the settlement discussions and proposed settlement agreement,
Globix does not believe that the shares of common stock and 11% senior notes
that are being held in escrow are likely to be distributed to the class action
litigants and their attorneys.
On November 12, 2003, we were served with a complaint filed in the United States
Court for Southern District of New York, entitled Alfred G. Binford v. Globix
Corporation, alleging breach of contract claims related to the failure to make
payments under an employment letter, as amended, seeking damages in the amount
of $2,113,000. Although there can be no assurance as to the outcome or effect of
this lawsuit, we do not believe, based on currently available information, that
the ultimate liabilities, if any, resulting from this lawsuit will have a
material adverse impact on our business, financial condition, results of
operations or cash flows. Globix has accrued its estimated liability. A court
date of November 1, 2004 has been set.
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. Except for the information described above, 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.
19
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 12, filed May 12, 2004
Current Report on Form 8-K, Item 5, filed July 21, 2004
Current Report on Form 8-K, Item 5 and 12, filed August 3, 2004
20
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: August 3, 2004
By: /S/ Robert M. Dennerlein
---------------------------------------------
Robert M. Dennerlein, Chief Financial Officer
(principal financial and accounting officer)
Date: August 3, 2004
21