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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM 10-K
________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2004
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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ------------------- -----------------------------------------
Common Stock, $.01 par value Over the Counter Bulletin Board
Indicate by check mark whether the 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 checkmark if disclosure of delinquent filers pursuant to
item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2). Yes |_| No |X|
As of March 31, 2004 the aggregate market value of voting stock held by
non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported on the Over the Counter Bulletin Board
Market, was approximately $45.8 million (calculated by excluding shares owned
beneficially by directors and named executive officers).
Number of shares of registrant's common stock outstanding as of
December 15, 2004 was 16,460,000.
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |X| No |_|
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the registrant's definitive proxy statement for its 2005
annual meeting of stockholders which is expected to be filed with the Securities
and Exchange Commission not later than January 28, 2005, are incorporated by
reference into Part III of this report on Form 10-K. In the event such proxy
statement is not filed by January 28, 2005, the required information will be
filed as an amendment to this report on Form 10-K no later than that date.
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GLOBIX CORPORATION
Table of Contents
PAGE
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Part I
Item 1. Business .......................................................................... 1
Item 2. Properties ........................................................................ 20
Item 3. Legal Proceedings ................................................................. 21
Item 4. Submission of Matters To a Vote of Security Holders ............................... 22
Part II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters ............. 23
Item 6. Selected Financial Data ........................................................... 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations ................................................................ 27
Item 7A. Quantitative and Qualitative Disclosures About Market Risk ........................ 44
Item 8. Financial Statements .............................................................. 45
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure ................................................................. 45
Item 9A. Controls and Procedures............................................................. 46
Item 9B. Other Information................................................................... 46
Part III
Item 10. Incorporated by reference to the Registrant's proxy statement for its 2005
Annual Meeting of Stockholders (except for information in response
to Item 406 of Regulation S-K) ............................................. 47
Items 11-14. Incorporated by reference to the Registrant's proxy statement for its
2005 Annual Meeting of Stockholders ........................................ 47
Part IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................... 47
Signatures 50
PART I
ITEM 1. BUSINESS
OUR COMPANY
We are a provider of Internet services to businesses. Our services
include:
o Hosting and co-location in our secure and fault-tolerant
Internet data centers;
o Network services and connectivity to the Internet through our
domestic and international Internet Protocol (IP) fiber based
network;
o Internet based managed services focusing on application
management and operating system management, security services
and storage services; and
o Media services including: streaming media, webcasting and
digital asset management solutions.
Our target market for our services is small to large size businesses in
a broad range of industries, including media, publishing, financial services,
retail, healthcare, governmental agencies, manufacturing, technology and
non-profit organizations. No single customer comprised more than 10% of our
revenues in the fiscal years ended September 30, 2004 or 2003. We sell our
services to businesses primarily through our direct sales force.
Our customers use our services to operate and maintain computer
equipment in a secure, fault-tolerant environment with connectivity to a
high-speed, high-capacity, direct link to the Internet, through our own network,
and to support Internet applications. Our employees are located in New York, New
York; Atlanta, Georgia; Santa Clara, California; Fairfield, New Jersey; and
London, England.
Our principal executive offices are located at 139 Centre Street, New
York, New York 10013, and our telephone number at that location is (212)
334-8500. Although we maintain a website at www.globix.com, we do not intend
that the information available through our website be incorporated into this
annual report. Our SEC filings are available on our website.
Globix was founded in 1989 and in 1998 undertook a major expansion plan
in order to pursue opportunities resulting from the growth of the Internet. On
March 1, 2002, Globix filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code, together with a prepackaged plan of reorganization, with
the United States Bankruptcy Court for the District of Delaware. We continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay our employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. On April 25, 2002, all conditions necessary for the plan of
reorganization to become effective were satisfied or waived and we emerged from
Chapter 11 bankruptcy protection. For additional information, see "Our Chapter
11 Bankruptcy Reorganization" under this Item, for a discussion of our
reorganization pursuant to Chapter 11 of the United States Bankruptcy Code.
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 approximately $41.6 million. The merger
agreement was amended as of October 8, 2004. Under the merger agreement, as
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amended, holders of NEON common stock will receive 1.2748 shares of Globix
common stock per each share of NEON common stock, and holders of NEON
convertible preferred stock will receive 1 share of a new class of convertible
preferred stock of Globix plus $3.75 in cash for each outstanding share of NEON
convertible preferred stock, after treating all accrued dividends as having been
paid in shares of NEON convertible preferred stock immediately prior to the
merger. As a result of the merger, NEON will become a wholly owned subsidiary of
Globix, and holders of NEON common stock 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, assuming
a December 31, 2004 closing, NEON preferred stockholders would receive in the
aggregate approximately $5.2 million in cash and approximately 2,908,614 shares
of Globix convertible preferred stock, having an aggregate liquidation value of
approximately $10.5 million . The new Globix preferred stock will vote together
with the Globix common stock and will be convertible into shares of Globix
common stock on a one-for-one basis. The Globix preferred stock will accrue
dividends at a rate of 6% per annum and will be redeemable only at the option of
Globix, and at the option of the holders upon a change in control of Globix.
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 holders of the 11% senior notes of Globix will
exchange $12.5 million in principal and accrued interest on the notes for
approximately 4,545,455 shares of Globix common stock.
2
WHAT WE OFFER OUR CUSTOMERS
We provide our customers with a range of Internet-based services,
including network infrastructure and expertise to build, maintain, operate and
support Internet-based operations. Our primary services include:
INTERNET HOSTING AND CO-LOCATION
We currently operate Internet data centers in New York, New York;
Atlanta, Georgia; Santa Clara, California; and London, England. Our Internet
data centers include electrical infrastructure, precision environmental control
systems, fire suppression systems and comprehensive security systems.
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 system and network 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 and web based
applications. In addition we also offer media service, such as streaming media
for business communication. Streaming media is a process by which audio, video
or other multimedia is delivered in a streaming or continuous fashion over the
Internet or over a company's intranet.
On October 31, 2003, we acquired the business and substantially all of
the assets of Aptegrity, Inc., a provider of web application and operations
management services. The acquisition of Aptegrity has enabled us to provide
remote management of a wider range of custom and off-the-shelf Web-based
applications. By managing e-commerce, database, content management and customer
relationship management software for our clients, we help them to protect
Internet revenue streams, reduce technology operating costs and operating risk,
and improve user satisfaction.
With the purchase of Aptegrity we gained new clients and the ability to
offer higher-revenue managed services to our existing customer base. In addition
we provide hosting and co-location services to some of Aptegrity's
pre-acquisition customers. Since the acquisition of Aptegrity our customers have
increased their spending with us on average. We attribute this to the greater
utilization of our bundled services as a result of the broader range of services
we are able to provide to our customers.
NETWORK SERVICES AND INTERNET ACCESS
We provide access to our network to our hosting and co-location
customers in 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.
Our network infrastructure is designed for high availability and low
latency, and utilizes a single autonomous system number. As a result, traffic is
carried on a network controlled by Globix to the greatest extent possible and
therefore does not suffer from the congestion or high latency of public
networks.
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The domestic Globix backbone is a Packet over Synchronous Optical
Network ("SONET"), which provides a mechanism for using the speed and efficient
management capabilities of SONET for data transport. Essentially, it provides a
method for carrying data packets in SONET frames that will operate at speeds up
to OC-48 (2.4Gbs). The OC-48 Globix domestic backbone connects to our data
centers and to our backbone points of presence in Boston, Chicago, Los Angeles,
Seattle and Washington, D.C.
Our European backbone is a Packet over SONET currently connecting
London, Amsterdam, Frankfurt and Paris. The domestic and European networks are
connected by two OC-3 (155Mbps) transatlantic crossings.
Our United States and European network sections interconnect to
numerous network access points, commercial Internet exchanges and other
Internet, application and network service providers.
Our network operations are directed from our 139 Centre Street data
center in New York, New York, which is staffed 24 hours a day, seven days a
week. Network administrators located in our operations center monitor our
network infrastructure. Our network administrators are able to identify and
correct network problems either themselves or by dispatching system engineers
located at our customer support centers.
CUSTOMER SUPPORT CENTERS
Our customer support call centers are operated 24 hours a day, seven
days a week, and are equipped with telecommunications systems capable of
automatic call distribution, automatic number identification, quality assurance
recording and archiving, and intelligent call routing. A trouble ticketing and
knowledge database of customer information and history supports our customer
service operations.
GOVERNMENT REGULATION
In the United States, our Internet services are currently classified by
the Federal Communications Commission as information services, which are not
subject to significant regulation, rather than as telecommunications or common
carrier services, which are subject to a comprehensive regulatory framework.
Similarly, our Internet services are not significantly regulated in certain
foreign jurisdictions in which we conduct business.
In certain other foreign jurisdictions in which we operate, however,
our provision of certain Internet services may be subject to the jurisdictions'
laws and regulations governing telecommunications services and/or common
carriers. In jurisdictions where these laws and regulations currently apply to
certain types of our Internet solutions, we endeavor to take all reasonable
steps necessary to ensure that we comply with these laws and regulations. This
may require us to, among other things, obtain regulatory authorizations and pay
fees each year to regulatory authorities.
The laws and regulations applicable to Internet-related services are
evolving in the United States and many other jurisdictions. As these laws and
regulations evolve, it is possible that we could be regulated in additional
jurisdictions as a telecommunications services provider and/or as a common
carrier. As a result, we may become subject to, among other things, additional
licensing requirements, fee payment obligations, common carrier obligations,
network access changes and/or universal service obligations.
4
In addition to the telecommunications and/or common carrier laws and
regulations that currently govern certain of our services in some jurisdictions
and that may, in the future, govern our Internet services in the United States
and other jurisdictions, new laws and regulations related to the provision of
Internet services may be adopted, implemented and/or challenged at the federal,
state and/or local levels in the United States and at corresponding levels in
foreign jurisdictions. These laws and regulations may address, among other
things, issues of user privacy, obscenity, pricing, consumer protection,
taxation, advertising, intellectual property rights, information security,
liability for certain types of content and the convergence of traditional
telecommunications services with Internet communications. A number of laws and
regulations related to these issues are currently being considered by United
States and foreign regulators.
It is impossible to predict the nature of any new laws or regulations
that will be applicable to our services, whether currently existing laws and
regulations will be newly-applied to our services or the manner in which
currently existing laws and regulations applicable to us will be interpreted and
enforced. The adoption of new laws or regulations or the application of existing
laws or regulations in a manner that is adverse to our company might decrease
demand for our Internet solutions, impose taxes, fees or other charges or other
costly technical requirements on our company or otherwise increase our cost of
doing business. Any of these developments could harm our business, financial
position, results of operations and cash flows.
The Digital Millennium Copyright Act ("DMCA") includes a limitation on
liability of on-line service providers for copyright infringement for
transmitting, routing or providing connections, transient storage, caching or
storage at the direction of a user. This limitation on liability applies if the
service provider had no actual knowledge or awareness of the copyright
infringement and if certain other conditions are met. It is not yet clear how
the DMCA will be applied to limit liability that we may face in the future for
any possible copyright infringement or copyright-related issues relating to the
activities of our customers. The DMCA also requires Internet service providers
to follow certain "notice and take-down" procedures in order to be able to take
advantage of the limitation on liability provided for in the DMCA.
We have implemented the procedures required by the DMCA and require our
users to agree to an "acceptable use" policy which prohibits the use of our
facilities for illegal purposes. There can be no assurance, however, that our
procedures and acceptable use policy will shield us from liability. Despite
enactment of the DMCA, the law relating to the liability of companies that
provide Internet-related services for information carried on or disseminated
through their networks remains largely unsettled. Claims could be made against
us under currently existing or future laws in the United States or other
jurisdictions for defamation, obscenity, negligence, copyright, trademark
infringement or other legal theories based on the nature and content of the
materials disseminated through our networks.
5
EMPLOYEES AND EMPLOYEE RELATIONS
As of September 30, 2004, we had approximately 240 full-time employees:
approximately 188 in the United States and 52 outside the United States. In
addition to our full-time employees, we also employ part-time personnel from
time to time in various departments to meet fluctuations in work levels. None of
our employees are covered by a collective bargaining agreement.
COMPETITION
Our competitors include other Internet service providers with a
significant national or global presence and a focus on business customers. Among
these competitors are IBM, Digex, Savvis, Akamai, NaviSite, EDS, Speedera, Data
Return, Rackspace and Equinix. Our competitors also include telecommunications
companies, such as AT&T, British Telecom, Level 3, MCI and Sprint. We believe
that competition is based upon a number of factors, including price, quality of
service and financial stability.
Of the competitors mentioned, some compete only in hosting and
infrastructure services, and some compete only in media services. Very few
provide services that compete across our entire services portfolio. We believe
our competitive differentiation from those that do is our flexibility, speed and
ability to customize a bundled solution across all of our service capabilities.
Competitive pressure impacts Globix's business in two primary ways:
customer churn and pricing pressure. For these purposes, churn means contractual
revenue loss due to customer cancellations and downgrades, net of upgrades and
additions to service.
Churn due to customer cancellations comes from three major sources:
customers no longer needing our services due to bankruptcy or exiting of a
product line, customers taking our services in-house and customers replacing our
services with services from a competitor. Customer churn due to downgrades is
caused mainly by customers not needing all the services we offered them in the
past (as a result of exiting a product line, taking services in-house or using a
competitor's services), or customers renewing their contracts for identical
services but at a lower price, which is mainly as a result of competitive
pricing pressure. Due to difficulty in determining the root cause of contract
cancellations and downgrades, it is impossible to determine precisely the
percentage of churn that is due to competitive pressure is inexact. However, we
believe that competitive pressure is a significant cause of contract
cancellations and downgrades. Conversely, obtaining contracts formerly provided
by our competitors is also a major source of new contract adds.
Our primary strategy for dealing with contract cancellations related to
competitive pressure is first to sell valued added services to clients who have
contracted only commodity services. We expect these value added services to
offer product differentiation and increase exit costs, thereby decreasing
cancellation rates. Second, we expect to continue to offset customer
cancellations with new contract adds obtained through direct marketing efforts
focused at prospective clients who potentially contract services with our
competitors.
Pricing pressure from competition specifically affects our commodity
products and services such as bandwidth and co-location. We believe that pricing
pressure for our managed services is considerably less significant.
Our primary strategy for dealing with price pressure is to bundle
higher value-added services with our core infrastructure services to provide
increased product differentiation.
6
TRADEMARKS AND PATENTS
We currently have eight trademark applications and one patent
application pending in the United States Patent and Trademark Office.
Registration of the same trademarks has been applied for or granted in certain
foreign countries. Additionally, Globix acquired the U.S. and European Union
registered trademarks of Aptegrity(R) and Minding your E-Business(R) in the
acquisition of Aptegrity, Inc.
OUR CHAPTER 11 BANKRUPTCY REORGANIZATION
On April 8, 2002, the United States Bankruptcy Court for the District
of Delaware confirmed our plan of reorganization, which became effective on
April 25, 2002. As of the effective date of the plan, all of our existing
securities were cancelled and:
o each holder of the 12.5% senior notes became entitled to
receive, in exchange for its claims in respect of the 12.5%
senior notes, its pro rata share of:
o $120 million in aggregate principal amount of the 11%
senior notes, and
o 13,991,000 shares of our common stock, representing
85% of the shares of our common stock issued and
outstanding following the effective date of the plan;
and
o each holder of shares of our preferred stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of
2,304,400 shares of our common stock, representing 14% of the
shares of our common stock issued and outstanding following
the effective date of the plan; and
o each holder of shares of our common stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of common stock, its pro rata share of 164,600
shares of our common stock, representing 1% of the shares of
our common stock issued and outstanding following the
effective date of the plan.
The plan provides that all of the shares of our common stock are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of our issued and outstanding common stock
on a fully-diluted basis following the effective date of the plan. As of
September 30, 2004, the number of outstanding options representing the right to
acquire 956,565 shares of common stock had been granted to members of our
management.
7
A total of 16,460,000 shares of our common stock and $120 million in
aggregate principal amount of the 11% senior notes were deemed to be issued and
outstanding on the effective date of the plan. As of September 30, 2002,
however, no shares of our common stock or 11% senior notes had been distributed.
In October 2002, we distributed a total of 16,295,400 shares of common stock and
$120 million in aggregate principal amount of 11% senior notes. Pursuant to the
terms of a Stipulation and Order that we entered into with the lead plaintiffs
in the class action lawsuit described in "Item 3 - Legal Proceedings", 229,452
of these shares of common stock and $1,968,000 in aggregate principal amount of
the 11% senior notes were placed in reserve 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, then 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 common stock and 11% senior notes held in
escrow. Based on an August 12, 2004 court approval of a settlement agreement
pursuant to which Globix would not be required to pay an amount in excess of our
liability insurance, described under "Item 3 - Legal Proceedings,", Globix does
not believe that the shares of common stock and 11% senior notes held in escrow
are likely to be distributed to the class action litigants and their attorneys,
and such shares and notes will accordingly be available for distribution to
Globix security holders under the plan. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the effective date of the
plan, which are allocable under the terms of the plan to the holders of our
common stock outstanding immediately prior to the effective date of the plan,
will occur following the resolution of the stockholder derivative suit against
our company and certain of our former officers and directors described in "Item
3 - Legal Proceedings".
Through September 30, 2004, we had acquired in the open market
approximately $26.1 million in aggregate principal amount of our 11% senior
notes and related accrued interest of approximately $1.9 million for an
aggregate purchase price of approximately $20.2 million, and had issued
approximately an additional $18.5 million in 11% senior notes in payment of
accrued interest on the 11% senior notes. The indenture governing the 11% senior
notes requires interest to be paid in kind through 2004, and permits interest to
be paid in kind for two years thereafter at the discretion of our board of
directors. In addition, on March 3, 2004, we purchased $40.3 million in
principal amount of the 11% senior notes pursuant to an offer to purchase as
described in "Item 2 - Properties". Our indebtedness at September 30, 2004
consisted of approximately $72.2 million in aggregate principal amount of our
11% senior notes, approximately $3.3 million in related accrued interest,
approximately $370 thousand of capital lease obligations and approximately $20
million of mortgage debt on our New York City headquarters and data center.
8
RISK FACTORS
There are a number of important factors that could affect our business
and future operating results, including, without limitation, the factors set
forth below. The information contained in this annual report should be read in
light of such factors. Any of the following factors could have a material
adverse effect on our business and our future operating results.
WE HAVE A HISTORY OF LOSSES WHICH IF IT CONTINUES IN THE FUTURE WILL EVENTUALLY
MAKE US UNABLE TO MEET OUR FINANCIAL OBLIGATIONS.
We have experienced significant losses since we began operations.
Despite improvement in our operating margins since our emergence from
bankruptcy, we may continue to incur losses in the future. For the year ended
September 30, 2004, we had a loss from operations of $33.9 million and a net
loss of $41.4 million. $18.0 million of the loss from operations and net loss
during the year ended September 30, 2004 was attributable to a writedown of our
property located at 415 Greenwich Street in New York City, which we sold in
January 2004. For the year ended September 30, 2003, we had a loss from
operations of $18.4 million and a net loss of approximately $25.3 million. Our
ability to achieve and sustain operating profits depends on our ability to
reduce our indebtedness and operating expenses and increase our revenue base. If
we are unable to reduce expenses sufficiently or build up our revenue base, we
will not become profitable. If we are unable to become profitable, we will
eventually become unable to meet our financial obligations.
OUR REVENUES COULD DECLINE SIGNIFICANTLY IF WE CONTINUE TO LOSE CUSTOMERS OR
HAVE OUR EXISTING CUSTOMERS REDUCE THEIR LEVEL OF SPENDING ON OUR SERVICES.
We have experienced and may continue to experience declines in revenue
due to customers leaving us or staying with us but choosing to decrease their
spending on our services. One of our biggest challenges has been to limit these
revenue declines. Although we have reduced the level of revenue declines due to
customer loss, we continue to experience declines in price per service.
Continued declines in revenue could harm our business, financial condition and
results of operations.
OUR ABILITY TO PAY THE PRINCIPAL AMOUNT OF THE 11% SENIOR NOTES WHEN DUE DEPENDS
ON OUR FUTURE OPERATING PERFORMANCE, AND FAILURE TO SATISFY THESE OBLIGATIONS
COULD RESULT IN THESE OBLIGATIONS BECOMING DUE AND PAYABLE, RESULTING IN
BANKRUPTCY.
Historically, we have not generated positive cash flows from
operations. Our ability to pay principal and interest on the 11% senior notes
and on our other indebtedness depends on our future operating performance. Our
outstanding indebtedness as of September 30, 2004 was approximately $95.8
million and may increase to approximately $104 million on September 30, 2005 if
our board of directors elects to pay interest in kind and not in cash on the
notes. Future operating performance is subject to market conditions and business
factors that are often beyond our control. Consequently, we cannot assure you
that we will have sufficient cash flows to pay the principal and interest on our
indebtedness. If our cash flows and capital resources are insufficient to allow
us to make scheduled payments on our indebtedness, we may have to reduce or
delay capital expenditures, sell assets, seek additional capital, restructure or
refinance our indebtedness or file for bankruptcy. The terms of our indebtedness
may restrict the use of these alternative measures, and we cannot assure you
that these measures would satisfy our scheduled debt service obligations. If we
cannot make scheduled payments on our indebtedness, we will be in default and,
as a result:
9
o our debt holders could declare all outstanding principal and
interest to be due and payable; and
o we could be forced into bankruptcy.
OUR OUTSTANDING INDEBTEDNESS RESTRICTS OUR FINANCIAL AND OPERATING FLEXIBILITY.
THIS COULD PLACE US AT A COMPETITIVE DISADVANTAGE THAT COULD IN TURN AFFECT OUR
ABILITY TO GENERATE CASH FLOW AND FULFILL OUR OBLIGATIONS.
As of September 30, 2004, we were highly leveraged and our outstanding
indebtedness was approximately $95.8 million. Our indebtedness could:
o limit our ability to obtain additional financing to operate or
grow our business;
o require us to use the proceeds of certain asset sales to
redeem indebtedness;
o limit our financial flexibility in planning for and reacting
to industry changes;
o place us at a competitive disadvantage as compared to less
leveraged companies; and
o in 2007, after the fourth anniversary of the issuance of the
11% senior notes, require us to dedicate a significant portion
of our cash flow to payments on our debt, reducing the
availability of our cash flow for other purposes.
COVENANTS IN THE INDENTURE GOVERNING THE 11% SENIOR NOTES IMPOSE LIMITATIONS ON
OUR ABILITY TO BORROW AND INVEST, WHICH COULD SEVERELY IMPAIR OUR ABILITY TO
EXPAND OR FINANCE OUR FUTURE OPERATIONS.
The indenture governing the 11% senior notes contains a number of
covenants that impose significant operating and financial restrictions on us and
our subsidiaries. These restrictions limit our ability to incur additional
indebtedness, create liens on assets, dispose of assets, enter into business
combinations or engage in certain activities with our subsidiaries.
OUR LEVERAGE WILL INCREASE AS A RESULT OF THE PAYMENT OF INTEREST IN KIND WHICH
COULD MAKE IT MORE DIFFICULT TO REPAY OR REFINANCE OUR INDEBTEDNESS AND PLACE US
AT AN OPERATIONAL AND COMPETITIVE DISADVANTAGE.
The indenture under which our 11% senior notes were issued requires us
to pay interest in kind through 2004 and permits us to pay interest in kind at
the discretion of our board of directors through 2006. The additional issuances
of 11% senior notes could further restrict our financial and operating
flexibility, limit our ability to obtain additional financing, place us at a
competitive disadvantage when compared to our competitors with less debt, and
make it more difficult to meet our financial obligations upon the maturity of
the 11% senior notes. The payment of interest in kind on May 1, 2004 resulted in
an additional $7.2 million in 11% senior notes.
10
OUR ACQUISITION STRATEGY MAY PROVE TO BE UNSUCCESSFUL WHICH COULD RESULT IN
FURTHER LOSSES AND AN INABILITY TO MEET OUR FINANCIAL OBLIGATIONS.
In order to increase our revenue base, we may make investments in or
acquire businesses, products, services or technologies. Consequently, we are
subject to the following risks:
o we may not be able to make investments or acquisitions on
terms which prove advantageous;
o acquisitions may cause a disruption in our ongoing business,
distract our management and other resources and make it
difficult to maintain the operations, organization and
procedures of our company or the acquired business; and
o we may not be able to retain key employees of the acquired
business or to maintain good relations with its customers or
suppliers.
OUR REORGANIZATION MAY HAVE ADVERSELY AFFECTED SOME OF OUR RELATIONSHIPS WITH
CUSTOMERS AND SUPPLIERS, AND TOGETHER WITH OUR HIGHLY LEVERAGED FINANCIAL
STRUCTURE MAY CONTINUE TO AFFECT THE WAY WE ARE VIEWED IN THE MARKET.
The continuing impact of our April 2002 bankruptcy reorganization
cannot be accurately quantified. However, our bankruptcy may have adversely
affected our ability to negotiate favorable terms with vendors or retain
customers. Our bankruptcy and continued leverage may cause customers to question
our financial soundness and may also affect the contractual terms that are
available to us.
OUR BUSINESS COULD SUFFER FROM A LOSS OF MANAGEMENT PERSONNEL, WHICH COULD
RESULT IN OUR INABILITY TO OPERATE AS EFFECTIVELY AS WE ANTICIPATED AND COULD
REDUCE OUR REVENUES.
Since our emergence from bankruptcy, we have undertaken a number of
changes in management as well as reductions in staffing. In the year following
our bankruptcy, we replaced our Chief Executive Officer and Chief Financial
Officer as well as other members of senior management. As a result, our business
experienced a lack of continuity in management. Our success depends largely on
the experience, skills and performance of our senior management team. The loss
or unavailability to us of any member of our senior management team could result
in our inability to operate the company as effectively as we anticipate and
could reduce our revenues.
WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE PERSONNEL WE NEED IN EACH OF THE
CRITICAL AREAS OF OUR BUSINESS, WHICH COULD ADVERSELY AFFECT THE ABILITY OF OUR
BUSINESS TO PERFORM ITS FUNCTIONS.
Our future success depends on our ability to attract and retain key
personnel for management, technical, sales and marketing and customer support
positions. The failure to attract or retain qualified personnel in each of these
critical areas could adversely affect the ability of our business to perform its
functions. Further efforts to control management costs, given our flat
organizational structure, could have an additional adverse impact on employee
morale.
11
COMPETITION FOR THE INTERNET SERVICES THAT WE PROVIDE IS INTENSE AND WE EXPECT
THAT COMPETITION WILL CONTINUE TO INTENSIFY, WHICH COULD RESULT IN OUR
ENCOUNTERING SIGNIFICANT PRICING PRESSURE.
Our competitors include other Internet service providers with a
significant national or global presence that focus on business customers, such
as IBM, Digex, EDS, NaviSite, Savvis, Akamai, Speedera, Data Return, Rackspace
and Equinix. Our competitors also include telecommunications companies, such as
AT&T, British Telecom, Level 3, MCI and Sprint. Many of our existing
competitors, as well as a number of potential new competitors, have:
o longer operating histories;
o greater name recognition;
o larger customer bases;
o larger networks;
o more and larger facilities; and
o significantly greater financial, technical and marketing
resources.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in the industry, we expect to continue
to encounter significant pricing pressures. These pricing pressures could result
in significantly lower average selling prices for our services. For example,
telecommunications companies operating outside of NEON's geographic market may
be able to provide customers with reduced communications costs in connection
with their Internet access services, significantly increasing pricing pressures
on us. We may not be able to offset the effects of any price reductions with an
increase in the number of our customers, higher revenue from value-added
services, cost reductions or otherwise.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO INTEGRATE, OPERATE AND MAINTAIN AND
UPGRADE OUR NETWORK AND FACILITIES, AND OUR FAILURE TO DO SO COULD CAUSE US TO
LOSE CUSTOMERS OR BE UNABLE TO OFFER COMPETITIVE SERVICES.
A key element of our business strategy is the maintenance and upgrading
of our facilities and network, which has required, and will continue to require,
management time and the periodic expenditure of capital. Any interruption in our
ability to deliver services over our network due to market disruptions or third
party insolvencies may make us less attractive to future customers and may
hamper our ability to retain our current customers which, in turn, could
adversely affect our entire business.
12
OUR BUSINESS RELIES ON THIRD-PARTY DATA COMMUNICATIONS AND TELECOMMUNICATIONS
PROVIDERS THAT COULD INCREASE PRICES OR INTERRUPT SERVICE, WHICH IN TURN COULD
CAUSE US TO LOSE BUSINESS OR BE UNABLE TO OPERATE IN A COMPETITIVE MANNER.
Our existing network relies on many third-party data communications and
telecommunications providers, located in the United States and abroad. These
carriers are subject to price constraints, including tariff controls, that in
the future may be relaxed or lifted. In addition, certain of these providers,
including MCI, Global Crossing and Cable and Wireless, have filed for protection
under Chapter 11 under the U.S. Bankruptcy Code, which may affect the
availability and quality of the services that these entities provide. Price
increases or the lack of service availability and quality could adversely affect
the costs of maintaining our network and our ability to maintain or grow our
business.
WE MAY NOT BE ABLE TO OBTAIN COMPUTER HARDWARE AND SOFTWARE ON THE SCALE AND AT
THE TIMES WE NEED AT AN AFFORDABLE COST, AND FAILURE TO DO SO OVER AN EXTENDED
PERIOD OF TIME COULD CAUSE US TO LOSE CUSTOMERS OR BE UNABLE TO OFFER
COMPETITIVE SERVICE.
We rely on outside vendors to supply us with computer hardware,
software and networking equipment. We primarily use products from Cisco, Compaq,
Juniper Networks and Sun Microsystems, either leased or purchased from the
manufacturer or a third-party vendor. Consequently, our expertise is
concentrated in products from these manufacturers. We also rely on Cisco for
network design and installation services. If we are unable over an extended
period of time to obtain the products and services that we need on a timely
basis and at affordable prices, it will harm our business, financial condition
and results of operations.
BECAUSE WE ARE DEPENDENT ON COMPUTER AND COMMUNICATION SYSTEMS, A SYSTEMS
FAILURE WOULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS.
Our business depends on the efficient and uninterrupted operation of
our computer and communications hardware systems and infrastructure. We
currently maintain most of our computer systems in our facilities in New York,
New York; Atlanta, Georgia; Santa Clara, California; and London, England. While
we have taken precautions against systems failure, interruptions could result
from natural disasters as well as power loss, our inability to acquire fuel for
our backup generators, telecommunications failure, terrorist attacks and similar
events. We also lease telecommunications lines from local, regional and national
carriers, whose service may be interrupted. Our business, financial condition
and results of operations could be harmed by any damage or failure that
interrupts or delays our operations.
OUR DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS EXPOSES US TO POSSIBLE
INTERRUPTIONS THAT COULD DELAY OR PREVENT US FROM PROVIDING OUR SERVICES.
Approximately 39% of our cost of revenues for the year ended September
30, 2004 is derived from services provided by three major telecommunication
carriers, MCI, Verizon and British Telecom. While we believe that most of these
services can be obtained from other alternative carriers, an interruption in
service from one of these carriers or other suppliers could limit our ability to
serve customers, which would adversely affect our results of operations.
13
IF OUR SECURITY MEASURES PROVED TO BE INADEQUATE, OUR ABILITY TO ATTRACT, RETAIN
AND SERVICE CUSTOMERS WOULD BE ADVERSELY AFFECTED.
Our infrastructure is potentially vulnerable to physical or electronic
break-ins, viruses, denial of service attacks or similar problems. If someone
were to circumvent our security measures, he or she could jeopardize the
security of confidential information stored on our systems, misappropriate
proprietary information or cause interruptions in our operations. We may be
required to make significant additional investments and efforts to protect
against or remedy security breaches. Security breaches that result in access to
confidential information could damage our reputation and expose us to a risk of
loss or liability. The security services that we offer in connection with our
customers' networks cannot assure complete protection from computer viruses,
break-ins and other disruptive problems. Although we attempt to contractually
limit our liability in such instances, the occurrence of these problems may
result in claims against us or liability on our part. These claims, regardless
of their ultimate outcome, could result in costly litigation and could harm our
business and reputation and impair our ability to attract and retain customers
for our services.
BECAUSE OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH, USE AND IMPROVEMENT OF THE
INTERNET, ANY DECREASE IN INTERNET USAGE COULD DECREASE THE DEMAND FOR OUR
SERVICES, AND REDUCE OUR REVENUES.
Our services are targeted toward businesses that use the Internet. The
Internet is subject to a high level of uncertainty and is characterized by
rapidly changing technology, evolving industry standards and frequent new
service introductions. Accordingly, we are subject to the risks and difficulties
frequently encountered in new and rapidly evolving markets.
Critical issues concerning the commercial use of the Internet remain
unresolved and may affect the growth of Internet use, especially in the market
we target. Despite growing interest in the many commercial uses of the Internet,
many businesses have been deterred from purchasing Internet services for a
number of reasons, including:
o inadequate protection of the confidentiality of stored data
and information moving across the Internet;
o inconsistent quality of service;
o inability to integrate business applications on the Internet;
o the need to deal with multiple vendors, whose products are
frequently incompatible;
o lack of availability of cost-effective, high-speed services;
and
o concern over the financial viability of Internet service
providers.
Capacity constraints caused by growth in Internet usage may, unless
resolved, impede further growth in Internet use. If the number of users on the
Internet does not increase and commerce over the Internet does not become more
accepted and widespread, demand for our services may decrease and, as a result,
our business would be harmed.
14
OUR BUSINESS REQUIRES US TO ADAPT TO TECHNOLOGICAL CHANGES, AND SIGNIFICANT
TECHNOLOGICAL CHANGES COULD RENDER OUR EXISTING SERVICES OBSOLETE.
We must adapt to our rapidly changing market by continually improving
the responsiveness, functionality and features of our services to meet our
customers' needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, our
business, financial condition and results of operations will be harmed.
CHANGES IN GOVERNMENT REGULATIONS RELATED TO THE INTERNET COULD RESTRICT OUR
ACTIVITIES, EXPOSE US TO LIABILITY OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS.
There are an increasing number of laws and regulations pertaining to
the Internet. These laws or regulations relate to liability for content and
information received from or transmitted over the Internet, user privacy and
security, taxation, the enforcement of online contracts, consumer protection and
other issues concerning services. The government may also seek to regulate some
aspects of our activities as basic telecommunications services. Moreover, the
applicability to the Internet of existing laws governing copyright, trademark,
trade secret, obscenity, libel, consumer protection, privacy and other issues is
uncertain and developing. We cannot predict the impact that future regulation or
regulatory changes may have on our business.
WE COULD BE LIABLE FOR VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES, WHICH COULD RESULT IN US HAVING TO PAY A LICENSE FEE OR DAMAGES TO
THIRD PARTIES, WHICH WOULD REDUCE OUR REVENUES.
Despite our efforts to protect the intellectual property that is
important to the operation of our business, a third party could bring a claim of
infringement against us or any of our material suppliers. If such a claim were
settled or adjudicated against us or one of our material suppliers, we could be
forced to pay for a license to continue using the intellectual property. There
is no guarantee that we could obtain such a license, or that it would be
available on reasonable terms. Alternatively, we could be forced to defend
ourselves against infringement claims, which could be costly and which could
result in us having to pay damages to third parties.
WE MAY BE LIABLE FOR THE MATERIAL THAT OUR CUSTOMERS DISTRIBUTE OVER THE
INTERNET, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US.
The law relating to the liability of online service providers, private
network operators and Internet service providers for content and information
carried on or disseminated through their networks is currently unsettled. While
we have taken steps to contractually limit our liability in these areas, we
could become subject to legal claims relating to the content of the web sites we
host. For example, lawsuits could be brought against us claiming that material
inappropriate for viewing by young children can be accessed from the web sites
that we host. Claims could also involve matters such as defamation, invasion of
privacy, violations of "anti-spamming" legislation, copyright and trademark
infringement. Internet service providers have been sued in the past, sometimes
successfully, based on the material disseminated over their networks. We may
take additional measures to reduce our exposure to these risks, which could be
costly or result in some customers not doing business with us. In addition,
defending ourselves against claims, or paying damage awards to third parties,
could strain our management and financial resources.
15
WE FACE RISKS ASSOCIATED WITH DIFFERING REGULATORY REGIMES AND MARKETS AS A
RESULT OF OUR INTERNATIONAL OPERATIONS WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
A substantial percentage of our business is located in the United
Kingdom. We face problems of managing our business under differing regulatory
regimes in areas such as intellectual property, telecommunications and employee
relations. As a result, we may find it more difficult and expensive to hire and
train employees and to manage international operations together with our United
States operations. Because we have limited experience operating in markets
outside the United States and the United Kingdom, we may have difficulty
adapting our services to different international market needs. We may also be
unsuccessful in our efforts to market and sell these services to customers
abroad. If we fail to successfully address these risks, our international
operations may be adversely affected.
CURRENCY EXCHANGE RATE FLUCTUATIONS MAY HAVE A SIGNIFICANT IMPACT ON OUR
REVENUES AFFECTING OUR RESULTS FROM OPERATIONS.
We are 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 year ended September 30, 2004 were denominated in
British Pounds. We believe that an immediate increase or decrease of 5% of the
Dollar in comparison to the British Pound would not have a material impact on
our operating results or cash flows; however, it might have a significant impact
on our revenues. 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.
OUR RESULTS OF OPERATIONS FLUCTUATE ON A QUARTERLY AND ANNUAL BASIS AND WE
EXPECT TO CONTINUE EXPERIENCING FLUCTUATIONS IN OUR FUTURE QUARTERLY AND ANNUAL
RESULTS OF OPERATIONS, WHICH COULD AFFECT THE MARKET PRICE OF OUR SECURITIES.
Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing fluctuations in our future quarterly and annual
results of operations due to a variety of factors, many of which are outside our
control, including:
o timing of contractual cancellations and renewals;
o demand for and market acceptance of our services;
o introductions of new services by us and our competitors;
o customer retention;
o capacity utilization of our data centers and assets;
o timing of customer installations;
o our mix of services sold;
o the timing and magnitude of our capital expenditures;
o changes in our pricing policies and those of our competitors;
o fluctuations in bandwidth used by customers;
16
o our retention of key personnel;
o reliable continuity of service and network availability;
o costs related to the acquisition of network capacity;
o arrangements for interconnections with third-party networks;
o the provision of customer discounts and credits;
o the introduction by third parties of new Internet and
networking technologies;
o licenses and permits required to construct facilities, deploy
networking infrastructure or operate in the United States and
foreign countries; and
o other general economic factors.
Fluctuations in our quarterly or annual results as a result of one or
more of these factors could affect the market price of our securities.
BECAUSE OUR COMMON STOCK IS THINLY TRADED, PRICES ARE MORE LIKELY TO BE VOLATILE
AND IT MAY BE HARDER FOR OUR STOCKHOLDERS TO SELL ANY SIZABLE NUMBER OF SHARES.
Our common stock is currently quoted on the OTC Bulletin Board (the
"OTCBB"). Although the OTCBB is a quotation service operated by The NASDAQ Stock
Market and displays real-time quotes, last sale prices, and volume information
on equity securities like our common stock, the stocks quoted on the OTCBB may
not be viewed within the investment community as equivalent to stocks quoted on
other markets, where there is a more active public trading market. In addition,
because of the relatively small number of shares that are traded, prices may be
volatile and it may be difficult to find a purchaser for any sizable amount of
the stock. Although we have applied to have our common stock listed on the
American Stock Exchange, we cannot assure you that an active and liquid trading
market will develop in our common stock, or if one does develop that it will
continue. The development of an active public trading market depends upon the
existence of willing buyers and sellers and is not within our control.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE ISSUED IN THE MERGER, MAY
DEPRESS OUR STOCK PRICE.
If our stockholders or option holders, including NEON stockholders and
option holders who are receiving Globix common stock and stock options in the
merger, sell substantial amounts of our common stock in the public market, the
market price of our common stock could fall. All the shares issued in the merger
will be freely tradable, subject to limitations applicable to affiliates of
NEON. In addition, we are obligated to register approximately 5 million shares
of our common stock received by certain stockholders in our bankruptcy, and we
intend to complete the public offer and sale of such shares within a short time
after the completion of the merger. We also have obligations to register the
approximately 4,545,455 shares issuable to certain holders of our 11% senior
notes in the debt-for-equity exchange described in "Item 1 - Business", within
ninety days after the merger is completed.
17
WE ARE NOT CURRENTLY REQUIRED TO MEET THE CORPORATE GOVERNANCE REQUIREMENTS
APPLICABLE TO LISTED COMPANIES.
Currently Globix common stock is quoted on the OTCBB where we are not
required to comply with any listing standards for our common stock. If our
application for listing of our common stock on the American Stock Exchange is
approved, we will have to meet a number of additional listing standards relating
to the independence of our board of directors and committees of our board, some
of which we currently do not meet. We cannot assure you that our application for
listing on the America Stock Exchange will be approved.
IF OUR BOARD OF DIRECTORS DETERMINES TO ENGAGE IN CERTAIN CHANGE OF CONTROL
TRANSACTIONS, OR IF A THIRD PARTY WERE TO ACQUIRE MORE THAN 50% OF OUR STOCK OR
ACQUIRE CONTROL OF OUR BOARD OF DIRECTORS, WE OR THE THIRD PARTY COULD BE
REQUIRED TO PURCHASE OUR 11% SENIOR NOTES AND OUR CONVERTIBLE PREFERRED STOCK TO
BE ISSUED IN THE MERGER, AND THE FAILURE TO DO SO WOULD RESULT IN AN EVENT OF
DEFAULT UNDER THE INDENTURE GOVERNING THE NOTES AND/OR A BREACH OF OUR
OBLIGATIONS WITH RESPECT TO OUR CONVERTIBLE PREFERRED STOCK.
In the event that:
o subject to certain exceptions, any person, entity or group of
persons or entities becomes the beneficial owner, directly or
indirectly, of more than 50% of our outstanding voting
securities;
o at any time during any two-year period following the
distribution of the 11% senior notes, the individuals who
comprised a majority of our board of directors at the
beginning of such two year period, plus any new directors
whose election to our board was approved by a majority of
those directors, cease to comprise a majority of our board of
directors; or
o subject to certain exceptions, we consolidate with or merge
with or into another entity, we sell or lease all or
substantially all of our assets to another entity or any
entity consolidates with or merges into or with our company,
in each case pursuant to a transaction in which our
outstanding voting securities are changed into or exchanged
for cash, securities or other property, unless no person,
entity or group of persons or entities owns, immediately after
the transaction, more than 50% of our outstanding voting
stock,
then each holder of the 11% senior notes will have the right to require us to
repurchase all or a portion of its 11% senior notes for a purchase price equal
to 101% of the principal amount of that holder's 11% senior notes plus accrued
and unpaid interest to the date of repurchase. There can be no assurance that we
will have sufficient funds available to make any required repurchases of 11%
senior notes or that the terms of our other indebtedness will permit us to make
any required repurchases of 11% senior notes. If we are unable to repurchase a
holder's 11% senior notes in connection with one of the events described above,
then this would constitute an event of default under the indenture governing the
11% senior notes.
Given the overlapping stock ownership between Globix and NEON, Globix
does not believe that the proposed merger of NEON with a wholly owned subsidiary
of Globix will constitute a change in control under the indenture.
AS A RESULT OF VARIOUS FINANCIAL ACCOUNTING COMPLEXITIES, ACCOUNTING STAFF
TURNOVER AND ACCOUNTING STAFF SHORTAGES, WE EXPERIENCED MATERIAL WEAKNESSES IN
OUR ACCOUNTING AND INTERNAL CONTROL ENVIRONMENT IN SUMMER 2003 THAT RESULTED IN
THE DELAY AND LATE FILING OF SEC REPORTS FILED DURING SUMMER 2003.
Since our emergence from bankruptcy effective April 25, 2002, Globix
has had to face many challenging and complex accounting and financial reporting
issues, including fresh start accounting, restructuring and the restatement of
amounts in its financial statements as of and for the quarter ended March 31,
2002. In addition, Globix experienced significant turnover in its financial
18
reporting staff, as well as limited management resources. Globix fell behind in
its SEC reporting for the year ended September 30, 2002, and experienced
difficulty in catching up with its filing obligations for the year ended
September 30, 2002 while fulfilling its responsibilities for the fiscal year
2003. The combined effect of these challenges placed a strain on our internal
accounting resources in summer 2003 and resulted in further delays in the
preparation and filing of periodic reports that were filed in summer 2003. The
strain on our internal accounting resources and the delays in the preparation
and filing of periodic reports created material weaknesses in our accounting and
internal control environment in summer 2003.
AS A RESULT OF OUR APPLICATION OF FRESH START ACCOUNTING UNDER AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION NO. 90-7,
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE"
(OTHERWISE KNOWN AS "SOP NO. 90-7"), AS OF MAY 1, 2002, OUR FINANCIAL STATEMENTS
AS OF AND FOR PERIODS SUBSEQUENT TO MAY 1, 2002 ARE NOT COMPARABLE TO OUR
FINANCIAL STATEMENTS AS OF AND FOR PERIODS PRIOR TO MAY 1, 2002, WHICH MAY MAKE
IT MORE DIFFICULT FOR YOU TO ASSESS OUR FINANCIAL PERFORMANCE.
In connection with our emergence from bankruptcy on April 25, 2002, we
applied the principles of SOP No. 90-7 as of May 1, 2002. Accordingly, our
assets and liabilities as of May 1, 2002 were revalued to fair market value, and
therefore our financial statements for periods subsequent to May 1, 2002 are not
comparable to our financial statements for periods prior to May 1, 2002. This
may make it more difficult for third parties to assess our financial
performance.
YOU ARE UNLIKELY TO BE ABLE TO EXERCISE EFFECTIVE REMEDIES AGAINST ARTHUR
ANDERSEN LLP, THE FORMER INDEPENDENT PUBLIC ACCOUNTANTS FOR GLOBIX, FOR ANY
LIABILITY THAT THEY MIGHT OTHERWISE HAVE UNDER THE SECURITIES ACT OF 1933 OR
OTHER SECURITIES LAWS.
Globix's Consolidated Financial Statements for the year ended September
30, 2001 (its predecessor company financial statements prior to its emergence
from bankruptcy in April 2002) were audited by Arthur Andersen LLP.
On March 14, 2002, Arthur Andersen LLP was indicted on federal
obstruction of justice charges arising from the government's investigation of
Enron Corp. On June 15, 2002, a jury in Houston, Texas, found Arthur Andersen
LLP guilty of these federal obstruction of justice charges. In light of the jury
verdict and the underlying events, Arthur Andersen LLP subsequently
substantially discontinued operations and dismissed essentially its entire
workforce. You are, therefore, unlikely to be able to exercise effective
remedies or collect judgments against Arthur Andersen LLP.
19
ITEM 2. PROPERTIES
In July 1998, we purchased the land and the approximately 155,000 gross
square foot building located at 139 Centre Street, New York, New York.
Construction at this facility was completed in July 1999 and the building houses
an Internet data center and offices for our executive, technical, sales and
administrative personnel. In December 2002 we retained the services of a real
estate broker to lease office space equivalent to approximately one third of our
139 Centre Street facility. As of September 30, 2004, we had leased office space
in approximately 25% of this facility to third parties for periods ranging
between two to six years. The estimated average annualized rental income is
approximately $0.9 million.
In July 1998, we signed a lease commencing January 15, 1999 for
approximately 60,000 gross square feet of space in Santa Clara, California. The
facility contains an Internet data center and offices for technical, sales and
administrative personnel. In October 1998, we signed a lease for the rental of
approximately 38,000 gross square feet of space at Prospect House, 80 New Oxford
Street, London, England. Construction at both of these facilities was completed
in July 1999.
Prospect House contains an Internet data center and some technical
staff while the balance of technical personnel, as well as sales and
administrative personnel, are located in our other London facility at 1 Oliver's
Yard. In July 2000, we entered into a lease for the Oliver's Yard facility,
which consists of approximately 210,000 gross square feet of space. Construction
and fit-out of one floor of Internet data center space has been completed and
the facility became operational in June 2001. In April 2002 we renegotiated our
lease for this Internet data center, resulting in our retaining a total of
60,000 gross square feet of space. We sublease access office space in our London
offices to third parties for periods ranging between 3 to 10 years. The
estimated average annualized income is approximately $800 thousand.
In August 2000, in connection with our acquisition of Comstar.net,
Incorporated, we acquired our existing leases for an Internet data center in
Atlanta, Georgia containing approximately 5,000 gross square feet of space.
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 for approximately $48.7 million in
net proceeds. On March 3, 2004, we used approximately $44 million of the net
proceeds to repurchase approximately $40.3 million in principal amount of our
outstanding 11% senior notes at par value plus accrued interest in the amount of
approximately $3.7.
In November 2003, our company assumed Aptegrity, Inc.'s lease of
approximately 5,600 square feet in Fairfield, New Jersey for approximately
$11,000 a month ending December 2006.
We believe that the facilities that we plan to continue to occupy are
adequate for our current and foreseeable needs and that additional space will be
available, either through leasing or purchasing, when needed.
20
ITEM 3. LEGAL PROCEEDINGS
On January 28, 2002, a derivative suit was filed in the United States
District Court for the Southern District of New York against our company, as
nominal defendant, and certain of our current and former directors and officers.
The action is entitled Susan Boney, Individually and Derivatively on behalf of
Nominal Defendant Globix Corp, Plaintiff v. the named former Board of Directors
(pre-Bankruptcy), Defendants and Globix Corp, a Delaware Corporation, Nominal
Defendant. Plaintiffs brought the action against the former board and certain
executives seeking damages and expenses for breach of fiduciary duty for
violations of federal and state securities laws alleging misrepresentations of
Globix's financial performance from 2000 through 2001. We believe that the
allegations in this lawsuit are without merit and we intend to vigorously defend
against them. In addition, the plaintiff has not pursued her claims since the
filing of the lawsuit. 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 August 12, 2004, the United States District Court for the Southern
District of New York approved the settlement of a class action lawsuit entitled
In re Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as
defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a
director of Globix) and Brian Reach, and asserted claims under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased our securities
between November 16, 2000 and December 27, 2001. The lawsuit alleged that the
defendants had failed to disclose the true state of the company's financial
condition during this period. Under the settlement, which remains subject to
appeal, the company has agreed to pay $3,500,000 (all of which would be covered
by insurance) to settle all claims against it. A motion for reconsideration of
the fee award has been filed by those plaintiffs' law firms whose fees were not
included in the settlement. Although there can be no assurance as to the outcome
of the motion, Globix does not believe that the ultimate liabilities, if any,
resulting from this appeal 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 court approval of the 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 February 6, 2003, a putative derivative suit was filed in New York
State Supreme Court (County of New York) against our company, as nominal
defendant, and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First
Boston Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon
Smith Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings,
LLC), the initial purchasers in our February 2000 offering of the 12.5% Senior
Notes. The suit alleged that the underwriting discount granted to the initial
purchasers of the 12.5% Notes violated Section 5-531 of the New York General
Obligations Law, which limits the amount that can be charged by a loan broker.
On March 6, 2003, the plaintiff and the initial purchasers entered into a
tolling agreement that would result in the dismissal of the action without
21
prejudice pending action on a motion to dismiss an amended complaint submitted
in a similar case involving debt securities issued by another corporation. On
March 13, 2003, the court dismissed the action without prejudice. On July 17,
2003, the plaintiff and the initial purchasers extended their tolling agreement
to allow the plaintiff to re-file a complaint against our company at any time
during a period of ten days following the disposition on appeal in the case
involving the other corporation. On February 2, 2004, the case involving the
other corporation was decided against the plaintiff, and accordingly no further
action was taken against our company.
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.
We are from time to time involved in other 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 we are a party, we
do 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of Globix's fiscal year ended September 30,
2004 there were no matters submitted to a vote of security holders.
22
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
Globix common stock is quoted on the OTC Bulletin Board under the
symbol "GBXX.OB." Quotations on the OTC Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Globix has submitted an application to have its
shares of common stock listed on the American Stock Exchange.
The following table sets forth the high and low closing sale prices for
Globix common stock as reported on the OTC Bulletin Board for the periods
indicated:
Fiscal 2003 High Low
--------------- -------- -------
First Quarter (commencing 10/31/02(1).......... $2.50 $1.25
Second Quarter ............................... 2.95 2.00
Third Quarter ................................ 3.10 1.70
Fourth Quarter ................................ 3.25 2.66
Fiscal 2004 High Low
--------------- -------- -------
First Quarter ................................. $5.05 $2.55
Second Quarter ............................... 4.65 2.70
Third Quarter .............................. 4.00 2.30
Fourth Quarter ................................ 3.37 2.60
(1) Globix common stock outstanding immediately prior to the effective date
of the plan of reorganization under Chapter 11 of the U.S. Bankruptcy
Code, April 25, 2002, was cancelled as of the effective date of such
plan. The first reported trade of our common stock following the
effective date of the plan of reorganization occurred on October 31,
2002.
On December 1, 2004, there were 337 record holders of Globix stock. In
addition, the plan of reorganization provides that the 268 record holders of the
common stock of Globix on the effective date of the plan will be entitled to
receive, in exchange for claims in respect of such stock, their pro rata portion
(which, under the terms of the Globix plan of reorganization, may be equal to
zero) of 164,600 shares of the common stock following the effective date. While
the distribution of these shares will not occur until the resolution of the
stockholders' class action suit described in "-Item 3 - Legal Proceedings" we
estimate that the total number of holders of our common stock following this
distribution will be approximately 431.
Other than payment of dividends on shares of our preferred stock that
were cancelled pursuant to our plan of reorganization, we have not historically
paid dividends, and we do not anticipate paying any cash dividends in the
foreseeable future. We currently intend to retain future earnings, if any, to
finance operations, expand our business and repay the 11% senior notes. Any
future determination to pay cash dividends will be at the discretion of our
board of directors and will be dependent upon our financial condition, operating
results, capital requirements and other factors that our board of directors
deems relevant. In addition, under the terms of the 11% senior notes, our
ability to pay cash dividends is contractually limited. It is not anticipated
that cash dividends will be paid to the holders of our common stock in the
foreseeable future.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical consolidated financial data as of and
for the years ended September 30, 2004 and September 30, 2003 (Successor
Company), five months ended September 30, 2002 (Successor Company), the seven
months ended April 30, 2002 (Predecessor Company), and as of and for the fiscal
years ended September 30, 2001 and 2000 (Predecessor Company) have been derived
from our audited consolidated financial statements and related notes.
This information should be read together with, and is qualified in its
entirety by reference to, our consolidated financial statements included
elsewhere in this annual report and the notes thereto and the information set
forth in "Item 7 - Management's Discussion and Analysis of Financial Condition
and Results of Operations".
As a result of the application of fresh start accounting under SOP No.
90-7 as of May 1, 2002 our financial results for the fiscal year ended September
30, 2002 include two different bases of accounting and, accordingly, the
operating results and cash flows of the Successor Company and the Predecessor
Company have been separately disclosed. For the purposes of this annual report
and the financial statements and related notes contained in this annual report,
references to the "Predecessor Company" are references to our company for
periods prior to April 30, 2002 (the last day of the calendar month in which we
emerged from bankruptcy) and references to the "Successor Company" are
references to our company for periods subsequent to April 30, 2002. The
Successor Company's financial statements are not comparable to the Predecessor
Company's financial statements.
24
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------------------------- -------------------------------------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2002 2002 2001 2000
------------- ------------- ------------- ------------- ------------- -------------
Consolidated Statement of
Operations Data:
Revenue $ 61,190 $ 60,177 $ 30,723 $ 51,273 $ 104,210 $ 81,287
Operating costs and expenses:
Cost of revenues (excluding
depreciation, amortization,
certain payroll and occupancy
shown below) 19,747 19,990 10,458 22,123 40,609 42,513
Selling, general and administrative 43,518 44,430 29,313 57,206 124,821 98,113
Loss (gain) on impairment of
assets 17,972 -- -- 2,578 3,500 --
Restructuring and other charges
(credits) -- (1,020) -- 24,834 56,109 --
Depreciation and amortization 13,828 15,523 6,060 28,115 36,657 18,228
------------- ------------- ------------- ------------- ------------- -------------
Total operating costs and expenses 95,065 78,923 45,831 134,856 261,696 158,854
Other operating income -- 345 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Loss from operations (33,875) (18,401) (15,108) (83,583) (157,486) (77,567)
Interest and financing expense, net (10,925) (13,962) (5,866) (32,487) (51,846) (33,082)
Other income (expense) 1,667 1,232 (157) (509) (1,379) 1,779
Gain (loss) on debt discharge 1,747 6,023 -- 427,066 -- (17,577)
Reorganization items -- -- -- (7,762) -- --
Fresh start accounting adjustments -- -- -- (148,569) -- --
Minority interest in subsidiary -- -- -- 5,778 -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes
and cumulative effect of a change
in accounting principle (41,386) (25,108) (21,131) 159,934 (210,711) (126,447)
Income tax expense -- 167 -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before cumulative
effect of a change in accounting
principle (41,386) (25,275) (21,131) 159,934 (210,711) (126,447)
Cumulative effect of a change in
accounting principle -- -- -- -- (2,332) --
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) (41,386) (25,275) (21,131) 159,934 (213,043) (126,447)
Dividends and accretion on
preferred stock -- -- -- (3,178) (7,104) (5,768)
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (41,386) $ (25,275) $ (21,131) $ 156,756 $ (220,147) $ (132,215)
============= ============= ============= ============= ============= =============
Earnings (loss) per common share:
Basic:
Before cumulative effect of a
change in accounting principle $ (2.51) $ (1.54) $ (1.28) $ 3.96 $ (5.66) $ (3.73)
Cumulative effect of a change in
accounting principle -- -- -- -- (0.06) --
------------- ------------- ------------- ------------- ------------- -------------
Basic earnings (loss) per share
attributable to common stockholders $ (2.51) $ (1.54) $ (1.28) $ 3.96 $ (5.72) $ (3.73)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding - basic 16,460,000 16,460,000 16,460,000 39,618,856 38,476,909 35,484,040
============= ============= ============= ============= ============= =============
Diluted:
Before cumulative effect of a
change in accounting principle $ (2.51) $ (1.54) $ (1.28) $ 3.30 $ (5.66) $ (3.73)
Cumulative effect of a change in
accounting principle -- -- -- -- (0.06) --
------------- ------------- ------------- ------------- ------------- -------------
Diluted earnings (loss) per share
attributable to common stockholders $ (2.51) $ (1.54) $ (1.28) $ 3.30 $ (5.72) $ (3.73)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding - diluted 16,460,000 16,460,000 16,460,000 48,507,456 38,476,909 35,484,040
============= ============= ============= ============= ============= =============
25
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
(CONTINUED)
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------------------------- -------------------------------------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2002 2002 2001 2000
------------- ------------- ------------- ------------- ------------- -------------
Other Consolidated Financial Data:
Net cash provided by (used in)
operating activities $ (1,568) $ (12,188) $ 3,679 $ (59,684) $ (140,543) $ (94,318)
Net cash provided by (used in)
investing activities $ 42,177 $ (858) $ (6,461) $ 5,842 $ (113,271) $ (149,939)
Net cash provided by (used in)
financing activities $ (53,423) $ (10,539) $ (2,279) $ (4,946) $ 387 $ 509,395
Consolidated Balance Sheet Data:
Cash, cash equivalent, short-term
investments and marketable
securities $ 20,158 $ 33,260 $ 54,281 $ 113,112 $ 378,510
Restricted cash and investments $ 4,737 $ 6,928 $ 9,097 $ 33,870 $ 43,178
Working capital $ 15,466 $ 28,449 $ 42,421 $ 78,340 $ 366,139
Total assets $ 138,542 $ 222,282 $ 262,720 $ 552,988 $ 729,591
Current portion of long-term debt $ 555 $ 1,510 $ 1,520 $ 6,687 $ 2,173
Long-term debt, less current portion $ 95,278 $ 140,389 $ 151,274 $ 630,750 $ 621,809
Mandatory redeemable convertible
preferred stock $ -- $ -- $ -- $ 83,230 $ 76,042
Stockholders' equity (deficit) $ 16,875 $ 53,351 $ 72,547 $ (237,325) $ (18,030)
26
ITEM 7. MANAGEMENT'S DISCUSSIONS AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with our consolidated financial
statements and the accompanying notes and "Item 6 - Selected Consolidated
Financial Data" appearing elsewhere in this annual report. The following
discussion contains forward-looking statements. These forward-looking statements
are based on our current expectations, assumptions, estimates and projections
about our company and our industry. Our results could differ materially from
those anticipated in these forward-looking statements as a result of various
factors, including the risks and uncertainties discussed in "Item 1 - Risk
Factors" and elsewhere in this annual report. The results shown herein are not
necessarily indicative of the results to be expected in any future periods.
As is more fully discussed in Note 1 ("Basis of Presentation") to the
consolidated financial statements, we reported under fresh start accounting
pursuant to SOP No. 90-7 as of May 1, 2002 resulting in a change in the basis of
accounting in the underlying assets and liabilities of our company at the
effective date of our plan of reorganization. Accordingly, the financial
statements of the Successor Company and the Predecessor Company are not
comparable. Where appropriate, we have combined the actual results of operations
for the Successor Company for the five months ended September 30, 2002 and the
Predecessor Company for the seven months ended April 30, 2002 as pro forma
combined 2002 operating results in order to present a more meaningful
comparative analysis to the operating results of the prior fiscal year.
Successor Company and Predecessor Company financial data are derived from the
consolidated financial statements that appear elsewhere in this annual report.
In addition to the basis in accounting differences noted above, our operating
results for fiscal 2002 were significantly impacted by:
o items associated with the Predecessor Company's bankruptcy,
including debt discharge, restructuring activities and other
charges related to certain bankruptcy activities and certain
changes in accounting estimates recorded in the third quarter
fiscal 2002; and
o the Successor Company recognizing the effects of reduced
depreciation, additional amortization and reduced interest expense
arising from the revaluation of our assets and liabilities and the
reduced amount of the Successor Company's outstanding debt
following the effective date of the plan.
OVERVIEW
Globix 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, Globix filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code,
together with a prepackaged plan of reorganization, with the United States
Bankruptcy Court for the District of Delaware. We continued to operate in
Chapter 11 in the ordinary course of business and received permission from the
bankruptcy court to pay our employees, trade, and certain other creditors in
full and on time, regardless of whether these claims arose prior to or after the
Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection. For additional information about our
reorganization, see "Our Chapter 11 Bankruptcy Reorganization" under "Item 1 -
Business".
27
Since Globix emerged from bankruptcy reorganization in April 2002, its
management has actively reviewed various strategies for increasing stockholder
value. A key objective has been to redress the imbalance between revenues and
costs that has historically been a feature of Globix' business, by increasing
the revenue base and by cutting costs. A second objective has been to reduce
leverage by buying back or paying off higher cost indebtedness.
Globix has attempted to address customer churn, industry-wide price
competition and price decreases in its traditional offerings of hosting and
network services by broadening the range of services it offers through the
addition of value added services as part of its managed services business. By
focusing on providing value added services Globix believes it will be able to
increase its monthly recurring revenue per customer or average revenue per unit
(ARPU). We calculate ARPU by dividing our average contracted monthly recurring
revenue for the period by our average number of contracted customers during the
period. During the fiscal year ended September 30, 2004 there was a 6% decrease
in our total number of customers, while our ARPU increased to approximately $3.4
thousand as of September 30, 2004 compared to approximately $2.7 thousand as of
September 30, 2003. In addition, during the fiscal year ended September 2004 we
saw an improvement in our monthly average churn rate in comparison to 2003. In
2004 our monthly positive change in contract rate (negative churn) averaged 0.3%
during the fiscal year ended September 30, 2004 compared to a monthly average
churn rate of 1.7% in the fiscal year ended September 30, 2003. We define churn
as contractual revenue losses as a percentage of total contractual revenue due
to customer cancellations and downgrades, net of upgrades, and additions of new
services.
In addition, Globix has cut the costs of its operations by combining
offices, eliminating redundancy within its operations and selling or leasing
excess office space. This process of cost cutting was largely completed with the
sale of the property at 415 Greenwich Street in New York, New York.
Growth through acquisition offers the possibility of revenue growth and
the expansion of service offerings, to enable Globix to offer a broader range of
services to compete more effectively, while providing a larger revenue base to
support Globix's existing indebtedness. The ability to achieve operating
efficiencies by combining administrative or other functions has also been a
consideration in reviewing possible acquisitions. In addition, market conditions
have made it possible to acquire related businesses at what are perceived to be
relatively low prices. In pursuing its acquisition strategy, Globix has reviewed
potential transactions involving smaller companies, like Aptegrity, Inc., whose
acquisition gradually expands the range of services that Globix provides, as
well as larger companies, such as NEON, that could significantly increase the
size of Globix' business and enhance its ability to compete against much larger
competitors.
In order to increase its operating flexibility and address concerns
about its long term financial viability, Globix has also attempted to decrease
its indebtedness through the repurchase of its 11% senior notes and the
repurchase or early payment of other financial obligations.
Although Globix operates in one operating segment, there are four 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.
28
MANAGED SERVICES
We provide managed application, system, network and media services to
our hosting and co-location customers. Such services include a wide variety of
maintenance, administration and problem resolution services for many popular
operating systems, Internet network devices, software security solutions,
web-based applications, as well as streaming media delivered in a streaming or
continuous fashion over the Internet or over a company's intranet.
NETWORK SERVICES AND INTERNET ACCESS
We provide access to our network for our hosting and co-location
customers located inside of our Internet data centers as well as Internet access
services which provide businesses with high-speed continuous access to the
Internet from their own premises. In addition, we provide other services, such
as domain name registration, local loop provisioning, Internet address
assignment, router configuration, e-mail configuration and management and
technical consulting services.
OTHER
Our other services, which we categorize as "other," are comprised of
hardware and software sales and other non-recurring revenue. For the fiscal year
ended September 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 the "Item 1
- - Business".
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities. We base
our accounting estimates on historical experience and other factors that are
believed to be reasonable under the circumstances. However, actual results may
vary from these estimates under different assumptions or conditions. The
following is a summary of our critical accounting policies and estimates:
29
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 ("SAB"), No. 104 "Revenue Recognition"
which revises and rescinds certain sections of SAB No. 101, "Revenue
Recognition". The changes noted in SAB 104 did not have a material effect on
Globix's consolidated financial statements. Globix recognizes revenue when
delivery has occurred, persuasive evidence of an agreement exists, the fee is
fixed or determinable and collectability is probable. SAB No. 104 expresses the
view of the Securities and Exchange Commission's staff in applying accounting
principles generally accepted in the United States of America to certain revenue
recognition issues. Under the provisions of SAB No. 104, set up and installation
revenue are deferred and recognized over the estimated length of the customer
relationship, which in the case of our business is approximately 36 months.
Prior to April 30, 2002, the estimated length of the customer relationship was
12-18 months. Monthly service revenue under recurring agreements related to
Internet hosting, co-location, network services, Internet access and managed
services is recognized over the period that service is provided. Revenue derived
from project or event type managed service engagements is recognized over the
life of the engagement. Payments received in advance of providing services are
deferred until the period that these services are provided.
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 Globix's
network, leased line and associated costs related to connecting with Globix's
peering partners and costs associated with leased lines connecting Globix's
facilities to its backbone and aggregation points of presence.
INTANGIBLE ASSETS
We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142,
"Goodwill and Other Intangible Assets" when we emerged from bankruptcy in April
2002. SFAS 141 requires all business combinations to be accounted for using the
purchase method of accounting and that certain intangible assets acquired in a
business combination must be recognized as assets separate from goodwill. SFAS
No. 142 addresses the recognition and measurement of goodwill and other
intangible assets subsequent to their acquisition. SFAS No. 142 also addresses
the initial recognition and measurement of intangible assets acquired outside of
a business combination whether acquired individually or with a group of other
assets. SFAS No. 142 provides that intangible assets with indefinite lives and
goodwill will not be amortized but, will be tested at least annually for
impairment. If an impairment is indicated then the asset will be written down to
its fair value typically based upon its future expected discounted cash flows.
Our intangible assets following bankruptcy are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
30
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 September 30, 2004 and September
30, 2003 the balance of bad debt reserve amounted to approximately $2.2 million
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.
31
FISCAL YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER
30, 2003
REVENUE. Revenue for the year ended September 30, 2004 increased 1.7%
or approximately $1.0 million to $61.2 million from $60.1 million for the year
ended September 30, 2003. On a fourth quarter comparison, revenue increased $2.2
million or 16% to $16 million for the quarter ended September 30, 2004 compared
to $13.8 million for the quarter ended September 30, 2003. In addition, on a
quarter over quarter basis, revenue increased by $0.3 million or 2% for the
quarter ended September 30, 2004 compared to the quarter ended June 30, 2004,
continuing the trend of increased revenue on a quarter over quarter basis for
the fourth straight quarter.
During the year ended September 30, 2004 our monthly positive change in
contract rate (negative churn) averaged 0.3% compared to a monthly average churn
rate of 1.7% for the fiscal year ended September 30, 2003. During the year ended
September 30, 2004, new contracts averaged 2.0% per month and contract upgrades
averaged 1.6% per month, offset by a 1.7% monthly average in contract downgrades
and a 1.6% average in contract cancellations per month. We define churn as
contractual revenue losses as a percentage of total contractual revenue due to
customer cancellations and downgrades, net of upgrades, and additions of new
services. Cancellations refer to customers that have either stopped using our
services completely or remained a customer but terminated a particular service.
Downgrades are a result of customers taking less of a particular service or
renewing their contract for identical services at a lower price.
During the fiscal year ended September 30, 2004, our monthly recurring
revenue per customer (ARPU) averaged approximately $3.3 thousand compared to an
average ARPU of approximately $2.7 thousand in the fiscal year ended September
30, 2003, despite a decrease of approximately 88 customers or 6% from 1,457
customers in September 30, 2003 to 1,369 at September 20, 2004. This is due
mainly to our focus on higher-revenue managed services customers as a result of
the acquisition of Aptegrity. We calculate ARPU by dividing our average
contracted monthly recurring revenue for the period by our average number of
contracted customers during the period.
Revenue breakdown for our four major service lines of Internet Hosting
and Co-Location, Managed Services, Network Services and Internet Access, and
Hardware and Software Sales, DSL and Other is as follows. Revenue from Internet
Hosting and Co-Location decreased by $2.3 million or 9% to $23.8 million in
fiscal year 2004 compared to $26.0 million in fiscal year 2003. Revenue from
Network Services and Internet Access revenue decreased by $1.6 million or 8% to
$17.5 million in fiscal year 2004 compared to $19.0 million in fiscal year 2003.
The decreases in these two major services lines are mainly due to lower revenue
under recurring contracts or churn. Revenue from Hardware and Software Sales,
DSL and Other decreased by $0.8 million or 46% to $1.0 million in fiscal year
2004 compared to $1.8 million in fiscal year 2003. This decrease was primarily
due to $0.7 million reduction in DSL revenue as a result of the sale of our DSL
customer accounts during fiscal year 2003 and a decrease of $0.5 million in
lower margin Hardware and Software sales. Revenue from Managed Services
increased by $5.7 million or 42% to $19.0 million in the year ended September
30, 2004 compared to $13.3 million in the year ended September 30, 2003. This
increase is the direct result of the acquisition of Aptegrity and our continued
focus on adding value-added services through our Managed Services line of
business. The above analysis includes the positive effect of foreign exchange
rates between the U.S. dollar and the British Pound in the amount of
approximately $2.8 million on our revenue year over year.
32
COST OF REVENUE. Cost of revenue for the year ended September 30, 2004,
decreased $243 thousand to $19.7 million from $20.0 million for the same period
in 2003. This was mainly due to $2.9 million decrease in our network cost
resulting from our continued focus on deriving efficiencies and cost savings
from our network. Additional decrease of approximately $134 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
$2.8 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 $392 thousand on cost of revenue year over
year. As a result of the variances described above gross margins increased to
67.7% for the year ended September 30, 2004 compared to 66.8% for the same
period ended September 30, 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased by approximately $900 thousand to $43.5
million as compared to $44.4 million for the year ended September 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 Globix's consultants. Bad debt expenses
decreased $1.2 million to approximately $0.7 million for year ended September
30, 2004, compared to $1.9 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 $1.0
million resulted from our efforts to reduce our operating cost. These were
offset mainly by a $1.7 million credit recorded during the year ended September
30, 2003 as a result of the settlement of the Rabbi Trust litigation. In
addition, our marketing expenses were up by approximately $0.7 million to $1.2
million in the year ended September 30, 2004 as a result of our increased
efforts to enhance long-term growth and improve our public relations. The
aforementioned analysis includes the adverse effect of foreign exchange rate in
the amount of approximately $1.5 million on selling, general and administrative
period over period.
LOSS ON IMPAIRMENT OF ASSETS. Impairment charges for the year ended
September 30, 2004 amounted to approximately $18 million as a result of the
write-down of the cost basis of Globix's property located at 415 Greenwich
Street in New York, NY to its market value less cost to sell of approximately
$11.5 million. The sale of the 415 Greenwich Street property was consummated on
January 22, 2004 for total cash consideration of $60 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$1.7 million to $13.8 million for the year ended September 30, 2004, as compared
to $15.5 million in the year ended September 30, 2003. The decrease resulted
from $1.7 million of depreciation expenses recorded in the year ended September
30, 2003 related to the 415 Greenwich Street 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 $292 thousand.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the
year ended September 30, 2004 was $11.5 million, compared to $15.1 million for
the same period in 2003. The decrease was attributable to the lower average
balance of the 11% senior notes outstanding in fiscal 2004 compared to fiscal
2003, which resulted from the repurchases we made throughout fiscal 2004 of
approximately $47.3 million of our 11% senior notes offset by an increase in the
balance of the 11% senior notes of approximately $7.2 million from the required
payment in kind of the related accrued interest in May, 2004.
INTEREST INCOME. Interest income for the year ended September 30, 2004
was $540 thousand, compared to $1.2 million, for the same period in 2003. The
decrease was primarily due to a decrease in our cash and investments.
33
OTHER INCOME, NET. Other income for the year ended September 30, 2004
was $1.7 million, compared to $1.2 million, for the same period in 2003. The
increase was due primarily to the receipt of $450 thousand for an insurance
claim filed in connection with the September 11, 2001 terrorist attack, and $850
thousand from leasing office space in our 139 Centre Street facility, offset by
other non-operational expenses.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the
factors described above, we reported net loss of $41.4 million, or $2.51 basic
and diluted loss per share for the year ended September 30, 2004, as compared to
a net loss of $25.3 million, or $1.54 basic and diluted loss per share for the
year ended September 30, 2003.
FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2002
REVENUE. Revenue for the fiscal year ended September 30, 2003 decreased
26.6% to $60.1 million from $82.0 million for the fiscal year ended September
30, 2002. This decrease in revenues was mainly attributable to customer churn
which accounted for $19.8 million, or approximately 90.4% of our revenue
decrease. During fiscal 2003 our monthly churn averaged approximately 1.7%. Of
this average monthly churn, 1.8% was related to downgrades, 3.2% was related to
cancellations, partially offset by decreases in churn of 1.7% and 1.6% related
to new and upgraded contracts, respectively. Revenues also declined due to a
decrease in lower margin hardware and software sales. Hardware and software
sales decreased $2.1 million, or 77.3%, as a result of our shift away from lower
margin hardware and software sales. This decrease accounted for 9.6% of our
total revenue decline.
COST OF REVENUE AND GROSS MARGIN. Cost of revenue for the fiscal year
ended September 30, 2003 decreased to $20.0 million from $32.6 million for the
fiscal year ended September 30, 2002. A decrease of $10.8 million or 85.7% of
our cost of revenue decrease, realized within non-hardware related costs
reflects our continued focus on network reconfiguration. A decrease of $1.8
million, or 14.3% of our cost of revenue decrease, in hardware costs reflects
our shift away from lower margin hardware sales. Gross margin increased to 66.8%
for the fiscal year ended September 30, 2003 from 60.0% for the fiscal year
ended September 30, 2002. The increase in gross margin is primarily attributable
to the movement away from lower margin products and the reduction of network
cost as a result of our focus on network reconfiguration. During fiscal year
2003, Globix sold its DSL services in the second quarter and shifted away from
hardware sales, both low margin products. In addition, Globix reduced certain
network costs through contract renegotiations with certain major vendors.
34
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $44.4 million, or 73.8% of revenue, for the year
ended September 30, 2003, compared to $29.3 million, or 95.0% of revenue, for
the five months ended September 30, 2002. For the seven-month period ended April
30, 2002, selling, general and administrative expenses were $57.2 million, or
111.6% of revenue. For the fiscal year ended September 30, 2002 selling, general
and administrative expenses totaled $86.5 million, or 106% of revenue.
The decrease in selling, general and administrative expenses as a
percentage of revenue for the fiscal year ended September 30, 2003 from both the
five-month period ended September 30, 2002 and the seven month period ended
April 30, 2002, was in part due to a decrease in salaries and benefits in
connection with our restructuring efforts, which focused on significant
reductions in facilities and personnel. During the year ended September 30,
2003, salaries and benefits were $21.3 million, or 35.5% of revenue, as compared
to $12.4 million, or 40.0% of revenue, in the five month period ended September
30, 2002. For the seven month period ended April 30, 2002, salaries and benefits
were $33.7 million, or 66.0% of revenue. For the fiscal year ended September 30,
2002, salaries and benefits totaled $46.1 million, or 56.0% of revenue. The
number of our employees decreased from approximately 262 as of September 30,
2002 to approximately 209 as of September 30, 2003.
For the year ended September 30, 2003, bad debt expense was $1.9
million, representing 3.1% of revenue, compared to $1.9 million, or 6.0% of
revenue, for the five-month period ended September 30, 2002. For the seven-month
period ended September 30, 2002, bad debt expense was $4.3 million, or 8.0% of
revenue. For the fiscal year ended September 30, 2002, bad debt expense was $6.2
million, or 8.0% of revenue. The decrease in bad debt expense for the fiscal
year ended September 30, 2003 was partially attributable to improvements in
collections as well as a proactive reduction in the number of high risk customer
account receivable balances.
RESTRUCTURING AND OTHER EXPENSES. We recorded a reversal in the fiscal
year 2003 of approximately $1.0 million to our previously recorded restructuring
charges. Reversals related to contract settlement charges in the amount of $0.8
million and facility closings charges of $0.2 million were primarily for
settling certain facility contracts and purchase commitments for amounts lower
than originally planned.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the
year ended September 30, 2003 was $15.5 million or 25.8% of revenue, as compared
to $6.1 million, or 20% of revenue, in the five-month period ended September 30,
2002. Depreciation and amortization in the seven month period ended April 30,
2002 was $28.1 million or 55.0% of revenue. For the fiscal year ended September
30, 2002, depreciation and amortization was $34.2 million, or 41.7% of revenue.
The decrease in depreciation and amortization expenses for the fiscal year 2003
compared to the fiscal year 2002 was attributable to a decrease in our capital
spending in connection with our restructuring plan as well as the impact of
fresh start accounting, in particular the revaluation of our tangible and
intangible assets as of April 30, 2002.
OTHER OPERATING INCOME. Other operating income resulted from the sale
of DSL customer accounts in the amount of $345 thousand during the fiscal year
ended September 30, 2003.
INTEREST AND FINANCING EXPENSE AND INTEREST INCOME. Interest and
financing expense for the year ended September 30, 2003 was $15.1 million, or
25.2% of revenue, compared to $6.7 million, or 22.0% of revenue, in the five
months ended September 30, 2002. Interest and financing expense in the
seven-month period ended April 30, 2002 was $34.5 million, or 67.0% of revenue.
For the fiscal year ended September 30, 2002, interest and financing expense
totaled $41.2 million, or 50.0% of revenue. The decrease in interest and
financing expense was primarily attributable to the reduction in our outstanding
indebtedness pursuant to the plan of reorganization and to the repurchase of
approximately $19 million in principal value of the 11% senior notes during the
fiscal year 2003.
35
Interest income in the year ended September 30, 2003 was $1.2 million,
or 2.0% of revenue, compared to $0.8 million, or 3.0% of revenue, in the
five-month period ended September 30, 2002. Interest income in the seven-month
period ended April 30, 2002 was $2.0 million, or 4.0% of revenue. For the fiscal
year ended September 30, 2002, interest income was $2.8 million, or 3.0% of
revenue. This decreasing trend was primarily attributable to the reduced amount
of our cash investments and the impact of declining interest rates as compared
to the prior fiscal year.
OTHER INCOME (EXPENSE). Other income in the year ended September 30,
2003 was $1.2 million compared to an expense of $0.6 million in the fiscal year
ended September 30, 2002. This increase is due primarily to write-offs of
strategic investments in the amount of $490 thousand in the prior period and
insurance receipts in the amount of $88 thousand associated with the September
11, 2001 terrorist attack received in the current year.
GAIN ON DISCHARGE OF DEBT. Gain on discharge of debt was $6.0 million
for the fiscal year ended September 30, 2003. The gain is a direct result of the
repurchase of approximately $19 million in principal value of the 11% senior
notes. We did not recognize any gain on discharge of debt during the five-month
period ended September 30, 2002. The gain on the discharge of approximately
$427.1 million recorded in the seven-month period ended April 30, 2002 resulted
from the exchange of the 12.5% senior notes for the 11% senior notes under the
plan of reorganization.
INCOME TAX EXPENSE. Income tax expense for the fiscal year ended
September 30, 2003, in the amount of $167 thousand, represents our estimated
income taxes due in the United Kingdom. We did not record any income tax
expenses during the fiscal year ended September 30, 2002.
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of
the factors described above, we reported net loss of $25.3 million and net loss
attributable to common stockholders of $25.3 million, or $1.54 basic and diluted
loss per share for the fiscal year ended September 30, 2003, as compared to a
net income of $138.8 million and net income attributable to common stockholders
of $135.6 million, or $2.67 basic earnings per share and $2.01 diluted earnings
per share, respectively, for the fiscal year ended September 30, 2002.
LIQUIDITY AND CAPITAL RESOURCES
Historically our cost structure exceeded our revenue base mainly due to
high labor costs resulting from higher than necessary head count, significant
level of overhead due to numerous locations and overlapping within our network.
This has led us historically to experience negative cash flows from operations
and incur net losses. Our management believes that steps taken as part of our
restructuring efforts to reduce facilities and personnel, combined with our
ongoing efforts to derive efficiencies from our network have reduced our cash
outflows to a level that meets our current revenue rate. Our ability to generate
positive cash flows from operations and achieve profitability is dependent upon
our ability to grow our revenue while maintaining our current cost structure and
network efficiencies. Management believes that by maintaining a monthly positive
change in contract rate (negative churn), by continuing to focus on providing
managed services solutions and by keeping close control over costs and
expenditures it will be able to meet its revenue and profitability targets.
Additionally, since emerging from bankruptcy our management has taken several
significant steps to reduce our level of outstanding indebtedness and is
committed to further reduce our financial obligations by settling them in cash,
converting into equity instruments, refinancing or any other manner, which may
be beneficial to us. The indenture governing our 11% senior notes permits
interest to be paid in kind in 2005 and 2006 at the discretion of our board of
directors. Although there can be no assurance, Globix management believes that
its board will elect payment of interest in kind in 2005.
36
As of September 30, 2004 our cash and cash equivalent, short-term and
long-term investments amounted to approximately $21.7 million. In addition
during fiscal year 2004 we used approximately $1.6 million in operating
activities, which we believe represents our recurring cash-flow activities
following the complete consummation of our plan of reorganization and under our
current cost structure. We further believe that this cash and investment balance
is sufficient to meet our 2005 anticipated day to day operating expenses,
commitments, working capital, capital expenditures and interest payment of
approximately $8.0 million under our 11% senior notes if our board does not
elect payment of interest in kind.
However, in the longer term there can be no assurance that we will be
successful in achieving sufficient profitability, attracting new customers,
maintaining our existing churn levels or reducing our outstanding indebtedness.
In addition, in the future, we may make acquisitions or repurchase indebtedness
of our company, which, in turn, may adversely affect our liquidity. In such
cases management will have to take drastic steps to reduce its operating
expenses to meet its then revenue base and liquidity needs. Such steps may
include further reduction of our headcount, consolidation or elimination of
facilities, termination of low margin customers and negotiating with our
creditors to restructure our indebtedness, mainly but not limited to our 11%
senior notes.
On March 1, 2002, our company and two of our wholly owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code, together with the plan of
reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade, and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan. 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.
As of the effective date of the plan, all of our existing securities
were cancelled and:
o each holder of our 12.5% senior notes due 2010 became entitled
to receive, in exchange for its claims in respect of the 12.5%
senior notes, its pro rata share of:
o $120 million in aggregate principal amount of our 11%
senior notes, and
o 13,991,000 shares of our common stock, representing
85% of the shares of our common stock issued and
outstanding following the effective date of the plan;
and
o each holder of shares of our preferred stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of
2,304,400 shares of our common stock, representing 14% of the
shares of our common stock issued and outstanding following
the effective date of the plan; and
o each holder of shares of our common stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
its shares of common stock, its pro rata share of 164,600
shares of our common stock, representing 1% of the shares of
our common stock issued and outstanding following the
effective date of the plan.
All of the shares of our common stock issued pursuant to the plan are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of our issued and outstanding common stock
on a fully-diluted basis following the effective date of the plan.
37
A total of 16,460,000 shares of our common stock and $120 million in
aggregate principal amount of the 11% senior notes were deemed to be issued and
outstanding on the effective date of the plan pursuant to the terms of the plan.
As of September 30, 2002, however, no shares of our common stock or 11% senior
notes had been distributed. In October 2002, we distributed a total of
16,295,400 shares of common stock and $120 million in aggregate principal amount
of 11% senior notes. Pursuant to the terms of a Stipulation and Order that we
entered into with the lead plaintiffs in the class action lawsuit described in
"Item 3 - Legal Proceedings," 229,452 of these shares of common stock and
$1,968,000 in aggregate principal amount of these 11% senior notes were placed
in reserve 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, then 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 common stock and 11% senior notes held in escrow. Based on an August 12, 2004
court approval of a settlement agreement pursuant to which Globix would not be
required to pay an amount in excess of our liability insurance described under
"Item 3 -Legal Proceedings," Globix believes that the shares of common stock and
11% senior notes held in escrow are not likely to be distributed to the class
action litigants and their attorneys, and such shares and notes will accordingly
be available for distribution to Globix security holders under the plan.
Distribution of the remaining 164,600 shares of common stock deemed to have been
issued on the effective date of the plan, which are allocable under the terms of
the plan to the holders of our common stock outstanding immediately prior to the
effective date of the plan, will occur following the resolution of the
stockholder derivative suit against our company and certain of our former
officers and directors described in "Item 3 - Legal Proceedings".
The indenture governing the 11% senior notes contains a number of
covenants that impose significant operating and financial restrictions on us and
our subsidiaries. These restrictions significantly limit, and in some cases
prohibit, among other things, the ability of our company and certain of our
subsidiaries to incur additional indebtedness, create liens on assets, enter
into business combinations or engage in certain activities with our
subsidiaries.
FISCAL YEAR ENDED SEPTEMBER 30, 2004
As of September 30, 2004, we 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 $12.4 million decrease in cash and cash equivalents to $12.1
million at September 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 year ended September 30, 2004, we
completed the sale of the 415 Greenwich Street 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 at par plus accrued interest as required
pursuant to the indenture and the remainder was used for working capital.
OPERATING ACTIVITIES. Net cash used in operating activities during the
year ended September 30, 2004 was approximately $1.6 million in comparison to
$12.2 million, which was used in operating activities during the year ended
September 30, 2003. The improvement in our cash burn is due to the pay-down of
the remaining pre-bankruptcy obligations to our vendors and others during fiscal
2003, our continuing improvement in collections, the reduction in the number of
high-risk customer account receivable balances and our ongoing focus on cost
control by adjusting our expenditure rate to our revenues. We believe that the
change in our accounts receivable, accounts payable and accrued liabilities
during fiscal 2004 represents our recurring cash-flow activities following the
complete consummation of our plan of reorganization.
38
Our $1.6 million use of cash in operating activities was attributed
mainly to our net loss of $41.4 million, which included non-cash depreciation
and amortization expenses of $13.8 million and a non-cash impairment charge of
$18.0 million resulting from a write-down of the 415 Greenwich Street 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 a portion of our 11%
senior notes. Changes in assets and liabilities resulted in an increase to
operating cash flow of approximately $9.5 million, which was mainly attributed
to a $9.4 million increase in accrued interest on the 11% senior notes, which we
expect will be paid in kind during May 2005.
INVESTING ACTIVITIES. Net cash provided by investing activities during
the year ended September 30, 2004 was $42.2 million. Approximately $48.7 million
resulted from the sale of the 415 Greenwich Street 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, $4.7 million for capital expenditures and $1.5 million
of deferred acquisition cost that we incurred as part of the proposed merger
with NEON.
FINANCING ACTIVITIES. Net cash used in financing activities during the
year ended September 30, 2004 was $53.4 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% senior notes in connection
with the sale of the 415 Greenwich Street property. $2.7 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.
FISCAL YEAR ENDED SEPTEMBER 30, 2003
As of September 30, 2003, we had cash and cash equivalents of
approximately $24.5 million compared to approximately $47.6 million on September
30, 2002.
OPERATING ACTIVITIES. For the fiscal year ended September 30, 2003 net
cash used in operating activities was approximately $12.2 million attributable
mainly to a net loss of $25.3 million and non-cash gains of approximately $6.0
million and $1.0 million for discharges resulting from our repurchase of the 11%
senior notes and reversal of restructuring accruals recorded in prior years,
respectively, offset by depreciation and amortization expenses of approximately
$15.5 million, an increase in our provision of doubtful accounts of
approximately $1.9 million and a non-cash charge of approximately $1.0 million
recorded in respect of warrants issued to a consultant. Changes in assets and
liabilities resulted in an increase to operating cash-flow of approximately $2.0
million.
INVESTING ACTIVITIES. Cash used for investing activities for the year
ended September 30, 2003 amounted to approximately $0.9 million, which
attributed mainly to capital expenditures in the amount of approximately $1.2
million.
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 and resulted in approximately $48.7
million in net proceeds. On March 3, 2004, we used approximately $44 million of
the net proceeds to repurchase approximately $40.3 million in principal amount
of our outstanding 11% senior notes at par value plus accrued interest in the
amount of approximately $3.7. We intend to use the remaining balance of the net
proceeds from the sale for working capital purposes. Consummation of the sale
also eliminated certain obligations that we incurred in connection with the
purchase and rehabilitation of the property.
39
On October 31, 2003, Globix paid approximately $2.0 million (subject to
final settlement) for the acquisition of the business, substantially all of the
assets and the assumption of certain liabilities of Aptegrity, Inc., a provider
of web application and operations management services.
FINANCING ACTIVITIES. Cash used in financing activities for the year
ended September 30, 2003 amounted to approximately $10.5 million. Approximately
$14.6 million were used to repurchase a portion of our 11% senior notes,
approximately $0.9 million were used to buy-out certain of our capital leased
equipments and approximately $1.1 million were used to amortize scheduled
payments under our mortgage and capital lease agreements, offset by a
contribution of approximately $6 million from the minority interest investor
mentioned above.
On October 3, 2003, we repurchased in the open market for approximately
$5.6 million additional portion of our outstanding 11% senior notes.
SEGMENT INFORMATION
Our activities fall within one operating segment. The following table
sets forth geographic segment information for the year ended September 30, 2004
and 2003 (Successor Company), , five months ended September 30, 2002 (Successor
Company), and for the seven months ended April 30, 2002 (Predecessor Company):
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------------- ------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
---------- ---------- ---------- ----------
Revenues:
United States ........................ $ 35,537 $ 36,833 $ 20,410 $ 37,747
Europe (mainly the United Kingdom) .. 25,653 23,344 10,313 13,526
---------- ---------- ---------- ----------
Consolidated ........................ $ 61,190 $ 60,177 $ 30,723 $ 51,273
========== ========== ========== ==========
Operating income (loss):
United States ........................ $ (37,755) $ (22,631) $ (15,069) $ (54,433)
Europe (mainly the United Kingdom) .. 3,880 4,230 (39) (29,150)
---------- ---------- ---------- ----------
Consolidated ........................ $ (33,875) $ (18,401) $ (15,108) $ (83,583)
========== ========== ========== ==========
Long-lived assets:
United States ........................ $ 64,978 $ 137,279 $ 148,559
United Kingdom ...................... 25,844 25,351 26,151
---------- ---------- ----------
Consolidated ........................ $ 90,822 $ 162,630 $ 174,710
========== ========== ==========
40
Although our company operates in one operating segment, there are 4
major service lines as detailed in the table below. Data for fiscal year 2002
have not been provided due to impracticability.
SUCCESSOR COMPANY
--------------------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------------ ----------------
Internet Hosting and Co-Location................ $ 23,760 $ 26,048
Managed Services................................ 18,996 13,342
Network Services and Internet Access............ 17,483 19,034
Hardware and Software Sales, DSL and Other ..... 951 1,753
------------------ ----------------
Revenue, net $ 61,190 $ 60,177
================== ================
INCOME TAXES
Globix is in an accumulated loss position for both financial and income
tax reporting purposes. Globix has United States Federal income tax loss
carryforwards of approximately $173.2 million at September 30, 2004. These
income tax loss carryforwards expire at various times through 2024. The United
States Federal income tax loss carryforwards were reduced upon emergence from
bankruptcy due to the Internal Revenue Code's rules and regulations related to
the cancellation of indebtedness income that is excluded from taxable income.
Since the bankruptcy plan provided for substantial changes in our ownership, our
use of the net operating loss carryforwards from the period prior to the
bankruptcy may be limited. Globix has not yet determined the impact, if any,
that changes in ownership have had on net operating loss carryforwards. As of
September 30, 2004, Globix also had net operating loss carryforwards of
approximately $24.3 million from its United Kingdom subsidiaries, which do not
expire under United Kingdom tax rules. For financial reporting purposes, income
tax benefits through September 30, 2004 related to both United States Federal
and foreign income tax losses are fully offset by a valuation allowance due to
the uncertainty of our ability to realize income tax benefits by generating
taxable income in the future.
Our emergence from bankruptcy in fiscal 2002 did not create a new tax
reporting entity. Accordingly, the adjustments required to adopt fresh start
accounting are not applicable for our tax reporting and, therefore, deferred tax
items were recognized concurrently with the recognition of the respective fresh
start accounting adjustments. In addition, pursuant to SOP No. 90-7, reversals
of the valuation allowance recorded against deferred tax assets that existed as
of the emergence date will first reduce intangibles, until exhausted, and
thereafter will be reported as additional paid in capital as opposed to income
tax expense. The balance of the valuation allowance for which this treatment is
required was approximately $80 million at September 30, 2004 and 2003.
INDEBTEDNESS
Our indebtedness at September 30, 2004 consisted of approximately $72.2
million in aggregate principal amount of our 11% senior notes, approximately
$3.3 million in related accrued interest, approximately $370 thousand of capital
lease obligations and approximately $19.9 million in mortgage debt. Total
borrowings at September 30, 2004 were approximately $95.9 million, which
included $0.6 million in current obligations and $95.3 million of the 11% senior
notes, related accrued interest, long-term mortgage and capital lease
obligations. The indenture governing the 11% senior notes requires interest to
be paid in kind through 2004, and permits interest to be paid in kind for two
years thereafter at the discretion of our board of directors.
41
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 and resulted in approximately $48.7
million in net proceeds. On March 3, 2004, we used approximately $44 million of
the net proceeds to repurchase approximately $40.3 million in principal amount
of our outstanding 11% senior notes at par value plus accrued interest in the
amount of approximately $3.7. Consummation of the sale also eliminated certain
obligations that we incurred in connection with the purchase and rehabilitation
of the property. In addition, through September 30, 2004 we acquired in the open
market approximately $26.1 million in aggregate principal amount of our 11%
senior notes and approximately $1.9 million of related accrued interest for an
aggregate purchase price of approximately $20.2 million in open market purchases
and issued an additional $18.5 million in 11% senior notes as payment of accrued
interest on the 11% senior notes.
COMMITMENTS
As of September 30, 2004, we had commitments to certain
telecommunications carriers totaling $25.6 million payable in various years
through 2009. Additionally, we have various agreements to lease facilities and
equipment and are obligated to make future minimum lease payments of
approximately $76 million on operating leases expiring in various years through
2017.
As of September 30, 2004 we had contractual obligations due in future
periods as follows:
LESS THAN 1 AFTER 5
------------ -------
Contractual Obligations TOTAL YEAR 2-3 YEARS 4-5 YEARS YEARS
----- ---- --------- --------- -----
11% senior notes ..................... $ 72,202 $ -- $ -- $ 72,202 $ --
11% senior notes - Accrued Interest... 3,349 -- -- 3,349 --
Mortgage Payable ..................... 33,979 2,142 4,284 4,284 23,269
Capital Lease Obligations ............ 370 249 121 -- --
Operating Leases ..................... 76,029 6,777 13,673 13,701 41,878
Telecommunications Commitments ....... 25,564 9,738 11,909 3,917 --
-------- -------- -------- -------- --------
Total Contractual Cash Obligations ... $211,493 $ 18,906 $ 29,987 $ 97,453 $ 65,147
======== ======== ======== ======== ========
42
RECENT TECHNICAL ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a derivative as discussed in
Statement No. 133. It also specifies when a derivative contains a financing
component that warrants special reporting in the Consolidated Statement of Cash
Flows. SFAS No. 149 amends certain other existing pronouncements in order to
improve consistency in reporting these types of transactions. The new guidance
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of this
standard did not have a material impact on our consolidated financial
statements.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 specifies that instruments within its
scope embody obligations of the issuer and that, therefore, the issuer must
classify them as liabilities. SFAS No. 150 requires issuers to classify as
liabilities the following three types of free standing financial instruments:
(1) mandatorily redeemable financial instruments; (2) obligations to repurchase
the issuer's equity shares by transferring assets and (3) certain obligations to
issue a variable number of shares. SFAS No. 150 defines a "freestanding
financial instrument" as a financial instrument that (1) is entered into
separately and apart from any of the entity's other financial instruments or
equity transactions or (2) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a separate basis. For
all financial instruments entered into or modified after May 31, 2003, SFAS No.
150 is effective immediately. For all other instruments of public companies,
SFAS No. 150 goes into effect at the beginning of the first interim period
beginning after June 15, 2003. For contracts that were created or modified
before May 31, 2003 and still exist at the beginning of the first interim period
beginning after June 15, 2003, entities should record the transition to SFAS No.
150 by reporting the cumulative effect of a change in an accounting principle.
SFAS No. 150 prohibits entities from restating financial statements for earlier
years presented. The adoption of this standard did not have a material impact on
our consolidated financial statements.
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
provision 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.
43
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 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 September 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 September 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 September 30, 2004, $4.7 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 year ended September 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 U.S. Dollar in comparison to the British Pound would not
have a material impact on its operating results or cash flows.
We believe that we have limited exposure to financial market risks,
including changes in interest rates. The fair value of our investment portfolio
or related income would not be significantly impacted by changes in interest
rates due mainly to the short-term nature of the majority of our investment
portfolio. An increase or decrease in interest rates would not significantly
increase or decrease interest expense on debt obligations, due to the fixed
nature of the substantial majority of our debt obligations.
44
ITEM 8. FINANCIAL STATEMENTS
Financial Statements are set forth herein beginning on page F-1.
ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALS
On July 31, 2002, we engaged PricewaterhouseCoopers LLP ("PWC") as our
independent accountants and dismissed Arthur Andersen LLP, which had previously
served as our independent accountants. The board of directors and audit
committee participated in and approved the decision to change independent
accountants. The audit reports of Arthur Andersen on the consolidated financial
statements of Globix and its subsidiaries as of and for the fiscal years ended
September 30, 2000 and 2001 did not contain an adverse opinion or disclaimer of
opinion, nor were they modified as to uncertainty, audit scope or accounting
principles. The audit report for the year ended September 30, 2001 contained a
going concern modification. During the fiscal years ended September 30, 2000 and
2001, there were no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
PWC served as our independent accountants from July 31, 2002 through
September 12, 2003. At a meeting held on September 12, 2003, our audit committee
recommended and approved a change in our independent accountants. Accordingly,
we dismissed PWC as our independent accountants on September 12, 2003.
PWC's reports on our financial statements for the seven-month period
ended April 30, 2002 and as of and for the five month period ended September 30,
2002 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
From the date of PWC's engagement on July 31, 2002 through September
12, 2003, there have been no disagreements with PWC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PWC,
would have caused PWC to make reference thereto in its report on the financial
statements for such periods.
From the date of PWC's engagement on July 31, 2002 through September
12, 2003, there have been no "reportable events" as that term is defined in Item
304(a)(1)(v) of Regulation S-K, except that on August 13, 2003 PWC provided us
with a management letter reporting to us the matter described in the following
paragraphs:
Since our emergence from bankruptcy in April 2002, we have had to face
many challenging and complex accounting and financial reporting issues,
including fresh start accounting, restructuring and the restatement of amounts
in our financial statements for the quarter ended March 31, 2002. In addition,
we have experienced significant turnover in our financial reporting staff, as
well as limited management resources. We fell behind in our periodic reporting
to the Securities and Exchange Commission for the year ended September 30, 2002,
and experienced difficulty in catching up with our filing obligations for the
year ended September 30, 2002 while fulfilling our responsibilities for the year
ended September 30, 2003. PWC reported that the combined effect of these
challenges had stressed the capabilities of our accounting staff and created
material weaknesses within our accounting and reporting controls. The management
letter indicated that the shortage of qualified accounting personnel had
required PWC to perform significantly more work in connection with the audit of
our financial statements for the seven-month period ended April 30, 2002 and the
five-month period ended September 30, 2002. The management letter recommended
hiring at least two additional senior financial staff members, one of whom would
be required to be the controller.
45
We agreed with these findings and recommendations and as such, the
management letter noted that we had hired a controller who began work on July
15, 2003. In addition, in order to resolve the problems described above, we
hired a new senior accountant in May 2003, a new manager of external reporting
in October 2003 and a new senior accountant in November 2003. In addition, we
returned to a normal recurring closing timetable that includes formal management
reviews and a monthly financial reporting package in January 2004. Finally, by
completing our fiscal 2002 reporting, we have significantly reduced the burden
on our internal accounting staff.
At its meeting on September 12, 2003, our audit committee recommended
and approved the engagement of Amper, Politziner & Mattia PC, which firm we
refer to as "Amper," as our independent auditors. Accordingly, we engaged Amper
as our independent auditors, effective September 12, 2003. During the two most
recent fiscal years and through September 12, 2003, we had not consulted with
Amper regarding any matter that would require reporting under Item 304(a)(2) of
Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain
disclosure controls and procedures that are designed to ensure that information
required to be disclosed in our report under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosures. Any
controls and procedures, no matter how well designed and operated, can provide
only reasonable assurance of achieving the desired control objectives. Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of September 30, 2004. Based upon
that evaluation and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their objectives.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no
change in our internal control over financial reporting that occurred during the
fourth fiscal quarter of the year covered by this Annual Report on Form 10-K
that has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
46
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by refererence to the Registrant's proxy statement for its
2005 Annual Meeting of Stockholders (except for information in response to Item
406 of Regulation S-K).
CODE OF ETHICS
The Globix Code of Business Conduct and Ethics, which applies to
directors, executive officers and employees, is included as Exhibit 14 to this
annual report on Form 10-K.
ITEMS 11-14.
Incorporated by reference to the Registrant's proxy statement for its
2005 Annual Meeting of Stockholders.
PART IV
ITEM 15. EXHIBITS, FINANCIALS SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements and Financial Statement Schedules
See the financial statements beginning on page F-1. See Schedule II -
Valuation and Qualifying Accounts on page F-43.
(b) Reports on Form 8-K
Current Report on Form 8-K filed on September 9, 2004 (Items 7 and 9)
Current Report on Form 8-K filed on October 13, 2004 (Items 1, 3, 8 and
9)
(c) Exhibits
EXHIBIT NO. EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger dated as of July 19, 2004 by and
between Globix Corporation and NEON Communications, Inc. (9)
2.2 First Amendment to Agreement and Plan of Merger dated as of
October 8, 2004 by and between Globix Corporation and NEON
Communications, Inc. (9)
2.3 Amended Joint Prepackaged Plan of Globix and certain of the
Globix's subsidiaries, dated April 8, 2002 (3)
2.4 Form of Securities Exchange Agreement, dated September 15,
2004 (4)
3.1 Amended and Restated Certificate of Incorporation of Globix
(5)
3.2 Amended and Restated Bylaws of Globix (5)
4.1 Indenture, dated as of April 23, 2002, between Globix, as
issuer, the Subsidiary Guarantors of Globix named therein and
HSBC Bank USA, as trustee, relating to the 11% senior notes
due 2008 (5)
47
4.2 Form of Pledge and Security Agreement, dated as of April 23,
2002, between each Subsidiary Guarantor of Globix and HSBC
Bank USA, as Collateral Agent/Trustee (5)
4.3 Form of Warrant issued to affiliates of Communication
Technology Advisors (6)
10.1 Purchase Agreement between Young Woo and Globix, dated as of
June 2, 1998 **(1)
10.4 Employment Agreement between Peter L. Herzig and Globix, dated
as of October 2, 2001 (2)
10.8 Consulting Agreement, dated as of April 19, 2002, between
Globix and Communication Technology Advisors LLC (6)
10.9 Agreement between Globix and Communication Technology
Advisors, dated as of November 1, 2002 (6)
10.10 Agreement between Globix and Communication Technology
Advisors, dated as of February 1, 2003 (6)
10.11 Registration Rights Agreement between Globix and the holders
of Globix's securities party thereto, dated as of April 23,
2002 (6)
10.12 Employment Agreement between Globix and Peter K. Stevenson,
dated as of April 15, 2002 (6)
10.14 Letter Agreement between Globix and H. Jameson Holcombe, dated
July 15, 2002 (6)
10.15 Amendment, dated as of August 1, 2003, to the Employment
Agreement between Globix and Peter K. Stevenson (7)
10.16 Contract of Sale, dated as of October 10, 2003, between Globix
and Heritage Partners LLC (7)
14 Code of Business Conduct and Ethics (7)
16 Letter re: Change in Certifying Accountant (8)
21 List of Subsidiaries (7)
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350.
32.2 Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350.
48
- --------------------------------------------------------------------------------
** Confidential treatment granted for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities
Act of 1933.
(1) Incorporated by reference to the Company's Report on Form
8-K/A filed on September 18, 1998.
(2) Incorporated by reference to the Company's Annual Report on
Form 10-K filed on December 31, 2001.
(3) Incorporated by reference to the Company's Current Report on
Form 8-K filed on April 23, 2002.
(4) Incorporated by reference to the Company's Current Report on
Form 8-K filed on October 13, 2004.
(5) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on May 15, 2002.
(6) Incorporated by reference to the Company's Annual Report on
Form 10-K filed on March 26, 2003.
(7) Incorporated by reference to the Company's Annual Report on
Form 10-K filed on December 18, 2003.
(8) Incorporated by reference to the Company's Report on Form 8-K
filed on September 19, 2003.
(9) Incorporated by reference to the Company's Registration
Statement on Form S-4 (No. 333-119666) filed on October 12,
2004.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: December 17, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
/S/ PETER K. STEVENSON
--------------------------------------------
Peter K. Stevenson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: December 17, 2004
/S/ ROBERT M. DENNERLEIN
--------------------------------------------
Robert M. Dennerlein
Chief Financial Officer
(principal financial and accounting officer)
Date: December 17, 2004
/S/ PETER S. BRODSKY
--------------------------------------------
Peter S. Brodsky
Director
Date: December 17, 2004
/S/ PETER L. HERZIG
--------------------------------------------
Peter L. Herzig
Director
Date: December 17, 2004
/S/ STEVEN LAMPE
--------------------------------------------
Steven Lampe
Director
Date: December 17, 2004
/S/ STEVEN G. SINGER
--------------------------------------------
Steven G. Singer
Director
Date: December 1, 2004
/S/ RAYMOND L. STEELE
--------------------------------------------
Raymond L. Steele
Director
Date: December 17, 2004
/S/ STEVEN A. VAN DYKE
--------------------------------------------
Steven A. Van Dyke
Director
Date: December 17, 2004
50
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Report of Independent Registered Public Accounting Firm........................................................................F-2
Report of Independent Registered Public Accounting Firm........................................................................F-3
Report of Independent Registered Public Accounting Firm........................................................................F-4
Consolidated Balance Sheets-as of September 30, 2004 and 2003..................................................................F-5
Consolidated Statements of Operations- For the Year Ended September 30, 2004 (Successor Company), Year Ended September 30,
2003 (Successor Company), Five Months Ended September 30, 2002 (Successor Company) and Seven Months Ended April 30, 2002
(Predecessor Company)..........................................................................................................F-6
Statements of Changes in Stockholders' Equity (Deficit) and Comprehensive Income (Loss)- for the Year Ended September 30,
2004 (Successor Company), Year Ended September 30, 2003 (Successor Company), Five Months Ended September 30, 2002
(Successor Company) and Seven Months Ended April 30, 2002 (Predecessor Company)................................................F-7
Consolidated Statements of Cash Flows- for the Year Ended September 30, 2004 (Successor Company), Year Ended September 30,
2003 (Successor Company), Five Months Ended September 30, 2002 (Successor Company) and Seven Months Ended April 30, 2002
(Predecessor Company)..........................................................................................................F-8
Notes to Consolidated Financial Statements.....................................................................................F-10
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (a Delaware Corporation) and Subsidiaries as of September 30, 2004
and 2003, and the related consolidated statements of operations, changes in
stockholders' equity and comprehensive income (loss), and cash flows for each of
the two years in the period ended September 30, 2004. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Globix Corporation
and Subsidiaries as of September 30, 2004 and 2003, and the results of its
operations and its cash flows for each of the two years in the period ended
September 30, 2004, in conformity with U.S. generally accepted accounting
principles.
In connection with our audits of the financial statements referred to above, we
audited Schedule II - Valuation and Qualifying Accounts. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
/s/ Amper, Politziner & Mattia PC
December 1, 2004
Edison, New Jersey
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated statements of operations, cash
flows and changes in stockholders' equity for the five months ended September
30, 2002 present fairly, in all material respects, the consolidated results of
operations and cash flows of Globix Corporation and its subsidiaries (the
Successor Company) in conformity with accounting principles generally accepted
in the United States of America. In addition, in our opinion, the financial
statement schedule for the five months ended September 30, 2002 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
As discussed in Note 3, the United States Bankruptcy Court for the District of
Delaware confirmed the Company's Prepackaged Plan of Reorganization (the "plan")
on April 8, 2002. Confirmation of the plan substantially alters rights and
interests of equity security holders as provided for in the plan. The plan was
substantially consummated on April 25, 2002 and the Company emerged from
bankruptcy. In connection with its emergence from bankruptcy, the Company
adopted fresh start accounting as of May 1, 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 3, 2003
F-3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated statements of operations, cash
flows and changes in stockholders' deficit for the seven months ended April 30,
2002 present fairly, in all material respects, the consolidated results of
operations and cash flows of Globix Corporation and its subsidiaries (the
Predecessor Company) for the seven months ended April 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule for the seven
months ended April 30, 2002 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 3, the Company filed a petition on March 1, 2002 with the
United States Bankruptcy Court for the District of Delaware for reorganization
under the provisions of Chapter 11 of the Bankruptcy Code. The Company's
Prepackaged Plan of Reorganization was substantially consummated on April 25,
2002 and the Company emerged from bankruptcy. In connection with its emergence
from bankruptcy, the Company adopted fresh start accounting.
As discussed in Note 4, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
on May 1, 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 3, 2003
F-4
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR COMPANY
-----------------------
SEPTEMBER 30,
-----------------------
2004 2003
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ................................................................. $ 12,075 $ 24,503
Short-term investments .................................................................... 7,625 7,226
Marketable securities ..................................................................... 458 1,531
Accounts receivable, net of allowance for doubtful accounts of $2,248 and
$2,646, respectively ................................................................... 6,157 6,012
Prepaid expenses and other current assets ................................................. 5,101 4,497
Restricted cash ........................................................................... 2,413 2,195
---------- ----------
Total current assets ............................................................ 33,829 45,964
Investments ............................................................................... 1,988 697
Investments, restricted ................................................................... 2,324 4,733
Property, plant and equipment, net ........................................................ 90,822 162,630
Intangible assets, net of accumulated amortization of $3,699 and $1,997, respectively...... 7,656 8,158
Other assets .............................................................................. 1,923 100
---------- ----------
Total assets .................................................................... $ 138,542 $ 222,282
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation and mortgage payable .......................... $ 555 $ 1,510
Accounts payable .......................................................................... 6,599 5,846
Accrued liabilities ....................................................................... 8,357 8,522
Deferred revenue .......................................................................... 2,852 1,637
---------- ----------
Total current liabilities ....................................................... 18,363 17,515
Capital lease obligations, net of current portion ......................................... 121 374
Mortgage payable .......................................................................... 19,606 19,912
11% Senior Notes .......................................................................... 72,202 112,321
Accrued interest - 11% Senior Notes ....................................................... 3,349 5,182
Other long term liabilities ............................................................... 8,026 10,659
Put-option liability ...................................................................... -- 2,968
---------- ----------
Total liabilities ............................................................... 121,667 168,931
---------- ----------
Commitments and contingencies (Note 19):
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 ................................................................ 100,012 97,191
Deferred compensation ..................................................................... (8) --
Accumulated other comprehensive income .................................................... 4,498 2,401
Accumulated deficit ....................................................................... (87,792) (46,406)
---------- ----------
Total stockholders' equity ...................................................... 16,875 53,351
---------- ----------
Total liabilities and stockholders' equity ...................................... $ 138,542 $ 222,282
========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-5
GLOBIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
--------------------------------------------- --------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- ------------- ------------- -------------
Revenue, net ............................................. $ 61,190 $ 60,177 $ 30,723 $ 51,273
Operating costs and expenses:
Cost of revenue (excluding depreciation,
amortization, occupancy and certain payroll) ....... 19,747 19,990 10,458 22,123
Selling, general and administrative .................. 43,518 44,430 29,313 57,206
Loss on impairment of assets ......................... 17,972 -- -- 2,578
Restructuring and other charges (credits) ............ -- (1,020) -- 24,834
Depreciation and amortization ........................ 13,828 15,523 6,060 28,115
------------- ------------- ------------- -------------
Total operating costs and expenses .... 95,065 78,923 45,831 134,856
Other operating income ............................... -- 345 -- --
------------- ------------- ------------- -------------
Loss from operations ..................................... (33,875) (18,401) (15,108) (83,583)
Interest and financing expense ....................... (11,465) (15,141) (6,653) (34,511)
Interest income ...................................... 540 1,179 787 2,024
Other (expense) income, net .......................... 1,667 1,232 (157) (509)
Gain on discharge of debt ............................ 1,747 6,023 -- 427,066
Minority interest in subsidiary ...................... -- -- -- 5,778
Reorganization items ................................. -- -- -- (7,762)
Fresh start accounting adjustments ................... -- -- -- (148,569)
------------- ------------- ------------- -------------
Income (loss) before income taxes ........................ (41,386) (25,108) (21,131) 159,934
Income tax expense ....................................... -- 167 -- --
------------- ------------- ------------- -------------
Net income (loss) ........................................ (41,386) (25,275) (21,131) 159,934
Dividends and accretion on preferred stock ............... -- -- -- (3,178)
------------- ------------- ------------- -------------
Net income (loss) attributable to common stockholders .... $ (41,386) $ (25,275) $ (21,131) $ 156,756
============= ============= ============= =============
Earnings (loss) per common share:
Basic income(loss) per share attributable to common
stockholders ......................................... $ (2.51) $ (1.54) $ (1.28) $ 3.96
============= ============= ============= =============
Weighted average common shares outstanding--diluted ...... 16,460,000 16,460,000 16,460,000 39,618,856
============= ============= ============= =============
Diluted (loss) income per share attributable to common
stockholders ......................................... $ (2.51) $ (1.54) $ (1.28) $ 3.30
============= ============= ============= =============
Weighted average common shares outstanding--diluted ...... 16,460,000 16,460,000 16,460,000 48,507,456
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GLOBIX CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK PAID-IN DEFERRED INCOME ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) DEFICIT (DEFICIT)
------------ --------- ---------- ------------ ----------- ------------ ------------
Balance, October 1, 2001
(Predecessor Company) ................. 41,920,229 $ 419 $ 171,176 $ (7,097) $ (2,703) $ (399,120) $ (237,325)
Amortization of deferred
compensation .......................... -- -- -- 7,027 -- -- 7,027
Cancellation of restricted
stock ................................. (23,750) -- (70) 70 -- -- --
Dividends and accretion on
preferred stock ....................... -- -- (3,178) -- -- -- (3,178)
Comprehensive Income (loss):
Net income ......................... -- -- -- -- -- 159,934 --
Unrealized holding gains ........... -- -- -- -- 1,185 -- --
Foreign currency translation
adjustments .................... -- -- -- -- (1,807) -- --
Total Comprehensive Income .............. -- -- -- -- -- -- 159,312
Fresh start accounting adjustments ...... (25,436,479) (254) (74,816) -- 3,325 239,186 167,441
------------ --------- ---------- ------------ ----------- ------------ ------------
Balance, May 1, 2002
(Successor Company) ................... 16,460,000 165 93,112 -- -- -- 93,277
Comprehensive Income (loss):
Net loss ........................... -- -- -- -- -- (21,131) --
Unrealized holding losses .......... -- -- -- -- (1,430) -- --
Foreign currency translation
adjustments .................... -- -- -- -- 1,831 -- --
Total Comprehensive Loss ................ -- -- -- -- -- -- (20,730)
------------ --------- ---------- ------------ ----------- ------------ ------------
Balance, September 30, 2002
(Successor Company) ................... 16,460,000 165 93,112 -- 401 (21,131) 72,547
Issuance of warrants to consultants ..... -- -- 1,050 -- -- -- 1,050
Capital contribution in minority-owned
subsidiary, net ....................... -- -- 5,997 -- -- -- 5,997
Put-option .............................. -- -- (2,968) -- -- -- (2,968)
Comprehensive Income (loss):
Net loss ........................... -- -- -- -- -- (25,275) --
Unrealized holding gains ........... -- -- -- -- 195 -- --
Foreign currency translation
adjustments .................... -- -- -- -- 1,805 -- --
Total Comprehensive Loss ................ -- -- -- -- -- -- (23,275)
------------ --------- ---------- ------------ ----------- ------------ ------------
Balance, September 30, 2003
(Successor Company) ................... 16,460,000 165 97,191 -- 2,401 (46,406) 53,351
Capital distribution in minority-owned
subsidiary, net ....................... -- -- (202) -- -- -- (202)
Deferred stock-based compensation ....... -- -- 30 (30) -- -- --
Amortization of deferred compensation ... -- -- -- 22 -- -- 22
Purchase of warrants by a consultant .... -- -- 25 -- -- -- 25
Put-option cancellation ................. -- -- 2,968 -- -- -- 2,968
Comprehensive Income (loss):
Net loss ........................... -- -- -- -- -- (41,386) --
Unrealized holding losses .......... -- -- -- -- (168) -- --
Reclassification of unrealized
holding losses to net
realized losses ................ -- -- -- -- 259 -- --
Foreign currency translation
adjustments .................... -- -- -- -- 2,006 -- --
Total Comprehensive Loss ................ -- -- -- -- -- -- (39,289)
------------ --------- ---------- ------------ ----------- ------------ ------------
Balance, September 30, 2004
(Successor Company) ................... 16,460,000 $ 165 $ 100,012 $ (8) $ 4,498 $ (87,792) $ 16,875
============ ========= ========== ============ =========== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
GLOBIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------------ --------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
-------------- -------------- -------------- --------------
Cash Flows From Operating Activities
Net Income (Loss) ............................................. $ (41,386) $ (25,275) $ (21,131) $ 159,934
Operating activities:
Depreciation and amortization ................................ 13,828 15,523 6,060 28,115
Provision for uncollectible receivables ...................... 780 1,861 1,904 4,284
Services contributed to minority-owned subsidiary ............ -- -- -- 372
Gain on debt discharge ....................................... (1,747) (6,023) -- (427,066)
Restructuring and other charge (net of cash payment) ......... -- (1,020) -- 8,233
Unrealized loss (gain) on short-term investment .............. (784) (439) 57 --
Loss on impairment of investment ............................. -- -- -- 490
Loss on impairment of assets ................................. 17,972 -- -- 2,578
Loss (gain) on sale of marketable securities ................. 249 -- -- (27)
Amortization of debt issuance costs .......................... -- -- -- 650
Amortization of deferred compensation and issuance of
stock warrants ............................................ 22 1,050 -- 7,027
Write-off of note receivable ................................. -- -- 4,078 --
Minority interest in subsidiary .............................. -- -- -- (5,778)
Fresh start accounting adjustment ............................ -- -- -- 148,569
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ................... (100) (639) 3,565 (3,449)
Decrease (increase) in prepaid expenses and other current
assets .................................................... 229 3,306 4,210 (4,574)
Decrease (increase) in other assets .......................... (357) 125 16 54
Increase (decrease) in accounts payable ...................... 427 (3,195) 1,362 (5,181)
Increase (decrease) in accrued liabilities ................... 324 (7,093) (1,762) 497
Increase in accrued interest ................................ 9,367 12,359 5,500 31,431
Other ........................................................ (392) (2,728) (180) (1,152)
-------------- -------------- -------------- --------------
Net Cash Provided by (Used in) Operating Activities ........... (1,568) (12,188) 3,679 (54,993)
-------------- -------------- -------------- --------------
Cash Flows From Investing Activities
Investments in short-term and long-term investments .......... (1,436) (2,017) (5,449) --
Proceeds from restricted cash and investments ................ 2,366 2,329 166 24,235
Proceeds from sale of marketable securities .................. 1,000 -- -- 64
Proceeds from sale of property plant and equipment ........... 48,694 -- -- --
Payment for business acquired from Aptegrity (Appendix A)..... (2,287) -- -- --
Deferred acquisition cost .................................... (1,465) -- -- --
Return on strategic investments .............................. -- -- 51 193
Purchase of property, plant and equipment .................... (4,695) (1,170) (1,229) (23,341)
-------------- -------------- -------------- --------------
Net Cash Provided by (Used in) Investing Activities ........... 42,177 (858) (6,461) 1,151
-------------- -------------- -------------- --------------
Cash Flows From Financing Activities
Repurchase of 11% Senior Notes ............................... (49,573) (14,612) -- --
Proceeds from exercise of stock options and warrants, net .... 25 -- -- --
Capital contribution (distribution) in minority-owned
subsidiary, net ........................................... (202) 5,997 -- --
Settlement of capital lease obligations ...................... (439) (850) -- --
Repayment of long-term note payable .......................... (2,666) -- -- --
Repayment of mortgage payable and capital lease obligation ... (568) (1,074) (2,279) (4,946)
-------------- -------------- -------------- --------------
Net Cash Provided by (Used in) Financing Activities ........... (53,423) (10,539) (2,279) (4,946)
Effect of Exchange Rates Changes on Cash and Cash
Equivalents ............................................... 386 526 (99) 8
-------------- -------------- -------------- --------------
Decrease in Cash and Cash Equivalents ......................... (12,428) (23,059) (5,160) (58,780)
Cash and Cash Equivalents, Beginning of Period ................ 24,503 47,562 52,722 111,502
-------------- -------------- -------------- --------------
Cash and Cash Equivalents, End Period ......................... $ 12,075 $ 24,503 $ 47,562 $ 52,722
============== ============== ============== ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
GLOBIX CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------------ -------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- ------------- ------------- -------------
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest ........................................ $ 5,797 $ 2,294 $ 975 $ 2,101
Cash paid for income taxes .................................... $ 179 $ -- $ -- $ --
Non-cash investing and financing activities:
11% Senior Notes issued in payment of accrued interest ........ $ 7,155 $ 11,298 $ -- $ --
Equipment acquired under capital lease obligations ............ $ -- $ -- $ -- $ 1,036
Capital expenditures included in accounts payable, capital
liabilities and other long term liabilities ................. $ -- $ -- $ 168 $ 273
Cumulative dividends and accretion on preferred stock ......... $ -- $ -- $ -- $ 3,178
Mandatorily redeemable convertible preferred stock ............ $ -- $ -- $ -- $ 83,230
Restructuring of debt ......................................... $ -- $ -- $ -- $ 427,066
Put-option .................................................... $ (2,968) $ 2,968 $ -- $ --
APPENDIX A - PAYMENT FOR BUSINESS ACQUIRED FROM APTEGRITY:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------------ -------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- ------------- ------------- -------------
Current assets ................................................ $ (696) $ -- $ -- $ --
Property, plant and equipment ................................. (738) -- -- --
Current liabilities ........................................... 347
Other intangible assets ....................................... (1,200) -- -- --
------------- ------------- ------------- -------------
$ (2,287) $ -- $ -- $ --
============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. GENERAL
Globix Corporation and its subsidiaries ("Globix", the "Company" or the
"Successor 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, Fairfield, New Jersey,
Santa Clara, California, Atlanta, Georgia and London, England.
The financial statements presented have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the Securities and Exchange Commission.
As a result of the application of fresh start accounting as of May 1, 2002, in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", the Company's financial results for
the fiscal year ended September 30, 2002 include two different bases of
accounting and, accordingly, the operating results and cash flows of the
Successor Company and the Predecessor Company have been separately disclosed.
For the purposes of these financial statements, references to the "Predecessor
Company" are references to the Company for periods prior to April 30, 2002 (the
last day of the calendar month in which the Company emerged from bankruptcy) and
references to the "Successor Company" are references to the Company for periods
subsequent to April 30, 2002. The Successor Company's financial statements are
not comparable to the Predecessor Company's financial statements. Although April
25, 2002 was the effective date of Globix's emergence from bankruptcy (the
"Effective Date"), for financial reporting convenience purposes, the Company
accounted for the consummation of the Plan of Reorganization (the "Plan") as of
April 30, 2002.
The following table describes the periods presented in the financial statements
and related notes thereto:
PERIOD REFERRED TO AS
------ --------------
From May 1, 2002 through September 30, 2004 "Successor Company"
From October 1, 2001 through April 30, 2002 "Predecessor Company"
The Company has historically experienced negative cash flow from operations and
has incurred net losses. For the year ended September 30, 2004 the Company had a
net loss of $41,386 and an accumulated deficit at September 30, 2004 of $87,792.
Our ability to generate positive cash flows from operations and achieve
profitability is dependant upon our ability to grow our revenue while
maintaining our current cost structure and network efficiencies. Our management
believes that steps taken as part of our restructuring efforts to reduce
facilities and personnel, combined with ongoing efforts to derive efficiencies
from our network, reduced our cash outflows to a level that meets our current
revenue rate. The Company believes that its cash and investments are sufficient
to meet its 2005 anticipated day-to-day operating expenses, commitments, working
capital, capital expenditure and approximately $8,000 of interest payments under
its 11% Senior Notes if its Board of Directors elects to make such payment in
cash and not in kind. However, there can be no assurance that we will be
successful in achieving sufficient profitability, attracting new customers,
maintaining our existing revenue levels or reducing our outstanding
indebtedness. In addition, in the future, the Company may make acquisitions or
repurchase its indebtedness, which, in turn, may adversely affect the Company's
liquidity. In such cases management will have to take drastic steps to reduce
its operating expenses to meet its then revenue base and liquidity needs. Such
steps may include further reduction of our headcount, consolidation or
elimination of facilities, termination of low margin customers and negotiating
with our creditors to restructure our indebtedness mainly but not limited to our
11% senior notes.
Approximately 39% of the Company's cost of revenue for the year ended September
30, 2004 is derived from services provided by 3 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.
F-10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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
December 31, 2004 closing, Neon preferred stockholders will receive in the
aggregate approximately $5,200 in cash and approximately 2,908,614 shares of a
class of Globix preferred stock to be created in the merger, having an aggregate
liquidation value of approximately $10,500. 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 6% per annum and will be redeemable only at the option of Globix, and at the
option of the holders upon a change in control.
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.
F-11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. REORGANIZATION AND EMERGING FROM CHAPTER 11
On March 1, 2002, the Company and two of its wholly-owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with a prepackaged Plan with the United
States Bankruptcy Court for the District of Delaware. The Company continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay its 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 the Company emerged from Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of the Company's existing securities
were cancelled and:
o Each holder of the Company's 12.5% Senior Notes due 2010 (the "12.5%
Senior Notes"), became entitled to receive, in exchange for its claims
in respect of the 12.5% Senior Notes, its pro rata share of:
o $120,000 in aggregate principal amount of the Company's 11% Senior
Secured Notes due 2008 (the "11% Senior Notes"), and
o 13,991,000 shares of the Company's common stock, representing 85% of
the shares of the Company's common stock issued and outstanding
following the Effective Date of the Plan;
o Each holder of shares of the Company's preferred stock outstanding
immediately prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of these shares of
preferred stock, its pro rata share of 2,304,400 shares of the
Company's common stock, representing 14% of the shares of the Company's
common stock issued and outstanding following the Effective Date of the
Plan; and
o Each holder of shares of the Company's common stock outstanding
immediately prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of these shares of
common stock, its pro rata share of 164,600 shares of the Company's
common stock, representing 1% of the shares of the Company's common
stock issued and outstanding following the Effective Date of the Plan.
A total of 16,460,000 shares of the Company's common stock and $120,000 in
aggregate principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date pursuant to the terms of the Plan, and are
deemed to be issued and outstanding for purposes of these financial statements.
As of September 30, 2002, however, no shares of the Company's common stock or
11% Senior Notes had been distributed. In October 2002, the Company distributed
a total of 16,295,400 shares of common stock and $120,000 in aggregate principal
amount of 11% Senior Notes. Pursuant to the terms of a Stipulation and Order
that the Company entered into with the lead plaintiffs in the class action
lawsuit described in Note 19, 229,452 of these shares of common stock and $1,968
in aggregate principal amount of these 11% Senior Notes were placed in reserve
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 the Company to pay an amount in excess of its liability insurance, then
the Company 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) of the shares of common
stock and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date, which
are allocable under the terms of the Plan to the holders of the Company's common
stock outstanding immediately prior to the Effective Date of the Plan, will
occur following the resolution of the shareholder derivative suit against the
Company and certain former officers and directors described in Note 19.
F-12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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, deferred tax assets and restructuring reserves. 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.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Included in the Company's consolidated results is a 0.01%
owned subsidiary, 415 Greenwich GC Tenant, LLC. The Company controls all
financial aspects of this entity. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN 46 classifies entities into two groups: (1) those for which
voting interest are used to determine consolidation; and (2) those for which
other interests (variable interest) are used to determine consolidation. FIN 46
deals with the identification of Variable Interest Entities ("VIE") and the
business enterprise which should include the assets, liabilities,
non-controlling interests, and results of activities of a VIE in its
consolidated financial statements. FIN 46 has become effective during 2003. The
adoption of FIN 46 did not have an effect on the Company's consolidated
financial statements.
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. 104 "Revenue Recognition " which revises
or rescinds certain sections of SAB No. 101, "Revenue Recognition". The changes
noted in SAB 104 did not have a material effect on the Company's consolidated
financial statements. The Company recognizes revenue when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectability is probable. SAB No. 104 expresses the view of the Securities and
Exchange Commission's staff in applying accounting principles generally accepted
in the United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 104, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months.
The Company maintains a provision for potential future credits which will be
issued in respect of current revenues.
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.
During the year ended September 30, 2002, the Company provided $802 and
purchased $551 of data center services from a telecommunications operator. $318
of the transactions billed were settled monetarily, with the balance of $445
settled by offsetting or netting the remainder.
F-13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 and
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.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, restricted cash, marketable securities and accounts receivable. The
Company maintains cash and cash equivalents, short-term investments and
restricted cash with various major financial institutions, which invest
primarily in U.S. Government instruments, high quality corporate obligations,
certificates of deposit and commercial paper. The Company's cash and cash
equivalent and investments in the U.S may be in excess of insured limits and are
not insured in other jurisdictions. The Company believes that the financial
institutions that hold the Company's investments are financially sound and,
accordingly, minimal credit risk exists with respect to these investments.
The Company believes that concentrations of credit risk with respect to trade
accounts receivable are limited due to the Company's large number of customers.
The Company performs ongoing credit evaluations of its customers and maintains
reserves for potential losses. No single customer of the Company individually
comprised more than 10% of the Company's revenues for all periods presented.
In December 2000, the Company received a note for $4,100 relating to the
settlement of a lease of a data center property. This note was to be paid on
either the sale of the property, the lease of at least 95% of the property, or
two years from the date of the note. The obligor has indicated that it has
insufficient funds to satisfy the debt and does not intend to make payment.
While the Company has made demand and intends to vigorously pursue legal remedy,
in light of the financial condition of the obligor, the Company has written off
the entire amount during the five month period ended September 30, 2002.
Short-term investments and marketable securities are well diversified and
accordingly minimal credit risk exists with respect to these investments.
F-14
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
Included in restricted cash are funds held in escrow related to a mortgage on
the Company's property located at 139 Centre Street and required share capital
held in escrow for the Company's European subsidiaries. These funds are
primarily invested in highly liquid investments with an original maturity of
three months or less. The classification is determined based on the expected
term of the collateral requirement or the availability of the funds and not the
maturity date of the underlying securities.
MARKETABLE SECURITIES
Investment in marketable equity securities covered by SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities", were designated as
available-for-sale. Accordingly, these securities are stated at fair value, with
unrealized gains/ losses reported in accumulated other comprehensive income
(loss). Realized gain and losses are calculated based on specific identification
method. Other-than-temporary declines in value from the original cost are
charged to operations in the period in which the loss occurs. In determining
whether other-than- temporary decline in the market value has occurred, the
Company considers the duration that and the extent to which market value is
below original cost. As of September 30, 2004 no impairment has been recorded.
At September 30, 2004 and 2003, marketable securities had a cost basis of
approximately $1,590 and $2,800 and a balance of unrealized losses of $1,132 and
$1,226, respectively which was included in the Company's accumulated other
comprehensive loss, a separate component of the stockholders' equity. During
fiscal 2004 the Company sold certain marketable securities with a cost basis of
$1,250 and fair market value of approximately $979 for a net consideration of
approximately $1,000 resulting in a loss of $249.
INVESTMENTS
Short-term investments consist of an investment in a limited partnership which
invests in fixed income securities and certain investments which do not meet the
requirements to be reported as cash and cash equivalents. The limited
partnership is accounted for in accordance with APB No. 18, "The Equity Method
of Accounting for Investments in Common Stock". At September 30, 2004 and 2003
the limited partnership had a cost basis of $5,000 and $5,000, respectively and
the unrealized gain from applying the equity method amounted to approximately
$380 and $523, respectively, which were recorded in the Company's consolidated
statements of operations.
Also included in investments are investments in mortgage and asset backed
securities which do not meet the requirements to be reported as cash and cash
equivalents. These investments are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income or loss in stockholders'
equity. At September 30, 2004 and 2003, these investments had a cost of $3,742
and $2,466, respectively and the balance of unrealized loss from the "mark to
market" adjustment of $12 and $9, respectively, which was included in the
Company's accumulated other comprehensive loss, a separate component of the
stockholders' equity.
Included in restricted investments as of September 30, 2004 and 2003 are amounts
held in escrow related to the lease of the Company's facility located at
Prospect House, 80 New Oxford Street, London, United Kingdom of approximately
$2,000. In addition restricted investments as of September 30, 2003 included
collateral funds for the note payable of $2,600. These funds are primarily
invested in highly liquid investments with an original maturity of three months
or less. The classification is determined based on the expected term of the
escrow requirement and not the maturity date of the underlying securities.
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 fee. Following the settlement the $2,600
included in the Company's long-term restricted investment were released from
escrow.
ACCOUNTS RECEIVABLE
Accounts receivable are recorded at the invoiced amount and are non-interest
bearing. At each reporting period the Company evaluates, on a specific basis,
the economic condition of its 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 non-recoverable amount. The
Company also maintains a general bad debt reserve based on the aging of its
customer's receivables and historical trends. In addition, during each reporting
period the Company must make estimates of potential future credits, which will
be issued in respect of current revenues. The Company analyzes historical
credits and changes in customer demands regarding its current billings when
evaluating credit reserves. If such analysis shows that it is probable that a
credit will be issued, the Company reserves the estimated credit amount against
revenues in the current period.
F-15
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at depreciated historical cost adjusted
for impairment and include fresh start adjustments. All identifiable assets
recognized in accordance with fresh start accounting were recorded at the
Effective Date of the Plan based upon an independent appraisal. Depreciation is
provided using the straight-line method for financial reporting purposes and
accelerated methods for income tax purposes. The estimated useful lives of
property are as follows:
YEARS
-------
Buildings and buildings improvements....................... 10 - 44
Computer hardware and software and network equipment ...... 2 - 7
Office furniture and equipment ............................ 3 - 7
Leasehold improvements are amortized over the term of the lease or life of the
asset, whichever is shorter. Maintenance and repairs are charged to expense as
incurred. The cost of additions and betterments are capitalized. The cost and
related accumulated depreciation of property retired or sold are removed from
the applicable accounts and any gain or loss is taken into income.
Software obtained for internal use is stated at depreciated historical cost
adjusted for impairments and fresh start adjustments and is depreciated using
the straight-line method over its estimated useful life.
The Company's long-lived assets are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
F-16
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standard No. 142, "Goodwill and other Intangible Assets "("SFAS 142") at the
Effective Date of the Plan. 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 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS 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. This statement 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.
For the seven month period ended April 30, 2002 goodwill amortization amounted
to $1,141. If the Company had adopted SFAS 142 as of October 1, 2001 and
discontinued goodwill amortization, the Company's net income and loss per common
share on a pro forma basis would have been as follows:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------------------- --------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
-------------- -------------- -------------- --------------
Net income (loss) ............................. $ (41,386) $ (25,275) $ (21,131) $ 159,934
Add back goodwill amortization .............. -- -- -- 1,141
Adjusted net income (loss) .................... (41,386) (25,275) (21,131) 161,075
Dividends and accretion on
preferred stock ........................... -- -- -- (3,178)
-------------- -------------- -------------- --------------
Adjusted net income (loss)
attributed to common stockholders ........... $ (41,386) $ (25,275) $ (21,131) $ 157,897
============== ============== ============== ==============
Adjusted earnings (loss) per common share:
Basic earnings (loss) per share
attributable to common stockholders ......... $ (2.51) $ (1.54) $ (1.28) $ 3.99
============== ============== ============== ==============
Diluted earnings (loss) per share
attributable to common stockholders ......... $ (2.51) $ (1.54) $ (1.28) $ 3.32
============== ============== ============== ==============
Intangible assets of the Successor Company are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
The Company amortizes 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 are being amortized over 8 years and the
customer contracts are amortized over 2-3 years.
Intangible assets are reviewed for impairment in accordance with SFAS No. 144.
During the seven month period ended April 30, 2002, the Company recorded an
impairment charge of $3,221 of intangible assets related to the acquisition of
Comstar.net, Inc., which ceased its operations. No impairment of intangible
assets was recognized during the years ended September 30, 2004 and 2003.
F-17
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME TAXES
Deferred income taxes are provided in accordance with SFAS No. 109, "Accounting
for Income Taxes" for differences between financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that these assets will not be realized. Certain tax benefits existed as of the
Effective Date of the Plan but were offset by valuation allowances. The
utilization of these benefits to reduce income taxes paid to U.S. Federal and
state and foreign jurisdictions does not reduce the Company's income tax
expense. Realization of net operating loss, tax credits and other deferred tax
benefits from pre-emergence attributes will first reduce intangible assets until
exhausted, and thereafter will be credited to additional paid in capital.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting method that includes amounts that
historically have not been recognized in the calculation of net income.
Comprehensive Income and Accumulated Other Comprehensive Income (Loss) includes
net income, foreign currency translation, and unrealized gain (loss) on
financial instruments and is included in the Consolidated Statements of
Stockholders' Equity (Deficit).
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with SFAS No. 52, "Foreign Currency Translation". These
subsidiaries' assets and liabilities are translated into U.S. Dollars at the
year-end rate of exchange. Income and expense items are translated at the
average exchange rate during the year. The resulting foreign currency
translation adjustment is included in stockholders' equity as a component of
accumulated other comprehensive income. Transaction gains and losses are
recorded in the consolidated statement of operations.
F-18
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------------------------- ------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- -------------- ------------- ------------
Net income (loss), as reported attributable
to common stockholders ...................... $ (41,386) $ (25,275) $ (21,131) $ 156,756
============= ============== ============= ============
Pro-forma net income (loss) attributed to
common stockholders ......................... $ (41,901) $ (26,488) $ (21,131) $ 151,621
============= ============== ============= ============
Earning (loss) per share attributable to
common stockholders
Basic - as reported ............................ $ (2.51) $ (1.54) $ (1.28) $ 3.96
============= ============== ============= ============
Basic - Pro-forma .............................. $ (2.55) $ (1.61) $ (1.28) $ 3.83
============= ============== ============= ============
Diluted - as reported .......................... $ (2.51) $ (1.54) $ (1.28) $ 3.30
============= ============== ============= ============
Diluted - Pro-forma ............................ $ (2.55) $ (1.61) $ (1.28) $ 3.19
============= ============== ============= ============
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:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------------------------- ------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- -------------- ------------- ------------
Expected life (in years) ................... 5.0 4.2 -- 6.0
Risk-free interest rate..................... 3.2% 2.7% -- 4.7%
Volatility.................................. 120% 128% -- 133%
Dividend yield.............................. 0.0% 0.0% -- 0.0%
F-19
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EARNINGS (LOSS) PER SHARE
Basic earnings or 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 earnings or loss per share is calculated
by dividing net income (loss) attributable to common shareholders by the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities. The following table summarizes the equivalent number of
common shares assuming the related securities that were outstanding for each of
the periods presented had been converted, but not included in the calculation of
diluted loss per share because such shares are antidilutive:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------------- ------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- -------------- ------------- ------------
Employee Stock Options........ 1,184,853 1,101,756 -- 10,021,258
Warrants...................... 500,000 500,000 -- 194,797
------------- -------------- ------------- ------------
1,684,853 1,601,756 -- 10,216,055
============= ============== ============= ============
The following is a reconciliation of basic earnings per share to diluted
earnings per share:
PREDECESSOR COMPANY
------------------------------------------------
SEVEN MONTHS ENDED APRIL 30, 2002
------------------------------------------------
NUMERATOR DENOMINATOR PER SHARE
INCOME (LOSS) SHARES AMOUNT
------------- -------------- -----------
Basic earnings per share:
Net income...................................... $ 159,934
Dividends and accretion on preferred stock...... (3,178)
------------- -------------
Net income attributable to common stockholders $ 156,756 39,618,856 $ 3.96
============= ============= ===========
Add back dividends on preferred stock........... 3,178 8,888,600
Diluted earnings per share:
------------- -------------
Net income attributable to common stockholders $ 159,934 48,507,456 $ 3.30
============= ============== ===========
F-20
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in Statement No. 133. It also
specifies when a derivative contains a financing component that warrants special
reporting in the Consolidated Statement of Cash Flows. SFAS No. 149 amends
certain other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this standard did
not have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
specifies that instruments within its scope embody obligations of the issuer and
that, therefore, the issuer must classify them as liabilities. SFAS No. 150
requires issuers to classify as liabilities the following three types of free
standing financial instruments: (1) mandatorily redeemable financial
instruments; (2) obligations to repurchase the issuer's equity shares by
transferring assets and (3) certain obligations to issue a variable number of
shares. SFAS No. 150 defines a "freestanding financial instrument" as a
financial instrument that (1) is entered into separately and apart from any of
the entity's other financial instruments or equity transactions or (2) is
entered into in conjunction with some other transaction and can be legally
detached and exercised on a separate basis. For all financial instruments
entered into or modified after May 31, 2003, SFAS No. 150 is effective
immediately. For all other instruments of public companies, SFAS No. 150 goes
into effect at the beginning of the first interim period beginning after June
15, 2003. For contracts that were created or modified before May 31, 2003 and
still exist at the beginning of the first interim period beginning after June
15, 2003, entities should record the transition to SFAS No. 150 by reporting the
cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits
entities from restating financial statements for earlier years presented. The
adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated financial statements.
RECLASSIFICATIONS
Certain amounts from prior years have been reclassified to conform with current
year presentation.
5. FRESH START ACCOUNTING
In accordance with SOP 90-7, the Company determined its enterprise value as of
the emergence date at $240,000. This amount was based upon several generally
accepted valuation methodologies including discounted cash flows, comparable
public company analysis and comparable mergers and acquisitions analysis. The
tangible assets were valued using the costs and market comparables methods. The
intangible assets were valued using the income approach and the cost approach
methods. Certain of the following assumptions which were used by the Company in
determining the enterprise value are highly subjective:
o 3-15- year cash flow depending on the asset evaluated, with no residual
value assigned;
o Corporate income tax rate of 45%;
o Discount rate of 20%.
The assigned equity values are based upon the reorganized value of the ongoing
business and include significant estimates made by management based on
information available as of the Effective Date. Valuation methodologies require
the input of highly subjective assumptions. Actual future results and events
could differ substantially from current estimates and assumptions. Any changes
in valuation could affect the Company's balance sheet.
In accordance with the principles of fresh start accounting, the Company has
adjusted the value of its assets and liabilities to their fair values as of
April 30, 2002. The equity value of the Successor Company at May 1, 2002 was
calculated as follows:
Enterprise Value........................................ $ 240,000
11% Senior Notes........................................ (120,000)
Mortgage Payable........................................ (20,536)
Capitalized Leases...................................... (6,187)
----------------
Equity value of Successor Company $ 93,277
================
F-21
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The net effect of all fresh start accounting adjustments resulted in a charge of
$148,569 which is reflected in the Predecessor Company's statement of operations
for the seven month period ended April 30, 2002. The interest of $11,507 on the
12.5% Senior Notes for the period March 1, 2002 through the Effective Date was
not accrued in accordance with SOP 90-7.
On the Effective Date of the Plan, the Company recognized a gain of $427,066
associated with the exchange of the 12.5% Senior Notes for the 11% Senior Notes
and shares of the Company's common stock under the Plan. As a result of the
adoption of SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of
SFAS 13, and Technical Corrections as of April 2002", the gain was reclassified
from extraordinary item to a gain on extinguishment of debt included in the
Predecessor Company's Statement of Operations for the seven month period ended
April 30, 2002
The Successor Company's gain on discharge of debt at April 30, 2002 was
calculated as follows:
Carrying value of 12.5% Senior Notes....................................... $ 600,000
Carrying value of related accrued interest................................. 43,750
Carrying value of 11% Senior Notes......................................... (120,000)
Carrying value of capitalized costs associated with 12.5% Senior Notes..... (17,398)
85% of equity value of Successor Company................................... (79,286)
------------
Gain on discharge of debt $ 427,066
============
The effects of the transactions contemplated by the Plan and the application of
fresh start accounting on the Company's consolidated balance sheet are as
follows:
PREDECESSOR SUCCESSOR
COMPANY COMPANY
APRIL 30, DEBT FRESH START APRIL 30,
2002 DISCHARGE ADJUSTMENTS(1) 2002
-------------- ------------- ---------------- -------------
ASSETS
Cash and cash equivalents $ 52,722 $ -- $ -- $ 52,722
Marketable securities 2,757 -- -- 2,757
Accounts receivable, net 11,959 -- -- 11,959
Prepaid expenses and other current assets 17,264 -- (2,024) 15,240
Restricted cash. 4,018 -- -- 4,018
-------------- ------------- ---------------- -------------
Total current assets 88,720 -- (2,024) 86,696
Investments, restricted 5,114 -- -- 5,114
Property, plant and equipment, net 333,063 -- (155,693) 177,370
Debt issuance costs, net 18,250 (17,398)(a) (852) --
Intangible assets, net -- -- 10,155 10,155
Other assets 500 -- (208) 292
-------------- ------------- ---------------- -------------
Total assets $ 445,647 $ (17,398) $ (148,622) $ 279,627
============== ============= ================ =============
F-22
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR SUCCESSOR
COMPANY COMPANY
APRIL 30, DEBT FRESH START APRIL 30,
2002 DISCHARGE ADJUSTMENTS(1) 2002
---------- ---------- ------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current portion of capital lease
obligation and mortgage payable ................................ $ 5,239 $ -- $ (1,690) $ 3,549
Accounts payable .................................................. 7,782 -- (110) 7,672
Accrued liabilities ............................................... 26,067 (2,713)(b) (2,264) 21,090
Accrued restructuring ............................................. 3,122 -- -- 3,122
---------- ---------- ------------- ----------
Total current liabilities .................................. 42,210 (2,713) (4,064) 35,433
Liabilities not subject to compromise:
Capital lease obligation, net of current
portion ........................................................ 6,383 -- (3,499) 2,884
Mortgage payable .................................................. 20,291 -- -- 20,291
11% Senior Notes .................................................. -- 120,000(c) -- 120,000
Other long-term liabilities ....................................... 232 -- 7,510 7,742
---------- ---------- ------------- ----------
Total liabilities not subject to compromise ................ 69,116 117,287 (53) 186,350
Liabilities subject to compromise ................................. 643,750 (643,750)(c),(d) -- --
---------- ---------- ------------- ----------
Total liabilities .......................................... 712,866 (526,463) (53) 186,350
MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK .................................... 83,695 (83,695)(e) -- --
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY .............................. (350,914) 592,760 (148,569) 93,277
---------- ---------- ------------- ----------
Total liabilities and
stockholders' (deficit) equity ........................... $ 445,647 $ (17,398) $ (148,622) $ 279,627
========== ========== ============= ==========
(a) To remove debt issuance cost associated with the 12.5% Senior Notes.
(b) To remove accrued dividends payable on mandatorily redeemable convertible
preferred stock.
(c) To exchange 12.5% Senior Notes for 11.0% Senior Notes.
(d) To remove accrued interest on 12.5% Senior Notes.
(e) To remove mandatorily redeemable convertible preferred stock.
(1) To adjust assets and liabilities to fair value.
6. REORGANIZATION ITEMS
Reorganization expenses are expenses incurred by the Predecessor Company in
connection with its reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization items included in the Predecessor Company's Statement of
Operations include professional fees directly related to the Predecessor
Company's bankruptcy. Reorganization expenses included in the statement of
operations were approximately $7,762 for the seven-month period ended April 30,
2002. No reorganization items were incurred by the Company in any of the other
periods presented.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SUCCESSOR COMPANY
------------------------------
SEPTEMBER 30,
------------------------------
2004 2003
------------ -------------
Prepaid expenses............................. $ 4,036 $ 3,797
Accrued interest income...................... 16 7
Notes receivables............................ 219 152
Other........................................ 830 541
------------ -------------
$ 5,101 $ 4,497
============ =============
F-23
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SUCCESSOR COMPANY
----------------------------
SEPTEMBER 30,
----------------------------
2004 2003
----------- ------------
Land.......................................................... $ 1,170 $ 2,713
Building and building improvements............................ 49,428 84,380
Leasehold improvements........................................ 42,486 75,286
Computer hardware and software and network equipment.......... 20,166 15,454
Furniture and equipment....................................... 4,632 3,846
----------- ------------
117,882 181,679
Less: Accumulated depreciation and amortization............... (27,060) (19,136)
Add: Construction in progress................................. -- 87
----------- ------------
Property, plant and equipment, net............................ $ 90,822 $ 162,630
=========== ============
Depreciation expense, were $12,126, $14,069, $5,517 and $26,974 for the year
ended September 30, 2004, the year ended September 30, 2003, the five months
ended September 30, 2002 and the seven months ended April 30, 2002,
respectively. During the seven month period ended April 30, 2002, the Company
determined that impaired assets previously held for disposal were to be used in
operations and accordingly $643 of this charge was reversed. The Company did not
record any impairment of property, plant and equipment during the year ended
September 30, 2003.
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. The sale of the Property was completed on January 22,
2004. In connection with the sale the Company recorded during the year ended
September 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 payment required to be made to a third party investor in the Property
(See Note 9), approximately $1,800 of property taxes due in connection with the
sale, $450 of sale related bonuses (See Note 21) and other related expenses. On
March 3, 2004, the Company used approximately $44,000 of the net proceeds 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.
Certain computer and network equipment are recorded under capital leases that
aggregated approximately $685 and $1,770 as of September 30, 2004 and 2003,
respectively. Accumulated amortization on the assets recorded under capital
leases aggregated approximately $129 and $257 as of September 30, 2004 and 2003,
respectively. As part of the sale of the Property during the year ended
September 30, 2004, the Company paid $319 to terminate several capital lease
obligations totaling $785. The early termination resulted in a gain of $466,
which was offset from the impairment charge recorded as part of the sale of the
Property. In addition, the Company purchased certain of its equipment recorded
under capital lease for a total consideration of $120. The acquired assets had a
carrying value of approximately $213 and the related balance of the capital
lease was $194. The transaction resulted in a net reduction of $74 to the
balance of the Company's property and equipment. During the year ended September
30, 2003, the Company purchased certain of its equipment recorded under capital
lease for a total consideration of $850. The acquired assets had a net carrying
value of $1,364 and the related balance of the capital lease was $1,690. The
transaction resulted in a net reduction of $840 in the balance of the Company's
network equipment.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the Company, owns
the land and building located at 139 Centre Street, New York, New York ("139
Centre St. Building"). The nine-story building with approximately 160,000 square
feet of floor space houses the Company's corporate headquarters and one of its
Internet data center facilities. A former owner has the right to purchase the
Centre Street property and is entitled to additional consideration if the
Company sells the property in an amount equal to the greater of (a) $1,000
(subject to increase after June 1, 2018 by ten percent and an additional ten
percent every fifth year thereafter), or (b) 10% of the gross sales price of the
property if the sales price is greater than $17,500. As to the use of the 139
Centre St. Building to secure the Company's mortgage note see Note 15.
F-24
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. MINORITY INTEREST
In September 2000, the Company purchased the Property. The Property is a
certified historic structure eligible for historic tax credits ("Tax Credits")
based on qualified expenditures, as defined in the Internal Revenue Code.
In June 2001, the Company entered into an agreement whereby the Tax Credits
generated from the renovation of the Property will be utilized by a third party
(the "Investor") via a subsidiary (the"LLC") in consideration for a capital
contribution to the LLC of approximately $16,549, which represents a 99.9%
interest in the LLC. As of September 30, 2004, the LLC had received
approximately $11,872 of such capital contribution and paid a total of $299 as
capital distribution . As a result of the sale of the Property the Company will
not receive the remaining balance of capital contribution or make any additional
capital distributions, see also Note 8.
Although the Company's ownership of the LLC is 0.1%, the Company has
consolidated the financial statements of the LLC since inception due to
effective control of the LLC by the Company resulting in a minority interest in
subsidiary in the accompanying consolidated financial statements. The following
table reflects the summary statement of operations data for the LLC for the year
ended September 30, 2004, the year ended September 30, 2003, the five months
ended September 30, 2002 and the seven months ended April 30, 2002:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
---------------------------------------------- ------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- -------------- ------------- ------------
Revenue.................................. $ 1,925 $ 7,700 $ 3,208 $ 4,492
Net Loss................................. (3,152) (439) (195) (7,374)
============= ============== ============= ============
Basic and diluted loss per share
attributable to common stockholders..... $ (0.08) $ (0.01) $ (0.01) $ (0.19)
============= ============== ============= ============
The Investor had a Put Option with the Company which provided that during the 6
months following the 61st month after the date of the certification of the
qualifying rehabilitation expenditures (the "Certification Date") which occurred
on September 17, 2002, the Investor may require the Company to purchase the
Investor's interest in the LLC for an amount equal to 25% of the Investor's
capital contribution in the LLC. If the Investor does not exercise its Put
Option, the Company may exercise a Call Option during a period of 24 months
following the 73rd month after the Certification Date. The Call Option allows
the Company to acquire the Investor interest in LLC for the greater of the fair
market value of the Investor interest in the LLC or an amount equal, on an after
tax basis, to taxes payable by the Investor upon the sale of its investment. In
connection with the $7,000 termination payment (See Note 8), the Investor agreed
to cancel the Put Option.
The Put Option was recorded at its fair value and was marked to fair value
through stockholders' equity. At September 30, 2003 the fair value of this
option approximated $2,968. As a result of the cancellation of the Put Option
during the year ended September 30, 2004, the Company reversed the put-option
liability through stockholder's equity and accordingly the balance of the Put
Option as of September 30, 2004 is $0.
See also Note 8 as to the sale of the Property during January 2004 and the
related payment to the Investor.
F-25
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INTANGIBLE ASSETS
SUCCESSOR COMPANY
-----------------------------------------------------------------
SEPTEMBER 30, 2004 SEPTEMBER 30, 2003
-----------------------------------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
--------------- ------------ -------------- ------------
Trademarks and trade names......... $ 2,372 $ 358 $ 1,584 $ 149
Network build-out know-how......... 7,453 2,251 7,453 1,320
Customer contracts................. 1,530 1,090 1,118 528
--------------- ------------ -------------- ------------
$ 11,355 $ 3,699 $ 10,155 $ 1,997
=============== ============ ============== ============
Identifiable intangible assets amortization expense amounted to $1,702, $1,454,
$543 and $0, for the year ended September 30, 2004, for the year ended September
30, 2003, for the five months ended September 30, 2002 and for the seven months
ended April 30, 2002, respectively.
Estimated future annual amortization expense as of September 30, 2004 is as
follows:
YEAR ENDING SEPTEMBER 30,
- -------------------------
2005 ............................ $ 1,573
2006 ............................ 1,167
2007 ............................ 1,150
2008 ............................ 1,150
2009 ............................ 1,150
Thereafter....................... 1,466
---------
Total............................ $ 7,656
=========
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SUCCESSOR COMPANY
------------------------
SEPTEMBER 30,
------------------------
2004 2003
---------- ----------
Franchise tax, sales tax and property tax......... $ 1,127 $ 1,663
Salaries, benefits and commissions................ 1,856 1,521
Telecommunications accrual........................ 2,429 2,370
Negative leasehold obligation..................... 710 678
Restructuring .................................... 25 68
Professional fees ................................ 785 586
Other ........................................... 1,425 1,636
---------- ----------
$ 8,357 $ 8,522
========== ==========
F-26
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. RESTRUCTURING AND OTHER
The Company recorded net restructuring of $24,834 in the seven month period
ended April 30, 2002 in order to reduce certain Internet data center lease
obligations and close certain network access points and network aggregation
points, resulting in the termination of certain employees, lease obligations and
write-off of certain equipment, leasehold improvements and other costs. This
amount is comprised of $28,395 of which $16,407 was for the write-off of
previously escrowed lease deposit and landlord inducement and legal payments,
$6,922 was for the write-off of equipment and leasehold improvements, $2,120 for
facilities closings and $2,946 was associated with employee terminations (148
employees). These were offset by reversals of $3,561, related to revised
estimates and a $1,184 vendor settlement related to an asset impaired in the
prior year. Reversals related to contract settlement charges and facility
closings were primarily for settling certain facility contracts and purchase
commitments for amounts lower than originally planned. Reversals related to
fiscal 2001 asset write downs were primarily related to adjustments to estimated
Plant, Property and Equipment impairment. Actual impairment amounts were less
than the original estimates. The Company believes these actions will result in
ongoing annual operating expense savings of approximately $24,000.
The following table displays the activity and balances of the restructuring
reserve account:
RESTRUCTURING OTHER
--------------------------------------------------- ---------------------------------
EMPLOYEE CONTRACT FACILITY ASSETS
TERMINATION SETTLEMENTS CLOSING WRITE-DOWN TOTAL
-------------- ---------------- --------------- ---------------- ---------------
October 1, 2001 Balance
(Predecessor Company) .................... $ 1,006 $ 4,050 $ 1,953 $ 2,182 $ 9,191
Additional Restructure Charge.............. 2,946 16,407 2,120 6,922 28,395
Deductions-Non-Cash........................ (889) -- (422) (6,922) (8,233)
Deductions-Cash............................ (2,520) (18,480) (1,669) -- (22,669)
Reversal to Fiscal 2001 Plan............... -- (678) (701) (2,182) (3,561)
-------------- ---------------- --------------- ---------------- ---------------
April 30, 2002 Balance
(Predecessor Company) .................... 543 1,299 1,281 -- 3,123
Deductions-Cash............................ (400) -- (895) -- (1,295)
-------------- ---------------- --------------- ---------------- ---------------
September 30, 2002 Balance
(Successor Company) ...................... 143 1,299 386 -- 1,828
Deduction-Cash............................. (143) (485) (112) -- (740)
Reversal of accruals....................... -- (814) (206) -- (1,020)
-------------- ---------------- --------------- ---------------- ---------------
September 30, 2003 (Successor
Company) ................................. -- -- 68 -- 68
Deduction-Cash............................. -- (43) -- (43)
September 30, 2004 (Successor -------------- ---------------- --------------- ---------------- ---------------
Company) ................................. $ -- $ -- $ 25 $ -- $ 25
============== ================ =============== ================ ===============
The remaining liability is expected to be settled in cash.
F-27
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
13. OTHER LONG TERM LIABILITIES
Other long-term liabilities consist of the following:
SUCCESSOR COMPANY
--------------------------
SEPTEMBER 30,
--------------------------
2004 2003
------------ ----------
Note payable................................ $ -- $ 2,600
Negative leasehold obligation............... 6,905 7,247
Deferred rent............................... 829 486
Other....................................... 292 326
------------ ----------
$ 8,026 $ 10,659
============ ==========
The Company had a $2,600 note payable, due November 15, 2005. The note bears
interest, payable monthly, at the rate of Prime plus 1%. The note was
collateralized by an irrevocable standby letter of credit. The related funds
were included in restricted investments on the accompanying consolidated balance
sheet for September 30, 2003. 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 fee. Following the
settlement the $2,600 included in the Company's long-term restricted investment
were released from escrow.
On July 21, 1999, the Company established a trust (the "Rabbi Trust") for the
benefit of a former executive. The trust agreement was for three years beginning
in April 1999 through March 1, 2002. The agreement was amended on March 21,
2001, and provided for payments from the Rabbi Trust commencing April 2001.
Payments were made from the Trust until March 1 2002, when Globix and two of its
wholly-owned subsidiaries filed for Chapter 11. The Company was in litigation
over the trust which was settled pursuant to court order confirmation of the
settlement dated June 13, 2003. Pursuant to this settlement, Mr. Bell received a
distribution of $990 and the Company received a distribution of approximately
$1,700. The amount of approximately $100 was retained by the trustee to cover
the costs of winding up the trust. See also Note 19.
In connection with fresh start accounting at the Effective Date, the Company
recorded a Negative Leasehold Liability associated with three of its Internet
data centers. The Negative Leasehold Liability amount was determined by
independent appraisal and based upon research of the local market condition in
each market and estimation of the net effective market rental rates in
comparison to the Company's contractual lease rates through expiration of the
lease. Such liability will be amortized to reduce lease expense over the
remaining life of the lease as follows:
YEAR ENDING SEPTEMBER 30,
- ----------------------------------
2005 ............................. $ 710
2006 ............................. 710
2007 ............................. 710
2008 ............................. 710
2009.............................. 710
Thereafter........................ 4,065
------------
Total............................. 7,615
Less: Current Portion............. (710)
------------
Long-term Portion................. $ 6,905
============
F-28
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
14. 12.5% SENIOR NOTES AND 11% SENIOR NOTES
In February 2000, the Company issued $600,000 in aggregate principal amount of
its 12.5% Senior Notes in a private placement resulting in net proceeds of
approximately $580,000. In connection with the offer of the 12.5% Senior Notes
the Company incurred costs of approximately $20,000 that were being amortized
over ten years using the effective interest method.
As of the Effective Date, all of the existing 12.5% Senior Notes were cancelled
and each holder of the 12.5% Senior Notes became entitled to receive, in
exchange for its 12.5% Senior Notes, its pro rata share of $120,000 in aggregate
principal amount of the 11% Senior Notes and 13,991,000 shares of the Company's
common stock, representing 85% of the shares of the Company's common stock
issued and outstanding following the Effective Date. The interest of $11,507 on
the 12.5% Senior Notes for the period March 1, 2002 through the Effective Date
was not accrued in accordance with SOP 90-7. See Note 5 as to the accounting
treatment applied under the Fresh Start Accounting.
The Company is deemed to have issued the 11% Senior Notes on the Effective Date
in one series that is initially limited to $120,000 aggregate principal amount
of 11% Senior Notes. However, none of the 11% Senior Notes had been distributed
as of September 30, 2002. In October 2002, the Company distributed $120,000 in
aggregate principal amount of the 11% Senior Notes, which included $1,968 in
aggregate principal amount of Senior Notes placed in reserve in escrow pursuant
to a Stipulation and Order entered into with the lead plaintiffs in the class
action lawsuit described in Note 19.
The 11% Senior Notes will mature on May 1, 2008. The 11% Senior Notes bear
interest at 11% per annum, payable annually in May of each year, commencing on
May 1, 2003. Interest on the 11% Senior Notes for the first two year period
following the initial date of issuance is payable in kind by the issuance of
additional notes with terms identical to the 11% Senior Notes (other than the
date of issuance) in a principal amount equal to the interest payment then due.
For the two year period thereafter, interest is payable in cash or, at the
Company's option when authorized by its board of directors, in additional notes
with terms identical to the 11% Senior Notes (other than the date of issuance),
or in any combination of cash and additional notes. For the remaining two years
until maturity, interest is payable in cash.
The 11% Senior Notes were issued under an indenture dated as of April 23, 2002
(the "Indenture"), among the Company, HSBC Bank USA, as trustee (the "Trustee")
and Bluestreak Digital, Inc., Gamenet Corporation, NAFT Computer Service
Corporation, NAFT International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.net, Inc. and Comstar Telecom & Wireless, Inc., as the initial
Subsidiary Guarantors. See Note 22 for additional disclosures related to the
Subsidiary Guarantors. During 2003, the Company merged each of these subsidiary
guarantors, other than 415 Greenwich GC, 415 Greenwich GC Tenant, LLC, 415
Greenwich GC MM, LLC, with into the Company. Under the terms of the Indenture,
the guarantees by 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC and 415
Greenwich GC MM, LLC ceased to be effective upon the sale of the Property (See
Note 8).
Each holder of the 11% Senior Notes will have the right to require the Company
to repurchase all or a portion of its 11% Senior Notes for a purchase price
equal to 101% of the principal amount of that holder's 11% Senior Notes plus
accrued and unpaid interest to the date of repurchase in the event that:
o Subject to certain exceptions, any person, entity or group of persons
or entities becomes the beneficial owner, directly or indirectly, of
50% or more of the Company's outstanding voting securities;
o At any time during the two-year period following the distribution of
the 11% Senior Notes, the individuals that comprise a majority of the
Company's board of directors on the date of distribution of the 11%
Senior Notes, plus any new directors elected to the Company's board of
directors during this two-year period, cease to comprise a majority of
the Company's board of directors;
o Subject to certain exceptions, the Company consolidates with or merges
with or into another entity, the Company sells or leases all or
substantially all of its assets to another entity or any entity
consolidates with or merges with or into the Company, in each case
pursuant to a transaction in which the Company's outstanding voting
securities are changed into or exchanged for cash, securities or other
property, unless no person, entity or group of persons or entities
owns, immediately after the transaction, more than 50% of the Company's
outstanding voting stock,
The Company does not believe that the proposed merger with Neon will constitute
a change in control given the overlapping ownership between the Company and
Neon.
F-29
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Indenture contains a number of covenants that impose significant operating
and financial restrictions on the Company and its subsidiaries. These
restrictions significantly limit, and in some cases prohibit, among other
things, the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, create liens on assets, enter into business
combinations or engage in certain activities with subsidiaries. As of September
30, 2004 and 2003, the Company was in compliance with the material operating and
financial restrictions imposed upon the Company contained in the Indenture.
During the year ended September 30, 2003, the Company repurchased in the open
market for $14,612 a portion of its outstanding 11% Senior Notes, which had a
principal value of approximately $19,074 and associated accrued interest of
$1,561. As a result of the repurchase the Company recorded a gain on discharge
of debt in the amount of $6,023. During the year ended September 30, 2003 the
Company issued an additional $11,298 in 11% Senior Notes as payment of accrued
interest on the 11% Senior Notes.
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. On
March 3, 2004, following the sale of the Property, the Company used
approximately $44,000 to repurchase $40,274 in principal amount of its
outstanding 11% Senior Notes at par value plus accrued interest in the amount of
$3,716 (See also Note 8). During the year ended September 30, 2004 the Company
issued an additional $7,155 in 11% Senior Notes as payment of accrued interest
on the 11% Senior Notes.
15. MORTGAGE PAYABLE
On January 25, 2000, the Company borrowed $21,000 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.
Future mortgage payments due under as of September 30, 2004 are as follows:
YEAR ENDING SEPTEMBER 30,
- -------------------------
2005.............................................. $ 2,142
2006.............................................. 2,142
2007.............................................. 2,142
2008.............................................. 2,142
2009.............................................. 2,142
Thereafter ....................................... 23,269
Less: Amount representing interest................ (14,067)
------------
Present value of net mortgage payments............ 19,912
Less: Principal Current Portion................... (306)
------------
Long-term Portion................................. $ 19,606
============
F-30
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. STOCKHOLDERS' EQUITY
RESTRICTED STOCK GRANT
In December 2000, the Company granted 3,063,490 shares of restricted stock to
certain employees and directors. The restricted stock awards vested 25% per year
over a four-year period on the anniversary date of the grant. In connection with
this restricted stock grant, the Company recorded a deferred compensation charge
of $8,999 in stockholders' equity. This deferred compensation was to be recorded
as compensation expense over the four-year vesting period. In April 2002, the
Company's board of directors approved the vesting of 100% of the remaining
unvested restricted shares. This resulted in a non-cash charge to compensation
expense of $5,100 in April 2002. Compensation expense recorded in the seven
month period ended April 30, 2002 was $7,027.
STOCK OPTION PLANS
On March 14, 2003, the Company's board of directors approved the 2003 Stock
Option Plan (the "2003 Plan"). The 2003 Plan provides for the grant of stock
options to purchase up to 1,828,889 shares of the Company's common stock to any
employee, officer, director, or consultant of the Company at an exercise price
equal to at least the fair market value at the date of grant. All options
granted under the 2003 Plan shall terminate no later than ten years from the
date of grant, 50% of options granted under the 2003 Plan vest ratably over a
period of up to 3 years with certain acceleration clauses while the remainder of
the 50% vest upon meeting certain financial conditions. As of September 30, 2004
644,036 options are available for future grants. While the 2003 Plan was
approved by the Company's stockholders during the annual stockholders meeting in
February 2004 all prior grants approved by the Company's board of directors were
considered as granted for accounting purposes.
Outstanding options, which are subject to meeting certain financial conditions,
are accounted for in accordance with FIN 28, "Accounting for Stock Appreciation
Rights and Other Variable Stock Option or Award Plans an interpretation of APB
Opinions No. 15 and 25". These options are subject to variable accounting and
are valued quarterly over their respective periods until all performance goals
are satisfied or until the options are vested, forfeited or cancelled. For the
year ended September 30, 2004 the Company recorded deferred stock compensation
of $30 and a non-cash charge of $22 representing the amortization of deferred
stock compensation of $22. These balances were based on the amount by which the
common stock closing price at September 30, 2004 exceeded the exercise price of
the unvested variable options. As of September 30, 2003 the closing price of the
common stock was below the exercise price and accordingly the Company did not
record any expense in respect of unvested variable options for the year ended
September 30, 2003.
Until the Effective Date the Company's shareholders approved several options
plans. As a result of the Company's reorganization, all outstanding options and
warrants granted under those plans were cancelled and such plans were considered
void as of the Effective Date.
Summary Stock Option Activity
The following table summarizes stock option information with respect to all
stock options for the three years ended September 30, 2003:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
Options outstanding, October 1, 2001 ......................... 10,394,781 $ 8.66
Granted 3,219,200 0.45
Canceled (3,592,723) 5.83
------------
Options outstanding, April 30, 2002 .......................... 10,021,258 $ 7.03
Canceled (10,021,258) 7.03
------------
Options outstanding, May 1, 2002 and September 30, 2002 ...... -- $ --
Granted 1,355,976 3.04
Canceled (254,220) 3.04
-----------
Options outstanding, September 30, 2003 ...................... 1,101,756 $ 3.04
Granted 175,000 4.10
Canceled (91,903) 3.04
------------
Options outstanding, September 30, 2004 ...................... 1,184,853 $ 3.20
============
F-31
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average fair value of options granted was $3.41 and $1.89 for the
years ended September 30, 2004 and 2003, respectively, and $0.41 for the seven
months ended April 30, 2002.
On March 14, 2003, the Company's board of directors approved the sale to
Communication Technology Advisors, LLC ("CTA") of a fully vested warrant
exercisable for 500,000 shares of the Company's common stock at an exercise
price of $3.00 per share. CTA provides consulting services to the Company and
was a related party until June 24, 2003 (See Note 21). During January 2004, CTA
purchased the warrants for $25. Following the purchase of the warrant, it will
be immediately exercisable for a period of 10 years from the date of issuance.
Since CTA is a provider of services to the Company the value of the warrant is
expensed as determined by using the Black Scholes valuation model. The
assumptions used in the Black- Scholes model include the risk free rate of
2.92%, volatility of 133%, no dividend yield, a contractual life of 10 years and
an expected life of five years with a fair market value of $2.50. The fair value
of the warrant of $ 1,050 was expensed as part of SG&A during the year ended
September 30, 2003. The CTA warrant is not included in the aforementioned table.
In April 1998, the Company completed a $160.0 million debt financing 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. Of
the 2,252,800 shares underlying the original 160,000 warrants, 194,797 shares
remained, until canceled on the Effective Date.
17. 401(K) PLAN
The Company offers its eligible U.S. employees the opportunity to participate in
a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code ("the 401(k) Plan"). Each employee
is eligible to contribute, on a tax-deferred basis, a portion of annual earnings
not to exceed certain federal income tax limitations. The Company made
discretionary contributions for all eligible employees who contribute to the
401(k) Plan in an amount not exceeding 50% of each participant's first 4% of
compensation contributed as elective deferrals for the Plan year. The Company
contributed approximately $110 to the 401(k) Plan during the period ended April
30, 2002. The Company ceased making contributions to the 401(k) Plan effective
January 1, 2002.
F-32
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. INCOME TAXES
The Company accounts for income taxes under SFAS. No. 109, "Accounting for
Income Taxes". This statement applies an asset and liability approach that
requires the recognition of deferred tax assets and liabilities with respect to
the expected future tax consequences of events that have been recognized in the
consolidated financial statements and the Company's tax returns.
The provision for income taxes for the periods below differs from the amount
computed by applying the federal statutory rate due to the following:
PREDECESSOR
SUCCESSOR COMPANY COMPANY
-------------------------------------------------- -------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- ------------- ------------- -------------
Statutory Federal income tax rate...... (35)% (35)% (35)% 35%
State and local taxes, net of Federal
benefit............................ (10)% (10)% (10)% 14%
Other: -- -- -- 5%
Valuation Allowance. .................. 45% 45% 45% (54)%
Effective income tax rate.............. -- -- -- --
Significant components of the deferred tax assets and liabilities are as
follows:
SUCCESSOR COMPANY
----------------------------------
SEPTEMBER 30,
----------------------------------
2004 2003
-------------- -------------
Deferred tax assets:
Net operating loss carryforwards............. $ 85,222 $ 48,318
Restructuring reserve........................ -- 364
Allowance for doubtful accounts.............. 516 589
Depreciation and amortization................ 31,323 46,771
Deferred rent................................ 373 219
Deferred revenue............................. 272 783
Other........................................ 11 31
-------------- -------------
Total deferred tax assets 117,717 97,075
Less: valuation allowance.................... (117,717) (97,075)
-------------- -------------
Total net deferred tax assets $ -- $ --
============== =============
The Company is in an accumulated loss position for both financial and income tax
reporting purposes. The Company has U.S. Federal income tax loss carryforwards
of approximately $173,158 at September 30, 2004. These income tax loss
carryforwards expire through 2024. The U.S. Federal income tax loss
carryforwards were reduced upon emergence from bankruptcy due to the Internal
Revenue Code's rules and regulations related to the cancellation of indebtedness
income that is excluded from taxable income. Since the Plan provided for
substantial changes in the Company's ownership, the Company's use of its net
operating loss carryforward may be limited. The Company has not yet determined
the impact, if any that changes in ownership have had on net operating loss
carryforwards. As of September 30, 2004, the Company also has net operating loss
carryforwards of approximately $24,335 from its United Kingdom Subsidiaries,
which do not expire under U.K. tax rules. For financial reporting purposes,
income tax benefits through September 30, 2004 related to both U.S. Federal and
foreign income tax losses are fully offset by a valuation allowance due to the
uncertainty of the Company's ability to realize income tax benefits by
generating taxable income in the future.
F-33
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's emergence from bankruptcy in fiscal 2002 did not create a new tax
reporting entity. Accordingly, the adjustments required to adopt fresh start
accounting are not applicable for the Company's tax reporting and therefore,
deferred tax items were recognized concurrently with the recognition of the
respective fresh start accounting adjustments. In addition pursuant to SOP No.
90-7, reversals of the valuation allowance recorded against deferred tax assets
that existed as of the emergence date will first reduce intangibles until
exhausted and thereafter are reported as additional paid in capital as opposed
to income tax expense. The balance of the valuation allowance for which this
treatment is required was approximately $80,400 at September 30, 2004 and 2003.
19. COMMITMENTS AND CONTINGENCIES
Leases
The Company has minimum monthly usage/maintenance levels with certain of its
telecommunications carriers expiring in various years through 2009. The Company
also leases certain of its facilities and various equipment under non-cancelable
operating leases expiring in various years through 2017. Total lease expense for
under operating leases for the year ended September 30, 2004, the year ended
September 30, 2003, the seven months ended April 30, 2002 and for the five
months ended September 30, 2002 was $6,502, $5,800, $6,101 and $2,993,
respectively.
Future minimum payments due under these operating leases and telecommunications
carrier usage commitments as of September 30, 2004 are as follows:
YEAR ENDING SEPTEMBER 30, TELECOM LEASES TOTAL
- ----------------------------- ------------- ------------ --------------
2005......................... $ 9,738 $ 6,777 $ 16,515
2006......................... 7,947 6,863 14,810
2007......................... 3,962 6,810 10,772
2008......................... 3,842 6,826 10,668
2009......................... 75 6,875 6,950
Thereafter................... -- 41,878 41,878
------------- ------------ --------------
Total $ 25,564 $ 76,029 $ 101,593
============= ============ ==============
Capital Lease Obligation
Future minimum lease payments due under capital leases as of September 30, 2004
are as follows:
YEAR ENDING SEPTEMBER 30,
- -------------------------
2005.............................................. $ 249
2006.............................................. 121
Less: Amount representing interest................ (--)
-----------
Present value of net minimum lease payments....... 370
Less: Principal Current Portion................... (249)
-----------
Long-term Portion................................. $ 121
===========
Rentals Due From Third Parties
As of September 30, 2004, we leased to third parties office space in our New
York building for periods ranging between two to six years and subleased space
in our London offices for periods ranging between three to ten years. Lease
income for the year ended September 30, 2004 and 2003 was approximately $1,640
and $430. Lease income for the five months ended September 30, 2002 and the
seven months ended April 30, 2002 were immaterial.
F-34
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
As of September 30, 2004, future minimum rental and sublease income are as
follows:
YEAR ENDING SEPTEMBER 30,
- -----------------------------
2005......................... $ 1,645
2006......................... 1,720
2007......................... 1,308
2008......................... 957
2009......................... 760
Thereafter................... 2,112
----------
Total $ 8,502
==========
Letters of Credit
As of September 30, 2003 the Company had collateralized letters of credit
aggregating to $2,600. The related funds are included in restricted cash and
investments on the accompanying consolidated balance sheet for September 30,
2003. Following the payment of the long-term note payable in April 2004, the
collateral was cancelled, see also Note 13.
Employment and Other Contractual Agreements
Peter K. Stevenson
Effective April 15, 2002, the Company entered into an employment agreement with
Peter K. Stevenson for his services as the Company's President and Chief
Executive Officer. Mr. Stevenson's employment agreement expired in July 2003,
and was extended until July 31, 2004 subject to extension for successive six
month periods with the mutual consent of Globix and Mr. Stevenson. Mr.
Stevenson's base salary is $308 per year. Mr. Stevenson is also eligible for an
annual bonus equal to up to 50% of his base salary which is contingent upon the
Company meeting certain performance targets and a bonus contingent on the
success the Company may have in the purchase or sale of certain assets or
disposition or acquisition of certain business in sums to be determined by the
Company's compensation committee. In addition, under the terms of Mr.
Stevenson's employment agreement, Mr. Stevenson was granted options to acquire
548,667 shares of the Company's common stock. As of September 30, 2004 and 2003
all of Mr. Stevenson's options were fully vested.
Mr. Stevenson's employment agreement provides that in the event that the Company
terminates his employment for any reason other than cause, if Mr. Stevenson
terminates his employment for good reason or if Mr. Stevenson's employment
terminates as a result of his death or permanent disability, then Mr. Stevenson
is entitled to a years' salary.
Contingencies
On January 28, 2002, a derivative suit was filed in the United States District
Court for the Southern District of New York against the Company, as nominal
defendant, and certain of our current and former directors and officers. The
action is entitled Susan Boney, Individually and Derivatively on behalf of
Nominal Defendant Globix Corp, Plaintiff v. the named former Board of Directors
(pre-Bankruptcy), Defendants and Globix Corp, a Delaware Corporation, Nominal
Defendant. Plaintiffs brought the action against the former board and certain
executives seeking damages and expenses for breach of fiduciary duty for
violations of federal and state securities laws alleging misrepresentations of
Globix's financial performance from 2000 through 2001. We believe that the
allegations in this lawsuit are without merit and we intend to vigorously defend
against them. In addition, the plaintiff has not pursued her claims since the
filing of the lawsuit. 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 August 12, 2004, the United States District Court for the Southern District
of New York approved the settlement of a class action lawsuit entitled In re
Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as
defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a
director of Globix) and Brian Reach, and asserted claims under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased our securities
between November 16, 2000 and December 27, 2001. The lawsuit alleged that the
defendants failed to disclose the true state of the Company's financial
condition during this period. Under the settlement, which remains subject to
appeal, the Company has agreed to pay $3,500 (all of which would be covered by
insurance) to settle all claims against it. A motion for reconsideration of the
fee award has been filed by those plaintiffs' law firms whose fees were not
included in the settlement. Although there can be no assurance as to the outcome
of the motion, the Company does not believe that the ultimate liabilities, if
any, resulting from this appeal will have a material adverse impact on our
business, financial condition, results of operations or cash flows.
F-35
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 court approval of the 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 June 12, 2002, Robert B. Bell, a former officer and director of the Company,
filed a complaint in the United States District Court for the Southern District
of New York, entitled Robert B. Bell v. Arnold M. Bressler, as Trustee, and
Globix Corporation, alleging breach of contract claims related to the failure to
make payments under a trust, which the Company refers to as the Rabbi Trust,
that Globix formed pursuant to an employment agreement with Mr. Bell. In
addition, in connection with the same underlying issues, on July 24, 2002 the
Company filed a complaint in the United States Bankruptcy Court for the District
of Delaware entitled Globix Corporation v. Arnold N. Bressler, as Trustee of the
Globix Corporation Rabbi Trust and Robert B. Bell. Subsequently, these
litigations were consolidated in the United States Bankruptcy Court matter.
This consolidated action was settled on June 13, 2003. As a result of the
settlement, Mr. Bell received a distribution of approximately $990 and Globix
received a distribution of approximately $1,700 from the Rabbi Trust.
On February 6, 2003, a putative derivative suit was filed in New York State
Supreme Court (County of New York) against the Company, as nominal defendant,
and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First Boston
Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon Smith
Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings, LLC), the
initial purchasers in our February 2000 offering of the 12.5% Senior Notes. The
suit alleges that the underwriting discount granted to the initial purchasers of
the 12.5% Notes violated Section 5-531 of the New York General Obligations Law,
which limits the amount that can be charged by a loan broker. On March 6, 2003,
the plaintiff and the initial purchasers entered into a tolling agreement that
would result in the dismissal of the action without prejudice pending action on
a motion to dismiss an amended complaint submitted in a similar case involving
debt securities issued by another corporation. On March 13, 2003, the court
dismissed the action without prejudice. On July 17, 2003, the plaintiff and the
initial purchasers extended their tolling agreement to allow the plaintiff to
re-file a complaint against the Company at any time during a period of ten days
following the disposition on appeal in the case involving the other corporation.
On February 2, 2004, the case against the other corporation was decided against
the plaintiff and accordingly no further action has been taken against the
Company.
On November 12, 2003, the Company was 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. The Company has accrued its estimated
liability. A court date is expected in the second quarter of fiscal 2005.
From time to time Globix 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.
F-36
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
20. SEGMENT INFORMATION
The Company reports segment information under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Effective April 1, 2001 and
for the fiscal year ended September 30, 2001, the Company began to evaluate its
results of operations based on one operating segment. Previously the Company
reported under two operating segments.
PREDECESSOR
SUCCESSOR COMPANY COMPANY
------------------------------------------------- -------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30,
2004 2003 2002 2002
------------- ------------- ------------- -------------
Revenues:
United States .......................... $ 35,537 $ 36,833 $ 20,410 $ 37,747
Europe (mainly the United Kingdom) ..... 25,653 23,344 10,313 13,526
------------- ------------- ------------- -------------
Consolidated ........................... $ 61,190 $ 60,177 $ 30,723 $ 51,273
============= ============= ============= =============
Operating income (loss):
United States .......................... $ (37,755) $ (22,631) $ (15,069) $ (54,433)
Europe (mainly the United Kingdom) ..... 3,880 4,230 (39) (29,150)
------------- ------------- ------------- -------------
Consolidated ........................... $ (33,875) $ (18,401) $ (15,108) $ (83,583)
============= ============= ============= =============
Long-lived assets:
United States .......................... $ 64,978 $ 137,279 $ 148,559
United Kingdom ......................... 25,844 25,351 26,151
------------- ------------- -------------
Consolidated ........................... $ 90,822 $ 162,630 $ 174,710
============= ============= =============
Although the Company operates in one operating segment, there are 4 major
service lines as detailed in the table below. Data for fiscal year 2002 has not
been provided due to impracticability.
SUCCESSOR COMPANY
-----------------------------
YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
------------- -------------
Internet Hosting and Co-Location..................... $ 23,760 $ 26,048
Managed Services..................................... 18,996 13,342
Network Services and Internet Access................. 17,483 19,034
Hardware and Software Sales, DSL and Other .......... 951 1,753
------------- -------------
Revenue, net $ 61,190 $ 60,177
============= =============
F-37
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
21. RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT WITH COMMUNICATION TECHNOLOGY ADVISORS
The Company and Communication Technology Advisors LLC ("CTA"), are parties to a
consulting agreement. Jared E. Abbruzzese, who was a member of the Company's
board of directors as of September 30, 2002 and resigned during the year ended
September 30, 2003, is the Founder and Chairman of CTA and is actively engaged
in all aspects of CTA's business.
Under this agreement, the Company engaged CTA to act as the Office of the Chief
Restructuring Officer, providing the Company with a wide range of business
advisory services. As consideration for the services provided by CTA, the
Company pays CTA a monthly fee of $65. The Company also reimburses CTA for its
out-of-pocket expenses incurred in connection with rendering services to the
Company during the term of the agreement. In addition to the monthly fee and
expense reimbursement, CTA is also entitled to a success fee in the amount of
$1,500 upon the achievement of certain success milestones. On August 14, 2004,
CTA waived any rights that it might have to the success fee with respect to the
proposed merger with Neon and accordingly no accrual for the success fee was
required as of September 30, 2004.
CTA was originally introduced to the Company as a financial advisor to the
unofficial committee of holders of the 12.5% Senior Notes prior to the
commencement of the Company's Chapter 11 case. CTA received a total of $594 in
fees in connection with its service as financial advisor to the unofficial
committee and to the Company and was reimbursed a total of $46 for out-of-pocket
expenses through September 30, 2002. As a result of this engagement, the Company
was introduced to Peter K. Stevenson, currently the Company's president and
Chief Executive Officer, who was among several CTA representatives providing
advisory services to the unofficial committee and to several other clients of
CTA unrelated to the Company. Mr. Stevenson does not own an equity interest in
CTA, nor is he actively consulting for or employed by CTA.
Neither CTA, nor any of its principals or affiliates as of September 30, 2002 or
thereafter was a stockholder of the Company, nor does it hold any debt of the
Company (other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under its existing agreement
with the Company). See Note 16 for warrant granted by the Company to CTA.
>From September 2002 through December 2002, CTA subleased office space from Net
One Group, Inc., a company founded by Mr. Stevenson. CTA paid a total of $4.8 in
rent to Net One Group under the sublease.
CTA has advised the Company that in connection with the conduct of its business
in the ordinary course it routinely advises clients in, and appears in
restructuring cases involving, telecommunications companies throughout the
country. CTA has also advised the Company that certain holders of the Company's
common stock and/or debt securities and/or certain of their respective
affiliates or principals are current clients of CTA in matters unrelated to the
Company, former clients of CTA in matters unrelated to the Company and
affiliates of clients who are (or were) represented by CTA in matters unrelated
to the Company.
The consulting services described above were approved by a majority of the
Company's disinterested directors.
For the years ended September 30, 2004 and 2003, the Company recorded in respect
of CTA, consulting expenses and reimbursement of expenses of $827 and $810,
respectively. Although CTA continues to provide the Company with ongoing
consulting services, it is no longer considered a related party as of September
30, 2004 and 2003.
BONUSES PAYMENT AS PART OF THE SALE OF THE PROPERTY
As part of the sale of the Property (See Note 8), the Company paid bonuses of
$450 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 and $169 payment to the Company's
Chief Executive Officer.
LIFE INSURANCE AND DISABILITY FOR PETER K. STEVENSON
Peter K. Stevenson, the Company's President and Chief Executive Officer,
receives life insurance and disability insurance benefits in excess of the
benefits that are offered to the Company's other employees. These benefits are
payable to an entity controlled by Mr. Stevenson. The premiums for these
benefits totaled $6.3 for the five month period ended September 30, 2002. No
further amounts were paid during fiscal years 2003 and 2004. These benefits were
approved by a majority of the Company's disinterested directors.
F-38
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
22. GUARANTEES
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires a liability to
be recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements. Additional disclosures
about guarantee agreements are also required in the interim and annual financial
statements. The adoption of FIN 45 did not have an effect on the Company's
results of operations or financial position.
Guaranty to the Investor
As part of the sale of the Property (See Note 8), the Company guaranteed to
indemnify and hold the Investor harmless from any adverse consequences, that the
Investor may suffer by reason of any non-compliance by the Company, that
directly impaired his 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.
Subsidiary Guarantors
Under the terms of the indenture governing the 11% Senior Notes, the following
subsidiaries of the Company have fully and unconditionally and jointly and
severally guaranteed the full and prompt performance of the Company's
obligations under the 11% Senior Notes and the Indenture, including the payment
of principal of and premium, if any, on and interest on the 11% Senior Notes:
Bluestreak Digital, Inc., Gamenet Corporation, Naft Computer Service
Corporation, Naft International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.Net, Inc. and Comstar Telecom & Wireless, Inc. The Company merged
each of these subsidiary guarantors, other than 415 Greenwich GC, LLC, 415
Greenwich GC Tenant, LLC and 415 Greenwich GC MM, LLC, with and into the
Company. Under the terms of the Indenture, the guarantees by 415 Greenwich GC,
LLC, 415 Greenwich GC Tenant, LLC and 415 Greenwich GC MM, LLC ceased to be
effective upon the sale of the Property (See Note 8).
23. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, restricted cash, receivables,
payables, and current portion of capital lease obligation and mortgage payable
included in the consolidated balance sheets approximate their fair value due to
the their short-term maturity.
The fair value of marketable securities and investments are based on quoted
market prices.
The fair market value of the 11% Senior Notes as of September 30, 2004 is
approximately $58,000 based on the repurchase price paid by the Company on
October 3, 2003 and current bids the Company received from unaffiliated parties
to buy-back their 11% Senior Notes (see Note 14).
F-39
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
24. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
SUCCESSOR COMPANY
-------------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2003 2004 2004 2004
------------- ------------- ------------- -------------
Net revenues ...................................... $ 14,385 $ 15,029 $ 15,729 $ 16,047
Operating costs and expenses:
Cost of revenues (excluding depreciation,
amortization, payroll and occupancy shown
below) ........................................ 4,876 4,974 4,935 4,962
Selling, general and administrative ............ 10,944 10,740 10,870 10,964
Loss on impairment of assets ................... 17,313 659 -- --
Depreciation and amortization .................. 3,371 3,473 3,519 3,465
------------- ------------- ------------- -------------
Total operating costs and expenses ................ 36,504 19,846 19,324 19,391
Loss from operations: ............................. (22,119) (4,817) (3,595) (3,344)
Interest and financing expense, net ............ (3,274) (2,921) (2,366) (2,364)
Other income (expense) ......................... 297 899 412 59
Gain on debt discharge ......................... 1,747 -- -- --
------------- ------------- ------------- -------------
Loss before income taxes .......................... (23,349) (6,839) (5,549) (5,649)
Income tax expense ................................ -- 35 21 (56)
------------- ------------- ------------- -------------
Net loss attributable to common stockholders ...... $ (23,349) $ (6,874) $ (5,570) $ (5,593)
============= ============= ============= =============
Basic and diluted loss per share attributed to
common stockholders .............................. $ (1.42) $ (0.42) $ (0.34) $ (0.34)
============= ============= ============= =============
SUCCESSOR COMPANY
-------------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2002 2003 2003 2003
------------- ------------- ------------- -------------
Net revenues ...................................... $ 16,480 $ 15,368 $ 14,519 $ 13,810
Operating costs and expenses:
Cost of revenues (excluding depreciation,
amortization, payroll and occupancy shown
below) ............................................ 5,624 5,274 4,601 4,491
Selling, general and administrative ............ 11,891 12,570 9,253 10,716
Restructuring charges .......................... -- -- (1,020)
Depreciation and amortization .................. 3,727 4,116 4,057 3,623
------------- ------------- ------------- -------------
Total operating costs and expenses ................ 21,242 21,960 17,911 17,810
------------- ------------- ------------- -------------
Other operating income ......................... 345
Loss from operations: ............................. (4,762) (6,247) (3,392) (4,000)
Interest and financing expense, net ............ (3,516) (3,214) (3,463) (3,769)
Other income (expense) ......................... 182 204 220 626
Gain on debt discharge ......................... 2,727 2,044 1,154 98
Minority interest in subsidiary ................ 108 120 105 (333)
------------- ------------- ------------- -------------
Net loss before income taxes ...................... (5,261) (7,093) (5,376) (7,378)
Income tax expense ................................ 167
------------- ------------- ------------- -------------
Net loss attributable to common stockholders ...... $ (5,261) $ (7,093) $ (5,376) $ (7,545)
============= ============= ============= =============
Basic and diluted loss per share attributed to
common stockholders .............................. $ (0.32) $ (0.43) $ (0.33) $ (0.46)
============= ============= ============= =============
F-40
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------------------------------------- ------------- ----------------------- ------------ -----------
ADDITIONS
-----------------------
BALANCE AT CHARGES TO CHARGES BALANCE AT
BEGINNING OF COSTS AND TO OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
------------ ---------- -------- ---------- ----------
Allowance for Doubtful Accounts
Predecessor Company (October 1,
2001 to April 30, 2002) ................. 8,052 4,284 94 (9,618) 2,812
Successor Company (May 1, 2002
to September 30, 2002) .................. 2,812 1,904 80 (2,231) 2,565
Successor Company (October 1,
2002 to September 30, 2003) ............. 2,565 1,997 24 (1,940) 2,646
Successor Company (October 1,
2003 to September 30, 2004) ............. 2,646 780 24 (1,202) 2,248
Deferred Tax Valuation Allowance
Predecessor Company (October 1,
2001 to April 30, 2002) ................. 167,421 40,400 66,021 (193,402) 80,440
Successor Company (May 1, 2002
to September 30, 2002) .................. 80,440 9,737 -- -- 90,177
Successor Company (October 1,
2002 to September 30, 2003) ............. 90,177 6,898 -- -- 97,075
Successor Company (October 1,
2003 to September 30, 2004) ............. 97,075 20,642 -- -- 117,717
F-41