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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 1-14168
GLOBIX CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3781263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 Centre Street, New York, New York 10013
(Address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (212) 334-8500
Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act). Yes [ ] No [x]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities and
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [x] No [ ]
Number of shares of the Registrant's common stock outstanding as of May 6,
2004 was 16,460,000.
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GLOBIX CORPORATION AND SUBSIDIARIES
Table of Contents
Page
Part I Financial Information
Item 1 Consolidated Balance Sheets-- As of March 31, 2004 (Unaudited) and September 30, 2003.................... 1
Interim Unaudited Consolidated Statements of Operations-- For the Three Month Periods Ended March 31,
2004 and 2003 and For the Six Month Periods Ended March 31, 2004 and 2003............................... 2
Interim Unaudited Consolidated Statements of Cash-Flows-- For the Three Month Periods Ended March 31,
2004 and 2003 and For the Six Month Periods Ended March 31, 2004 and 2003............................... 3
Notes to the Interim Unaudited Consolidated Financial Statements......................................... 5
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk............................................... 18
Item 4 Controls and Procedures.................................................................................. 18
Part II Other Information........................................................................................
Item 1. Legal Proceedings........................................................................................ 19
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities......................... 19
Item 3. Defaults Upon Senior Securities.......................................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders...................................................... 19
Item 5. Other Information ....................................................................................... 20
Item 6. Exhibits and Reports on Form 8-K ........................................................................ 21
Signatures 22
Certifications 23-26
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in Thousands, Except Share and Per Share Data)
March 31, September 30,
2004 2003
-------------- ---------------
(Unaudited)
--------------
Assets
Current assets:
Cash and cash equivalents ............................................................... $ 10,718 $24,503
Short-term investments .................................................................. 10,656 7,226
Marketable securities ................................................................... 643 1,531
Accounts receivable, net of allowance for doubtful accounts of $2,050 and
$2,646, respectively .................................................................... 6,058 6,012
Prepaid expenses and other current assets ............................................... 6,260 4,497
Restricted cash ......................................................................... 2,308 2,195
-------------- ---------------
Total current assets .......................................................... 36,643 45,964
Investments.............................................................................. 2,244 697
Investments, restricted ................................................................. 4,959 4,733
Property, plant and equipment, net ...................................................... 94,410 162,630
Intangible assets, net of accumulated amortization of $2,835 and $1,997, respectively ... 8,520 8,158
Other assets ............................................................................ 378 100
-------------- ---------------
Total assets .................................................................. $ 147,154 $222,282
============== ===============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of capital lease obligation and mortgage payable ........................ $ 611 $ 1,510
Accounts payable ........................................................................ 4,423 5,846
Accrued liabilities ..................................................................... 10,870 10,159
-------------- ---------------
Total current liabilities ..................................................... 15,904 17,515
Capital lease obligations, net of current portion ....................................... 351 374
Mortgage payable ........................................................................ 19,755 19,912
11% Senior Notes ........................................................................ 65,047 112,321
Accrued interest - 11% Senior Notes ..................................................... 6,587 5,182
Other long term liabilities ............................................................. 10,882 10,659
Put-option liability..................................................................... -- 2,968
-------------- ---------------
Total liabilities.............................................................. 118,526 168,931
-------------- ---------------
Commitments and contingencies (Note 5)
Stockholders' Equity:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000
issued and outstanding, for all periods presented ................................... 165 165
Additional paid-in capital .............................................................. 100,018 97,191
Deferred compensation ................................................................... (23) --
Accumulated other comprehensive income................................................... 5,097 2,401
Accumulated deficit...................................................................... (76,629) (46,406)
-------------- ---------------
Total stockholders' equity..................................................... 28,628 53,351
-------------- ---------------
Total liabilities and stockholders' equity..................................... $147,154 $222,282
============== ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
For the Three Months Ended For the Six Months Ended
------------------------------------ -----------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
---------------- ---------------- ---------------- ---------------
Revenue, net ...................................... $ 15,029 $ 15,368 $ 29,414 $ 31,848
Operating costs and expenses:
Cost of revenue (excluding depreciation,
amortization, certain payroll and occupancy
shown below) ................................ 4,974 5,274 9,850 10,898
Selling, general and administrative ........... 10,740 12,570 21,684 24,461
Loss on impairment of assets .................. 659 -- 17,972 --
Depreciation and amortization .................
3,473 4,116 6,844 7,843
---------------- ---------------- ---------------- ---------------
Total operating costs and
expenses .................................... 19,846 21,960 56,350 43,202
Other operating income ....................... -- 345 -- 345
---------------- ---------------- ---------------- ---------------
Loss from operations .............................. (4,817) (6,247) (26,936) (11,009)
Interest and financing expense ................ (3,058) (3,561) (6,511) (7,465)
Interest income ............................... 137 347 316 735
Other (expense) income, net ................... 899 204 1,196 386
Gain on discharge of debt...................... -- 2,044 1,747 4,771
Minority interest in subsidiary ............... -- 120 -- 228
---------------- ---------------- ---------------- ---------------
Loss before income taxes........................... (6,839) (7,093) (30,188) (12,354)
Income tax expense................................. 35 -- 35 --
---------------- ---------------- ---------------- ---------------
Net loss .......................................... $ (6,874) $ (7,093) $ (30,223) $ (12,354)
================ ================ ================ ===============
Basic and diluted loss per share................... $ (0.42) $ (0.43) $ (1.84) $ (0.75)
================ ================ ================ ===============
Weighted average common shares outstanding--basic
and diluted.................................... 16,460,000 16,460,000 16,460,000 16,460,000
================ ================ ================ ===============
The accompanying notes are an integral part of these condensed consolidated
financial statements.
2
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
For the Six Months Ended
------------------------------------
March 31, March 31, 2003
2004
---------------- ----------------
Cash Flows From Operating Activities
Net Loss ...................................................................... $ (30,223) $ (12,354)
Operating activities:
Depreciation and amortization ................................................ 6,844 7,843
Provision for uncollectible receivables....................................... 438 1,255
Gain on debt discharge........................................................ (1,747) (4,771)
Gain on sale of short-term investments ....................................... -- (181)
Loss on impairment of property held for sale.................................. 17,972 --
Gain on sale of marketable securities......................................... 249 --
Amortization of deferred compensation and issuance of stock warrants.......... 13 1,050
Minority interest in subsidiary............................................... -- (228)
Changes in assets and liabilities:
Decrease (increase) in accounts receivable ................................... 429 (240)
Decrease (increase) in prepaid expenses and other current assets.............. (1,390) 2,900
Increase in other assets...................................................... (279) --
Decrease in accounts payable.................................................. (1,767) (459)
Decrease in accrued liabilities............................................... (160) (5,469)
Decrease in accrued interest.................................................. 5,450 6,158
Other......................................................................... (218) (232)
---------------- ----------------
Net Cash Used in Operating Activities (4,389) (4,728)
---------------- ----------------
Cash Flows From Investing Activities...........................................
Investments in short-term and long-term investments........................... (4,900) (4,410)
Investments in restricted cash and investments................................ (130) (96)
Proceeds from sale of marketable securities .................................. 1,000 --
Proceeds from sale of property plant and equipment............................ 48,694 --
Payment for business acquired from Aptegrity (Appendix A) .................... (2,287) --
Purchase of property, plant and equipment..................................... (1,782) (790)
---------------- ----------------
Net Cash Provided by (Used in) Investing Activities 40,595 (5,296)
---------------- ----------------
Cash Flows From Financing Activities
Proceeds from exercise of warrants............................................ 25 --
Repurchase of 11% Senior Notes................................................ (49,573) (11,943)
Capital contribution (distribution) in minority-owned subsidiary, net......... (202) 5,997
Capital lease termination payment ............................................ (439) --
Repayment of mortgage payable and capital lease obligation.................... (294) (692)
---------------- ----------------
Net Cash Used in Financing Activities (50,483) (6,638)
---------------- ----------------
Effects of Exchange Rates Changes on Cash and Cash Equivalents................. 492 26
---------------- ----------------
Decrease in Cash and Cash Equivalents (13,785) (16,636)
Cash and Cash Equivalent, Beginning of Period 24,503 47,562
---------------- ----------------
Cash and Cash Equivalent, End Period $ 10,718 $ 30,926
================ ================
Supplemental disclosure of cash flow information:
Cash paid for interest......................................................... $ 4,710 $ 1,165
================ ================
Non-cash financing activities:
Capital expenditures included in accounts payable, accrued liabilities and
other long-term liabilities................................................ $ -- $ 191
================ ================
Put-option..................................................................... $ 2,968 $ --
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
GLOBIX CORPORATION AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in Thousands, Except Share and Per Share Data)
(Unaudited)
Appendix A - Payment for business acquired from Aptegrity:
For the Six Months Ended
------------------------------------
March 31, March 31, 2003
2004
---------------- ----------------
Current assets ................................................................ $ (696) $ --
Property, plant and equipment ................................................. (738) --
Current liabilities ........................................................... 347 --
Other intangible assets ....................................................... (1,200) --
---------------- ----------------
$ (2,287) $ --
================ ================
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 1 - GENERAL
Globix Corporation and its subsidiaries ("Globix" or, the "Company") is
a provider of Internet solutions to businesses. The solutions include
secure and fault-tolerant Internet data centers with network services
providing network connectivity to the Internet and Internet-based
managed services and application services, which include co-location,
dedicated hosting, streaming media, and messaging services. The Company
currently offers services from facilities in New York City, New York,
Santa Clara, California, Fairfield, New Jersey, Atlanta, Georgia and
London, England.
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.
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 six-month period ended March 31, 2004 an impairment
charge of $17,972 to write-down the Property to its market value less
cost to sell of approximately $12,000 reflecting a $7,000 termination
payment to a third party investor (the "Investor") in the Property,
approximately $1,800 of property taxes due in connection with the sale
and other related expenses. Also included in the cost to sell were $450
of sale related bonuses to certain of the Company's Executive Officers
and employees, which included a $169 payment to the Chairman of the
Board of Directors for his contributions in connection with the sale.
In connection with the $7,000 termination payment, the Investor agreed
to cancel of the put-option it had with the Company. The put option
gave the Investor the right to require the Company to purchase the
Investor's interest in an LLC under various circumstances for an amount
equal to 25% of the Investor's capital contribution in the LLC.
Accordingly the Company reversed the put-option liability in the amount
of $2,968, which represented the fair value of the put-option, through
its stockholder's equity.
As part of the sale of the Property the Company guaranteed to indemnify
and hold the third party investor harmless from any adverse
consequences, that the Investor may suffer by reason of any
non-compliance by the Company, that directly impaired 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 third party
investor estimated at approximately $10,160. The Company estimated the
fair value of the guaranty as immaterial based on a discounted
cash-flow model.
On March 3, 2004 the Company used approximately $44,000 of the net
proceeds from the sale to repurchase $40,274 in principal amount of its
outstanding 11% Senior Notes Due 2008 at par value plus accrued
interest in the amount of $3,716. The Company intends to use the
remaining balance of the net proceeds from the sale for working capital
purposes.
On October 3, 2003, the Company repurchased in the open market for
$5,583 a portion of its outstanding 11% Senior Notes, which had a
principal value of $7,000 and associated accrued interest of $330. As a
result of the repurchase the Company recorded a gain on discharge of
debt in the amount of $1,747.
5
The Company has historically experienced negative cash flow from
operations and has incurred net losses. The Company's ability to
generate positive cash flow from operations and achieve profitability
is dependent upon its ability to reduce its indebtedness and operating
expenses or increase its revenue base. For the six months ended March
31, 2004, the Company had a net loss of $30,223 and an accumulated
deficit at March 31, 2004 of $76,629. The Company is dependent upon its
cash on hand and cash generated from operations to support its capital
requirements. Although no assurances can be given, the Company's
management believes that actions taken by the Company pursuant to its
Plan of Reorganization (the "Plan") from April 30, 2002, including
company downsizing, headcount reductions and other cost reductions, as
well as cost control measures and the restructuring of its outstanding
debt in connection with the Plan, have positioned the Company to
maintain sufficient cash flows from operations to meet its operating,
capital and debt service requirements for the next 12 months. There can
be no assurance, however, that the Company will be successful in
executing its business plan, achieving profitability, in attracting new
customers, or in maintaining its existing customer base. Moreover,
despite the Company's restructuring, it has continued to experience
significant decreases in revenue and low levels of new customer
additions in the period following its restructuring. In the future, the
Company may make acquisitions or repurchase indebtedness of the
Company, which, in turn, may adversely affect the Company's liquidity.
Approximately 29%, 19% (Unaudited) and 38% of the Company's cost of
revenue for the six and three month periods ended March 31, 2004 and
for the fiscal year ended September 30, 2003, respectively is derived
from services provided by 2 major telecommunication carriers. While the
Company believes that most of these services can be obtained from other
alternative carriers, an interruption in services from one of these
carriers or other suppliers could limit the Company's ability to serve
its customers, which would adversely affect the Company's results of
operations. No single customer comprised more than 10% of the Company's
revenues for any of the periods presented.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The condensed consolidated financial statements of Globix Corporation
and its subsidiaries (the "Company") have been prepared by the Company
according to accounting principles generally accepted in the United
States of America for interim financial information, and the rules and
regulations of the Securities and Exchange Commission for interim
condensed consolidated financial statements. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles in the United States of America for complete
financial statements. In the opinion of management, the unaudited
interim condensed consolidated financial statements furnished herein
include all of the adjustments necessary for a fair presentation of the
Company's financial position at March 31, 2004 and for the three and
six month periods then ended. All such adjustments are of a normal
recurring nature. The condensed consolidated financial statements
should be read in conjunction with the consolidated financial
statements and notes thereto, contained in the 2003 Form 10-K. The
results of operations for the three and six month periods ended March
31, 2004 are not necessarily indicative of the results for the entire
fiscal year ending September 30, 2004.
Management Estimates
The preparation of the Company's financial statements in accordance
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions. Such
estimates and assumptions affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosures of contingent
assets and liabilities.
Significant estimates include estimates of the collectibility of
accounts receivable, the useful lives and ultimate realizability of
property, equipment, intangible assets and deferred tax assets.
Estimates and assumptions are reviewed periodically and the effects of
revisions are reflected in the period that they are determined to be
necessary. Actual results may vary from these estimates under different
assumptions or conditions.
6
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 loss per share if the Company
had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation.
For the Three Months Ended For the Six Months Ended
--------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
-------------- --------------- -------------- ------------
Net loss as reported ............................. $ (6,874) $ (7,093) $ (30,223) $ (12,354)
Add: Stock-based employee compensation expense
included in reported net loss............... (21) -- 13 --
Deduct: Amortization of stock-based employee
compensation expense determined under fair
value based method........................ 127 500 235 500
============== =============== ============== ============
Pro-forma net loss attributed to common
stockholders................................ $ 7,022) $ (7,593) $ (30,445) $ (12,854)
============== =============== ============== ============
Basic and diluted - as reported.................... $ (0.42) $ (0.43) $ (1.84) $ (0.75)
============== =============== ============== ============
Basic and diluted - Pro-forma...................... $ (0.43) $ (0.46) $ (1.85) $ (0.78)
============== =============== ============== ============
Under SFAS No. 123 the fair value of each option grant is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions:
For the Three Months Ended For the Six Months Ended
--------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
-------------- -------------- -------------- ------------
Expected life (in years).......................... 5.0 4.0 5.0 4.0
Risk-free interest rate........................... 3.2% 2.7% 3.2% 2.7%
Volatility........................................ 120% 133% 120% 133%
Dividend yield.................................... 0.0% 0.0% 0.0% 0.0%
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Recent Accounting Pronouncements
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin
(ARB) No. 51", which relates to the identification of, and financial
reporting for, variable-interest entities (VIEs). FIN No. 46 requires
that if an entity is the primary beneficiary of a variable interest
entity, the assets, liabilities and results of operations of the
variable interest entity should be included in the consolidated
financial statements of the entity. The provisions of FIN No. 46 are
effective immediately for all arrangements entered into after January
31, 2003. For those arrangements entered into prior to February 1,
2003, the provisions of FIN No. 46 are required to be adopted at the
beginning of the first interim or annual period beginning after June
15, 2003. In October 2003, FASB Staff Position deferred the effective
date for existing VIE arrangements created before February 1, 2003 to
the first interim or annual reporting period that ends after December
15, 2003. The adoption of this standard did not have a material impact
on the Company's consolidated financial statements.
Reclassification
Certain prior period balances have been reclassified to conform to
current period presentation.
NOTE 3 - SEGMENT INFORMATION
The Company evaluates its results of operations based on one operating
segment in accordance with SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information".
For the Three Months Ended For the Six Months Ended
--------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
-------------- -------------- -------------- ------------
Revenues:.........................................
United States............................... $ 8,625 $ 9,398 $ 17,113 $ 19,979
Europe...................................... 6,404 5,970 12,301 11,869
-------------- --------------- -------------- ------------
Consolidated................................ $ 15,029 $ 15,368 $ 29,414 $ 31,848
============== =============== ============== ============
Operating income (loss):
United States.............................. $ (5,753) $ (7,149) $ (28,639) $ (12,729)
Europe .................................... 936 902 1,703 1,720
-------------- --------------- -------------- ------------
Consolidated............................... $ (4,817) $ (6,247) $ (26,936) $ (11,009)
============== =============== ============== ============
March 31, September 30,
2004 2003
--------------- -----------------
Tangible assets:
United States.............................. $ 98,920 $ 175,864
Europe..................................... 39,714 38,260
--------------- -----------------
Consolidated............................... $ 138,634 $ 214,124
=============== =================
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
Although the Company operates in one operating segment, there are 4
major service lines as follows:
For the Three Months Ended For the Six Months Ended
--------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
-------------- --------------- -------------- ------------
Internet Hosting and Co-Location................... $ 5,793 $ 6,719 $ 11,748 $ 13,716
Managed Services................................... 4,632 3,285 8,804 6,895
Network Services and Internet Access............... 4,508 4,919 8,732 9,769
Hardware and Software Sales, DSL and Other......... 96 445 130 1,468
-------------- --------------- -------------- ------------
Revenue, net ...................................... $ 15,029 $ 15,368 $ 29,414 $ 31,848
============== =============== ============== ============
NOTE 4 - COMPREHENSIVE INCOME
For the Three Months Ended For the Six Months Ended
--------------------------------- ------------------------------
March 31, March 31, March 31, March 31,
2004 2003 2004 2003
-------------- --------------- -------------- ------------
Net loss......................................... $ (6,874) $ (7,093) $ (30,223) $ (12,354)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable
securities available for sale (47) (448) 262 (319)
Foreign currency translation adjustment....... 720 (565) 2,434 261
-------------- --------------- -------------- ------------
Comprehensive loss ............................... $ (6,201) $(8,106) $(27,527) $ (12,412)
============== =============== ============== ============
9
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITED CONSOLIDATED FINANACIAL STATEMENTS
(All Amounts in Thousands, Except Share and Per Share Data)
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
There is a putative class action lawsuit pending in the United States
District Court for the Southern District of New York entitled In re
Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit names
as defendants Globix and our former officers Marc Bell, Peter Herzig
(who remains a director of Globix) and Brian Reach, and asserts claims
under sections 10(b) and 20(a) of the Securities Exchange Act of 1934
and Rule 10b-5 promulgated thereunder on behalf of all persons or
entities who purchased our securities between November 16, 2000 and
December 27, 2001.
A consolidated amended complaint was filed in this lawsuit on June 28,
2002. The Company filed a motion to dismiss the consolidated amended
complaint, but withdrew this motion without prejudice in the course of
settlement discussions with the parties. On March 31, 2004, the parties
entered into an agreement in principle to settle all claims against the
defendants for $3,500, all of which would be covered by insurance. The
proposed settlement is subject to the approval of the court. If the
settlement is not approved by the court, the Company intend to re-file
our motion to dismiss. We believe that the allegations in this lawsuit
are without merit and we intend to vigorously defend against them.
Although there can be no assurance as to the outcome or effect of this
lawsuit, the Company does not believe, based on currently available
information, that the ultimate liabilities, if any, resulting from this
lawsuit will have a material adverse impact on the Company's business,
financial condition, results of operations or cash flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order
provides that 229,452 shares of our common stock and $1,968 in
aggregate principal amount of the 11% Senior Notes will be held in
escrow pending the outcome of the class action lawsuit. In the event
that any judgment or settlement entered into in connection with the
class action lawsuit requires us to pay an amount in excess of our
liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is
$10,000 or greater) or a portion of (in the event that this excess is
less than $10,000) the shares of our common stock and the 11% Senior
Notes being held in escrow. Based on the settlement discussions and
proposed settlement agreement, the Company does not believe that the
shares of common stock and 11% Senior Notes that are being held in
escrow are likely to be distributed to the class action litigants and
their attorneys.
From time to time, the Company is involved in legal proceedings in the
ordinary course of our business operations. Although there can be no
assurance as to the outcome or effect of any legal proceedings to which
the Company is a party, the Company does not believe, based on
currently available information, that the ultimate liabilities, if any,
arising from any such legal proceedings would have a material adverse
impact on our business, financial condition, results of operations or
cash flows. Except for the information described above, there have been
no developments since the prior descriptions in Note 18 to the
Consolidated Financial Statements in the 2003 Form 10-K, and the "Legal
Proceedings" section thereto.
10
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Statement Regarding Forward-Looking Statements
Certain statements in this Form 10-Q, under the captions "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Quantitative and Qualitative Disclosures about Market Risk," and "Legal
Proceedings," constitute forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. Such forward-looking
statements involve unknown and uncertain risks, uncertainties and other factors,
which may cause the actual results, performance or achievements of the Company,
or industry results, to be materially different from any future results,
performance, or achievements expressed or implied by such forward-looking
statements. Forward-looking statements are identified by the use of forward
looking words or phrases such as "anticipates," "intends," "expects,"
"believes," "estimates," or words or phrases of similar import. These
forward-looking statements are subject to numerous assumptions, risks, and
uncertainties and the statements looking forward beyond 2004 are subject to
greater uncertainty because of the increased likelihood of changes in underlying
factors and assumptions. Actual results could differ materially from those
anticipated by the forward-looking statements. Among these factors are the
Company's high degree of leverage and history of operating losses, its ability
to retain existing customers and attract new customers, its ability to achieve
cost-savings and generate positive cash flow, risks associated with potential
acquisitions and divestitures and other factors affecting the Company's business
generally. Such factors are more fully described herein and in the Company's
Annual Report on Form 10-K for the year ended September 30, 2003, which should
be considered in connection with a review of this report. For a general
discussion of risks affecting the Company's business, see "Risk Factors" in the
Company's Annual Report on Form 10-K for the year ended September 30, 2003.
Overview
Globix Corporation is a provider of Internet services for small to large size
business in a broad range of industries. Our Company was founded in 1989 and in
1998 undertook a major expansion plan in order to pursue opportunities resulting
from the growth of the Internet. On March 1, 2002, the Company filed a voluntary
petition under Chapter 11 of the U.S. Bankruptcy Code, together with a
prepackaged Plan of Reorganization, which we refer to as the "Plan," with the
United States Bankruptcy Court for the District of Delaware. We continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay our employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed
the Plan. Effective April 25, 2002, all conditions necessary for the Plan to
become effective were satisfied or waived and we emerged from Chapter 11
bankruptcy protection. For additional information about our reorganization, see
"Our Chapter 11 Bankruptcy Reorganization" under Part I in our Annual Report on
Form 10-K for the year ended September 30, 2003.
Although the Company operates in one operating segment, there are 4 major
service lines as follows:
Internet Hosting and Co-Location - We offer co-location solutions for customers
who choose to own and maintain their own servers, but require the physically
secure, climate-controlled environment provided by our Internet data centers and
connectivity to our network. We offer hosting services in a dedicated server
environment. This service includes providing bandwidth and services to meet
customer-specific needs.
Managed Services - We provide managed application, system, network and media
services to our hosting and co-location customers. Such services include a wide
variety of maintenance, administration and problem resolution services for many
popular operating systems, Internet network devices, software security
solutions, web-based applications, as well as streaming media delivered in a
streaming or continuous fashion over the Internet or over a company's intranet.
Network Services and Internet Access - We provide access to our network for our
hosting and co-location customers located inside of our Internet Data Centers as
well as Internet access services, which provide businesses with high-speed
continuous access to the Internet from their own premises. In addition, we
provide other services, such as domain name registration, local loop
provisioning, Internet address assignment, router configuration, e-mail
configuration and management and technical consulting services.
Other- Is comprised of hardware and software sales and other non-recurring
revenue.
For the six-month period ended March 31, 2003 other also includes revenue from
DSL customer accounts, which were sold during the fiscal year 2003.
For a more detailed description of these service lines see "Business" section in
our 2003 Form 10-K.
11
Critical Accounting Policies and Estimates
This Management's Discussion and Analysis of Financial Condition and Results of
Operations is based upon our interim consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of our financial statements
requires us to make estimates that affect the reported amounts of assets,
liabilities, revenue and expenses and related disclosures of contingent assets
and liabilities. We base our accounting estimates on historical experience and
other factors that are believed to be reasonable under the circumstances.
However, actual results may vary from these estimates under different
assumptions or conditions. The following is a summary of our critical accounting
policies and estimates:
Revenue Recognition
Revenue consists primarily of Internet hosting, co-location, managed services,
network services and Internet access.
We recognize revenue in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial
Statements," as amended. SAB No. 101 expresses the view of the Securities and
Exchange Commission's staff in applying accounting principles generally accepted
in the United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 101, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months. Effective
October 1, 2000, we changed our revenue recognition method for set up and
service installation fees upon the adoption of SAB No. 101. Prior to our
adoption of SAB No. 101, we recognized revenue immediately upon completion of
set up or installation. The change in accounting principle resulted in a revenue
deferral and cumulative effect charge totaling $2.3 million, or $0.06 per share,
which was reflected in our consolidated statements of operations for the fiscal
year ended September 30, 2001. Our adoption of SAB No. 101 decreased our net
loss by $0.5 million for the fiscal year ended September 30, 2001. The effect of
our adoption of SAB No. 101 for the fiscal year ended September 30, 2000 was not
material.
Monthly service revenue related primarily to Internet hosting co-location,
network services and Internet access is recognized over the period that services
are provided. Revenue derived from managed services is recognized at the
completion of a project. Projects are generally completed within a month.
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 the Company's
network, leased line and associated costs related to connecting with the
Company's peering partners and costs associated with leased lines connecting the
Company's facilities to its backbone and aggregation points of presence.
Intangible Assets
We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets" 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 No. 142 addresses the
recognition and measurement of goodwill and other intangible assets subsequent
to their acquisition. SFAS No. 142 also addresses the initial recognition and
measurement of intangible assets acquired outside of a business combination
whether acquired individually or with a group of other assets. SFAS No. 142
provides that intangible assets with indefinite lives and goodwill will not be
amortized but will be tested at least annually for impairment. If impairment is
indicated then the asset will be written down to its fair value typically based
upon its future expected discounted cash flows.
12
Intangible assets of the Successor Company are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
We amortize intangible assets by the straight-line method over their estimated
useful lives. Trademarks and trade name are amortized over a period of 7-15
years, network build-out/know-how is amortized over 8 years and the customer
contracts are amortized over 2-3 years.
Estimates
The preparation of financial statements requires us to make estimates and
assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Use of
estimates and assumptions include, but are not limited to, allowance for
doubtful accounts, credit reserve and deferred tax valuation allowance.
Allowance for Doubtful Accounts and Credit Reserve
At each reporting period we evaluate on a specific basis the economic condition
of our customers and their ability and intent to pay their debt. If such
evaluation shows that it is probable that a customer will not settle his full
obligation, a reserve against accounts receivable in general and administrative
expense is recorded for the questionable amount. We also maintain a general bad
debt reserve, which is based on the aging of our customers receivables. In
addition during each reporting period we must make estimates of potential future
credits, which will be issued in respect of current revenues. We analyze
historical credits and changes in customer demands regarding our current
billings when evaluating credit reserves. If such analysis shows that it is
probable that a credit will be issued, we reserve the estimated credit amount
against revenues in the current period. As of March 31, 2004 and September 30,
2003 the balance of bad debt reserve amounted to approximately $2.1 million
(Unaudited) and $2.6 million, respectively.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements we are
required to estimate our income tax expense in each of the jurisdictions in
which we operate. This process involves us estimating our actual current tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as accruals and reserves, for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within our consolidated balance sheet. We must then assess the
likelihood that our deferred tax assets will be recovered from future taxable
income and to the extent we believe that recovery is not likely, we must
establish a valuation allowance. Management currently estimates that it is more
likely than not that these assets will not be realized in the foreseeable future
and accordingly a 100% valuation allowance is recorded against the deferred tax
assets.
Interim Financial Information
The consolidated financial information as of March 31, 2004 and for the three
and six months ended March 31, 2004 and 2003 is unaudited, but includes all
adjustments, consisting only of normal and recurring accruals, that management
considers necessary for a fair presentation of its combined results of
operations, financial position and cash flows. Results for the three and six
months ended March 31, 2004 and 2003 are not necessarily indicative of results
to be expected for the entire fiscal year.
13
Quarter Ended March 31, 2004 Compared To The Quarter Ended March 31, 2003
Revenue, net. Revenue for the quarter ended March 31, 2004 decreased 2.2% or
$339 thousand to $15.0 million from $15.4 million for the three-month period
ended March 31, 2003. Customer churn accounted for $2.0 million of the net
decrease in revenue for the quarter ended March 31, 2004 compared to the quarter
ended March 31, 2003. During the quarter ended March 31, 2004 our monthly churn
rate contribution averaged 1.3% compared to a monthly averaged churn rate of
2.2% for the quarter ended March 31, 2003. Of this average monthly churn rate,
2.1% was related to downgrades and 1.9% was related to cancellations. These were
offset by increases of 1.4% in new contracts and 1.3% in contract upgrades. In
addition to the decrease associated with customer churn, the Company experienced
a $116 thousand decrease in lower margin hardware and software sales to $24
thousand as a result of our shift away from lower margin hardware and software
revenue and a decrease of $263 thousand from DSL services as a result of the
sale of our DSL customer accounts during fiscal 2003. These decreases were
offset by our new revenue stream of $1.2 million resulting from the Aptegrity
acquisition and by approximately $800 thousand of positive effect arising from
foreign exchange rates between the U.S. dollar and the British Pound. We define
churn as contractual revenue losses due to customer cancellations and
downgrades, net of upgrades, and additions of new services. Cancellations refer
to customers that have either stopped using our services completely or remained
a customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price.
By service lines, revenue from Internet Hosting and Co-Location and revenue from
Network Services and Internet Access were down $926 and $411 thousand,
respectively to $5.8 million and $4.5 million, respectively for the three month
period ended March 31, 2004. This decrease is mainly attributed to customer
churn. Revenue from Managed Services increased by $1.3 million to $4.6 million
in the quarter ended March 31, 2004 mainly due to the Aptegrity contribution.
Hardware and software sales, DSL and Other were down by $349 thousand to $96
thousand for the quarter ended March 31, 2004 mainly due to our shift away from
lower margin hardware and software sales and due to the sale of our DSL customer
accounts in fiscal 2003.
Cost of Revenue. Cost of revenue for the quarter ended March 31, 2004, decreased
$300 thousand to $5 million from $5.3 million for the quarter ended March 31,
2003. A decrease of $912 thousand was realized within non-hardware related
costs. This was offset by additional costs of $697 thousand associated with the
business acquired from Aptegrity. This net decrease of approximately $215
thousand, representing 71.6% of the total decrease in cost of revenue, was
primarily attributable to our continued focus on deriving efficiencies and cost
savings from our network. Decrease of $85 thousand, representing 28.4% of the
total decrease in cost of revenue, was attributable to lower hardware costs as a
result of our shift away from lower margin hardware sales. The aforementioned
analysis includes the adverse effect of foreign exchange rate in the amount of
approximately $125 thousand on cost of revenue quarter over quarter. As a result
of the variances described above gross margins increased to 66.9% for the
quarter ended March 31, 2004 compared to 65.7% for the quarter ended March 31,
2003.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $1.8 million to $10.7 million as compared to $12.6 million
for the quarter ended March 31, 2003. The decrease in selling, general and
administrative expenses was mainly due to a decrease of $1.2 million in
professional services quarter over quarter which is attributable to a one time
non-cash charge of $1.1 million in the second quarter of fiscal 2003 related to
warrants granted to one of the Company's consultants. In addition salaries and
benefits decreased $248 thousand to $5.3 million in the quarter ended March 31,
2004 compared to $5.6 million in the quarter ended March 31, 2003, primarily as
a result of our restructuring efforts that focused on significant reduction in
facilities and personnel. Bad debt expenses decreased $393 thousand to $237
thousand for the quarter ended March 31, 2004, compared to $630 thousand in the
same quarter last year, as a result of improvement in collections and a
reduction in the number of high risk customer account receivable balances. The
aforementioned analysis includes the adverse effect of foreign exchange rate in
the amount of approximately $437 thousand on selling, general and administrative
quarter over quarter.
Loss on Impairment of Assets. Impairment charges for the quarter ended March 31,
2004 amounted to $659 thousand as a result of additional costs incurred in
connection with the write-down of the cost basis of the Company's property
located at 415 Greenwich Street in New York, NY ("the Property") to its market
value less cost to sell of approximately $11.5 million. The sale of the Property
was consummated on January 22, 2004 for total cash consideration of $60 million.
Depreciation and Amortization. Depreciation and amortization decreased to $3.5
million for the quarter ended March 31, 2004, as compared to $4.1 million in the
quarter ended March 31, 2003. The decrease resulted from $409 thousand of
depreciation expenses recorded in the three month period ended March 31, 2003
related to the Property which was not depreciated during the same period in 2004
and from lower capital spending, offset by amortization of intangible assets
resulting from the acquisition of Aptegrity in the amount of $80 thousand.
14
Interest and Financing Expenses. Interest and financing expense for the quarter
ended March 31, 2004 was $3.1 million, compared to $3.6 million, for the quarter
ended March 31, 2003. The decrease was attributable to the repurchase of
approximately $16.8 million of our 11% Senior Notes during the calendar year
2003 and by the repurchase of approximately $40.3 million during March 2004,
offset by a an increase in the balance of the 11% Senior Notes of approximately
$11.3 million resulting from a payment in kind of the related accrued interest
as of May, 2003.
Interest Income. Interest income for the quarter ended March 31, 2004 was $137
thousand, compared to $347 thousand, for the quarter ended March 31, 2003. The
decrease was primarily due to a decrease in our cash and investments.
Other Income, net. Other income for the quarter ended March 31, 2004 was $899
thousand, compared to $204 thousand, for the quarter ended March 31, 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 $270
thousand of rental income from leasing office space in our 139 Centre Street
facility.
Income Tax Expense. Income tax expenses for the quarter ended March 31, 2004 in
the amount of $35 thousand represent our estimated income taxes due in the U.K.
We did not record any income tax expense during the same period of 2003.
Net Loss Attributable To Common Stockholders. As a result of the factors
described above, we reported net loss of $6.9 million, or $0.42 basic and
diluted loss per share for the quarter ended March 31, 2004, as compared to a
net loss of $7.1 million, or $0.43 basic and diluted loss per share for the
quarter ended March 31, 2003.
Six Months Ended March 31, 2004 Compared To The Six Months Ended March 31, 2003
Revenue, net. Revenue for the six-month period ended March 31, 2004 decreased
7.6% or $2.4 million to $29.4 million from $31.8 million for the same period in
2003. Customer churn accounted for $4.2 million of the net decrease in revenue
for the six-month period ended March 31, 2004 compared to the six-month period
ended March 31, 2003. During the six-month period ended March 31, 2004 our
monthly positive change in contract (negative churn) averaged 0.6% compared to a
monthly averaged churn rate of 2.2% for the same period in 2003. Of this average
monthly churn rate, 1.9% was related to downgrades and 1.8% was related to
cancellations. These were offset by increases of 2.9% in new contracts, which,
include the one time contribution from the Aptegrity acquisition, and 1.4% in
contract upgrades. In addition to the decrease associated with customer churn,
the Company experienced a $449 thousand decrease in lower margin hardware and
software sales and a decrease of $718 thousand from DSL services as a result of
the sale of our DSL customer accounts during the fiscal year 2003. These were
offset by our new revenue stream of $1.9 million resulting from the Aptegrity
acquisition and by approximately $1.9 million of positive effect arising from
foreign exchange rates between the U.S. dollar and the British Pound.
By service lines revenue from Internet Hosting and Co-Location and revenue from
Network Services and Internet Access were down $2.0 and $1.0 million,
respectively to $11.7 million and $8.7 million, respectively for the six month
period ended March 31, 2004. This decrease was mainly attributed to customer
churn. Revenue from Managed Services increased by $1.9 million to $8.7 million
in the period ended March 31, 2004 mainly due to the Aptegrity contribution.
Hardware and software sales, DSL and Other were down by $1.3 million to $130
thousand for the six month period ended March 31, 2004 mainly due to our shift
away from lower margin hardware and software sales and to the sale of our DSL
customer accounts during 2003.
Cost of Revenue. Cost of revenue for the six-month period ended March 31, 2004,
decreased $1.0 million to $9.9 million from $10.9 million for the same period in
2003. A decrease of $1.8 million was realized within non-hardware related costs.
This was offset by additional costs of $1.2 million associated with the business
acquired from Aptegrity. This net decrease of approximately $600 thousand,
representing 59.4% of the total decrease in cost of revenue was primarily
attributable to our continued focus on deriving efficiencies and cost savings
from our network. Decrease of $419 thousand, representing 40.6% of the total
decrease in cost of revenue, was attributable to lower hardware costs as a
result of our shift away from lower margin hardware sales. The aforementioned
analysis includes the adverse effect of foreign exchange rate in the amount of
approximately $188 thousand on cost of revenue during the six month period ended
March 31, 2004 over the same period in 2004. As a result of the variances
described above gross margins increased to 66.5% for the six-month period ended
March 31, 2004 compared to 65.8% for the same period in 2003.
15
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2.8 million to $21.7 million as compared to $24.5 million
for the six-month period ended March 31, 2003. The decrease in selling, general
and administrative expenses were mainly due to a decrease of $1.2 million in
professional services period over period which was attributable to a one time
non-cash charge of $1.1 million in the second quarter of fiscal 2003 related to
warrants granted to one of the Company's consultants. In addition salaries and
benefits decreased $1.1 million to $10.2 million in the six-month period ended
March 31, 2004 compared to $11.3 million in the same period in 2003, which
resulted from our restructuring efforts that focused on significant reduction in
facilities and personnel. Bad debt expenses decreased $681 thousand to $573
thousand for the six month period ended March 31, 2004, compared to $1.1 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. The
aforementioned analysis includes the adverse effect of foreign exchange rate in
the amount of approximately $739 thousand on selling, general and administrative
during the six month period ended March 31, 2004 over the same period in 2003.
Loss on Impairment of Assets. Impairment charges for the six month period ended
March 31, 2004 amounted to $18 million as a result of the write-down of the cost
basis of the Company's property located at 415 Greenwich Street in New York, NY
("the Property") to its market value less cost to sell of approximately $11.5
million. The sale of the Property was consummated on January 22, 2004 for total
cash consideration of $60 million.
Depreciation and Amortization. Depreciation and amortization decreased to $6.8
million for the six-month period ended March 31, 2004, as compared to $7.8
million in the same period in 2003. The decrease resulted from $844 thousand of
depreciation expenses recorded in the six month period ended March 31, 2003
related to the Property which was not depreciated during the same period in 2004
and from lower capital spending, offset by amortization of intangible assets
resulting from the acquisition of Aptegrity in the amount of $106 thousand.
Interest and Financing Expenses. Interest and financing expense for the
six-month period ended March 31, 2004 was $6.5 million, compared to $7.5 million
for the same period in 2003. The decrease was attributable to the repurchase of
approximately $16.8 million of our 11% Senior Notes during the calendar year
2003 and by the repurchase of approximately $40.3 million of our 11% Senior
Notes during March 2004, offset by an increase in the balance of the 11% Senior
Notes of approximately $11.3 million resulting from the required payment in kind
of the related accrued interest as of May, 2003.
Interest Income. Interest income for the six-month period ended March 31, 2004
was $316 thousand, compared to $735 thousand, for the same period in 2003. The
decrease was primarily due to a decrease in our cash and investments.
Other Income, net. Other income for the six-month period ended March 31, 2004
was $1.2 million, compared to $386 thousand, for the same period in 2003. The
increase was due primarily to the receipt of a $450 thousand for an insurance
claim filed in connection with the September 11, 2001 terrorist attack, and $413
thousand of rental income from leasing office space in our 139 Centre Street
facility.
Income Tax Expense. Income tax expenses for the six month period ended March 31,
2004 in the amount of $35 thousand represent our estimated income taxes due in
the U.K. We did not record any income tax expense during the same period of
2003.
Net Loss Attributable To Common Stockholders. As a result of the factors
described above, we reported net loss of $30.2 million, or $1.84 basic and
diluted loss per share for the six-month period ended March 31, 2004, as
compared to a net loss of $12.4 million, or $0.75 basic and diluted loss per
share for the six-month period ended March 31, 2003.
16
Liquidity and Capital Resources
As of March 31, 2004 the Company had cash and cash equivalents, short-term and
long-term investments totaling to approximately $23.6 million compared to
approximately $32.4 million on September 30, 2003. This decrease of $8.8 million
included a $13.8 million decrease in cash and cash equivalents to $10.7 million
at March 31, 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 six month period ended March 31, 2004,
the Company has completed the sale of the Property for approximately $48.7
million in net proceeds, of which approximately $44 million was used to purchase
a portion of our 11% Senior Notes including accrued interest and the remainder
is expected to be used for working capital.
Operating activities:
Net cash used in operating activities during the six month period ended March
31, 2004 was approximately $4.4 million. This was attributable mainly to the net
loss of $30.2 million and a non-cash gain on debt discharge of $1.7 million
resulting from the repurchase of portion of our 11% Senior Notes, offset by
non-cash depreciation and amortization expenses of $6.8 million and a non-cash
impairment charge of $18.0 million resulting from a write-down of the Property
to its fair market value less cost for sale. Changes in assets and liabilities
resulted in an increase to operating cash flow of approximately $2.1 million.
This was mainly attributed to a $5.5 million increase in accrued interest on the
11% Senior Notes offset by $1.8 million decrease in accounts payable and by $1.4
million increase in prepaid expenses and other current assets.
Investing activities:
Net cash provided by investing activities during the six-month period ended
March 31, 2004 was $40.6 million. Approximately $48.7 million resulted from the
sale of the Property. This was offset by the use of $2.3 million for the
acquisition of Aptegrity, $3.9 million, net for investments and $1.8 million for
capital expenditures.
Financing activities:
Net cash used in financing activities during the six month period ended March
31, 2004 was $50.5 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 as part of an offer
to the holders of the 11% Notes in connection with the sale of the Property. The
remaining $910 thousand was used for payment and settlement of certain
contractual obligations.
We historically have experienced negative cash flows from operations and have
incurred net losses. Our ability to generate positive cash flows from operations
and achieve profitability is dependent upon our ability to grow our revenue and
achieve further operating efficiencies while reducing our outstanding
indebtedness and other fixed obligations. We are dependent upon our cash on hand
and cash generated from operations to support our capital requirements. Our
management believes that we are positioned to maintain sufficient cash flows
from operations to meet our operating, capital and debt service requirements for
at least the next 12 months. There can be no assurance, however, that we will be
successful in executing our business plan, achieving profitability, or in
attracting new customers or maintaining our existing customer base. Moreover, we
have continued to experience significant decreases in revenue and low levels of
new customer additions in the period following our restructuring. In the future,
we may make acquisitions or repurchase indebtedness of our Company, which, in
turn, may adversely affect our liquidity.
17
Item 3. Quantitative and Qualitative Disclosures about Market Risk
At March 31, 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
March 31, 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 March 31, 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 March 31, 2004, $7.3 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 six-month period ended March 31, 2004 were
denominated in British Pounds. To date, we have not utilized financial
instruments to minimize our exposure to foreign currency fluctuations. We will
continue to analyze risk management strategies to minimize foreign currency
exchange risk in the future. The Company believes that an immediate increase or
decrease of 5% of the Dollar in comparison to the British Pound would not have a
material impact on its operating results or cash flows.
We believe that we have limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or related
income would not be significantly impacted by changes in interest rates due
mainly to the short-term nature of the majority of our investment portfolio. An
increase or decrease in interest rates would not significantly increase or
decrease interest expense on debt obligations, due to the fixed nature of the
substantial majority of our debt obligations.
Item 4. Controls and Procedures
Based on their evaluation of the Company's disclosure controls and procedures as
of the end of the period covered by this report, the Chief Executive Officer and
Chief Financial Officer have concluded that such controls and procedures are
effective. There were no changes in the Company's internal control over
financial reporting that occurred during the Company's most recent fiscal
quarter that materially affected, or are reasonably likely to materially affect,
the Company's internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There is a putative class action lawsuit pending in the United States District
Court for the Southern District of New York entitled In re Globix Corp
Securities Litigation, No. 02-CV-00082. This lawsuit names as defendants Globix
and our former officers Marc Bell, Peter Herzig (who remains a director of
Globix) and Brian Reach, and asserts claims under sections 10(b) and 20(a) of
the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on
behalf of all persons or entities who purchased our securities between November
16, 2000 and December 27, 2001.
A consolidated amended complaint was filed in this lawsuit on June 28, 2002. We
filed a motion to dismiss the consolidated amended complaint, but withdrew this
motion without prejudice in the course of settlement discussions with the
parties. On March 31, 2004, the parties entered into an agreement in principle
to settle all claims against the defendants for $3.5 million, all of which would
be covered by insurance. The proposed settlement is subject to the approval of
the court. If the settlement is not approved by the court, we intend to re-file
our motion to dismiss. We believe that the allegations in this lawsuit are
without merit and we intend to vigorously defend against them. Although there
can be no assurance as to the outcome or effect of this lawsuit, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material adverse
impact on our business, financial condition, results of operations or cash
flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968,000 in aggregate principal amount
of the 11% senior notes will be held in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) the shares of our common stock and the 11% senior notes being held in
escrow. Based on the settlement discussions and proposed settlement agreement,
Globix does not believe that the shares of common stock and 11% senior notes
that are being held in escrow are likely to be distributed to the class action
litigants and their attorneys.
From time to time, the Company is involved in legal proceedings in the ordinary
course of our business operations. Although there can be no assurance as to the
outcome or effect of any legal proceedings to which the Company is a party, the
Company does not believe, based on currently available information, that the
ultimate liabilities, if any, arising from any such legal proceedings would have
a material adverse impact on our business, financial condition, results of
operations or cash flows. Except for the information described above, there have
been no developments since the prior descriptions in Note 18 to the Consolidated
Financial Statements in the 2003 Form 10-K, and the "Legal Proceedings" section
thereto.
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity
Securities
Not Applicable.
Item 3. Defaults Upon Senior Securities
Not Applicable.
Item 4. Submission of Matters to a Vote of Security Holders
On February 24, 2004 the Company held its Annual Meeting of Shareholders. The
following is a brief description of those matters voted on at the meeting along
with a statement of votes for, any against or any abstentions with respect to
each matter.
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1. The shareholders elected the following directors to serve until the next
annual meeting of shareholders or until their successors are duly elected
and qualified:
Number of Stock Number of Stock Number of Shares
Voted For Voted Against Abstain
--------------------- -------------------- --------------------
Peter K. Stevenson............... 12,023,680 -- 563,673
Peter S. Brodsky................. 12,023,680 -- 563,673
Peter L. Herzig.................. 10,863,079 -- 1,724,274
Steven Lampe..................... 12,023,680 -- 563,673
Steven G. Singer................. 12,023,680 -- 563,673
Raymond L. Steele................ 11,978,840 -- 608,513
Steven A. Van Dyke............... 11,978,840 -- 608,513
2. The shareholders adopted the Globix Corporation 2003 Stock Option Plan.
Number of Stock Number of Stock Number of Shares
Voted For Voted Against Abstain
--------------------- -------------------- --------------------
8,554,980 956,397 20,000
Item 5. Other Information
Not Applicable.
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Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit Description
- ------- -----------
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
Current Report on Form 8-K, Item 5, filed January 22, 2004
Current Report on Form 8-K, Item 5, filed January 26, 2004
Current Report on Form 8-K, Item 12, filed February 6, 2004
Current Report on Form 8-K, Item 5, filed February 27, 2004
Current Report on Form 8-K, Item 5, filed April 29, 2004
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOBIX CORPORATION
By: /S/ Peter K. Stevenson
-------------------------------------------
Peter K. Stevenson, President, Chief
Executive Officer
Date: May 7, 2004
By: /S/ Robert M. Dennerlein
-------------------------------------------
Robert M. Dennerlein, Chief Financial Officer
(principal financial and accounting officer)
Date: May 7, 2004
22