Exhibit 99.1

Telx Holdings, Inc. and Subsidiaries

Condensed Consolidated Financial Statements

June 30, 2015

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Telx Holdings, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

June 30, 2015 and December 31, 2014

(Unaudited)

 

(in thousands, except share and per share data)

 

		June 30,				December 31,
		2015				2014
						Restated
Assets
Cash and cash equivalents		$	9,012			$	11,865
Accounts receivable, net of allowance for doubtful accounts of $561 and $677			17,156				14,709
Current deferred tax assets			1,833				2,219
Prepaid expenses			2,504				2,565
Deferred sales commissions			2,979				2,713
Unbilled revenue			3,818				3,231
Deferred financing costs, net			3,835				3,963
Other current assets			652				863
Total current assets			41,789				42,128
Property and equipment, net			369,426				375,348
Goodwill			339,013				339,013
Trademark			129,941				129,941
Customer relationships, net			128,967				138,408
Other intangible assets, net			5,787				6,032
Deferred financing costs, net			19,296				22,737
Cash - restricted			1,773				1,965
Other assets			9,294				8,617
Total assets		$	1,045,286			$	1,064,189
Liabilities and Stockholders’ Equity
Accounts payable		$	4,779			$	8,472
Accrued power			4,706				4,378
Accrued payroll and bonus			4,735				6,675
Other accrued expenses and other current liabilities			11,520				12,758
Customer security deposits			2,020				1,652
Deferred revenue			4,278				4,268
Current portion of capital leases and other financing obligations			5,340				5,084
Current portion of term loan and other loans payable			22,181				29,174
Total current liabilities			59,559				72,461
Customer security deposits, less current portion			341				729
Deferred rent			103,246				87,328
Deferred revenue, less current portion			6,680				6,325
Deferred tax liabilities			59,128				59,111
Capital leases and other financing obligations, less current portion			44,529				47,334
Term loan and other loans payable, less current portion			733,211				730,013
Total liabilities			1,006,694				1,003,301
Common stock, par value $0.001 per share; 400,000 shares authorized, 300,083 shares issued and outstanding							—
Additional paid-in capital			157,485				157,225
Accumulated deficit			(118,893	)			(96,337	)
Total stockholders’ equity			38,592				60,888
Total liabilities and stockholders’ equity		$	1,045,286			$	1,064,189

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Telx Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Operations

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

(in thousands)

 

		Six Months Ended June 30,
		2015				2014
Revenues
Revenues		$	164,233			$	141,242
Related party revenues			5,301				4,930
Total revenues			169,534				146,172
Expenses
Cost of revenues			116,825				98,956
Sales and marketing			23,822				21,849
General and administrative			19,285				18,697
Transaction costs			932				3,587
Total costs and operating expenses			160,864				143,089
Income from operations			8,670				3,083
Interest and other income			5				5
Interest expense			(29,806	)			(27,793	)
Loss before income taxes			(21,131	)			(24,705	)
Income tax (expense) benefit			(1,425	)			10,821
Net loss		$	(22,556	)		$	(13,884	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Telx Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

Six Months Ended June 30, 2015 and 2014

(Unaudited)

 

(in thousands)

 

		Six Months Ended June 30,
		2015				2014
Cash flows from operating activities
Net loss		$	(22,556	)		$	(13,884	)
Adjustments to reconcile net loss to net cash provided by operating activities
Depreciation and amortization			24,250				18,620
Amortization of intangibles assets			9,686				9,848
Amortization of deferred financing costs			1,912				2,152
Loss on early extinguishment of debt			1,657				1,307
Stock-based compensation			260				304
Provision for bad debts			61				124
Deferred tax expense (benefit)			403				(10,951	)
Noncash interest expense			5,791				3,294
Changes in operating assets and liabilities
Accounts receivable			(2,508	)			(5,848	)
Prepaid expenses and other current assets			(581	)			615
Other assets			(677	)			(1,016	)
Accounts payable			56				2,120
Customer security deposits			(20	)			116
Accrued expenses and other current liabilities			(1,178	)			(1,265	)
Deferred revenue			365				(842	)
Deferred rent			15,918				15,685
Net cash provided by operating activities			32,839				20,379
Cash flows from investing activities
Purchases of property and equipment			(23,749	)			(42,110	)
Change in restricted cash			192				(1	)
Net cash used in investing activities			(23,557	)			(42,111	)
Cash flows from financing activities
Payments of financing costs			—				(21,345	)
Payments on capital lease and other financial obligations			(2,549	)			(2,393	)
Proceeds from term loan and other loans payables			—				713,000
Repayment of term loan and other loans payable			(2,586	)			(527,939	)
Proceeds from revolving credit facility			13,000				19,000
Repayment of revolving credit facility			(20,000	)			(18,000	)
Payment of dividend			—				(148,000	)
Issuance of common shares			—				292
Net cash (used in) provided by financing activities			(12,135	)			14,615
Net decrease in cash and cash equivalents			(2,853	)			(7,117	)
Cash and cash equivalents
Beginning of period			11,865				16,624
End of period		$	9,012			$	9,507
Supplemental disclosures of cash flow information
Interest paid		$	20,378			$	21,175
Income taxes paid		$	155			$	282
Supplemental cash flow information for noncash activities
Purchase of property and equipment included in accounts payable and accrued expenses		$	2,666			$	13,757
Assets acquired through capital leases		$	—			$	4,126

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Telx Holdings, Inc. and Subsidiaries

Condensed Consolidated Statements of Stockholders’ Equity

Six months ended June 30, 2015

(Unaudited)

 

(in thousands, except share data)

 

		Common Stock								Additional				Accumulated
		Shares				Amount				Paid-in Capital				Deficit				Total
Balances at December 31, 2014 Restated			300,083			$	—			$	157,225			$	(96,337	)		$	60,888
Compensation expense for common stock options			—				—				260				—				260
Net loss for the six months ended June 30, 2015			—				—				—				(22,556	)			(22,556	)
Balances at June 30, 2015			300,083			$	—			$	157,485			$	(118,893	)		$	38,592

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

1.	Organization and Nature of Operations

Telx Holdings, Inc. (the “Company”) was incorporated under the laws of the State of Delaware for the initial purpose of acquiring The Telx Group, Inc. In September 2011, the holders of The Telx Group, Inc.’s common stock and Class A Preferred Stock approved and adopted an agreement and plan of merger by and among The Telx Group, Inc., Telx Holdings, Inc. and Telx Merger Sub, Inc., a wholly owned subsidiary of the Company, created specifically for the merger. On September 26, 2011, the wholly owned subsidiary of the Company merged into The Telx Group, Inc. and The Telx Group, Inc. was the surviving entity.

The Company is a leading provider in global interconnection, data center colocation and cloud enablement solutions. The Company operates secure, environmentally controlled facilities in which network providers and other customers place their equipment (Colocation Services) and converge their networks to conduct business with each other (Interconnection Services). As of June 30, 2015, the Company operated leased facilities throughout the United States of America and owned and operated buildings in Atlanta, Georgia and Clifton, New Jersey. The Company’s customers include international and domestic telecommunication companies, internet service providers, enterprises and media companies.

 

2.	Restatement of the Consolidated Financial Statements

As previously disclosed in the consolidated financial statements for the years ended December 31, 2014, 2013 and 2012, the Company has restated its previously issued consolidated financial statements to correct an error in the accounting for a build to suit lease agreement. During 2012, the Company entered into an agreement for the construction and subsequent leasing of a Datacenter in Clifton, New Jersey. As a result of the nature of the Company’s involvement in the project, and certain provisions within the lease, the Company was deemed to be the owner of the construction project and subsequent building through December 31, 2034. The restated amounts as of December 31, 2014 are reflected in these condensed consolidated financial statements.

As a result of this error, the following adjustments have been made to the previously issued consolidated financial statements:

 

		December 31, 2014
Consolidated Balance Sheet		As Previously Reported				Adjustment				As Restated
Property and equipment, net		$	347,198			$	28,150			$	375,348
Total assets			1,036,039				28,150				1,064,189
Deferred rent			91,566				(4,238	)			87,328
Capital leases and other financing obligations, less current portion			11,512				35,822				47,334
Total liabilities			971,717				31,584				1,003,301
Accumulated deficit			(92,903	)			(3,434	)			(96,337	)
Total stockholders’ equity			64,322				(3,434	)			60,888
Total liabilities and stockholders’ equity			1,036,039				28,150				1,064,189

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

3.	Basis of Presentation and Summary of Significant Accounting Policies

These condensed consolidated financial statements reflect the condensed consolidated historical results of operations, financial position and cash flows of the Company in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

The accompanying condensed consolidated financial statements of the Company as of June 30, 2015 and December 31, 2014 (restated) and for the six month periods ended June 30, 2015 and 2014 are unaudited and, in management’s opinion, reflect all adjustments, consisting of normal and recurring adjustments, necessary for a fair statement of the financial position, results of operations and cash flows for the periods presented. These condensed consolidated financial statements should be read in conjunction with the more detailed consolidated financial statements and notes thereto, included in the restated audited consolidated financial statements for the year ended December 31, 2014 issued on July 10, 2015. The year-end condensed balance sheet data was derived from the audited consolidated financial statements, but does not include all disclosures required by GAAP.

The Company has no elements of comprehensive loss other than net loss; therefore comprehensive loss equals net loss for all periods presented.

The following is a summary of significant accounting policies used in the preparation of the accompanying condensed consolidated financial statements.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Significant items subject to such estimates and assumptions include the carrying amount of property and equipment, goodwill and intangible assets, valuation allowances for receivables and deferred income taxes, stock based compensation, and sale leaseback accounting. These estimates and assumptions are based on management’s best estimate and judgment. Management evaluates its estimates and assumptions on an on-going basis using historical experience and other factors, including the current economic environment. The Company believes its estimates and assumptions are reasonable, and adjusts both as facts and circumstances dictate. As future events and their effects cannot be predicted with accuracy, actual results could differ significantly from these estimates. Changes in estimates resulting from changes in the economic environment will be reflected in the condensed consolidated financial statements in future periods.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Cash and Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less from date of purchase to be cash equivalents. Cash equivalents consist of money market instruments, which are classified as Level 1 instruments.

Restricted Cash

Restricted cash represents deposits maintained with financial institutions as a) collateral for open letters of credit issued on behalf of the Company for certain operating leases and b) a mortgage escrow. The availability of the funds in those accounts is subject to restrictions for specific use.

Concentration of Credit Risk

Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents, and accounts receivable. The Company maintains cash and cash equivalents primarily with one financial institution, and such deposits may exceed federal deposit insurance limits.

The Company’s customers are concentrated in the United States of America. The Company performs credit evaluations of its customers and requires collateral from some customers where considered appropriate. Collateral is in the form of customer deposits, payments for services are generally due on the first day of the month to which services relate, and standard customer contracts contain a right to retain customer equipment in case of nonpayment of an accounts receivable balance.

For the periods ended June 30, 2015 and 2014, the top five customers accounted for 19% and 19% of revenues, respectively. The Company has no customers that account for more than 10% of revenues for the six month periods ended June 30, 2015 or 2014.

Accounts Receivable and Allowance for Doubtful Accounts

Receivables are stated net of the allowance for doubtful accounts of $561 and $677 at June 30, 2015 and December 31, 2014, respectively. The Company extends credit to its customers in the normal course of business. The Company maintains an allowance for doubtful accounts to reserve for potentially uncollectible trade receivables. Management analyzes bankruptcy filings, historical bad debts, customer credit-worthiness, and changes in customer payment patterns when evaluating collectability and the adequacy of reserves. Actual results could differ from management estimates. Receivables are written-off against the allowance when determined uncollectible.

Customer Security Deposits

The Company collects security deposits from certain customers based on a credit review of the customer. Security deposits are classified as short term when the underlying customer contract is scheduled to renew within the next twelve months or the customer contract has a month-to-month term.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Property and Equipment

Property and equipment are stated at cost. Depreciation is calculated when the asset is placed in service on the straight-line method over the estimated useful lives of the assets, as shown below. In the case of leasehold improvements, depreciation is calculated on the straight-line method over the shorter of the estimated useful life of the asset or the lease term. Maintenance and repairs are generally expensed as incurred. Gains and losses from sales and retirements of property and equipment are included in the operating results for the period in which they occur.

 

		Estimated Useful Life
Furniture and fixtures			5 years
Leasehold and building improvements			2-40 years
Buildings			25-40 years
Collocation and computer equipment			3-15 years

Capitalized Installation Costs

Capitalized installation costs include material and internal labor directly attributable to facility leasehold improvements and customer installations. These capitalized costs are included in property and equipment on the condensed consolidated balance sheet and amortized over their useful life or the remaining term of the lease, whichever is less.

Impairment of Long-Lived Assets

Long-lived assets such as property and equipment, and purchased intangibles subject to amortization, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset group to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset group exceeds its estimated future cash flows, an impairment charge is recognized in the amount by which the carrying amount of the asset exceeds the fair value of the asset. The Company had no impairments of long-lived assets for the six month periods ended June 30, 2015 or 2014.

Goodwill and Other Intangible Assets

The Company has one reportable operating unit. At June 30, 2015 and December 31, 2014, all goodwill was attributable to the Company’s one reporting unit. Goodwill represents the amount by which the purchase price exceeds the fair value of identifiable tangible and intangible assets acquired and liabilities assumed in an acquisition. The Company accounts for its goodwill and other intangible assets under Accounting Standards Codification (“ASC”) FASB ASC Topic 350-20, Goodwill, Accounting Standard Update (“ASU” 2011-08, Testing Goodwill for Impairment, and FASB ASC Topic 350-30, General Intangibles Other than Goodwill. Goodwill and intangible assets acquired in an acquisition and determined to have an indefinite useful life are not amortized, but instead are tested for impairment at least annually or whenever events or changes in circumstances indicate that the carrying value amount of these assets might not be fully recoverable. The Company elected to perform the two-step goodwill impairment test approach. The first step involves a comparison of the fair value of the reporting unit with its carrying amount. If the carrying amount of the reporting unit exceeds its fair value, the second step is performed. The second step involves a comparison of the implied fair value and carrying value of the reporting

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

unit’s goodwill. To the extent that a reporting unit’s goodwill carrying amount exceeds the implied fair value of its goodwill, an impairment loss is recognized. Trademark and goodwill are the only intangible assets with indefinite lives. Assembled workforce is included in goodwill. The Company completed its annual impairment review as of September 30, 2014 and determined that no impairment charge was required.

Intangible assets with finite useful lives are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Customer relationships are amortized over their useful lives on a basis consistent with the expected cash flows to be generated from the relationships. Other intangibles are amortized on a straight-line basis over their respective useful lives.

Fair Value Measurements

FASB ASC Topic 820 defines fair value and establishes guidelines for measuring fair value and disclosures regarding fair value measurements. The Company follows the guidelines of FASB ASC Topic 820 for all of its financial assets and liabilities that are disclosed at fair value on a recurring basis. FASB ASC Topic 820 establishes a fair value hierarchy based on the input used in valuation techniques. There are three levels to the hierarchy of inputs to fair value as follows:

 

The Company endeavors to utilize the best available information in measuring fair value. Financial instruments are classified in their entirety based on the lowest level of input that is significant to the fair value measurement (Note 4).

Deferred Financing Costs

Deferred financing costs represent the direct costs related primarily to the issuance of the Company’s Term Loan, Revolving Credit Facility and Senior Unsecured Notes (Note 4). Net deferred financing costs were approximately $23,131 and $26,700 as of June 30, 2015 and December 31, 2014, respectively. Costs associated with obtaining financing are deferred and amortized to interest expense using an effective rate method over the term of the related borrowing facility. Unamortized deferred financing costs are written-off when the respective debt is extinguished prior to maturity.

Leases

The Company occupies all but two owned facilities and offices under various leases, which are accounted for as operating leases in accordance with FASB ASC Topic 840, Leases. Lease terms are determined to include renewal periods when the renewals are reasonably assured. The leases

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

include scheduled base rent increases over the term of the leases. The Company recognizes rent expense from operating leases over the lease term on a straight-line basis. Rent expense includes adjustments for rent concessions, escalations and leasehold improvement allowances.

The Company leases certain equipment under capital lease agreements. The assets held under capital leases and the related obligations are recorded at the lesser of the present value of aggregate future minimum lease payments, including estimated bargain purchase options, or the fair value of the assets held under capital lease. The related assets are depreciated over the term of the lease or the estimated useful life in accordance with FASB ASC Topic 840, Leases.

The Company considers the nature of renovations and the Company’s involvement during the construction period of newly leased space to determine if it is considered the owner of the construction project during the construction period. If the company determines that it is the owner of the construction project, it is required to capitalize all construction costs incurred on its consolidated balance sheet along with the corresponding financing liability (“build-to-suit accounting”). Upon completion of the project, the Company assesses whether the circumstances qualify for sales recognition under sale lease-back accounting guidance. If the lease meets the sale-leaseback criteria, the Company will remove the asset and related financial obligation from the balance sheet and treat the building lease as either an operating or capital lease. If upon completion of construction, the project does not meet sale-lease back criteria, the Company will record the building at its fair value and the related financial obligation for accounting purposes.

The Company capitalizes lease origination costs, and amortizes these costs on a straight-line basis over the respective lease terms.

Accounting for Stock-Based Compensation

The Company accounts for stock-based compensation in accordance with FASB ASC Topic 718, Compensation – Stock Compensation, which requires that all stock-based compensation be recognized as an expense in the condensed consolidated financial statements and that such cost be measured as the fair value of the award at the grant date and also requires that any excess tax benefits related to stock-based compensation exercises be reflected as cash flows from financing activities.

The Company recognizes compensation costs on a straight-line basis over the requisite service period for the entire award. The Company uses the Black-Scholes-Merton option-pricing model to determine the fair value of stock-based awards. The determination of the fair value of stock-based awards is based on a number of complex and subjective assumptions. These assumptions include the dividend yield of the underlying security, the expected volatility of the underlying security, a risk-free interest rate, the expected term of the option, and the forfeiture rate for the award class.

The Company engaged a third-party independent valuation specialist to assist in estimating the fair value of the underlying securities for all stock-based awards issued. The Company utilized a consistent methodology for estimating the fair value of the underlying securities for all stock-based awards issued through and outstanding as of June 30, 2015.

In the event of a change of control, all outstanding stock-based awards will be accelerated and become fully vested in accordance with the plan description.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Derivative Financial Instruments

Derivative instruments are recorded in the condensed consolidated balance sheet as either assets or liabilities and measured at fair value. As required by the Credit Agreement (Note 4), the Company entered into certain interest rate hedging agreements to reduce interest rate risks and to manage interest expense. The interest rate differentials to be paid or received under such derivatives and the changes in fair value of the instruments are recognized in interest expense. The principle objectives of the derivative instruments were to minimize the risks and reduce the expenses associated with financing activities. The Company does not enter into derivative instruments for trading purposes.

Advertising Costs

Advertising costs are charged to expense in the period incurred. Advertising costs for the six month periods ended June 30, 2015 and 2014 were $1,175 and $1,312, respectively, and are included in sales and marketing expenses in the condensed consolidated statements of operations.

Income Taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the condensed consolidated statement of operations in the period that includes the enactment date. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amounts expected to be realized. A valuation allowance was established in the third quarter of 2014 and continues to be applied to reduce deferred tax assets to the amounts that are more likely than not to be realized. This allowance accounts for the difference between the effective tax rate and the statutory rate for the six months ended June 30, 2015.

There were no significant changes in estimates that affected the provision for the six months ended June 30, 2015 and 2014, respectively.

The Company accounts for uncertain tax positions in accordance with FASB ASC Topic 740, Income Taxes, which prescribes a recognition threshold and measurement attribute for the financial recognition and measurement of a tax position taken or expected to be taken on a tax return. It requires that the Company determine whether the benefits of its tax positions will more likely than not be sustained upon audit based on the technical merits of its tax position. Guidance is also provided on de-recognition, classification, interest and penalties, accounting in interim periods, and disclosure. The Company recognizes penalties and interest related to uncertain tax positions, if any, as a component of income tax expense. As of June 30, 2015, the Company had no liabilities for uncertain tax positions.

Revenue Recognition

The Company generates recurring revenue from providing colocation and interconnection services. A substantial part of the Company’s revenues are provided from these recurring revenues. The remaining revenues are nonrecurring and are earned by providing installation services and technical support. All revenue is earned in the United States of America.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Colocation services are generally governed by the terms and conditions of a master service agreement (MSA). Customers typically execute a MSA for one to three year terms. The Company bills customers on a monthly basis and recognizes the revenue as those services are performed over the term of the agreement. Revenues from installation services for colocation services are initially deferred and recognized on a straight-line basis over the average life of the customer relationship.

Interconnection services are generally provided on a month-to-month, one year or multi-year term under the MSA for colocation services. Interconnection services include port and cross connect services. Port services are typically sold on a one year or multi-year term and revenue is recognized on a recurring monthly basis similar to colocation services. The Company bills customers on a monthly basis and recognizes the revenue in the period the service is provided. Revenue for cross connect installations is generally recognized in the period the cross connect is installed.

Technical support services are provided on a time and materials basis and are billed and recognized in the period services are provided.

Revenue is recognized only when the service has been provided and when there is persuasive evidence of an arrangement, the fee is fixed or determinable, and collection of the receivable is reasonably assured. The Company regularly assesses collectability of accounts receivable from customers based on a number of factors, including prior history with the customer and the credit status of the customer. If the Company determines that collection of revenue from a customer is not reasonably assured, the Company does not recognize revenue until collection becomes reasonably assured, which is generally upon receipt of cash. Sales tax collected from customers on certain services and products are remitted to the applicable taxing authorities and accounted for on a net basis, with no impact on revenue.

Revenue from customer orders that include specific periodic contractual rate increases is generally recognized on a straight-line basis over the actual contract life.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

4.	Current and Long-Term Debt, Capital Leases, and Other Financing Obligations

Current and long-term debt consists of the following:

 

		June 30, 2015				December 31, 2014 Restated
Term loans (1)		$	630,250			$	632,625
Revolving credit facility (1)			17,000				24,000
Unsecured Senior Note (1)			91,585				85,794
Mortgage (2)			16,557				16,767
Capital leases (4)			10,453				12,688
Other financing obligations (3)			39,416				39,731
			805,261				811,605
Less: Current portion			(27,521	)			(34,258	)
		$	777,740			$	777,347

 

(1)

On September 26, 2011, the Company entered into a credit agreement with Morgan Stanley Senior Funding, Inc. consisting of a $255,000 term loan (the “Term Loan”) and a $50,000 revolving credit facility (collectively, the “Credit Agreement”). On the same date, the Company entered into an Indenture Agreement for 12% Senior Unsecured Notes (the “Notes”) in the aggregate amount of $180,000, with Wilmington Trust National Association.

The Term Loan had a maturity date of September 25, 2017 and required quarterly interest payments at a Eurodollar rate or 1.25%, whichever was higher, plus a 6.5% applicable margin. Principal payments of 0.25% of the original principal amount were due quarterly, with the remaining principal outstanding due at maturity.

The revolving credit facility had a maturity date of September 25, 2016 and required quarterly interest payments at a Eurodollar rate or 1.25%, whichever was higher, plus a 4.5% applicable margin.

The Notes were due at their maturity date of September 25, 2019, with interest payable quarterly at 12%. Interest was to be paid in cash, except that an amount equal to 2% per annum shall be capitalized and added to the principal amount of the Notes rather than paid in cash. The Company had the option to pay the entire amount of such interest due in cash by providing the Trustee notice in writing at least ten (10) business days prior to any interest payment, as defined, that it will pay the entire amount of interest due on such Interest Payment Date in cash.

On February 17, 2012, the Company obtained an additional $75,000 in funding under the Term Loan.

 

14

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

On October 9, 2012, the Company refinanced the $330,000 Term Loan and increased the size of the Term Loan by $35,000. The interest rate was changed to a Eurodollar rate or 1.25%, whichever is higher, plus a 5% applicable margin. The Company also increased the revolving credit facility by $15,000 to $65,000.

On October 10, 2013, the Company amended the terms of the Term Loan lowering the applicable margin to 4%. In addition, the applicable margin on the revolving credit facility was lowered to 4%.The Company also increased the revolving credit facility by $20,000 to $85,000.

On April 9, 2014 the Company entered into a new debt refinancing transaction replacing the September 2011 Credit Agreement, as amended, and the Notes with a $475,000 first lien term loan, a $110,000 revolving credit facility, a $160,000 second lien term loan (collectively, the “New Credit Agreement”), and a $78,000 Unsecured Senior Note. Under ASC 470-50-40 Debt-Modifications and Extinguishment, the Company recorded a loss on the extinguishment of debt of $1,307, consisting of write-offs of deferred financing costs associated with certain lenders leaving the loan syndicate. The loss is included in interest expense on the condensed consolidated statement of operations for the six months ended June 30, 2014.

At June 30, 2015 and December 31, 2014, the Company had $ 3,261 in outstanding letters of credit under the New Credit Agreement relating to certain operating leases, which reduce, on a dollar for dollar basis, the amount of borrowing capacity under the Company’s revolving credit facility.

The first lien term loan is due at the maturity date of April 9, 2020, interest is payable quarterly at a rate of LIBOR with a 1% floor, plus an applicable margin of 3.5% and principal is payable quarterly at 0.25% of the original principal amount. The second lien term loan is due at the maturity date of April 9, 2021. Interest is payable quarterly at a rate of LIBOR with a 1% floor, plus an applicable margin of 6.5% and the principal is due at maturity. The Unsecured Senior Note is due at the maturity date of July 9, 2021. Interest on the Unsecured Senior Note is capitalized at 13.5% and added to the principal balance, which is due at maturity.

The revolving credit facility has a maturity date of April 9, 2020 and requires quarterly interest payments at an adjusted LIBOR with a 1% floor, plus an applicable margin of 3.25%.

The obligations under the New Credit Agreement are collateralized by substantially all of the Company’s assets.

The Term Loan contains restrictive covenants that are triggered if the Company has drawn down more than 30% of the revolving credit facility at the end of the reporting period. The covenants include one financial covenant requiring the Company to maintain a leverage ratio, as defined in the New Credit Agreement. These covenants have not been triggered during any of the periods presented.

 

(2)

On January 25, 2013, the Company entered into a $17,500 Commercial Mortgage Loan (“Mortgage’) with The Provident Bank. The Mortgage has a maturity date of January 1, 2020, an interest rate of 4.25% per annum, and requires monthly payments of principal and interest of $95 until the maturity date, upon which date the entire unpaid amount is due and payable. The Mortgage is collateralized by the Company’s owned building at 100 Delawanna Avenue in Clifton, NJ.

 

15

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

(3)

The Company has a loan payable to Digital-Bryan Street Partnership, L.P. entered into under the provisions of the Third Amendment to the Master Meet-Me-Room agreement (MMR), exercised at the Company’s option under the December 1, 2006 Operating Agreement between the Company and Digital Realty Trust, L.P., the Parent of Digital-Bryan Street Partnership, L.P., for the utilization of $2,400 of MMR Alteration Allowance. The Third Amendment was effective April 1, 2008. The assets purchased under the MMR Alteration Allowance were capitalized and the $2,400 was recognized as a liability, as the Company is obligated to repay this loan to Digital Realty Trust (who made payments to the contractors directly) over the term of the agreement of ten years. The loan carries an interest rate of 10% per annum and requires monthly payments of principal and interest of $32. The outstanding balance on this loan was $912 and $1,052 as of June 30, 2015 and December 31, 2014, respectively.

The Company has a lease for datacenter space in Chicago, Illinois. In connection with this lease, the Company received $1,000 in financing from the landlord for leasehold improvements that is included in other financing obligations in the condensed consolidated balance sheets. The loan carries an interest rate of 11% per annum and requires monthly payments of principal and interest of $14. At June 30, 2015 and December 31, 2014, $609 and $657, respectively, remain outstanding on this obligation.

During 2012, the Company entered into the construction of a datacenter in Clifton, New Jersey. As a result of the nature of the Company’s involvement in the project, and certain provisions within the lease, the Company was deemed to be the owner of the construction project and subsequent building (“build-to-suit accounting”) through December 31, 2034. The deemed loan carries an interest rate of 11%. At June 30, 2015 and December 31, 2014, $35,787 and $35,822, respectively, remain outstanding on this deemed financing obligation.

During 2013, the Company entered into a lease for datacenter space in Seattle, Washington. In connection with this lease, the Company received $2,399 in financing from the landlord for generator and chiller improvements that is included in other financing obligations in the condensed consolidated balance sheet. The loan carries an interest rate of 9% per annum and requires monthly payments of principal and interest of $32. At June 30, 2015 and December 31, 2014, $2,108 and $2,200 respectively remain outstanding on this obligation.

 

(4)	The Company has several capital leases for financed equipment purchases, which are accounted for in accordance with ASC 840-30 Leases – Capital Leases (Note 7).

 

16

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Future Principal Payments

The following table provides the schedule of future principal payments of the Company’s debt obligations by year, excluding capital and built-to-suit lease obligations (Note 7), as of June 30, 2015:

 

Years Ending December 31,
2015 (6 months remaining)		$	19,883
2016			5,824
2017			5,911
2018			5,707
2019			5,674
Thereafter			716,022
		$	759,021

Fair Value of Debt Facilities

The following table provides the estimated fair values of the Company’s Term Loans, Unsecured Senior Note, and other debt as of June 30, 2015 and December 31, 2014:

 

		June 30, 2015				December 31, 2014 Restated
Term loans (Level 1)		$	627,123			$	612,065
Revolving credit facility (Level 1)			17,000				24,000
Unsecured Senior Note (Level 1)			96,851				91,251
Mortgage (Level 2)			15,747				15,891
Capital leases (Level 2)			10,453				12,688
Other financing obligations (Level 2)			39,416				39,731
		$	806,590			$	795,626

 

 

5.	Stockholders’ Equity

Common Stock

As of June 30, 2015, and December 31, 2014, the Company had 300,083 shares of common stock, outstanding, par value $0.001. Each share of common stock is entitled to one vote. For the six months ended June 30, 2015, and 2014, dividends of $0 and $148,000 were declared and paid on the common stock.

 

6.	Related Party Transactions

Management Fees

The Company has management agreements with its owners, ABRY Partners, LLC and Berkshire Partners, LLC (collectively, the “Managers”). The Company engaged the Managers for a term of 10 years, through September 2021, to provide consulting and management advisory services for an annual fee of $1,000, which is included in general and administrative expenses on the condensed consolidated statements of operations.

 

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Datapipe

Datapipe is a vendor of the Company. ABRY has ownership in Datapipe. The Company expensed $37 and $38 for services provided by Datapipe for the six months ended June 30, 2015 and 2014, respectively.

RCN Cable

RNC Cable is a customer of the Company. ABRY has ownership in RNC Cable, who provided revenues to the Company of approximately $76 and $72 for services in the six months ended June 30, 2015 and 2014, respectively.

One Source Networks

One Source Networks is a customer of the Company. ABRY has ownership in One Source Networks, who provided revenues to the Company of approximately $67 and $47 for the six months ended June 30, 2015 and 2014, respectively. The Company had receivables due from One Source Networks of $0 and $1 at June 30, 2015 and December 31, 2014, respectively.

Securus

Securus is a customer of the Company. ABRY has ownership in Securus, who provided revenues to the Company of approximately $659 and $713 for services in the six months ended June 30, 2015 and 2014, respectively. The Company had receivables due from Securus of $114 and $116 at June 30, 2015 and December 31, 2014, respectively.

Lightower Fiber Networks

Lightower Fiber Networks is a customer of the Company. Berkshire and ABRY have ownership in Lightower Fiber Networks and the predecessor companies, who provided revenues to the Company of approximately $4,197 and $3,843 for services in the six months ended June 30, 2015 and 2014, respectively. The Company had $474 and $0 receivables due from Lightower Fiber Networks and the predecessor companies at June 30, 2015, and December 31, 2014, respectively.

Asurion Insurance Services Inc.

Asurion Insurance Services Inc. is a customer of the Company. Berkshire has ownership in Asurion, who provided revenues to the Company of approximately $302 and $291 for services in the six months ended June 30, 2015 and 2014, respectively.

Airband

Airband is a customer of the Company. ABRY has ownership in Airband. The Company had receivables due from Airband of $0 and $23 at June 30, 2015 and December 31, 2014, respectively.

 

18

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

7.	Commitments and Contingencies

Operating Leases, Capital Leases and Build-to-Suit Lease

The Company leases certain operating facilities, offices, and equipment under various lease agreements expiring during the years ending December 2015 through December 2037. Future minimum lease payments under operating leases, capital leases, and a build-to-suit lease that have remaining non-cancelable lease terms at June 30, 2015 are as follows:

 

		Operating				Capital				Build-to-Suit
		Leases				Leases				Lease
Year Ending December 31,
2015 (6 months remaining)			44,661				2,719				2,023
2016			93,579				5,438				4,046
2017			102,086				3,192				4,046
2018			106,798				236				4,100
2019			112,332				—				4,154
Thereafter			1,230,167				—				68,754
Total minimum payments required		$	1,689,623				11,585				87,123
Less: Amount representing interest							(1,132	)			(64,573	)
Present value of net minimum lease payments						$	10,453			$	22,550

In December 2012, the Company entered into a 23 year lease agreement for a 216,000 square foot Datacenter in Clifton New Jersey. The Company incurred construction costs during 2012 related to the construction of this new facility, and therefore was deemed the accounting owner of the construction project. Because of a condemnation clause in the lease which allowed the Company to participate in property appreciation in the event of a condemnation award, we were deemed to have continuing involvement in the building and were considered to be the owner of the facility for accounting purposes. The Company recorded a $29,827 building and deemed financing obligation in 2012 under the build-to-suit accounting model. The deemed financing obligation is included in long term capital leases and other financing obligations in the accompanying condensed consolidated balance sheet.

The operating leases for the Company’s facilities at 60 Hudson Street in New York, New York require the Company to maintain a $1,450 letter of credit, issued for the benefit of 60 Hudson Owner, LLC, the Company’s landlord at 60 Hudson Street. The letter of credit is collateralized by cash deposits of at least the amount of the letter of credit held in a restricted account and is reflected in Cash-restricted on the condensed consolidated balance sheet. An additional outstanding letter of credit for $113 is collateralized by the Company’s revolving line of credit.

The operating lease for the Company’s facilities at 32 Avenue of the Americas requires the Company to maintain a $3,148 letter of credit, issued for the benefit of 32 Sixth Avenue Company, LLC, the Company’s landlord at 32 Avenue of the Americas. $1,648 of this letter of credit is related to the build out of the leased space and is expected to be released upon meeting certain construction milestones. The letter of credit is collateralized by the company’s revolving line of credit.

 

19

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Telx Holdings, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

June 30, 2015

(Unaudited)

 

(in thousands, except share and per share data)

 

Rent expense for the six months ended June 30, 2015 and 2014 was $67,355 and $56,803, respectively. This amount is net of sublease income for the six months ended June 30, 2015 and 2014 of approximately $54 and $53, respectively.

Legal Matters

The Company and its subsidiaries are parties in various lawsuits arising in the ordinary course of business. In the opinion of management, with the advice of its legal counsel, the ultimate disposition of these matters will not have a material adverse effect on the financial position, results of operations or cash flows of the Company.

 

8.	Subsequent Events

On July 13, 2015, the Company signed a definitive agreement under which Digital Realty Trust Inc. will acquire the Company’s equity, including 100% of the voting interest, in an all cash transaction that values the Company at $1.886 billion. The transaction is subject to various closing conditions and is expected to close in 2015.

The Company’s management has performed an evaluation of subsequent events as of August 5, 2015, the date the condensed consolidated financial statements were available to be issued, and noted no other subsequent events or transactions which require recognition or disclosure in the condensed consolidated financial statements.

 

20