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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 DECEMBER 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
February 14, 2005 was 16,460,000.
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GLOBIX CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE
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Part I Financial Information
Item 1 Consolidated Balance Sheets -- As of December 31, 2004 and September 30, 2004........................... 1
Interim Consolidated Statements of Operations -- For the Three Months Ended December 31, 2004 and
for the Three Months Ended December 31, 2003 ......................................................... 2
Interim Consolidated Statements of Cash-Flows -- For the Three Months Ended December 31, 2004 and
for the Three Months Ended December 31, 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................... 10
Item 3 Quantitative and Qualitative Disclosures About Market Risk.............................................. 17
Item 4 Controls and Procedures................................................................................. 17
Part II Other Information
Item 1. Legal Proceedings....................................................................................... 18
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities........................ 18
Item 3. Defaults Upon Senior Securities......................................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders..................................................... 18
Item 5. Other Information ...................................................................................... 18
Item 6. Exhibits ............................................................................................... 18
Signatures .............................................................................................................. 19
Certifications .......................................................................................................... 20-23
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
DECEMBER 31, SEPTEMBER 30,
2004 2004
------------- -------------
(Unaudited)
-------------
ASSETS
Current assets:
Cash and cash equivalents ................................................................ $ 9,333 $ 12,075
Short-term investments ................................................................... 7,067 7,625
Marketable securities .................................................................... 709 458
Accounts receivable, net of allowance for doubtful accounts of $2,258 and $2,248,
respectively .......................................................................... 7,580 6,157
Prepaid expenses and other current assets ................................................ 4,960 5,101
Restricted cash .......................................................................... 2,012 2,413
------------- -------------
Total current assets ........................................................... 31,661 33,829
Investments .............................................................................. 1,656 1,988
Investments, restricted .................................................................. 2,509 2,324
Property, plant and equipment, net ....................................................... 91,137 90,822
Intangible assets, net of accumulated amortization of $4,131 and $3,699, respectively .... 7,224 7,656
Other assets.............................................................................. 2,032 1,923
------------- -------------
Total assets ................................................................... $ 136,219 $ 138,542
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation and mortgage payable ......................... $ 579 $ 555
Accounts payable ......................................................................... 5,605 6,599
Accrued liabilities ...................................................................... 8,619 8,357
Deferred revenue ......................................................................... 3,265 2,852
------------- -------------
Total current liabilities ...................................................... 18,068 18,363
Capital lease obligations, net of current portion ........................................ 65 121
Mortgage payable ......................................................................... 19,523 19,606
11% Senior Notes ......................................................................... 72,202 72,202
Accrued interest - 11% Senior Notes ...................................................... 5,351 3,349
Other long term liabilities .............................................................. 8,256 8,026
------------- -------------
Total liabilities .............................................................. 123,465 121,667
------------- -------------
Commitments and contingencies (Note 5)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 500,000,000 shares authorized; 16,460,000
issued and outstanding, for both periods presented .................................... 165 165
Additional paid-in capital ............................................................... 100,037 100,012
Deferred compensation .................................................................... (10) (8)
Accumulated other comprehensive income ................................................... 6,619 4,498
Accumulated deficit ...................................................................... (94,057) (87,792)
------------- -------------
Total stockholders' equity ..................................................... 12,754 16,875
------------- -------------
Total liabilities and stockholders' equity ..................................... $ 136,219 $ 138,542
============= =============
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
-------------------------------
DECEMBER 31, DECEMBER 31,
2004 2003 (*)
------------- -------------
Revenue, net ......................................................... $ 16,530 $ 14,385
Operating costs and expenses:
Cost of revenue (excluding depreciation and amortization) ........ 9,699 8,438
Selling, general and administrative .............................. 7,303 7,382
Loss on impairment of assets ..................................... -- 17,313
Depreciation and amortization .................................... 3,543 3,371
------------- -------------
Total operating costs and expenses ................ 20,545 36,504
Loss from operations ................................................. (4,015) (22,119)
Interest and financing expense ................................... (2,487) (3,453)
Interest income .................................................. 127 179
Other (expense) income, net ...................................... 110 297
Gain on discharge of debt ........................................ -- 1,747
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Net loss ............................................................. $ (6,265) $ (23,349)
============= =============
Basic and diluted loss per share ..................................... $ (0.38) $ (1.42)
============= =============
Weighted average common shares outstanding - basic and diluted ....... 16,460,000 16,460,000
============= =============
(*) Restated - see Note 2 "Reclassifications and Restatement".
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 THREE MONTHS ENDED
-------------------------------
DECEMBER 31, DECEMBER 31,
2004 2003
------------- -------------
Cash Flows From Operating Activities
Net Loss ........................................................................ $ (6,265) $ (23,349)
Operating activities:
Depreciation and amortization ............................................... 3,543 3,371
Provision for uncollectible receivables ..................................... 4 202
Gain on debt discharge ...................................................... -- (1,747)
Loss on impairment of assets ................................................ -- 17,313
Gain on sale of marketable securities ....................................... -- 142
Amortization of deferred compensation ....................................... 23 34
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .................................. (1,161) (486)
Decrease (increase) in prepaid expenses and other current assets ............ 354 (590)
Decrease (increase) in other assets ......................................... (68) (211)
Increase (decrease) in accounts payable ..................................... (1,124) (457)
Increase (decrease) in accrued liabilities .................................. 204 12
Decrease in accrued interest ................................................ 2,002 2,927
Other ....................................................................... (156) (121)
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Net Cash Used in Operating Activities ........................................... (2,644) (2,960)
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Cash Flows From Investing Activities
Proceeds from (investments in) short-term and long-term investments ......... 936 (4,269)
Proceeds from restricted cash and investments ............................... 390 146
Proceeds from sale of marketable securities ................................. -- 570
Payment for business acquired from Aptegrity (Appendix A) ................... -- (2,287)
Deferred acquisition cost ................................................... (42) --
Purchase of property, plant and equipment ................................... (1,606) (438)
------------- -------------
Net Cash Used in Investing Activities ........................................... (322) (6,278)
------------- -------------
Cash Flows From Financing Activities
Repurchase of 11% Senior Notes .............................................. -- (5,583)
Capital contribution (distribution) in minority-owned subsidiary, net ....... -- (202)
Capital lease termination payment ........................................... -- (319)
Repayment of mortgage payable and capital lease obligation .................. (138) (171)
------------- -------------
Net Cash Used in Financing Activities ........................................... (138) (6,275)
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Effect of Exchange Rates Changes on Cash and Cash Equivalents ................... 362 368
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Decrease in Cash and Cash Equivalents ........................................... (2,742) (15,145)
Cash and Cash Equivalents, Beginning of Period .................................. 12,075 24,503
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Cash and Cash Equivalents, End Period ........................................... $ 9,333 $ 9,358
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest ..................................................... $ 484 $ 477
============= =============
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 THREE MONTHS ENDED
-------------------------------
DECEMBER 31, DECEMBER 31,
2004 2003
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Current assets ............................................................... $ -- $ (696)
Property, plant and equipment ................................................ -- (738)
Current liabilities .......................................................... -- 347
Other intangible assets ...................................................... -- (1,200)
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$ -- $ 2,287
============= =============
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 1 - GENERAL
Globix Corporation and its subsidiaries ("Globix", the "Company" or the
"Successor Company") is a provider of Internet solutions to businesses.
The solutions include secure and fault-tolerant Internet data centers
with network services providing network connectivity to the Internet
and Internet-based managed services and application services, which
include co-location, dedicated hosting, streaming media, and messaging
services. The Company currently offers services from facilities in New
York City, New York, Fairfield, New Jersey, Santa Clara, California,
Atlanta, Georgia and London, England.
On July 19, 2004, Globix signed a definitive merger agreement with NEON
Communications, Inc. ("Neon"), a privately held provider of optical
networking services for customers in the Northeast and mid-Atlantic
markets. Neon's revenue for the year ended December 31, 2004 was
approximately $48,057 (Unaudited). Under the merger agreement, holders
of Neon common stock, options and warrants will receive 1.2748 shares
of Globix common stock for each share of common stock, options or
warrants owned by the holder. As a result of the merger, Neon will
become a wholly owned subsidiary of Globix, and holders of Neon common
stock and warrants will receive approximately 27.6 million shares of
Globix common stock, representing approximately 56.7% of the
outstanding shares of common stock of the combined entity. In addition
at the closing, the combined entity's cash will be used to redeem one
third of Neon's preferred stock and accrued dividends at closing and
Globix will issue convertible preferred stock for the balance. Assuming
a February 28, 2005 closing, Neon preferred stockholders will receive
in the aggregate approximately $5,340 in cash and approximately
2,966,800 shares of a class of Globix preferred stock to be created in
the merger, having an aggregate liquidation value of approximately
$10,680. The new Globix preferred stock will vote together with the
common stock and will be convertible into shares of Globix common
stock. The Globix preferred stock will accrue dividends at a rate of 6%
per annum and will be redeemable only at the option of Globix, and at
the option of the holders upon a change in control. Following the
merger, the Board of Globix will include 4 members of the Board of
Directors of Neon, 4 members of the current Globix Board and 1 member
who currently serves on both the Globix and the Neon Boards. The
transaction is subject to a number of conditions, including approval of
the merger by Neon stockholders, the registration of the Globix common
stock and preferred stock to be issued in the merger and other
regulatory approvals. The merger is also conditioned upon a debt for
equity exchange where, in a private transaction, certain of Globix's
senior secured note holders will exchange $12,500 in principal and
accrued interest of its 2008 11% Senior Notes for approximately
4,545,455 shares of Globix common stock.
The Company has historically experienced negative cash flow from
operations and has incurred net losses. For the three-month period
ended December 31, 2004 the Company had a net loss of $6,265 and an
accumulated deficit at December 31, 2004 of $94,057. Our ability to
generate positive cash flows from operations and achieve profitability
is dependant upon our ability to grow our revenue while maintaining our
current cost structure and network efficiencies. Our management
believes that steps taken as part of our restructuring efforts to
reduce facilities and personnel, combined with ongoing efforts to
derive efficiencies from our network, have reduced our expenses to a
level that meets our current revenue rate. The Company believes that
its cash and investments are sufficient to meet its 2005 anticipated
day-to-day operating expenses, commitments, working capital, capital
expenditure and approximately $8,000 of interest payments under its 11%
Senior Notes if its Board of Directors elects to make such payment in
cash and not in kind. However, there can be no assurance that we will
be successful in achieving sufficient profitability, attracting new
customers, maintaining our existing revenue levels or reducing our
outstanding indebtedness. In addition, in the future, the Company may
make acquisitions or repurchase its indebtedness, which, in turn, may
adversely affect the Company's liquidity. In such cases management will
have to take drastic steps to reduce its operating expenses to meet its
then revenue base and liquidity needs. Such steps may include further
reduction of our headcount, consolidation or elimination of facilities,
termination of low margin customers and negotiating with our creditors
to restructure our indebtedness mainly but not limited to our 11%
senior notes.
5
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements of Globix Corporation and its
subsidiaries (the "Company") have been prepared by the Company
according to U.S. generally accepted accounting principles for interim
financial information, and the rules and regulations of the Securities
and Exchange Commission for interim 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 consolidated financial statements
furnished herein include all of the adjustments necessary for a fair
presentation of the Company's financial position at December 31, 2004
and the three month period then ended. All such adjustments are of a
normal recurring nature. The consolidated financial statements should
be read in conjunction with the consolidated financial statements and
notes thereto, contained in the 2004 Form 10-K. The results of
operations for the three-month period ended December 31, 2004 are not
necessarily indicative of the results for the entire fiscal year ending
September 30, 2005.
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 allowance for doubtful
accounts, credit reserve, the useful lives and ultimate realizability
of property, equipment, intangible assets, deferred tax valuation
allowance and payroll and occupancy cost allocations between cost of
revenue and selling, general and administrative expenses. Estimates and
assumptions are reviewed periodically and the effects of revisions are
reflected in the period that they are determined to be necessary.
Actual results may vary from these estimates under different
assumptions or conditions.
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based
Compensation", which establishes a fair value based method of
accounting for stock-based compensation plans, the Company has elected
to follow Accounting Principles Board Opinion No. 25 "Accounting for
Stock Issued to Employees" for recognizing stock-based compensation
expense for financial statement purposes. For companies that choose to
continue applying the intrinsic value method, SFAS No. 123 mandates
certain pro forma disclosures as if the fair value method had been
utilized. The Company accounts for stock based compensation to
consultants in accordance with EITF 96-18, "Accounting for Equity
Instruments That Are Issued to Other Than Employees for Acquiring, or
in Conjunction with Selling, Goods or Services" and SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - an amendment of
FASB Statement No. 123", which provides optional transition guidance
for those companies electing to voluntarily adopt the accounting
provisions of SFAS No. 123. In addition, SFAS No. 148 mandates certain
new disclosures that are incremental to those required by SFAS No. 123.
The Company continued to account for stock-based compensation in
accordance with APB No. 25.
The following table illustrates the effect on loss attributable to
common stockholders and loss per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation.
6
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
For the Three Months Ended
--------------------------------
December 31, December 31,
2004 2003
-------------- -------------
Net loss, as reported attributable to common
stockholders ........................................... $ (6,265) $ (23,349)
Add: Stock-based employee compensation expense
included in reported net loss ....................... 23 34
Deduct: Amortization of stock-based employee
compensation expense determined under fair
value based method ............................... (141) (108)
-------------- -------------
Pro-forma net loss attributed to common
stockholders ........................................... $ (6,383) $ (23,423)
============== =============
Earning (loss) per share attributable
to common stockholders
Basic and diluted - as reported .......................... $ (0.38) $ (1.42)
============== =============
Basic and diluted - Pro-forma ............................ $ (0.39) $ (1.42)
============== =============
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
--------------------------------
December 31, December 31,
2004 2003
-------------- -------------
Expected life (in years) .................................. -- 4.2
Risk-free interest rate.................................... -- 2.7%
Volatility................................................. -- 128%
Dividend yield............................................. -- 0.0%
The Company did not grant any new options during the three-month period
ended December 31, 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board issued
No. SFAS 123 (revised 2004), "Share-Based Payment", which is a revision
of SFAS 123. SFAS 123(R) supersedes APB 25, Accounting for Stock Issued
to Employees, and amends SFAS 95, Statement of Cash Flows. Generally,
the approach in SFAS 123(R) is similar to the approach described in
SFAS 123. However, SFAS 123(R) requires all share-based payments to
employees, including grants of employee stock options, to be recognized
in the income statement based on their fair values. This revised
standard will be effective for our reporting period beginning July 1,
2005.
As permitted by SFAS 123, the Company currently accounts for
share-based payments to employees using APB 25 intrinsic value method
and, as such, generally recognizes no compensation cost for employee
stock options. Accordingly, the adoption of SFAS 123(R)'s fair value
method will have an impact on our result of operations, although it
will have no impact on our overall financial position. The impact of
the modified prospective adoption of SFAS 123(R) cannot be predicted at
this time because it will depend on levels of share-based payments
granted in the future. However, had we adopted SFAS 123(R) in prior
periods, the impact of that standard would have approximated the impact
of SFAS 123 as described in the disclosure of pro forma net income and
earnings per share as shown in the table above.
7
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED FINANACIAL STATEMENTS
(ALL AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECLASSIFICATIONS AND RESTATEMENT
Certain prior period balances have been reclassified to conform to
current period presentation.
The Company restated its previous presentation of cost of revenue and
selling, general and administrative costs for fiscal years 2004 and
2003. The effect of the restatement on the Company's consolidated
statement of operations is as follows:
Three Months Ended
December 31, 2003
-------------------------------
Previously
Restated Reported
------------- -------------
Cost of Revenue .................................. $ 8,438 $ 4,876
Selling, general and administrative .............. 7,382 10,944
Total operating costs and expenses ............... 36,504 36,504
Loss from operations ............................. 22,119 22,119
Net loss ......................................... 23,349 23,349
Basic and diluted loss per share ................. $ 1.42 $ 1.42
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
-------------------------------
December 31, December 31,
2004 2003
------------- -------------
Revenues:
United States .............................. $ 8,882 $ 8,488
Europe .................................... 7,648 5,897
------------- -------------
Consolidated .............................. $ 16,530 $ 14,385
============= =============
Operating income (loss):
United States .............................. $ (4,864) $ (22,991)
Europe .................................... 849 872
------------- -------------
Consolidated .............................. $ (4,015) $ (22,119)
============= =============
December 31, September 30,
2004 2004
------------- -------------
Tangible assets:
United States .............................. $ 63,633 $ 64,978
Europe .................................... 27,504 25,844
------------- -------------
Consolidated .............................. $ 91,137 $ 90,822
============= =============
8
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO INTERIM UNAUDITEDCONSOLIDATED 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
-------------------------------
December 31, December 31,
2004 2003
------------- -------------
Internet Hosting and Co-Location ................. $ 6,070 $ 5,955
Managed Services ................................. 5,425 4,172
Network Services and Internet Access ............. 3,978 4,224
Hardware and Software Sales and Other ............ 1,057 34
------------- -------------
Revenue, net ..................................... $ 16,530 $ 14,385
============= =============
NOTE 4 - COMPREHENSIVE INCOME
For the Three Months Ended
-------------------------------
December 31, December 31,
2004 2003
------------- -------------
Net loss ......................................... $ (6,265) $ (23,349)
Other comprehensive loss:
Unrealized gain on marketable securities
available for sale ......................... 242 309
Foreign currency translation adjustment ...... 1,879 1,714
------------- -------------
Comprehensive loss ............................... $ (4,144) $ (21,326)
============= =============
NOTE 5 - COMMITMENTS AND CONTINGENT LIABILITIES
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.
On November 12, 2003, we were served with a complaint filed in the
United States Court for Southern District of New York, entitled Alfred
G. Binford v. Globix Corporation, alleging breach of contract claims
related to the failure to make payments under an employment letter, as
amended, seeking damages in the amount of $2,113. A trial date has been
confirmed by the Court for February 28, 2005.Although there can be no
assurance as to the outcome or effect of this lawsuit, we do not
believe, based on currently available information, that the ultimate
liabilities, if any, resulting from this lawsuit will have a material
adverse impact on our business, financial condition, results of
operations or cash flows. Globix has accrued its estimated liability.
Other than described above, there have been no developments since the
prior descriptions in Note 19 to the Consolidated Financial Statements
in the 2004 Form 10-K, and the "Legal Proceedings" section thereto.
9
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 fiscal 2005 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, 2004, 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, 2004.
OVERVIEW
Globix is a provider of Internet services for small to large size businesses in
a broad range of industries. Our company was founded in 1989 and in 1998
undertook a major expansion plan in order to pursue opportunities resulting from
the growth of the Internet. On March 1, 2002, Globix filed a voluntary petition
under Chapter 11 of the United States Bankruptcy Code, together with a
prepackaged plan of reorganization, with the United States Bankruptcy Court for
the District of Delaware. We continued to operate in Chapter 11 in the ordinary
course of business and received permission from the bankruptcy court to pay our
employees, trade, and certain other creditors in full and on time, regardless of
whether these claims arose prior to or after the Chapter 11 filing. On April 8,
2002, the bankruptcy court confirmed the plan of reorganization. Effective April
25, 2002, all conditions necessary for the plan of reorganization to become
effective were satisfied or waived and we emerged from Chapter 11 bankruptcy
protection. For additional information about our reorganization, see "Our
Chapter 11 Bankruptcy Reorganization" under Part I in our Annual Report on Form
10-K for the year ended September 30, 2004.
Since Globix emerged from bankruptcy reorganization in April 2002, its
management has actively reviewed various strategies for increasing stockholder
value. A key objective has been to redress the imbalance between revenues and
costs that has historically been a feature of Globix's business, by increasing
the revenue base and by cutting costs. A second objective has been to reduce
leverage by buying back or paying off higher cost indebtedness.
Globix has attempted to address customer churn, industry-wide price competition
and price decreases in its traditional offerings of hosting and network services
by broadening the range of services it offers through the addition of value
added services as part of its managed services business. By focusing on
providing value added services Globix believes it will be able to increase its
monthly recurring revenue per customer or average revenue per unit (ARPU). We
calculate ARPU by dividing our average contracted monthly recurring revenue for
the period by our average number of contracted customers during the period.
During the three-month period ended December 31, 2004 our total number of
customers remained stable, while our ARPU increased to approximately $3.6
thousand as of December 31, 2004 compared to approximately $3.4 thousand as of
September 30, 2004. Our monthly positive change in contract rate (negative
churn) averaged 1.2% during the three month period ended December 31, 2004
compared to a monthly average negative churn rate of 0.3% in the fiscal year
ended September 30, 2004. These improvements in ARPU and Churn reflect the
continuation during fiscal 2005 of the business trends we experienced in fiscal
2004. We define churn as contractual revenue losses as a percentage of total
contractual revenue due to customer cancellations and downgrades, net of
upgrades, and additions of new services.
10
Growth through acquisition offers the possibility of revenue growth and the
expansion of service offerings, to enable Globix to offer a broader range of
services to compete more effectively, while providing a larger revenue base to
support Globix's existing indebtedness. The ability to achieve operating
efficiencies by combining administrative or other functions has also been a
consideration in reviewing possible acquisitions. In addition, market conditions
have made it possible to acquire related businesses at what are perceived to be
relatively low prices. In pursuing its acquisition strategy, Globix has reviewed
potential transactions involving smaller companies, like Aptegrity, Inc., whose
acquisition gradually expands the range of services that Globix provides, as
well as larger companies, such as NEON, that could significantly increase the
size of Globix' business and enhance its ability to compete against much larger
competitors.
In order to increase its operating flexibility and address concerns about its
long term financial viability, Globix has also attempted to decrease its
indebtedness through the repurchase of its 11% senior notes and the repurchase
or early payment of other financial obligations.
Although the Company operates in one operating segment, there are 4 major
service lines as follows:
INTERNET HOSTING AND CO-LOCATION - We offer co-location solutions for customers
who choose to own and maintain their own servers, but require the physically
secure, climate-controlled environment provided by our Internet data centers and
connectivity to our network. We offer hosting services in a dedicated server
environment. This service includes providing hardware usage, bandwidth and
managed services to meet customer-specific needs.
MANAGED SERVICES - We provide managed application, system, network and media
services to our hosting and co-location customers. Such services include a wide
variety of maintenance, administration and problem resolution services for many
popular operating systems, Internet network devices, software security
solutions, web-based applications, as well as streaming media delivered in a
streaming or continuous fashion over the Internet or over a company's intranet.
NETWORK SERVICES AND INTERNET ACCESS - We provide access to our network for our
hosting and co-location customers located inside of our Internet data centers as
well as Internet access services which provide businesses with high-speed
continuous access to the Internet from their own premises. In addition, we
provide other services, such as domain name registration, local loop
provisioning, Internet address assignment, router configuration, e-mail
configuration and management and technical consulting services.
OTHER - Is comprised of hardware and software sales and other non-recurring
revenue.
For a more detailed description of these service lines see "Business" section in
our 2004 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 ("SAB"), No. 104 "Revenue Recognition" which revises
and rescinds certain sections of SAB No. 101, "Revenue Recognition". The changes
noted in SAB 104 did not have a material effect on Globix's consolidated
financial statements. Globix recognizes revenue when delivery has occurred,
persuasive evidence of an agreement exists, the fee is fixed or determinable and
collectability is probable. SAB No. 104 expresses the view of the Securities and
Exchange Commission's staff in applying accounting principles generally accepted
in the United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 104, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months. Monthly service
revenue under recurring agreements related to Internet hosting, co-location,
network services, Internet access and managed services is recognized over the
period that service is provided. Revenue derived from project or event type
managed service engagements is recognized over the life of the engagement.
Payments received in advance of providing services are deferred until the period
that these services are provided.
COST OF REVENUE
Cost of revenue consists primarily of telecommunications costs for Internet
access and managed hosting, payroll and occupancy which we incur in support of
our network operations, systems and customer services and the cost of hardware
and software purchased for resale to customers. Payroll costs allocated to cost
of revenue are based on the primary activity of the department such as
maintaining the network, customer support and systems operations. Occupancy
costs allocated to cost of revenue are based primarily on the square footage of
our various facilities. Cost of revenue excludes depreciation and amortization.
Telecommunications costs include the cost of providing local loop for connecting
dedicated access customers to Globix's network, leased line and associated costs
related to connecting with Globix's peering partners and costs associated with
leased lines connecting Globix's facilities to its backbone and aggregation
points of presence.
INTANGIBLE ASSETS
We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and
Other Intangible Assets" when we emerged from bankruptcy in April 2002. SFAS 141
requires all business combinations to be accounted for using the purchase method
of accounting and that certain intangible assets acquired in a business
combination must be recognized as assets separate from goodwill. SFAS No. 142
addresses the recognition and measurement of goodwill and other intangible
assets subsequent to their acquisition. SFAS No. 142 also addresses the initial
recognition and measurement of intangible assets acquired outside of a business
combination whether acquired individually or with a group of other assets. SFAS
No. 142 provides that intangible assets with indefinite lives and goodwill will
not be amortized but, will be tested at least annually for impairment. If an
impairment is indicated then the asset will be written down to its fair value
typically based upon its future expected discounted cash flows.
Our intangible assets are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
12
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 in accordance with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions that affect the reported amount of assets, liabilities, revenue
and expenses and related disclosure of contingent assets and liabilities. Use of
estimates and assumptions include, but is not limited to, allowance for doubtful
accounts, credit reserve, the useful lives and ultimate realizability of
property, equipment, intangible assets, deferred tax valuation allowance and
payroll and occupancy cost allocation between cost of revenue and selling,
general and administrative expenses. 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.
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 December 31, 2004 and September
30, 2004 the balance of bad debt reserve amounted to approximately $2.3 million
and $2.2 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.
RESTATEMENT
The Company restated its previous presentation of cost of revenue and selling,
general and administrative costs for fiscal years 2004 and 2003 by allocating
certain payroll and occupancy expenses previously included under selling general
and administrative expenses to cost of revenue. See Note 3 to the financial
statements of Globix.
13
QUARTER ENDED DECEMBER 31, 2004 COMPARED TO THE QUARTER ENDED DECEMBER 31, 2003
REVENUE, NET. Revenue for the three-month period ended December 31, 2004
increased 14.9% or approximately $2.1 million to $16.5 million from $14.4
million for the three-month period ended December 31, 2003.
During the quarter ended December 31, 2004 our monthly positive change in
contract rate (negative churn) averaged 1.2% compared to a monthly average
positive change in contract rate of 2.6% in the quarter ended December 31, 2003.
This decrease resulted from the favorable impact of the Aptegrity acquisition on
our October 2003 churn. During the quarter ended December 31, 2004, new
contracts averaged 0.9% per month and contract upgrades averaged 2.3% per month,
offset by a 1.1% monthly average in contract downgrades and a 0.9% average in
contract cancellations per month. We define churn as contractual revenue losses
as a percentage of total contractual revenue due to customer cancellations and
downgrades, net of upgrades, and additions of new services. Cancellations refer
to customers that have either stopped using our services completely or remained
a customer but terminated a particular service. Downgrades are a result of
customers taking less of a particular service or renewing their contract for
identical services at a lower price.
During the quarter ended December 31, 2004, our monthly recurring revenue per
customer (ARPU) averaged approximately $3.5 thousand compared to an average ARPU
of approximately $3.1 thousand in the quarter ended December 31, 2003, despite a
decrease of approximately 82 customers or 6% from 1,446 customers in December
31, 2003 to 1,364 at December 31, 2004. This is due mainly to our focus on
higher-revenue managed services customers following the acquisition of
Aptegrity. We calculate ARPU by dividing our average contracted monthly
recurring revenue for the period by our average number of contracted customers
during the period.
Revenue breakdown for our four major service lines of Internet Hosting and
Co-Location, Managed Services, Network Services and Internet Access, and
Hardware and Software Sales and Other is as follows. Revenue from Internet
Hosting and Co-Location increased by $115 thousand or 2% to $6.1 million in the
quarter ended December 31, 2004 compared to $6.0 million in the same period in
fiscal year 2004. Revenue from Network Services and Internet Access decreased by
$245 thousand or 5% to $4.0 million in first fiscal quarter of 2005 compared to
$4.2 million in the first fiscal quarter of 2004. The changes in these two major
service lines are mainly due to churn. Revenue from Hardware and Software Sales
and Other increased by $1.0 million to $1.1 million in the three-month period
ended December 31, 2004 compared to $34 in the same period in fiscal year 2004,
which resulted primarily from a non-recurring Hardware sale. Revenue from
Managed Services increased by $1.2 million or 29% to $5.4 million in the
three-month period ended December 31, 2004 compared to $4.2million in the same
period in fiscal 2004. This increase is the direct result of the acquisition of
Aptegrity, which was included in our statement of operation from November 1,
2003 and our continued focus on adding value-added services through our Managed
Services line of business. The above analysis includes the positive effect of
foreign exchange rates between the U.S. dollar and the British Pound in the
amount of approximately $550 thousand on our revenue for the quarter ended
December 31, 2004 over the quarter ended December 31, 2003.
COST OF REVENUE. Cost of revenue for the quarter ended December 31, 2004,
increased to $9.7 million from $8.4 million in the quarter ended December 31,
2003. This increase of approximately $1.0 million was directly attributable to
our increase in low margin hardware sales quarter over quarter. In addition
labor costs were up by approximately $220 thousand mainly due to the acquisition
of Aptegrity, which occurred on October 31, 2003 and due to our continued focus
on managed services. In addition, our cost of revenue increased by approximately
$350 thousand during the quarter ended December 31, 2004 compared to the quarter
ended December 31, 2003 due to higher utility costs. These increases were offset
partly by approximately $320 thousand decrease in our network cost resulting
from our continued focus on deriving efficiencies and cost savings from our
network. Our gross margins for the three month period ended December 31, 2004
and 2003 remained stable at 41.3%. Foreign exchange rates between the U.S.
dollar and the British Pound did not have a material effect on the
aforementioned analysis.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses were $7.3 million as compared to $7.4 million for the quarter ended
December 31, 2003. The decrease in selling, general and administrative expenses
was due to a $333 thousand decrease in bad debt expenses to $4 thousand for the
quarter ended December 31, 2004, compared to $337 thousand in the same quarter
last year, as a result of our continuing improvement in collections, reduction
in the number of high risk customer account receivable balances and as a result
of collection of previously written-off balances. This was offset in part due by
a $500 thousand increase in salaries and benefits to $5.4 million in the quarter
ended December 31, 2004 compared to $4.9 million in the quarter ended December
31, 2003, which resulted mainly from higher sales commissions as a result of our
higher revenue. In addition, reduction in our office space used for selling and
administration purposes reduced our occupancy costs by approximately $200
thousand. . The aforementioned analysis includes the adverse effect of foreign
exchange rate in the amount of approximately $300 thousand on selling, general
and administrative for the quarter ended December 31, 2004 over the quarter
ended December 31, 2003.
14
DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses for the
three month period ended December 31, 2004 were $3.5, flat with deprecation and
amortization expenses in the amount of $3.4 during the same period in 2003. This
is mainly due to our low level of capital spending.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the quarter
ended December 31, 2004 were $2.5 million, compared to $3.5 million for the
quarter ended December 31, 2003, as a result of our lower average outstanding
balance of the 11% senior notes during the three month period ended December 31,
2004 compared to the same period in 2003.
INTEREST INCOME. Interest income for the quarter ended December 31, 2004 was
$127 thousand, compared to $179 thousand for the quarter ended December 31,
2003. The decrease was primarily due to a decrease in our cash and investments.
OTHER INCOME, NET. Other income for the quarter ended December 31, 2004 was $110
thousand, compared to $297 thousand for the quarter ended December 31, 2003. The
decrease resulted from a higher level of non-recurring expenses incurred during
the three month period ended December 31, 2004 compared to the same period in
2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors
described above, we reported net loss of $6.3 million, or $0.38 basic and
diluted loss per share for the three month period ended December 31, 2004, as
compared to a net loss of $23.3 million, or $1.42 basic and diluted loss per
share for the same period in 2003.
LIQUIDITY AND CAPITAL RESOURCES
Historically our cost structure exceeded our revenue base mainly due to high
labor costs resulting from higher than necessary head count, significant level
of overhead due to numerous locations and overlapping within our network. This
has led us historically to experience negative cash flows from operations and
incur net losses. Our management believes that steps taken as part of our
restructuring efforts to reduce facilities and personnel, combined with our
ongoing efforts to derive efficiencies from our network have reduced our cash
outflows to a level that meets our current revenue rate. Our ability to generate
positive cash flows from operations and achieve profitability is dependent upon
our ability to grow our revenue while maintaining our current cost structure and
network efficiencies. Management believes that by maintaining a monthly positive
change in contract rate (negative churn), by continuing to focus on providing
managed services solutions and by keeping close control over costs and
expenditures it will be able to meet its revenue and profitability targets.
Additionally, since emerging from bankruptcy our management has taken several
significant steps to reduce our level of outstanding indebtedness and is
committed to further reducing our financial obligations by settling them in
cash, converting into equity instruments, refinancing or any other manner, which
may be beneficial to us. The indenture governing our 11% senior notes permits
interest to be paid in kind in 2005 and 2006 at the discretion of our board of
directors. Although there can be no assurance, Globix management believes that
its board will elect payment of interest in kind in 2005.
As of December 31, 2004 our cash and cash equivalent, short-term and long-term
investments amounted to approximately $18.1 million. In addition during the
three-month period ended December 31, 2004 we used approximately $2.6 million in
operating activities, an improvement of approximately $300 thousand in
comparison to cash used in operations of $2.9 million in the same period in
2003. We believe that the aforementioned cash outflow represents our recurring
cash-flow activities following the complete consummation of our plan of
reorganization and under our current cost structure. We further believe that
this cash and investment balance is sufficient to meet our 2005 anticipated day
to day operating expenses, commitments, working capital, capital expenditures
and interest payment of approximately $8.0 million under our 11% senior notes if
our board does not elect payment of interest in kind.
However, in the longer term there can be no assurance that we will be successful
in achieving sufficient profitability, attracting new customers, maintaining our
existing churn levels or reducing our outstanding indebtedness. In addition, in
the future, we may make acquisitions or repurchase indebtedness of our company,
which, in turn, may adversely affect our liquidity. In such cases management
will have to take drastic steps to reduce it's the Company's operating expenses
to meet its then revenue base and liquidity needs. Such steps may include
further reduction of our headcount, consolidation or elimination of facilities,
termination of low margin customers and negotiating with our creditors to
restructure our indebtedness, mainly but not limited to our 11% senior notes.
15
OPERATING ACTIVITIES:
During the three month period ended December 31, 2004, net cash used in
operating activities was approximately $2.6 million in comparison to $3.0
million, which was used in operating activities during the same period in 2003.
The improvement in our cash-outflow is due mainly to the decrease in our loss
from operations excluding depreciation and amortization and loss on impairment
of assets. As part of our normal course of doing business we experienced changes
in our accounts receivable, accounts payable, accrued liabilities and accrued
interest, which in the aggregate did not have a material effect on our first
quarter of fiscal 2005 operating cash-flow.
INVESTING ACTIVITIES:
Net cash used in investing activities during the three month period ended
December 31, 2004 was $322 thousand. Approximately $1.6 million was used for
capital expenditures, offset by proceeds from certain financial investments we
have liquidated mainly to fund such capital expenditures.
FINANCING ACTIVITIES:
Net cash used in financing activities during the three month period ended
December 31, 2004 was $138 thousand which were used for paying our scheduled
mortgage and capital lease payments.
16
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At December 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
December 31, 2003, the majority of our investments were due to mature within
twelve months and the carrying value of these investments approximated fair
value.
As of December 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 December 31, 2004, $4.5 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. 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.
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
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. We maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed in our report under the Securities Exchange Act of 1934, as
amended, is recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, and that
such information is accumulated and communicated to our management, including
our Chief Executive Officer and Chief Financial Officer, as appropriate, to
allow timely decisions regarding required disclosures. Any controls and
procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives. Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of December 31, 2004. Based upon
that evaluation and subject to the foregoing, our Chief Executive Officer and
Chief Financial Officer concluded that the design and operation of our
disclosure controls and procedures provided reasonable assurance that the
disclosure controls and procedures are effective to accomplish their objectives.
INTERNAL CONTROLS. In February 2005, the Company determined to reclassify
certain payroll and occupancy expense incurred in support of the Company's
network operations, network operations, systems and customer services as cost of
revenue rather than selling, general and administrative expenses for fiscal year
2003 and thereafter, as explained in Note 3 to the financial statements. There
were no other 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.
17
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
>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.
On November 12, 2003, we were served with a complaint filed in the United States
Court for Southern District of New York, entitled Alfred G. Binford v. Globix
Corporation, alleging breach of contract claims related to the failure to make
payments under an employment letter, as amended, seeking damages in the amount
of $2,113,000. A trial date has been confirmed by the Court for February 28,
2005.Although there can be no assurance as to the outcome or effect of this
lawsuit, we do not believe, based on currently available information, that the
ultimate liabilities, if any, resulting from this lawsuit will have a material
adverse impact on our business, financial condition, results of operations or
cash flows. Globix has accrued its estimated liability.
Other than as described above, there have been no developments since the prior
descriptions in Note 18 to the Consolidated Financial Statements in the 2004
Form 10-K, and the "Legal Proceedings" section thereto.
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Not Applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(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
18
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: February 14, 2005
By: /S/ Robert M. Dennerlein
---------------------------------------------
Robert M. Dennerlein, Chief Financial Officer
(principal financial and accounting officer)
Date: February 14, 2005
19