AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 12, 2004
Registration No. [___]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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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 NUMBER)
7389
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)
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139 CENTRE STREET
NEW YORK, NEW YORK 10013
(212) 334-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
PETER K. STEVENSON
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GLOBIX CORPORATION
139 CENTRE STREET
NEW YORK, NEW YORK 10013
(212) 334-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
----------------------------
COPIES TO:
BONNIE J. ROE, ESQ. MELINDA BRUNGER, ESQ.
DAY, BERRY & HOWARD LLP ANDREWS KURTH LLP
ONE CANTERBURY GREEN 600 TRAVIS, SUITE 4200
STAMFORD, CT 06901 HOUSTON, TX 77002
TELEPHONE: (203) 977-7300 TELEPHONE: (713) 220-4200
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As
soon as practicable after this Registration Statement becomes effective and all
other conditions to the merger described in the joint proxy statement/prospectus
have been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. |_|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act of 1933 registration statement number of the
earlier effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act of 1933, check the following box and list the
Securities Act of 1933 registration statement number of the earlier effective
registration statement for the same offering. |_|
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE AGGREGATE REGISTRATION
PER SHARE OFFERING PRICE FEE
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Common Stock, $.01 par value(1) 30,906,468 $ 4.29 $132,615,610 $16,802.40(2)
Convertible Preferred Stock, $.01 2,826,297 $ 3.60 $ 10,174,688 $ 1,289.13(4)
par value(3)
TOTAL $18,091.53
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(1) This Registration Statement covers the maximum number of shares of Globix
Corporation ("Globix") common stock, par value $.01 per share, that are
estimated to be issued, directly or indirectly, upon the consummation of
the proposed merger of a new wholly owned subsidiary of Globix with and
into NEON Communications, Inc. ("NEON"), calculated based on the number
of shares of NEON common stock, par value $0.001 per share, issued and
outstanding, including shares underlying all outstanding options and
warrants to purchase NEON common stock that are exercisable as of
September 30, 2004 or that become fully exercisable immediately prior to
the consummation of the merger, calculated as of September 22, 2004
(24,244,170) and an exchange ratio of 1.2748 shares of Globix common
stock for each such share of NEON common stock.
(2) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, because there
is currently no public trading market for NEON common stock, the
registration fee was computed on the basis of the book value of such
securities computed as of October 8, 2004 ($5.47).
(3) This Registration Statement covers the maximum number of shares of Globix
convertible preferred stock that are estimated to be issued upon the
consummation of the proposed merger of a new wholly owned subsidiary of
Globix with and into NEON, calculated based on the product of (a) the
number of shares of NEON 12% Series A Cumulative Convertible Preferred
Stock, par value $0.001 per share, issued and outstanding, after treating
all accrued and unpaid dividends on the NEON convertible preferred stock
immediately prior to the merger as if paid in additional shares of NEON
convertible preferred stock, calculated as of September 30, 2004
(1,356,625) and (b) an exchange ratio of 2.08333 shares of Globix
convertible preferred stock to be created in connection with the merger
for each such share of NEON convertible preferred stock.
(4) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, because there
is currently no public trading market for NEON 12% Series A Cumulative
Convertible Preferred Stock, the registration fee was computed on the
basis of the book value of such securities computed as of October 8,
2004 ($11.25), reduced by the maximum amount of cash ($3.75) to be paid
by the Registrant in exchange for such securities.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY
BE CHANGED. THE REGISTRANT MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND
THE REGISTRANT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE
WHERE THE OFFER OR SALE IS NOT PERMITTED.
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SUBJECT TO COMPLETION, DATED OCTOBER ___, 2004.
[GLOBIX LOGO] [NEON LOGO]
Dear Globix and NEON Stockholders:
After careful consideration, the board of directors of NEON
Communications, Inc. ("NEON") has approved (with one director, Mr. Steven Lampe,
abstaining, and as to the first amendment, with two directors, Messrs. Lampe and
Robert Grubin, abstaining) and the board of directors of Globix Corporation
("Globix") has approved (with one director, Mr. Lampe, abstaining) the merger of
a new wholly owned subsidiary of Globix with and into NEON, resulting in NEON
becoming a wholly owned subsidiary of Globix.
We are pleased to provide to you this joint proxy statement/prospectus
with respect to the proposed merger. A copy of the Agreement and Plan of Merger,
dated as of July 19, 2004, and the First Amendment to Agreement and Plan of
Merger, dated as of October 8, 2004, by and among Globix and NEON are attached
as Appendices A-1 and A-2, respectively, to this joint proxy
statement/prospectus.
If the merger is consummated, each outstanding share of common stock of
NEON would be converted into the right to receive shares of Globix common stock
and each outstanding share of NEON's 12% Series A Cumulative Convertible
Preferred Stock ("NEON convertible preferred stock") would be converted into the
right to receive a combination of cash and shares of a new class of Globix
convertible preferred stock to be created in connection with the merger ("Globix
convertible preferred stock"). Each outstanding Class A warrant, other common
stock warrant and stock option will be converted into or modified to represent
rights to receive Globix securities, and each redeemable preferred stock warrant
will expire, as described below.
In particular, upon completion of the merger:
o each outstanding share of NEON common stock, other than shares
held in treasury or held by Globix, will be converted into,
and will have the right to receive, 1.2748 shares of Globix
common stock;
o all accrued and unpaid dividends on the NEON convertible
preferred stock through the closing date of the merger will be
treated as if paid in shares of NEON convertible preferred
stock based on the liquidation preference of $11.25 per share
of NEON convertible preferred stock and each outstanding share
of NEON convertible preferred stock, other than shares held in
treasury or held by Globix, but including the shares treated
as issued with respect to accrued but unpaid dividends, will
be converted into, and will have the right to receive, $3.75
in cash and 2.08333 shares of Globix convertible preferred
stock with the terms described in the section entitled
"Description of Globix Capital Stock - Description of
Preferred Stock" beginning on page 122 of this joint proxy
statement/prospectus. A copy of the certificate of designation
for the Globix convertible preferred stock is included as an
exhibit to the first amendment to the merger agreement which
is attached as Appendix A-2 to this joint proxy
statement/prospectus;
o each outstanding Class A warrant of NEON will be exercised or
will be converted into, and will have the right to receive,
1.2748 shares of Globix common stock;
o each outstanding redeemable preferred stock warrant of NEON
will expire at the effective time of the merger and the
holders of the expired warrants will not have any rights to
receive payments with respect to those warrants;
o each outstanding NEON warrant, other than the Class A warrants
and the redeemable preferred stock warrants, will be converted
into, and will have the right to receive, a Globix warrant
with substantially the terms described in the section entitled
"Description of Globix Capital Stock - Description of Globix
Warrants" beginning on page 124 of this joint proxy
statement/prospectus, representing the right to acquire a
number of shares of Globix common stock that equals the number
of shares of NEON common stock for which such warrant was
exercisable multiplied by 1.2748, and the exercise price per
share of Globix common stock will be equal to the exercise
price per share of NEON common stock subject to the warrant
divided by 1.2748; and
o each option to acquire NEON common stock that was granted
under NEON's stock plans or otherwise granted by NEON and that
is outstanding and unexercised immediately prior to the
effective time of the merger will be modified and become an
option to purchase Globix common stock and the number of
shares of Globix common stock subject to the modified option
will be equal to the number of shares of NEON common stock
subject to the NEON stock option, assuming full vesting,
multiplied by 1.2748, and the exercise price per share of
Globix common stock will be equal to the exercise price per
share of NEON common stock subject to the NEON stock option
divided by 1.2748.
Globix common stock is traded on the OTC Bulletin Board under the
symbol "GBXX.OB." The closing price for Globix common stock reported on the OTC
Bulletin Board on September 30, 2004 was $3.20 per share. Application has been
made to list Globix common stock on the American Stock Exchange.
Following the merger, based on 16,460,000 outstanding shares of Globix
common stock as of August 1, 2004 and an additional 4,545,455 shares of Globix
common stock that Globix intends to issue in a debt-for-equity exchange that is
a condition to the merger and is described herein, NEON common stockholders
would beneficially own approximately 56.7% of the outstanding shares of common
stock of the combined company (ignoring current cross ownership between the
holders of Globix and NEON common stock, as further described in the section
entitled "The Merger - Interests of Certain Persons in the Merger" beginning on
page 65 of this joint proxy statement/prospectus) and current Globix common
stockholders would beneficially own approximately 81.8% of the outstanding
shares of common stock of the combined company (due to current cross ownership).
The foregoing ownership percentages do not include the shares of NEON
convertible preferred stock that are beneficially owned by certain common
stockholders of NEON and that will be exchanged for Globix convertible preferred
stock in the merger or currently exercisable options or warrants (other than the
Class A warrants) held by NEON or Globix common stockholders. See "Securities
Ownership of Certain Beneficial Owners and Management of Globix Following The
Merger" beginning on page 154 of this joint proxy statement/prospectus for a
more complete description of the beneficial ownership of Globix management, the
Globix board of directors and owners of more than 5% of Globix common stock
following the completion of the merger.
For Globix and NEON to complete the merger, Globix stockholders must
vote to approve the issuance of shares of Globix common stock in connection with
the merger. Further, NEON stockholders must vote to approve the merger, the
merger agreement and the transactions contemplated by the merger agreement as
well as a proposed amendment to NEON's amended and restated certificate of
incorporation ("certificate of incorporation") and a proposed amendment to
NEON's certificate of designation with respect to the NEON convertible preferred
stock.
At the Globix special meeting to be held on __________, 2004 at 10:00
a.m., local time, at the offices of Globix at 139 Centre Street, New York, NY,
Globix stockholders will be asked to consider and vote upon a proposal to
approve the issuance of Globix common stock to the security holders of NEON in
the merger.
Globix's board of directors (with one director, Mr. Lampe, abstaining)
has approved the merger, the merger agreement and the transactions contemplated
by the merger agreement and recommends that you vote "FOR" the proposed issuance
of Globix common stock in connection with the merger and "FOR" the proposal to
grant discretionary authority to adjourn or postpone the Globix special meeting
to solicit additional votes to approve the matter considered at the Globix
special meeting, if necessary. The proposals are described in more detail in
this joint proxy statement/prospectus, which you should read in its entirety
before voting.
At the NEON special meeting to be held on _______, 2004 at 10:00 a.m.,
local time, at the offices of NEON at 2200 West Park Drive, Westborough,
Massachusetts, NEON stockholders will be asked to consider and vote upon a
proposal to approve the merger, the merger agreement and the transactions
contemplated by the merger agreement. NEON stockholders will also be asked to
approve a proposed amendment to the certificate of incorporation and a proposed
amendment to the certificate of designation with respect to the NEON convertible
preferred stock, which is a constituent part of the certificate of
incorporation. As described in this joint proxy statement/prospectus, the merger
would qualify as a "Liquidation Event" as defined in NEON's certificate of
incorporation and a "Change of Control" as defined in the certificate of
designation. In order to effect the distribution of the merger consideration as
described in the merger agreement and to complete the merger, the certificate of
incorporation and certificate of designation must be amended to provide that the
merger with Globix is not a "Liquidation Event" or a "Change in Control."
NEON's board of directors (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and Grubin,
abstaining) has approved the merger, the merger agreement and the transactions
contemplated by the merger agreement and the amendments to the certificate of
incorporation and the certificate of designation and recommends that you vote
"FOR" approval and adoption of the merger, the merger agreement and the
transactions contemplated by the merger agreement, "FOR" approval and adoption
of the amendment of NEON's certificate of incorporation, "FOR" approval and
adoption of the amendment of the certificate of designation for the NEON
convertible preferred stock and "FOR" the proposal to grant discretionary
authority to adjourn or postpone the NEON special meeting to solicit additional
votes to approve the matters considered at the NEON special meeting, if
necessary. The proposals are described in more detail in this joint proxy
statement/prospectus, which you should read in its entirety before voting.
YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend your
company's special meeting, please take the time to vote by promptly completing
and mailing the enclosed proxy card in the postage-paid envelope provided.
BEFORE YOU VOTE, PLEASE REVIEW THIS JOINT PROXY STATEMENT/PROSPECTUS AND IN
PARTICULAR REVIEW THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE
20 OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
On Behalf of the Board of Directors On Behalf of the Board of Directors
of Globix Corporation, of NEON Communications, Inc.,
/s/ Peter K. Stevenson /s/ Stephen E. Courter
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Peter K. Stevenson Stephen E. Courter
President and Chief Executive Officer President, Chief Executive Officer
and Chairman of the Board
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/ PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED ___________, 2004 AND WAS
FIRST MAILED TO STOCKHOLDERS OF GLOBIX AND STOCKHOLDERS
OF NEON ON OR ABOUT ____________, 2004.
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GLOBIX CORPORATION
139 Centre Street
New York, New York 10013
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 2004
To the stockholders of Globix:
A special meeting of the stockholders of Globix Corporation ("Globix"),
will be held at the offices of Globix at 139 Centre Street, New York, New York
on [ ], 2004 at 10:00 a.m., local time, for the following purposes:
1. To consider and vote upon a proposal to issue shares of common stock
with a par value of $0.01 per share pursuant to the Agreement and Plan of
Merger, dated as of July 19, 2004, as amended by the First Amendment to
Agreement and Plan of Merger, dated as of October 8, 2004 (as amended, the
"merger agreement"), by and among Globix and NEON Communications, Inc. ("NEON"),
pursuant to which a new wholly owned subsidiary of Globix will be merged with
and into NEON and NEON will become a wholly owned subsidiary of Globix (the
"merger"). A copy of the merger agreement and the first amendment to the merger
agreement are attached as Appendices A-1 and A-2, respectively, to the joint
proxy statement/prospectus accompanying this notice.
2. To grant discretionary authority to adjourn or postpone the Globix
special meeting to solicit additional votes to approve the matter considered at
the Globix special meeting, if necessary.
3. To consider and act upon any other matter that may properly come
before the special meeting or any adjournment or postponement of the special
meeting.
The accompanying joint proxy statement/prospectus and proxy card are
being furnished to the stockholders of Globix in connection with the
solicitation of proxies by Globix's board of directors for use at the special
meeting of stockholders.
Globix's board of directors (with one director, Mr. Steven Lampe,
abstaining) has approved the merger, the merger agreement and the transactions
contemplated by the merger agreement and recommends that you vote "FOR" the
proposed issuance of Globix common stock in connection with the merger and "FOR"
the proposal to grant discretionary authority to adjourn or postpone the Globix
special meeting to solicit additional votes to approve the matter considered at
the Globix special meeting, if necessary. The proposals are described in more
detail in the accompanying joint proxy statement/prospectus, which you should
read in its entirety before voting.
The board of directors has fixed the close of business on September 27,
2004 as the record date for determining the stockholders entitled to receive
this notice, and to vote their shares at the special meeting or any adjournment
or postponement of the special meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN,
DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY
TIME PRIOR TO ITS USE. PROMPTLY SIGNING AND RETURNING YOUR PROXY CARD WILL HELP
ENSURE THE PRESENCE OF A QUORUM FOR THE SPECIAL MEETING. A postage-paid,
self-addressed envelope is enclosed for your convenience. Your shares will be
voted at the special meeting in accordance with your proxy.
By Order of the Board of Directors
of Globix Corporation,
/s/ PETER K. STEVENSON
-------------------------------------
Peter K. Stevenson
President and Chief Executive Officer
NEON COMMUNICATIONS, INC.
2200 West Park Drive
Westborough, Massachusetts 01581
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON [ ], 2004
To the stockholders of NEON:
A special meeting of the stockholders of NEON Communications, Inc.
("NEON"), will be held at the offices of NEON at 2200 West Park Drive,
Westborough, Massachusetts on [ ], 2004 at 10:00 a.m., local time, for the
following purposes:
1. To approve and adopt the Agreement and Plan of Merger, dated as of
July 19, 2004, as amended by the First Amendment to Agreement and Plan of
Merger, dated as of October 8, 2004 (as amended, the "merger agreement"), by and
among Globix Corporation ("Globix") and NEON, pursuant to which a new wholly
owned subsidiary of Globix will be merged with and into NEON, and the
transactions contemplated by the merger agreement (the "merger"). As a result of
the merger, NEON will become a wholly owned subsidiary of Globix. A copy of the
merger agreement and the first amendment to the merger agreement are attached as
Appendices A-1 and A-2, respectively, to the joint proxy statement/prospectus
accompanying this notice.
2. To approve and adopt an amendment to the amended and restated
certificate of incorporation ("certificate of incorporation") of NEON to provide
that the merger of a new wholly owned subsidiary of Globix with and into NEON is
not a "Liquidation Event" of NEON that would trigger the liquidation provision,
which provides that upon the occurrence of a liquidation event (including a
transaction such as the merger), all assets of NEON remaining after payment of
all liabilities and subject to any preferential payments would be distributed
ratably to its common stockholders. A copy of the proposed amendment to NEON's
certificate of incorporation is included in the joint proxy statement/prospectus
in Appendix B-1.
3. To approve and adopt an amendment to the certificate of designation
with respect to NEON's 12% Series A Cumulative Convertible Preferred Stock to
provide that the merger of a new wholly owned subsidiary of Globix with and into
NEON is not a "Change of Control" of NEON that would trigger the change of
control provisions in the certificate of designation, including the right of
each holder of NEON convertible preferred stock to require NEON to purchase its
shares of NEON convertible preferred stock for cash. A copy of the proposed
amendment to NEON's certificate of designation is included in the joint proxy
statement/prospectus in Appendix B-2.
4. To grant discretionary authority to adjourn or postpone the NEON
special meeting to solicit additional votes to approve the matters considered at
the NEON special meeting, if necessary.
5. To consider and act upon any other matter that may properly come
before the special meeting or any adjournment or postponement of the special
meeting.
The accompanying joint proxy statement/prospectus and proxy card are
being furnished to the stockholders of NEON in connection with the solicitation
of proxies by NEON's board of directors for use at the special meeting of
stockholders.
NEON's board of directors (with one director, Mr. Steven Lampe,
abstaining, and as to the first amendment, with two directors, Messrs. Lampe and
Robert Grubin, abstaining) has approved the merger, the merger agreement and the
transactions contemplated by the merger agreement and the amendments to the
certificate of incorporation and the certificate of designation and recommends
that you vote "FOR" approval and adoption of the merger, the merger agreement
and the transactions contemplated by the merger agreement, "FOR" approval and
adoption of the amendment of NEON's certificate of incorporation, "FOR" approval
and adoption of the amendment of the certificate of designation for the NEON
convertible preferred stock and "FOR" the proposal to grant discretionary
authority to adjourn or postpone the NEON special meeting to solicit additional
votes to approve the matters considered at the NEON special meeting, if
necessary. The proposals are described in more detail in the accompanying joint
proxy statement/prospectus, which you should read in its entirety before voting.
The board of directors has fixed the close of business on [________],
2004 as the record date for determining the stockholders entitled to receive
this notice, and to vote their shares at the special meeting or any adjournment
or postponement of the special meeting.
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN,
DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY
TIME PRIOR TO ITS USE. PROMPTLY SIGNING AND RETURNING YOUR PROXY CARD WILL HELP
ENSURE THE PRESENCE OF A QUORUM FOR THE SPECIAL MEETING. A postage-paid,
self-addressed envelope is enclosed for your convenience. Your shares will be
voted at the special meeting in accordance with your proxy.
By Order of the Board of Directors of
NEON Communications, Inc.,
/s/ STEPHEN E. COURTER
-------------------------------------
Stephen E. Courter
President, Chief Executive Officer
and Chairman of the Board
ADDITIONAL INFORMATION
This joint proxy statement/prospectus incorporates important business
and financial information about Globix from documents filed with the Securities
and Exchange Commission, referred to as the SEC, that are not included in, or
delivered with, this joint proxy statement/prospectus. Globix will provide you
with copies of this information, without charge, upon written or oral requests
to:
Globix Corporation
139 Centre Street
New York, NY 10013
(212) 334-8500
Attention: Eran Hertz
PLEASE REQUEST DOCUMENTS FROM GLOBIX NOT LATER THAN [__________], 2004.
UPON REQUEST, GLOBIX WILL MAIL ANY DOCUMENTS TO YOU BY FIRST CLASS MAIL BY THE
NEXT BUSINESS DAY.
See the section entitled "Where You Can Find More Information"
beginning on page 175 of this joint proxy statement/prospectus for more
information about the documents referred to in this joint proxy
statement/prospectus.
You should rely only on the information contained in, or incorporated
by reference into, this joint proxy statement/prospectus in deciding how to vote
on the respective proposals described in this joint proxy statement/prospectus.
No one has been authorized to provide you with information that is different
from that contained in, or incorporated by reference into, this joint proxy
statement/prospectus. This joint proxy statement/prospectus is dated [ ], 2004.
You should not assume that the information contained in, or incorporated by
reference into, this joint proxy statement/prospectus is accurate as of any date
other than that date.
This joint proxy statement/prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities or the solicitation
of a proxy, in any jurisdiction to or from any person to whom it is unlawful to
make any such offer or solicitation in such jurisdiction. Information contained
in this joint proxy statement/prospectus regarding Globix and its wholly owned
subsidiary to be created in connection with the merger has been provided by
Globix and information contained in this joint proxy statement/prospectus
regarding NEON has been provided by NEON.
TABLE OF CONTENTS
PAGE
----
QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER...............................1
SUMMARY.......................................................................7
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION.....................................................16
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA..........................17
MARKET PRICE DATA AND DIVIDEND INFORMATION...................................18
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS...................19
RISK FACTORS.................................................................20
THE SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS.......................37
THE SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS................40
THE MERGER...................................................................44
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS.......................75
APPROVAL OF AMENDMENT OF NEON'S CERTIFICATE OF INCORPORATION.................87
APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION FOR NEON
CONVERTIBLE PREFERRED STOCK...............................................88
INFORMATION ABOUT GLOBIX.....................................................88
Selected Consolidated Financial Data of Globix......................95
Globix Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................100
Share Ownership of Certain Beneficial Owners and Management
of Globix.......................................................118
Description of Globix Capital Stock................................121
INFORMATION ABOUT NEON......................................................125
Selected Consolidated Financial Data of NEON.......................131
NEON Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................134
Security Ownership of Directors, Executive Officers and
More Than Five Percent Stockholders of NEON.....................142
MANAGEMENT OF GLOBIX AFTER MERGER...........................................145
GLOBIX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................154
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OF GLOBIX FOLLOWING THE MERGER...........................................154
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL
STATEMENTS OF GLOBIX CORPORATION AND NEON COMMUNICATIONS, INC............160
COMPARISON OF STOCKHOLDERS RIGHTS...........................................165
i
OTHER MATTERS...............................................................208
WHERE YOU CAN FIND MORE INFORMATION.........................................209
GLOBIX FINANCIAL STATEMENTS.................................................F-1
NEON FINANCIAL STATEMENTS..................................................F-42
APPENDIX A-1 AGREEMENT AND PLAN OF MERGER
APPENDIX A-2 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
APPENDIX B-1 FORM OF CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF NEON
APPENDIX B-2 FORM OF CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATION
FOR NEON CONVERTIBLE PREFERRED STOCK
APPENDIX C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
APPENDIX D OPINION OF NEEDHAM & COMPANY, INC.
APPENDIX E OPINION OF ADAMS HARKNESS, INC.
APPENDIX F AFFIRMATION LETTER OF ADAMS HARKNESS, INC.
ii
QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER
Q: WHAT IS THE PROPOSED TRANSACTION UPON WHICH I AM BEING ASKED TO VOTE?
A: NEON and Globix propose to enter into a business combination pursuant
to the terms of a merger agreement. In the merger, a new wholly owned
subsidiary of Globix will merge with and into NEON with NEON surviving
the merger. As a result, NEON will become a wholly owned subsidiary of
Globix.
In order to complete the merger, Globix stockholders must approve the
issuance of shares of Globix common stock in connection with the merger
and NEON stockholders must approve and adopt the merger, the merger
agreement, and the transactions contemplated by the merger agreement,
as well as an amendment to NEON's certificate of incorporation and an
amendment to NEON's certificate of designation with respect to its
convertible preferred stock. Each of Globix and NEON will hold a
special meeting of its respective stockholders to obtain these
approvals.
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: Globix and NEON independently concluded that the merger will benefit
the two companies and thus the stockholders of each company. To review
the reasons for the transaction in greater detail, see "The Merger -
The NEON Special Committee's and NEON's Reasons for the Merger"
beginning on page 56 of this joint proxy statement/prospectus and
"The Merger - The Globix Special Committee's and Globix's Reasons for
the Merger" beginning on page 50 of this joint proxy
statement/prospectus.
Q: WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON COMMON STOCK?
A: If the merger is completed, you will receive 1.2748 shares of Globix
common stock in exchange for each share of NEON common stock that you
own.
Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON CONVERTIBLE PREFERRED
STOCK?
A. If the merger is completed, you will receive (a) $3.75 in cash and (b)
2.08333 shares of a new class of Globix convertible preferred stock to
be created in connection with the merger in exchange for each share of
NEON convertible preferred stock that you own immediately prior to the
merger, treating all accrued and unpaid dividends on the NEON
convertible preferred stock as if paid in additional shares of NEON
convertible preferred stock immediately prior to the merger.
Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON STOCK OPTIONS?
A. If the merger is completed, each option to acquire NEON common stock
that was granted under NEON's stock plans or otherwise granted by NEON
and that is outstanding and unexercised immediately prior to the
effective time of the merger will be modified and become an option to
purchase Globix common stock. The number of shares of Globix common
stock issuable pursuant to a NEON stock option will be equal to the
number of shares of NEON common stock subject to the NEON stock option,
assuming full vesting, multiplied by 1.2748 and the exercise price per
share of Globix common stock will be equal to the exercise price per
share of NEON common stock subject to the NEON stock option divided by
1.2748.
Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON CLASS A WARRANTS?
A. If the merger is completed, your Class A warrant will be converted into
the right to receive 1.2748 shares of Globix common stock in exchange
for each Class A warrant that you own. It is a condition to the merger
that at least 90% of the Class A warrants be exercised immediately
prior to consummation of the merger and the NEON common stock
receivable upon their exercise will be converted into shares of Globix
common stock in the merger.
1
Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON REDEEMABLE PREFERRED
STOCK WARRANTS?
A. If the merger is completed, the redeemable preferred stock warrants
will expire in accordance with their terms and you will not receive any
payment with respect to those warrants in connection with the merger.
Q: WHAT IS THE EXCHANGE RATIO FOR THE NEON COMMON STOCK AND WHAT HAPPENS
AS THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES?
A: The exchange ratio for the NEON common stock is fixed at 1.2748 shares
of Globix common stock for each share of NEON common stock. The
exchange ratio is a fixed number and therefore will not be affected by
any fluctuations in the market price of Globix common stock; however,
the value of the Globix common stock received by NEON stockholders in
exchange for their NEON common stock will be dependent on the current
market price of Globix common stock.
Q: WHAT IS THE EXCHANGE RATIO FOR THE NEON CONVERTIBLE PREFERRED STOCK AND
WHAT HAPPENS AS THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES?
A: The NEON convertible preferred stock will be exchanged for a
combination of cash and a new class of Globix convertible preferred
stock to be created in connection with the merger. The cash
consideration for each share of NEON convertible preferred stock is
fixed at $3.75 and the exchange ratio for the NEON convertible
preferred stock is fixed at 2.08333 shares of Globix convertible
preferred stock for each share of NEON convertible preferred stock,
treating all accrued and unpaid dividends on the NEON convertible
preferred stock as if paid in additional shares of NEON convertible
preferred stock immediately prior to the merger. The Globix convertible
preferred stock will be created in connection with the merger so there
currently exists no market price for the Globix convertible preferred
stock. The Globix convertible preferred stock will be convertible into
shares of Globix common stock initially at a rate of one share of
Globix convertible stock into one share of Globix common stock;
HOWEVER, given the liquidation preference of $3.60, which is not tied
to the market price of Globix common stock, and other rights and
preferences associated with the Globix convertible preferred stock, the
underlying value of the Globix convertible preferred stock may bear no
relation to the current market price of Globix common stock.
Q: WHAT IS THE EXCHANGE RATIO FOR THE CLASS A WARRANTS AND WHAT HAPPENS AS
THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES?
A. The exchange ratio for the Class A warrants is fixed at 1.2748 shares
of Globix common stock for each Class A warrant. The exchange ratio is
a fixed number and therefore will not be affected by any fluctuations
in the market price of Globix common stock; however, the value of the
Globix common stock received by you in exchange for the Class A
warrants will be dependent on the current market price of Globix common
stock.
Q: WILL GLOBIX STOCKHOLDERS RECEIVE ANY NEW SHARES AS A RESULT OF THE
MERGER?
A. No. Globix stockholders will continue to hold the Globix shares they
currently own.
Q: WHEN AND WHERE WILL THE SPECIAL MEETINGS TAKE PLACE?
A: The special meeting of NEON stockholders will be held on
[____________], 2004 at 10:00 a.m., local time, at the offices of NEON
at 2200 West Park Drive, Westborough, Massachusetts 01581.
The special meeting of Globix stockholders will be held on
[____________], 2004 at 10:00 a.m., local time, at the offices of
Globix at 139 Centre Street, New York, New York 10013.
Q: WHO MUST APPROVE THE ISSUANCE OF SHARES OF GLOBIX COMMON STOCK IN
CONNECTION WITH THE MERGER?
A: The listing requirements of the American Stock Exchange require the
holders of a majority of votes cast by Globix stockholders eligible to
vote at the Globix special meeting to approve the issuance of Globix
common stock in connection with the merger.
2
Q: WHO MUST APPROVE THE PROPOSAL TO GRANT DISCRETIONARY AUTHORITY TO
ADJOURN OR POSTPONE THE GLOBIX SPECIAL MEETING TO SOLICIT ADDITIONAL
VOTES, IF NECESSARY?
A: The approval of the holders of a majority of votes cast by stockholders
eligible to vote at the Globix special meeting is required to approve
the proposal to grant discretionary authority to adjourn or postpone
the special meeting, if necessary, to solicit additional votes to
approve the proposal to issue Globix common stock in the merger.
Q: WHO MUST APPROVE THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS
CONTEMPLATED BY THE MERGER AGREEMENT?
A: In addition to the approvals of the board of directors of Globix (with
one director, Mr. Steven Lampe, abstaining) and the board of directors
NEON (with one director, Mr. Lampe, abstaining, and as to the first
amendment, with two directors, Messrs. Lampe and Robert Grubin,
abstaining), which have already been obtained, the holders of a
majority of NEON's outstanding common stock and convertible preferred
stock that are entitled to vote at any annual or special meeting of
NEON stockholders, voting together as a single class on an as-converted
into common stock basis, must approve the merger, the merger agreement
and the transactions contemplated by the merger agreement. Each holder
of NEON convertible preferred stock is entitled to one vote for each
share of NEON convertible preferred stock.
Q: WHO MUST APPROVE THE AMENDMENT TO NEON'S CERTIFICATE OF INCORPORATION?
A: In addition to the approval of the board of directors of NEON, which
has already been obtained (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and
Grubin, abstaining), the following approvals of the stockholders of
NEON must be obtained:
o holders of a majority of NEON's outstanding common stock entitled
to vote at any annual or special meeting of NEON stockholders,
voting as a separate class; and
o holders of a majority of NEON's outstanding common stock and
convertible preferred stock that are entitled to vote at any
annual or special meeting of NEON stockholders, voting together as
a single class.
Q: WHO MUST APPROVE THE AMENDMENT TO THE NEON CERTIFICATE OF DESIGNATION?
A: In addition to the approval of the board of directors of NEON, which
has already been obtained (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and
Grubin, abstaining), the following approvals of the stockholders of
NEON must be obtained:
o holders of two-thirds of NEON's outstanding convertible
preferred stock voting together as a single class; and
o holders of a majority of NEON's outstanding common stock and
convertible preferred stock that are entitled to vote at any
annual or special meeting of NEON stockholders, voting
together as a single class.
Q: WHO MUST APPROVE THE GRANT OF DISCRETIONARY AUTHORITY TO ADJOURN OR
POSTPONE THE NEON SPECIAL MEETING TO SOLICIT ADDITIONAL VOTES, IF
NECESSARY?
A: The approval of the holders of a majority of NEON's capital stock
present in person or represented by proxy and entitled to vote at any
annual or special meeting of NEON stockholders, considered on an
as-converted into common stock basis, is required to grant
discretionary authority to adjourn or postpone the NEON special meeting
to solicit additional votes to approve the matters considered at the
NEON special meeting, if necessary.
3
Q: DO NEON STOCKHOLDERS HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE
TRANSACTION?
A: Under Delaware law, holders of NEON outstanding common stock and
convertible preferred stock who comply with the governing statutory
provisions are entitled to appraisal rights to receive a judicially
determined (through the Delaware state courts) fair value for their
shares instead of the merger consideration. A copy of the applicable
statute is attached to this joint proxy statement/prospectus as
Appendix C.
Q: DO GLOBIX STOCKHOLDERS HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE
TRANSACTION?
A: No.
Q: WHAT DO I NEED TO DO NOW?
A: You should carefully read and consider the information contained in
this joint proxy statement/prospectus. You should then complete and
sign your proxy card and return it in the enclosed return envelope as
soon as possible so that your shares will be represented at your
company's special meeting.
If you are the record holder of NEON shares and you sign, date and mail
your proxy card without identifying how you want to vote, your proxy
will be voted "FOR" the merger, the merger agreement and the
transactions contemplated by the merger agreement, "FOR" the amendment
to NEON's certificate of incorporation, "FOR" the amendment to the
certificate of designation for the NEON convertible preferred stock and
"FOR" the proposal to grant discretionary authority to adjourn or
postpone the NEON special meeting to solicit additional votes to
approve the matters considered at the NEON special meeting, if
necessary. Except with respect to the adjournment/postponement proposal
as to which a failure to vote will have no effect, if you do not vote,
it will have the same effect as a vote "AGAINST" the proposals. You may
also vote by appearing at the special meeting and voting in person.
If you are the record holder of Globix shares and you sign, date and
mail your proxy card without identifying how you want to vote, your
proxy will be voted "FOR" approval of the issuance of Globix common
stock pursuant to the merger, and "FOR" the proposal to grant
discretionary authority to adjourn or postpone the Globix special
meeting to solicit additional votes to approve the matter considered at
the Globix special meeting, if necessary. If you do not vote, you will
have no effect on the outcome of these proposals. You may also vote by
appearing at the special meeting and voting in person.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
AUTOMATICALLY VOTE MY SHARES FOR ME?
A: No. Your broker is not permitted to vote your shares without specific
instructions from you. Unless you follow the directions your broker
provides you regarding how to instruct your broker to vote your shares,
your shares will not be voted. Please check the voting information form
used by your broker to see if it offers telephone or Internet voting.
Q: WHAT IF I FAIL TO INSTRUCT MY BROKER?
A: The broker holding your shares in "street name" may vote the shares
only if you provide the broker with appropriate instructions. If you
fail to instruct your broker to vote your shares and the broker submits
an unvoted proxy, the resulting "broker non-vote" will be counted for
the purpose of determining the existence of a quorum at your company's
special meeting, but will not be voted on any of the proposals at the
special meeting. A broker non-vote will therefore have the same effect
as a vote against the proposals being submitted to stockholders at the
NEON special meeting. A broker non-vote will not be considered a vote
cast at the Globix special meeting and will therefore have no effect on
the outcome of the proposals being submitted to stockholders at the
Globix special meeting.
4
Q: CAN I CHANGE MY VOTE AFTER I MAIL MY SIGNED PROXY?
A: Yes. You can change your vote at any time before your proxy is voted at
your company's special meeting of stockholders. You can do this in one
of three ways. First, you can send a written notice to NEON or Globix,
as applicable, stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy. If you choose either
of these two methods, you must submit your notice of revocation or your
new proxy at the address for NEON on page 42 of this joint proxy
statement/ prospectus if you are a NEON stockholder or page 39 of this
joint proxy statement/prospectus if you are a Globix stockholder.
Third, you can attend your company's special meeting of stockholders
and vote in person. Your attendance alone will not revoke your proxy.
Q: CAN I ATTEND THE SPECIAL MEETING AND VOTE MY SHARES IN PERSON?
A: Yes. You are invited to attend your company's stockholder meeting. If
your shares are held in "street name," then you are not the stockholder
of record and you must ask the bank, broker, or other nominee holding
your shares how you can vote in person at the meeting.
Q: ARE THERE RISKS THAT I SHOULD CONSIDER IN CONNECTION WITH THE MERGER?
A: Yes. For example, the number of shares of Globix common stock that NEON
common stockholders will receive at closing will not change even if the
market price of Globix common stock increases or decreases before the
completion of the proposed transaction. In evaluating the merger, you
should carefully consider this and other factors discussed in the
section entitled "Risk Factors," beginning on page 20 of this joint
proxy statement/prospectus.
Q: IF I OWN NEON COMMON STOCK WILL I RECOGNIZE A GAIN OR LOSS ON THE
PROPOSED TRANSACTION?
A: It is intended that the merger will constitute a reorganization within
the meaning of Section 368(a) of the Internal Revenue Code. As a result
of reorganization treatment, a holder of NEON common stock would not
recognize taxable gain or loss as a result of the merger. To review
certain federal income tax consequences of the merger to holders of
NEON common stock in greater detail, see "The Merger - Material United
States Federal Income Tax Consequences," beginning on page 68 of this
joint proxy statement/prospectus.
Q: IF I OWN NEON CONVERTIBLE PREFERRED STOCK WILL I RECOGNIZE A GAIN OR
LOSS ON THE PROPOSED TRANSACTION?
A: A holder of NEON convertible preferred stock may recognize gain, but
not loss, with respect to cash received in exchange for such stock in
the merger. To review certain federal income tax consequences of the
merger to holders of NEON convertible preferred stock in greater
detail, see "The Merger - Material United States Federal Income Tax
Consequences," beginning on page 68 of this joint proxy
statement/prospectus.
Q: WILL I BE ABLE TO TRADE THE GLOBIX COMMON STOCK THAT I RECEIVE IN THE
MERGER?
A: Yes. The Globix common stock that you will receive in the merger will
be freely tradable unless you are an affiliate of Globix or NEON.
Q: SHOULD I SEND IN MY NEON STOCK OR WARRANT CERTIFICATES NOW?
A: No, you should not send in your stock or warrant certificates with your
proxy. You will receive instructions for exchanging your stock or
warrant certificates if the merger is consummated.
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We expect to complete the merger promptly after we receive approval by
the NEON stockholders at the NEON special meeting and the Globix
stockholders at the Globix special meeting, we receive all necessary
regulatory approvals and all other conditions in the merger agreement
have been met or waived. See "Terms of the Merger Agreement and Related
Transactions - Conditions Precedent to Each Party's Obligation to
Effect the Merger" beginning on page 82 of this joint proxy
statement/prospectus.
5
Q: WHO CAN HELP ANSWER MY QUESTIONS?
A: If you are a Globix stockholder with questions about the merger, how to
vote or revoke your proxy, or if you need additional copies of this
joint proxy statement/prospectus or the enclosed proxy card, you should
contact Mr. James C. Schroeder, Globix's General Counsel at (212)
625-7231.
If you are a NEON stockholder with questions about the merger, how to
vote or revoke your proxy, or if you need additional copies of this
joint proxy statement/prospectus or the enclosed proxy card, you should
contact Mr. Christopher E. Dalton, NEON's Senior Counsel, at (508)
621-1714.
6
SUMMARY
FOR YOUR CONVENIENCE, WE HAVE PROVIDED A BRIEF SUMMARY OF CERTAIN
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY
HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY STATEMENT/PROSPECTUS AND
DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND
THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE
MERGER AS WELL AS OTHER MATTERS TO BE CONSIDERED AT YOUR COMPANY'S STOCKHOLDER
MEETING, YOU SHOULD CAREFULLY READ THIS ENTIRE JOINT PROXY STATEMENT/
PROSPECTUS, THE MERGER AGREEMENT WHICH WE HAVE ATTACHED AS APPENDIX A-1 ALONG
WITH THE FIRST AMENDMENT TO THE MERGER AGREEMENT WHICH WE HAVE ATTACHED AS
APPENDIX A-2 AND THE DOCUMENTS INCORPORATED BY REFERENCE INTO THIS JOINT PROXY
STATEMENT/PROSPECTUS. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 175 OF
THIS JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE INCLUDED PAGE REFERENCES
PARENTHETICALLY TO DIRECT YOU TO MORE COMPLETE DESCRIPTIONS OF THE TOPICS
PRESENTED IN THE SUMMARY. IN THIS JOINT PROXY STATEMENT/ PROSPECTUS, "WE," "US"
AND "OUR" MAY REFER TO EITHER GLOBIX OR NEON, DEPENDING ON THE CONTEXT IN WHICH
THEY ARE USED, AND "YOU" AND "YOUR" REFER TO STOCKHOLDERS OF NEON OR GLOBIX,
DEPENDING ON THE CONTEXT IN WHICH THEY ARE USED.
THE COMPANIES (PAGES 88 and 125)
GLOBIX CORPORATION
139 Centre Street
New York, New York 10013
(212) 334-8500
Globix is a provider of application, media and infrastructure
management services. Globix provides flexible business solutions which combine
skills, support, technology and experience to enable its customers to use the
Internet as a way to provide business benefits and sustain a competitive
advantage. By managing complex applications, media and infrastructure
environments, Globix helps its clients protect Internet revenue streams, improve
user satisfaction and reduce technology operating costs and risks. Globix's
clients include operating divisions of Fortune 100 companies as well as
mid-sized enterprises in a number of vertical markets including media and
publishing, technology, financial services, health care and government. Globix
and its subsidiaries have operations in New York, NY, London, UK, Santa Clara,
CA, Fairfield, NJ, and Atlanta, GA. Globix common stock is traded on the OTC
Bulletin Board under the symbol "GBXX.OB"
NEON COMMUNICATIONS, INC.
2200 West Park Drive
Westborough, Massachusetts 01581
(508) 616-7800
NEON is a facilities-based communications provider, supplying
telecommunication services to communications companies and non-carrier customers
in the twelve-state Northeast and mid-Atlantic market. NEON is an independent
provider of SONET and dense wave division multiplexing ("DWDM") services to a
wide range of communications carriers including local, long distance and
wireless telephone companies and Internet service providers. NEON also provides
services to non-carrier customers such as financial institutions and colleges
and universities.
NEON owns and operates a high bandwidth fiber optic network, consisting
of approximately 4,600 route miles and over 218,000 fiber miles. Its network
extends from Portland, ME to Washington, D.C. and includes metro and intercity
coverage as well as co-location space in a number of large, mid-size and small
markets in the Northeast and mid-Atlantic, including Boston, New York,
Philadelphia, Newark, Baltimore, Washington, DC, Portland, Portsmouth,
Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack,
Reston, Vienna, and smaller communities along our network routes.
SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS (PAGE 37
A special meeting of the stockholders of Globix will be held at the
offices of Globix at 139 Centre Street, New York, New York on [______], 2004 at
10:00 a.m., local time. The board of directors of Globix has fixed the close of
business on September 27, 2004 as the record date for determining the
stockholders entitled to receive this notice, and to vote their shares at the
special meeting or any adjournment or postponement of the special meeting.
7
There were 16,460,000 shares of Globix common stock issued and
outstanding as of the Globix record date, although of these shares of common
stock only 16,065,948 shares have been distributed. Of the 16,460,000 shares of
common stock deemed issued and outstanding, 229,452 of these shares were placed
in reserve in escrow pending the outcome of a class action lawsuit described in
"Information About Globix - Legal Proceedings" beginning on page 94 of this
joint proxy statement/prospectus and are not entitled to vote at the special
meeting. Another 164,600 shares of common stock will be distributed following
resolution of a shareholder derivative suit filed against Globix and certain of
our former officers and directors, as described in "Information About Globix -
Legal Proceedings" beginning on page 94 of this joint proxy
statement/prospectus and are also not entitled to vote. Therefore, although
16,460,000 shares of common stock are deemed issued and outstanding as of the
Globix record date, only 16,065,948 shares of common stock are entitled to vote
at the meeting. Each holder of Globix common stock is entitled to one vote for
each share held.
GLOBIX STOCKHOLDER VOTE REQUIRED FOR THE GLOBIX COMMON STOCK ISSUANCE IN THE
MERGER
Globix has submitted an application to list its common stock on the
American Stock Exchange. Under the rules of the American Stock Exchange, Globix
stockholders must vote to approve the issuance of Globix common stock in
connection with the merger in order for Globix and NEON to complete the merger.
At the special meeting the Globix stockholders will vote to approve the issuance
of Globix common stock in connection with the merger and to grant discretionary
authority to adjourn or postpone the Globix special meeting to solicit
additional votes to approve the matter considered at the special meeting, if
necessary. The listing requirements of the American Stock Exchange and the
Globix bylaws require the approval of a majority of votes cast at the Globix
special meeting of stockholders by Globix stockholders entitled to vote on the
issuance of Globix common stock in connection with the merger. The approval of a
majority of votes cast at the Globix special meeting of stockholders by Globix
stockholders entitled to vote is required to approve the proposal to grant
discretionary authority to adjourn or postpone the special meeting to solicit
additional votes to approve the matter considered at the special meeting, if
necessary.
SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS (PAGE 40)
A special meeting of the stockholders of NEON will be held at the
offices of NEON at 2200 West Park Drive, Westborough, Massachusetts 01581 on [
], 2004 at 10:00 a.m., local time. The board of directors of NEON has fixed the
close of business on [____________], 2004 as the record date for determining the
stockholders entitled to receive this notice, and to vote their shares at the
special meeting or any adjournment or postponement of the special meeting.
There were 15,775,863 shares of NEON common stock and 1,101,887 shares
of NEON convertible preferred stock issued and outstanding as of the record
date. Each holder of NEON common stock is entitled to one vote per share and
each holder of NEON convertible preferred stock is entitled to one vote for each
share of NEON convertible preferred stock.
NEON STOCKHOLDER VOTE REQUIRED FOR THE MERGER AND OTHER PROPOSALS (PAGE 41)
At the special meeting the NEON stockholders will vote on the following
four agenda items:
o to approve and adopt the merger agreement, the merger and the
transactions contemplated by the merger agreement;
o to approve and adopt an amendment to NEON's certificate of
incorporation to provide that the merger of a new wholly owned subsidiary of
Globix with and into NEON is not a "Liquidation Event" of NEON that would
trigger the liquidation provision set forth in the certificate of incorporation
which provides that upon the occurrence of a liquidation event all assets of
NEON remaining after payment of all liabilities and subject to any preferential
payments would be distributed ratably to its common stockholders;
o to approve and adopt an amendment to the certificate of designation
with respect to the NEON's convertible preferred stock to provide that the
merger of the new wholly owned subsidiary of Globix with and into NEON is not a
"Change of Control" of NEON that would trigger the change of control provisions
set forth in the certificate of designation which would require the immediate
repurchase of the NEON convertible preferred stock in cash; and
8
o to approve the proposal to grant discretionary authority to adjourn
or postpone the NEON special meeting to solicit additional votes to approve the
matters considered at the NEON special meeting, if necessary.
The required vote for each agenda item is described below.
APPROVAL OF MERGER
Under Delaware law and NEON's certificate of incorporation, the
affirmative vote by the holders of a majority of NEON's outstanding common stock
and convertible preferred stock that are entitled to vote at any annual or
special meeting of NEON stockholders, voting together as a single class, is
required to approve the merger, the merger agreement and transactions
contemplated by the merger agreement.
APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION
Under Delaware law and NEON's certificate of incorporation, the
affirmative vote by the holders of a majority of NEON's outstanding common stock
entitled to vote at any annual or special meeting of NEON stockholders voting as
a separate class, and the affirmative vote by the holders of a majority of
NEON's outstanding common stock and convertible preferred stock that are
entitled to vote at any annual or special meeting of NEON stockholders, voting
together as a single class, are required to approve the amendment to NEON's
certificate of incorporation.
APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION
Under Delaware law and NEON's certificate of incorporation (which
includes the certificate of designation), the affirmative vote by the holders of
two-thirds of NEON's outstanding convertible preferred stock, voting together as
a single class, and the affirmative vote by the holders of a majority of NEON's
outstanding common stock and convertible preferred stock that are entitled to
vote at any annual or special meeting of NEON stockholders, voting together as a
single class, are required to approve the amendment to the certificate of
designation for the NEON convertible preferred stock.
APPROVAL OF PROPOSAL TO GRANT DISCRETIONARY AUTHORITY TO ADJOURN OR
POSTPONE THE SPECIAL MEETING
The approval of the holders of a majority of NEON's capital stock
present in person or represented by proxy and entitled to vote, is required to
approve the proposal to grant discretionary authority to adjourn or postpone the
special meeting to solicit additional votes to approve the matters considered at
the special meeting.
THE MERGER (PAGE 44)
The merger agreement provides that a new wholly owned subsidiary of
Globix will merge with and into NEON. NEON will be the surviving corporation in
the merger and will become a wholly owned subsidiary of Globix.
RECOMMENDATION OF GLOBIX'S BOARD OF DIRECTORS AND REASONS FOR THE
MERGER (PAGE 51)
The Globix board of directors (with one director, Mr. Lampe,
abstaining) has determined that the merger is advisable and in the best
interests of Globix and its stockholders. The Globix board of directors (with
one director, Mr. Lampe, abstaining) recommends that Globix stockholders vote
"FOR" the proposed issuance of Globix common stock in connection with the merger
and the other proposal.
See "The Merger -- The Globix Special Committee's and Globix's Reasons
for the Merger" beginning at page 50 of this joint proxy statement/prospectus
for reasons supporting the decision of the Globix board of directors.
OPINION OF GLOBIX'S FINANCIAL ADVISOR (PAGE 51)
Needham & Company, Inc. has delivered an opinion to a special committee
of the Globix board of directors, dated September 28, 2004, that, as of that
date and based on and subject to the matters described in its opinion, the
common stock exchange ratio was fair to the holders of Globix common stock from
a financial point of view. See "The Merger - Opinion of Globix's Financial
Advisor" beginning on page 51 of this joint proxy statement prospectus. The
9
full text of the written opinion of Needham & Company is attached to this joint
proxy statement/prospectus as Appendix D. Globix stockholders should read this
opinion in its entirety for a description of the procedures followed,
assumptions made, matters considered and limitations on the review undertaken in
delivering the opinion. The Needham & Company opinion is addressed to the
special committee of the Globix board of directors and does not constitute a
recommendation to any Globix stockholder as to how that stockholder should vote
or act on any matter relating to the merger.
RECOMMENDATION OF NEON'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER
(PAGE 57)
The NEON board of directors (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and Grubin,
abstaining) has determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement and the proposed amendments to
NEON's certificate of incorporation and certificate of designation for NEON
convertible preferred stock are advisable and in the best interests of NEON and
its stockholders. The NEON board of directors (with one director, Mr. Lampe,
abstaining, and as to the first amendment, with two directors, Messrs. Lampe and
Grubin, abstaining) recommends that NEON stockholders vote "FOR" the proposal to
approve and adopt the merger, the merger agreement and the transactions
contemplated by the merger agreement and each of the other proposals.
See "The Merger -- The NEON Special Committee's and NEON's Reasons for
the Merger" beginning on page 56 of this joint proxy statement/prospectus for
the reasons supporting the NEON board of directors' recommendations.
OPINION OF NEON'S FINANCIAL ADVISOR (PAGE 58)
Adams Harkness, Inc. (f/k/a Adams, Harkness & Hill, Inc.) provided a
fairness opinion to the NEON special committee and the board of directors on
July 16, 2004 that, as of that date and based on and subject to the matters
described in its written opinion, the proposed consideration to be received by
the common stockholders of NEON in the merger was fair to the common
stockholders of NEON from a financial point of view. On October 8, 2004, Adams
Harkness provided an affirmation of its fairness opinion. See "The Merger -
Opinion of NEON's Financial Advisor" beginning on page 58 of this joint proxy
statement/prospectus. The full text of the written opinion of Adams Harkness
dated July 16, 2004 is attached to this joint proxy statement/prospectus as
Appendix E. A copy of the affirmation letter dated October 8, 2004 is attached
to this joint proxy statement/prospectus as Appendix F. NEON stockholders should
read the opinion and the affirmation letter in their entirety for a description
of the procedures followed, assumptions made, matters considered and limitations
on the review undertaken in delivering the opinion. Adams Harkness' opinion and
affirmation letter are directed to the NEON special committee and the board of
directors and do not constitute a recommendation to any NEON stockholder as to
any matter relating to the merger.
WHAT NEON STOCKHOLDERS WILL RECEIVE IN THE MERGER (PAGE 20)
In the merger, you will receive Globix common stock for each share of
NEON common stock that you own and a combination of cash and a new class of
Globix convertible preferred stock to be created in connection with the merger
for each share of NEON convertible preferred stock that you own. In the case of
NEON common stock, each share is exchangeable for 1.2748 shares of Globix common
stock. In the case of NEON convertible preferred stock, each share is
exchangeable for (a) $3.75 in cash and (b) 2.08333 shares of Globix convertible
preferred stock, treating all accrued and unpaid dividends on the NEON
convertible preferred stock as if paid in additional shares of NEON convertible
preferred stock immediately prior to the merger.
Following the merger, based on 16,460,000 outstanding shares of Globix
common stock as of August 1, 2004, and assuming the issuance of an additional
4,545,455 shares of Globix common stock in a debt-for-equity exchange that is a
condition to the merger and is described in the section entitled "Terms of the
Merger Agreement and Related Transactions - Debt-for-Equity Exchange" beginning
on page 87 of this joint proxy statement/ prospectus, NEON common stockholders
would beneficially own approximately 56.7% of the outstanding shares of common
stock of the combined company (ignoring current cross ownership between the
holders of Globix and NEON common stock, as further described in the section
entitled "The Merger - Interests of Certain Persons in the Merger" beginning on
page 65 of this joint proxy statement/prospectus) and current Globix common
stockholders would beneficially own approximately 81.8% of the outstanding
shares of common stock of the combined company (due to current cross ownership).
The foregoing ownership percentages do not include the shares of NEON
convertible preferred stock that are beneficially owned by certain common
stockholders of NEON and that will be exchanged for Globix convertible preferred
stock in the merger or currently exercisable options or warrants (other than the
10
Class A warrants) held by NEON or Globix common stockholders. See "Share
Ownership of Certain Beneficial Owners and Management of Globix Following The
Merger" beginning on page 154 of this joint proxy statement/prospectus for a
more complete description of the beneficial ownership of Globix management, the
Globix board of directors and owners of more than 5% of Globix common stock
following the completion of the merger.
TREATMENT OF NEON OPTIONS AND WARRANTS (PAGE 76)
Each option to acquire NEON common stock granted under NEON's stock
plans or otherwise granted by NEON that is outstanding and unexercised
immediately prior to the effective time of the merger will be modified and
become an option to purchase Globix common stock. At the effective time of the
merger, Globix will modify NEON's options to provide for the purchase of Globix
common stock, adjusting the number of shares issuable upon exercise and the
exercise price of such option to reflect the exchange ratio in the merger
applicable to the NEON common stock underlying such NEON option. The duration
and other terms of each such modified option, including the vesting schedule
(with credit for options already vested), will be the same as under the prior
NEON stock option.
NEON has three types of outstanding warrants: Class A warrants,
redeemable preferred stock warrants and warrants for NEON common stock issued to
Communications Technology Advisors LLC ("CTA"), which we refer to as "CTA
warrants". The Class A warrants will be exercised immediately prior to the
merger or will be converted into shares of Globix common stock in the merger.
The redeemable preferred stock warrants will expire upon the merger in
accordance with their terms. At the effective time of the merger, Globix will
replace the CTA warrants with warrants to purchase Globix common stock,
adjusting the number of shares issuable upon exercise and the exercise price of
such warrants to reflect the exchange ratio in the merger applicable to the NEON
common stock.
TOTAL CONSIDERATION GLOBIX WILL PAY (PAGE 75)
In the merger, Globix will issue or reserve for issuance a total of up
to approximately 31.0 million shares of Globix common stock to be allocated
among NEON's outstanding shares of common stock and outstanding warrants and
options to purchase NEON common stock. In the merger, Globix will issue a new
class of convertible preferred stock to be created in connection with the merger
to the holders of NEON convertible preferred stock and also pay $3.75 in cash
per share of outstanding NEON convertible preferred stock, treating all accrued
and unpaid dividends on the NEON convertible preferred stock as if paid in
additional shares of NEON convertible preferred stock immediately prior to the
merger. Globix will reserve a sufficient number of shares of Globix common stock
for issuance upon conversion of the Globix convertible preferred stock. Assuming
a September 30, 2004 closing date, Globix would pay approximately $5.1 million
in cash and issue a total of up to approximately 2,826,297 shares of Globix
convertible preferred stock, having an aggregate liquidation value of
approximately $10.2 million, to the holders of NEON convertible preferred stock.
EXCHANGE OF NEON CERTIFICATES (PAGE 77)
After the merger occurs, the exchange agent will send a letter to NEON
stockholders that will provide instructions on exchanging your NEON stock
certificates for Globix stock certificates. PLEASE DO NOT SEND ANY STOCK
CERTIFICATES TO ANY TRANSFER AGENT AT THIS TIME.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS (PAGE 73)
The holders of Globix stock do not have dissenters' rights or appraisal
rights in connection with the merger.
ANY NEON STOCKHOLDER WHO OBJECTS TO THE MERGER IS PERMITTED BY DELAWARE
LAW TO SEEK RELIEF AS A DISSENTING STOCKHOLDER AND HAVE THE "FAIR VALUE" OF ITS
SHARES OF NEON COMMON STOCK AND CONVERTIBLE PREFERRED STOCK DETERMINED BY A
COURT AND PAID IN CASH.
If you are a NEON stockholder and wish to dissent, you must deliver to
NEON, prior to the vote on the merger at the special meeting, a written demand
for appraisal of your shares. You also must not vote in favor of the merger
agreement. To not vote in favor of the merger agreement, you can either:
o vote "no" in person at the special meeting or by proxy;
o abstain from voting;
11
o fail to vote; or
o if you returned a duly executed proxy, revoke your proxy prior
to the special meeting.
The relevant provisions of Delaware law are technical in nature and
complex. If you wish to exercise appraisal rights and obtain appraisal of the
fair value of your shares, you may wish to consult with legal counsel, because
the failure to comply strictly with these provisions may result in waiver or
forfeiture of your appraisal rights.
Beneficial owners of NEON common stock or NEON convertible preferred
stock, whose shares are held of record by another person, such as a bank, broker
or nominee, and who wish to seek appraisal, should instruct the record holder to
follow the appraisal procedures of Delaware law.
A COPY OF THE RELEVANT SECTION OF DELAWARE LAW GOVERNING THIS PROCESS
IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS.
VOTING OF PROXIES AT THE SPECIAL MEETINGS (PAGES 37 and 40)
Properly executed proxies received prior to or at your company's
meeting, and not revoked, will be voted at such meeting in accordance with the
instructions indicated on such proxies. If no instruction is indicated, then
unless the shares covered by the proxy are in a brokerage account, such proxies
will be voted for each proposal at your company's special meeting. If you submit
a proxy that indicates an abstention from voting in all matters, your shares
will be counted as present for the purpose of determining the existence of a
quorum at the special meeting, but they will not be voted on any matter at the
special meeting. Consequently, if you are a NEON stockholder your abstention
will have the same effect as a vote against each proposal at the NEON special
meeting. If your proxy indicates an abstention only as to a particular proposal,
that abstention will have the same effect as a vote against that particular
proposal only. If you are a Globix stockholder your abstention will have no
effect on the outcome of the proposals at the Globix special meeting.
If you hold your shares of Globix common stock or NEON common stock or
convertible preferred stock in a brokerage account, the broker holding such
shares in "street name" may vote the shares only if you provide the broker with
appropriate instructions. If an executed proxy statement is returned to your
company by a broker holding shares of your company's common stock or convertible
preferred stock in street name, which indicates that the broker does not have
discretionary authority to vote on one or more of the agenda items for the
special meeting, the shares will be considered present at the meeting for
purposes of determining a quorum, but will not be considered to have been voted
in favor of or against the applicable proposal.
INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 65)
In addition to their interests as stockholders, some of the directors
and officers of NEON and of Globix may have interests in the merger that are
different from, or in addition to, your interests. All officers and directors of
NEON, including Mr. Courter and William A. Marshall, Chief Financial Officer of
NEON, have stock option agreements (and employment agreements in the case of Mr.
Courter and Mr. Marshall) that provide that, upon a change of control of NEON,
including a transaction such as the merger, their unvested options will
accelerate and become fully vested and exercisable. Options to purchase
approximately 1,349,677 shares of NEON common stock held by NEON's officers and
directors at a weighted average exercise price of $5.24 per share will be fully
vested and exercisable immediately prior to the completion of the merger.
Pursuant to the merger agreement, Messrs. Barr, Cecin, Courter and
Forsgren, currently members of the board of directors of NEON, will join the
nine member board of directors of Globix, and Mr. Lampe, currently a member of
the board of directors of both NEON and Globix, will remain on the board of
directors of Globix. Messrs. Stevenson, Herzig, Singer and Steele, currently
members of the board of directors of Globix, will continue to serve on the board
of directors of Globix. In addition, Globix will indemnify the officers and
directors of NEON for events occurring before and in connection with the merger
and will continue NEON's directors' and officers' liability insurance coverage
and fiduciary liability insurance coverage for at least five years after the
merger.
12
Certain NEON stockholders who are affiliated with directors of NEON
and/or Globix beneficially own a significant number of NEON securities and a
significant number of Globix securities. Some of these significant stockholders
include LC Capital Master Fund Ltd., Loeb Partners Corp. and three trusts for
the benefit of the children of the brother of Mr. Singer, who is the
non-executive chairman of the board of directors of Globix, which we refer to
collectively as the "Singer Trusts." See "The Merger - Interests of Certain
Persons in the Merger" beginning on page 65 of this joint proxy
statement/prospectus.
CTA provides consulting and business development services to NEON.
Additionally, under a letter agreement between NEON and CTA, CTA agreed to
provide merger and acquisition advice and opportunities to NEON for a success
fee. CTA has agreed to waive this fee in relation to the merger. NEON has issued
warrants for its common stock to certain current and former affiliates of CTA
and to certain of such affiliates' designees as payment for CTA's services. One
of CTA's employees, Wayne Barr, Jr., serves on NEON's board of directors and Mr.
Barr will serve on the Globix board of directors following the merger. A current
director of NEON, Mr. Peter Aquino, was affiliated with CTA at the time NEON's
board of directors approved the merger.
CTA also provides consulting and business development services to
Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a
success fee if Globix consummates a sale, merger or a similar transaction with
CTA's assistance. CTA has agreed to waive this fee in relation to the merger.
Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for
500,000 shares of Globix common stock at $3.00 per share through March 13, 2013,
which were purchased for $25,000. See "Description of Globix Capital Stock -
Description of Globix Warrants" beginning on page 124 of this joint proxy
statement/prospectus.
The NEON board of directors and special committee and the Globix board
or directors and special committee were aware of and discussed these potentially
conflicting interests when they approved the merger.
WHAT IS NEEDED TO COMPLETE THE MERGER (PAGE 82)
Several conditions must be satisfied before the merger will be
completed. These include:
o adoption of the merger, the merger agreement and the
transactions contemplated by the merger agreement by the NEON
stockholders as described above;
o approval of the amendments to NEON's certificate of
incorporation and certificate of designation for the NEON
convertible preferred stock by the NEON stockholders;
o approval of the issuance of Globix common stock in connection
with the merger by the Globix stockholders;
o approval of the merger in accordance with the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 as
amended;
o Globix's 11% senior note holders exchange $12.5 million in
principal and accrued interest of Globix's 11% senior notes
for approximately 4,545,455 shares of Globix common stock;
o the holders of 90% or more of the NEON Class A warrants
exercise their Class A warrants and the Class A warrant
agreement is amended to provide for the conversion of NEON
Class A warrants into shares of Globix common stock in the
merger; and
o other contractual conditions set forth in the merger
agreement.
If the law permits, Globix or NEON may each waive conditions for their
benefit and their stockholders' benefit and complete the merger even though one
or more of these conditions has not been met. NEON's stockholder approval of the
merger, the merger agreement and the transactions contemplated by the merger
agreement cannot be waived. We cannot assure you that the conditions will be
satisfied or waived or that the merger will occur.
13
TERMINATION OF THE MERGER AGREEMENT (PAGE 84)
Globix and NEON may mutually agree at any time to terminate the merger
agreement without completing the merger, even if the NEON stockholders have
approved it. Also either company may decide, without the consent of the other,
to terminate the merger agreement, subject to a variety of conditions, in a
number of circumstances. These circumstances include, among others:
o certain breaches under the merger agreement;
o any court or governmental entity issuing a final order or
judgment preventing completion of the merger;
o NEON stockholders not approving the merger;
o Globix stockholders not approving the issuance of Globix
common stock in the merger;
o the board of directors of NEON having recommended to its
stockholders an alternative sale or business transaction or
having withdrawn its recommendation of the merger (permitting
Globix to terminate) or having approved an agreement with
respect to such transaction (permitting NEON to terminate);
o the board of directors of Globix having recommended to its
stockholders an alternative sale or business transaction or
having withdrawn its recommendation with respect to the
issuance of Globix common stock in connection with the merger
(permitting NEON to terminate) or having approved an agreement
with respect to such transaction (permitting Globix to
terminate); or
o the merger not having been completed by January 17, 2005,
which is 150 days from August 20, 2004, the expiration date of
the waiting period applicable to the completion of the merger
under the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended.
Generally, each company has agreed to pay its own fees and expenses if
the merger is not completed. NEON and Globix have also agreed that all expenses
incurred in connection with the filing, printing and mailing of this joint proxy
statement/prospectus and the registration statement of which it is a part and
the Hart-Scott-Rodino filing would be borne equally by Globix and NEON if the
merger agreement is terminated. No specific termination or similar fees are
imposed on a party terminating the merger agreement.
AMENDMENT OF NEON'S CERTIFICATE OF INCORPORATION (PAGE 87)
Before completing the merger and after receiving the requisite vote,
NEON will file an amendment to its certificate of incorporation to amend the
liquidation provision to exclude the merger from the definition of "Liquidation
Event" in the certificate of incorporation. NEON's certificate of incorporation
currently provides that upon the occurrence of a liquidation event (including a
transaction such as the merger), all assets of NEON remaining after payment of
all liabilities and subject to any preferential payments would be distributed
ratably to its common stockholders.
See "Approval of Amendment of NEON's Certificate of Incorporation"
beginning on page 87 of this joint proxy statement/prospectus for a
description of the effect of this amendment.
AMENDMENT OF NEON'S CERTIFICATE OF DESIGNATION (PAGE 88)
Before completing the merger and after receiving the requisite vote,
NEON will file an amendment to the certificate of designation for the NEON
convertible preferred stock to provide that the merger is not a "Change of
Control" of NEON that would trigger the change of control provisions in the
certificate of designation and would require the immediate repurchase by NEON of
the NEON convertible preferred stock in cash.
See "Approval of Amendment of NEON's Certificate of Designation"
beginning on page 88 of this joint proxy statement/prospectus for a
description of the effect of this amendment.
14
DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE 165)
When the merger is completed, holders of NEON common stock and
convertible preferred stock will become holders of Globix common stock and
convertible preferred stock. Their rights after the merger will be governed by
the Globix certificate of incorporation and bylaws rather than the NEON
certificate of incorporation and bylaws, but will continue to be governed by
Delaware law. See "Comparison of Stockholders Rights" beginning on page 165 of
this joint proxy statement/prospectus.
U.S. FEDERAL INCOME TAX CONSEQUENCES (PAGE 68)
In the opinion of Day, Berry & Howard LLP, counsel to Globix, and
Andrews Kurth LLP, counsel to NEON, the merger will qualify as a tax-free
reorganization for U.S. federal income tax purposes. As a result, neither
Globix, NEON nor the newly formed wholly owned subsidiary of Globix to be merged
with and into NEON will recognize gain or loss as a result of the merger.
Holders of NEON common stock, Class A warrants, and CTA warrants will not
recognize gain or loss as a result of their exchange of those securities for
shares of Globix common stock in the merger. Holders of NEON convertible
preferred stock may recognize gain, but not loss, with respect to their receipt
of cash in exchange for their shares of NEON convertible preferred stock, but
such holders will not recognize gain or loss with respect to their receipt of
Globix convertible preferred stock in exchange for shares of NEON convertible
preferred stock in the merger. See "The Merger - Material United States Federal
Income Tax Consequences" beginning on page 68 of this joint proxy
statement/prospectus for greater detail.
YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL EXPLANATION OF THE TAX
CONSEQUENCES OF THE MERGER TO YOU.
ACCOUNTING TREATMENT (PAGE 67)
The merger will be accounted for using the purchase method of
accounting and Globix will be deemed the acquirer for accounting and financial
reporting purposes. Under the purchase method of accounting, the purchase price
in the merger will be allocated among the NEON assets acquired and the NEON
liabilities assumed to the extent of their fair market value. The excess of the
fair value of the identifiable net assets acquired over NEON's purchase price
(i.e., negative goodwill) will be reduced by assigning it on a pro-rated basis
to the estimated fair value of all identified noncurrent acquired assets.
GOVERNMENTAL AND REGULATORY APPROVALS (PAGE 67)
The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended
(the "HSR Act") and its related rules and regulations prohibit Globix and NEON
from completing the merger until Globix and NEON each file notifications with
the Antitrust Division of the Department of Justice and the Federal Trade
Commission, and the HSR Act waiting period requirements have been satisfied.
Globix and NEON each filed HSR Act notifications with the Federal Trade
Commission and the Antitrust Division on August 13, 2004, and the waiting period
was terminated on August 20, 2004.
Several of NEON's subsidiaries have authorizations from certain states
in the Northeast and mid-Atlantic regions to be competitive local exchange
carriers, or CLECs. NEON and Globix must request approval of the merger from the
applicable agencies of some of these states and must notify the applicable
agencies of the other states of the merger. NEON and Globix have filed all
applicable documents required to be filed prior to completion of the merger to
either seek authorization of the proposed merger or to give notification of the
proposed merger.
15
SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
FINANCIAL INFORMATION
The following selected unaudited pro forma consolidated combined
financial information has been derived from, and should be read in conjunction
with, the Unaudited Pro Forma Condensed Combined Consolidated Financial
Information and related notes included in this joint proxy statement/prospectus
on page 160. This information is based on the historical consolidated balance
sheets and related historical consolidated statements of operations of Globix
and the historical consolidated balance sheets and related historical
consolidated statements of operations of NEON, using the purchase method of
accounting for business combinations. Due to different fiscal year ends for
Globix and NEON, the unaudited pro forma condensed combined consolidated
statement of operations data combines the audited historical consolidated
statement of operations data of Globix for the year ended September 30, 2003
with the audited historical consolidated statement of operations data of NEON
for the year ended December 31, 2003, giving effect to the merger as if it had
occurred on October 1, 2002.
This information is for illustrative purposes only. The companies might
have performed differently had they been combined as of the dates for which
information is presented. You should not rely on the unaudited pro forma
condensed combined consolidated financial information as being indicative of the
historical results that would have been achieved had the companies always been
combined or the future results that the combined company will experience after
the merger.
NINE MONTHS ENDED YEAR ENDED
JUNE 30, 2004 SEPTEMBER 30, 2003
-----------------------------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
-----------------------------------------
PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS DATA (UNAUDITED):
Revenue, net $ 79,457 $ 101,765
Loss from operations (34,556) (21,948)
Loss before income tax benefit (expense) and
extraordinary item (38,315) (27,374)
Net loss before extraordinary item (37,083) (26,253)
Net loss (35,153) (24,322)
Net loss attributable to common stockholders (35,383) (24,621)
Basic and diluted loss per share $ (0.73) $ (0.51)
AS OF JUNE 30, 2004
-------------------
(IN THOUSANDS)
-------------------
PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET DATA (UNAUDITED):
Cash, cash equivalent, short-term investments and
marketable securities $ 27,656
Restricted cash and investments $ 12,658
Working capital $ 20,214
Total assets $ 277,650
Current portion of long-term debt $ 562
Long-term debt, less current portion $ 80,915
6% cumulative convertible preferred stock $ 12,295
Stockholders' equity $ 126,608
16
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA
The following table presents specified historical per share data of
Globix and NEON and combined per share data on an unaudited pro forma basis
after giving effect to the merger. This data is derived from, and should be read
in conjunction with, the separate historical consolidated financial statements
of NEON and the separate historical consolidated financial statements of Globix,
each included in this joint proxy statement/prospectus, as well as the unaudited
pro forma condensed combined consolidated financial statements included in this
joint proxy statement/prospectus. The unaudited pro forma combined per share
data do not necessarily indicate the operating results that would have been
achieved had the merger been completed as of the beginning of the earliest
period presented and should not be taken as representative of future operations.
The results might have been different if the companies had always been combined.
The number of shares used in the calculations assumes that all NEON
shares of common stock outstanding as of June 30, 2004, including shares
issuable upon exercise of the NEON Class A warrants, are converted into shares
of Globix common stock at the exchange ratio of 1.2748 and the issuance of
4,545,455 shares of Globix common stock in the debt-for-equity exchange in
connection with the merger.
The unaudited pro forma combined book value per share represents
Globix's historical book value as adjusted for the fair value and number of
shares issued in connection with the merger. Tangible book value per share
represents Globix's historical tangible book value as adjusted for the fair
value and number of shares issued in connection with the merger and the
estimated goodwill and other intangible assets recorded in connection with the
merger.
The NEON pro forma equivalent amounts are calculated by multiplying the
unaudited pro forma combined amounts by the exchange ratio of 1.2748.
The information in the following table is based on, and should be read
together with, the historical financial information that Globix and NEON have
presented in this joint proxy statement/prospectus beginning on page F-1 and
F-42, respectively.
HISTORICAL PRO FORMA
------------------------------ ------------------------------
GLOBIX NEON
YEAR ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31, NEON
2003 2003 GLOBIX EQUIVALENT
------------- ------------- ------------- -------------
Net loss per share:
Basic and diluted $ (1.54) $ (0.16) $ (0.51) $ (0.65)
Book value per common share at
period end $ 3.25 $ 7.71
Tangible book value per share at
period end $ 13.01 $ 10.59
----------------------------------------------------------------
HISTORICAL PRO FORMA
------------------------------ ------------------------------
GLOBIX NEON
AS OF AND AS OF AND
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED NEON
JUNE 30, 2004 JUNE 30, 2004 GLOBIX EQUIVALENT
------------- ------------- ------------- -------------
Net loss per share:
Basic and diluted $ (2.17) $ (0.17) $ (0.73) $ (0.93)
Book value per common share at
period end $ 1.37 $ 7.46 $ 2.61 $ 3.32
Tangible book value per share at
period end $ 7.99 $ 10.51 $ 5.47 $ 6.98
---------------
Neither Globix nor NEON pays any dividends on its shares of common stock.
17
MARKET PRICE DATA AND DIVIDEND INFORMATION
Globix common stock is quoted on the OTC Bulletin Board under the
symbol "GBXX.OB." Quotations on the OTC Bulletin Board reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions. Globix has submitted an application to have its
shares of common stock listed on the American Stock Exchange.
The following table sets forth the high and low closing sale prices for
Globix common stock as reported on the OTC Bulletin Board for the periods
indicated:
------------------------------- ------------------------------ --------------------------
Fiscal 2003 High Low
----------- -------- -------
------------------------------- ------------------------------ --------------------------
First Quarter (commencing
10/31/02(1) ................... $2.50 $1.25
------------------------------- ------------------------------ --------------------------
Second Quarter ................ 2.95 2.00
------------------------------- ------------------------------ --------------------------
Third Quarter ................. 3.10 1.70
------------------------------- ------------------------------ --------------------------
Fourth Quarter ................ 3.25 2.66
------------------------------- ------------------------------ -------------------------
------------------------------- ------------------------------ --------------------------
Fiscal 2004 High Low
----------- -------- -------
-------------------------------- ------------------------------ -------------------------
First Quarter .................. $5.05 $2.55
-------------------------------- ------------------------------ -------------------------
Second Quarter ................. 4.65 2.70
-------------------------------- ------------------------------ -------------------------
Third Quarter .................. 4.00 2.30
-------------------------------- ------------------------------ -------------------------
Fourth Quarter (through
9/30/04) ....................... 3.37 2.60
-------------------------------- ------------------------------ -------------------------
(1) Globix common stock outstanding immediately prior to the effective date
of the plan of reorganization under Chapter 11 of the U.S. Bankruptcy
Code, April 25, 2002, was cancelled as of the effective date of such
plan. The first reported trade of our common stock following the
effective date of the plan of reorganization occurred on October 31,
2002.
On September 27, 2004, there were 337 record holders of Globix stock.
In addition, the plan of reorganization provides that the 268 record holders of
the common stock of Globix on the effective date of the plan will be entitled to
receive, in exchange for claims in respect of such stock, their pro rata portion
(which, under the terms of the Globix plan of reorganization, may be equal to
zero) of 164,600 shares of the common stock following the effective date. While
the distribution of these shares will not occur until the resolution of the
stockholders' class action suit described in "Information About Globix -
Business - Legal Proceedings," we estimate that the total number of holders of
our common stock following this distribution will be approximately 431.
On July 16, 2004, the business day before the public announcement that
Globix and NEON had entered into the merger agreement, the closing price per
share of Globix common stock on the OTC Bulletin Board was $2.85. On [__], 2004,
the latest practicable trading day before the printing of this joint proxy
statement/prospectus, the closing price per share of Globix common stock on the
OTC Bulletin Board was $___.
Because the market price of Globix common stock is subject to
fluctuation, the market value of the shares of Globix common stock that holders
of NEON common stock will receive in the merger may increase or decrease prior
to and following the vote on the merger. We urge stockholders to obtain current
market quotations for Globix common stock. We cannot assure you of the future
prices or trading markets for Globix common stock. The Globix convertible
preferred stock to be issued in the merger is not currently traded in any
securities market.
18
NEON MARKET PRICE DATA
Neither NEON's common stock nor its convertible preferred stock is
traded in any securities market. On September 29, 2004, there were 153 record
holders of NEON common stock and 46 record holders of NEON convertible preferred
stock.
DIVIDEND INFORMATION
Neither Globix nor NEON has ever paid any cash dividends on its shares
of common stock. Under the merger agreement, each company has agreed not to pay
dividends pending the completion of the merger, without the written consent of
the other, except that NEON may pay accrued but unpaid dividends on its
convertible preferred stock in additional shares of NEON convertible preferred
stock. The Globix board of directors presently intends to retain all earnings
for use in its business and has no present intention to pay cash dividends
before or after the merger, except that it will retain the option to pay accrued
dividends on the Globix convertible preferred stock issued in the merger in
additional shares of Globix convertible preferred stock.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS
This joint proxy statement/prospectus and the documents incorporated by
reference into this joint proxy statement/prospectus contain forward-looking
statements about the merger, Globix and NEON within the meaning of Section 27A
of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended. Statements containing the words "believes,"
"expects," "anticipates," "estimates," "plans," "projects," "predicts,"
"intends," "seeks," "will," "may," "should," "would," "continues" and similar
expressions, or the negative of these terms, constitute forward-looking
statements that involve risks and uncertainties. Such statements are based on
current expectations and are subject to risks, uncertainties and changes in
condition, significance, value and effect. These risks include those discussed
in the section entitled "Risk Factors" beginning on page 20 of this joint
proxy statement/prospectus. Such risks, uncertainties and changes in condition,
significance, value and effect could cause Globix's or NEON's actual results to
differ materially from those anticipated events. In evaluating the merger
agreement and the merger for purposes of the NEON special meeting and the
issuance of Globix common stock in the merger for purposes of the Globix special
meeting, you should carefully consider the discussion of risks and uncertainties
discussed in the section entitled "Risk Factors" beginning on page 20 of this
joint proxy statement/prospectus as well as elsewhere in this document.
All subsequent written and oral forward-looking statements concerning
the merger or other matters addressed in this joint proxy statement/prospectus
and attributable to Globix or NEON or any person acting on their behalf are
expressly qualified in their entirety by the cautionary statements contained or
referred to in this section. Except to the extent required by applicable law or
regulations, Globix and NEON undertake no obligation to update such
forward-looking statements to reflect events or circumstances after the date of
this joint proxy statement/prospectus or to reflect the occurrence of
unanticipated events. In evaluating forward-looking statements, you should
consider these risks and uncertainties, together with the other risks described
from time to time in Globix's reports and documents filed with the Securities
and Exchange Commission.
19
RISK FACTORS
IN THE MERGER, NEON COMMON STOCKHOLDERS WILL RECEIVE SHARES OF GLOBIX
COMMON STOCK IN EXCHANGE FOR THEIR SHARES OF NEON COMMON STOCK AND NEON
PREFERRED STOCKHOLDERS WILL RECEIVE GLOBIX CONVERTIBLE PREFERRED STOCK AND CASH
IN EXCHANGE FOR THEIR SHARES OF NEON CONVERTIBLE PREFERRED STOCK. BY VOTING IN
FAVOR OF THE ISSUANCE OF GLOBIX COMMON STOCK IN CONNECTION WITH THE MERGER,
GLOBIX STOCKHOLDERS WILL BE VOTING FOR A BUSINESS COMBINATION WITH NEON. BEFORE
DECIDING WHETHER OR NOT TO APPROVE THE MERGER AND THE OTHER PROPOSALS, BOTH NEON
STOCKHOLDERS AND GLOBIX STOCKHOLDERS SHOULD CONSIDER THE FOLLOWING RISKS AND
UNCERTAINTIES THAT ARE APPLICABLE TO THE MERGER, GLOBIX AND NEON. IN ADDITION TO
THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, NEON
STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING
WHETHER TO VOTE IN FAVOR OF THE MERGER, THE MERGER AGREEMENT AND THE
TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND THE OTHER PROPOSALS AND
GLOBIX STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN
DECIDING WHETHER TO VOTE IN FAVOR OF THE ISSUANCE OF GLOBIX COMMON STOCK IN
CONNECTION WITH THE MERGER. YOU ALSO SHOULD KEEP THE FOLLOWING RISK FACTORS IN
MIND WHEN YOU READ FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY
STATEMENT/PROSPECTUS. PLEASE REFER TO THE SECTION ENTITLED "CAUTIONARY STATEMENT
CONCERNING FORWARD-LOOKING STATEMENTS" BEGINNING ON PAGE 19 OF THIS JOINT
PROXY STATEMENT/PROSPECTUS.
MERGER RELATED RISK FACTORS
THE EXCHANGE RATIO FOR GLOBIX COMMON STOCK THAT HOLDERS OF NEON COMMON STOCK
WILL RECEIVE IN THE MERGER IS FIXED AND WILL NOT BE ADJUSTED IN THE EVENT OF ANY
CHANGE IN THE PRICE OF GLOBIX COMMON STOCK.
Holders of NEON common stock will receive 1.2748 shares of Globix
common stock for each share of NEON common stock owned. The exchange ratio for
NEON common stock is fixed and will not be adjusted for any increase or decrease
in the market price of Globix common stock. Accordingly, the specific dollar
value of Globix common stock to be received by NEON common stockholders in the
merger will depend on the market value of Globix common stock at the time of the
merger. The market price of Globix common stock may decline, causing the value
of the consideration received by NEON common stockholders in the merger to
decline. Globix common stock is thinly traded on the OTC Bulletin Board. The
market price of Globix common stock is extremely volatile and has fluctuated
over a wide range. From August 31, 2003 to September 30, 2004, Globix common
stock traded as high as $5.10 per share and as low as $2.00 per share. From July
16, 2004, the last trading day prior to the date on which the merger was
announced, through September 30, 2004, the price of Globix common stock has
fluctuated between $2.56 and $3.61.
In addition, there will be a period between the completion of the
merger and the time at which former NEON stockholders receiving stock
consideration actually receive certificates evidencing Globix common stock.
Accordingly, the value of the Globix common stock NEON stockholders actually
receive may be more or less than the value of Globix common stock at the
effective time of the merger resulting from the exchange. Until stock
certificates are received, NEON stockholders will not be able to sell their
Globix shares in the open market and, thus, will not be able to avoid losses
resulting from any decline in the trading price of the Globix common stock
during this period. Fluctuations in Globix's quarterly and annual results may
affect the market price for Globix common stock and there are a number of
factors that may affect Globix's future quarterly and annual results of
operations. See "Risk Factors - Risk Factors Related to Globix," beginning on
page 20 of this joint proxy statement prospectus.
NEON IS NOT PERMITTED TO TERMINATE THE MERGER DUE TO A DECREASE IN GLOBIX'S
STOCK PRICE.
NEON is not permitted to terminate the merger solely due to decreases
in Globix's stock price, even if those fluctuations would materially affect the
value of the consideration NEON stockholders will receive in the merger.
DIRECTORS AND OFFICERS OF NEON AND GLOBIX MAY HAVE CONFLICTS OF INTEREST THAT
INFLUENCED THEIR DECISIONS TO APPROVE THE MERGER.
When considering the NEON board of directors' recommendation of the
merger, the merger agreement and the transactions contemplated by the merger
agreement and the other proposals and the Globix board of directors'
recommendation of the issuance of Globix common stock in the merger, you should
consider that some directors and executive officers of NEON and Globix have
20
interests in the merger and the other proposals that are in addition to, or
different from, their interests as NEON stockholders or Globix stockholders, as
the case may be. These interests are described in the section entitled "The
Merger -- Interests of Certain Persons in the Merger," beginning on page 65
of this joint proxy statement/prospectus.
These interests include:
o CROSS OWNERSHIP. Three significant stockholders of NEON that
collectively beneficially own an aggregate of approximately
41.7% of the NEON common stock and 47.1% of the NEON
convertible preferred stock as of August 1, 2004 also
beneficially own a significant number of shares of Globix
common stock. These stockholders include LC Capital Master
Fund Ltd., Loeb Partners Corp. and three trusts for the
benefit of the children of the brother of Mr. Singer, who is
the non-executive chairman of the board of directors of
Globix, which we refer to collectively as the "Singer Trusts".
Each of these stockholders is affiliated with directors of
NEON or Globix or both (in the case of Mr. Lampe). The
interests of such stockholders in completing the merger may be
different from the interests of other NEON or Globix
stockholders.
o DEBT-FOR-EQUITY EXCHANGE. LC Capital Master Fund Ltd. and the
Singer Children's Management Trust, one of the Singer Trusts,
are entitled to participate in the Globix debt-for-equity
exchange which is described in more detail in the section
entitled "Terms of the Merger Agreement and Related
Transactions - Debt-for-Equity Exchange" beginning on page
87 of this joint proxy statement/prospectus.
o OFFICER AND DIRECTOR BENEFITS. All officers and directors of
NEON, including Mr. Courter and Mr. Marshall, have stock
option agreements (and employment agreements in the case of
Mr. Courter and Mr. Marshall) that provide that, upon a change
of control of NEON, including a transaction such as the
merger, their unvested options will accelerate and become
fully vested and exercisable.
o BOARD OF DIRECTORS AND MANAGEMENT OF GLOBIX. Four of NEON's
current directors, Messrs. Courter, Barr, Cecin and Forsgren,
will become directors of Globix in the merger and one of
NEON's current directors, Mr. Lampe, is also a director of
Globix and will remain on the Globix board of directors
following the merger. Four of Globix's current directors,
Messrs. Stevenson, Singer, Steele and Herzig will remain
directors of Globix following the merger. NEON's Chairman,
President and Chief Executive Officer, Mr. Courter, will
remain the Chairman, President and Chief Executive Officer of
NEON and will be considered an executive officer of Globix
following the merger, and the current officers of NEON will
continue to be officers of NEON after consummation of the
merger.
o INDEMNIFICATION. Under the merger agreement, Globix and NEON
will provide indemnification for present and former directors
and officers of NEON with respect to matters existing prior to
the closing of the merger, including matters relating to the
merger. NEON will maintain directors' and officers' liability
insurance and fiduciary liability insurance for at least five
years after the merger benefiting such persons with respect to
matters existing prior to or relating to the merger.
o BUSINESS ADVISORS OF NEON AND GLOBIX. Communication Technology
Advisors LLC, which we refer to as "CTA," provides consulting
and business development services to NEON. NEON has issued
warrants for its common stock to certain current and former
affiliates of CTA and certain of such affiliates' designees as
payment for such services. One of CTA's employees, Wayne Barr,
Jr., serves on NEON's board of directors and Mr. Barr will
serve on the Globix board of directors following the merger. A
current director of NEON, Mr. Aquino, was affiliated with CTA
at the time NEON's board of directors approved the merger.
Under a letter agreement between NEON and CTA, CTA agreed to
provide merger and acquisition advice and opportunities to
NEON for a success fee. CTA has agreed to waive this fee in
relation to the merger.
21
CTA also provides consulting and business development services
to Globix and certain affiliates of CTA, including Mr. Barr,
hold warrants exercisable for 500,000 shares of Globix common
stock at $3.00 per share through March 13, 2013, which were
purchased for $25,000. See "Description of Globix Capital
Stock - Description of Globix Warrants" beginning on page 124
of this joint proxy statement/prospectus. Under a letter
agreement between Globix and CTA, CTA is entitled to a success
fee if Globix consummates a sale, merger or a similar
transaction with CTA's assistance. CTA has agreed to waive
this fee in relation to the merger.
THE HOLDERS OF NEON CONVERTIBLE PREFERRED STOCK WILL RECEIVE A SMALLER CASH
PAYMENT IN CONNECTION WITH THE MERGER THAN THEY WOULD IF THE MERGER WERE TREATED
AS A "CHANGE OF CONTROL" UNDER NEON'S CERTIFICATE OF DESIGNATION.
As a result of the amendment to NEON's certificate of designation being
proposed to the NEON stockholders in this joint proxy statement/prospectus and
the terms of the merger agreement, holders of NEON convertible preferred stock
will receive a smaller cash payment in connection with the merger than they
would if the merger were treated as a "Change of Control" under NEON's
certificate of designation with respect to the NEON convertible preferred stock.
If the merger were deemed a change of control, each of the 1,101,887 shares of
NEON convertible preferred stock outstanding as of the effective date of the
merger would be entitled to be paid $11.3625, plus accrued but unpaid dividends
of approximately $2.60 as of September 30, 2004, in cash, for an aggregate
immediate cash payment of approximately $15,385,097. Under the terms of the
merger, the holders of NEON convertible preferred stock will receive $3.75 in
cash plus 2.08333 shares of a new class of Globix convertible preferred stock
with a liquidation preference of $3.60 per share to be created in connection
with the merger, for each share of NEON convertible preferred stock, treating
all accrued and unpaid dividends on the NEON convertible preferred stock as if
paid in additional shares of NEON convertible preferred stock immediately prior
to the merger.
THE STRUCTURE AND IMPLEMENTATION OF THE MERGER INVOLVES A NUMBER OF RISKS,
INCLUDING RISKS OF INTEGRATING THE TWO BUSINESSES AND UNKNOWN LIABILITIES.
The merger involves the combination of two companies that previously
operated independently in markets with different economic, demographic and
competitive characteristics, and is a complex transaction. The process of
integrating operations could cause an interruption of, or loss of momentum in,
the activities of one or more of the combined company's businesses and the loss
of key personnel. Among the risks the merger involves are risks of successful
integration, potential liabilities that may be incurred as a result of the
merger and numerous other risks, including:
o failure to successfully cross-sell services to customers of
the two businesses;
o failure to achieve expected cost savings in integrating
operations;
o diversion of management attention from business matters to
integration issues;
o identifying and retaining key personnel, which may be
difficult in the combined company;
o integrating accounting, engineering, information technology
and administrative systems, which may be unexpectedly
difficult or costly;
o making significant cash expenditures that may be required to
retain personnel, eliminate unnecessary resources and
integrate the two businesses;
o maintaining uniform standards, controls, procedures and
policies, which may be harder than Globix and NEON anticipate
and interfere with efficient administration of the combined
company; and
o changes in the businesses as a result of the merger that
impair relationships with employees, customers or vendors.
22
In addition, as a result of the merger, each of Globix and NEON will
succeed to any liabilities of the other company now existing or arising out of
the other company's businesses prior to closing, including unknown liabilities.
These liabilities may include liabilities to customers, suppliers or employees,
as well as potential liabilities that can arise in the ordinary course of
business.
Failure to overcome these risks or any other problems encountered in
connection with the merger could have a material adverse effect on business,
results of operations and financial condition of the combined companies.
LIMITATIONS MAY BE IMPOSED ON THE USE OF EITHER OR BOTH COMPANIES' NET OPERATING
LOSSES FOR INCOME TAX PURPOSES.
Changes in the ownership of NEON securities as a result of NEON's plan
of reorganization has caused there to be an annual limitation on the use of net
operating loss carry forwards that arose prior to the effective date of NEON's
plan of reorganization. Similarly, changes in the ownership of Globix securities
as a result of Globix's plan of reorganization has caused there to be an annual
limitation on the use of net operating loss carry forwards that arose prior to
the effective date of Globix's plan of reorganization. Additional limitations
may be imposed as a result of future changes of ownership, including changes of
ownership pursuant to the merger, that would apply to subsequently generated net
operating loss carry forwards as well. See "The Merger - Material United States
Federal Income Tax Consequences," beginning on page 68 of this joint proxy
statement/prospectus.
UNANTICIPATED ADDITIONAL COSTS RELATING TO THE MERGER COULD REDUCE GLOBIX'S
FUTURE EARNINGS PER SHARE.
Globix believes that it has reasonably estimated the likely costs of
integrating the operations of NEON into Globix, and the incremental costs, of
operating as a combined company. However, it is possible that additional
transaction costs such as fees or professional expenses, or additional future
operating expenses, such as increased personnel costs or increased taxes, as
well as other types of adverse developments, could have a material adverse
effect on the results of operations and financial condition of Globix after the
merger.
IF THE MERGER IS NOT COMPLETED, GLOBIX AND NEON WILL EACH HAVE INCURRED
SUBSTANTIAL EXPENSES WITHOUT REALIZING THE EXPECTED BENEFITS.
Globix and NEON have incurred substantial expenses in connection with
the transactions described in this joint proxy statement/prospectus. The
completion of the merger depends on the satisfaction of specified conditions and
the receipt of regulatory approvals and we cannot guarantee that the conditions
to completion of the merger will be met. In particular, it is a closing
condition to the merger that some of Globix's 11% senior note holders exchange
$12.5 million in principal and accrued interest of 11% senior notes for
approximately 4,545,455 shares of Globix common stock, and it is possible that
Globix may not be able to complete the exchange based on a failure to receive
the requisite approvals or that such 11% senior note holders will fail to
consummate the exchange. In addition, each of Globix and NEON have the right to
terminate the merger agreement in the event of a material adverse change in the
other's business or in certain cases if they receive another acquisition
proposal. If the merger is not completed, these expenses could have a material
adverse impact on the financial condition of Globix and/or NEON because they
would not have realized the expected benefits of the merger.
AFTER THE MERGER, STOCKHOLDERS OF NEON WILL HAVE DIFFERENT RIGHTS THAT MAY BE
LESS ADVANTAGEOUS THAN THEIR CURRENT RIGHTS.
Upon completion of the merger, NEON stockholders will become Globix
stockholders. Although both companies are incorporated in Delaware, differences
in NEON's certificate of incorporation and bylaws and Globix's certificate of
incorporation and bylaws will result in changes to the rights of NEON
stockholders when they become Globix stockholders. For more information, see the
section entitled "Comparison of Stockholders Rights," beginning on page 165 of
this joint proxy statement/prospectus. A stockholder of NEON may conclude that
his, her or its rights under Globix's certificate of incorporation and bylaws
are more limited than his, her or its current rights under NEON's certificate of
incorporation, certificate of designation with respect to the convertible
preferred stock and bylaws.
23
RISK FACTORS RELATED TO GLOBIX
There are a number of important factors that could affect our business
and future operating results, including, without limitation, the factors set
forth below. The information contained in this joint proxy statement/prospectus
should be read in light of such factors. Any of the following factors could have
a material adverse effect on our business and our future operating results.
WE HAVE A HISTORY OF LOSSES WHICH IF IT CONTINUES IN THE FUTURE WILL EVENTUALLY
MAKE US UNABLE TO MEET OUR FINANCIAL OBLIGATIONS.
We have experienced significant losses since we began operations.
Despite improvement in our operating margins since our emergence from
bankruptcy, we may continue to incur losses in the future. For the year ended
September 30, 2003, we had a loss from operations of $18.4 million and a net
loss of approximately $25.3 million. For the nine month period ended June 30,
2004, we had a loss from operations of $30.5 million and a net loss of $35.8
million. $18.0 million of the loss from operations and net loss in the nine
month period ended June 30, 2004 was attributable to a write-down of our
property located at 415 Greenwich Street in New York City, which we sold in
January 2004. Our ability to achieve and sustain operating profits depends on
our ability to reduce our indebtedness and operating expenses and increase our
revenue base. If we are unable to reduce expenses sufficiently or build up our
revenue base, we will not become profitable. If we are unable to become
profitable, we will eventually become unable to meet our financial obligations.
OUR REVENUES COULD DECLINE SIGNIFICANTLY IF WE CONTINUE TO LOSE CUSTOMERS OR
HAVE OUR EXISTING CUSTOMERS REDUCE THEIR LEVEL OF SPENDING ON OUR SERVICES.
We have experienced and may continue to experience declines in revenue
due to customers leaving us or staying with us but choosing to decrease their
spending on our services. One of our biggest challenges has been to limit these
revenue declines. Although we have reduced the level of revenue declines due to
customer loss, we continue to experience declines in price per service.
Continued declines in revenue could harm our business, financial condition and
results of operations.
OUR ABILITY TO PAY THE PRINCIPAL AMOUNT OF THE 11% SENIOR NOTES WHEN DUE DEPENDS
ON OUR FUTURE OPERATING PERFORMANCE, AND FAILURE TO SATISFY THESE OBLIGATIONS
COULD RESULT IN THESE OBLIGATIONS BECOMING DUE AND PAYABLE, RESULTING IN
BANKRUPTCY.
Historically, we have not generated positive cash flows from
operations. Our ability to pay principal and interest on the 11% senior notes
and on our other indebtedness depends on our future operating performance. Our
outstanding indebtedness as of June 30, 2004 was approximately $94.0 million and
may increase to approximately $101 million in 2005 if we elect to pay interest
in kind and not in cash on the notes. Future operating performance is subject to
market conditions and business factors that are often beyond our control.
Consequently, we cannot assure you that we will have sufficient cash flows to
pay the principal and interest on our indebtedness. If our cash flows and
capital resources are insufficient to allow us to make scheduled payments on our
indebtedness, we may have to reduce or delay capital expenditures, sell assets,
seek additional capital, restructure or refinance our indebtedness or file for
bankruptcy. The terms of our indebtedness may restrict the use of these
alternative measures, and we cannot assure you that these measures would satisfy
our scheduled debt service obligations. If we cannot make scheduled payments on
our indebtedness, we will be in default and, as a result:
o our debt holders could declare all outstanding principal and
interest to be due and payable; and
o we could be forced into bankruptcy.
OUR OUTSTANDING INDEBTEDNESS RESTRICTS OUR FINANCIAL AND OPERATING FLEXIBILITY.
THIS COULD PLACE US AT A COMPETITIVE DISADVANTAGE THAT COULD IN TURN AFFECT OUR
ABILITY TO GENERATE CASH FLOW AND FULFILL OUR OBLIGATIONS.
As of June 30, 2004, we were highly leveraged and our outstanding
indebtedness was approximately $94.0 million. Our indebtedness could:
o limit our ability to obtain additional financing to operate or
grow our business;
o require us to use the proceeds of certain asset sales to
redeem indebtedness;
24
o limit our financial flexibility in planning for and reacting
to industry changes;
o place us at a competitive disadvantage as compared to less
leveraged companies; and
o after the fourth anniversary of the issuance of the 11% senior
notes, require us to dedicate a substantial portion of our
cash flow to payments on our debt, reducing the availability
of our cash flow for other purposes.
COVENANTS IN THE INDENTURE GOVERNING THE 11% SENIOR NOTES IMPOSE LIMITATIONS ON
OUR ABILITY TO BORROW AND INVEST, WHICH COULD SEVERELY IMPAIR OUR ABILITY TO
EXPAND OR FINANCE OUR FUTURE OPERATIONS.
The indenture governing the 11% senior notes contains a number of
covenants that impose significant operating and financial restrictions on us and
our subsidiaries. These restrictions limit our ability to incur additional
indebtedness, create liens on assets, dispose of assets, enter into business
combinations or engage in certain activities with our subsidiaries.
OUR LEVERAGE WILL INCREASE AS A RESULT OF THE PAYMENT OF INTEREST IN KIND AND
COULD FURTHER RESTRICT OUR FINANCIAL AND OPERATING FLEXIBILITY.
The indenture under which our 11% senior notes were issued requires us
to pay interest in kind through 2004 and permits us to pay interest in kind at
the discretion of our board of directors through 2006. The additional issuances
of 11% senior notes could further restrict our financial and operating
flexibility, limit our ability to obtain additional financing, place us at a
competitive disadvantage when compared to our competitors with less debt, and
make it more difficult to meet our financial obligations upon the maturity of
the 11% senior notes.
OUR ACQUISITION STRATEGY MAY PROVE TO BE UNSUCCESSFUL WHICH COULD ADVERSELY
AFFECT OUR FUTURE RESULTS.
In order to increase our revenue base, we may make investments in or
acquire businesses, products, services or technologies. Consequently, we are
subject to the following risks:
o we may not be able to make investments or acquisitions on
terms which prove advantageous;
o acquisitions may cause a disruption in our ongoing business,
distract our management and other resources and make it
difficult to maintain the operations, organization and
procedures of our company or the acquired business; and
o we may not be able to retain key employees of the acquired
business or to maintain good relations with its customers or
suppliers.
OUR REORGANIZATION MAY HAVE ADVERSELY AFFECTED SOME OF OUR RELATIONSHIPS WITH
CUSTOMERS AND SUPPLIERS, AND TOGETHER WITH OUR HIGHLY LEVERAGED FINANCIAL
STRUCTURE MAY CONTINUE TO AFFECT THE WAY WE ARE VIEWED IN THE MARKET.
The continuing impact of our April 2002 bankruptcy reorganization
cannot be accurately quantified. However, our bankruptcy may have adversely
affected our ability to negotiate favorable terms with vendors or retain
customers. Our bankruptcy and continued leverage may cause customers to question
our financial soundness and may also affect the contractual terms that are
available to us.
OUR BUSINESS COULD SUFFER FROM A LOSS OF MANAGEMENT PERSONNEL, WHICH COULD
RESULT IN OUR INABILITY TO OPERATE AS EFFECTIVELY AS WE ANTICIPATED AND COULD
HAVE A SIGNIFICANT ADVERSE EFFECT ON OUR BUSINESS.
Since our emergence from bankruptcy, we have undertaken a number of
changes in management as well as reductions in staffing. In the year following
our bankruptcy, we replaced our Chief Executive Officer and Chief Financial
Officer as well as other members of senior management. As a result, our business
experienced a lack of continuity in management. Our success depends largely on
the experience, skills and performance of our senior management team. The loss
or unavailability to us of any member of our senior management team could result
in our inability to operate the company as effectively as we anticipate and
could have a significant adverse effect on our business.
25
WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE PERSONNEL WE NEED IN EACH OF THE
CRITICAL AREAS OF OUR BUSINESS, WHICH COULD ADVERSELY AFFECT THE ABILITY OF OUR
BUSINESS TO PERFORM ITS FUNCTIONS.
Our future success depends on our ability to attract and retain key
personnel for management, technical, sales and marketing and customer support
positions. The failure to attract or retain qualified personnel in each of these
critical areas could adversely affect the ability of our business to perform its
functions. Further efforts to control management costs, given our flat
organizational structure, could have an additional adverse impact on employee
morale.
COMPETITION FOR THE INTERNET SERVICES THAT WE PROVIDE IS INTENSE AND WE EXPECT
THAT COMPETITION WILL CONTINUE TO INTENSIFY, WHICH COULD RESULT IN OUR
ENCOUNTERING SIGNIFICANT PRICING PRESSURE.
Our competitors include other Internet service providers with a
significant national or global presence that focus on business customers, such
as IBM, Digex, EDS, NaviSite, Savvis, Akamai, Speedera, Data Return, Rackspace
and Equinix. Our competitors also include telecommunications companies, such as
AT&T, British Telecom, Level 3, MCI and Sprint. Many of our existing
competitors, as well as a number of potential new competitors, have:
o longer operating histories;
o greater name recognition;
o larger customer bases;
o larger networks;
o more and larger facilities; and
o significantly greater financial, technical and marketing
resources.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in the industry, we expect to continue
to encounter significant pricing pressures. These pricing pressures could result
in significantly lower average selling prices for our services. For example,
telecommunications companies operating outside of NEON's geographic market may
be able to provide customers with reduced communications costs in connection
with their Internet access services, significantly increasing pricing pressures
on us. We may not be able to offset the effects of any price reductions with an
increase in the number of our customers, higher revenue from value-added
services, cost reductions or otherwise. In addition, Internet access service
businesses are likely to encounter consolidation in the near future, which could
result in increased prices and other competition.
OUR SUCCESS WILL DEPEND ON OUR ABILITY TO INTEGRATE, OPERATE AND MAINTAIN AND
UPGRADE OUR NETWORK AND FACILITIES, AND OUR FAILURE TO DO SO COULD ADVERSELY
AFFECT OUR ENTIRE BUSINESS.
A key element of our business strategy is the maintenance and upgrading
of our facilities and network, which has required, and will continue to require,
management time and the periodic expenditure of capital. Any interruption in our
ability to deliver services over our network due to market disruptions or third
party insolvencies may make us less attractive to future customers and may
hamper our ability to retain our current customers which, in turn, could
adversely affect our entire business.
OUR BUSINESS COULD BE ADVERSELY AFFECTED BY PRICE INCREASES OR SERVICE
INTERRUPTIONS IN OUR TELECOMMUNICATIONS SERVICE, WHICH COULD HARM OUR BUSINESS,
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our existing network relies on many third-party data communications and
telecommunications providers, located in the United States and abroad. These
carriers are subject to price constraints, including tariff controls, that in
the future may be relaxed or lifted. In addition, certain of these providers,
including MCI, Global Crossing and Cable and Wireless, have filed for protection
under Chapter 11 under the U.S. Bankruptcy Code, which may affect the
availability and quality of the services that these entities provide. Price
increases or the lack of service availability and quality could adversely affect
the costs of maintaining our network and our ability to maintain or grow our
business.
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WE MAY NOT BE ABLE TO OBTAIN COMPUTER HARDWARE AND SOFTWARE ON THE SCALE AND AT
THE TIMES WE NEED AT AN AFFORDABLE COST, AND FAILURE TO DO SO OVER AN EXTENDED
PERIOD OF TIME COULD HARM OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
We rely on outside vendors to supply us with computer hardware,
software and networking equipment. We primarily use products from Cisco, Compaq,
Juniper Networks and Sun Microsystems, either leased or purchased from the
manufacturer or a third-party vendor. Consequently, our expertise is
concentrated in products from these manufacturers. We also rely on Cisco for
network design and installation services. If we are unable over an extended
period of time to obtain the products and services that we need on a timely
basis and at affordable prices, it will harm our business, financial condition
and results of operations.
BECAUSE WE ARE DEPENDENT ON COMPUTER AND COMMUNICATION SYSTEMS, A SYSTEMS
FAILURE WOULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS.
Our business depends on the efficient and uninterrupted operation of
our computer and communications hardware systems and infrastructure. We
currently maintain most of our computer systems in our facilities in New York,
New York; Atlanta, Georgia; Santa Clara, California; and London, England. While
we have taken precautions against systems failure, interruptions could result
from natural disasters as well as power loss, our inability to acquire fuel for
our backup generators, telecommunications failure, terrorist attacks and similar
events. We also lease telecommunications lines from local, regional and national
carriers, whose service may be interrupted. Our business, financial condition
and results of operations could be harmed by any damage or failure that
interrupts or delays our operations.
OUR DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS EXPOSES US TO POSSIBLE
INTERRUPTIONS THAT COULD DELAY OR PREVENT US FROM PROVIDING OUR SERVICES.
Approximately 30% of our cost of revenues is derived from services
provided by two major telecommunication carriers, MCI and Verizon. While we
believe that most of these services can be obtained from other alternative
carriers, an interruption in service from one of these carriers or other
suppliers could limit our ability to serve customers, which would adversely
affect our results of operations.
IF OUR SECURITY MEASURES PROVED TO BE INADEQUATE, OUR ABILITY TO ATTRACT AND
RETAIN CUSTOMERS WOULD BE ADVERSELY AFFECTED.
Our infrastructure is potentially vulnerable to physical or electronic
break-ins, viruses or similar problems. If someone were to circumvent our
security measures, he or she could jeopardize the security of confidential
information stored on our systems, misappropriate proprietary information or
cause interruptions in our operations. We may be required to make significant
additional investments and efforts to protect against or remedy security
breaches. Security breaches that result in access to confidential information
could damage our reputation and expose us to a risk of loss or liability. The
security services that we offer in connection with our customers' networks
cannot assure complete protection from computer viruses, break-ins and other
disruptive problems. Although we attempt to contractually limit our liability in
such instances, the occurrence of these problems may result in claims against us
or liability on our part. These claims, regardless of their ultimate outcome,
could result in costly litigation and could harm our business and reputation and
impair our ability to attract and retain customers for our services.
BECAUSE OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH, USE AND IMPROVEMENT OF THE
INTERNET, ANY DECREASE IN INTERNET USAGE COULD ADVERSELY AFFECT OUR REVENUES.
Our services are targeted toward businesses that use the Internet. The
Internet is subject to a high level of uncertainty and is characterized by
rapidly changing technology, evolving industry standards and frequent new
service introductions. Accordingly, we are subject to the risks and difficulties
frequently encountered in new and rapidly evolving markets.
Critical issues concerning the commercial use of the Internet remain
unresolved and may affect the growth of Internet use, especially in the market
we target. Despite growing interest in the many commercial uses of the Internet,
many businesses have been deterred from purchasing Internet services for a
number of reasons, including:
o inadequate protection of the confidentiality of stored data
and information moving across the Internet;
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o inconsistent quality of service;
o inability to integrate business applications on the Internet;
o the need to deal with multiple vendors, whose products are
frequently incompatible;
o lack of availability of cost-effective, high-speed services;
and
o concern over the financial viability of Internet service
providers.
Capacity constraints caused by growth in Internet usage may, unless
resolved, impede further growth in Internet use. If the number of users on the
Internet does not increase and commerce over the Internet does not become more
accepted and widespread, demand for our services may decrease and, as a result,
our business would be harmed.
OUR BUSINESS REQUIRES US TO ADAPT TO TECHNOLOGICAL CHANGES, AND SIGNIFICANT
TECHNOLOGICAL CHANGES COULD RENDER OUR EXISTING SERVICES OBSOLETE.
We must adapt to our rapidly changing market by continually improving
the responsiveness, functionality and features of our services to meet our
customers' needs. If we are unable to respond to technological advances and
conform to emerging industry standards in a cost-effective and timely basis, our
business, financial condition and results of operations will be harmed.
CHANGES IN GOVERNMENT REGULATIONS RELATED TO THE INTERNET COULD RESTRICT OUR
ACTIVITIES, EXPOSE US TO LIABILITY OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS.
There are an increasing number of laws and regulations pertaining to
the Internet. These laws or regulations relate to liability for content and
information received from or transmitted over the Internet, user privacy and
security, taxation, the enforcement of online contracts, consumer protection and
other issues concerning services. The government may also seek to regulate some
aspects of our activities as basic telecommunications services. Moreover, the
applicability to the Internet of existing laws governing copyright, trademark,
trade secret, obscenity, libel, consumer protection, privacy and other issues is
uncertain and developing. We cannot predict the impact that future regulation or
regulatory changes may have on our business.
WE COULD BE LIABLE FOR VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF THIRD
PARTIES, WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
Despite our efforts to protect the intellectual property that is
important to the operation of our business, a third party could bring a claim of
infringement against us or any of our material suppliers. If such a claim were
settled or adjudicated against us or one of our material suppliers, we could be
forced to pay for a license to continue using the intellectual property. There
is no guarantee that we could obtain such a license, or that it would be
available on reasonable terms. Alternatively, we could be forced to defend
ourselves against infringement claims, which could be costly and which could
result in us having to pay damages to third parties.
WE MAY BE LIABLE FOR THE MATERIAL THAT OUR CUSTOMERS DISTRIBUTE OVER THE
INTERNET, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US.
The law relating to the liability of online service providers, private
network operators and Internet service providers for content and information
carried on or disseminated through their networks is currently unsettled. While
we have taken steps to contractually limit our liability in these areas, we
could become subject to legal claims relating to the content of the web sites we
host. For example, lawsuits could be brought against us claiming that material
inappropriate for viewing by young children can be accessed from the web sites
that we host. Claims could also involve matters such as defamation, invasion of
privacy, copyright and trademark infringement. Internet service providers have
been sued in the past, sometimes successfully, based on the material
disseminated over their networks. We may take additional measures to reduce our
exposure to these risks, which could be costly or result in some customers not
doing business with us. In addition, defending ourselves against claims, or
paying damage awards to third parties, could strain our management and financial
resources.
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WE FACE RISKS ASSOCIATED WITH DIFFERING REGULATORY REGIMES AND MARKETS AS A
RESULT OF OUR INTERNATIONAL OPERATIONS WHICH COULD ADVERSELY AFFECT OUR RESULTS
OF OPERATIONS.
A substantial percentage of our business is located in the United
Kingdom. We face problems of managing our business under differing regulatory
regimes in areas such as intellectual property, telecommunications and employee
relations. As a result, we may find it more difficult and expensive to hire and
train employees and to manage international operations together with our United
States operations. Because we have limited experience operating in markets
outside the United States and the United Kingdom, we may have difficulty
adapting our services to different international market needs. We may also be
unsuccessful in our efforts to market and sell these services to customers
abroad. If we fail to successfully address these risks, our international
operations may be adversely affected.
CURRENCY EXCHANGE RATE FLUCTUATIONS MAY HAVE A SIGNIFICANT IMPACT ON OUR
REVENUES AFFECTING OUR RESULTS FROM OPERATIONS.
We are subject to market risk associated with foreign currency exchange
rates. Approximately 42% of our revenues and approximately 28% of our operating
costs and expenses for the nine-month period ended June 30, 2004 were
denominated in British Pounds. We believe that an immediate increase or decrease
of 5% of the Dollar in comparison to the British Pound would not have a material
impact on our operating results or cash flows; however, it may have a
significant impact on our revenues. To date, we have not utilized financial
instruments to minimize our exposure to foreign currency fluctuations. We will
continue to analyze risk management strategies to minimize foreign currency
exchange risk in the future.
OUR RESULTS OF OPERATIONS FLUCTUATE ON A QUARTERLY AND ANNUAL BASIS AND WE
EXPECT TO CONTINUE EXPERIENCING FLUCTUATIONS IN OUR FUTURE QUARTERLY AND ANNUAL
RESULTS OF OPERATIONS, WHICH COULD AFFECT THE MARKET PRICE OF OUR SECURITIES.
Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing fluctuations in our future quarterly and annual
results of operations due to a variety of factors, many of which are outside our
control, including:
o timing of contractual cancellations and renewals;
o demand for and market acceptance of our services;
o introductions of new services by us and our competitors;
o customer retention;
o capacity utilization of our data centers and assets;
o timing of customer installations;
o our mix of services sold;
o the timing and magnitude of our capital expenditures;
o changes in our pricing policies and those of our competitors;
o fluctuations in bandwidth used by customers;
o our retention of key personnel;
o reliable continuity of service and network availability;
o costs related to the acquisition of network capacity;
o arrangements for interconnections with third-party networks;
o the provision of customer discounts and credits;
o the introduction by third parties of new Internet and
networking technologies;
o licenses and permits required to construct facilities, deploy
networking infrastructure or operate in the United States and
foreign countries; and
29
o other general economic factors.
Fluctuations in our quarterly or annual results as a result of one or
more of these factors could affect the market price of our securities.
BECAUSE OUR COMMON STOCK IS THINLY TRADED, PRICES ARE MORE LIKELY TO BE VOLATILE
AND IT MAY BE HARDER FOR OUR STOCKHOLDERS TO SELL ANY SIZABLE NUMBER OF SHARES.
Our common stock is currently quoted on the OTC Bulletin Board (the
"OTCBB"). Although the OTCBB is a quotation service operated by The Nasdaq Stock
Market and displays real-time quotes, last sale prices, and volume information
on equity securities like our common stock, the stocks quoted on the OTCBB may
not be viewed within the investment community as equivalent to stocks quoted on
other markets, where there is a more active public trading market. In addition,
because of the relatively small number of shares that are traded, prices may be
volatile and it may be difficult to find a purchaser for any sizable amount of
the stock. Although we have applied to have our common stock listed on the
American Stock Exchange, we cannot assure you that an active and liquid trading
market will develop in our common stock, or if one does develop that it will
continue. The development of an active public trading market depends upon the
existence of willing buyers and sellers and is not within our control. For these
reasons, we cannot assure NEON stockholders that they will be able to resell the
shares of Globix common stock received in connection with the merger for a price
that is equal to or greater than the price of Globix common stock on the date
the merger is completed.
FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE ISSUED IN THE MERGER, MAY
DEPRESS OUR STOCK PRICE.
If our stockholders or option holders, including NEON stockholders and
option holders who are receiving Globix common stock and stock options in the
merger, sell substantial amounts of our common stock in the public market, the
market price of our common stock could fall. All the shares sold in this
offering will be freely tradable, subject to limitations applicable to
affiliates of NEON. In addition, we are obligated to register approximately 5
million shares of our common stock received by certain stockholders in our
bankruptcy, and we intend to complete the public offer and sale of such shares
within a short time after the completion of the merger. We also have obligations
to register the approximately 4,545,455 shares issuable to certain holders of
our 11% senior notes in the debt-for-equity exchange described in this joint
proxy statement/prospectus within ninety days after the merger is completed.
WE ARE NOT REQUIRED TO MEET CERTAIN CORPORATE GOVERNANCE REQUIREMENTS APPLICABLE
TO LISTED COMPANIES.
Currently Globix common stock is quoted on the OTCBB where we are not
required to meet or maintain any listing standards for our common stock. If our
application for listing of our common stock on the American Stock Exchange is
approved, we will have to meet a number of additional listing standards relating
to the independence of our board of directors and committees of our board, some
of which we currently do not meet. We cannot assure you that our application for
listing on the America Stock Exchange will be approved.
IF OUR BOARD OF DIRECTORS DETERMINES TO ENGAGE IN CERTAIN CHANGE OF CONTROL
TRANSACTIONS, OR IF A THIRD PARTY WERE TO ACQUIRE MORE THAN 50% OF OUR STOCK OR
ACQUIRE CONTROL OF OUR BOARD OF DIRECTORS, WE OR THE THIRD PARTY COULD BE
REQUIRED TO PURCHASE OUR 11% SENIOR NOTES AND OUR CONVERTIBLE PREFERRED STOCK TO
BE ISSUED IN THE MERGER, AND THE FAILURE TO DO SO WOULD RESULT IN AN EVENT OF
DEFAULT UNDER THE INDENTURE GOVERNING THE NOTES AND/OR A BREACH OF OUR
OBLIGATIONS WITH RESPECT TO OUR CONVERTIBLE PREFERRED STOCK.
In the event that:
o subject to certain exceptions, any person, entity or group of
persons or entities becomes the beneficial owner, directly or
indirectly, of more than 50% of our outstanding voting
securities;
o at any time during any two-year period following the
distribution of the 11% senior notes, the individuals who
comprised a majority of our board of directors at the
beginning of such two year period, plus any new directors
whose election to our board was approved by a majority of
those directors, cease to comprise a majority of our board of
directors; or
30
o subject to certain exceptions, we consolidate with or merge
with or into another entity, we sell or lease all or
substantially all of our assets to another entity or any
entity consolidates with or merges into or with our company,
in each case pursuant to a transaction in which our
outstanding voting securities are changed into or exchanged
for cash, securities or other property, unless no person,
entity or group of persons or entities owns, immediately after
the transaction, more than 50% of our outstanding voting
stock,
then each holder of the 11% senior notes will have the right to require us to
repurchase all or a portion of its 11% senior notes for a purchase price equal
to 101% of the principal amount of that holder's 11% senior notes plus accrued
and unpaid interest to the date of repurchase. There can be no assurance that we
will have sufficient funds available to make any required repurchases of 11%
senior notes or that the terms of our other indebtedness will permit us to make
any required repurchases of 11% senior notes. If we are unable to repurchase a
holder's 11% senior notes in connection with one of the events described above,
then this would constitute an event of default under the indenture governing the
11% senior notes.
Additionally, in the event of a change in control, each holder of our
convertible preferred stock will have the option to require us to redeem its
shares at a price equal to $3.636 per share plus all accrued and unpaid
dividends up to the date that such shares are redeemed. We cannot redeem any
shares of our convertible preferred stock upon a change in control prior to
repurchasing any securities ranking senior to our convertible preferred stock,
including the 11% senior notes. Therefore, if we are unable to repurchase all of
the 11% senior notes in connection with a change in control we would not be able
to redeem any shares of our convertible preferred stock.
AS A RESULT OF VARIOUS FINANCIAL ACCOUNTING COMPLEXITIES, ACCOUNTING STAFF
TURNOVER AND ACCOUNTING STAFF SHORTAGES, WE EXPERIENCED MATERIAL WEAKNESSES IN
OUR ACCOUNTING AND INTERNAL CONTROL ENVIRONMENT IN SUMMER 2003 THAT RESULTED IN
THE DELAY AND LATE FILING OF SEC REPORTS FILED DURING SUMMER 2003.
Since our emergence from bankruptcy effective April 25, 2002, Globix
has had to face many challenging and complex accounting and financial reporting
issues, including fresh start accounting, restructuring and the restatement of
amounts in its financial statements as of and for the quarter ended March 31,
2002. In addition, Globix experienced significant turnover in its financial
reporting staff, as well as limited management resources. Globix fell behind in
its SEC reporting for the year ended September 30, 2002, and experienced
difficulty in catching up with its filing obligations for the year ended
September 30, 2002 while fulfilling its responsibilities for the fiscal year
2003. The combined effect of these challenges placed a strain on our internal
accounting resources in summer 2003 and resulted in further delays in the
preparation and filing of periodic reports that were filed in summer 2003. The
strain on our internal accounting resources and the delays in the preparation
and filing of periodic reports created material weaknesses in our accounting and
internal control environment in summer 2003. For further information concerning
our internal controls, see "Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure" beginning on page 116 of this joint proxy
statement/prospectus.
AS A RESULT OF OUR APPLICATION OF FRESH START ACCOUNTING UNDER AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION NO. 90-7,
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE"
(OTHERWISE KNOWN AS "SOP NO. 90-7"), AS OF MAY 1, 2002, OUR FINANCIAL STATEMENTS
AS OF AND FOR PERIODS SUBSEQUENT TO MAY 1, 2002 ARE NOT COMPARABLE TO OUR
FINANCIAL STATEMENTS AS OF AND FOR PERIODS PRIOR TO MAY 1, 2002, WHICH MAY MAKE
IT MORE DIFFICULT FOR YOU TO ASSESS OUR FINANCIAL PERFORMANCE.
In connection with our emergence from bankruptcy on April 25, 2002, we
applied the principles of SOP 90-7 as of May 1, 2002. Accordingly, our assets
and liabilities as of May 1, 2002 were revalued to fair market value, and
therefore our financial statements for periods subsequent to May 1, 2002 are not
comparable to our financial statements for periods prior to May 1, 2002. This
may make it more difficult for third parties to assess our financial
performance.
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YOU ARE UNLIKELY TO BE ABLE TO EXERCISE EFFECTIVE REMEDIES AGAINST ARTHUR
ANDERSEN LLP, THE FORMER INDEPENDENT PUBLIC ACCOUNTANTS FOR GLOBIX, FOR ANY
LIABILITY THAT THEY MIGHT OTHERWISE HAVE UNDER SECTION 11(A) OF THE SECURITIES
ACT OF 1933 OR OTHER SECURITIES LAWS.
Globix's Consolidated Financial Statements for the year ended September
30, 2001 (its predecessor company financial statements prior to its emergence
from bankruptcy in April 2002) were audited by Arthur Andersen LLP.
On March 14, 2002, Arthur Andersen LLP was indicted on federal
obstruction of justice charges arising from the government's investigation of
Enron Corp. On June 15, 2002, a jury in Houston, Texas, found Arthur Andersen
LLP guilty of these federal obstruction of justice charges. In light of the jury
verdict and the underlying events, Arthur Andersen LLP subsequently
substantially discontinued operations and dismissed essentially its entire
workforce. You are, therefore, unlikely to be able to exercise effective
remedies or collect judgments against Arthur Andersen LLP. In addition, Arthur
Andersen LLP has not consented to the inclusion of its report for Globix in this
joint proxy statement/prospectus, and the requirement to file its consent with
respect to such report has been dispensed with in reliance on Rule 437a under
the Securities Act of 1933. Because Arthur Andersen LLP has not consented to the
inclusion of its report in this joint proxy statement/prospectus, you will not
be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933 for any untrue statement of a material fact contained in
the financial statements audited by Arthur Andersen LLP or any omissions to
state a material fact required to be stated in those financial statements.
RISK FACTORS RELATED TO NEON
After the merger, NEON's operating results will have a significant
impact on the operating results of Globix. NEON's contribution to the combined
results will depend upon the extent to which NEON achieves its own strategic
plan. The following risk factors are ones that NEON believes may inhibit its
ability to achieve its plan. The information contained in this joint proxy
statement/prospectus should be read in light of such factors. Any of the
following factors could have a material adverse effect on the business and
future operating results of the combined company. In addition, these risks may
have a material adverse effect on the business, financial condition or results
of operations of NEON if the merger is not consummated.
RISKS RELATING TO OUR BUSINESS STRATEGY
OUR BUSINESS STRATEGY DEPENDS UPON ANTICIPATED CUSTOMER DEMAND FOR OUR SERVICES,
AND OUR FAILURE TO OBTAIN CUSTOMERS FOR OUR SERVICES AT PROFITABLE RATES WOULD
ADVERSELY AFFECT OUR BUSINESS RESULTS.
Our ability to become profitable depends upon our ability to secure a
market for our services and obtain service contracts with our communications
customers. Many of our targeted customers may also be our potential competitors.
If our services are not satisfactory or cost competitive, our targeted customers
may utilize other providers where available, or construct their own networks,
which would reduce their need for our services and create future sources of
competition for us.
INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FROM A BROAD RANGE OF
COMPETITORS MAY PREVENT US FROM OBTAINING CUSTOMERS AND REQUIRE US TO LOWER
PRICES.
The telecommunications industry is highly competitive. We face
substantial competition from companies with significantly greater financial and
other resources, whose capacity is interchangeable with the capacity we offer,
including incumbent local telephone companies, national long-haul and regional
carriers, dark fiber providers and metro carriers. In addition, potential
competitors capable of offering services similar to those offered by us include
other communications service providers that own and operate their own networks
and equipment, including cable television companies, electric utilities,
microwave carriers, satellite carriers, wireless communication system operators
and end-users with private communications networks.
32
BECAUSE WE OFFER A RELATIVELY NARROW RANGE OF SERVICES IN COMPARISON TO SOME OF
OUR COMPETITORS, WE CANNOT ACHIEVE REVENUES COMPARABLE TO COMPANIES OFFERING A
BROADER ARRAY OF SERVICES AND MAY BE AT A COMPETITIVE DISADVANTAGE WITH RESPECT
TO THE SERVICES WE OFFER.
Unlike more diversified telecommunications companies, we derive and
expect to continue to derive substantially all of our revenues from the leasing
of fiber optic capacity on a wholesale basis to our customers, most of whom are
telecommunications companies and Internet service providers serving end-users.
The limited nature of our current services could limit our potential revenues
and result in our having lower revenues than competitors which provide a wider
array of services. While we are currently attempting to expand the breadth of
our product offering, we cannot assure you that any new product offerings will
achieve market acceptance.
DUE TO RAPIDLY EVOLVING TECHNOLOGIES IN OUR INDUSTRY AND THE UNCERTAINTY OF
FUTURE GOVERNMENT REGULATION, OUR CURRENT BUSINESS PLAN MAY BECOME OBSOLETE AND
WE MAY BE UNABLE TO MAINTAIN A COMPETITIVE POSITION IF WE ARE UNABLE TO
SUCCESSFULLY ADJUST OUR PRODUCTS, SERVICES AND BUSINESS STRATEGIES AS REQUIRED.
In the future, we may become subject to more intense competition due to
the development of new technologies, an increased supply of domestic and
international transmission capacity, the consolidation in the industry among
local and long distance service providers and the effects of deregulation
resulting from the Telecommunications Act of 1996. The introduction of new
services and products or the emergence of new technologies may change the cost
or increase the supply of services and products similar to those that we
provide. We cannot predict which of many possible future product and service
offerings will be crucial to maintain our competitive position or what
expenditures will be required to develop profitably and provide such products
and services. Prices for our services to carriers specifically, and interstate
services in general, may decline over the next several years due primarily to
price competition to the extent that network providers continue to install
networks that compete with our network. We also believe that there will be
technological advances that will permit substantial increases in the
transmission capacity of both new and existing fiber.
A LIMITED NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SIGNIFICANT PERCENTAGE OF OUR
REVENUES AND ACCOUNTS RECEIVABLE.
Historically, a limited number of customers have accounted for a
significant percentage of our revenues and accounts receivable. In 2001 and
2003, one customer accounted for 10% of net revenues. In 2002 and for the six
months ended June 30, 2004, no customer accounted for more than 10% of net
revenues. At December 31, 2002 and 2003, no customers had balances in excess of
10% of accounts receivable. At June 30, 2004, one customer accounted for
approximately 41% of accounts receivable. This customer is currently undergoing
bankruptcy reorganization and has agreed to pay the accounts receivable balance
in full. We anticipate that our results of operations in any given period will
continue to depend to a significant extent upon revenues from a relatively small
number of customers.
OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL, OUR ABILITY TO
HIRE ADDITIONAL QUALIFIED PERSONNEL AND THE MAINTENANCE OF GOOD LABOR RELATIONS.
We depend on the performance of our executive officers and key
employees. In particular, our senior management has significant experience in
the telecommunications industry and the loss of any of them could negatively
affect our ability to execute our business strategy. Our future success also
depends on our continuing ability to identify, hire, train and retain other
highly qualified technical, operations, sales, marketing, financial, legal,
human resource, and managerial personnel as we grow our business. Competition
for such qualified personnel is high. Our business will be harmed if we cannot
attract and retain the necessary qualified personnel.
AS A RESULT OF OUR APPLICATION OF FRESH START ACCOUNTING UNDER AMERICAN
INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION NO. 90-7,
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE"
(OTHERWISE KNOWN AS "SOP NO. 90-7"), AS OF DECEMBER 31, 2002, OUR FINANCIAL
STATEMENTS AS OF AND FOR PERIODS SUBSEQUENT TO DECEMBER 31, 2002 ARE NOT
COMPARABLE TO OUR FINANCIAL STATEMENTS FOR PERIODS PRIOR TO DECEMBER 31, 2002,
WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO ASSESS OUR FINANCIAL PERFORMANCE.
33
In connection with our emergence from bankruptcy on December 20, 2002,
we have applied the principles of SOP 90-7 as of December 31, 2002. Accordingly
our financial statements as of and for periods subsequent to December 31, 2002
are not comparable to our financial statements for periods prior to December 31,
2002. This may make it more difficult for third parties to assess our financial
performance.
CONTINUING WEAKNESS IN THE TELECOMMUNICATIONS INDUSTRY MAY IMPACT US.
The continuation of the downturn in the telecommunications industry,
may have a significant impact on us. Several of our competitors and customers
have filed for protection under the bankruptcy laws and we may be unable to
collect receivables due to bankruptcies and business difficulties among our
customers. Oversupply of capacity and an ongoing downward trend in bandwidth
prices may continue if our competitors do not successfully consolidate. Even if
they do successfully consolidate, they may do so to our detriment. Competitors
who successfully complete restructuring or bankruptcy reorganization processes
or who introduce new product offerings may put us at a competitive disadvantage.
TERRORIST ATTACKS OR WAR MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
OPERATING RESULTS.
The occurrence of terrorist attacks or armed conflicts may directly
impact our facilities or the facilities of our suppliers or customers. In
addition, such attacks or conflicts may result in increased volatility in the
United States and global financial markets. Any of these occurrences could
potentially have a material impact on our financial condition and operating
results.
UNCERTAINTY OR NEGATIVE PUBLICITY MAY NEGATIVELY AFFECT OUR BUSINESS.
There is a possibility that uncertainty or adverse publicity concerning
negative perceptions about the industry as a whole could hinder our ability to
obtain new customers or undermine our commercial relationship with existing
customers. Despite a successful reorganization, potential customers may
associate our bankruptcy with negative business implications and misunderstand
(or fail to recognize) the state of our finances and future prospects.
RISKS RELATING TO THE EXPANSION AND OPERATION OF OUR FIBER OPTIC NETWORK
THE SUCCESSFUL, TIMELY AND COST-EFFECTIVE EXPANSION OF OUR FIBER OPTIC NETWORK
WITHIN THE NORTHEAST AND MID-ATLANTIC REGIONS IS CRUCIAL TO OUR BUSINESS PLAN,
AND DEPENDS UPON NUMEROUS FACTORS BEYOND OUR CONTROL.
Our ability to achieve our strategic objectives depends in large part
upon the successful, timely and cost-effective expansion of our fiber optic
network within the Northeast and mid-Atlantic regions. The failure of both
affiliated and third party suppliers or contractors to meet their obligations to
construct and maintain significant portions of our fiber optic network in a
timely and cost-effective manner could affect our ability to execute our
business plan.
THE EXPENDITURES NECESSARY TO SUFFICIENTLY EXPAND OUR FIBER OPTIC NETWORK AND
DEVELOP OUR SERVICES IN ORDER TO SATISFY THE CURRENT AND FORECASTED DEMANDS OF
OUR CUSTOMERS MAY SURPASS OUR AVAILABLE CASH, AND WE MAY BE UNABLE TO OBTAIN
ADDITIONAL CAPITAL TO DEVELOP OUR SERVICES ON A TIMELY BASIS AND ON ACCEPTABLE
TERMS.
Although we have expended significant resources in building our network
and the development of our customer base, we will require additional cash in
order to expand our geographic coverage and the range of services which we can
offer throughout our service area in order to be competitive in our market and
to meet customer demands. These expenditures for expansion and for more
services, together with associated operating expenses, will reduce our cash flow
and profitability until we establish an adequate customer base throughout all of
our coverage areas. To date, we have expended substantial amounts on
construction of our network from the proceeds of our financing activities and,
accordingly, we have generated negative cash flow.
WE OBTAIN SOME OF THE KEY COMPONENTS USED IN OUR FIBER OPTIC NETWORK FROM A
SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS
OF ONE OF THESE SUPPLIERS COULD DISRUPT OUR OPERATIONS AND RESULT IN A
SUBSTANTIAL LOSS OF REVENUES.
34
We depend upon a small group of suppliers for some of the key
components and parts used in our network. In particular, we purchase fiber optic
equipment from Nortel Networks, Cisco Systems, Lucent Technologies and ECI
Telecom. Any delay or extended interruption in the supply of any of the key
components, changes in the pricing arrangements with our suppliers and
manufacturers or delay in transitioning a replacement supplier's product into
our network could disrupt our operations.
OUR FIBER OPTIC NETWORK, WHICH IS OUR SOLE SOURCE OF REVENUE, IS VULNERABLE TO
PHYSICAL DAMAGE, CATASTROPHIC OUTAGES, POWER LOSS AND OTHER DISRUPTIONS BEYOND
OUR CONTROL, AND THE OCCURRENCE OF ANY OF THESE FAILURES COULD RESULT IN
IMMEDIATE LOSS OF REVENUES, PAYMENT OF OUTAGE CREDITS TO OUR CUSTOMERS AND, MORE
IMPORTANTLY, THE LOSS OF OUR CUSTOMERS' CONFIDENCE AND OUR BUSINESS REPUTATION.
Our success in marketing our services to our customers requires that we
provide high reliability, high bandwidth and a secure network. Our network and
the infrastructure upon which it depends are subject to physical damage, power
loss, capacity limitations, software defects, breaches of security and other
disruptions beyond our control that may cause interruptions in service or
reduced capacity for customers. Our agreements with our customers typically
provide for the payment of outage related credits (a predetermined reduction or
offset against our lease rate when a customer's leased facility is
non-operational or otherwise does not meet certain operating parameters) or
damages in the event of a disruption in service. These credits or damages could
be substantial and could significantly decrease our net revenues. Significant or
lengthy outages would also undermine our customers' confidence in our fiber
optic network and injure our business reputation.
RISKS RELATING TO OUR RIGHTS-OF-WAY
WE COULD LOSE THE CONTRACT RIGHTS UPON WHICH WE RELY TO OPERATE AND MAINTAIN OUR
NETWORK IN THE EVENT OF BANKRUPTCY PROCEEDINGS RELATING TO ONE OR MORE OF THE
THIRD PARTIES THAT HAVE GRANTED TO US THE RIGHT TO BUILD AND OPERATE OUR NETWORK
USING THEIR RIGHTS-OF-WAY.
The construction and operation of significant portions of our fiber
optic network depends upon contract rights known as indefeasible rights-of-use.
Indefeasible rights-of-use are commonly used in the telecommunications industry,
but remain a relatively new concept in property law. Although indefeasible
rights-of-use give the holder a number of rights to control the relevant
rights-of-way or fiber optic filaments, legal title remains with the grantor of
the rights. Therefore, the legal status of indefeasible rights-of-use remains
uncertain, and our indefeasible rights-of-use might be voidable in the event of
bankruptcy of the grantor. If we were to lose an indefeasible right-of-use in a
key portion of our network, our ability to service our customers could become
seriously impaired and we could be required to incur significant expense to
resume the operation of our fiber optic network in the affected areas.
DESPITE OUR EXISTING RIGHTS-OF-WAY, WE MAY BE FORCED TO MAKE SUBSTANTIAL
ADDITIONAL PAYMENTS TO THE AFFECTED LANDOWNERS OR REMOVE OUR NETWORK FROM THEIR
PROPERTY, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS AND OUR RESULTS OF
OPERATIONS.
Our indefeasible rights-of-use and other rights-of-way depend on the
grantor's interest in the property on which our network is located. To the
extent that a grantor of an indefeasible right-of-use or other rights-of-way has
a limited easement in the underlying property and not full legal title, the
adequacy of our indefeasible rights-of-use or other rights-of-way could be
challenged in court. We believe that the easements granted by a substantial
number of landowners to grantors of our indefeasible rights-of-use are similar
in scope to those with respect to which claims have been asserted, and we cannot
guarantee that claims will not be made in the future.
BECAUSE SIGNIFICANT PORTIONS OF OUR FIBER OPTIC NETWORK ARE CONSTRUCTED UPON
RIGHTS-OF-WAY CONTROLLED BY UTILITY COMPANIES AND MUNICIPALITIES WHICH GENERALLY
PLACE THE OPERATION OF THEIR FACILITIES AHEAD OF THE OPERATION OF OUR FIBER
OPTIC NETWORK, WE MAY BE UNABLE TO CONSTRUCT AND OPERATE OUR FIBER OPTIC NETWORK
IN THE AFFECTED AREAS WITHOUT PERIODIC INTERRUPTIONS AND DELAYS CAUSED BY THE
DAY-TO-DAY OPERATIONS OF THESE ENTITIES.
Our rights-of-way agreements with Northeast Utilities, Central Maine
Power and Consolidated Edison Communications, Inc. and various other entities
contain provisions which acknowledge the right of these entities to make the
provision of their services to their own customers their top priority. These
companies are required only to exercise "reasonable care" with respect to our
facilities and are otherwise free to take whatever actions they deem appropriate
with respect to ensuring or restoring service to their customers, any of which
actions could impair operation of our network.
35
MUNICIPAL REGULATION OF OUR ACCESS TO PUBLIC RIGHTS-OF-WAY IS SUBJECT TO CHANGE
AND COULD IMPOSE ADMINISTRATIVE BURDENS THAT WOULD ADVERSELY AFFECT OUR
BUSINESS.
Local governments typically retain the ability to license public
rights-of-way, subject to the federal requirement that local governments may not
prohibit the provision of telecommunications services. Changes in local
government regulation could impose additional costs on our business and limit
our operations. Local authorities affect the timing and costs associated with
our use of public rights-of-way.
RISKS RELATING TO GOVERNMENT REGULATION
FEDERAL REGULATION OF THE TELECOMMUNICATIONS INDUSTRY IS CHANGING RAPIDLY AND WE
COULD BECOME SUBJECT TO UNFAVORABLE NEW RULES AND REQUIREMENTS WHICH COULD
IMPOSE SUBSTANTIAL FINANCIAL AND ADMINISTRATIVE BURDENS ON US AND INTERFERE WITH
OUR ABILITY TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGIES.
Regulation of the telecommunications industry is changing rapidly.
Existing and future federal, state, and local governmental regulations will
greatly influence our viability. Consequently, undesirable regulatory changes
could adversely affect our business, financial condition and results of
operations. For example, the FCC recently issued rules under the
Telecommunications Act of 1996 which would have required that competitive local
exchange carriers, such as NEON, be allowed to purchase the use of certain
elements of the telecommunications network owned and operated by incumbent local
exchange carriers. By purchasing these elements, competitive local exchange
carriers would have been able to provide services in a cost-effective manner to
their customers. However, the FCC's rules were challenged in court by the
incumbent local exchange carriers. The U.S. Court of Appeals for the District of
Columbia Circuit sided with the incumbent local exchange carriers and has
required the FCC to formulate new rules. Any new rules issued by the FCC may not
provide competitive local exchange carriers with the ability to purchase the use
of all of the elements of the incumbent local exchange carrier's network, and as
a result the competitive local exchange carriers may not be able to continue
providing services to their customers that they are currently providing.
REVENUES FROM TELECOMMUNICATIONS PROVIDED TO END-USERS, WHICH REPRESENT A
PORTION OF OUR REVENUES, ARE SUBJECT TO CONTRIBUTIONS TO THE FCC'S UNIVERSAL
SERVICE FUND.
While we generally do not deal directly with end-users of
telecommunications and are therefore generally exempt from contributing to the
FCC's Universal Service Fund, the FCC treats certain Internet service providers
purchasing telecommunications as end-users. Our revenues from providing
telecommunications to end-users, which represent a portion of our revenues, are
therefore currently subject to an assessment of 8.9%. Such assessments vary and
may increase from quarter to quarter. If the annual contribution amount would be
less than $10,000, we would qualify for a de minimus exemption from contribution
to the Fund. Our required contributions to the Universal Service Fund for the
year ended December 31, 2003 and the six months ended June 30, 2004 were
approximately $168,000 and $94,000, respectively.
IF WE BECOME SUBJECT TO REGULATION AS A COMMON CARRIER IN THE FUTURE, WE WOULD
BE SUBJECT TO ADDITIONAL REGULATORY REQUIREMENTS.
We do not believe that we are currently a "common carrier," but that
status could change based on differing interpretations of current regulations,
regulatory changes and changes in the way we conduct our business. If we become
regulated as a common carrier by the FCC, we would have to publicize the rates
for our services and submit other reports, and would be required to contribute
to federal funds including, but not limited to, those established for
Telecommunications Relay Services, for the management of the North American
Numbering Plan and for Local Number Portability. These regulatory requirements
could impose substantial burdens on us.
The Telecommunications Act of 1996 requires incumbent local telephone
companies to provide elements of their networks to competitors on an unbundled
basis. The FCC determined that dark fiber is a network element that incumbent
local telephone companies must provide to others. The availability of this
alternative source of supply may increase competition among providers of dark
fiber services and could decrease the demand for our services.
STATE REGULATION OF COMPANIES PROVIDING TELECOMMUNICATIONS SERVICES VARIES
SUBSTANTIALLY FROM STATE TO STATE AND WE MAY BECOME SUBJECT TO BURDENSOME AND
RESTRICTIVE STATE REGULATIONS AS WE EXPAND OUR FIBER OPTIC NETWORK INTO A
BROADER GEOGRAPHIC AREA, WHICH COULD INTERFERE WITH OUR OPERATIONS AND OUR
ABILITY TO MEET OUR STRATEGIC OBJECTIVES.
36
We may be subject to state regulation, which can vary substantially
from state to state. NEON subsidiaries have obtained authority to provide
intrastate telecommunications services on a competitive common carrier basis in
our market area. Therefore, these subsidiaries are subject to the obligations
that applicable law places on all similarly certificated common carriers
including the filing of tariffs, state regulation of certain service offerings,
pricing, payment of regulatory fees and reporting requirements. The costs of
compliance with these regulatory obligations, or any of the regulatory
requirements of other states to which we might become subject, could have a
material adverse effect on our operations. Moreover, some of our rights-of-way
depend on our status as a common carrier in these states, and if that status
were to be successfully challenged, those rights-of-way could be terminated.
YOU ARE UNLIKELY TO BE ABLE TO EXERCISE EFFECTIVE REMEDIES AGAINST ARTHUR
ANDERSEN LLP, THE FORMER INDEPENDENT PUBLIC ACCOUNTANTS FOR NEON FOR ANY
LIABILITY THAT THEY MIGHT OTHERWISE HAVE UNDER SECTION 11(A) OF THE SECURITIES
ACT OF 1933 OR OTHER SECURITIES LAWS.
NEON's Consolidated Financial Statements as of December 31, 2001, and
for the year then ended (its predecessor company financial statements prior to
its emergence from bankruptcy in December 2002), were audited by Arthur Andersen
LLP.
On March 14, 2002, Arthur Andersen LLP was indicted on federal
obstruction of justice charges arising from the government's investigation of
Enron Corp. On June 15, 2002, a jury in Houston, Texas, found Arthur Andersen
LLP guilty of these federal obstruction of justice charges. In light of the jury
verdict and the underlying events, Arthur Andersen LLP subsequently
substantially discontinued operations and dismissed essentially its entire
workforce. You are, therefore, unlikely to be able to exercise effective
remedies or collect judgments against Arthur Andersen LLP. In addition, Arthur
Andersen LLP has not consented to the inclusion of its report for NEON in this
joint proxy statement/prospectus, and the requirement to file its consent with
respect to such report has been dispensed with in reliance on Rule 437a under
the Securities Act of 1933. Because Arthur Andersen LLP has not consented to the
inclusion of its report in this joint proxy statement/prospectus, you will not
be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933 for any untrue statement of a material fact contained in
the financial statements audited by Arthur Andersen LLP or any omissions to
state a material fact required to be stated in those financial statements.
THE SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS
GENERAL
Globix is furnishing this joint proxy statement/prospectus to its
stockholders in connection with the solicitation of proxies by the Globix board
of directors for use at the special meeting of stockholders of Globix to be held
on [_____], 2004, and at any adjournment or postponement of the special meeting.
This document was first mailed to stockholders of Globix on or about
[_____], 2004.
DATE, TIME AND PLACE
The special meeting will be held on [________], 2004 at 10:00 a.m.,
local time, at the offices of Globix at 139 Centre Street, New York, NY 10013.
Globix's telephone number is (212) 334-8500.
PURPOSE OF THE SPECIAL MEETING
The purpose of the Globix special meeting is to consider and vote upon
proposals to:
1. Issue Globix common stock pursuant to the merger agreement;
2. Grant discretionary authority to adjourn or postpone the Globix
special meeting to solicit additional votes to approve the matter considered at
the Globix special meeting, if necessary; and
3. Consider and act upon any other matter that may properly come before
the special meeting or any adjournment or postponement of the special meeting.
37
RECORD DATE AND VOTING
Holders of record of common stock at the close of business on September
27, 2004 (referred to in this joint proxy statement/prospectus as the Globix
record date) that are entitled to vote at any annual or special meeting of
Globix stockholders are entitled to vote at the special meeting and any
adjournment or postponement of the special meeting.
On the Globix record date, there were 16,460,000 shares of common stock
outstanding. Of these shares of common stock, only 16,065,948 shares have been
distributed. Of the 16,460,000 shares of common stock deemed issued and
outstanding, 229,452 shares were placed in reserve in escrow pending the outcome
of a class action lawsuit described in "Information About Globix - Legal
Proceedings" beginning on page 94 of this joint proxy statement/prospectus
and are not entitled to vote at the special meeting. Another 164,600 shares of
common stock will be distributed following resolution of a shareholder
derivative suit filed against Globix and certain of our former officers and
directors, as described in "Information About Globix - Legal Proceedings"
beginning on page 94 of this joint proxy statement/prospectus and are also
not entitled to vote. Therefore, although 16,460,000 shares of common stock are
deemed issued and outstanding as of the Globix record date, only 16,065,948
shares of common stock are entitled to vote at the special meeting.
Each share of common stock entitled to vote at the special meeting is
entitled to one vote on each matter properly brought before the special meeting.
Under the applicable rules of the American Stock Exchange, the issuance
of shares of Globix common stock in connection with the merger requires the
approval of a majority of votes cast by stockholders eligible to vote at the
Globix special meeting.
The approval of the holders of a majority of votes cast by stockholders
eligible to vote at the Globix special meeting is also required to approve the
proposal to grant discretionary authority to adjourn or postpone the special
meeting, if necessary, to solicit additional votes to approve the proposal to
issue Globix common stock in the merger.
As of the close of business on the Globix record date for the special
meeting, Globix's directors and their respective affiliates beneficially owned
and were entitled to vote approximately 5,348,581 shares of Globix common stock.
As of the close of business on the record date, directors of NEON and
their respective affiliates beneficially owned 1,219,817 shares of Globix common
stock.
VOTING OF PROXIES AT THE GLOBIX SPECIAL MEETING AND REVOCATION OF PROXIES
All shares of Globix common stock that are entitled to vote and are
represented at the Globix special meeting by properly executed proxies received
prior to or at such meeting, and not revoked, will be voted at such meeting in
accordance with the instructions indicated on such proxies. If no instruction is
indicated, then unless the shares covered by the proxy are in a brokerage
account, such proxies will be voted "FOR" the proposed issuance of Globix common
stock pursuant to the merger and "FOR" the proposal to grant discretionary
authority to adjourn or postpone the Globix special meeting to solicit
additional votes to approve the matter considered at the Globix special meeting,
if necessary. If your shares are held in a brokerage account, please review
"Quorum, Adjournment, Abstentions and Broker Non-Votes for Shares Held in a
Brokerage Account" below.
The Globix board of directors does not know of any matters other than
those described in the notice of the Globix special meeting that are to come
before such meeting. If any other matters are properly presented at the Globix
special meeting for consideration, the persons named in the enclosed proxy card
and acting thereunder generally will have discretion to vote on such matters in
accordance with their best judgment.
Any proxy given pursuant to the solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by:
o filing with James C. Schroeder, the General Counsel of Globix,
at or before the taking of a vote at the Globix special
meeting, a written notice of revocation bearing a later date
than the proxy;
38
o duly executing a later dated proxy relating to the same shares
and delivering it to James C. Schroeder before the taking of
the vote at the Globix special meeting; or
o attending the Globix special meeting and voting in person
(although attendance at the Globix special meeting will not in
and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent to
Globix Corporation, 139 Centre Street, New York, New York 10013, Attn: James C.
Schroeder, or hand-delivered to James C. Schroeder at or before the taking of
the vote at the Globix special meeting in New York.
Globix will be soliciting proxies on its own behalf. Globix intends to
solicit proxies through this joint proxy statement/prospectus and directly
through its directors, officers and regular employees. Solicitation of some
stockholders may be made in person or by mail, telephone, facsimile transmission
or other means of electronic transmission. Globix will bear its own expenses in
connection with the solicitation of proxies for its special meeting of
stockholders.
QUORUM, ADJOURNMENT, ABSTENTIONS AND BROKER NON-VOTES FOR SHARES HELD IN A
BROKERAGE ACCOUNT
The representation in person, or by properly executed proxy, of the
holders of one-third of all shares of capital stock entitled to vote at the
special meeting is necessary to constitute a quorum for the transaction of
business at the special meeting of Globix.
Globix has appointed Mellon Investor Services LLC, its transfer agent,
to function as the inspector of elections of the special meeting. The inspector
of elections will ascertain whether a quorum is present, tabulate votes and
determine the voting results on all matters presented to Globix stockholders at
the special meeting. If fewer shares of Globix common stock are voted for the
approval of the proposal being considered at the special meeting than are
required for approval of such proposal, and if stockholders approve the proposal
to grant discretionary authority to adjourn or postpone the special meeting, the
special meeting may be adjourned or postponed for the purpose of allowing
additional time for obtaining additional proxies or votes, and, at any
subsequent reconvening of the special meeting, all proxies will be voted in the
same manner as the proxies would have been voted at the original convening of
the special meeting, except for any proxies that have been effectively revoked
or withdrawn prior to the subsequent reconvening of the special meeting.
If you submit a proxy that indicates an abstention from voting in all
matters, your shares will be counted as present for the purpose of determining
the existence of a quorum at the special meeting, but they will not be voted on
any matter at the special meeting. Consequently, your abstention will not be
considered a vote cast and will have no effect in the outcome of the proposal to
approve the issuance of Globix common stock in connection with the merger or the
proposal to grant discretionary authority to adjourn or postpone the special
meeting to solicit additional votes to approve the matter considered at the
special meeting, if necessary. If your proxy indicates an abstention only as to
a particular proposal, that abstention will have no effect on the outcome of
that particular proposal only.
If you hold your shares of Globix common stock in a brokerage account,
the broker holding such shares in "street name" may vote the shares only if you
provide the broker with appropriate instructions. If an executed proxy statement
is returned to Globix by a broker holding shares of Globix common stock in
street name, which indicates that the broker does not have discretionary
authority to vote on one or more of the agenda items for the special meeting,
the shares will be considered present at the meeting for purposes of determining
a quorum, but will not be considered to be votes cast in favor of or against the
applicable proposal and will have no effect on the outcome of such proposal.
YOUR BROKER WILL VOTE YOUR SHARES ONLY IF YOU PROVIDE INSTRUCTIONS ON HOW TO
VOTE BY FOLLOWING THE INSTRUCTIONS PROVIDED TO YOU BY YOUR BROKER. You are urged
to mark the applicable box on the proxy to indicate how to vote your shares. In
addition, please note that if your shares are held in "street name" by a broker,
bank or other nominee, and you wish to vote in person at the Globix special
meeting, you must bring to the special meeting a letter from your broker, bank
or other nominee in order to vote your shares in person.
39
GLOBIX BOARD OF DIRECTORS RECOMMENDATION
The Globix board of directors (with one director, Mr. Lampe,
abstaining) has determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement are advisable and in the best
interests of Globix and its stockholders. Accordingly, the Globix board of
directors (with one director, Mr. Lampe, abstaining) has approved the merger,
the merger agreement and the transactions contemplated by the merger agreement
(including the issuance of Globix common stock in the merger) and recommends
that Globix stockholders vote "FOR" approval of the issuance of Globix common
stock in connection with the merger and "FOR" the proposal to grant
discretionary authority to adjourn or postpone the Globix special meeting to
solicit additional votes to approve the matter considered at the special
meeting, if necessary. In considering such recommendations, Globix stockholders
should be aware that some Globix directors and officers have interests in the
merger that are different from, or in addition to, those of Globix stockholders.
See "The Merger -- Interests of Certain Persons in the Merger," beginning on
page 65 of this joint proxy statement prospectus.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF GLOBIX. ACCORDINGLY, GLOBIX STOCKHOLDERS ARE
URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT
AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE.
THE SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS
GENERAL
NEON is furnishing this joint proxy statement/prospectus to its
stockholders in connection with the solicitation of proxies by the NEON board of
directors for use at the special meeting of stockholders of NEON to be held on [
], 2004, and at any adjournment or postponement of the special meeting. This
document is also being furnished to NEON stockholders by Globix as a prospectus
of Globix in connection with the issuance by Globix of shares of Globix common
stock and convertible preferred stock as contemplated by the merger agreement.
This document was first mailed to stockholders of NEON on or about [ ],
2004.
DATE, TIME AND PLACE
The special meeting will be held on [ ], 2004 at 10:00 a.m., local
time, at the offices of NEON at 2200 West Park Drive, Westborough, Massachusetts
01581. NEON's telephone number is (508) 616-7800.
PURPOSE OF THE SPECIAL MEETING
The purpose of the NEON special meeting is to consider and vote upon
proposals to:
1. Approve and adopt the merger, the merger agreement and the
transactions contemplated by the merger agreement;
2. Approve and adopt an amendment to the certificate of incorporation
of NEON to provide that the merger is not a "Liquidation Event" that would
trigger the liquidation provision in the certificate of incorporation, which
provides that upon the occurrence of a liquidation event, all assets of NEON
remaining after payment of all liabilities and subject to any preferential
payments would be distributed ratably to its common stockholders;
3. Approve and adopt an amendment to the certificate of designation
with respect to NEON's 12% Series A Cumulative Convertible Preferred Stock to
provide that the merger is not a "Change of Control" of NEON that would trigger
the change of control provisions in the certificate of designation, including
the right of each holder of NEON convertible preferred stock to require NEON to
purchase its shares of NEON convertible preferred stock;
4. Grant discretionary authority to adjourn or postpone the NEON
special meeting to solicit additional votes to approve the matters considered at
the special meeting, if necessary; and
5. Consider and act upon any other matter that may properly come before
the special meeting.
40
A copy of the merger agreement and the first amendment to the merger agreement
are included in Appendices A-1 and A-2, respectively, to this joint proxy
statement/prospectus. A copy of the proposed amendments to NEON's certificate of
incorporation and the certificate of designation are included in this joint
proxy statement/prospectus in Appendices B-1 and B-2, respectively. NEON
stockholders are encouraged to read the merger agreement and the proposed
amendments in their entirety.
RECORD DATE AND VOTING
Holders of record of common stock and convertible preferred stock of
NEON at the close of business on [__________], 2004 (referred to in this joint
proxy statement/prospectus as the NEON record date) that are entitled to vote at
any annual or special meeting of NEON stockholders are entitled to vote at the
special meeting and any adjournment or postponement of the special meeting.
On the NEON record date, the following voting securities were
outstanding:
o 15,775,863 shares of common stock; and
o 1,101,887 shares of convertible preferred stock.
Each share of common stock entitled to vote at the special meeting is
entitled to one vote on each matter properly brought before the special meeting.
Each share of NEON convertible preferred stock entitled to vote at the special
meeting is entitled to one vote, which is the number of votes equal to the
number of shares of common stock into which such share of NEON convertible
preferred stock would be convertible as provided in the certificate of
designation for the NEON convertible preferred stock. Approval of the merger
agreement and the amendments of NEON's certificate of incorporation and the
certificate of designation require special votes as described below.
Under Delaware law and NEON's certificate of incorporation, the
affirmative vote by the holders of a majority of NEON's outstanding common stock
and convertible preferred stock that are entitled to vote at any annual or
special meeting of NEON stockholders, voting together as a single class, is
required to approve the merger.
Under Delaware law and NEON's certificate of incorporation the
following stockholder approvals are required to approve the amendment to NEON's
certificate of incorporation to amend the liquidation provision to exclude the
merger from the definition of "Liquidation Event":
o holders of a majority of NEON's outstanding common stock
entitled to vote at any annual or special meeting of NEON
stockholders, voting as a separate class; and
o holders of a majority of NEON's outstanding common stock and
preferred stock that are entitled to vote at any annual or
special meeting of NEON stockholders, voting together as a
single class.
Under Delaware law and NEON's certificate of incorporation of which the
certificate of designation is a part, the following stockholder approvals are
required to approve the amendment to the certificate of designation with respect
to the NEON convertible preferred stock to exclude the merger from the
definition of "Change of Control":
o holders of two-thirds of NEON's outstanding convertible
preferred stock, voting as a separate class; and
o holders of a majority of NEON's outstanding common stock and
preferred stock that are entitled to vote at any annual or
special meeting of NEON stockholders, voting together as a
single class.
The approval of the holders of a majority of NEON's capital stock
present in person or represented by proxy and entitled to vote at any annual or
special meeting of NEON stockholders, considered on an as-converted into common
stock basis, is required to approve the proposal to grant discretionary
authority to adjourn or postpone the special meeting to solicit additional votes
to approve the matters considered at the special meeting.
41
As of the close of business on the NEON record date for the special
meeting, NEON's directors and their respective affiliates, beneficially owned
and were entitled to vote approximately 5,687,273 shares of NEON common stock
and 215,920 shares of NEON convertible preferred stock or approximately 36.0%
and 19.6% of the shares of NEON's outstanding common stock and convertible
preferred stock, respectively, entitled to vote at the special meeting and
34.6% of NEON's common stock and preferred stock entitled to vote at the
special meeting as a single class.
As of the close of business on the NEON record date, directors of
Globix and their affiliates beneficially owned 1,673,543 shares of NEON common
stock and 171,476 shares of NEON convertible preferred stock.
VOTING OF PROXIES AT THE NEON SPECIAL MEETING AND REVOCATION OF PROXIES
All shares of NEON capital stock that are entitled to vote and are
present in person or represented at the NEON special meeting by properly
executed proxies received prior to or at such meeting, and not revoked, will be
voted at such meeting in accordance with the instructions indicated on such
proxies. If no instruction is indicated, then unless the shares covered by the
proxy are in a brokerage account, such proxies will be voted "FOR" approval and
adoption of the merger, the merger agreement and the transactions contemplated
by the merger agreement, "FOR" approval and adoption of the amendment of NEON's
certificate of incorporation, "FOR" approval and adoption of the amendment of
the certificate of designation for the NEON convertible preferred stock and
"FOR" the proposal to grant discretionary authority to adjourn or postpone the
NEON special meeting to solicit additional votes to approve the matters
considered at the NEON special meeting, if necessary. If your shares are held in
a brokerage account, please review "Quorum, Adjournment, Abstentions and Broker
Non-Votes for Shares Held in a Brokerage Account" beginning on page 39 of
this joint proxy statement/prospectus.
The NEON board of directors does not know of any matters other than
those described in the notice of the NEON special meeting that are to come
before such meeting. If any other matters are properly presented at the NEON
special meeting for consideration, the persons named in the enclosed proxy card
and acting thereunder generally will have discretion to vote on such matters in
accordance with their best judgment.
Any proxy given pursuant to the solicitation may be revoked by the
person giving it at any time before it is voted. Proxies may be revoked by:
o filing with Stephen Bogiages, the Secretary of NEON, at or
before the taking of a vote at the NEON special meeting, a
written notice of revocation bearing a later date than the
proxy;
o duly executing a later dated proxy relating to the same shares
and delivering it to Mr. Bogiages before the taking of the
vote at the NEON special meeting; or
o attending the NEON special meeting and voting in person
(although attendance at the NEON special meeting will not in
and of itself constitute a revocation of a proxy).
Any written notice of revocation or subsequent proxy should be sent to
NEON Communications, Inc., 2200 West Park Drive, Westborough, Massachusetts
01581, Attn: Stephen Bogiages, Secretary, or hand-delivered to Mr. Bogiages at
or before the taking of the vote at the NEON special meeting in Westborough,
Massachusetts.
NEON will be soliciting proxies on its own behalf. NEON intends to
solicit proxies through this joint proxy statement/prospectus and directly
through its directors, officers and regular employees. Solicitation of some
stockholders may be made in person or by mail, telephone, facsimile transmission
or other means of electronic transmission.
NEON will bear its own expenses in connection with the solicitation of
proxies for its special meeting of stockholders. Globix will bear one half of
all other expenses incurred in connection with the preparation and printing of
this document and the preparation and filing of the registration statement of
which this document forms a part.
42
QUORUM, ADJOURNMENT, ABSTENTIONS AND BROKER NON-VOTES FOR SHARES HELD IN A
BROKERAGE ACCOUNT
The representation in person, or by properly executed proxy, of the
holders of a majority of all shares of capital stock entitled to vote at the
special meeting is necessary to constitute a quorum for the transaction of
business at the special meeting of NEON. In connection with the separate vote by
the holders of NEON's common stock with respect to the amendment to the
certificate of incorporation, a majority of the total outstanding shares of
NEON's common stock present in person or represented by proxy shall constitute a
quorum entitled to take action at the NEON special meeting. In connection with
the separate vote by the holders of NEON's convertible preferred stock with
respect to the amendment to the certificate of designation, a majority of the
total outstanding shares of NEON's convertible preferred stock present in person
or represented by proxy shall constitute a quorum entitled to take action at the
NEON special meeting.
NEON has appointed Stephen Bogiages, its Secretary, to function as the
inspector of elections of the special meeting. The inspector of elections will
ascertain whether a quorum is present, tabulate votes and determine the voting
results on all matters presented to NEON stockholders at the special meeting. If
fewer shares of NEON common and convertible preferred stock are voted for the
approval of the proposals being considered at the special meeting than are
required for approval of each such proposal, and if stockholders approve the
proposal to grant discretionary authority to adjourn or postpone the special
meeting, the special meeting may be adjourned or postponed for the purpose of
allowing additional time for obtaining additional proxies or votes, and, at any
subsequent reconvening of the special meeting, all proxies will be voted in the
same manner as the proxies would have been voted at the original convening of
the special meeting, except for any proxies that have been effectively revoked
or withdrawn prior to the subsequent reconvening of the special meeting.
If you submit a proxy that indicates an abstention from voting in all
matters, your shares will be counted as present for the purpose of determining
the existence of a quorum at the special meeting, but they will not be voted on
any matter at the special meeting. Consequently, your abstention will have the
same effect as a vote against the proposal to approve the merger, the merger
agreement and the transactions contemplated by the merger agreement, the
amendment to the certificate of incorporation and the amendment to the
certificate of designation and the proposal to grant discretionary authority to
adjourn or postpone the special meeting to solicit additional votes to approve
the matters considered at the special meeting, if necessary. If your proxy
indicates an abstention only as to a particular proposal, that abstention will
have the same effect as a vote against that particular proposal only.
If you hold your shares of NEON common stock or convertible preferred
stock in a brokerage account, the broker holding such shares in "street name"
may vote the shares only if you provide the broker with appropriate
instructions. If an executed proxy statement is returned to NEON by a broker
holding shares of NEON common stock or convertible preferred stock in street
name, which indicates that the broker does not have discretionary authority to
vote on one or more of the agenda items for the special meeting, the shares will
be considered present at the meeting for purposes of determining a quorum, but
will not be considered to have been voted in favor of or against the applicable
proposal. Consequently, your failure to instruct your broker as to a specific
proposal will have the same effect as a vote against that proposal. YOUR BROKER
WILL VOTE YOUR SHARES ONLY IF YOU PROVIDE INSTRUCTIONS ON HOW TO VOTE BY
FOLLOWING THE INSTRUCTIONS PROVIDED TO YOU BY YOUR BROKER. You are urged to mark
the applicable box on the proxy to indicate how to vote your shares. In
addition, please note that if your shares are held in "street name" by a broker,
bank or other nominee, and you wish to vote in person at the NEON special
meeting, you must bring to the special meeting a letter from your broker, bank
or other nominee in order to vote your shares in person.
NEON BOARD OF DIRECTORS RECOMMENDATION
The NEON board of directors has determined (with one director, Mr.
Lampe, abstaining, and as to the first amendment, with two directors, Messrs.
Lampe and Grubin, abstaining) that the merger, the merger agreement and the
transactions contemplated by the merger agreement, and the amendments of NEON's
certificate of incorporation and the certificate of designation for the NEON
convertible preferred stock are advisable and in the best interests of NEON and
its stockholders. Accordingly, the NEON board of directors has approved (with
one director, Mr. Lampe, abstaining, and as to the first amendment, with two
directors, Messrs. Lampe and Grubin, abstaining) the merger, the merger
agreement and the transactions contemplated by the merger agreement, and the
43
amendments of NEON's certificate of incorporation and the certificate of
designation for the NEON convertible preferred stock and recommends that NEON
stockholders vote "FOR" adoption and approval of the merger, the merger
agreement and the transactions contemplated by the merger agreement, "FOR"
adoption and approval of the amendment of NEON's certificate of incorporation,
"FOR" adoption and approval of the amendment of the certificate of designation
for the NEON convertible preferred stock and "FOR" the proposal to grant
discretionary authority to adjourn or postpone the NEON special meeting to
solicit additional votes to approve the matters considered at the special
meeting, if necessary. In considering such recommendations, NEON stockholders
should be aware that some NEON directors and officers have interests in the
merger that are different from, or in addition to, those of NEON stockholders,
and that NEON and Globix have provided indemnification arrangements to directors
and officers of NEON. See "The Merger -- Interests of Certain Persons in the
Merger," beginning on page 65 of this joint proxy statement/prospectus.
THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT
IMPORTANCE TO THE STOCKHOLDERS OF NEON. ACCORDINGLY, NEON STOCKHOLDERS ARE URGED
TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO
COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE
ENCLOSED, POSTAGE-PAID ENVELOPE.
NEON'S STOCKHOLDERS SHOULD NOT SEND ANY STOCK OR WARRANT CERTIFICATES
WITH THEIR PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER
OF NEON COMMON AND CONVERTIBLE PREFERRED STOCK CERTIFICATES AND CLASS A WARRANTS
WILL BE MAILED TO NEON STOCKHOLDERS PROMPTLY FOLLOWING COMPLETION OF THE MERGER.
FOR MORE INFORMATION REGARDING THE PROCEDURES FOR EXCHANGING NEON STOCK AND
WARRANT CERTIFICATES FOR GLOBIX STOCK CERTIFICATES, SEE "TERMS OF THE MERGER
AGREEMENT AND RELATED TRANSACTIONS -- PROCEDURES FOR EXCHANGING STOCK AND
WARRANT CERTIFICATES," BEGINNING ON PAGE 77 OF THIS JOINT PROXY
STATEMENT/PROSPECTUS.
THE MERGER
GENERAL
The board of directors of NEON (with one director, Mr. Lampe,
abstaining, and as to the first amendment, with two directors, Messrs. Lampe and
Grubin, abstaining) and the board of directors of Globix (with one director, Mr.
Lampe, abstaining) have each approved the merger agreement, which provides for
the merger of a new wholly owned subsidiary of Globix with and into NEON. NEON
will be the surviving corporation in the merger and as a result will be a wholly
owned subsidiary of Globix. Each share of NEON common stock outstanding
immediately prior to the merger will be converted into the right to receive
shares of Globix common stock, and each share of NEON convertible preferred
stock issued and outstanding immediately prior to the merger will be converted
into the right to receive a combination of cash and shares of a new class of
Globix convertible preferred stock created in connection with the merger. The
shares of NEON common stock and convertible preferred stock will be converted in
accordance with the terms specified in the merger agreement, as described under
"Terms of the Merger Agreement and Related Transactions -- Conversion of Shares
in the Merger," beginning on page 75 of this joint proxy statement/prospectus.
BACKGROUND OF THE MERGER
In October 2003, representatives of CTA approached Peter K. Stevenson,
Globix's Chief Executive Officer and President, about the possibility of Globix
acquiring or merging with NEON.
From November 2003 until mid-January 2004, Mr. Stevenson and Stephen
Courter, Chairman, President and Chief Executive Officer of NEON, had
preliminary conceptual discussions regarding a possible combination involving
NEON and Globix. Members of Globix's management, together with Globix's outside
counsel, Day Berry & Howard LLP, studied the possibility of a combination
between Globix and NEON, but determined that it would not be possible to pursue
the transaction until the completion of Globix's sale of the property located at
415 Greenwich Street in New York City, which took place in January 2004, and the
purchase of a portion of Globix's 11% senior notes with a portion of the
proceeds of that sale.
In December 2003, Globix was approached by certain investment banks
regarding the possible acquisition by Globix of the domestic assets of a foreign
Internet company. Globix had previously entered into a confidentiality agreement
with the company in July 2003 to enable the parties to explore a potential
transaction, and Globix determined at that time and again in December 2003 not
to pursue the acquisition.
44
On January 15, 2004, NEON's board of directors met to discuss and
consider, among other things, the status of preliminary discussions regarding
the possibility of a business combination between Globix and NEON.
In late January 2004, after further discussions between Mr. Stevenson
and Mr. Courter, Globix and NEON entered into a confidentiality agreement to
enable them to share information concerning their respective businesses on a
confidential basis to assist in analyzing a possible combination involving
Globix and NEON. During that time Globix also entered into a confidentiality
agreement with Needham & Company, Inc., with a view toward engaging Needham &
Company to serve as its financial advisor with respect to the possible
combination.
From mid-January 2004 to mid-February 2004, Mr. Stevenson and Mr.
Courter continued periodic discussions regarding a possible combination of NEON
and Globix.
On February 3, 2004, Mr. Stevenson and Robert M. Dennerlein, the Chief
Financial Officer of Globix, met with representatives of Needham & Company and
CTA to discuss the potential combination. CTA provides consulting and business
development services to NEON and also provides similar services to Globix. At
that meeting, the parties discussed the fact that both companies had completed
significant cost cutting and restructuring of their respective businesses since
their respective bankruptcies in 2002, but both companies faced considerable
pricing pressure from larger competitors that could offer a wider range of
services. The presentation prepared by Globix noted that NEON and Globix had
complementary portfolios of customers, which would enable each to offer their
services to the others' customers, and that the combination could be expected to
provide various operational synergies to both NEON and Globix.
Over the course of February 2004, members of Globix's management,
together with Day, Berry & Howard, reviewed in greater detail the issues
surrounding a potential combination with NEON. In response to feedback from
representatives of NEON, to the effect that NEON viewed Globix's level of debt
as a significant negative factor in considering a potential combination,
Globix's management considered whether it would be possible to reduce Globix's
indebtedness prior to the completion of such combination. After reviewing
various alternatives, Globix's management concluded that there was no attractive
opportunity for reducing indebtedness prior to the completion of the possible
combination.
On February 26, 2004, NEON's board of directors met to discuss and
consider, among other things, an overview of the possible combination between
NEON and Globix and the benefits that may arise from such combination.
Additionally, the NEON board of directors received preliminary financial and
business materials related to the possible combination. After discussing and
considering the possible combination and the related materials, the NEON board
of directors authorized NEON to engage legal counsel to assist the due diligence
efforts in order to further investigate a possible merger between Globix and
NEON. Joshua Revitz's resignation as a NEON director was also presented at the
same meeting.
In early March, 2004, NEON engaged the law firm of Andrews Kurth LLP as
its counsel in regards to the possible combination.
On March 2, 2004, Globix's board of directors met by conference
telephone call to discuss, among other things, the possible combination with
NEON. At this meeting, management presented the opportunity of merging with NEON
to the board, indicating that a merger could strengthen Globix's competitive
position by expanding the number of services that it could offer and that it
also offered the possibility of improving Globix's balance sheet and financial
position. In light of the potential conflict of interests of certain members of
the Globix board of directors in the possible combination, the board established
a special committee to consider and negotiate the possible combination with NEON
and authorized the special committee to begin negotiations with NEON. The
initial members of the special committee were Mr. Stevenson and Mr. Herzig; on
March 9, 2004, Raymond Steele joined the special committee and Mr. Stevenson
became a nonvoting member of the special committee. In its deliberations on
March 2, 2004, the Globix board considered the conflicts of interest that Mr.
Singer, Mr. Lampe and Mr. Van Dyke have through direct or indirect ownership of
equity interests in NEON and also, in the case of Mr. Lampe, his service on the
board of directors of both Globix and NEON.
45
On March 3, 2004, the Globix special committee met to review the status
of the negotiations and discuss the engagement of an investment banking firm to
provide a fairness opinion. Pursuant to instructions from the special committee,
Mr. Stevenson forwarded to Mr. Courter an initial draft of a term sheet and
indicated that Day, Berry & Howard had been authorized to begin preparation of a
draft merger agreement. On March 8, 2004, the Globix special committee
considered various proposals of investment banking firms to provide a fairness
opinion and serve as financial advisors to Globix. On March 9, 2004, the Globix
special committee approved the engagement of Needham & Company to provide a
fairness opinion and on March 11, 2004, an engagement letter was signed with
Needham & Company.
Comments on the initial draft term sheet were received on March 11,
2004 from Andrews Kurth LLP, as outside counsel to NEON. On March 15, 2004, Day,
Berry & Howard delivered the first draft of the merger agreement to NEON and
Andrews Kurth. On March 21, 2004, Andrews Kurth sent comments on the first draft
to Globix and Day, Berry & Howard on behalf of NEON.
The Globix special committee continued to meet in person or
telephonically regularly in March and once in April in order to monitor progress
of the draft term sheet and draft merger agreement and the due diligence review.
On March 24, 2004, NEON's board of directors met to consider
presentations by NEON's outside legal counsel regarding the possible merger. The
board of directors also discussed and considered the formation and appointment
of a special committee to consider, investigate and negotiate the possible
merger. The board of directors also discussed appointing a new director to
replace Mr. Revitz and that such director would be an independent director.
On March 25 and 26, 2004, Andrews Kurth conducted a legal due diligence
review of Globix at Globix's offices in New York. On March 26 and 27, Day, Berry
& Howard conducted a legal due diligence review of NEON at NEON's offices in
Westborough, Massachusetts, and representatives of Day, Berry & Howard
subsequently returned to NEON's offices at various times to continue Globix's
legal due diligence review, with the last such on-site due diligence being
conducted on May 12, 2004. Following the parties' on-site review activities,
Andrews Kurth's and Day, Berry & Howard's legal due diligence reviews continued
via mail and electronic-mail through mid-July as the parties continued to gather
and exchange documents and information responsive to the due diligence requests
of each respective counsel.
On April 22, 2004, NEON's board of directors appointed Jose A.
Cecin, Jr. to the NEON board of directors. Additionally, it received additional
information and materials regarding the possible merger and considered a
presentation by Mr. Courter regarding the materials and the status of
negotiations. After discussing and considering the materials and the
presentation, the NEON board of directors created a special committee of the
NEON board of directors to review and further investigate the possible merger
and designated John H. Forsgren and Mr. Cecin as members of the special
committee.
On April 30, 2004, NEON's special committee of the board of directors
held an initial meeting. At the meeting, the special committee members
discussed, among other things, the engagement of a financial advisor to issue a
fairness opinion on the potential merger and selected Adams Harkness, Inc.
(f/k/a Adams, Harkness & Hill, Inc.) as its financial advisor.
On May 3, 2004, Day, Berry & Howard sent a revised draft of the merger
agreement to NEON and Andrews Kurth, and on May 13, 2004, Andrews Kurth provided
comments to the revised draft on behalf of NEON. The Globix special committee
reviewed the status of negotiations on May 10 (when the status was also
discussed with the entire Globix board of directors) and again on May 17, 2004.
On May 20, 2004, NEON's special committee retained the law firm of
Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. as counsel to the special
committee. On May 21, 2004, NEON's special committee met and was briefed by
Adams Harkness on the progress of its analysis. The NEON special committee was
also briefed on the status of negotiations with Globix. On May 27, 2004, the
NEON special committee met with NEON's board of directors to report on its
efforts in regard to the potential merger, including its progress on due
diligence. NEON's board of directors and the special committee also discussed
and considered the terms of the potential merger.
46
From May 21, 2004 until July 16, 2004, a number of drafts of the merger
agreement were negotiated and exchanged between the parties. During the period
from May 21, 2004 through July 16, 2004, the parties and their respective
special committees discussed and negotiated several issues, including, but not
limited to, the exchange ratio for shares of NEON common stock, the
consideration to be given to holders of NEON's convertible preferred stock, the
directors of the surviving corporation and Globix following the merger, the
scope of representations and warranties to be made by each of NEON and Globix,
whether representations and warranties would survive the merger, conduct of
business by NEON and Globix in the period between the signing of the merger
agreement and the merger closing, the completion of a financial due diligence
review process after signing the merger agreement, events that would give either
or both of NEON and Globix the right to terminate the merger agreement, and
provisions that would allow each of NEON and Globix to consider alternative
acquisition proposals if the fiduciary duties of the board of directors of
either company required such consideration.
On June 18, 2004, Day, Berry & Howard circulated the initial draft of
the certificate of designation for the proposed new series of Globix convertible
preferred stock. The proposed exchange ratio of 1.2748 shares of Globix common
stock for each share of NEON common stock was incorporated into a revised draft
of the merger agreement circulated by Andrews Kurth on July 2, 2004, based on
the discussions between the parties.
From June 3, 2004 to July 14, 2004, the NEON special committee met with
its financial advisor and legal counsel numerous times to consider various
valuation parameters for NEON and Globix, revised drafts of the merger agreement
and the terms of the potential merger. The NEON special committee also discussed
its fiduciary duties in considering the possible merger. During this period,
Adams Harkness also continued its due diligence review of NEON and Globix.
Also during this time period, the NEON special committee, NEON's
management and/or their respective legal advisors and Adams Harkness met or held
telephonic conversations to discuss various due diligence issues. Among other
things, the participants discussed NEON management's view of Globix's and NEON's
relative business strengths and NEON's reasons for pursuing a merger of the two
companies at this time, which are described in more detail below under "-- The
NEON Special Committee's and NEON's Reasons for the Merger."
From June 1, 2004 to July 14, 2004, the Globix special committee met on
numerous occasions, both with and without legal counsel and members of
management, to consider the status of negotiations, the terms and conditions of
the merger agreement and the Globix convertible preferred stock, the calculation
of the exchange rate, the due diligence review and other matters relating to the
merger. On June 18, 2004 the Globix special committee hired Dechert LLP as
independent legal counsel. On June 21, 2004, the Globix special committee met
with Needham & Company to discuss its preliminary financial analysis of the
proposed merger. On July 12, the Globix special committee met jointly with the
nominating committee of the Globix board of directors to consider the possible
appointment of certain members of the NEON board of directors to the Globix
board of directors following the merger.
On July 14, 2004, NEON's board of directors and NEON's special
committee separately heard and considered the presentation of Mr. Courter and
legal counsel to both NEON and NEON's special committee regarding the status of
operational, financial, business and legal due diligence.
On July 14, 2004, the Globix special committee met with representatives
of Needham & Company, Day, Berry & Howard and Dechert, as well as members of
management, to consider the proposed merger agreement and to review the
presentation of Needham & Company concerning its financial analysis of the
proposed merger. The special committee met thereafter in executive session with
its independent counsel and then met with the full board of directors, again
with representatives of Needham & Company, Day, Berry & Howard and Dechert, as
well as members of management. The full board reviewed presentations by Needham
& Company, members of management and legal counsel and posed various questions
concerning the terms of the merger. At that time, representatives of Needham &
Company indicated that, in accordance with the terms of the merger agreement,
Needham & Company was in a position to deliver, as of the expected July
19 date of the merger agreement, its written opinion as to the fairness, from a
financial point of view, to the holders of Globix common stock of the ratio for
exchanging NEON common stock for Globix common stock pursuant to the merger
agreement, after taking into account the consideration to be offered to the
holders of NEON preferred stock in the merger and the exchange of shares of
Globix common stock for Globix 11% senior notes that is a condition to closing
47
of the merger. Following these discussions, the Globix board of directors, by
the unanimous vote of all of the Globix directors, other than Mr. Lampe who
abstained, determined that, subject to receipt of final approval of the special
committee and receipt of the written opinion of Needham & Company, the
transaction was advisable and in the best interests of Globix and its
stockholders and approved the entry into the merger agreement and the
transactions contemplated thereby.
On July 15, 2004, the NEON special committee had a telephonic meeting
with its legal and financial advisors. The special committee's advisors
summarized the status of the merger agreement negotiations. Adams Harkness also
presented its valuation analyses relating to NEON, Globix and the combined
entity. On July 15, 2004, NEON's board of directors also met to discuss and
consider the merger and the merger agreement.
On July 16, 2004, the NEON special committee had a telephonic meeting
with its various advisors, as well as Mr. Courter and legal counsel. Mr. Courter
and legal counsel reported to the special committee the results of the completed
due diligence with respect to Globix. Representatives of Mintz Levin informed
the special committee of the results of the negotiations with Globix regarding
the merger agreement based on information from NEON's legal counsel and NEON. In
addition, Adams Harkness delivered its opinion that the ratio for exchanging
NEON common stock for Globix common stock pursuant to the merger agreement is
fair, from a financial point of view, to the holders of NEON common stock (as
stockholders of NEON), which opinion was subsequently confirmed in writing. Upon
completing its deliberations, and subject to finalizing the merger agreement,
the special committee unanimously determined that the merger agreement and the
transactions contemplated thereby are advisable, and in the best interests of,
the holders of NEON common stock and NEON convertible preferred stock (as
stockholders of NEON) and unanimously recommended that NEON's board of directors
adopt and approve the merger agreement and the transactions contemplated by the
merger agreement and declare advisable and recommend that the stockholders of
NEON adopt and approve the merger agreement and the transactions contemplated by
the merger agreement.
Immediately following the NEON special committee meeting, a telephonic
meeting of NEON's board of directors was held. All of the members of NEON's
board of directors were present. The NEON special committee delivered its
recommendation to the NEON board of directors that the board of directors
approve the merger, the merger agreement and the transactions contemplated by
the merger agreement and declare advisable and recommend that the stockholders
of NEON adopt and approve the merger, the merger agreement and the transactions
contemplated by the merger agreement. The NEON board of directors, by the
unanimous vote of all of the NEON directors, other than Mr. Lampe who abstained,
determined that the merger, the merger agreement and the transactions
contemplated by the merger agreement are advisable, and in the best interests
of, the holders of NEON common stock and NEON convertible preferred stock (as
stockholders of NEON), approved the merger, the merger agreement and the
transactions contemplated by the merger agreement and declared advisable and
recommended that the stockholders of NEON adopt and approve the merger, the
merger agreement and the transactions contemplated by the merger agreement.
On July 16, 2004, the parties exchanged final versions of their
disclosure documents and the merger agreement, which were sent out that evening
to the parties and their financial advisors and legal counsel, and the
independent board committees and their financial advisors and legal counsel.
On the afternoon of July 16, 2004, the Globix special committee held a
telephonic meeting at which representatives of Day, Berry & Howard, Dechert and
Needham & Company were also present. The Globix special committee discussed the
changes made to the draft merger agreement since July 14 and gave its final
approval to the merger agreement and the transactions contemplated by the merger
agreement.
On the morning of July 19, 2004, Needham & Company delivered to the
Globix special committee its written opinion to the effect that, as of that date
and based upon and subject to the matters described in the opinion, and after
taking into account the consideration to be offered to the holders of NEON
preferred stock in the merger and the exchange of shares of Globix common stock
for Globix 11% senior notes that is a condition to closing of the merger, the
common stock exchange ratio pursuant to the merger agreement was fair to the
holders of Globix common stock from a financial point of view.
The merger agreement was executed on July 19, 2004 following the
receipt by Globix of the written opinion of Needham & Company, and Globix and
NEON issued a joint press release announcing the signing of the merger
agreement.
48
In late August 2004, NEON received communications from certain holders
of NEON's convertible preferred stock to the effect that such holders believed
that the conversion price of the proposed Globix convertible preferred stock,
which was originally set at $8.82 per share, was too high in light of the then
current trading values of the Globix common stock of approximately $3.00 per
share. As the conversion price is based on the amount of the liquidation
preference that is surrendered upon conversion of the preferred stock into
common stock, the holders believed that they should have the right to receive
more shares of common stock for the aggregate liquidation preference of the
preferred stock. On August 23, Mr. Courter shared these concerns with Mr.
Stevenson. Given the fact that a favorable vote of the holders of the NEON
convertible preferred stock is required for the merger, NEON and Globix,
together with CTA, discussed the possibility of lowering the conversion price
per share of the Globix convertible preferred stock (and proportionately
increasing the aggregate number of shares that could be acquired upon conversion
of the Globix convertible preferred stock into Globix common stock) in exchange
for a reduction of the rate at which dividends accrue on the Globix convertible
preferred stock. Globix management then consulted with Needham & Company and
discussed the possible impact of the revised terms on the fairness, from a
financial point of view, to the holders of Globix common stock of the common
stock exchange ratio. On September 1, 2004, the board of directors of Globix
held a telephonic meeting to consider and approve an amendment to the merger
agreement to revise the conversion price and liquidation preference per share
and to reduce the dividend rate of the preferred stock. At the meeting,
management presented two possible scenarios:
o a conversion price and liquidation preference per share of
$3.60 per share and a dividend rate of 6 percent per annum;
and
o a conversion price and liquidation preference per share of
$4.64 per share and a dividend rate of 9 percent per annum.
The Globix board of directors noted that both scenarios would result in
a dilution of the Globix common stock, but that the lowered dividend rate would
offset some of the dilution on a going forward basis. In addition, the Globix
board of directors noted that the lowered conversion price and liquidation
preference per share would encourage Globix preferred stockholders to convert
their preferred stock into common stock and to think of their interests as
allied with the holders of the Globix common stock, rather than relying on their
rights as preferred stockholders. The Globix board of directors directed
management to negotiate a revised conversion price, liquidation preference and
dividend rate following either of the two scenarios that were presented at the
meeting, or at a conversion price, liquidation preference and dividend rate
falling between the two scenarios. The Globix board of directors (with Mr. Lampe
abstaining) and the special committee then approved and adopted an amendment to
the merger agreement containing such terms, subject to receipt of a bring down
letter or new fairness opinion from Needham & Company reflecting the revised
terms and final approval of the special committee. In considering the amendment
to the merger agreement, the Globix board of directors took into account the
fact that Mr. Lampe indirectly holds, and Mr. Singer's family holds, interests
in the NEON preferred stock.
On September 2, 2004, at the instruction of Globix management, Day,
Berry & Howard delivered to NEON and its counsel a draft amendment to the merger
agreement changing the Globix convertible preferred stock conversion rate to
$3.60 per share and the dividend rate to 6 percent per annum. Minor changes were
then discussed by counsel to both parties. On the morning of September 17, 2004,
the NEON board of directors (with two directors, Messrs. Lampe and Grubin,
abstaining) approved the amendment to the merger agreement. In approving the
amendment, the NEON board of directors considered a report from the special
committee. The special committee reported that, after discussions with their
legal and financial advisors, they had concluded that the amendment did not
change their approval and recommendation of the merger agreement, as amended. On
October 8, 2004, the special committee received a letter from Adams Harkness,
which affirmed that the exchange ratio provided in the merger agreement, as
amended, was fair, from a financial point of view, to the holders of NEON common
stock (as stockholders of NEON).
The Globix special committee met by telephone conference call on
September 20, 2004 and approved the amendment to the merger agreement, subject
to receipt of a revised fairness opinion. On September 28, 2004, Needham &
Company delivered to the Globix special committee its written opinion to the
effect that, as of that date and based upon and subject to the matters described
in the opinion, and after taking into account the consideration to be offered to
the holders of NEON preferred stock in the merger and the exchange of shares of
Globix common stock for Globix 11% senior notes that is a condition to closing
of the merger, the common stock exchange ratio pursuant to the amended merger
agreement was fair to the holders of Globix common stock from a financial point
of view. The parties exchanged executed copies of the amendment to the merger
agreement on October 8, 2004.
49
THE GLOBIX SPECIAL COMMITTEE'S AND GLOBIX'S REASONS FOR THE MERGER
Since Globix emerged from bankruptcy reorganization in April 2002, its
board of directors 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,
either by increasing the revenue base or by cutting costs. A second objective
has been to reduce leverage by buying back or paying off higher cost
indebtedness.
Growth through acquisition of related businesses has been one of the
strategies reviewed by the Globix board of directors in this process. Such
acquisitions could enable Globix to offer a broader range of services to compete
more effectively with larger companies, 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
discounted prices. In pursuing its acquisition strategy, the Globix board of
directors has reviewed potential transactions involving smaller companies, like
Aptegrity, Inc., whose acquisition could gradually expand the range of services
that Globix provides, as well as larger companies, such as NEON, that could
significantly increase the size of Globix's business and enhance its ability to
compete against the much larger companies that offer managed Internet
applications and infrastructure services. At the same time, the board has
considered the various risks presented by acquisitions, the other demands on the
company's resources and the uncertainty that the potential benefits of any
acquisition will be achieved.
In reviewing the proposed merger with NEON and making its final
determination to approve the merger agreement, Globix and the Globix special
committee considered, among other things:
o the Globix special committee's view that Globix, on a stand alone
basis, runs a long term risk of not being able to meet its business
plan due to its heavy debt load;
o the Globix special committee's view that the combination of the two
companies would be beneficial because:
o the two companies have complementary products that, when
offered together, would be more attractive to a wider range of
potential customers than the single offerings of either
company;
o the two companies have different customer bases and would be
able to cross-sell their products to each others' customers;
o the combination would result in various administrative cost
savings;
o the common ownership of the two companies would ease some
transition issues;
o Globix would benefit from a larger platform from which to sell
its services; and
o Globix would benefit from a larger asset base to support its
indebtedness.
o the Globix special committee's view that the combination presented the
following risks:
o the disruption in the business of both companies caused by the
transaction and the management time required to integrate the
two businesses;
o the lack of geographic diversity in NEON's business;
o the fact that the range of NEON's service offerings is very
narrow; and
o the fact that the anticipated synergies and cost savings are
speculative.
o the business, financial condition, results of operations, prospects,
current business strategy and competitive position of each of Globix,
NEON and the combined company, as well as general economic and stock
market conditions;
o discussions with management and information provided by management as
to its analysis of the transaction and the businesses of the two
companies; and
50
o the ability of the combined companies to use their historical net
operating losses to offset income tax liabilities following completion
of the transaction.
In considering the valuation of NEON and the fairness of the
transaction to Globix and its stockholders, the Globix board of directors and
the Globix special committee considered, among other things:
o the historical trading values of the Globix common stock and the fact
that the NEON common stock is not publicly traded;
o the impact of Globix's proportionately high level of debt on the
trading values of the Globix common stock;
o the contribution analysis, accretion/dilution analysis, selected
company analysis, selected transaction analysis and other financial
analyses presented by Needham & Company to the special committee;
o the opinion delivered to the special committee by Needham & Company as
to the fairness, from a financial point of view, of the common stock
exchange ratio to the holders of the Globix common stock; and
o the value of the debt-for-equity exchange to Globix and its
contribution to the reduction of Globix's indebtedness.
In reviewing the transaction, the Globix board and special committee
concluded that the potential benefits of the transaction outweighed the
potential risks and that, in light of the potential benefits of the transaction,
the consideration to be offered to the holders of NEON stock and warrants is
fair to the stockholders of Globix. The preceding discussion of the information
and factors considered by the Globix board and special committee is not intended
to be exhaustive, but is believed to include all material factors considered by
the board and the special committee. In evaluating the merger, the members of
the Globix board and the special committee took into account their knowledge of
the business, financial condition and prospects of Globix and the advice of its
advisors. In light of the number and variety of the factors considered by the
board and the special committee, the board and the special committee did not
find it practicable to assign relative weights to the foregoing factors. Rather,
the board and the special committee made their determinations based on the total
mix of information available to them.
RECOMMENDATIONS OF GLOBIX'S BOARD OF DIRECTORS
The Globix board of directors (with one director, Mr. Lampe,
abstaining) has determined that the merger, the merger agreement and the
transactions contemplated by the merger agreement are advisable and in the best
interests of Globix and its stockholders. Accordingly, the Globix board of
directors (with one director, Mr. Lampe, abstaining) has approved the merger,
the merger agreement and the transactions contemplated by the merger agreement
(including the issuance of Globix common stock in the merger) and recommends
that stockholders vote "FOR" approval of the issuance of Globix common stock in
connection with the merger and "FOR" the proposal to grant discretionary
authority to adjourn or postpone the Globix special meeting to solicit
additional votes to approve the matter considered at the special meeting, if
necessary.
OPINION OF GLOBIX'S FINANCIAL ADVISOR
Globix retained Needham & Company to render an opinion as to the
fairness, from a financial point of view, of the exchange ratio pursuant to the
merger agreement to the holders of Globix common stock. The exchange ratio was
determined through arm's length negotiations between Globix and NEON and not by
Needham & Company.
On July 19, 2004, Needham & Company delivered to the special committee
of the Globix board of directors its written opinion that, as of that date and
based upon and subject to the assumptions and other matters described in the
opinion, the common stock exchange ratio pursuant to the merger agreement was
fair to the holders of Globix common stock from a financial point of view. On
September 28, 2004, Needham & Company delivered to the special committee its
written opinion that, as of that date and based upon and subject to the
assumptions and other matters described in the opinion, the common stock
exchange ratio pursuant to the amended merger agreement was fair to the holders
51
of Globix common stock from a financial point of view. THE NEEDHAM & COMPANY
OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE OF THE GLOBIX BOARD OF DIRECTORS,
IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AGREEMENT, AS AMENDED, AND
DOES NOT CONSTITUTE A RECOMMENDATION TO ANY GLOBIX STOCKHOLDER AS TO HOW THAT
STOCKHOLDER SHOULD VOTE ON, OR TAKE ANY OTHER ACTION RELATING TO, THE ISSUANCE
OF SHARES IN THE MERGER.
The complete text of the September 28, 2004 Needham & Company opinion,
which sets forth the assumptions made, matters considered, limitations on and
scope of the review undertaken by Needham & Company, is attached to this joint
proxy statement/prospectus as Appendix D. The summary of the September 28, 2004
Needham & Company opinion set forth in this joint proxy statement/prospectus is
qualified in its entirety by reference to the Needham & Company opinion. GLOBIX
STOCKHOLDERS SHOULD READ THE NEEDHAM & COMPANY OPINION CAREFULLY AND IN ITS
ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED,
AND THE ASSUMPTIONS MADE BY NEEDHAM & Company.
In arriving at its opinion, Needham & Company, among other things:
o reviewed a draft of the amended merger agreement dated
September 28, 2004;
o reviewed certain publicly available information concerning
Globix and NEON and certain other relevant financial and
operating data of Globix and NEON furnished to Needham &
Company by Globix and NEON;
o reviewed the historical stock prices and trading volumes of
Globix common stock;
o held discussions with members of management of Globix and NEON
concerning the respective companies' current and future
business prospects and joint prospects for the combined
companies, including potential cost savings and other
synergies that may be achieved by the combined companies;
o reviewed certain financial forecasts with respect to Globix
and NEON prepared by the respective managements of Globix and
NEON including, with respect to Globix, forecasts
characterized by Globix management as a downside scenario;
o compared certain publicly available financial data of
companies whose securities are traded in the public markets
and that Needham & Company deemed relevant to similar data for
NEON;
o reviewed the financial terms of certain other business
combinations that Needham & Company deemed generally relevant;
and
o performed and/or considered such other studies, analyses,
inquiries and investigations as Needham & Company deemed
appropriate.
In arriving at its opinion, Needham & Company did not independently
verify, nor did Needham & Company assume responsibility for independent
verification of, any of the information reviewed by or discussed with it and
assumed and relied on the accuracy and completeness of that information. Needham
& Company assumed that the financial forecasts for Globix and NEON provided to
it by their respective managements and the joint prospects of the combined
companies were reasonably prepared on bases reflecting the best currently
available estimates and judgments of management of Globix and NEON, at the time
of preparation, of the future operating and financial performance of Globix and
NEON and the combined companies. Needham & Company relied upon the estimates of
Globix and NEON of the potential cost savings and other synergies, including the
amount and timing thereof, that may be achieved as a result of the merger.
Needham & Company did not assume any responsibility for or make or obtain any
independent evaluation, appraisal or physical inspection of the assets or
liabilities of Globix or NEON. Needham & Company's opinion states that it was
based on economic, monetary and market conditions existing as of its date.
Needham & Company expressed no opinion as to what the value of Globix common
stock will be when issued to the stockholders of NEON pursuant to the merger or
the prices at which Globix common stock will actually trade at any time. In
addition, Needham & Company was not asked to consider, and the Needham & Company
opinion does not address, Globix's underlying business decision to engage in the
merger or the Globix debt-for-equity exchange or the relative merits of the
merger or the Globix debt-for-equity exchange as compared to other business
strategies that might be available to Globix.
52
No limitations were imposed by Globix on Needham & Company with respect
to the investigations made or procedures followed by Needham & Company in
rendering its opinion.
In preparing its opinion, Needham & Company performed a variety of
financial and comparative analyses. The following paragraphs summarize the
material financial analyses performed by Needham & Company in arriving at its
opinion. Some of the summaries of the financial analyses include information
presented in tabular format. The tables are not intended to stand alone, and in
order to more fully understand the financial analyses used by Needham & Company,
the tables must be read together with the full text of each summary.
For purposes of the contribution, selected companies and selected
transaction analyses, the terms transaction value and market value represent the
value, or deemed value based upon the merger consideration or exchange ratio, of
the relevant company's common equity, and the terms aggregate transaction value
and enterprise value represent, with respect to the relevant company, market
value plus debt, less cash.
CONTRIBUTION ANALYSIS. Needham & Company reviewed and analyzed the pro
forma contribution of each of Globix and NEON to pro forma combined August 31,
2004 balance sheet information, and pro forma projected calendar 2004 through
calendar 2007 combined operating results. In calculating the pro forma projected
combined operating results, Needham & Company used financial forecasts prepared
by Globix and NEON management and assumed no cost savings or other synergies.
Needham & Company reviewed, among other things, the pro forma contributions to
revenue, gross profit, earnings before interest and taxes, or EBIT, earnings
before interest, taxes, depreciation and amortization, or EBITDA, cash and
equivalents, total assets, stockholders' equity, working capital and enterprise
value. This analysis indicated that NEON would have contributed:
o 42.9% of pro forma combined cash and cash equivalents;
o 54.4% of pro forma combined total assets;
o 86.3% of pro forma combined stockholder's equity;
o 25.3% of pro forma combined net working capital; and
o 39.6% of pro forma combined enterprise value.
This analysis also indicated that NEON would contribute the percentages
shown in the following table of
o last twelve months, or LTM, and projected calendar 2004
through projected calendar 2007 pro forma combined revenue;
o LTM and projected calendar 2004 through projected calendar
2007 pro forma combined gross profit;
o LTM and projected calendar 2004 through projected calendar
2007 pro forma combined EBIT; and
o LTM and projected calendar 2004 through projected calendar
2007 pro forma combined EBITDA.
LTM CY 2004E CY 2005E CY 2006E CY 2007E
--- -------- -------- -------- --------
Revenue 43.5% 43.5% 47.8% 49.4% 50.5%
Gross profit 33.7% 34.9% 43.0% 45.9% 48.3%
EBIT N/M N/M N/M N/M 43.1%
EBITDA N/M N/M 74.3% 60.0% 56.7%
The results of the contribution analysis are not necessarily indicative
of the contributions that the respective businesses may have in the future.
Based on the exchange ratio, after taking into account the transactions
contemplated by the merger agreement, including the Globix's debt-for-equity
exchange, and using the treasury stock method to calculate the number of shares
of Globix common stock outstanding, NEON common stockholders would beneficially
own approximately 56.7% of the outstanding shares of common stock of the
combined company (ignoring current cross ownership between the holders of Globix
and NEON common stock, as further described in the section entitled "The Merger
- Interests of Certain Persons in the Merger" beginning on page 65 of this
53
joint proxy statement/prospectus). The foregoing ownership percentage does not
include the shares of NEON convertible preferred stock that are beneficially
owned by certain common stockholders of NEON and that will be exchanged for
Globix convertible preferred stock in the merger or currently exercisable
options or warrants (other than the Class A warrants) held by NEON or Globix
common stockholders.
ACCRETION/DILUTION ANALYSIS. Needham & Company reviewed various pro
forma financial impacts of the merger on the holders of Globix and NEON common
stock based on the Globix closing stock price of $2.85 on July 16, 2004, the
last trading day prior to announcement of the merger, and the common stock
exchange ratio of 1.2748 and estimated financial results of Globix and NEON for
calendar years 2004, 2005 and 2006, and assuming cost savings and other
synergies resulting from the merger. The estimated financial results and cost
savings and other synergies were based upon Globix management estimates. Based
upon these projections and assumptions, Needham & Company noted that the
merger would result in accretion to the projected earnings per share of Globix
for each of calendar years 2004, 2005 and 2006. The actual operating or
financial results achieved by the combined entity may vary from projected
results, and these variations may be material.
SELECTED COMPANY ANALYSIS. Using information provided by NEON
management, Needham & Company compared selected historical and projected
financial and market data ratios for NEON to the corresponding publicly
available data and ratios of certain publicly traded companies that Needham &
Company deemed relevant because their lines of businesses are similar to NEON's
line of business. These companies, referred to as the selected companies,
consisted of the following:
Level 3 Communications, Inc.;
Corvis Corporation;
Cogent Communications Group, Inc.;
FiberNet Telecom Group, Inc.;
XO Communications, Inc.; and
VersaTel Telecom International N.V.
The table below sets forth information concerning the following
multiples for the selected companies and for NEON:
o Enterprise value as a multiple of LTM revenues;
o Enterprise value as a multiple of projected calendar 2004
revenues;
o Enterprise value as a multiple of projected calendar 2005
revenues; and
o Enterprise value as a multiple of LTM EBITDA.
Needham & Company also compared, for the selected companies,
o Enterprise value as a multiple of LTM EBIT;
o Price as a multiple of LTM earnings per share;
o Price as a multiple of projected calendar 2004 earnings per
share; and
o Price as a multiple of projected calendar 2005 earnings per
share;
but determined these comparisons were not meaningful because of NEON's losses.
Needham & Company calculated multiples for the selected companies based
on the closing stock prices of those companies on August 31, 2004 and for NEON
based on the Globix closing stock price of $2.85 on July 16, 2004 and the
exchange ratio of 1.2748 shares of Globix common stock for each share of NEON
common stock.
SELECTED COMPANIES
-------------------------------------
HIGH LOW MEAN MEDIAN NEON
---- --- ---- ------ ----
Enterprise value to LTM revenues 3.7x 0.4x 1.5x 1.3x 1.6x
Enterprise value to projected 1.6x 0.3x 0.9x 0.9x 1.5x
calendar 2004 revenues
Enterprise value to projected 1.7x 0.3x 0.9x 0.7x 1.1x
calendar 2005 revenues
Enterprise value to LTM EBITDA 13.4x 6.5x 10.3x 10.9x 19.0x
54
No company, transaction or business used in the preceding "Selected
Company Analysis," or the following "Selected Transaction Analysis" as a
comparison is identical to Globix, NEON or the merger. Accordingly, an
evaluation of the results of these analyses is not entirely mathematical;
rather, it involves complex considerations and judgments concerning differences
in the financial and operating characteristics and other factors that could
affect the acquisition, public trading or other values of the selected companies
or selected transactions or the business segment, company or transaction to
which they are being compared.
SELECTED TRANSACTION ANALYSIS. Needham & Company analyzed publicly
available financial information for the following selected telecommunications
industry merger and acquisition transactions, which represent transactions since
January 1, 2002 involving targets with an equity value of between $30 million
and $200 million:
ACQUIRER TARGET
-------- ------
ITC DeltaCom, Inc. BTI Telecom Corp.
CenturyTel, Inc. Digital Teleport, Inc.
Level 3 Communications, Inc. Genuity Inc.
Xspedius Management Corp. LLC e.spire Communications, Inc.
In examining the selected transactions, Needham & Company analyzed, for
the selected transactions and for NEON, the enterprise value as a multiple of
revenue for the last 12 months. Of the transactions analyzed, Needham & Company
believed that the acquisition by CenturyTel of Digital Teleport was the most
relevant for purposes of the selected transaction analysis because of the
similarity of the target's line of business and size to those of NEON, and noted
this transaction had a multiple of enterprise value to LTM revenues of 1.8x.
Needham & Company calculated multiples for NEON based on the Globix
closing stock price of $2.85 on July 16, 2004, the exchange ratio of 1.2748
shares of Globix common stock for each share of NEON common stock.
The following table sets forth information concerning the multiples of
enterprise value to LTM revenues for the selected transactions.
SELECTED TRANSACTIONS
--------------------------------------
GLOBIX /
HIGH LOW MEAN MEDIAN NEON MERGER
---- --- ---- ------ -----------
Enterprise value to LTM revenue 3.1x 0.4x 1.6x 1.4x 1.6x
OTHER ANALYSES. In rendering its opinion, Needham & Company considered
various other analyses, including a discounted cash flow sensitivity analysis
and a history of trading prices and volumes for Globix common stock.
The summary set forth above does not purport to be a complete
description of the analyses performed by Needham & Company in connection with
the rendering of its opinion. The preparation of a fairness opinion involves
various determinations as to the most appropriate and relevant quantitative and
qualitative methods of financial analyses and the application of those methods
to the particular circumstances and, therefore, such an opinion is not readily
susceptible to summary description. Accordingly, Needham & Company believes that
its analyses must be considered as a whole and that selecting portions of its
analyses or the factors it considered, without considering all analyses and
factors, could create a misleading or incomplete view of the process underlying
its opinion. In its analyses, Needham & Company made numerous assumptions with
respect to industry performance, general business and economic and other
matters, many of which are beyond the control of Globix and NEON. Any estimates
contained in these analyses are not necessarily indicative of actual values or
predictive of future results or values, which may be significantly more or less
favorable. Additionally, analyses relating to the values of businesses or assets
do not purport to be appraisals or necessarily reflect the prices at which
businesses or assets may actually be sold. Accordingly, these analyses and
estimates are inherently subject to substantial uncertainty. Needham & Company's
opinion and its related analyses were only one of many factors considered by the
special committee of Globix's board of directors in its evaluation of the
proposed merger and should not be viewed as determinative of the views of the
special committee of Globix's board of directors or management with respect to
the common stock exchange ratio or the merger.
55
Under the terms of its engagement letter with Needham & Company, Globix
has paid or agreed to pay Needham & Company fees for rendering the Needham &
Company opinion that Globix and Needham & Company believe are customary in
transactions of this nature. None of Needham & Company's fees are contingent on
consummation of the merger. Whether or not the merger is consummated, Globix has
agreed to reimburse Needham & Company for certain of its out-of-pocket expenses
and to indemnify it against specified liabilities relating to or arising out of
services performed by Needham & Company in rendering its opinion.
Needham & Company is a nationally recognized investment banking firm.
As part of its investment banking services, Needham & Company is regularly
engaged in the evaluation of businesses and their securities in connection with
mergers and acquisitions, negotiated underwritings, secondary distributions of
securities, private placements and other purposes. Needham & Company was
retained by the special committee of the Globix board of directors to render an
opinion in connection with the merger based on Needham & Company's experience as
a financial advisor in mergers and acquisitions as well as Needham & Company's
familiarity with technology companies. Needham & Company has had no other
investment banking relationship with Globix, and has had no investment banking
relationship with NEON, during the past two years. Needham & Company may in the
future provide investment banking and financial advisory services to Globix and
NEON unrelated to the proposed merger, for which services Needham & Company
expects to receive compensation. In the normal course of its business, Needham &
Company may actively trade the equity securities of Globix for its own account
or for the account of its customers and, therefore, may at any time hold a long
or short position in these securities.
THE NEON SPECIAL COMMITTEE'S AND NEON'S REASONS FOR THE MERGER
THE NEON SPECIAL COMMITTEE'S REASONS FOR THE MERGER
In reaching its determination, the NEON special committee considered:
o the NEON special committee's conclusion that entering into the merger
agreement at this time would provide greater value to NEON's stockholders than
they would receive if NEON remained a stand-alone entity due to, among other
factors, the greater diversification of products and services that could be
offered by the combined entity;
o the NEON special committee's conclusion that the economic terms
contained in the merger agreement represented the best economic terms that could
be obtained from Globix;
o the NEON special committee's conclusion that the expenditure of
approximately $5 million of available cash by the combined company to eliminate
a portion of the NEON convertible preferred stock was a prudent financial
decision based upon:
o the combined company's liquidity position
post-merger,
o the high dividend rate on the convertible preferred
stock, and
o the combined company's new right to redeem the
convertible preferred stock a year earlier;
o the business, financial condition, results of operations, prospects,
current business strategy and competitive position of each of NEON, Globix and
the new combined company, as well as general economic and stock market
conditions;
o the information from, analysis by and the substance of discussions
with NEON management in support of the merger;
o the NEON special committee's conclusion that, since the merger
consideration to be received by NEON common stockholders would be in the form of
publicly tradable Globix securities, the exchange of NEON securities in the
merger would provide:
o increased liquidity for the common stockholders, and
o improved access to the capital markets for the
combined company;
56
o the NEON special committee's belief that the merger would allow
Globix and NEON to realize cost savings as a result of certain business
synergies;
o the fact that the receipt of Globix capital stock by the holders of
NEON capital stock in the merger is expected to be tax-free to such holders, as
well as to Globix and NEON; and
o the opinion of Adams Harkness to the effect that, based upon and
subject to the assumptions, qualifications and limitations stated in its
opinion, as of the date of its opinion, the exchange ratio of 1.2748 shares of
Globix common stock for each outstanding share of NEON common stock to be paid
to the holders thereof in the merger was fair, from a financial point of view,
to the holders of NEON common stock (as stockholders of NEON), and the reports
and analyses presented to the NEON special committee by Adams Harkness in
connection with the opinion. See "--Opinion of NEON's Financial Advisor"
beginning on page 58 of this joint proxy statement/prospectus.
The NEON special committee also considered a number of negative factors
in its deliberations concerning the merger, including:
o the fact that the merger agreement does not provide the holders of
NEON capital stock with any protection against fluctuations in the market price
of Globix common stock during the period from the signing of the merger
agreement to the completion of the merger;
o the reduction in the combined company's liquidity as a result of the
combined company's expenditure of approximately $5 million of available cash to
eliminate a portion of the NEON convertible preferred stock;
o the combined company's liquidity position post-merger;
o the loss of control over the future operations of NEON following the
merger;
o the fact that the merger agreement provides that Globix has the right
not to proceed with the transaction under certain circumstances, including in
the event that greater than fifteen percent (15%) of NEON's common stockholders
or convertible preferred stockholders elect to exercise their appraisal rights;
o the ability of Globix to reduce its pre-merger debt; and
o the other factors discussed in this joint proxy statement/prospectus
under the section entitled "Risk Factors," beginning on page 20 of this joint
proxy statement/prospectus.
The NEON special committee believed that these negative factors were
substantially outweighed by the benefits anticipated from the merger. The
preceding discussion of the information and factors considered by the NEON board
of directors is not intended to be exhaustive, but is believed to include all
material factors considered by the NEON board of directors. Mr. Lampe, a
director on the NEON and Globix boards of directors, abstained from voting on
the merger. In evaluating the merger, the members of the NEON special committee
considered their knowledge of the business, financial condition and prospects of
NEON, and the advice of its advisors. In light of the number and variety of
factors that the NEON special committee considered in connection with their
evaluation of the merger, the NEON special committee did not find it practicable
to assign relative weights to the foregoing factors. Rather, the NEON special
committee made its determination based upon the total mix of information
available to it.
NEON'S REASONS FOR THE MERGER
In determining the fairness of the terms of the merger and approving
the merger agreement and the transactions contemplated by the merger agreement,
the NEON board of directors considered the factors described above under "--The
NEON Special Committee's Reasons for the Merger" beginning on page 56 of this
joint proxy statement/prospectus. In approving the merger agreement and the
transactions contemplated by the merger agreement, the NEON board of directors
concurred with and adopted the analysis of the NEON special committee with
respect to the financial evaluation of NEON and of the exchange ratio.
57
In evaluating the merger, the members of the NEON board of directors
considered their knowledge of the business, financial condition and prospects of
NEON, and the advice of its advisors. In light of the number and variety of
factors that NEON's board of directors considered in connection with their
evaluation of the merger, NEON's board of directors did not find it practicable
to assign relative weights to the foregoing factors. Rather, NEON's board of
directors made its determination based upon the total mix of information
available to it.
RECOMMENDATIONS OF NEON'S BOARD OF DIRECTORS
The NEON board of directors (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and Grubin,
abstaining) has approved the merger, the merger agreement and the transactions
contemplated by the merger agreement, and on the basis of the recommendation of
the NEON special committee, determined that the terms of the merger are
advisable and in the best interests of NEON and its stockholders. Accordingly,
the NEON board of directors (with one director, Mr. Lampe, abstaining, and as to
the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining)
recommends that NEON's stockholders vote "FOR" the merger, the merger agreement
and the transactions contemplated by the merger agreement, "FOR" the amendment
to NEON's certificate of incorporation, "FOR" the amendment to the certificate
of designation for the NEON convertible preferred stock and "FOR" the proposal
to grant discretionary authority to adjourn or postpone the NEON special meeting
to solicit additional votes to approve the matters considered at the NEON
special meeting, if necessary.
OPINION OF NEON'S FINANCIAL ADVISOR
Adams Harkness, Inc. (f/k/a Adams, Harkness & Hill, Inc.) provided a
fairness opinion to the NEON special committee on July 16, 2004 that, as of the
date of such fairness opinion, the exchange ratio payable pursuant to the merger
agreement was fair, from a financial point of view, to the holders of NEON
common stock (as stockholders of NEON). The full text of the July 16, 2004
fairness opinion, which sets forth assumptions made, matters considered and
limitations on the review undertaken in connection with the fairness opinion, is
attached as Appendix E to this joint proxy statement/prospectus and is
incorporated herein by reference (the "Adams Harkness fairness opinion"). The
Adams Harkness fairness opinion, referred to herein, does not constitute a
recommendation as to how any NEON stockholder should vote with respect to the
merger. NEON stockholders are urged to, and should, read the fairness opinion in
its entirety.
The NEON special committee retained Adams Harkness to assist it in its
evaluation of the proposed merger. Pursuant to the terms of Adams Harkness'
engagement letter, Adams Harkness was retained by the NEON special committee to
render an opinion as to the fairness, from a financial point of view, to the
stockholders of NEON of the consideration to be received, or the exchange ratio
to be employed, as the case may be, by such stockholders in connection with the
merger. Adams Harkness is a nationally recognized investment banking firm and is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, private
placements and valuations for corporate and other purposes.
At the meeting of the NEON special committee on July 16, 2004, Adams
Harkness rendered its fairness opinion, in writing, that, as of that date, based
upon and subject to the various considerations set forth in such fairness
opinion, the exchange ratio of 1.2748 set forth in the draft merger agreement
dated as of July 16, 2004 is fair, from a financial point of view, to the
holders of NEON common stock (as stockholders of NEON).
The Adams Harkness fairness opinion is directed to the NEON special
committee and addresses only the fairness, from a financial point of view, of
the exchange ratio of 1.2748 set forth in the merger agreement. The description
of the Adams Harkness fairness opinion set forth in this joint proxy
statement/prospectus is only a summary and NEON stockholders should refer to the
full text of the Adams Harkness fairness opinion.
The following is a summary of the various sources of information and
valuation methodologies used by Adams Harkness in arriving at its fairness
opinion. To assess the fairness of the transaction, Adams Harkness employed
analyses based on the following:
o relative valuations for each of NEON and Globix based on a
discounted cash flow valuation analysis for each company on a
stand-alone basis;
58
o each company's implied pro forma revenue and EBITDA
contribution to the combined entity;
o valuation metrics derived from selected comparable companies;
and
o valuation metrics derived from selected precedent
transactions.
In conducting its investigation and analysis and in arriving at its
opinion, Adams Harkness reviewed the information and took into account the
investment, financial and economic factors it deemed relevant and material under
the circumstances. The material actions undertaken by Adams Harkness in
connection with the preparation and rendering of its fairness opinion were as
follows:
o reviewed the terms of the merger agreement furnished to Adams
Harkness by legal counsel to the NEON special committee which,
for the purposes of the Adams Harkness fairness opinion, Adams
Harkness assumed, with the permission of the NEON special
committee, to be identical in all material respects to the
merger agreement to be executed;
o analyzed and discussed with management of NEON and Globix
certain historical and projected financial statements and
other financial and operating data concerning each company,
including with respect to Globix, forecasts characterized by
Globix management as a downside scenario;
o reviewed and analyzed the historical common stock trading
history of Globix;
o conducted due diligence discussions with members of senior
management of NEON and Globix concerning the financial
performance, operations, business strategy and prospects for
such company, respectively;
o reviewed and analyzed the potential pro forma financial
effects of the merger on the projected financial results of
the consolidated entity;
o compared the results of operations of Globix with those of
certain companies Adams Harkness deemed to be relevant and
comparable;
o compared the terms and conditions of the merger with certain
mergers and acquisitions Adams Harkness deemed to be relevant
and comparable;
o reviewed and analyzed the current capitalization of each of
NEON and Globix, as well as the projected pro forma
capitalization of Globix after giving effect to the merger;
and
o performed such other financial studies, investigations and
analyses and took into account such other matters as it deemed
necessary, including Adams Harkness' assessment of general
economic, market and monetary conditions as of the date of the
Adams Harkness fairness opinion.
In rendering its fairness opinion, Adams Harkness assumed and relied
upon the accuracy and completeness of all of the financial and other information
that was publicly available or provided to Adams Harkness by, or on behalf of,
NEON and Globix, and did not independently verify such information. Adams
Harkness also relied on the assurances of NEON's management that they were not
aware of any facts that would make such information misleading. Adams Harkness
assumed, with the NEON special committee's consent, that:
o with respect to forecasts reviewed relating to the prospects
of NEON or Globix, that such forecasts were reasonably
prepared on bases reflecting the best currently available
estimates and judgments of the management of NEON and Globix,
respectively, as to the future financial performance of such
company;
o all material assets and liabilities (contingent or otherwise,
known or unknown) of each of NEON and Globix are as set forth
in the historic and projected financial statements of each
such company as provided to Adams Harkness;
59
o obtaining any regulatory and other approvals and third party
consents required for consummation of the merger would not
have a material effect on the anticipated benefits of the
merger; and
o the merger would be consummated in accordance with the terms
set forth in the merger agreement.
In conducting its review, Adams Harkness did not obtain an independent
evaluation or appraisal of any of the assets or liabilities (contingent or
otherwise) of NEON or Globix. Adams Harkness' fairness opinion did not predict
or take into account any possible economic, monetary or other changes which may
occur, or information which may come available, after the date of its written
fairness opinion.
For purposes of its analyses, Adams Harkness assumed, among other
things, that there would be 25,156,262 pro forma fully diluted shares of NEON
common stock outstanding, and 22,326,902 fully diluted shares of Globix common
stock outstanding, immediately prior to the effective time of the merger.
DISCOUNTED CASH FLOW ANALYSIS
Adams Harkness analyzed certain historical and projected financial
statements of NEON and Globix, provided by management of NEON and Globix,
respectively, in performing a discounted cash flow analysis for each company.
Adams Harkness relied on such information and assumed such information to be
complete and accurate in all material respects. Through these analyses, Adams
Harkness assessed the stand-alone value for each company based on the valuation
implied by the present value of the company's future cash flows using selected
discount rates. Implied equity values were then calculated using most recent
(March 31, 2004) balance sheet information (assuming, based on discussions with
management of NEON and Globix, the conversion of $12.5 million of Globix debt
into equity). Terminal values were calculated by tax affecting out-year free
cash flows at 40% and capitalizing this amount using a sensitized range of
long-term growth rates (reflective of historical and projected performance) and
weighted average costs of capital ("WACC"). The present value of tax shields
relating to an out-year residual net operating loss balance was added to the
valuation of both companies.
Adams, Harkness also paid close attention to the fact that NEON is a
private company. In arriving at an appropriate valuation, Adams Harkness applied
a discount to the value of NEON's securities based on its view that valuations
of private securities are subject to a discount relative to the market price of
comparable public securities, reflecting the inability to freely trade such
private securities in the public marketplace. For purposes of its analysis,
Adams Harkness applied a 26% valuation discount (reflecting a 30% base discount,
reduced to adjust for NEON's size).
In arriving at the appropriate discount rates to apply to each company,
Adams Harkness performed WACC calculations, based on the respective balance
sheet information of each company as of March 31, 2004 (adjusted, in the case of
Globix, to reflect the anticipated conversion of $12.5 million of Globix debt
into equity prior to closing). For purposes of this calculation, Adams Harkness:
o calculated beta, in the case of Globix, using comparable
publicly traded companies, and in the case of NEON, using
Ibbotson SIC code small company composite data because of the
limited number of comparable, publicly traded companies;
o assumed a risk free rate of 4.5% (based on the 10 year
Treasury Note yield as of July 15, 2004), and a market risk
premium of 7%;
o applied a 7% size premium adjustment to the base WACC
calculated for each company; and
o applied a 26% premium to NEON's cost of equity capital to
reflect the impact of the lack of a liquid, public market for
NEON's securities.
60
Based on these assumptions, Adams Harkness performed three-year and
five-year discounted cash flow analyses for each company, sensitized in each
case to account for a range of long-term revenue growth rates and WACCs. For
NEON, Adams Harkness utilized long-term revenue growth rates between 5.5% and
6.5%, and WACCs ranging from 25.0% to 26.0%. Based on the above assumptions and
sensitivities, Adams Harkness' three-year discounted cash flow analysis resulted
in a range of implied equity values for NEON between $51.8 million and $53.5
million, and the five-year discounted cash flow analysis resulted in a range of
implied equity values for NEON between $66.3 million and $70.9 million.
For Globix, Adams Harkness utilized long-term revenue growth rates
between 4.5% and 5.5%, and WACCs ranging from 14.0% to 15.0%. Based on the above
assumptions and sensitivities, Adams Harkness' three-year discounted cash flow
analysis resulted in a range of implied equity values for Globix between $31.7
million and $47.3 million, and the five-year discounted cash flow analysis
resulted in a range of implied equity values for Globix between $37.5 million
and $52.4 million.
Using the ranges of equity values listed above, Adams Harkness
calculated ranges of implied NEON pro forma ownership in the consolidated
entity. Based on each company's three-year discounted cash flow analysis, Adams
Harkness derived a range of implied NEON pro forma equity ownership in the
consolidated entity of between 53% and 62%. Based on each company's five-year
discounted cash flow analysis, Adams Harkness derived a range of implied NEON
pro forma equity ownership in the consolidated entity of between 58% and 64%.
CONTRIBUTION ANALYSIS
Based on management projections, Adams Harkness analyzed each company's
implied pro forma ownership in the consolidated entity based on the percentage
of projected revenues and EBITDA each company will contribute to the
consolidated entity. Because of each company's limited operating history
following emergence from bankruptcy, Adams Harkness primarily focused on each
company's projected revenue and EBITDA contribution for the calendar years 2004
- 2006.
The following table reflects the projected revenue contribution of each
of NEON and Globix to the consolidated entity based on each company's respective
revenue projections:
-----------------------------------------------------------
Revenue Contribution to Consolidated Entity
-------------------------------------------
Year NEON Globix
--------------------- --------------------- ---------------
CY 2004E 43.4% 56.6%
--------------------- --------------------- ---------------
CY 2005E 46.6% 53.4%
--------------------- --------------------- ---------------
CY 2006E 51.6% 48.4%
--------------------- --------------------- ---------------
CY 2007E 55.9% 44.1%
--------------------- --------------------- ---------------
CY 2008E 59.5% 40.5%
--------------------- --------------------- ---------------
The following table reflects the projected EBITDA contribution of each
of NEON and Globix to the consolidated entity based on each company's respective
EBITDA projections:
-----------------------------------------------------------
EBITDA Contribution to Consolidated Entity
------------------------------------------
Year NEON Globix
--------------------- --------------------- ---------------
CY 2004E 57.2% 42.8%
--------------------- --------------------- ---------------
CY 2005E 59.6% 40.4%
--------------------- --------------------- ---------------
CY 2006E 69.2% 30.8%
--------------------- --------------------- ---------------
CY 2007E 73.5% 26.5%
--------------------- --------------------- ---------------
CY 2008E 75.8% 24.2%
--------------------- --------------------- ---------------
61
PUBLIC COMPANY PEER ANALYSIS
Adams Harkness established a group of publicly traded companies that it
deemed comparable to each of NEON and Globix based on similarity of services
offered, markets served and financial performance (collectively, for purposes of
this section, the "Peer Group Companies"), and analyzed certain operating
performance characteristics and public market valuation metrics of such Peer
Group Companies. Such information included:
o last twelve months revenue and projected 2004 and 2005
revenue;
o last twelve months earnings before interest and taxes
depreciation and amortization, referred to as EBITDA, and
projected 2004 and 2005 projected EBITDA; and
o ratio of enterprise value to last twelve months revenue, and
2004 and 2005 projected revenue.
NEON is a privately held regional service provider of advanced optical
networking solutions and services in the Northeast and mid-Atlantic markets.
Adams Harkness established the following group of four publicly traded companies
in the communications and information services industry that it deemed
comparable to NEON (in alphabetical order):
-------------------------------- ---------------- ----------------- ---------------- ---------------
Last Twelve Last Twelve
Enterprise Months Months
Company Market Value Value (1) Revenue (2) EBITDA (2)
------- ------------ --------- ----------- ----------
-------------------------------- ---------------- ----------------- ---------------- ---------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
-------------------------------- ---------------- ----------------- ---------------- ---------------
Corvis Corp $600.4 $317.4 $459.6 NMF
-------------------------------- ---------------- ----------------- ---------------- ---------------
Fiber Net Telecom Group $48.5 $57.0 $30.5 NA
-------------------------------- ---------------- ----------------- ---------------- ---------------
Global Crossing $277.9 $172.9 $2,932.0 NA
-------------------------------- ---------------- ----------------- ---------------- ---------------
Level 3 Communications $2,071.2 $6,242.2 $1,619.0 $412.0
-------------------------------- ---------------- ----------------- ---------------- ---------------
(1) Market value is derived from share prices as of the close of
trading on July 15, 2004 and the financial data information and the
number of fully diluted shares outstanding are taken from each
company's most recent SEC filings. To determine enterprise value,
market value is adjusted for a company's debt and cash positions by
adding the debt balance and subtracting the cash balance.
(2) Last twelve months revenue and last twelve months EBITDA data are
obtained from each Peer Group Company's most recent SEC filings.
Globix is a publicly traded (OTC Bulletin Board) provider of hosting,
network and applications solutions for businesses in the US and UK, based in New
York, NY and employing approximately 250 employees. Globix offers web hosting,
dedicated internet access and networking services, streaming media, content
delivery, network security solutions, virtual private networks, and managed
network services. Adams Harkness established the following group of eight
publicly traded companies in the hosting and network applications industry that
it deemed comparable to Globix (in alphabetical order):
62
-------------------------------- ---------------- ----------------- ---------------- ---------------
Last Twelve Last Twelve
Enterprise Months Months
Company Market Value Value (1) Revenue (2) EBITDA (2)
------- ------------ --------- ----------- ----------
-------------------------------- ---------------- ----------------- ---------------- ---------------
(IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS)
-------------------------------- ---------------- ----------------- ---------------- ---------------
Corio Inc $116.3 $83.3 $67.4 $1.6
------------------------------- ----------------- ----------------- ---------------- ---------------
Equant $1,561.1 $1,232.0 $2,948.9 $208.5
------------------------------- ----------------- ----------------- ---------------- ---------------
Equinix Inc $532.4 $560.2 $128.8 $5.7
------------------------------- ----------------- ----------------- ---------------- ---------------
Interland Inc $47.3 $17.2 $106.0 NMF
------------------------------- ----------------- ----------------- ---------------- ---------------
InterNAP Network Services $347.7 $270.0 $140.7 $10.6
------------------------------- ----------------- ----------------- ---------------- ---------------
NaviSite Inc $90.5 $95.0 $73.9 NMF
------------------------------- ----------------- ----------------- ---------------- ---------------
Raindance Communications $109.6 $71.6 $74.8 $12.9
------------------------------- ----------------- ----------------- ---------------- ---------------
Savvis Communications $142.3 $173.6 $305.8 NMF
------------------------------- ----------------- ----------------- ---------------- ---------------
(1) Market value is derived from share prices as of the close of
trading on July 15, 2004 and the financial data information and the
number of fully diluted shares outstanding are taken from each
company's most recent SEC filings. To determine enterprise value,
market value is adjusted for a company's debt and cash positions by
adding the debt balance and subtracting the cash balance.
(2) Last twelve months revenue and last twelve months EBITDA data are
obtained from each Peer Group Company's most recent SEC filings.
Based on its expertise in the valuation of publicly-traded companies
and, in particular, its research into the performance variables considered by
investors when assessing relative value among the Peer Group Companies, Adams
Harkness concluded that, because of the limited set of comparable companies,
most without valuation metrics applicable to NEON or Globix, the valuations
implied for both NEON and Globix through peer group analyses were rendered less
meaningful than those derived from certain other analyses.
PRECEDENT TRANSACTION ANALYSIS
Adams Harkness assessed the transaction premiums and relative
valuations associated with selected precedent publicly disclosed acquisitions it
deemed relevant. Adams Harkness reviewed five precedent transactions related
specifically to communications and information services companies. Each of the
five precedent transactions were announced after July 23, 2003. Adams Harkness
analyzed the transaction value to last twelve months revenue multiple and the
transaction value to EBITDA multiple paid in each transaction.
Premiums paid in precedent public company change of control
transactions typically imply the range of consideration acquirors are willing to
pay above a seller's stock price prior to or at the time of the announcement of
the relevant transaction. However, since market conditions change over time,
valuation metrics derived from precedent transactions may or may not be accurate
proxies for value at a given point in time.
63
Adams Harkness identified two precedent transactions with available and
applicable valuation metrics it deemed relevant to NEON. In chronological order,
the selected transactions were:
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Value of Enterprise Target Net Target LTM Ent
Date Transaction Value Sales LTM EBITDA Val/ Ent Val/
Target Name Acquiror Name Announced ($ mil) ($ mil) ($ mil) ($ mil) Sales EBITDA
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Reliance Gateway
FLAG Telecom Group Ltd Net Pvt Ltd 10/16/2003 194.8 176.0 148.5 (39.7) 1.2x NMF
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Focal Communications Corvis Corporation 3/8/2004 210.0 297.0 306.9 15.7 1.0x 18.9x
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Adams Harkness identified three precedent transactions with available
and applicable valuation metrics it deemed relevant to Globix. In chronological
order, the selected transactions were:
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Value of Enterprise Target Net Target LTM Ent
Date Transaction Value Sales LTM EBITDA Val/ Ent Val/
Target Name Acquiror Name Announced ($ mil) ($ mil) ($ mil) ($ mil) Sales EBITDA
-------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Digex Inc. WorldCom Inc 7/24/2003 25.5 242.4 154.4 12.2 1.6x 19.8x
--------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Axcelerant Inc GRIC Communications Inc 8/12/2003 51.9 46.6 16.1 (2.8) 2.9x NMF
--------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
Host Europe PLC PIPEX Communications PLC 4/2/2004 55.0 46.5 30.4 6.2 1.5x 7.5x
--------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ----------
As part of its analysis of the above transactions, Adams Harkness
analyzed the ratio of enterprise value to last twelve months revenue of the
target companies, as well as analyzing the enterprise value to EBITDA of the
target companies. Based on this analysis, Adams Harkness applied a range of
ratios of transaction value to last twelve months revenue and EBITDA multiples.
The results of the analysis offered a mean enterprise value to last twelve
months revenue of 1.6x, and a mean enterprise value to EBITDA of 15.4x. However,
because of the limited number of precedent transactions with available and
applicable valuation metrics, Adams Harkness concluded that the valuations
implied for each of NEON and Globix through precedent transaction analyses were
less meaningful than those derived from certain other analyses.
SUMMARY OF FINANCIAL AND COMPARATIVE ANALYSES
The foregoing summary does not purport to be a complete description of
the analyses performed by Adams Harkness. The preparation of a fairness opinion
is a complex process. Adams Harkness believes that its analyses must be
considered as a whole, and that selecting portions of such analysis without
considering all analyses and factors would create an incomplete view of the
processes underlying its fairness opinion. Any estimates contained in Adams
Harkness' analyses are not necessarily indicative of actual values, which may be
significantly more or less favorable than as set forth therein. Estimates of
values of companies do not purport to be appraisals or necessarily to reflect
the prices at which companies may actually be sold. Such estimates are
inherently subject to uncertainty. Adams Harkness advised the NEON special
committee that the financial and comparative analyses conducted by it in
rendering its fairness opinion (specifically, the discounted cash flow analysis,
the pro forma ownership analysis, the peer group analysis and the selected
precedent transactions analysis) constituted a "going concern" analysis of NEON.
Taken together, the information and analyses employed by Adams Harkness lead to
Adams Harkness' overall opinion that the exchange ratio of 1.2748 set forth in
the merger agreement is fair, from a financial point of view, to holders of NEON
common stock (as stockholders of NEON).
AFFIRMATION OF FAIRNESS OPINION
On October 8, 2004 Adams, Harkness provided to the NEON special
committee, in writing, an affirmation of its fairness opinion that, as of such
date, based upon and subject to the various considerations and assumptions set
forth in the affirmation of the fairness opinion, the exchange ratio is fair,
from a financial point of view, to holders of NEON common stock (as stockholders
of NEON). The full text of the affirmation of the fairness opinion dated October
8, 2004, which sets forth, among other things, the assumptions made, procedures
followed, matters considered, and limitations on the scope of the review
undertaken by Adams, Harkness in rendering its affirmation of its opinion, is
attached as Appendix F to this joint proxy statement/prospectus and is
64
incorporated herein by reference. The Adams, Harkness affirmation of its
fairness opinion is directed to the NEON special committee and addresses only
the fairness, from a financial point of view, of the Exchange Ratio pursuant to
the merger agreement as of October 8, 2004, and does not address any other
aspect of the merger or constitute a recommendation to any holder of common
stock as to how to vote at the special meeting. In connection with Adams,
Harkness' affirmation of its fairness opinion review and arriving at the
fairness opinion and this affirmation thereof, Adams, Harkness has not
independently verified any information received from NEON or Globix, have relied
on such information, and have assumed that all such information is complete and
accurate in all material respects. Adams, Harkness has also relied on the
assurances of management of NEON that they are not aware of any facts that would
make such information misleading. With respect to any forecasts reviewed,
relating to the prospects of NEON or Globix, Adams, Harkness has assumed, and
received written confirmation thereof, that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgments of
management of NEON and Globix, respectively, as to the future financial
performance of such company. In particular, with permission of the NEON special
committee, in connection with the Adams, Harkness affirmation of the fairness
opinion, Adams, Harkness has relied on the financial projections prepared by
Globix management and utilized in the analysis supporting the fairness opinion
of July 16, 2004, and not any subsequently shared financial modeling scenarios.
MATERIAL CONTRACTS BETWEEN GLOBIX AND NEON
Other than contracts relating to the merger agreement and the merger,
which are described in the section entitled "Terms of the Merger Agreement and
Related Transactions" beginning on page 75 of this joint proxy
statement/prospectus, there are no material contracts between Globix and NEON.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
INTERESTS OF GLOBIX'S AND NEON'S DIRECTORS AND OFFICERS IN THE MERGER
When NEON's stockholders are considering the recommendation of NEON's
board of directors that they vote in favor of the adoption of the merger, the
merger agreement and the transactions contemplated by the merger agreement and
the other proposals set forth in this joint proxy statement/prospectus, NEON
stockholders should be aware that some of the directors and officers of NEON
have interests in the merger and participate in arrangements that are different
from, or are in addition to, those of NEON stockholders generally. The NEON
board of directors and its special committee were aware of these interests and
considered them, among other matters, when they adopted and approved the merger,
the merger agreement and the transactions contemplated by the merger agreement
(with Mr. Lampe abstaining from the voting, and as to the first amendment, with
Messrs. Lampe and Grubin, abstaining from voting).
Similarly, when Globix's stockholders are considering the
recommendation of Globix's board of directors that they vote in favor of the
issuance of Globix common stock in connection with the merger, Globix
stockholders should be aware that some of the directors and officers of Globix
have interests in the merger and participate in arrangements that are different
from, or are in addition to, those of Globix stockholders generally. The Globix
board of directors and its special committee were aware of these interests and
considered them, among other matters, when they adopted and approved the merger,
the merger agreement and the transactions contemplated by the merger agreement
(with Mr. Lampe abstaining from the voting).
These special interests on behalf of Globix and NEON directors and
officers include the following:
SIGNIFICANT HOLDERS OF GLOBIX AND NEON SECURITIES ARE AFFILIATED WITH
NEON AND GLOBIX DIRECTORS
Certain NEON stockholders who beneficially own a significant percentage
of NEON securities also beneficially own a significant percentage of the Globix
common stock. Beneficial ownership of the equity securities of Globix and NEON
by significant stockholders is disclosed under "Share Ownership of Certain
Beneficial Owners and Management of Globix," "Security Ownership of Directors,
Officers and More Than Five Percent Stockholders of NEON" and "Share Ownership
of Globix After the Merger" on pages 118, 142 and 154 of this joint proxy
statement/prospectus. These persons may have interests in the merger that are
different from, or are in addition to, those of NEON stockholders generally.
Steven Lampe, a director of both Globix and NEON, is affiliated with LC
Capital Master Fund Ltd., which holds approximately 7.4% of the outstanding
common stock of Globix and 10.6% and 15.6%, respectively, of the outstanding
common stock and convertible preferred stock of NEON, as of August 1, 2004. Mr.
Singer, the non-executive chairman of the board of directors of Globix, is a
trustee of certain trusts for the benefit of his brother's children. These and
other trusts for the benefit of his brother's children (collectively, the
"Singer Trusts") hold approximately 6.7% of the outstanding common stock of
Globix and 3.6% and 27.5%, respectively, of the outstanding common stock and
convertible preferred stock of NEON, as of August 1, 2004. Robert Grubin, a
director of NEON, is a partner at Loeb Partners Corp., which holds approximately
2.5% of the outstanding common stock of Globix and 14.1% and 4.0%, respectively,
of the outstanding common stock and convertible preferred stock of NEON, as of
August 1, 2004.
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DEBT-FOR-EQUITY EXCHANGE
It is a condition to the closing of the merger that some of Globix's
11% senior note holders exchange $12.5 million in principal and accrued interest
of Globix's 11% senior notes for approximately 4,545,455 shares of Globix common
stock at a price per share of $2.75, the approximate trading price of the Globix
common stock at the time the parties reached an agreement on the overall amount
of the exchange. LC Capital Master Fund Ltd. and the Singer Children's
Management Trust, one of the Singer Trusts, have agreed to participate in the
debt-for-equity exchange which is described in more detail in the section
entitled "Terms of the Merger Agreement and Related Transactions -
Debt-for-Equity Exchange" beginning on page 87 of this joint proxy
statement/prospectus.
ACCELERATED VESTING OF OPTIONS
All officers and directors of NEON, including Mr. Courter and Mr.
Marshall, have stock option agreements (and employment agreements in the case of
Mr. Courter and Mr. Marshall) that provide that, upon a change of control of
NEON, including a transaction such as the merger, their unvested options will
accelerate and become fully vested and exercisable. Options to purchase
approximately 1,349,677 shares of NEON common stock held by NEON's officers and
directors at a weighted exercise price of $5.24 per share will be fully vested
and exercisable immediately prior to the completion of the merger.
INDEMNIFICATION AND DIRECTORS AND OFFICERS INSURANCE
The merger agreement requires Globix and NEON, as the surviving
corporation, to indemnify and hold harmless each present and former director and
officer of NEON and other persons entitled to indemnification under the
certificate of incorporation and bylaws or similar organizational documents of
NEON or any of its subsidiaries as in effect on the date of the merger agreement
against any costs or expenses reasonably incurred in connection with any
threatened, pending or completed claim, action, suit, proceeding or
investigation brought against such indemnified person and arising out of or
pertaining to matters existing or occurring with respect to NEON or any of its
subsidiaries at or prior to the effective time of the merger to the fullest
extent permitted under NEON's organizational documents and applicable law. Each
indemnified person will be entitled to advancement of expenses incurred in the
defense of any claim, action, suit, proceeding or investigation from Globix and
NEON to the fullest extent permitted by the Delaware General Corporation Law and
the Sarbanes-Oxley Act of 2002. However, any person to whom expenses are
advanced must provide an undertaking to repay such advances if it is ultimately
determined that such person is not entitled to indemnification.
Additionally, the merger agreement requires that NEON maintain for a
period of at least five years policies of directors' and officers' liability
insurance and fiduciary liability insurance for the benefit of the indemnified
persons with respect to claims arising from facts or events that occurred on or
before the effective time of the merger, including in respect of the
transactions contemplated by the merger agreement.
BUSINESS ADVISORS OF NEON AND GLOBIX
CTA provides consulting and business development services to NEON.
Under a letter agreement between NEON and CTA, CTA agreed to present merger and
acquisition advice and opportunities to NEON for a success fee. CTA has agreed
to waive this fee in relation to the merger. NEON has issued to certain current
and former affiliates of CTA and certain of such affiliates' designees warrants
exercisable for 300,000 shares of NEON common stock at $6.06 per share through
October 23, 2008 and warrants exercisable for 350,000 shares of NEON common
stock at $5.30 per share through December 3, 2007, as payment for such services.
CTA purchased the warrants exercisable for 350,000 shares of NEON common stock
for $25,000. One of CTA's employees, Wayne Barr, Jr., serves on NEON's board of
directors and Mr. Barr will serve on the board of directors of Globix following
the merger. A current director of NEON, Mr. Aquino, was affiliated with CTA at
the time NEON's board of directors approved the merger.
CTA provides similar consulting and business development services to
Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a
success fee if Globix consummates a sale, merger or similar transaction with
CTA's assistance. CTA has agreed to waive this fee in relation to the merger.
Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for
500,000 shares of Globix common stock at $3.00 per share through March 13, 2013,
which were purchased for $25,000. See "Description of Globix Capital Stock -
Description of Globix Warrants" beginning on page 124 of this joint proxy
statement/prospectus.
OPERATION OF GLOBIX AND NEON AFTER THE MERGER
Following the merger, the stockholders of NEON will become stockholders
of Globix, and their rights as stockholders will be governed by Globix's
certificate of incorporation and bylaws, each as amended to date and currently
in effect, and the laws of the State of Delaware. See "Comparison of Stockholder
Rights," beginning on page 165 of this joint proxy statement/prospectus.
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After the merger, NEON, as the surviving entity following the merger,
will continue to operate as a wholly owned subsidiary of Globix. Upon the
completion of the merger, Mr. Courter, the chairman of the board, president and
chief executive officer of NEON, will be the chairman of the board, president
and chief executive officer and a director of the wholly owned subsidiary NEON
and will be a director of Globix, and all other executive officers and directors
of NEON before the merger will serve in such capacities after the merger,
subject to the authority of the board of directors of Globix after the merger.
After the merger, the board of directors of Globix will be comprised of
nine members, including four persons who are currently directors of Globix
(Messrs. Herzig, Singer, Steele and Stevenson), four persons who are currently
directors of NEON (Messrs. Barr, Cecin, Courter and Forsgren) and one person who
is currently a director of both companies (Mr. Lampe). The management of Globix
after the transaction will remain unchanged, except that Mr. Courter may be
deemed an executive officer of Globix for purposes of the Securities Exchange
Act of 1934, by virtue of his position with a principal business unit of Globix.
For further information, see "Globix - Management of Globix After the Merger, "
beginning on page 145 of this joint proxy statement/prospectus.
ACCOUNTING TREATMENT
Globix intends to account for the merger as a purchase in accordance
with generally accepted accounting principles in the United States. Globix has
been identified as the acquirer for accounting purposes as a result of the
following: Globix will pay part of the consideration to acquire NEON in cash,
part through the issuance of Globix common stock and convertible preferred stock
and part through the assumption of NEON warrants and options; the merged
company's management and operations are expected to be controlled by Globix's
board of directors which will consist of four individuals who are currently
members of the board of directors of Globix, four individuals who are currently
members of the board of directors of NEON and one individual who is currently a
member of the board of directors of both NEON and Globix; and the current
holders of Globix common stock are expected to continue to hold the majority of
the common stock of the combined company following the merger, factoring in
cross ownership between the two companies.
The purchase price will be allocated to NEON's assets and liabilities
based on their estimated fair values at the time of completion of the merger.
The excess of the fair value of the identifiable net assets acquired over the
purchase price (i.e. negative goodwill) which is expected to be approximately
$30.2 million, will be reduced to zero by assigning it on a pro rata basis to
the estimated fair value of all identified noncurrent acquired assets. Following
the completion of the merger, the results of operations of NEON will be included
in the consolidated financial statements of Globix from the date of the
acquisition.
GOVERNMENTAL AND REGULATORY APPROVALS
The Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended
(the "HSR Act") and its related rules and regulations prohibit Globix and NEON
from completing the merger until Globix and NEON each file notifications with
the Antitrust Division of the Department of Justice and the Federal Trade
Commission, and the HSR Act waiting period requirements have been satisfied.
Even after the HSR Act waiting period expires or is terminated, and even after
the merger is completed, the Antitrust Division or the Federal Trade Commission
could challenge the merger on antitrust grounds. In addition, before or after
the merger is completed, states and private litigants could also challenge the
merger on antitrust grounds. Globix and NEON each filed HSR Act notifications
with the Federal Trade Commission and the Antitrust Division on August 13, 2004,
and the waiting period was terminated on August 20, 2004.
NEON's subsidiary, NEON Connect, Inc., has competitive local exchange
carrier, or CLEC, authorization in several states in the Northeast and
mid-Atlantic regions. Of these several states, Vermont, New Jersey and Delaware
require that approval must be granted in order for NEON Connect, Inc.'s parent
company, NEON, to merge with and into a wholly owned subsidiary of Globix.
Similarly, NEON's subsidiary NorthEast Optic Network of New York, Inc. also has
authorization to be a CLEC in the State of New York. The State of New York also
requires that approval be granted by the state in order for NEON, as the parent
of NorthEast Optic Network of New York, Inc., to consummate the merger. Each of
these states requires the approval as a means of ensuring that after the merger
has taken place, the new organization will maintain the obligations that each
state requires in order to be a CLEC. NEON and Globix have submitted
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applications to the state agencies that oversee public utilities in each of the
four states identified above and are awaiting approvals from each agency. An
agency could challenge NEON and Globix's position that after the merger closes,
the new organization will maintain the obligations required to be a CLEC. Should
such a challenge occur, the responsible state agency may not provide the
required approval.
NEON Connect, Inc. also possesses CLEC authorizations in Maine,
Maryland, Massachusetts, New Hampshire, Rhode Island and Washington, D.C. In
each of these jurisdictions, the agency that oversees public utilities requires
that it be notified of the merger, as part of regulating CLECs. The State of New
Hampshire requires the notification before the merger closes and the remaining
jurisdictions require notification after the merger is completed. NorthEast
Optic Network of Connecticut, Inc., a subsidiary of NEON, also possesses
authorization to be a CLEC in the State of Connecticut. Connecticut, as part of
regulating competitive local exchange carriers, also requires that its agency
which oversees public utilities receive a notice of the merger after the merger
is completed.
NEON Optica is a party to a franchise agreement with the City of New
York and a fiber optic cable license agreement with the City of White Plains,
New York. Both of these agreements require the respective cities to give their
prior written consent in the event of a change of control of NEON Optica or any
person holding control of NEON Optica. NEON has solicited from the cities the
required consents and is working with each of the cities to obtain those
consents.
Other than the SEC declaring Globix's registration statement on Form
S-4 relating to this transaction effective, approval under the HSR Act and
approval from certain state agencies with regard to CLEC authorization, Globix
and NEON do not believe that any additional material governmental filings are
required in connection with the merger.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
This discussion is based on the Internal Revenue Code of 1986, as amended
(referred to in this discussion as the "Code"), and on Treasury regulations,
administrative rulings and court decisions in effect as of the date of this
joint proxy statement/prospectus, all of which may change at any time, possibly
with retroactive effect.
A. TO THE HOLDERS OF NEON SECURITIES
The following discussion summarizes the material United States federal
income tax consequences of the merger that are generally applicable to holders
of NEON common stock, NEON convertible preferred stock, NEON Class A warrants,
NEON redeemable preferred stock warrants, and NEON CTA warrants (collectively,
"NEON Securities"). This discussion assumes that holders of NEON Securities hold
their securities as capital assets within the meaning of Section 1221 of the
Code. This discussion does not address all aspects of United States federal
income taxation that may be important to a holder of NEON Securities in light of
his, her or its particular circumstances or particular tax status, including,
without limitation, the following:
o holders of securities who are not citizens or residents of the
United States;
o financial institutions;
o tax exempt organizations;
o mutual funds;
o pension funds;
o insurance companies;
o dealers in securities or foreign currency;
o holders of securities who acquired their shares in connection
with stock option grants or in other compensatory
transactions; and
o holders of securities who hold their securities as part of a
hedge, straddle or conversion transaction.
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In addition, the following discussion does not address the tax
consequences of other transactions effectuated prior to or after the merger,
whether or not such transactions are in connection with the merger. Furthermore,
neither estate and gift nor foreign, state or local tax considerations are
addressed. No ruling has been obtained from the Internal Revenue Service
regarding the tax consequences of the merger, and the following discussion is
not binding on the Internal Revenue Service.
WE URGE HOLDERS OF NEON SECURITIES TO CONSULT THEIR OWN TAX ADVISOR(S)
AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF
THE MERGER AND THEIR RELATED REPORTING OBLIGATIONS IN LIGHT OF THEIR PARTICULAR
CIRCUMSTANCES.
It is intended that the merger will constitute a "reorganization"
within the meaning of Section 368(a) of the Code, by virtue of Section
368(a)(2)(E) of the Code, with each of Globix, NEON and Cornerstone Merger
Corp., the subsidiary of Globix formed for purposes of this transaction ("Merger
Corp."), qualifying as a "party to a reorganization" under Section 368(b) of the
Code. Qualifying as a "reorganization" within the meaning of Section 368(a) of
the Code will result in the following federal income tax consequences, subject
to the limitations and qualifications referred to above:
Recognition of Gain or Loss
---------------------------
o No gain or loss will be recognized by holders of NEON common
stock solely with respect to their receipt of Globix common
stock in the merger.
o The Internal Revenue Service (the "IRS") has ruled that
amounts received in a reorganization with respect to accrued
dividends, where there has been no declaration to pay the
dividends, are treated as part of the reorganization
consideration and not as a payment of the accrued dividend
(though the reorganization consideration, in whole or in part,
may be treated as a dividend under the rules discussed below).
Provided that amounts distributed to holders of NEON
convertible preferred stock in respect of the accrued
dividends that have not been declared are treated as part of
the reorganization consideration, no gain or loss will be
recognized by holders of NEON convertible preferred stock with
respect to their receipt of Globix convertible preferred stock
in the merger. However, gain, if any, but not loss, will be
recognized with respect to cash received by a holder of NEON
convertible preferred stock in the merger, but only to the
extent that the amount of cash received by such holder in the
merger exceeds the allocable portion of such holder's basis in
the NEON convertible preferred stock that it surrenders in
exchange therefor. A holder's basis in the NEON convertible
preferred stock will be allocated between the Globix
convertible preferred stock and cash in proportion to the
relative fair market value of each.
o Gain recognized by a holder of NEON convertible preferred
stock, if any, will be capital gain (taxed to individuals at a
maximum tax rate of 15% if the shares of NEON convertible
preferred stock have been held for more than one year and
otherwise at ordinary income tax rates and taxed to
corporations at a maximum tax rate of 35%) unless the cash
received for NEON convertible preferred stock has the effect
of a dividend under the provisions of Sections 356 and 302 of
the Code, in which case the gain will be treated as dividend
income (taxed to individuals at a maximum rate of 15% in the
case of qualifying dividends and to corporations at a maximum
tax rate of 35%, though the amount of the dividend to
corporate holders may be reduced by a dividends received
deduction, as discussed below) to the extent of the holder's
ratable share of any earnings and profits, as calculated for
federal income tax purposes, and any excess will be capital
gain. The receipt of cash generally will not have the effect
of a dividend if it is not essentially equivalent to a
dividend under Section 302(b)(1) of the Code, which generally
requires that there be a meaningful reduction of the interest
such holder otherwise would have had in Globix immediately
following the merger had part of its convertible preferred
69
stock not been exchanged for cash. The IRS has indicated that
any reduction in the interest of a minority shareholder that
owns a very small percentage of the shares of a public and
widely held corporation will be a meaningful reduction and
therefore will not be essentially equivalent to a dividend
where the holder exercises no control over corporate affairs.
For purposes of determining whether a holder of NEON
convertible preferred stock has had a meaningful reduction of
its interest as a result of the merger, the constructive
ownership rules of Section 318 of the Code apply in comparing
such holder's percentage interest in Globix immediately after
the merger with the percentage of Globix such holder would
have owned if it had received Globix convertible preferred
stock in lieu of cash in the merger. Generally, the
constructive ownership rules under Section 318 treat a holder
as owning (i) shares of stock owned by certain relatives,
related corporations, partnership, estates or trusts, and (ii)
shares of stock the holder has an option to acquire. As
discussed above, a holder's receipt of cash that is treated as
essentially equivalent to a dividend up to the amount by which
the cash exceeds the holder's basis in the NEON convertible
preferred stock surrendered in exchange for the cash will be
taxed as dividend income only to the extent of the holder's
ratable share of earnings and profits, calculated under
federal income tax rules. It is not clear whether the relevant
earnings and profits are only those of NEON or also include
the earnings and profits of Globix. NEON and Globix have each
tentatively determined that they do not anticipate having
earnings and profits. If this proves to be the case, the
amount that would otherwise have been treated as dividend
income will be capital gain. Until such time as NEON and
Globix make such a final determination, there can be no
assurance as to whether either or both of them has earnings
and profits. A corporate holder of NEON convertible preferred
stock may be eligible for a dividends received deduction on
any amount treated as a dividend, as discussed above. However,
the benefit of the dividends received deduction may be reduced
or eliminated by many exceptions to and restrictions on
dividends received deductions, including restrictions relating
to the holding period of stock, debt-financed portfolio stock,
taxpayers that pay the alternative minimum tax and so-called
"extraordinary dividends" within the meaning of Section 1059
of the Code. If Section 1059 applies to a corporate holder of
NEON convertible preferred stock, the IRS probably would take
the position that the basis of the Globix convertible
preferred stock received by such holder must be reduced under
Section 1059 by the amount of dividend income excluded by such
corporate holder as a result of the dividends received
deduction, and if the amount of such exclusion exceeds such
basis, the excess will be treated as capital gain.
o No gain or loss will be recognized by a holder of NEON Class A
warrants with respect to its receipt solely of Globix common
stock in the merger.
o Capital loss will be recognized by a holder of redeemable
preferred stock warrants of NEON upon expiration of such
warrants in an amount equal to the holder's cost or other
basis for such warrants. Under current law, capital losses are
deductible only to the extent of capital gains plus, in the
case of a non-corporate taxpayer, ordinary income of up to
$3,000 in any year.
o No gain or loss will be recognized by a holder of NEON CTA
warrants with respect to its receipt solely of Globix CTA
warrants in the merger.
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Basis of Globix Stock Received in the Merger
--------------------------------------------
o Except as described above with regard to certain corporate
holders of NEON convertible preferred stock, the aggregate tax
basis of (i) the Globix common stock received in the merger by
a holder of NEON common stock or NEON Class A warrants; (ii)
the Globix convertible preferred stock received in the merger
by a holder of NEON convertible preferred stock; or (iii) the
Globix warrants received in the merger by a holder of NEON CTA
warrants will in each case be the same as each such holder's
aggregate tax basis in the NEON common stock, Class A
warrants, convertible preferred stock or CTA warrants
surrendered in exchange therefor, decreased by the amount of
cash received and increased by the amount of gain recognized
on the exchange (including any portion of such gain that was
treated as a dividend).
Holding Period
--------------
o The holding period for the Globix common stock received in the
merger by a holder of NEON common stock or Class A warrants
will include the period during which the holder held the NEON
common stock or Class A warrants surrendered in exchange
therefor.
o The holding period for the Globix convertible preferred stock
received in the merger by a holder of NEON convertible
preferred stock will include the period during which the
holder held the NEON convertible preferred stock surrendered
in exchange therefor.
o The holding period for the Globix CTA warrants received in the
merger by a holder of NEON CTA warrants will include the
period during which the holder held the NEON CTA warrants
surrendered in exchange therefor.
Dissenters' Rights
------------------
A dissenting stockholder who perfects dissenters' rights under Delaware
law generally will recognize gain or loss with respect to his, her or its shares
of NEON Securities equal to the difference between the amount of cash received
and the basis in such shares. Such gain or loss generally will be long-term
capital gain or loss, provided the shares were held for more than one year prior
to disposition. Interest, if any, awarded by a court in an appraisal proceeding
would be included in such stockholder's income as ordinary income.
Withholding
-----------
Under the Code, payment to a holder of NEON Securities may, under
certain circumstances, be subject to backup withholding at a 28% rate with
respect to the amount of cash, if any, received pursuant to the merger. Any
amount withheld under the backup withholding rules is not an additional tax and
may be refunded or credited against the holder's federal income tax liability,
provided the required information is furnished to the IRS.
Successful Challenge by the IRS to the Tax-Free Reorganization Status
---------------------------------------------------------------------
of Merger
---------
The above summary of certain tax consequences of the merger to holders
of NEON Securities is not binding on the IRS and the parties are not requesting
a ruling from the IRS in connection with the merger. A successful IRS challenge
to the "tax-free reorganization" status of the merger would result in a holder
of NEON Securities recognizing gain or loss with respect to the NEON Securities
surrendered equal to the difference between the holder's basis in the NEON
Securities surrendered and the fair market value, as of the effective time of
the merger, of the consideration (including Globix common stock, Globix
convertible preferred stock, Globix warrants, and cash) received in exchange for
such NEON Securities. In such event, the holder's aggregate basis in the Globix
common stock or Globix warrants so received would equal their fair market value
and their holding period would begin the day after the merger.
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B. TO GLOBIX AND NEON
Recognition of Gain or Loss
---------------------------
Neither Globix, Merger Corp. nor NEON will recognize gain or loss as a
result of the merger.
Limitation on NEON and Globix Tax Attributes
--------------------------------------------
Under Section 382 of the Code, following an "ownership change," special
limitations apply to the use by a "loss corporation" of its (i) net operating
loss ("NOL") carryforwards arising before the ownership change and (ii) net
unrealized built-in losses ("NUBILs") (if such losses existed immediately before
the ownership change and exceed a statutory threshold amount) recognized during
the five years following the ownership change ((i) and (ii) are referred to
collectively as the "Applicable Tax Attributes"). After an ownership change, the
amount of the loss corporation's taxable income for each post-change taxable
year that may be offset by the Applicable Tax Attributes is limited to the
product of the "long-term tax-exempt rate" (published by the IRS for the month
of the ownership change) multiplied by the value of the loss corporation's stock
(the "Section 382 Limitation"). To the extent that the loss corporation's
Section 382 Limitation in a given taxable year exceeds its taxable income for
the year, that excess increases the Section 382 Limitation in future taxable
years.
NEON had NOL carryforwards of approximately $79 million at December 31,
2003. These NOL carryforwards expire through 2023 and are subject to review and
possible adjustment by the IRS. As a result of its bankruptcy reorganization in
2002, NEON experienced an ownership change, subjecting approximately $65 million
of its NOL carryforwards to a Section 382 Limitation of approximately $6 million
per year.
Globix had NOL carryforwards of approximately $90 million at September
30, 2003. These NOL carryforwards expire through 2022 and are subject to review
and possible adjustment by the IRS. As a result of its bankruptcy reorganization
in 2002, Globix experienced an ownership change, subjecting approximately $45
million of its NOL carryforwards and NUBILs (assuming Globix is found to have
had NUBILs that exceeded the threshold at the time of its 2002 bankruptcy
reorganization) to a Section 382 Limitation. Globix has not yet determined the
amount of the Section 382 Limitation or whether its NUBILs exceeded the
threshold amount.
As a result of the merger, NEON or Globix, or both, may experience
another ownership change. Under Section 382, the determination of whether an
ownership change has occurred is based on ownership shifts involving persons or
groups that are or are deemed to be "5% shareholders." Although NEON and Globix
will each be tested for an ownership change, cross-ownership in NEON and Globix
may be taken into account in determining whether a change in ownership has
occurred as a result of the merger. If the merger results in an ownership change
for either NEON or Globix, or both, another Section 382 Limitation will apply to
the Applicable Tax Attributes of NEON and/or Globix, as the case may be,
including both those that existed at the time of the bankruptcy ownership change
and Applicable Tax Attributes that arose thereafter. Only the Section 382
Limitation resulting from the merger, if any, would apply to Applicable Tax
Attributes that arose subsequent to NEON's or Globix's bankruptcy
reorganization, as the case may be. NEON and Globix have not yet determined
whether the merger will result in another ownership change of either of them.
Further, whether or not the merger causes an ownership change, NEON or Globix
may each experience an ownership change after the merger as a result of future
changes in the ownership of their stock that could result in additional Section
382 Limitations.
Under regulations governing consolidated returns of affiliated groups,
NOL carryforwards of an acquired company or group can be used only to offset the
acquired company or group's taxable income, not to offset the taxable income of
other members of the acquiring corporation's consolidated group. If, however,
the shareholders of the acquired corporation in a merger receive more than 50
percent of the fair market value of the stock of the acquiring corporation (as a
result of owning stock in the acquired corporation), and the acquired company or
group is treated as remaining in existence for purposes of the consolidated
return rules (with the acquiring company as the new parent). In that case, the
NOL limitation applies to the acquiring corporation, rather than to the acquired
corporation. As a result of this rule, NEON's consolidated group will be treated
as remaining in existence with Globix as the new parent and Globix's
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consolidated group will be treated as terminated. The use of Globix's NOL
carryforwards will be limited under the above rule, unless Globix experiences a
Section 382 ownership change as a result of the merger, in which case Globix's
NOL carryforwards will be subject to a Section 382 Limitation but will not be
subject to the consolidated group taxable income limitation.
APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS
Under Delaware law, the holders of NEON outstanding common stock and
convertible preferred stock who comply with the governing statutory provisions
are entitled to appraisal rights to receive a judicially determined fair value
for their shares instead of the merger consideration. The stockholders of Globix
are not entitled to appraisal rights in connection with the merger. If the
merger is consummated, a holder of record of NEON stock on the date of making a
demand for appraisal, as described below, will be entitled to have those shares
appraised by the Delaware Court of Chancery under Section 262 of the Delaware
General Corporation Law, or DGCL, and to receive payment for the "fair value" of
those shares instead of the consideration provided for in the merger agreement.
In order to be eligible to receive this payment, however, a NEON stockholder
must (1) continue to hold its shares through the time of the merger, and, as a
result, a stockholder who is the record holder of shares of NEON common stock
and convertible preferred stock on the date the written demand for appraisal is
made, but who thereafter transfers those shares before the effective time of the
merger, will lose any right to appraisal in respect of those shares; (2)
strictly comply with the procedures discussed under Section 262; and (3) not
vote in favor of the merger or consent thereto in writing, and, as a result, a
stockholder who submits a proxy and wishes to exercise appraisal rights must
vote against the merger agreement or abstain from voting on the merger agreement
because a proxy which does not contain voting instructions will, unless revoked,
be voted in favor of the merger agreement. This joint proxy statement/prospectus
is being sent to all holders of record of NEON common stock and convertible
preferred stock on the record date for the NEON special meeting and constitutes
notice of the appraisal rights available to those holders under Section 262. The
written demand for appraisal must be in addition to and separate from any proxy
or vote. Neither voting (in person or by proxy) against, abstaining from voting
or failing to vote on the proposed merger agreement will constitute a written
demand for appraisal within the meaning of Section 262.
THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT
COMPLIANCE WITH THE PROCEDURES IN SECTION 262. FAILURE TO FOLLOW ANY OF THESE
PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS' RIGHTS UNDER
SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF SECTION
262.
The following summary is not a complete statement of Section 262 of the
DGCL, and is qualified in its entirety by reference to Section 262, which is
incorporated herein by reference, together with any amendments to the laws that
may be adopted after the date of this joint proxy statement/prospectus. A copy
of Section 262 is attached as Appendix C to this joint proxy
statement/prospectus.
A holder of NEON stock who elects to exercise appraisal rights under
Section 262 must deliver a written demand for appraisal of its shares of NEON
prior to the vote on the merger. The written demand must reasonably inform NEON
of the identity of the holder and that the holder intends to demand the
appraisal of the holder's shares. All demands should be delivered to NEON, 2200
West Park Drive, Westborough, Massachusetts, 01581, Attention: Christopher E.
Dalton, Esq.
Only a holder of shares of NEON stock on the date of making a written
demand for appraisal who continuously holds those shares through the time of the
merger is entitled to seek appraisal. Simply voting against the approval and
adoption of the merger agreement does not constitute a demand for appraisal
rights and does not constitute a waiver of appraisal rights. Demand for
appraisal must be executed by or for the holder of record, fully and correctly,
as that holder's name appears on the holder's stock certificates representing
shares of NEON stock, should specify the holder's name and mailing address, the
number of shares of NEON common stock and convertible preferred stock owned and
that the holder intends to demand appraisal of the holder's shares. If NEON
stock is owned of record in a fiduciary capacity by a trustee, guardian or
custodian, the demand should be made in that capacity. If NEON stock is owned of
record by more than one person, as in a joint tenancy or tenancy in common, the
demand should be made by or for all owners of record. An authorized agent,
including one or more joint owners, may execute the demand for appraisal for a
holder of record; that agent, however, must identify the record owner or owners
and expressly disclose in the demand that the agent is acting as agent for the
record owner or owners of the shares.
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A record holder such as a broker who holds shares of NEON stock as a
nominee for beneficial owners, some of whom desire to demand appraisal, must
exercise appraisal rights on behalf of those beneficial owners with respect to
the shares of NEON stock held for those beneficial owners. In that case, the
written demand for appraisal should state the number of shares of NEON stock
covered by it. Unless a demand for appraisal specifies a number of shares, the
demand will be presumed to cover all shares of NEON stock held in the name of
the record owner.
BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE
APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY
REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF
THE NEON SPECIAL MEETING.
Within 10 days after the merger, the surviving or resulting corporation
is required to send notice of the effectiveness of the merger to each
stockholder who prior to the time of the merger complies with the requirements
of Section 262 and has delivered notice of intent to demand appraisal.
Within 120 days after the merger, the surviving corporation or any
stockholder who has complied with the requirement of Section 262 may file a
petition in the Delaware Court of Chancery demanding a determination of the fair
value of the shares of NEON stock held by all stockholders seeking appraisal. If
no petition is filed by either the surviving corporation or any dissenting
stockholder within the 120-day period, the rights of all dissenting stockholders
to appraisal will cease. Stockholders seeking to exercise appraisal rights
should not assume that the surviving corporation will file a petition with
respect to the appraisal of the fair value of their shares or that the surviving
corporation will initiate any negotiations with respect to the fair value of
those shares. The surviving corporation is under no obligation to and has no
present intention to take any action in this regard. Accordingly, stockholders
who wish to seek appraisal of their shares should initiate all necessary action
with respect to the perfection of their appraisal rights within the time periods
and in the manner prescribed in Section 262. FAILURE TO FILE THE PETITION ON A
TIMELY BASIS WILL CAUSE THE STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE.
A stockholder timely filing a petition for appraisal with the Delaware
Court of Chancery must deliver a copy to the surviving corporation, which will
then be obligated within 20 days to provide the Register in Chancery with a duly
verified list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the value of
their shares have not been reached by the surviving corporation. After notice to
those stockholders, the Delaware Court of Chancery may conduct a hearing on the
petition to determine which stockholders have become entitled to appraisal
rights. The Court of Chancery may require stockholders who have demanded an
appraisal of their shares and who hold stock represented by certificates to
submit their certificates to the Register in Chancery for notation thereon of
the pendency of the appraisal proceedings. If any stockholder fails to comply
with such requirement, the Delaware Court of Chancery may dismiss the
proceedings as to that stockholder.
Within 120 days after the time of the merger, any stockholder who has
complied with subsections (a) and (d) of Section 262 is entitled, upon written
request, to receive from the surviving corporation a statement setting forth the
total number of shares of NEON stock not voted in favor of the merger with
respect to which demands for appraisal have been received by NEON and the number
of holders of those shares. The statement must be mailed within 10 days after
NEON has received the written request or within 10 days after the time for
delivery of demands for appraisal under subsection (d) of Section 262 has
expired, whichever is later.
If a petition for an appraisal is filed in a timely manner, at the
hearing on the petition, the Delaware Court of Chancery will determine which
stockholders are entitled to appraisal rights and will appraise the shares of
NEON stock owned by those stockholders. The court will determine the fair value
of those shares, exclusive of any element of value arising from the
accomplishment or expectation of the merger, together with a fair rate of
interest, to be paid, if any, upon the fair value.
Stockholders who consider seeking appraisal should consider that the
fair value of their shares under Section 262 could be more than, the same as, or
less than, the value of the consideration provided for in the merger agreement
without the exercise of appraisal rights. The Court of Chancery may determine
the cost of the appraisal proceeding and assess it against the parties as the
Court deems equitable. Upon application of a dissenting stockholder, the Court
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may order that all or a portion of the expenses incurred by any dissenting
stockholder in connection with the appraisal proceeding (including, without
limitation, reasonable attorney's fees and the fees and expenses of experts) be
charged pro rata against the value of all shares of NEON stock entitled to
appraisal. In the absence of a court determination or assessment, each party
bears its own expenses. Final decisions by the Court of Chancery in appraisal
proceedings are subject to appeal to the Delaware Supreme Court.
Any stockholder who has demanded appraisal in compliance with Section
262 will not, after the merger, be entitled to vote such stock for any purpose
or receive payment of dividends or other distributions, if any, on the NEON
stock, except for dividends or distributions, if any, payable to stockholders of
record at a date prior to the merger.
A stockholder may withdraw a demand for appraisal and accept the Globix
common stock and/or preferred stock and cash, as applicable, at any time within
60 days after the merger by delivering to NEON a written withdrawal of the
stockholder's demand for appraisal. If an appraisal proceeding is properly
instituted, it may not be dismissed as to any stockholder without the approval
of the Delaware Court of Chancery, and any such approval may be conditioned on
the Court of Chancery's deeming the terms to be just. If, after the merger, a
holder of NEON stock who had demanded appraisal for its shares fails to perfect
or loses its right to appraisal, those shares will be treated under the merger
agreement as if they were converted into Globix common stock and/or preferred
stock at the time of the merger.
IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DELAWARE CORPORATE
LAW, ANY NEON STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD
CONSULT A LEGAL ADVISOR.
TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS
THE MERGER AGREEMENT
THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE
MERGER AGREEMENT AS AMENDED BY THE FIRST AMENDMENT TO THE MERGER AGREEMENT,
COPIES OF WHICH ARE ATTACHED AS APPENDICES A-1AND A-2, RESPECTIVELY, TO THIS
JOINT PROXY STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE.
STOCKHOLDERS OF NEON AND GLOBIX ARE URGED TO READ THE MERGER AGREEMENT IN ITS
ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY
DISCREPANCY BETWEEN THE TERMS OF THE MERGER AGREEMENT AND THE FOLLOWING SUMMARY,
THE MERGER AGREEMENT WILL CONTROL.
THE MERGER
Following the approval of the merger and adoption of the merger
agreement by the stockholders of NEON and the approval of the issuance of Globix
common stock in connection of the merger by the stockholders of Globix and the
satisfaction or waiver of the other conditions to the merger set forth in the
merger agreement, Cornerstone Merger Corp., a wholly owned subsidiary of Globix,
will merge with and into NEON, with NEON continuing as the surviving corporation
under the name "NEON Communications, Inc." and as a wholly owned subsidiary of
Globix.
THE EFFECTIVE TIME
At the closing of the merger, the parties will cause the merger to
become effective by filing a certificate of merger with the Delaware Secretary
of State. The parties anticipate that the closing of the merger will occur in
the fourth quarter of calendar 2004 but cannot assure you as to the exact
timing.
DIRECTORS AND OFFICERS OF NEON AFTER THE MERGER
At the effective time of the merger, the directors of NEON before the
merger will remain the directors of NEON, and the officers of NEON before the
merger will remain officers of NEON.
CONVERSION OF SHARES IN THE MERGER
Upon completion of the merger:
o each outstanding share of NEON common stock, other than shares
held in treasury, will be converted into, and will have the
right to receive, 1.2748 shares of Globix common stock (the
"exchange ratio");
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o all accrued and unpaid dividends on the NEON convertible
preferred stock through the closing date of the merger shall
be treated as if paid in shares of NEON convertible preferred
stock based on the liquidation preference of $11.25 per share
of NEON convertible preferred stock and each outstanding share
of NEON convertible preferred stock, other than shares held in
treasury or held by Globix but including the shares treated as
issued with respect to accrued but unpaid dividends, will be
converted into, and will have the right to receive, $3.75 in
cash and 2.08333 shares of Globix convertible preferred stock
with the terms described in the section entitled "Description
of Globix Capital Stock - Description of Preferred Stock,"
beginning on page 122 of this joint proxy
statement/prospectus. A copy of the certificate of designation
for the Globix convertible preferred stock is included as an
exhibit to the first amendment to the merger agreement which
is attached as Appendix A-2 to this joint proxy
statement/prospectus;
o each outstanding Class A warrant of NEON issued under the
Class A warrant agreement dated as of December 23, 2002
between NEON and American Stock Transfer & Trust Company, as
warrant agent, will be exercised immediately prior to the
merger or will be converted into, and will have the right to
receive, 1.2748 shares of Globix common stock;
o each outstanding redeemable preferred stock warrant of NEON
issued under the redeemable preferred stock warrant agreement
dated as of December 23, 2002 between NEON and American Stock
Transfer & Trust Company, as warrant agent, will expire at the
effective time of the merger and the holders of the expired
warrants will not have any rights to receive payments with
respect to those warrants; and
o each outstanding NEON CTA warrant will be converted into, and
will have the right to receive, a Globix warrant with
substantially the terms described in the section entitled
"Description of Globix Capital Stock - Description of Globix
Warrants," beginning on page 124 of this joint proxy
statement/prospectus, representing the right to acquire a
number of shares of Globix common stock that equals the number
of shares of NEON common stock for which such warrant was
exercisable multiplied by the exchange ratio, at a purchase
price equal to the purchase price per share of NEON common
stock subject to such warrant divided by the exchange ratio.
For a description of the differences between the rights of the holders
of Globix capital stock and holders of NEON capital stock, see "Comparison of
Stockholders Rights" beginning on page 165 of this joint proxy
statement/prospectus.
TREATMENT OF NEON OPTIONS
At the effective time of the merger, each option to acquire NEON common
stock that was granted under NEON's stock plans or otherwise granted by NEON and
that is outstanding and unexercised immediately prior to the effective time of
the merger will be modified and become an option to purchase Globix common
stock. In each case, the number of shares of Globix common stock subject to the
modified stock option will be equal to the number of shares of NEON common stock
subject to the NEON stock option, assuming full vesting, multiplied by the
exchange ratio (and rounding any fractional share to the nearest whole share)
and the exercise price per share of Globix common stock will be equal to the
exercise price per share of NEON common stock subject to the NEON stock option
divided by the exchange ratio. The duration and other terms of each such
modified NEON stock option, including the vesting schedule, will be the same as
the prior NEON stock option. It is the intention of Globix and NEON that each
NEON stock option that qualifies before the merger as an "incentive stock
option" under Section 422 of the Internal Revenue Code of 1986, as amended,
will, to the extent permitted by applicable law, continue to qualify as an
incentive stock option. See "The Merger -- Interests of NEON's Directors,
Officers and Significant Stockholders in the Merger" beginning on page 65 of
this joint proxy statement/prospectus for a discussion of the treatment of the
acceleration of vesting schedules of executive officers pursuant to the merger.
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TAX TREATMENT OF NEON OPTION HOLDERS
Neither the merger nor the modification of NEON options and the NEON
option plan will be taxable to holders of NEON options. It is anticipated that
NEON will amend the NEON option plan to provide for the issuance of Globix
common stock upon exercise of outstanding options granted under the NEON option
plan. Provided that all the requirements of Treasury Regulations section 1.424-1
are met, it is the intention of Globix and NEON that each NEON option that
qualified before the merger as an "incentive stock option" under Section 422 of
the Internal Revenue Code of 1986, as amended, will continue to qualify as an
incentive stock option after the merger and after the amendment of the NEON
option plan to provide for the issuance of Globix common stock upon exercise of
options previously granted under the NEON option plan. If Globix, as the sole
shareholder of NEON, timely approves the amendment of the NEON option plan in
accordance with Treasury Regulations section 1.424-1, additional incentive stock
options for the issuance of Globix stock may be issued under the NEON option
plan.
The accelerated vesting of options held by certain NEON employees as a
result of the merger will not be an excess parachute payment to such employees
and will not result in the recognition of income by, or imposition of an excise
tax on, such employees or the disallowance of a deduction by NEON.
THE EXCHANGE AGENT
Globix will authorize a bank, trust company or such other person that
is reasonably acceptable to Globix and NEON to act as exchange agent in the
merger. Promptly after the merger, Globix will deposit with the exchange agent
shares of Globix common stock, Globix convertible preferred stock and cash (the
"merger consideration") to be paid in exchange for the NEON common stock, NEON
convertible preferred stock and NEON Class A warrants.
PROCEDURES FOR EXCHANGING STOCK AND WARRANT CERTIFICATES
Within five days after the effective time of the merger, the exchange
agent will mail to the holders of record of NEON capital stock and NEON Class A
warrants a letter of transmittal and instructions on how to surrender their NEON
stock certificates or warrant certificates, as the case may be, in exchange for
the merger consideration. HOLDERS OF NEON CAPITAL STOCK AND CLASS A WARRANTS
SHOULD NOT SURRENDER THEIR NEON STOCK CERTIFICATES OR WARRANT CERTIFICATES UNTIL
THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT.
Upon surrendering their NEON stock certificates or warrant
certificates, the letter of transmittal and any other documents required by the
exchange agent, the holders of NEON stock certificates or warrant certificates
will be entitled to a certificate representing that number of shares of Globix
common stock, or Globix convertible preferred stock and cash, as the case may
be, to which the holder is entitled. Until surrendered to the exchange agent,
outstanding NEON stock certificates and Class A warrant certificates will be
deemed from and after the effective time of the merger to evidence only the
ownership of the number of full shares of Globix common stock, or Globix
convertible preferred stock and cash, into which their NEON securities were
converted at the effective time and any dividends and other distributions, as
applicable.
DIVIDENDS WITH RESPECT TO UNEXCHANGED SHARES
Until each NEON stockholder surrenders his or her NEON stock
certificate or warrant certificate in exchange for a Globix stock certificate,
that stockholder will not receive any dividends or other distributions declared
or made by Globix after the effective time of the merger, if any. However, once
that stockholder surrenders his or her NEON stock certificate or warrant
certificate to the exchange agent, he or she will receive (i) a Globix stock
certificate, (ii) cash with respect to NEON convertible preferred stock
exchanged and (iii) at the appropriate payment date with respect to such
dividends, the amount of any dividends or other distributions with a record date
after the effective time of the merger, if any.
NO FRACTIONAL SHARES
No fractional shares of Globix common stock or Globix convertible
preferred stock will be issued in connection with the merger. Instead, the
aggregate of all converted shares issued to each NEON stockholder will be
rounded up to the nearest whole share.
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RETURN OF EXCHANGE FUND
Any shares of Globix capital stock and cash that the exchange agent has
not distributed six months after the effective time of the merger will be
delivered to Globix upon demand. Certificates representing NEON capital stock
and Class A warrants must thereafter be surrendered for exchange to Globix. None
of Globix, NEON or the exchange agent will be liable for any shares of Globix
capital stock, dividends or distributions with respect thereto, or cash
delivered to a public official pursuant to any abandoned property, escheat or
similar laws.
LOST, STOLEN OR DESTROYED STOCK CERTIFICATES
If a certificate representing NEON capital stock or warrants is lost,
stolen or destroyed, the exchange agent will issue the applicable merger
consideration in exchange for the certificate only upon the making of an
affidavit of such loss, theft or destruction by the claimant, and, if required
by Globix or the exchange agent, the posting of a bond as indemnity against any
claim that may be made against Globix or the exchange agent with respect to such
certificate.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, each of NEON and Globix has made a number of
representations and warranties to the other with respect to it and its
subsidiaries, where applicable, that relate to a number of matters, including:
o its incorporation, good standing and qualification to do
business;
o its power and authority to own, lease and operate its
properties and to carry on its business;
o its certificate of incorporation and bylaws;
o its capitalization;
o its authority to enter into the merger agreement;
o the effect of the merger, or entering into the merger
agreement, on its outstanding obligations;
o required consents, waivers and approvals;
o regulatory approvals required to complete the merger;
o with respect to Globix, its filings and reports with the SEC;
o its financial statements and liabilities;
o changes in its business since the date of its more recent
audited balance sheet (September 30, 2003 for Globix and
December 31, 2003 for NEON);
o the completeness and accuracy of information being supplied
for inclusion in this joint proxy statement/prospectus and the
related registration statement;
o vote required with respect to the merger;
o title to and operation of the assets and properties it owns
and leases;
o the receipt of an opinion from its financial advisor that the
exchange ratio is fair, from a financial point of view, to its
common stockholders;
o identification of transactions with certain related parties;
o litigation with respect to the corporation or its
subsidiaries;
o its intellectual property, the other intellectual property
that it uses and infringement of other intellectual property;
o its compliance with applicable laws;
78
o permits required to conduct its business and compliance with
those permits;
o accounts receivable and warranties;
o customers and suppliers;
o unlawful business practices;
o its taxes;
o its employee benefit plans;
o its hazardous material activities and environmental
liabilities;
o its agreements, contracts and commitments;
o brokers' and finders' fees in connection with the merger; and
o its insurance.
The representations and warranties in the merger agreement are
complicated and are not easily summarized. Globix and NEON urge you to read
carefully the articles in the merger agreement entitled "Representations and
Warranties of NEON" and "Representations and Warranties of Globix."
CONDUCT OF BUSINESS OF NEON AND GLOBIX PENDING THE MERGER
Each of NEON and Globix has agreed that until the closing of the merger
(or the merger agreement terminates), or unless the other party to the merger
agreement consents in writing or as required by law, it and its subsidiaries
will conduct their respective businesses in the usual, regular and ordinary
course in all material respects, in substantially the same manner in which it
was conducted prior to July 19, 2004, and not enter into any new material line
of business. Each of NEON and Globix further agrees to discharge or satisfy
claims, liabilities or obligations only in the usual, regular and ordinary
course of business. Each of NEON and Globix has also agreed to use all
commercially reasonable efforts to:
o carry on and preserve its present lines of business;
o maintain their rights and franchises; and
o maintain its relationships with customers, suppliers and
others with which it has business dealings.
In addition, until the closing of the merger (or the merger agreement
terminates), or unless the other party to the merger agreement consents in
writing, each of NEON and Globix has agreed not to:
o declare or pay dividends or make other distributions in
respect to any of its capital stock, except for dividends by
subsidiaries of NEON or Globix, as the case may be, to such
corporation or other subsidiaries thereof and except for
accruals of dividends on the NEON convertible preferred stock;
o effect any stock splits, combinations or recapitalizations
with respect to its capital stock;
o repurchase or redeem shares of its capital stock, except
repurchases of shares in connection with its stock option
plans consistent with past practices;
o issue or authorize the issuance of any securities convertible
into or exercisable for its capital stock (including
indebtedness with voting rights), other than issuances of
capital stock upon exercise of outstanding options or
warrants; issuances by a wholly owned subsidiary of capital
stock to NEON or Globix, as the case may be, or to another
wholly owned subsidiary of such company; the issuance of
341,936 shares of NEON common stock to Mode 1 Communications,
Inc. or any exchange of outstanding 11% senior notes of Globix
for shares of Globix common stock in one or more private
transactions, after NEON and Globix shall have negotiated in
good faith any modifications to the merger agreement required
by such exchange;
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o amend its charter or bylaws or the charter or bylaws of any of
its subsidiaries;
o acquire or agree to acquire, by merging or consolidating with,
acquiring a substantial portion of the assets of or making a
substantial equity investment in, other entities;
o sell, lease, encumber or otherwise dispose of property or
assets (including capital stock of its subsidiaries) that are
material to its business, other than internal reorganizations
or consolidations involving existing subsidiaries; sales
or encumbrances in the ordinary course of business, liens for
current property taxes and other governmental changes not yet
due or delinquent and being contested in good faith and with
adequate reserves; statutory liens of landlord or mechanics in
the ordinary course; equipment leases and purchase money
security interests;
o make any loans to or investments in any other person other
than loans to subsidiaries or financing transactions in the
ordinary course of business;
o incur or guarantee indebtedness, issue or sell any debt
securities or rights to such debt securities, or engage in any
asset securitization transaction, except in each case in the
ordinary course of business consistent with past practice or
under existing credit facilities or intercompany indebtedness;
o materially change its method of accounting, except as required
by generally accepted accounting principles in the United
States; change its fiscal year; make or revoke any election
relating to taxes; settle or compromise any material tax
liability; or change any material aspects of its method of
accounting for tax purposes;
o adopt, amend or terminate any employee benefit plan,
consulting agreement or any other employee benefit fund, award
or arrangement for the benefit of any director, officer or
employee of such corporation or any of its subsidiaries, other
than in the ordinary course of business consistent with past
practice or to the extent not material;
o increase compensation, benefits (including severance) or
bonuses to any employee, officer, director or consultant,
other than annual increases in salary to current non-officer
employees granted in the ordinary course of business
consistent with past practice;
o enter into, amend or terminate any change of control,
retention or severance agreement for the benefit of any
director, officer or employee of the corporation or its
subsidiaries;
o adopt a plan of liquidation, dissolution or other
reorganization (other than the merger) or alter the corporate
structure or ownership of any of its subsidiaries;
o enter into, renew or modify any contract with respect to which
the aggregate annual payments to it or from it to a third
party are expected to exceed $500,000, except in the ordinary
course of business consistent with past practice; or
o enter into any agreement, commitment or arrangement to take
any of the prohibited actions listed above.
The agreements related to the conduct of each of NEON's and Globix's
business in the merger agreement are complicated and not easily summarized. We
urge you to read the section in the merger agreement entitled "Covenants
Relating to Conduct of Business" carefully.
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Notwithstanding the covenants described above, the merger agreement
provides that each party to the agreement shall exercise complete control and
supervision over its and its subsidiaries' operations pending the merger,
consistent with the terms of the merger agreement. The parties have formed a
transition committee comprised of senior personnel of both parties to develop
transition plans for the post-closing period. Each party has also agreed to use
commercially reasonable efforts to manage its business so that, assuming a
September 30, 2004 merger, NEON would have approximately $7 million of
unrestricted cash on a consolidated basis (including cash, if any, used to
redeem NEON convertible preferred stock) and Globix would have approximately $18
million of unrestricted cash on a consolidated basis, in each case immediately
prior to the merger.
ADDITIONAL AGREEMENTS OF GLOBIX AND NEON
Pursuant to the merger agreement, Globix and NEON have also agreed to
use commercially reasonable efforts to take all necessary, proper or appropriate
actions to consummate the transactions contemplated by the merger agreement. In
particular, Globix and NEON agreed to file a pre-merger notification and report
form under the HSR Act, which was filed on August 13, 2004 and the HSR Act
waiting period was terminated on August 20, 2004.
Each of Globix and NEON has agreed to use its reasonable best efforts
to have the S-4 registration statement of which this joint proxy
statement/prospectus forms a part declared effective by the SEC.
In accordance with its certificate of incorporation and bylaws, NEON
will take all action necessary to convene a meeting or meetings of the holders
of NEON stock, to be held as promptly as practicable after the S-4 registration
statement is declared effective.
Subject to the fiduciary duty exception described below, the NEON board
of directors:
o will recommend approval of the merger, the amendment to the
certificate of incorporation and the amendment to the
certificate of designation by its stockholders;
o will not withdraw or modify its recommendation; and
o will take all lawful action to solicit stockholder approval as
promptly as possible.
In accordance with its certificate of incorporation and bylaws, Globix
will take all action necessary to convene a meeting or meetings of the holders
of Globix common stock, to be held as promptly as practicable after the S-4
registration statement is declared effective.
Subject to the fiduciary duty exception described below, the Globix
board of directors:
o will recommend approval of the issuance of Globix's common
stock in the merger;
o will not withdraw or modify its recommendation; and
o will take all lawful action to solicit stockholder approval as
promptly as possible.
The merger agreement does not preclude either NEON or Globix from,
prior to the receipt of the requisite stockholder approval, providing
information to or entering into negotiations with, a third party with respect to
an alternative acquisition proposal if the board of directors of NEON or Globix,
as applicable, concludes in good faith that it is required to do so under
applicable law. Further, if the board of directors of NEON or Globix, as
applicable, concludes in good faith that it is required to do so under
applicable law and has either entered into, or resolved to enter into, an
agreement (or agreement in principle) to effect a competing acquisition or other
business combination proposal, it may withdraw, modify or change its
recommendations to its stockholders in order to comply with its fiduciary
duties.
Unless the merger agreement is terminated, each of the NEON board of
directors and the Globix board of directors is obligated to convene its
respective stockholder meeting whether or not it continues to recommend the
merger or the common stock issuance in the merger, as applicable.
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DIRECTORS' AND OFFICERS' INDEMNIFICATION
Globix has agreed and shall cause NEON as the surviving subsidiary in
the merger to agree, to fulfill and honor in all respects the indemnification
obligations of NEON to its present and former officers and directors pursuant to
the indemnification provisions of NEON's and its subsidiaries' certificate of
incorporation, bylaws and other charter documents arising out of or pertaining
to matters existing or occurring with respect to NEON or any of its subsidiaries
prior to or at the effective time of the merger. The merger agreement provides
that Globix shall cause NEON to maintain directors' and officers' liability
insurance and fiduciary liability insurance with respect to claims arising from
facts or events occurring on or before the effective date of the merger for a
period of at least five years from the date of the completion of the merger.
FINANCIAL DUE DILIGENCE
Before mailing of this joint proxy statement/prospectus, the
accountants for Globix and NEON completed a limited financial due diligence
review of the other party to the merger agreement and prepared a report to be
presented for review by the board of directors and special committee of each of
Globix and NEON. Each party was obligated to notify the other party by September
15, 2004 of any issues arising as a result of such financial due diligence. No
such notifications were provided.
CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER
The following conditions must be satisfied before the merger can become
effective:
o holders of NEON capital stock must have approved the merger,
the merger agreement and the transactions contemplated by the
merger agreement, and the amendment to the NEON certificate of
incorporation and to the certificate of designation;
o no court or governmental entity shall have enacted, issued,
promulgated, enforced or entered, or instituted a proceeding
to do so, any law, statute, ordinance, rule, regulation,
judgment, decree, injunction or other order that is in effect
and that restrains, enjoins or otherwise prohibits
consummation of the merger;
o holders of Globix capital stock must have approved the
issuance of Globix common stock in connection with the merger;
o all applicable waiting periods under the HSR Act have expired
or been terminated;
o Globix and NEON have obtained all authorizations, consents,
orders, declarations or approvals of, or filings with, any
governmental authority required in connection with the merger,
which the failure to obtain, make or occur would have the
effect of restraining or prohibiting the merger or any of the
transactions contemplated or would have a material adverse
effect on Globix, assuming the merger had taken place;
o the S-4 registration statement of which this joint proxy
statement/prospectus forms a part must have become effective
under the Securities Act of 1933, all necessary blue sky or
state securities or other authorizations shall have been
received, and there must be no stop order or threat of
proceedings by the SEC to suspend the effectiveness of the S-4
registration statement; and
o the number of shares of NEON common stock that are dissenting
shares shall be no greater than 15% of the outstanding NEON
common stock and the number of shares of NEON convertible
preferred stock that are dissenting shares shall be no greater
than 15% of the outstanding NEON convertible preferred stock.
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CONDITIONS PRECEDENT TO GLOBIX'S OBLIGATIONS
Globix's obligations to effect the merger are subject to the
fulfillment or satisfaction, prior to or on the closing date of the merger, of
each of the following conditions:
o each of NEON's representations and warranties contained in the
merger agreement must be true and correct in all material
respects as of the closing, other than representations and
warranties that expressly relate to an earlier date (in which
case such representations and warranties must be true as of
such earlier date);
o NEON shall have performed and complied in all material
respects with all agreements to be performed prior to or on
the closing date;
o Globix shall have received a favorable legal opinion dated as
of the closing date from its counsel that the merger
constitutes a reorganization within the meaning of Section
368(a) of the Internal Revenue Code of 1986, as amended;
o there shall not have been any changes, circumstances or
effects which, individually or in the aggregate, have had or
could reasonably be expected to have a material adverse effect
on NEON and its subsidiaries taken as a whole;
o there shall not be any litigation pending or threatened which
could reasonably be expected to prohibit the merger, impose
limitations on Globix's ownership or operations of NEON after
the merger or compel Globix or any of its affiliates to
dispose of or hold separate any portion of the business of
NEON or any of NEON's subsidiaries;
o NEON and each subsidiary shall have entered into a subsidiary
guaranty and security agreement with respect to the indenture
dated as of April 23, 2002 among Globix, certain of its
subsidiaries and HSBC Bank USA, as trustee;
o Globix shall have received a Foreign Investment Real Property
Tax Act certificate that neither NEON nor any office or
subsidiary is a US real property holding corporation;
o NEON or the applicable subsidiary shall have received all
consents or waivers in order to avoid the occurrence, as a
result of the merger, of loss or substantial diminution in
value of any material contract to which NEON or a subsidiary
is a party or any permit applicable to NEON or a subsidiary;
and
o the holders of 90% or more of the NEON Class A warrants shall
have exercised their Class A warrants and the Class A warrant
agreement shall have been amended to provide for the
conversion of NEON Class A warrants into shares of Globix
common stock.
CONDITIONS PRECEDENT TO NEON'S OBLIGATIONS
NEON's obligations to effect the merger are subject to the satisfaction
of the following conditions prior to the closing date of the merger:
o each of Globix's representations and warranties contained in
the merger agreement must be true and correct in all material
respects as of the closing, other than representations and
warranties that expressly relate to an earlier date (in which
case such representations and warranties must be true as of
such earlier date);
o Globix shall have performed and complied in all material
respects with all agreements to be performed prior to or on
the closing date;
o NEON shall have received a favorable legal opinion dated as of
the closing date from its counsel that the merger constitutes
a reorganization within the meaning of Section 368(a) of the
Internal Revenue Code of 1986, as amended;
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o there shall not have been any changes, circumstances or
effects which, individually or in the aggregate, have had or
could reasonably be expected to have a material adverse effect
on Globix and its subsidiaries taken as a whole;
o there shall not be any litigation pending or threatened which
could reasonably be expected to prohibit the merger, impose
limitations on Globix's ownership or operations of NEON after
the merger or compel Globix or any of its affiliates to
dispose of or hold separate any portion of the business of
NEON or any of NEON's subsidiaries;
o Globix or the applicable subsidiary shall have received all
consents or waivers in order to avoid the occurrence, as a
result of the merger, of loss or substantial diminution in
value of any material contract to which Globix or a subsidiary
is a party or any permit applicable to Globix or a subsidiary;
and
o Globix shall have acquired 11% senior notes in an amount equal
to $12,500,000, including principal and accrued interest, in
exchange for shares of Globix common stock valued at $2.75 per
share.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated, and the merger may be abandoned
at any time prior to the closing date, whether before or after stockholder
approval:
o by the mutual written agreement of Globix and NEON;
o by Globix or NEON if:
* the closing date has not occurred within 150 days
after the expiration or termination of the waiting
period applicable to the merger under the HSR Act,
except that the right to terminate the merger
agreement is not available to any party who has
caused the delay in the closing date by failing to
fulfill its obligations under the merger agreement;
* any court or other governmental authority of
competent jurisdiction issues an order or takes any
other final and non-appealable action restraining,
enjoining or otherwise prohibiting the merger, except
that the right to terminate the merger agreement is
not available to any party whose failure to fulfill
its obligations under the merger agreement has been
the cause of the issuance of such order;
* the other party shall have failed to comply in any
material respect with any of its covenants or
agreements contained in the merger agreement required
to be complied with prior to the date of such
termination, which failure to comply has not been
cured within five business days following receipt by
such other party of written notice of such failure to
comply;
* the holders of NEON common stock and NEON convertible
preferred stock do not approve the merger, the
amendment to the NEON certificate of incorporation or
the amendment to the NEON certificate of designation;
* the holders of Globix common stock do not approve the
issuance of Globix common stock in the merger; or
* shares of NEON common stock representing greater than
15% of the outstanding NEON common stock or shares of
NEON convertible preferred stock representing greater
than 15% of the outstanding NEON convertible
preferred stock, each as of the record date, dissent
from the merger.
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o by NEON if:
* the board of directors of Globix shall not have
recommended or shall have resolved not to recommend,
or shall have qualified, changed, modified or
withdrawn its recommendation of the issuance of
Globix common stock in the merger to its
stockholders, or shall have resolved to do so;
* the board of directors of Globix shall have
recommended to the stockholders of Globix any
transaction involving the acquisition of all or
substantially all of Globix's business other than the
merger or shall have resolved to do so;
* there has been a breach of a representation or
warranty of Globix that gives rise to a failure of
the fulfillment of a condition of NEON's obligations
to effect the merger, which breach has not been cured
within five business days following receipt by Globix
of written notice of the breach;
* there shall have been any changes, circumstances or
effects which, individually or in the aggregate, have
had or could reasonably be expected to have a
material adverse effect on Globix and its
subsidiaries, taken as a whole;
* on or prior to September 15, 2004, NEON shall have
notified Globix in writing that the results of the
review by NEON of the financial due diligence report
by the auditors of NEON provided to the board of
directors of NEON are not satisfactory and reflect a
material adverse effect with respect to Globix and
its subsidiaries, taken as a whole, as determined in
good faith by the special committee of the board of
directors of NEON, after a full discussion with
Globix of all issues raised in such review; or
* the board of directors of NEON has approved a merger,
acquisition or other agreement (including an
agreement in principle) to effect a competing
acquisition or business combination proposal.
o by Globix if:
* the board of directors of NEON shall not have
recommended, or shall have resolved not to recommend,
or shall have qualified, changed, modified or
withdrawn its recommendation of the merger to its
stockholders, or shall have resolved to do so;
* the board of directors of NEON shall have recommended
to the stockholders of NEON any transaction involving
the acquisition of all or substantially all of NEON's
business other than the merger, or shall have
resolved to do so;
* there has been a breach of a representation or
warranty of NEON that gives rise to a failure of the
fulfillment of a condition of Globix's obligations to
effect the merger, which breach has not cured within
five business days following receipt by NEON of
written notice of the breach;
* there shall have been any changes, circumstances or
effects which, individually or in the aggregate, have
had or could reasonably be expected to have a
material adverse effect with respect to NEON and its
subsidiaries, taken as a whole;
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* on or prior to September 15, 2004, Globix shall have
notified NEON in writing that the results of the
review by Globix of the financial due diligence
report by the auditors of Globix provided to the
board of directors of Globix are not satisfactory and
reflect a material adverse effect with respect to
NEON and its subsidiaries, taken as a whole, as
determined in good faith by the special committee of
the board of directors of Globix, after a full
discussion with NEON of all the issues raised in the
review; or
* the board of directors of Globix has approved a
merger, acquisition or other agreement (including an
agreement in principle) to effect a competing
acquisition or other business combination proposal.
EFFECTS OF TERMINATION; PAYMENT OF EXPENSES
If the merger agreement is terminated for any of the reasons specified
above, all provisions of the merger agreement shall terminate, except that each
party shall continue to be bound by confidentiality obligations set forth in the
merger agreement, shall be bound to cover its expenses of the merger described
below and shall be liable for any fraud or willful breach of a covenant
contained in the merger agreement.
If the merger agreement is not consummated, all associated costs and
expenses, including fees and disbursements of counsel, financial advisors and
accountants, shall be paid by the party incurring the costs, except that
printing expenses and filing fees under the Securities Act of 1933, the
Securities Exchange Act of 1934, applicable Blue Sky regulations and the HSR Act
will be shared equally by Globix and NEON.
If the merger is consummated, Globix and the surviving subsidiary will
pay all costs and expenses incurred in connection with the merger and the
transactions contemplated by the merger.
WAIVER AND AMENDMENT OF THE MERGER AGREEMENT
At any time prior to the effective time of the merger, Globix and NEON
may agree in writing to:
o extend the time for the performance of any obligation or other
act required to be performed under the merger agreement;
o waive any inaccuracies in the representations and warranties
contained in the merger agreement or in any document delivered
pursuant to the merger agreement;
o waive compliance with any of the agreements or conditions
contained in the merger agreement; or
o amend the merger agreement.
RESTRICTIONS ON RESALES BY AFFILIATES
The shares of Globix common stock and convertible preferred stock to be
issued to NEON stockholders in the merger have been registered under the
Securities Act of 1933. These shares may be traded freely and without
restriction by those stockholders not deemed to be "affiliates" of NEON as that
term is defined under the Securities Act of 1933. An affiliate of a corporation,
as defined by the rules promulgated under the Securities Act of 1933, is a
person who directly or indirectly, through one or more intermediaries, controls,
is controlled by, or is under common control with, that corporation. Any
transfer by an affiliate of NEON must be one permitted by the resale provisions
of Rule 145 promulgated under the Securities Act of 1933. If a NEON affiliate
becomes an affiliate of Globix, any transfer must be permitted by the resale
provisions of Rule 144 promulgated under the Securities Act of 1933 or otherwise
permitted under the Securities Act of 1933.
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SOLICITATION OF CLASS A WARRANTHOLDERS
As one of the conditions to Globix's obligation to consummate the
merger, and as required by the merger agreement, NEON must solicit the consent
of the holders of at least ninety percent (90%) of the Class A warrants to
exercise their respective Class A warrants prior to or as of the effective time
of the merger. Additionally, NEON is required to solicit the consent of at least
a majority of the holders of the Class A warrants to amend the warrant agreement
pursuant to which the Class A warrants are issued to provide that upon a merger
of NEON the Class A warrant holders may receive the same type of consideration
as the holders of NEON common stock immediately prior to such merger. Messrs.
Lampe and Grubin, currently directors of NEON, collectively, indirectly
beneficially own approximately 20% of the issued and outstanding Class A
warrants. Each of Messrs. Lampe and Grubin has provided notice to NEON that
their respective affiliates intend to exercise their respective Class A warrants
prior to or as of the effective date of the merger.
DEBT-FOR-EQUITY EXCHANGE
NEON's obligations to effect the merger are conditioned in part upon
Globix completing a number of private debt-for-equity exchange transactions with
some existing debt holders in which Globix will exchange certain of its 11%
senior notes in an aggregate amount of $12,500,000 in principal and accrued
interest in return for issuing approximately 4,545,455 shares of Globix common
stock at a price per share of $2.75, the approximate trading price of the Globix
common stock at the time the parties reached an agreement on the overall amount
of the exchange. Globix has entered into securities exchange agreements with
York Capital Management (an affiliate of JGD Management Corp.), MacKay Shields
LLC, LC Capital Master Fund Ltd., Goldman Sachs & Co., the Singer Children's
Management Trust, one of the Singer Trusts, Lloyd Miller and Cypress Management
Partnership in order to effect the debt-for-equity exchange. Each of the
exchanging debt holders, except for Cypress Management Partnership and Lloyd
Miller, is itself or is affiliated with a holder of 5% or more of the Globix
common stock. Each of the exchanging holders, other than Goldman Sachs & Co.,
Lloyd Miller and Cypress Management Partnership has a significant interest in
NEON or is affiliated with a holder of a significant interest in NEON. Mr.
Singer, who is the non-executive chairman of the board of directors of Globix,
is a trustee of the Singer Children's Management Trust. Mr. Lampe, who is a
director of both Globix and NEON, is an affiliate of LC Capital Master Fund Ltd.
Under the terms of the securities exchange agreements, each of the
debt-for-equity exchange transactions is to be effected at the time of the
merger or at an earlier time mutually agreed upon. Globix has agreed to file a
registration statement with the Securities and Exchange Commission as promptly
as possible, but not later than 90 days after the closing of the merger, in
order to register the shares of common stock issued in exchange for its 11%
senior notes. With respect to registration of the shares of common stock issued
in the debt-for-equity exchange, Globix has granted the exchanging holders the
right to purchase additional shares of Globix common stock equal to (1) up to 5%
of the shares acquired by them at a purchase price of $2.75 per share if the
registration statement is not effective within 90 days after the closing of the
merger, and (2) an additional 5% of the shares acquired by them at a purchase
price of $2.75 per share if the registration statement is not effective for more
than 90 days during the first twelve months commencing on the 90th day following
the closing of the merger.
The merger agreement provides that in the event Globix wishes to
exchange additional 11% senior notes in excess of $12,500,000 for additional
shares of its common stock, Globix and NEON will negotiate in good faith all of
the modifications to the merger agreement that would be necessary or appropriate
to reflect any additional exchange.
APPROVAL OF AMENDMENT OF NEON'S
CERTIFICATE OF INCORPORATION
Approval of a majority of the outstanding shares of NEON common stock
and NEON convertible preferred stock entitled to vote, voting as a single class,
and a majority of the outstanding shares of NEON common stock entitled to vote,
voting as a separate class, is required to authorize the amendment to NEON's
certificate of incorporation. The amendment would except the merger from the
definition of liquidation event in NEON's certificate of incorporation. The
certificate of incorporation currently provides that upon the occurrence of a
liquidation event, subject to any preferential rights of preferred stock, all
remaining NEON assets will be distributed ratably to the holders of NEON common
87
stock. A liquidation event is currently defined to include, among other things,
any consolidation, merger or share exchange of NEON in which the holders of
NEON's voting stock outstanding immediately prior to such consolidation, merger
or share exchange do not in the aggregate hold a majority of the voting stock of
the surviving or resulting entity.
The full text of the liquidation provisions of the certificate of
incorporation relating to the definition of liquidation event as such provisions
will be amended if the merger agreement and the merger are approved, is set
forth in Appendix B-1 hereto.
You should carefully read the liquidation event provision and consult
with legal counsel regarding the impact of the amendment to the certificate of
incorporation to amend the liquidation provision.
NEON's board of directors (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and Grubin,
abstaining) has approved the amendment to the certificate of incorporation and
recommends that you vote "FOR" approval and adoption of the amendment of NEON's
certificate of incorporation.
APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION
FOR NEON CONVERTIBLE PREFERRED STOCK
Approval of a majority of the outstanding shares of NEON common stock
and NEON convertible preferred stock entitled to vote, voting as a single class,
and two-thirds of the outstanding shares of NEON convertible preferred stock
entitled to vote, voting as a separate class, is required to authorize the
amendment to the certificate of designation with respect to the NEON convertible
preferred stock. The amendment would except the merger from the definition of
change of control as set forth in the certificate of designation.
The full text of the provisions of the certificate of designation of
the NEON convertible preferred stock relating to the definition of change of
control, as such provisions will be amended if the merger agreement and the
merger are approved, is set forth as Appendix B-2 hereto.
NEON's board of directors (with one director, Mr. Lampe, abstaining,
and as to the first amendment, with two directors, Messrs. Lampe and Grubin,
abstaining) has approved the amendment to the certificate of designation and
recommends that you vote "FOR" approval and adoption of the amendment of the
certificate of designation for the NEON convertible preferred stock.
INFORMATION ABOUT GLOBIX
OUR COMPANY
We are a provider of Internet services to businesses. Our services
include:
o Hosting and co-location in our secure and fault-tolerant
Internet data centers;
o Network services and connectivity to the Internet through our
domestic and international Internet Protocol (IP) fiber based
network;
o Internet based managed services focusing on application
management and operating system management, security services
and storage services; and
o Media services including: streaming media, webcasting and
digital asset management solutions.
Our target market for our services is small to large size businesses in
a broad range of industries, including media, publishing, financial services,
retail, healthcare, governmental agencies, manufacturing, technology and
non-profit organizations. No single customer comprised more than 10% of our
revenues in the fiscal years ended September 30, 2003 or 2002. We sell our
services to businesses primarily through our direct sales force.
Our customers use our services to operate and maintain computer
equipment in a secure, fault-tolerant environment with connectivity to a
high-speed, high-capacity, direct link to the Internet, through our own network,
and to support Internet applications. Our employees are located in New York, New
York; Atlanta, Georgia; Santa Clara, California; Fairfield, New Jersey; and
London, England.
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Our principal executive offices are located at 139 Centre Street, New
York, New York 10013, and our telephone number at that location is (212)
334-8500. Although we maintain a website at www.globix.com, we do not intend
that the information available through our website be incorporated into this
joint proxy statement/prospectus. Our SEC filings are available on our website.
Globix was founded in 1989 and in 1998 undertook a major expansion plan
in order to pursue opportunities resulting from the growth of the Internet. On
March 1, 2002, Globix filed a voluntary petition under Chapter 11 of the United
States Bankruptcy Code, together with a prepackaged plan of reorganization, with
the United States Bankruptcy Court for the District of Delaware. We continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay our employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. On April 25, 2002, all conditions necessary for the plan of
reorganization to become effective were satisfied or waived and we emerged from
Chapter 11 bankruptcy protection. For additional information, see "Our Chapter
11 Bankruptcy Reorganization" beginning on page 92 of this joint proxy
statement/prospectus, for a discussion of our reorganization pursuant to Chapter
11 of the United States Bankruptcy Code.
WHAT WE OFFER OUR CUSTOMERS
We provide our customers with a range of Internet-based services,
including network infrastructure and expertise to build, maintain, operate and
support Internet-based operations. Our primary services include:
INTERNET HOSTING AND CO-LOCATION
We currently operate Internet data centers in New York, New York;
Atlanta, Georgia; Santa Clara, California; and London, England. Our Internet
data centers include electrical infrastructure, precision environmental control
systems, fire suppression systems and comprehensive security systems.
We offer co-location solutions for customers who choose to own and
maintain their own servers, but require the physically secure,
climate-controlled environment provided by our Internet data centers and
connectivity to our network. We offer hosting services in a dedicated server
environment. This service includes providing hardware usage, bandwidth and
managed services to meet customer-specific needs.
MANAGED SERVICES
We provide managed system and network services to our hosting and
co-location customers. Such services include a wide variety of maintenance,
administration and problem resolution services for many popular operating
systems, Internet network devices, software security solutions and web based
applications. In addition we also offer media service, such as streaming media
for business communication. Streaming media is a process by which audio, video
or other multimedia is delivered in a streaming or continuous fashion over the
Internet or over a company's intranet.
On October 31, 2003, we acquired the business and substantially all of
the assets of Aptegrity, Inc., a provider of web application and operations
management services. The acquisition of Aptegrity has enabled us to provide
remote management of a wider range of custom and off-the-shelf Web-based
applications. By managing e-commerce, database, content management and customer
relationship management software for our clients, we help them to protect
Internet revenue streams, reduce technology operating costs and operating risk,
and improve user satisfaction.
With the purchase of Aptegrity we gained new clients and the ability to
offer higher-revenue managed services to our existing customer base. In addition
we provide hosting and co-location services to some of Aptegrity's
pre-acquisition customers. Since the acquisition of Aptegrity our customers have
increased their spending with us on average. We attribute this to the greater
utilization of our bundled services as a result of the broader range of services
we are able to provide to our customers.
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NETWORK SERVICES AND INTERNET ACCESS
We provide access to our network to our hosting and co-location
customers in our Internet data centers as well as Internet access services which
provide businesses with high-speed continuous access to the Internet from their
own premises. In addition, we provide other services, such as domain name
registration, local loop provisioning, Internet address assignment, router
configuration, e-mail configuration and management and technical consulting
services.
Our network infrastructure is designed for high availability and low
latency, and utilizes a single autonomous system number. As a result, traffic is
carried on a network controlled by Globix to the greatest extent possible and
therefore does not suffer from the congestion or high latency of public
networks.
The domestic Globix backbone is a Packet over Synchronous Optical
Network ("SONET"), which provides a mechanism for using the speed and efficient
management capabilities of SONET for data transport. Essentially, it provides a
method for carrying data packets in SONET frames that will operate at speeds up
to OC-48 (2.4Gbs). The OC-48 Globix domestic backbone connects to our data
centers and to our backbone points of presence in Boston, Chicago, Los Angeles,
Seattle and Washington, D.C.
Our European backbone is a Packet over SONET currently connecting
London, Amsterdam, Frankfurt and Paris. The domestic and European networks are
connected by two OC-3 (155Mbps) transatlantic crossings.
Our United States and European network sections interconnect to
numerous network access points, commercial Internet exchanges and other
Internet, application and network service providers.
Our network operations are directed from our 139 Centre Street data
center in New York, New York, which is staffed 24 hours a day, seven days a
week. Network administrators located in our operations center monitor our
network infrastructure. Our network administrators are able to identify and
correct network problems either themselves or by dispatching system engineers
located at our customer support centers.
CUSTOMER SUPPORT CENTERS
Our customer support call centers are operated 24 hours a day, seven
days a week, and are equipped with telecommunications systems capable of
automatic call distribution, automatic number identification, quality assurance
recording and archiving, and intelligent call routing. A trouble ticketing and
knowledge database of customer information and history supports our customer
service operations.
GOVERNMENT REGULATION
In the United States, our Internet services are currently classified by
the Federal Communications Commission as information services, which are not
subject to significant regulation, rather than as telecommunications or common
carrier services, which are subject to a comprehensive regulatory framework.
Similarly, our Internet services are not significantly regulated in certain
foreign jurisdictions in which we conduct business.
In certain other foreign jurisdictions in which we operate, however,
our provision of certain Internet services may be subject to the jurisdictions'
laws and regulations governing telecommunications services and/or common
carriers. In jurisdictions where these laws and regulations currently apply to
certain types of our Internet solutions, we endeavor to take all reasonable
steps necessary to ensure that we comply with these laws and regulations. This
may require us to, among other things, obtain regulatory authorizations and pay
fees each year to regulatory authorities.
The laws and regulations applicable to Internet-related services are
evolving in the United States and many other jurisdictions. As these laws and
regulations evolve, it is possible that we could be regulated in additional
jurisdictions as a telecommunications services provider and/or as a common
carrier. As a result, we may become subject to, among other things, additional
licensing requirements, fee payment obligations, common carrier obligations,
network access changes and/or universal service obligations.
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In addition to the telecommunications and/or common carrier laws and
regulations that currently govern certain of our services in some jurisdictions
and that may, in the future, govern our Internet services in the United States
and other jurisdictions, new laws and regulations related to the provision of
Internet services may be adopted, implemented and/or challenged at the federal,
state and/or local levels in the United States and at corresponding levels in
foreign jurisdictions. These laws and regulations may address, among other
things, issues of user privacy, obscenity, pricing, consumer protection,
taxation, advertising, intellectual property rights, information security,
liability for certain types of content and the convergence of traditional
telecommunications services with Internet communications. A number of laws and
regulations related to these issues are currently being considered by United
States and foreign regulators.
It is impossible to predict the nature of any new laws or regulations
that will be applicable to our services, whether currently existing laws and
regulations will be newly-applied to our services or the manner in which
currently existing laws and regulations applicable to us will be interpreted and
enforced. The adoption of new laws or regulations or the application of existing
laws or regulations in a manner that is adverse to our company might decrease
demand for our Internet solutions, impose taxes, fees or other charges or other
costly technical requirements on our company or otherwise increase our cost of
doing business. Any of these developments could harm our business, financial
position, results of operations and cash flows.
The Digital Millennium Copyright Act ("DMCA") includes a limitation on
liability of on-line service providers for copyright infringement for
transmitting, routing or providing connections, transient storage, caching or
storage at the direction of a user. This limitation on liability applies if the
service provider had no actual knowledge or awareness of the copyright
infringement and if certain other conditions are met. It is not yet clear how
the DMCA will be applied to limit liability that we may face in the future for
any possible copyright infringement or copyright-related issues relating to the
activities of our customers. The DMCA also requires Internet service providers
to follow certain "notice and take-down" procedures in order to be able to take
advantage of the limitation on liability provided for in the DMCA.
We have implemented the procedures required by the DMCA and require our
users to agree to an "acceptable use" policy which prohibits the use of our
facilities for illegal purposes. There can be no assurance, however, that our
procedures and acceptable use policy will shield us from liability. Despite
enactment of the DMCA, the law relating to the liability of companies that
provide Internet-related services for information carried on or disseminated
through their networks remains largely unsettled. Claims could be made against
us under currently existing or future laws in the United States or other
jurisdictions for defamation, obscenity, negligence, copyright, trademark
infringement or other legal theories based on the nature and content of the
materials disseminated through our networks.
EMPLOYEES AND EMPLOYEE RELATIONS
As of June 30, 2004, we had approximately 250 full-time employees:
approximately 190 in the United States and 60 outside the United States. In
addition to our full-time employees, we also employ part-time personnel from
time to time in various departments to meet fluctuations in work levels. None of
our employees are covered by a collective bargaining agreement.
COMPETITION
Our competitors include other Internet service providers with a
significant national or global presence that focuses on business customers, such
as IBM, Digex, Savvis, Akamai, NaviSite, EDS Speedera, Data Return, Rackspace
and Equinix. Our competitors also include telecommunications companies, such as
AT&T, British Telecom, Level 3, MCI and Sprint. We believe that competition is
based upon a number of factors, including price, quality of service and
financial stability.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in our industry, we have encountered
significant pricing pressures. These pricing pressures have resulted in
significantly lower average selling prices for our services.
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TRADEMARKS AND PATENTS
We currently have eight trademark applications and one patent
application pending in the United States Patent and Trademark Office.
Registration of the same trademarks has been applied for or granted in certain
foreign countries. Additionally, Globix acquired the US and European Union
registered trademarks of Aptegrity(R) and Minding your E-Business(R) in the
acquisition of Aptegrity, Inc.
OUR CHAPTER 11 BANKRUPTCY REORGANIZATION
On April 8, 2002, the United States Bankruptcy Court for the District
of Delaware confirmed our plan of reorganization, which became effective on
April 25, 2002. As of the effective date of the plan, all of our existing
securities were cancelled and:
o each holder of the 12.5% senior notes became entitled to
receive, in exchange for its claims in respect of the 12.5%
senior notes, its pro rata share of:
o $120 million in aggregate principal amount of the 11%
senior notes, and
o 13,991,000 shares of our common stock, representing
85% of the shares of our common stock issued and
outstanding following the effective date of the plan;
and
o each holder of shares of our preferred stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of
2,304,400 shares of our common stock, representing 14% of the
shares of our common stock issued and outstanding following
the effective date of the plan; and
o each holder of shares of our common stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of common stock, its pro rata share of 164,600
shares of our common stock, representing 1% of the shares of
our common stock issued and outstanding following the
effective date of the plan.
The plan provides that all of the shares of our common stock are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of our issued and outstanding common stock
on a fully-diluted basis following the effective date of the plan. As of June
30, 2004, the number of outstanding options representing the right to acquire
956,598 shares of common stock had been granted to members of our management.
A total of 16,460,000 shares of our common stock and $120 million in
aggregate principal amount of the 11% senior notes were deemed to be issued and
outstanding on the effective date of the plan. As of September 30, 2002,
however, no shares of our common stock or 11% senior notes had been distributed.
In October 2002, we distributed a total of 16,295,400 shares of common stock and
$120 million in aggregate principal amount of 11% senior notes. Pursuant to the
terms of a Stipulation and Order that we entered into with the lead plaintiffs
in the class action lawsuit described in " - Legal Proceedings" beginning on
page 94 of this joint proxy statement/prospectus, 229,452 of these shares of
common stock and $1,968,000 in aggregate principal amount of the 11% senior
notes were placed in reserve in escrow pending the outcome of the class action
lawsuit. In the event that any judgment or settlement entered into in connection
with the class action lawsuit requires us to pay an amount in excess of our
liability insurance, then we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) the shares of common stock and 11% senior notes held in escrow. Based
on an August 12, 2004 court approval of a settlement agreement pursuant to which
Globix would not be required to pay an amount in excess of our liability
insurance, described under " - Legal Proceedings," beginning on page 94 of
this joint proxy statement/prospectus, Globix does not believe that the shares
of common stock and 11% senior notes held in escrow are likely to be distributed
to the class action litigants and their attorneys, and such shares and notes
will accordingly be available for distribution to Globix security holders under
92
the plan. Distribution of the remaining 164,600 shares of common stock deemed to
have been issued on the effective date of the plan, which are allocable under
the terms of the plan to the holders of our common stock outstanding immediately
prior to the effective date of the plan, will occur following the resolution of
the stockholder derivative suit against our company and certain of our former
officers and directors described in " - Legal Proceedings" beginning on page
94 of this joint proxy statement/prospectus.
Through June 30, 2004, we had acquired approximately $26.1 million in
aggregate principal amount of our 11% senior notes and related accrued interest
of approximately $1.9 million for an aggregate purchase price of approximately
$20.2 million, and had issued approximately an additional $18.5 million in 11%
senior notes in payment of accrued interest on the 11% senior notes. The
indenture governing the 11% senior notes requires interest to be paid in kind
through 2004, and permits interest to be paid in kind for two years thereafter
at the discretion of our board of directors. In addition, on March 3, 2004, we
purchased $40.3 million in principal amount of the 11% senior notes pursuant to
an offer to purchase as described in " - Properties" below. Our indebtedness at
June 30, 2004 consisted of approximately $72.2 million in aggregate principal
amount of our 11% senior notes, approximately $1.3 million in related accrued
interest, approximately $448 thousand of capital lease obligations and
approximately $20 million of mortgage debt on our New York City headquarters and
data center.
PROPERTIES
In July 1998, we purchased the land and the approximately 155,000 gross
square foot building located at 139 Centre Street, New York, New York.
Construction at this facility was completed in July 1999 and the building houses
an Internet data center and offices for our executive, technical, sales and
administrative personnel. In December 2002 we retained the services of a real
estate broker to lease office space equivalent to approximately one third of our
139 Centre Street facility. As of November 30, 2003, we had leased or contracted
to lease office space of approximately 25% of this facility to third parties for
periods ranging between three to seven years. The estimated average annualized
rental income is approximately $0.9 million.
In July 1998, we signed a lease commencing January 15, 1999 for
approximately 60,000 gross square feet of space in Santa Clara, California. The
facility contains an Internet data center and offices for technical, sales and
administrative personnel. In October 1998, we signed a lease for the rental of
approximately 38,000 gross square feet of space at Prospect House, 80 New Oxford
Street, London, England. Construction at both of these facilities was completed
in July 1999.
Prospect House contains an Internet data center and some technical
staff while the balance of technical personnel, as well as sales and
administrative personnel, are located in our other London facility at 1 Oliver's
Yard. In July 2000, we entered into a lease for the Oliver's Yard facility,
which consists of approximately 210,000 gross square feet of space. Construction
and fit-out of one floor of Internet data center space has been completed and
the facility became operational in June 2001. In April 2002 we renegotiated our
lease for this Internet data center, resulting in our retaining a total of
60,000 gross square feet of space.
In August 2000, in connection with our acquisition of Comstar.net,
Incorporated, we acquired our existing leases for an Internet data center in
Atlanta, Georgia containing approximately 5,000 gross square feet of space.
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 for approximately $48.7 million in
net proceeds. On March 3, 2004, we used approximately $44 million of the net
proceeds to repurchase approximately $40.3 million in principal amount of our
outstanding 11% senior notes at par value plus accrued interest in the amount of
approximately $3.7.
In November 2003, our company assumed Aptegrity, Inc.'s lease of
approximately 5,600 square feet in Fairfield, New Jersey for approximately
$11,000 a month ending December 2006.
We believe that the facilities that we plan to continue to occupy are
adequate for our current and foreseeable needs and that additional space will be
available, either through leasing or purchasing, when needed.
93
LEGAL PROCEEDINGS
On January 28, 2002, a derivative suit was filed in the United States
District Court for the Southern District of New York against our company, as
nominal defendant, and certain of our current and former directors and officers.
The action is entitled Susan Boney, Individually and Derivatively on behalf of
Nominal Defendant Globix Corp, Plaintiff v. the named former Board of Directors
(pre-Bankruptcy), Defendants and Globix Corp, a Delaware Corporation, Nominal
Defendant. Plaintiffs brought the action against the former board and certain
executives seeking damages and expenses for breach of fiduciary duty for
violations of federal and state securities laws alleging misrepresentations of
Globix's financial performance from 2000 through 2001. We believe that the
allegations in this lawsuit are without merit and we intend to vigorously defend
against them. In addition, the plaintiff has not pursued her claims since the
filing of the lawsuit. Although there can be no assurance as to the outcome or
effect of this lawsuit, we do not believe, based on currently available
information, that the ultimate liabilities, if any, resulting from this lawsuit
will have a material adverse impact on our business, financial condition,
results of operations or cash flows.
On August 12, 2004, the United States District Court for the Southern
District of New York approved the settlement of a class action lawsuit entitled
In re Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as
defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a
director of Globix) and Brian Reach, and asserted claims under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased our securities
between November 16, 2000 and December 27, 2001. The lawsuit alleged that the
defendants had failed to disclose the true state of the company's financial
condition during this period. Under the settlement, which remains subject to
appeal, the company has agreed to pay $3,500,000 (all of which would be covered
by insurance) to settle all claims against it. An appeal of the settlement has
been filed by the plaintiffs' law firms whose fees were not included in the
settlement. Although there can be no assurance as to the outcome of the appeal,
Globix does not believe that the ultimate liabilities, if any, resulting from
this appeal will have a material adverse impact on our business, financial
condition, results of operations or cash flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968,000 in aggregate principal amount
of the 11% senior notes will be held in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than $10
million) the shares of our common stock and the 11% senior notes being held in
escrow. Based on the court approval of the settlement agreement, Globix does not
believe that the shares of common stock and 11% senior notes that are being held
in escrow are likely to be distributed to the class action litigants and their
attorneys.
On November 12, 2003, we were served with a complaint filed in the
United States Court for Southern District of New York, entitled Alfred G.
Binford v. Globix Corporation, alleging breach of contract claims related to the
failure to make payments under an employment letter, as amended, seeking damages
in the amount of $2,113,000. Although there can be no assurance as to the
outcome or effect of this lawsuit, we do not believe, based on currently
available information, that the ultimate liabilities, if any, resulting from
this lawsuit will have a material adverse impact on our business, financial
condition, results of operations or cash flows. Globix has accrued its estimated
liability.
We are from time to time involved in other legal proceedings in the
ordinary course of our business operations. Although there can be no assurance
as to the outcome or effect of any legal proceedings to which we are a party, we
do not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings would have a
material adverse impact on our business, financial condition, results of
operations or cash flows.
94
SELECTED CONSOLIDATED FINANCIAL DATA OF GLOBIX
The following selected historical consolidated financial data as of and
for the year ended September 30, 2003 (Successor Company), five months ended
September 30, 2002 (Successor Company), the seven months ended April 30, 2002
(Predecessor Company), as of and for the fiscal years ended September 30, 2001,
2000 and 1999 (Predecessor Company) have been derived from our audited
consolidated financial statements and related notes. The selected historical
financial data as of and for the nine months ended June 30, 2004 and 2003
(Successor Company) is derived from our unaudited consolidated financial
statements and includes all adjustments, consisting of normal recurring
adjustments, which, in our opinion, are necessary for a fair presentation of the
financial position and results of operations for these periods.
This information should be read together with, and is qualified in its
entirety by reference to, our consolidated financial statements included
elsewhere in this joint proxy statement/prospectus, and the notes thereto and
the information set forth in "Globix Management's Discussion and Analysis of
Financial Condition and Results of Operations" beginning on page 100 of this
joint proxy statement/prospectus.
As a result of the application of fresh start accounting under SOP No.
90-7 as of May 1, 2002 our financial results for the fiscal year ended September
30, 2002 include two different bases of accounting and, accordingly, the
operating results and cash flows of the Successor Company and the Predecessor
Company have been separately disclosed. For the purposes of this joint proxy
statement/prospectus and the financial statements and related notes contained in
this joint proxy statement/prospectus, references to the "Predecessor Company"
are references to our company for periods prior to April 30, 2002 (the last day
of the calendar month in which we emerged from bankruptcy) and references to the
"Successor Company" are references to our company for periods subsequent to
April 30, 2002. The Successor Company's financial statements are not comparable
to the Predecessor Company's financial statements.
95
(IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------- ------------------------------------------------------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, YEAR ENDED
2003 2002 2002 2001 2000 1999
------------- ------------- ------------- ------------- ------------- -------------
Consolidated Statement of
Operations Data:
Revenue $ 60,177 $ 30,723 $ 51,273 $ 104,210 $ 81,287 $ 33,817
Operating costs and expenses:
Cost of revenues (excluding
depreciation, amortization,
certain payroll and occupancy
shown below) 19,990 10,458 22,123 40,609 42,513 22,184
Selling, general and
administrative 44,430 29,313 57,206 124,821 98,113 36,495
Loss (gain) on impairment of
assets -- -- 2,578 3,500 -- --
Restructuring and other charges
(credits) (1,020) -- 24,834 56,109 -- --
Depreciation and amortization 15,523 6,060 28,115 36,657 18,228 6,329
------------- ------------- ------------- ------------- ------------- -------------
Total operating costs and expenses 78,923 45,831 134,856 261,696 158,854 65,008
Other operating income 345 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Loss from operations (18,401) (15,108) (83,583) (157,486) (77,567) (31,191)
Interest and financing expense,
net (13,962) (5,866) (32,487) (51,846) (33,082) (18,386)
Other income (expense) 1,232 (157) (509) (1,379) 1,779 6,192
Gain (loss) on debt discharge 6,023 -- 427,066 -- (17,577) --
Reorganization items -- -- (7,762) -- -- --
Fresh start accounting adjustments -- -- (148,569) -- -- --
Minority interest in subsidiary -- -- 5,778 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes
and cumulative effect of a change
in accounting principle (25,108) (21,131) 159,934 (210,711) (126,447) (43,385)
Income tax expense 167 -- -- -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before cumulative
effect of a change in accounting
principle (25,275) (21,131) 159,934 (210,711) (126,447) (43,385)
Cumulative effect of a change in
accounting principle -- -- -- (2,332) -- --
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) (25,275) (21,131) 159,934 (213,043) (126,447) (43,385)
Dividends and accretion on
preferred stock -- -- (3,178) (7,104) (5,768) --
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) attributable to
common stockholders $ (25,275) $ (21,131) $ 156,756 $ (220,147) $ (132,215) $ (43,385)
============= ============= ============= ============= ============= =============
Earnings (loss) per common share:
Basic:
Before cumulative effect of a
change in accounting principle $ (1.54) $ (1.28) $ 3.96 $ (5.66) $ (3.73) $ (1.73)
Cumulative effect of a change in
accounting principle -- -- -- (0.06) -- --
------------- ------------- ------------- ------------- ------------- -------------
Basic earnings (loss) per share
attributable to common stockholders $ (1.54) $ (1.28) $ 3.96 $ (5.72) $ (3.73) $ (1.73)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding - basic 16,460,000 16,460,000 39,618,856 38,476,909 35,484,040 25,116,800
============= ============= ============= ============= ============= =============
Diluted:
Before cumulative effect of a
change in accounting principle $ (1.54) $ (1.28) $ 3.30 $ (5.66) $ (3.73) $ (1.73)
Cumulative effect of a change in
accounting principle -- -- -- (0.06) -- --
------------- ------------- ------------- ------------- ------------- -------------
Diluted earnings (loss) per share
attributable to common
stockholders $ (1.54) $ (1.28) $ 3.30 $ (5.72) $ (3.73) $ (1.73)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding - diluted 16,460,000 16,460,000 48,507,456 38,476,909 35,484,040 25,116,800
============= ============= ============= ============= ============= =============
96
Other Consolidated Financial Data:
Net cash provided by (used in)
operating activities $ (12,188) $ 3,679 $ (59,684) $ (140,543) $ (94,318) $ (36,897)
Net cash provided by (used in)
investing activities $ (858) $ (6,461) $ 5,842 $ (113,271) $ (149,939) $ (58,774)
Net cash provided by (used in)
financing activities $ (10,539) $ (2,279) $ (4,946) $ 387 $ 509,395 $ 135,589
Consolidated Balance Sheet Data:
Cash, cash equivalent, short-term
investments and marketable
securities $ 33,260 $ 54,281 $ 113,112 $ 378,510 $ 111,412
Restricted cash and investments $ 6,928 $ 9,097 $ 33,870 $ 43,178 $ 45,039
Working capital $ 28,449 $ 42,421 $ 78,340 $ 366,139 $ 101,216
Total assets $ 222,282 $ 262,720 $ 552,988 $ 729,591 $ 302,518
Current portion of long-term debt $ 1,510 $ 1,520 $ 6,687 $ 2,173 $ 2,088
Long-term debt, less current portion $ 140,389 $ 151,274 $ 630,750 $ 621,809 $ 161,005
Mandatory redeemable convertible
preferred stock $ -- $ -- $ 83,230 $ 76,042 $ --
Stockholders' equity (deficit) $ 53,351 $ 72,547 $ (237,325) $ (18,030) $ 106,405
97
SUCCESSOR COMPANY
-------------------------------
NINE MONTHS NINE MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
2004 2003
------------- -------------
(Unaudited) (Unaudited)
------------- -------------
Consolidated Statement of Operations Data:
Revenue $ 45,143 $ 46,367
Operating costs and expenses:
Cost of revenues (excluding
depreciation, amortization,
certain payroll and occupancy
shown below) 14,785 15,499
Selling, general and administrative 32,554 33,714
Loss on impairment of assets 17,972 --
Restructuring and other charges
(credits) -- --
Depreciation and amortization 10,363 11,900
------------- -------------
Total operating costs and expenses 75,674 61,113
Other operating income -- 345
------------- -------------
Loss from operations (30,531) (14,401)
Interest and financing expense, net (8,560) (10,193)
Other income (expense) 1,607 606
Gain (loss) on debt discharge 1,747 5,925
Reorganization items -- --
Fresh start accounting adjustments -- --
Minority interest in subsidiary -- 333
------------- -------------
Income (loss) before income taxes
and cumulative effect of a
change in accounting principle (35,737) (17,730)
Income tax expense 56 --
------------- -------------
Income (loss) before cumulative
effect of a change in accounting
principle (35,793) (17,730)
Cumulative effect of a change in
accounting principle -- --
------------- -------------
Net income (loss) (35,793) (17,730)
Dividends and accretion on
preferred stock -- --
------------- -------------
Net income (loss) attributable to
common stockholders $ (35,793) $ (17,730)
============= =============
Earnings (loss) per common share:
Basic:
Before cumulative effect of a
change in accounting principle $ (2.17) $ (1.08)
Cumulative effect of a change
in accounting principle -- --
------------- -------------
Basic earnings (loss) per share
attributable to common stockholders $ (2.17) $ (1.08)
============= =============
Weighted average common shares
outstanding - basic 16,460,000 16,460,000
============= =============
Diluted:
Before cumulative effect of a
change in accounting principle $ (2.17) $ (1.08)
Cumulative effect of a change in
accounting principle -- --
------------- -------------
Diluted earnings (loss) per share
attributable to common stockholders $ (2.17) $ (1.08)
============= =============
Weighted average common shares
outstanding - diluted 16,460,000 16,460,000
============= =============
Other Consolidated Financial Data:
Net cash provided by (used in)
operating activities $ (4,984) $ (8,741)
Net cash provided by (used in)
investing activities $ 44,297 $ (5,426)
Net cash provided by (used in)
financing activities $ (53,279) $ (9,665)
98
Consolidated Balance Sheet Data:
Cash, cash equivalent, short-term
investments and marketable
securities $ 19,962 $ 34,865
Restricted cash and investments $ 4,403 $ 6,507
Working capital $ 18,655 $ 26,357
Total assets $ 139,609 $ 230,971
Current portion of long-term debt $ 562 $ 1,532
Long-term debt, less current
portion $ 92,415 $ 138,990
Mandatory redeemable convertible
preferred stock $ -- $ --
Stockholders' equity $ 22,619 $ 57,294
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GLOBIX MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read together with our consolidated financial
statements and the accompanying notes and "Selected Consolidated Financial Data
of Globix" beginning on page 95 of this joint proxy statement/prospectus. The
following discussion contains forward-looking statements. These forward-looking
statements are based on our current expectations, assumptions, estimates and
projections about our company and our industry. Our results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risks and uncertainties discussed in
"Risk Factors" beginning on page 20 of this joint proxy statement/prospectus
and elsewhere in this joint proxy statement/prospectus. The results shown herein
are not necessarily indicative of the results to be expected in any future
periods.
As is more fully discussed in Note 1 ("Basis of Presentation") to the
consolidated financial statements, we reported under fresh start accounting
pursuant to SOP 90-7 as of May 1, 2002 resulting in a change in the basis of
accounting in the underlying assets and liabilities of our company at the
effective date of our plan of reorganization. Accordingly, the financial
statements of the Successor Company and the Predecessor Company are not
comparable. Where appropriate, we have combined the actual results of operations
for the Successor Company for the five months ended September 30, 2002 and the
Predecessor Company for the seven months ended April 30, 2002 as pro forma
combined 2002 operating results in order to present a more meaningful
comparative analysis to the operating results of the prior fiscal year.
Successor Company and Predecessor Company financial data are derived from the
consolidated financial statements that appear elsewhere in this joint proxy
statement/prospectus. In addition to the basis in accounting differences noted
above, our operating results for fiscal 2002 were significantly impacted by:
o items associated with the Predecessor Company's bankruptcy,
including debt discharge, restructuring activities and other
charges related to certain bankruptcy activities and certain
changes in accounting estimates recorded in the third quarter
fiscal 2002; and
o the Successor Company recognizing the effects of reduced
depreciation, additional amortization and reduced interest
expense arising from the revaluation of our assets and
liabilities and the reduced amount of the Successor Company's
outstanding debt following the effective date of the plan.
OVERVIEW
Globix is a provider of Internet services for small to large size
businesses in a broad range of industries. Our company was founded in 1989 and
in 1998 undertook a major expansion plan in order to pursue opportunities
resulting from the growth of the Internet. On March 1, 2002, Globix filed a
voluntary petition under Chapter 11 of the United States Bankruptcy Code,
together with a prepackaged plan of reorganization, with the United States
Bankruptcy Court for the District of Delaware. We continued to operate in
Chapter 11 in the ordinary course of business and received permission from the
bankruptcy court to pay our employees, trade, and certain other creditors in
full and on time, regardless of whether these claims arose prior to or after the
Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed the plan of
reorganization. Effective April 25, 2002, all conditions necessary for the plan
of reorganization to become effective were satisfied or waived and we emerged
from Chapter 11 bankruptcy protection. For additional information about our
reorganization, see "Our Chapter 11 Bankruptcy Reorganization" beginning on page
92 of this joint proxy statement/prospectus.
Since Globix emerged from bankruptcy reorganization in April 2002, its
management has actively reviewed various strategies for increasing stockholder
value. A key objective has been to redress the imbalance between revenues and
costs that has historically been a feature of Globix' business, by increasing
the revenue base and by cutting costs. A second objective has been to reduce
leverage by buying back or paying off higher cost indebtedness.
100
Globix has attempted to address industry-wide price competition and
price decreases by offering higher-revenue managed services in addition to its
more traditional offering of hosting and network services and broadening the
range of services it offers in order to capture a larger share of the market. In
addition, Globix has cut the costs of its operations by combining offices,
eliminating redundancy within its operations and selling or leasing excess
office space. This process of cost cutting was largely completed with the sale
of the property at 415 Greenwich Street in New York, New York.
Growth through acquisition offers the possibility of revenue growth and
the expansion of service offerings, to enable Globix to offer a broader range of
services to compete more effectively, while providing a larger revenue base to
support Globix' existing indebtedness. The ability to achieve operating
efficiencies by combining administrative or other functions has also been a
consideration in reviewing possible acquisitions. In addition, market conditions
have made it possible to acquire related businesses at what are perceived to be
relatively low prices. In pursuing its acquisition strategy, Globix has reviewed
potential transactions involving smaller companies, like Aptegrity, Inc., whose
acquisition gradually expands the range of services that Globix provides, as
well as larger companies, such as NEON, that could significantly increase the
size of Globix' business and enhance its ability to compete against much larger
competitors.
In order to increase its operating flexibility and address concerns
about its long term financial viability, Globix has also attempted to decrease
its indebtedness through the repurchase of its 11% senior notes and the
repurchase or early payment of other financial obligations.
Although Globix operates in one operating segment, there are four major
service lines as follows:
INTERNET HOSTING AND CO-LOCATION
We offer co-location solutions for customers who choose to own and
maintain their own servers, but require the physically secure,
climate-controlled environment provided by our Internet data centers and
connectivity to our network. We offer hosting services in a dedicated server
environment. This service includes providing hardware usage, bandwidth and
managed services to meet customer-specific needs.
MANAGED SERVICES
We provide managed application, system, network and media services to
our hosting and co-location customers. Such services include a wide variety of
maintenance, administration and problem resolution services for many popular
operating systems, Internet network devices, software security solutions,
web-based applications, as well as streaming media delivered in a streaming or
continuous fashion over the Internet or over a company's intranet.
NETWORK SERVICES AND INTERNET ACCESS
We provide access to our network for our hosting and co-location
customers located inside of our Internet data centers as well as Internet access
services which provide businesses with high-speed continuous access to the
internet from their own premises. In addition, we provide other services, such
as domain name registration, local loop provisioning, Internet address
assignment, router configuration, e-mail configuration and management and
technical consulting services.
OTHER
Our other services, which we categorize as "other," are comprised of
hardware and software sales and other non-recurring revenue. For the fiscal year
ended September 30, 2003 and for the nine-month period ended June 30, 2003,
"other" also includes revenue from DSL customer accounts which were sold during
the second quarter of fiscal year 2003.
For a more detailed description of these service lines see the
"Our Company" section beginning on page 88 of this joint proxy
statement/prospectus.
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates that affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities. We base
our accounting estimates on historical experience and other factors that are
believed to be reasonable under the circumstances. However, actual results may
vary from these estimates under different assumptions or conditions. The
following is a summary of our critical accounting policies and estimates:
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. 101 "Revenue Recognition in
Financial Statements," as amended when delivery has occurred, persuasive
evidence of an agreement exists, the fee is fixed or determinable and
collectability is probable. SAB No. 101 expresses the view of the Securities and
Exchange Commission's staff in applying accounting principles generally accepted
in the United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 101, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months. Effective
October 1, 2000, we changed our revenue recognition method for set up and
service installation fees upon the adoption of SAB No. 101. Prior to our
adoption of SAB No. 101, we recognized revenue immediately upon completion of
set up or installation. The change in accounting principle resulted in a revenue
deferral and cumulative effect charge totaling $2.3 million, or $0.06 per share,
which was reflected in our consolidated statements of operations for the fiscal
year ended September 30, 2001. Our adoption of SAB No. 101 decreased our net
loss by $0.5 million for the fiscal year ended September 30, 2001. The effect of
our adoption of SAB No. 101 for the fiscal year ended September 30, 2000 was not
material.
Monthly service revenue under recurring agreements related to Internet
hosting co-location, network services, Internet access and managed services is
recognized over the period 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. As of June 30, 2004,
September 30, 2003 and September 30, 2002 deferred revenue amounted to $1.6
million, $1.7 million and $1.5 million, respectively.
COST OF REVENUE
Cost of revenue consists primarily of telecommunications costs for
Internet access and managed hosting and includes the cost of hardware and
software purchased for resale to customers and payroll cost which relates to
certain managed services. Cost of revenue excludes certain payroll, occupancy,
depreciation and amortization. Telecommunications costs include the cost of
providing local loop for connecting dedicated access customers to 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.
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Our intangible assets following bankruptcy are as follows:
o trademarks and trade name;
o network build-out/know-how; and
o customer contracts.
We amortize intangible assets by the straight-line method over their
estimated useful lives. Trademarks and trade name are amortized over a period of
7-15 years, network build-out/know-how is amortized over 8 years and the
customer contracts are amortized over 2-3 years.
ESTIMATES
The preparation of financial statements requires us to make estimates
and assumptions that affect the reported amount of assets and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reported period. Use of
estimates and assumptions include, but are not limited to, allowance for
doubtful accounts, credit reserve and deferred tax valuation allowance.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CREDIT RESERVE
At each reporting period we evaluate on a specific basis the economic
condition of our customers and their ability and intent to pay their debt. If
such evaluation shows that it is probable that a customer will not settle his
full obligation, a reserve against accounts receivable in general and
administrative expense is recorded for the questionable amount. We also maintain
a general bad debt reserve, which is based on the aging of our customers
receivables. In addition during each reporting period we must make estimates of
potential future credits, which will be issued in respect of current revenues.
We analyze historical credits and changes in customer demands regarding our
current billings when evaluating credit reserves. If such analysis shows that it
is probable that a credit will be issued, we reserve the estimated credit amount
against revenues in the current period. As of June 30, 2004, September 30, 2003
and September 30, 2002 the balance of bad debt reserve amounted to approximately
$2.2 million (Unaudited), $2.6 million and $2.6 million, respectively.
ACCOUNTING FOR INCOME TAXES
As part of the process of preparing our consolidated financial
statements we are required to estimate our income tax expense in each of the
jurisdictions in which we operate. This process involves us estimating our
actual current tax exposure together with assessing temporary differences
resulting from differing treatment of items, such as accruals and reserves, for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. We must
then assess the likelihood that our deferred tax assets will be recovered from
future taxable income and to the extent we believe that recovery is not likely,
we must establish a valuation allowance. Management currently estimates that it
is more likely than not that these assets will not be realized in the
foreseeable future and accordingly a 100% valuation allowance is recorded
against the deferred tax assets.
INTERIM FINANCIAL INFORMATION
The consolidated financial information as of June 30, 2004 and for the
nine months ended June 30, 2004 and 2003 is unaudited, but includes all
adjustments, consisting only of normal and recurring accruals, that management
considers necessary for a fair presentation of its combined results of
operations, financial position and cash flows. Results for the nine months ended
June 30, 2004 and 2003 are not necessarily indicative of results to be expected
for the entire fiscal year.
NINE MONTHS ENDED JUNE 30, 2004 COMPARED TO THE NINE MONTHS ENDED JUNE 30, 2003
REVENUE. Revenue for nine-month period ended June 30, 2004 decreased
2.6% or $1.2 million to $45.1 million from $46.3 million for the nine-month
period ended June 30, 2003. By service lines, revenue from Internet Hosting and
Co-Location and revenue from Network Services and Internet Access were down $2.2
million and $1.4 million, respectively, to $17.9 million and $13.2 million,
respectively, for the nine-month period ended June 30, 2004 mainly due to lower
revenue under recurring contracts. Hardware and software sales, DSL and Other
was down by $1.2 million to $371 thousand for the nine-month period ended June
30, 2004 mainly due to a decrease of $718 thousand from DSL services as a result
of the sale of our DSL customer accounts during the fiscal year 2003 and a
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decrease of approximately $400 thousand in lower margin hardware and software
sales. Revenue from Managed Services increased by $3.6 million to $13.7 million
in the nine-month period ended June 30, 2004 mainly due to the Aptegrity
acquisition and our continued growth in Managed Services. The aforementioned
analysis includes the positive effect of foreign exchange rates between the U.S.
dollar and the British Pound in the amount of approximately $2.0 million on our
revenue period over period.
During the nine-month period ended June 30, 2004 our monthly positive
change in contract rate (negative churn) averaged 0.7% compared to a monthly
averaged churn rate of 2.1% for the same period in 2003. New contracts increased
2.3% and contract upgrades increased 1.5%, offset by 1.6% increase in contract
downgrades and a 1.5% increase in contract cancellations.
COST OF REVENUE. Cost of revenue for the nine-month period ended June
30, 2004, decreased $714 thousand to $14.8 million from $15.5 million for the
same period in 2003. This was mainly due to $2.3 million decrease in our network
cost resulting from our continued focus on deriving efficiencies and cost
savings from our network. Additional decrease of approximately $400 thousand
resulted from lower hardware costs as a result of our shift away from lower
margin hardware sales. These decreases were offset in part by additional labor
costs of $2.0 million associated with the business acquired from Aptegrity and
our continued focus on Managed Services. The aforementioned analysis includes
the adverse effect of foreign exchange rates between the U.S. dollar and the
British Pound in the amount of approximately $275 thousand on cost of revenue
period over period. As a result of the variances described above gross margins
increased to 67.2% for the nine-month period ended June 30, 2004 compared to
66.6% for the same period ended June 30, 2003.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and
administrative expenses decreased $1.2 million to $32.6 million as compared to
$33.7 million for the nine-month period ended June 30, 2003. The decrease in
selling, general and administrative expenses was mainly due to a one time
non-cash charge of $1.1 million in the second quarter of fiscal 2003 related to
warrants granted to one of Globix's consultants. In addition salaries and
benefits decreased $686 thousand to $15.7 million in the nine-month period ended
June 30, 2004 compared to $16.4 million in the same period in 2003, which
resulted from our restructuring efforts that focused on significant reduction in
facilities and personnel. Bad debt expenses decreased $817 thousand to $615
thousand for the nine-month period ended June 30, 2004, compared to $1.4 million
in the same period last year, as a result of improvement in collections and a
reduction in the number of high risk customer account receivable balances. Other
cost savings amounting to approximately $700 thousand resulted from our efforts
to reduce our operating cost. These were offset mainly by a $1.7 million credit
recorded during the nine-month period ended June 30, 2003 as a result of the
settlement of the Rabbi Trust litigation. In addition, our marketing expenses
were up by approximately $630 thousand to $955 thousand in the nine-month period
ended June 30, 2004 as a result of our increased efforts to enhance long-term
growth and improving our public relations. The aforementioned analysis includes
the adverse effect of foreign exchange rate in the amount of approximately $1.1
million on selling, general and administrative period over period.
LOSS ON IMPAIRMENT OF ASSETS. Impairment charges for the nine-month
period ended June 30, 2004 amounted to $18 million as a result of the write-down
of the cost basis of Globix's property located at 415 Greenwich Street in New
York, NY to its market value less cost to sell of approximately $11.5 million.
The sale of the 415 Greenwich Street property was consummated on January 22,
2004 for total cash consideration of $60 million.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased
$1.5 million to $10.4 million for the nine-month period ended June 30, 2004, as
compared to $11.9 million in the same period in 2003. The decrease resulted from
$1.3 million of depreciation expenses recorded in the nine-month period ended
June 30, 2003 related to the 415 Greenwich Street property which was not
depreciated during the same period in 2004 and from lower capital spending,
offset by amortization of intangible assets resulting from the acquisition of
Aptegrity in the amount of $212 thousand.
INTEREST AND FINANCING EXPENSES. Interest and financing expense for the
nine-month period ended June 30, 2004 was $9.0 million, compared to $11.2
million for the same period in 2003. The decrease was attributable to the
repurchase of approximately $16.8 million of our 11% senior notes during the
calendar year 2003 and by the repurchase of approximately $40.3 million of our
11% senior notes during March 2004. These were offset by an increase in the
balance of the 11% senior notes of approximately $11.3 million and $7.2 million
resulting from the required payment in kind of the related accrued interest as
of May, 2003 and 2004, respectively.
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INTEREST INCOME. Interest income for the nine-month period ended June
30, 2004 was $415 thousand, compared to $1,030 thousand, for the same period in
2003. The decrease was primarily due to a decrease in our cash and investments.
OTHER INCOME, NET. Other income for the nine-month period ended June
30, 2004 was $1.6 million, compared to $606 thousand, for the same period in
2003. The increase was due primarily to the receipt of $450 thousand for an
insurance claim filed in connection with the September 11, 2001 terrorist
attack, and $637 thousand from leasing office space in our 139 Centre Street
facility.
INCOME TAX EXPENSE. Income tax expenses for the nine-month period ended
June 30, 2004 in the amount of $56 thousand represent our estimated income taxes
due in the U.K. We did not record any income tax expense during the same period
of 2003.
NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the
factors described above, we reported net loss of $35.8 million, or $2.17 basic
and diluted loss per share for the nine-month period ended June 30, 2004, as
compared to a net loss of $17.7 million, or $1.08 basic and diluted loss per
share for the nine-month period ended June 30, 2003.
FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2002
REVENUE. Revenue for the fiscal year ended September 30, 2003 decreased
26.6% to $60.1 million from $82.0 million for the fiscal year ended September
30, 2002. This decrease in revenues was mainly attributable to customer churn
which accounted for $19.8 million, or approximately 90.4% of our revenue
decrease. 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 fiscal 2003 our monthly churn averaged approximately
1.7%. Of this average monthly churn, 1.8% was related to downgrades, 3.2% was
related to cancellations, partially offset by decreases in churn of 1.7% and
1.6% related to new and upgraded contracts, respectively. Revenues also declined
due to a decrease in lower margin hardware and software sales. Hardware and
software sales decreased $2.1 million, or 77.3%, as a result of our shift away
from lower margin hardware and software sales. This decrease accounted for 9.6%
of our total revenue decline.
COST OF REVENUE AND GROSS MARGIN. Cost of revenue for the fiscal year
ended September 30, 2003 decreased to $20.0 million from $32.6 million for the
fiscal year ended September 30, 2002. A decrease of $10.8 million or 85.7% of
our cost of revenue decrease, realized within non-hardware related costs
reflects our continued focus on network reconfiguration. A decrease of $1.8
million, or 14.3% of our cost of revenue decrease, in hardware costs reflects
our shift away from lower margin hardware sales. Gross margin increased to 66.8%
for the fiscal year ended September 30, 2003 from 60.0% for the fiscal year
ended September 30, 2002. The increase in gross margin is primarily attributable
to the movement away from lower margin products and the reduction of network
cost as a result of our focus on network reconfiguration. During fiscal year
2003, Globix sold its DSL services in the second quarter and shifted away from
hardware sales, both low margin products. In addition, Globix reduced certain
network costs through contract renegotiations with certain major vendors.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses were $44.4 million, or 73.8% of revenue, for the year
ended September 30, 2003, compared to $29.3 million, or 95.0% of revenue, for
the five months ended September 30, 2002. For the seven-month period ended April
30, 2002, selling, general and administrative expenses were $57.2 million, or
111.6% of revenue. For the fiscal year ended September 30, 2002 selling, general
and administrative expenses totaled $86.5 million, or 106% of revenue.
The decrease in selling, general and administrative expenses as a
percentage of revenue for the fiscal year ended September 30, 2003 from both the
five-month period ended September 30, 2002 and the seven month period ended
April 30, 2002, was in part due to a decrease in salaries and benefits in
connection with our restructuring efforts, which focused on significant
reductions in facilities and personnel. During the year ended September 30,
2003, salaries and benefits were $21.3 million, or 35.5% of revenue, as compared
to $12.4 million, or 40.0% of revenue, in the five month period ended September
30, 2002. For the seven month period ended April 30, 2002, salaries and benefits
105
were $33.7 million, or 66.0% of revenue. For the fiscal year ended September 30,
2002, salaries and benefits totaled $46.1 million, or 56.0% of revenue. The
number of our employees decreased from approximately 262 as of September 30,
2002 to approximately 209 as of September 30, 2003.
For the year ended September 30, 2003, bad debt expense was $1.9
million, representing 3.1% of revenue, compared to $1.9 million, or 6.0% of
revenue, for the five-month period ended September 30, 2002. For the seven-month
period ended September 30, 2002, bad debt expense was $4.3 million, or 8.0% of
revenue. For the fiscal year ended September 30, 2002, bad debt expense was $6.2
million, or 8.0% of revenue. The decrease in bad debt expense for the fiscal
year ended September 30, 2003 was partially attributable to improvements in
collections as well as a proactive reduction in the number of high risk customer
account receivable balances.
RESTRUCTURING AND OTHER EXPENSES. We recorded a reversal in the fiscal
year 2003 of approximately $1.0 million to our previously recorded restructuring
charges. Reversals related to contract settlement charges in the amount of $0.8
million and facility closings charges of $0.2 million were primarily for
settling certain facility contracts and purchase commitments for amounts lower
than originally planned.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the
year ended September 30, 2003 was $15.5 million or 25.8% of revenue, as compared
to $6.1 million, or 20% of revenue, in the five-month period ended September 30,
2002. Depreciation and amortization in the seven month period ended April 30,
2002 was $28.1 million or 55.0% of revenue. For the fiscal year ended September
30, 2002, depreciation and amortization was $34.2 million, or 41.7% of revenue.
The decrease in depreciation and amortization expenses for the fiscal year 2003
compared to the fiscal year 2002 was attributable to a decrease in our capital
spending in connection with our restructuring plan as well as the impact of
fresh start accounting, in particular the revaluation of our tangible and
intangible assets as of April 30, 2002.
OTHER OPERATING INCOME. Other operating income resulted from the sale
of DSL customer accounts in the amount of $345 thousand during the fiscal year
ended September 30, 2003.
INTEREST AND FINANCING EXPENSE AND INTEREST INCOME. Interest and
financing expense for the year ended September 30, 2003 was $15.1 million, or
25.2% of revenue, compared to $6.7 million, or 22.0% of revenue, in the five
months ended September 30, 2002. Interest and financing expense in the
seven-month period ended April 30, 2002 was $34.5 million, or 67.0% of revenue.
For the fiscal year ended September 30, 2002, interest and financing expense
totaled $41.2 million, or 50.0% of revenue. The decrease in interest and
financing expense was primarily attributable to the reduction in our outstanding
indebtedness pursuant to the plan of reorganization and to the repurchase of
approximately $19 million in principal value of the 11% senior notes during the
fiscal year 2003.
Interest income in the year ended September 30, 2003 was $1.2 million,
or 2.0% of revenue, compared to $0.8 million, or 3.0% of revenue, in the
five-month period ended September 30, 2002. Interest income in the seven-month
period ended April 30, 2002 was $2.0 million, or 4.0% of revenue. For the fiscal
year ended September 30, 2002, interest income was $2.8 million, or 3.0% of
revenue. This decreasing trend was primarily attributable to the reduced amount
of our cash investments and the impact of declining interest rates as compared
to the prior fiscal year.
OTHER INCOME (EXPENSE). Other income in the year ended September 30,
2003 was $1.2 million compared to an expense of $0.6 million in the fiscal year
ended September 30, 2002. This increase is due primarily to write-offs of
strategic investments in the amount of $490 thousand in the prior period and
insurance receipts in the amount of $88 thousand associated with the September
11, 2001 terrorist attack received in the current year.
GAIN ON DISCHARGE OF DEBT. Gain on discharge of debt was $6.0 million
for the fiscal year ended September 30, 2003. The gain is a direct result of the
repurchase of approximately $19 million in principal value of the 11% senior
notes. We did not recognize any gain on discharge of debt during the five-month
period ended September 30, 2002. The gain on the discharge of approximately
$427.1 million recorded in the seven-month period ended April 30, 2002 resulted
from the exchange of the 12.5% senior notes for the 11% senior notes under the
plan of reorganization.
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INCOME TAX EXPENSE. Income tax expense for the fiscal year ended
September 30, 2003, in the amount of $167 thousand, represents our estimated
income taxes due in the United Kingdom. We did not record any income tax
expenses during the fiscal year ended September 30, 2002.
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of
the factors described above, we reported net loss of $25.3 million and net loss
attributable to common stockholders of $25.3 million, or $1.54 basic and diluted
loss per share for the fiscal year ended September 30, 2003, as compared to a
net income of $138.8 million and net income attributable to common stockholders
of $135.6 million, or $2.67 basic earnings per share and $2.01 diluted earnings
per share, respectively, for the fiscal year ended September 30, 2002.
FISCAL YEAR ENDED SEPTEMBER 30, 2002 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30,
2001
REVENUE. Revenue for the fiscal year ended September 30, 2002 decreased
21.0% to $82.0 million from $104.2 million for the fiscal year ended September
30, 2001. This decrease was primarily attributable to significant decreases in
lower margin hardware sales and increased customer churn. Hardware and software
sales decreased $5.1 million, or 65.0%, as a result of our shift away from lower
margin hardware and software revenue. This decrease accounted for 23.0% of our
total revenue decline. Customer churn accounted for $17.1 million, or
approximately 77.0% of our revenue decrease. We define churn as contractual
revenue losses as a percentage of total contractual revenue due to customer
cancellations and downgrades, net of upgrades, and additions of new services.
Cancellations refer to customers that have either stopped using our services
completely or remained a customer but terminated a particular service.
Downgrades are a result of customers taking less of a particular service or
renewing their contract for identical services at a lower price. During the
fiscal year 2002 our monthly churn averaged approximately 2.5%. Of this average
monthly churn, 1.7% was related to downgrades, 3.9% was related to
cancellations, partially offset by decreases in churn of 1.7% and 1.4% related
to new and upgraded contracts, respectively. For the first three quarters of
fiscal 2002, cancellations constituted approximately 69.0% of our monthly
revenue losses and downgrades constituted approximately 31.0% of our monthly
revenue losses. In the fourth quarter of 2002, cancellations constituted
approximately 52.0% of our monthly revenue losses and downgrades constituted
approximately 48.0% of our monthly revenue losses.
COST OF REVENUE AND GROSS MARGIN. Cost of revenue for the fiscal year
ended September 30, 2002 decreased to $32.6 million from $40.6 million for the
fiscal year ended September 30, 2001. A decrease of $3.9 million, or 11.0%,
realized within non-hardware related costs reflects our continued focus on
network reconfiguration. A decrease of $4.2 million, or 64.0%, in hardware costs
reflects our shift away from lower margin hardware sales. Gross margin decreased
to 60.0% for the fiscal year ended September 30, 2002 from 61.0% for the fiscal
year ended September 30, 2001, primarily due to the impact of pricing pressure
within the co-location and bandwidth product categories.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses, excluding restructuring charges and gains/losses on
impairment of operating assets were $57.2 million, or 112.0% of revenue, for the
seven-month period ended April 30, 2002, compared to $124.8 million, or 120.0%
of revenue, for the fiscal year ended September 30, 2001. For the five-month
period ended September 30, 2002, selling, general and administrative expenses
were $29.3 million, or 95.0% of revenue. For the fiscal year ended September 30,
2002 selling, general and administrative expenses totaled $86.5 million, or 106%
of revenue.
The sequential decrease in selling, general and administrative expenses
as a percentage of revenue from the fiscal year ended September 30, 2001 through
both the seven-month period ended April 30, 2002 and the five-month period ended
September 30, 2002, was primarily attributable to a decrease in salaries and
benefits in connection with our restructuring efforts, which focused on
significant reductions in facilities and personnel. In the seven month period
ended April 30, 2002, salaries and benefits were $33.7 million, or 66.0% of
revenue, as compared to $72.7 million, or 70.0% of revenue, in the fiscal year
ended September 30, 2001. For the five-month period ended September 30, 2002,
salaries and benefits were $12.4 million, or 40.0% of revenue. For the fiscal
year ended September 30, 2002, salaries and benefits totaled $46.1 million, or
56.0% of revenue. The number of our employees decreased from approximately 650
as of September 30, 2001 to approximately 262 as of September 30, 2002.
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For the seven-month period ended April 30, 2002, bad debt expense was
$4.3 million, representing 8.0% of revenue, compared to $14.1 million, or 14.0%
of revenue, for the fiscal year ended September 30, 2001. For the five-month
period ended September 30, 2002, bad debt expense was $1.9 million, or 6.0% of
revenue. For the fiscal year ended September 30, 2002, bad debt expense
decreased to $6.2 million, or 8.0% of revenue. The decrease in bad debt expense
for the fiscal year ended September 30, 2002 was partially attributable to
improvements in collections as well as a proactive reduction in the number of
high risk customer account receivable balances. This decrease was also
attributable to a reduction in our allowance for doubtful accounts from a
balance of approximately $8.1 million at September 30, 2001 to $2.6 million at
September 30, 2002.
In the seven-month period ended April 30, 2002, marketing expenses were
$1.1 million, or 2.0% of revenue, compared to $6.4 million, or 6.0% or revenue,
for the fiscal year ended September 30, 2001. For the five- month period ended
September 30, 2002, marketing expense was $0.2 million, or 1.0% of revenue. For
the fiscal year ending September 30, 2002, marketing expense totaled $1.4
million, or 2.0% of revenues. The decrease in marketing expenses for the fiscal
year ended September 30, 2002 was attributable to a reduction in the amount of
our advertising pursuant to our restructuring plan.
Decreases in selling, general and administrative expenses in the fiscal
year ended September 30, 2002 were offset by the write-off in the five months
ended September 30, 2002 of a $4.1 million note receivable related to a lease
deposit that we deemed to be uncollectible. The lease was associated with our
Boston, Massachusetts data center, which we closed as part of our restructuring
plan.
LOSS ON IMPAIRMENT OF ASSETS. In the seven-month period ended September
30, 2002, loss on impairment of assets resulted in a $2.6 million non-cash
expense, as compared to $3.5 million in 2001. This non cash-expense was
attributable to the write down, in accordance with SFAS No. 121, of goodwill
generated from our acquisition of Comstar.net, Inc., totaling $3.2 million. The
$0.6 million credit balance was associated with the partial reversal of an
estimated write-off in the fiscal year ended September 30, 2001 of certain
assets associated with an indefeasible right of use ("IRU"), capacity on a
wavelength purchased from a supplier whose financial viability was originally
thought to have impaired the recoverability of these assets.
RESTRUCTURING AND OTHER EXPENSES. We recorded a restructuring charge of
approximately $24.8 million in the fiscal year ended September 30, 2002,
compared to $56.1 million in the fiscal year ended September 30, 2001. Of the
$24.8 million restructuring charge in the fiscal year ended September 30, 2002,
$17.2 million was for the write-off of previously escrowed lease deposit and
landlord inducement and legal payments, $2.9 million was associated with
employee terminations and $4.7 million was for the write-off of equipment and
leasehold improvements.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the
seven-month period ended April 30, 2002 was $28.1 million, or 55.0% of revenue,
as compared to $36.7 million, or 35.0% of revenue, in the fiscal year ended
September 30, 2001. The increase in depreciation and amortization as a
percentage of revenue for the seven- month period ended April 30, 2002 resulted
from an increase in our capital expenditures. Depreciation and amortization in
the five-month period ended September 30, 2002 was $6.1 million, or 20.0% of
revenue. In the five-month period ended September 30, 2002, this decrease was
attributable to a decrease in our capital spending in connection with our
restructuring plan as well as the impact of fresh start accounting, in
particular the revaluation of our tangible and intangible assets as of April 30,
2002. For the fiscal year ended September 30, 2002, depreciation and
amortization was $34.2 million, or 41.7% of revenue.
INTEREST AND FINANCING EXPENSE AND INTEREST INCOME. Interest and
financing expense for the seven-month period ended April 30, 2002 was $34.5
million, or 67.0% of revenue, compared to $65.1 million, or 63.0% of revenue, in
the fiscal year ended September 30, 2001. Interest and financing expense in the
five month period ended September 30, 2002 was $6.7 million, or 22.0% of
revenue. For the fiscal year ended September 30, 2002, interest and financing
expense totaled $41.2 million, or 50.0% of revenue. The decrease in interest and
financing expense was primarily attributable to the reduction in our outstanding
indebtedness pursuant to the plan of reorganization. As of the effective date of
the plan, our annual interest expense was reduced from $75.0 million to
approximately $13.2 million, before compounding.
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Interest income in the seven-month period ended April 30, 2002 was $2.0
million, or 4.0% of revenue, compared to $13.3 million, or 13.0% of revenue, in
the fiscal year ended September 30, 2001. Interest income in the five-month
period ending September 30, 2002 was $0.8 million, or 3.0% of revenue. This
decreasing trend was primarily attributable to the reduced amount of our cash
investments and the impact of declining interest rates as compared to the prior
fiscal year. For the fiscal year ended September 30, 2002, interest income was
$2.8 million, or 3.0% of revenue.
GAIN ON DISCHARGE OF DEBT. On the effective date of the plan, we
recognized a gain on the discharge of debt of $427.1 million associated with the
exchange of the 12.5% senior notes for the 11% senior notes under the plan and
recognized this gain in the fiscal year ended September 30, 2002. We did not
recognize any gain on the discharge of debt in the fiscal year ended September
30, 2001.
MINORITY INTEREST IN SUBSIDIARY. The minority interest credit of $5.8
million in the fiscal year ended September 30, 2002 was related to the
consolidation of a subsidiary in which we own 0.1% but which we consolidate with
our results due to our effective control of this subsidiary. We did not
recognize any minority interest in the fiscal year ended September 30, 2001.
REORGANIZATION ITEMS. Reorganization expenses of $7.8 million recorded
in the fiscal year ended September 30, 2002 were attributable to expenses
incurred by the Predecessor Company in connection with its Chapter 11 bankruptcy
filing and reorganization. There were no reorganization expenses in the fiscal
year ended September 30, 2001.
FRESH START ACCOUNTING ADJUSTMENTS. Pursuant to fresh start accounting
principles, we have adjusted the value of our assets and liabilities to their
fair values as of April 30, 2002. The net effect of all fresh start accounting
adjustments in the fiscal year ended September 30, 2002 resulted in a charge of
$148.6 million. There were no fresh start accounting adjustments in 2001.
OTHER INCOME. Other income decreased to $0.6 million in the fiscal year
ended September 30, 2002 from $2.1 million in the year ended September 30, 2001.
This decrease primarily resulted from decreased gains on sales of short-term
investments and marketable securities.
OTHER EXPENSES. The decrease in other expense to $1.3 million for the
fiscal year ended September 30, 2002 as compared to $3.5 million for the fiscal
year ended September 30, 2001 is a result of fewer impairments on strategic
investments in fiscal 2002 as compared to fiscal 2001.
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of
the factors described above, we reported net income of $138.8 million and net
income attributable to common stockholders of $135.6 million, or $2.67 basic
earnings per share and $2.01 diluted earnings per share, respectively, for the
fiscal year ended September 30, 2002, as compared to a net loss of $213.0
million and net loss attributable to common stockholders of $220.1 million, or
$5.72 basic and diluted loss per share (including the cumulative effect of a
change of accounting principle associated with the adoption of SAB No. 101 of
$2.3 million, or $0.06 per share), for the fiscal year ended September 30, 2001.
LIQUIDITY AND CAPITAL RESOURCES
On March 1, 2002, our company and two of our wholly owned domestic
subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions
under Chapter 11 of the United States Bankruptcy Code, together with the plan of
reorganization, with the United States Bankruptcy Court for the District of
Delaware. We continued to operate in Chapter 11 in the ordinary course of
business and received permission from the bankruptcy court to pay our employees,
trade, and certain other creditors in full and on time, regardless of whether
these claims arose prior to or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the plan. Effective
April 25, 2002, all conditions necessary for the plan to become effective were
satisfied or waived and we emerged from Chapter 11 bankruptcy protection.
As of the effective date of the plan, all of our existing securities
were cancelled and:
o each holder of our 12.5% senior notes due 2010 became entitled
to receive, in exchange for its claims in respect of the 12.5%
senior notes, its pro rata share of:
o $120 million in aggregate principal amount of our 11%
senior notes, and
109
o 13,991,000 shares of our common stock, representing
85% of the shares of our common stock issued and
outstanding following the effective date of the plan;
and
o each holder of shares of our preferred stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
these shares of preferred stock, its pro rata share of
2,304,400 shares of our common stock, representing 14% of the
shares of our common stock issued and outstanding following
the effective date of the plan; and
o each holder of shares of our common stock outstanding
immediately prior to the effective date of the plan became
entitled to receive, in exchange for its claims in respect of
its shares of common stock, its pro rata share of 164,600
shares of our common stock, representing 1% of the shares of
our common stock issued and outstanding following the
effective date of the plan.
All of the shares of our common stock issued pursuant to the plan are
subject to dilution by the exercise of management incentive stock options,
representing up to 10% of the shares of our issued and outstanding common stock
on a fully-diluted basis following the effective date of the plan.
A total of 16,460,000 shares of our common stock and $120 million in
aggregate principal amount of the 11% senior notes were deemed to be issued and
outstanding on the effective date of the plan pursuant to the terms of the plan.
As of September 30, 2002, however, no shares of our common stock or 11% senior
notes had been distributed. In October 2002, we distributed a total of
16,295,400 shares of common stock and $120 million in aggregate principal amount
of 11% senior notes. Pursuant to the terms of a Stipulation and Order that we
entered into with the lead plaintiffs in the class action lawsuit described in
"- Legal Proceedings," beginning on page 94 of this joint proxy
statement/prospectus, 229,452 of these shares of common stock and $1,968,000 in
aggregate principal amount of these 11% senior notes were placed in reserve in
escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires us to pay an amount in excess of our liability insurance, then we will
be required to issue to the class action litigants and their attorneys all (in
the event that this excess is $10 million or greater) or a portion of (in the
event that this excess is less than $10 million) the shares of common stock and
11% senior notes held in escrow. Based on an August 12, 2004 court approval of a
settlement agreement pursuant to which Globix would not be required to pay an
amount in excess of our liability insurance described under "-Legal
Proceedings," beginning on page 94 of this joint proxy statement/prospectus,
Globix does not believe that the shares of common stock and 11% senior notes
held in escrow are likely to be distributed to the class action litigants and
their attorneys, and such shares and notes will accordingly be available for
distribution to Globix security holders under the plan. Distribution of the
remaining 164,600 shares of common stock deemed to have been issued on the
effective date of the plan, which are allocable under the terms of the plan to
the holders of our common stock outstanding immediately prior to the effective
date of the plan, will occur following the resolution of the stockholder
derivative suit against our company and certain of our former officers and
directors described in "- Legal Proceedings," beginning on page 94 of this
joint proxy statement/prospectus.
The indenture governing the 11% senior notes contains a number of
covenants that impose significant operating and financial restrictions on us and
our subsidiaries. These restrictions significantly limit, and in some cases
prohibit, among other things, the ability of our company and certain of our
subsidiaries to incur additional indebtedness, create liens on assets, enter
into business combinations or engage in certain activities with our
subsidiaries.
Historically our cost structure exceeded our revenue base mainly due to
high labor costs resulting from higher then necessary head count, significant
level of overhead due to numerous locations and overlapping within our network.
This has led us to historically experience negative cash flows from operations
and incur net losses. Our management believes that steps taken as part of our
restructuring efforts to reduce facilities and personnel, combined with our
ongoing efforts to derive efficiencies from our network have reduced our
expenses to a level that meets our current revenue rate. Our ability to generate
positive cash flows from operations and achieve profitability is dependent upon
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our ability to grow our revenue while maintaining our current cost structure and
network efficiencies. Management believes that by maintaining a monthly positive
change in contract rate (negative churn) and by continuing to focus on providing
managed services solutions it will be able to meet its revenue and profitability
targets. We also believe that our internally generated funds, available cash and
investments are sufficient to meet our presently anticipated day-to-day
operating expenses, commitments, working capital, capital expenditure and
interest payments under our 11% senior notes when required to be made in cash.
Additionally, since emerging from bankruptcy our management has taken several
significant steps to reduce our level of outstanding indebtedness and is
committed to further reduce our financial obligations by settling them in cash,
converting into equity instruments, refinancing or any other manner, which may
be beneficial to us. However, there can be no assurance that we will be
successful in executing our business plan, achieving profitability, attracting
new customers or maintaining our existing revenue levels or reducing our
outstanding indebtedness. In the future, we may make acquisitions or repurchase
indebtedness of our company, which, in turn, may adversely affect our liquidity.
NINE MONTH PERIOD ENDED JUNE 30, 2004
As of June 30, 2004, we had cash and cash equivalents, short-term and
long-term investments totaling to approximately $21.7 million compared to
approximately $32.4 million on September 30, 2003. This decrease of $10.7
million included a $13.5 million decrease in cash and cash equivalents to $11.0
million at June 30, 2004 from $24.5 million at September 30, 2003. This was
mainly attributable to operating activities, investing activities and financing
activities as described below. During the nine-month period ended June 30, 2004,
we completed the sale of the 415 Greenwich Street property for approximately
$48.7 million in net proceeds, of which approximately $44 million was used to
purchase a portion of our 11% senior notes including accrued interest and the
remainder was used for working capital.
OPERATING ACTIVITIES. Net cash used in operating activities during the
nine-month period ended June 30, 2004 was approximately $5.0 million. This was
attributed mainly to our net loss of $35.8 million which included non-cash
depreciation and amortization expenses of $10.4 million and a non-cash
impairment charge of $18.0 million resulting from a write-down of the 415
Greenwich Street property to its fair market value less cost for sale offset by
a non-cash gain on debt discharge of $1.7 million resulting from the repurchase
of a portion of our 11% Senior Notes. Changes in assets and liabilities resulted
in an increase to operating cash flow of approximately $3.8 million. This was
mainly attributed to a $7.4 million increase in accrued interest on the 11%
senior notes offset by $1.3 million decrease in accrued liabilities, a $1.0
million decrease in accounts payable and by $0.9 million increase in prepaid
expenses and other current assets.
INVESTING ACTIVITIES. Net cash provided by investing activities during
the nine-month period ended June 30, 2004 was $44.3 million. Approximately $48.7
million resulted from the sale of the 415 Greenwich Street property and
approximately $1.0 million, net resulted from the sale of our investment in
Globecomm Systems, Inc. and other investments. This was offset by the use of
$2.3 million for the acquisition of Aptegrity and $3.2 million for capital
expenditures.
FINANCING ACTIVITIES. Net cash used in financing activities during the
nine-month period ended June 30, 2004 was $53.2 million. Approximately $49.6
million of the cash used in financing activities was attributed to the
repurchase of a portion of our 11% senior notes and related accrued interest in
the open market and as part of an offer to the holders of the 11% senior notes
in connection with the sale of the 415 Greenwich Street property. $2.6 million
was used to prepay a long-term note payable and the remaining $1.1 million was
used for payment and settlement of certain contractual obligations.
FISCAL YEAR ENDED SEPTEMBER 30, 2003
As of September 30, 2003, we had cash and cash equivalents of
approximately $24.5 million compared to approximately $47.6 million on September
30, 2002.
111
OPERATING ACTIVITIES. For the fiscal year ended September 30, 2003 net
cash used in operating activities was approximately $12.2 million attributable
mainly to a net loss of $25.3 and non-cash gains of approximately $6.0 million
and $1.0 million for discharges resulting from our repurchase of the 11% senior
notes and reversal of restructuring accruals recorded in prior years,
respectively, offset by depreciation and amortization expenses of approximately
$15.5 million, an increase in our provision of doubtful accounts of
approximately $1.9 and a non-cash charge of approximately $1.0 recorded in
respect of warrants issued to a consultant. Changes in assets and liabilities
resulted in an increase to operating cash-flow of approximately $2.0 million.
INVESTING ACTIVITIES. Cash used for investing activities for the year
ended September 30, 2003 amounted to approximately $0.9 million, which
attributed mainly to capital expenditures in the amount of approximately $1.2
million.
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 and resulted in approximately $48.7
million in net proceeds. On March 3, 2004, we used approximately $44 million of
the net proceeds to repurchase approximately $40.3 million in principal amount
of our outstanding 11% senior notes at par value plus accrued interest in the
amount of approximately $3.7. We intend to use the remaining balance of the net
proceeds from the sale for working capital purposes. Consummation of the sale
also eliminated certain obligations that we incurred in connection with the
purchase and rehabilitation of the property.
On October 31, 2003, Globix paid approximately $2.0 million (subject to
final settlement) for the acquisition of the business, substantially all of the
assets and the assumption of certain liabilities of Aptegrity, Inc., a provider
of web application and operations management services.
FINANCING ACTIVITIES. Cash used in financing activities for the year
ended September 30, 2003 amounted to approximately $10.5 million. Approximately
$14.6 million were used to repurchase a portion of our 11% senior notes,
approximately $0.9 million were used to buy-out certain of our capital leased
equipments and approximately $1.1 million were used to amortize scheduled
payments under our mortgage and capital lease agreements, offset by a
contribution of approximately $6 million from the minority interest investor
mentioned above.
On October 3, 2003, we repurchased in the open market for approximately
$5.6 million additional portion of our outstanding 11% senior notes.
FISCAL YEAR ENDED SEPTEMBER 30, 2002
OPERATING ACTIVITIES. Net cash used in operating activities was $55.0
million in the seven months ended April 30, 2002 and net cash provided by
operating activities was $3.7 million in the five-month period ended September
30, 2002. Net cash used in operating activities in the fiscal year ended
September 30, 2002 was $51.3 million. The primary component of this decrease was
the impact of year over year decreases in our losses from operations.
Additionally, net cash provided by or used in operating activities can vary
significantly from period to period depending upon the timing of operating cash
receipts and payments, particularly accounts receivable, prepaid expenses and
other assets and accounts payable and accrued liabilities. Our net loss was
offset by a gain on the discharge of the 12.5% senior notes recorded as of the
effective date of the plan, as well as by non-cash interest charges on the 12.5%
senior notes, depreciation and amortization expenses, provisions for
uncollectible accounts receivable and non-cash components of restructuring
charges.
INVESTING ACTIVITIES. Net cash provided by investing activities was
$1.2 million in the seven-month period ended April 30, 2002 and net cash used in
investing activities were $6.5 million in the five-month period ended September
30, 2002. Net cash used in investing activities in the fiscal year ended
September 30, 2002 was $5.3 million. The decrease in net cash used in investing
activities was primarily attributable to decreased capital spending. Capital
expenditures related to our network and facilities were $24.7 million in the
seven-month period ended April 30, 2002 and $1.4 million in the five-month
period ended September 30, 2002. Of these amounts, we paid $23.3 million in the
seven-month period ended April 30, 2002 and $1.2 million in the five-month
period ended September 30, 2002, in cash. The balance was financed under
financing arrangements or remained in accounts payable, accrued liabilities and
other long term liabilities at the period end.
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FINANCING ACTIVITIES. Net cash used in financing activities was $4.9
million in the seven-month period ended April 30, 2002 and $2.3 million in the
five-month period ended September 30, 2002. Net cash used in financing
activities for the fiscal year ended September 30, 2002 was $7.2 million. This
decrease was primarily attributable to the decrease in capital contributions in
a subsidiary in which we own a minority interest. In the seven-month period
ended April 30, 2002, we repaid certain mortgage and capital lease obligations
totaling $4.9 million and settled certain capital lease obligations for $18.7
million in cash. In the five-month period ended September 30, 2002, we repaid
certain mortgage and capital lease obligations totaling $2.3 million.
SEGMENT INFORMATION
Our activities fall within one operating segment. The following table
sets forth geographic segment information for the nine months ended June 30,
2004 and 2002 (Successor Company), year ended September 30, 2003 (Successor
Company), five months ended September 30, 2002 (Successor Company), seven months
ended April 30, 2002 and for the year ended September 30, 2001 (Predecessor
Company):
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------------------------------------- ---------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
-------------------------- YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPT. 30, SEPT. 30, APRIL 30, SEPT. 30,
2004 2003 2003 2002 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Revenues:
United States ............. $ 26,334 $ 28,764 $ 36,833 $ 20,410 $ 37,747 $ 82,020
Europe (mainly
the United Kingdom) ..... 18,809 17,603 23,344 10,313 13,526 22,190
---------- ---------- ---------- ---------- ---------- ----------
Consolidated .............. $ 45,143 $ 46,367 $ 60,177 $ 30,723 $ 51,273 $ 104,210
========== ========== ========== ========== ========== ==========
Operating income (loss):
United States ............. $ (33,446) $ (17,066) $ (22,631) $ (15,069) $ (54,433) $(142,713)
Europe (mainly
the United Kingdom) ..... 2,915 2,665 4,230 (39) (29,150) (14,773)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated .............. $ (30,531) $ (14,401) $ (18,401) $ (15,108) $ (83,583) $(157,486)
========== ========== ========== ========== ========== ==========
Long-lived assets:
United States ............. $ 66,305 $ 140,772 $ 137,279 $ 148,559 $ 297,713
United Kingdom ............ 26,145 25,618 25,351 26,151 59,526
Europe - other ............ -- -- -- -- 3,272
---------- ---------- ---------- ---------- ----------
Consolidated .............. $ 92,450 $ 166,390 $ 162,630 $ 174,710 $ 360,511
========== ========== ========== ========== ==========
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Although our company operates in one operating segment, there are 4
major service lines as detailed in the table below. Data for fiscal years 2002
and 2001 have not been provided due to impracticability.
SUCCESSOR COMPANY
---------------------------------------------
FOR THE NINE MONTHS ENDED
--------------------------- YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
2004 2003 2003
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Internet Hosting and Co-Location .............. $ 17,854 $ 20,088 $ 26,048
Managed Services .............................. 13,721 10,089 13,342
Network Services and Internet Access .......... 13,197 14,643 19,034
Hardware and Software Sales, DSL and Other .... 371 1,547 1,753
------------ ------------ ------------
Revenue, net .................................. $ 45,143 $ 46,367 $ 60,177
============ ============ ============
INCOME TAXES
Globix is in an accumulated loss position for both financial and income
tax reporting purposes. Globix has United States Federal income tax loss
carryforwards of approximately $91 million at September 30, 2003. These income
tax loss carryforwards expire through 2022. The United States Federal income tax
loss carryforwards were reduced upon emergence from bankruptcy due to the
Internal Revenue Code's rules and regulations related to the cancellation of
indebtedness income that is excluded from taxable income. Since the plan
provided for substantial changes in our ownership, our use of its net operating
loss carryforward may be limited. Globix has not yet determined the impact, if
any, that changes in ownership have had on net operating loss carryforwards. As
of September 30, 2003, Globix also has net operating loss carryforwards of
approximately $24.7 million from its United Kingdom Subsidiaries, which do not
expire under United Kingdom tax rules. For financial reporting purposes, income
tax benefits through September 30, 2003 related to both United States Federal
and foreign income tax losses are fully offset by a valuation allowance due to
the uncertainty of our ability to realize income tax benefits by generating
taxable income in the future.
Our emergence from bankruptcy in fiscal 2002 did not create a new tax
reporting entity. Accordingly, the adjustments required to adopt fresh start
accounting are not applicable for our tax reporting and, therefore, deferred tax
items were recognized concurrently with the recognition of the respective fresh
start accounting adjustments. In addition, pursuant to SOP 90-7 reversals of the
valuation allowance recorded against deferred tax assets that existed as of the
emergence date will first reduce intangibles, until exhausted, and thereafter
are reported as additional paid in capital as opposed to income tax expense. The
balance of the valuation allowance for which this treatment is required was
approximately $80 million at September 30, 2003 and 2002.
INDEBTEDNESS
Our indebtedness at June 30, 2004 consisted of approximately $72.2
million in aggregate principal amount of our 11% senior notes, approximately
$1.3 million in related accrued interest, approximately $448 thousand of capital
lease obligations and approximately $20.7 million in mortgage debt. Total
borrowings at June 30, 2004 were approximately $94.0 million, which included
$0.6 million in current obligations and $93.4 million of the 11% senior notes,
related accrued interest, long-term mortgage and capital lease obligations. The
indenture governing the 11% senior notes requires interest to be paid in kind
through 2004, and permits interest to be paid in kind for two years thereafter
at the discretion of our board of directors.
In September 2000 we purchased the land and approximately 187,000 gross
square foot building located at 415 Greenwich Street, New York, New York. During
October 2003 we reached an agreement to sell the property for total cash
consideration of approximately $60 million. The agreement was subject to various
closing conditions which were not satisfied until January 2004. The sale of the
property was completed on January 22, 2004 and resulted in approximately $48.7
million in net proceeds. On March 3, 2004, we used approximately $44 million of
the net proceeds to repurchase approximately $40.3 million in principal amount
of our outstanding 11% senior notes at par value plus accrued interest in the
amount of approximately $3.7. Consummation of the sale also eliminated certain
114
obligations that we incurred in connection with the purchase and rehabilitation
of the property. In addition, through June 30, 2004 we acquired approximately
$26.1 million in aggregate principal amount of our 11% senior notes and
approximately $1.9 million of related accrued interest for an aggregate purchase
price of approximately $20.2 million in open market purchases and issued an
additional $18.5 million in 11% senior notes as payment of accrued interest on
the 11% senior notes.
COMMITMENTS
As of June 30, 2004, we had commitments to certain telecommunications
carriers totaling $31 million payable in various years through 2009.
Additionally, we have various agreements to lease facilities and equipment and
are obligated to make future minimum lease payments of approximately $80 million
on operating leases expiring in various years through 2017.
As of June 30, 2004 we had contractual obligations due in future
periods as follows:
Less than After 5
Contractual Obligations Total 1 year 2-3 years 4-5 years years
--------- --------- --------- --------- ---------
11% senior notes $ 72,202 $ -- $ -- $ 72,202 $ --
11% senior notes - Accrued Interest 1,347 -- -- 1,347 --
Mortgage Payable 19,980 299 660 777 18,244
Capital Lease Obligations 448 263 185 -- --
Operating Leases 77,938 6,729 13,729 13,772 43,758
Telecommunications Commitments 31,219 11,297 15,014 4,908 --
--------- --------- --------- --------- ---------
Total Contractual Cash Obligations $203,134 $ 18,588 $ 29,588 $ 92,956 $ 62,002
========= ========= ========= ========= =========
RECENT TECHNICAL ACCOUNTING PRONOUNCEMENTS
In April 2003, the Financial Accounting Standards Board issued SFAS No.
149, "Amendment of Statement 133 on Derivative Instruments and Hedging
Activities." SFAS No. 149 clarifies under what circumstances a contract with an
initial net investment meets the characteristics of a derivative as discussed in
Statement No. 133. It also specifies when a derivative contains a financing
component that warrants special reporting in the Consolidated Statement of Cash
Flows. SFAS No. 149 amends certain other existing pronouncements in order to
improve consistency in reporting these types of transactions. The new guidance
is effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The adoption of this
standard did not have a material impact on our consolidated financial
statements.
In May 2003, the Financial Accounting Standards Board issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity." SFAS No. 150 specifies that instruments within its
scope embody obligations of the issuer and that, therefore, the issuer must
classify them as liabilities. SFAS No. 150 requires issuers to classify as
liabilities the following three types of free standing financial instruments:
(1) mandatorily redeemable financial instruments; (2) obligations to repurchase
the issuer's equity shares by transferring assets and (3) certain obligations to
issue a variable number of shares. SFAS No. 150 defines a "freestanding
financial instrument" as a financial instrument that (1) is entered into
separately and apart from any of the entity's other financial instruments or
equity transactions or (2) is entered into in conjunction with some other
transaction and can be legally detached and exercised on a separate basis. For
all financial instruments entered into or modified after May 31, 2003, SFAS No.
150 is effective immediately. For all other instruments of public companies,
SFAS No. 150 goes into effect at the beginning of the first interim period
beginning after June 15, 2003. For contracts that were created or modified
before May 31, 2003 and still exist at the beginning of the first interim period
beginning after June 15, 2003, entities should record the transition to SFAS No.
150 by reporting the cumulative effect of a change in an accounting principle.
SFAS No. 150 prohibits entities from restating financial statements for earlier
years presented. The adoption of this standard did not have a material impact on
our consolidated financial statements.
115
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No.
51", which relates to the identification of, and financial reporting for,
variable-interest entities (VIEs). FIN No. 46 requires that if an entity is the
primary beneficiary of a variable interest entity, the assets, liabilities and
results of operations of the variable interest entity should be included in the
consolidated financial statements of the entity. The provisions of FIN No. 46
are effective immediately for all arrangements entered into after January 31,
2003. For those arrangements entered into prior to February 1, 2003, the
provision of FIN No. 46 are required to be adopted at the beginning of the first
interim or annual period beginning after June 15, 2003. In October 2003, FASB
Staff Position deferred the effective date for existing VIE arrangements created
before February 1, 2003 to the first interim or annual reporting period that
ends after December 15, 2003. The adoption of this standard did not have a
material impact on the company's consolidated financial statements.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2004, investments consisted of an investment in a limited
partnership that invests in fixed income securities and investments in fixed
rate investment grade and government securities denominated in U.S. dollars. At
June 30, 2004, the majority of our investments were due to mature within twelve
months and the carrying value of these investments approximated fair value.
As of June 30, 2004 marketable securities included our investment in
EDGAR Online Inc., which is recorded at fair market value. We do not hedge our
exposure to fluctuations in the value of our investments in equity securities.
At June 30, 2004, $4.4 million of our cash and investments were
restricted in accordance with the terms of certain collateral obligations.
We are also subject to market risk associated with foreign currency
exchange rates. Approximately 42% of our revenues and approximately 28% of our
operating costs and expenses for the nine-month period ended June 30, 2004 were
denominated in British Pounds. To date, we have not utilized financial
instruments to minimize our exposure to foreign currency fluctuations. We will
continue to analyze risk management strategies to minimize foreign currency
exchange risk in the future. The company believes that an immediate increase or
decrease of 5% of the Dollar in comparison to the British Pound would not have a
material impact on its operating results or cash flows.
We believe that we have limited exposure to financial market risks,
including changes in interest rates. The fair value of our investment portfolio
or related income would not be significantly impacted by changes in interest
rates due mainly to the short-term nature of the majority of our investment
portfolio. An increase or decrease in interest rates would not significantly
increase or decrease interest expense on debt obligations, due to the fixed
nature of the substantial majority of our debt obligations.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
On July 31, 2002, we engaged PricewaterhouseCoopers LLP ("PWC") as our
independent accountants and dismissed Arthur Andersen LLP, which had previously
served as our independent accountants. The board of directors and audit
committee participated in and approved the decision to change independent
accountants. The audit reports of Arthur Andersen on the consolidated financial
statements of Globix and its subsidiaries as of and for the fiscal years ended
September 30, 2000 and 2001 did not contain an adverse opinion or disclaimer of
opinion, nor were they modified as to uncertainty, audit scope or accounting
principles. The audit report for the year ended September 30, 2001 contained a
going concern modification. During the fiscal years ended September 30, 2000 and
2001, there were no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would
have caused it to make reference to the subject matter of the disagreement in
connection with its report.
PWC served as our independent accountants from July 31, 2002 through
September 12, 2003. At a meeting held on September 12, 2003, our audit committee
recommended and approved a change in our independent accountants. Accordingly,
we dismissed PWC as our independent accountants on September 12, 2003.
PWC's reports on our financial statements for the seven-month period
ended April 30, 2002 and as of and for the five month period ended September 30,
2002 contained no adverse opinion or disclaimer of opinion and were not
qualified or modified as to uncertainty, audit scope or accounting principle.
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From the date of PWC's engagement on July 31, 2002 through September
12, 2003, there have been no disagreements with PWC on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements, if not resolved to the satisfaction of PWC,
would have caused PWC to make reference thereto in its report on the financial
statements for such periods.
From the date of PWC's engagement on July 31, 2002 through September
12, 2003, there have been no "reportable events" as that term is defined in Item
304(a)(1)(v) of Regulation S-K, except that on August 13, 2003 PWC provided us
with a management letter reporting to us the matter described in the following
paragraphs:
Since our emergence from bankruptcy in April 2002, we have had to face
many challenging and complex accounting and financial reporting issues,
including fresh start accounting, restructuring and the restatement of amounts
in our financial statements for the quarter ended March 31, 2002. In addition,
we have experienced significant turnover in our financial reporting staff, as
well as limited management resources. We fell behind in our periodic reporting
to the Securities and Exchange Commission for the year ended September 30, 2002,
and experienced difficulty in catching up with our filing obligations for the
year ended September 30, 2002 while fulfilling our responsibilities for the year
ended September 30, 2003. PWC reported that the combined effect of these
challenges had stressed the capabilities of our accounting staff and created
material weaknesses within our accounting and reporting controls. The management
letter indicated that the shortage of qualified accounting personnel had
required PWC to perform significantly more work in connection with the audit of
our financial statements for the seven-month period ended April 30, 2002 and the
five-month period ended September 30, 2002. The management letter recommended
hiring at least two additional senior financial staff members, one of whom would
be required to be the controller.
We agreed with these findings and recommendations and as such, the
management letter noted that we had hired a controller who began work on July
15, 2003. In addition, in order to resolve the problems described above, we
hired a new senior accountant in May 2003, a new manager of external reporting
in October 2003 and a new senior accountant in November 2003. In addition, we
returned to a normal recurring closing timetable that includes formal management
reviews and a monthly financial reporting package in January 2004. Finally, by
completing our fiscal 2002 reporting, we have significantly reduced the burden
on our internal accounting staff.
At its meeting on September 12, 2003, our audit committee recommended
and approved the engagement of Amper, Politziner & Mattia PC, which firm we
refer to as "Amper," as our independent auditors. Accordingly, we engaged Amper
as our independent auditors, effective September 12, 2003. During the two most
recent fiscal years and through September 12, 2003, we had not consulted with
Amper regarding any matter that would require reporting under Item 304(a)(2) of
Regulation S-K.
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SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBIX
PRINCIPAL HOLDERS OF COMMON STOCK
The following table and the accompanying notes set forth certain
information, as of August 1, 2004 (except as set forth below), concerning the
beneficial ownership of our common stock by: (1) each person who is known by us
to beneficially own more than five percent of our common stock, (2) each current
director of Globix, (3) each officer of Globix named in the Summary Compensation
Table and (4) all current directors and executive officers as a group.
NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES(1),(2) CLASS
------------------- ------------- -----
Goldman, Sachs & Co. 1,405,513(3) 8.54%
85 Broad Street
New York, NY 10004
HM Parties(4) 2,304,400(5) 14.00%
c/o Hicks, Muse, Tate & Furst Incorporated
200 Crescent Court, Suite 1600
Dallas, Texas 75201
MacKay Shields LLC 2,482,491(6) 15.08%
c/o MacKay Shields Financial Corp.
9 West 57th Street
New York, NY 10019
JGD Management Corp. 1,027,733(7) 6.24%
350 Park Avenue
New York, New York 10022
Kingdon Capital Management, LLC 1,181,976(8) 7.18%
152 West 57th Street, 50th Floor
New York, NY 10019
Peter S. Brodsky --(9) *
Peter L. Herzig -- *
Steven Lampe 1,219,817(10) 7.41%
Steven G. Singer 1,107,088(11) 6.73%
Raymond L. Steele -- *
Peter K. Stevenson 548,667(12) 3.23%
Steven Van Dyke 168,609(13) 1.02%
Robert M. Dennerlein 50,000(14) *
H. Jameson Holcombe 53,291(15) *
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NAME AND ADDRESS NUMBER OF PERCENT OF
OF BENEFICIAL OWNER SHARES(1),(2) CLASS
------------------- ------------- -----
John D. McCarthy 73,160(16) *
Philip J. Cheek 15,000(17) *
James C. Schroeder 4,167(18) *
Gregory P. Leahy --(19) *
All directors and executive officers as a group
(12 persons) 3,239,799(20) 18.83%
* Less than 1%.
(1) The information regarding beneficial ownership of our common stock has
been presented in accordance with the rules of the Securities and
Exchange Commission. Under these rules, a person may be deemed to
beneficially own any shares as to which such person, directly or
indirectly, has or shares voting power or investment power and also any
shares of our common stock as to which such person has the right to
acquire voting or investment power within 60 days through the exercise
of any stock option or other right. The percentage of beneficial
ownership as to any person as of a particular date is calculated by
dividing (a) (i) the number of shares beneficially owned by such person
plus (ii) the number of shares as to which such person has the right to
acquire voting or investment power within 60 days by (b) the total
number of shares outstanding as of such date, plus any shares that such
person has the right to acquire from Globix within 60 days. For
purposes of calculating the beneficial ownership percentages set forth
above, the total number of shares of our common stock deemed to be
outstanding as of August 1, 2004 was 16,460,000. As used in this joint
proxy statement/prospectus, "voting power" is the power to vote or
direct the voting of shares and "investment power" is the power to
dispose or direct the disposition of shares. Except as noted, each
stockholder listed has sole voting and investment power with respect to
the shares shown as being beneficially owned by such stockholder.
(2) On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit described in the section of this
joint proxy statement/prospectus entitled "Information About Globix-
--Legal Proceedings" beginning on page 94 of this joint proxy
statement/prospectus. The Stipulation and Order provides that 229,452
shares of our common stock and $1.968 million in aggregate principal
amount of our 11% senior notes will be held in reserve in escrow
pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action
lawsuit requires us to pay an amount in excess of our liability
insurance, we will be required to issue to the class action litigants
and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than
$10 million) the shares of our common stock and the notes being held in
escrow. On August 12, 2004, the United States District Court for the
Southern District of New York approved the settlement of the class
action lawsuit in an amount which would be covered by liability
insurance. Although the settlement remains subject to appeal, Globix
believes that its liability insurance is sufficient to cover any
judgment or settlement in the class action lawsuit and that the shares
of Globix common stock and the notes being held in escrow will be
distributed in accordance with the plan or reorganization rather than
to the class action litigants and their attorneys. Accordingly, MacKay
Shields LLC and Goldman Sachs & Co. (and each other former holder of
our 12.5% notes on the effective date of the plan of reorganization)
will be entitled to receive a portion of these 229,452 shares of common
stock based on its percentage ownership of the 12.5% notes on the
effective date of the plan of reorganization.
119
(3) This information is as of August 31, 2004 and based on information
provided to us by Goldman Sachs & Co.
(4) "HM Parties" refers collectively to HM4 Globix Qualified Fund, LLC, HM4
Globix Private Fund, LLC, HM PG-IV Globix, LLC, HM 4-EQ Globix
Coinvestors, LLC and HM 4-SBS Globix Coinvestors, LLC. Of the 2,304,400
shares held by the HM Parties: (i) 2,092,487 of these shares are owned
of record by HM4 Globix Qualified Fund, LLC; (ii) 14,831 of these
shares are owned of record by HM4 Globix Private Fund, LLC; (iii)
111,430 of these shares are owned of record by HM PG-IV Globix, LLC;
(iv) 34,177 of these shares are owned of record by HM4 EQ Globix
Coinvestors, LLC; and (v) 51,475 of these shares are owned of record by
HM4 SBS Globix Coinvestors, LLC.
(5) Thomas O. Hicks is the President and Chief Executive Officer of each of
the HM Parties and is the sole member of the ultimate general partner
of the controlling member of each of the HM Parties and has the
ultimate legal authority over all investment decisions made with
respect to the shares of our common stock owned of record by the HM
Parties. Accordingly, Mr. Hicks may be deemed to beneficially own all
or a portion of the shares of our common stock owned of record by the
HM Parties. Peter S. Brodsky, a director of Globix, Dan H. Blanks, Joe
Colonnetta, Jack D. Furst, a director of Globix from December 1999
through April 2002, Lyndon Lea, John R. Muse, Rick Neuman and Andrew
Rosen are partners of Hicks, Muse, Tate & Furst Incorporated, which is
an affiliate of Mr. Hicks and of the HM Parties, and serve as officers
of each of the HM Parties. In addition, Messrs. Hicks, Muse, Lea and
Furst are members of the management committee of Hicks, Muse Tate &
Furst Incorporated. Consequently, these individuals may be deemed to
beneficially own all or a portion of the shares of our common stock
owned of record by the HM Parties. Each of Messrs. Hicks, Brodsky,
Blanks, Colonnetta, Furst, Lea, Muse, Neuman and Rosen disclaims the
existence of a group and disclaims beneficial ownership of the shares
of our common stock of which he is not the record owner.
(6) This information is as of August 27, 2004 and based on information
provided to us by MacKay Shields LLC, the pecuniary interests in these
shares are held by a number of clients for whom MacKay Shields LLC is
the discretionary investment advisor or subadvisor. MacKay Shields LLC
has voting and investment control over these shares and, accordingly,
is deemed to beneficially own these shares.
(7) According to information provided to us by JGD Management Corp. these
shares are held by certain managed accounts and investment funds for
whom JGD Management Corp. is the discretionary investment advisor.
(8) According to information provided to us by Kingdon Capital Management,
LLC, these shares are directly beneficially owned by Kingdon Capital
Management, LLC and held of record by Kingdon Associates, Kingdon
Partners, Kingdon Family Partnership LP and M. Kingdon Offshore N.V.
(9) Mr. Brodsky is a partner of Hicks, Muse, Tate & Furst Incorporated,
which is an affiliate of Mr. Hicks and each of the HM Parties, and
serves as an officer of each of the HM Parties. Consequently, Mr.
Brodsky may be deemed to beneficially own all or a portion of the
shares of our common stock owned of record by each of the HM Parties.
Mr. Brodsky disclaims the existence of a group and disclaims beneficial
ownership of shares of our common stock of which he is not the record
owner.
(10) Mr. Lampe is affiliated with LC Capital Master Fund Ltd., which owns
these shares. Mr. Lampe has voting and investment control over these
shares and, consequently, is deemed to beneficially own these shares.
(11) Mr. Singer is co-trustee of two trusts for the benefit of his brother's
children and as trustee has voting and investment control over the
517,979 shares of our common stock held in the trusts. Mr. Singer and
his sister-in-law, Karen Singer, filed a Schedule 13G to report the
beneficial ownership of these shares and an additional 589,109 shares
held in a trust for the benefit of Mr. Singer's brother's children, for
which Karen Singer serves as sole trustee. Mr. Singer and his
sister-in-law disclaim membership in a group, as such term is defined
in Section 13(d)(3) of the Securities Exchange Act of 1934, and
disclaim any other interest in the common stock held in the Singer
Trusts.
120
(12) Pursuant to the terms of Mr. Stevenson's employment agreement described
in "Executive Compensation - Employment Agreements - Peter K.
Stevenson", on March 14, 2003, we granted to Mr. Stevenson options to
acquire 548,667 shares of our common stock pursuant to our 2003 Stock
Option Plan. As of December 31, 2003, all of these stock options were
vested.
(13) Mr. Van Dyke is the founder and co-managing principal of Bay Harbour
Management L.C. Bay Harbour Management serves as investment advisor for
Bay Harbour 90-1, Ltd., Bay Harbour Partners, Ltd., Zurich
Institutional Benchmarks Master Fund Ltd. and HFR DS Strategic Master
Trust, which collectively owned (as of August 1, 2003) 168,609 shares
of our common stock, or approximately 1.02 percent of the shares of our
outstanding common stock. Bay Harbour Management has voting and
investment control over these shares and, accordingly, may be deemed to
beneficially own these shares. Mr. Van Dyke is the natural person with
voting and investment control over these shares.
(14) Includes options to purchase 50,000 shares that are exercisable within
60 days of August 1, 2004, including 16,667 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(15) Includes options to purchase 53,291 shares that are exercisable within
60 days of August 1, 2004, including 17,764 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(16) Includes options to purchase 73,158 shares that are exercisable within
60 days of August 1, 2004, including 24,386 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(17) Includes options to purchase 15,000 shares that are exercisable within
60 days of August 1, 2004, including 5,000 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(18) Includes 4,167 options which will vest on September 30, 2004 assuming
certain performance targets are achieved.
(19) Does not include options to purchase 100,590 shares, which were
forfeited when Mr. Leahy resigned from Globix on July 12, 2003.
(20) Includes option to purchase an aggregate of 744,283 shares that are
exercisable within 60 days of August 1, 2004, including 67,984 options
which will vest on September 30, 2004 assuming certain performance
targets are achieved.
Unless otherwise indicated, the address for the individuals listed
above is c/o Globix Corporation, 139 Centre St., New York, NY 10013.
DESCRIPTION OF GLOBIX CAPITAL STOCK
DESCRIPTION OF COMMON STOCK
The following summary is a description of the material terms of our
common stock, does not purport to be complete and is subject in all respects to
the applicable provisions of Delaware law and of our constituent documents and
of the constituent documents of our subsidiaries.
GENERAL
Our company is authorized to issue 500,000,000 shares of common stock
with a par value of $0.01 per share. We are also authorized to issue 5,000,000
shares of preferred stock with a par value of $0.01 per share. As of August 1,
2004, 16,460,000 shares of common stock were issued and outstanding (including
229,452 shares held in reserve pending the outcome of a class action lawsuit and
164,600 shares held in reserve pending resolution of a shareholder derivative
suit, each as described in detail in the section entitled "Information About
Globix - Legal Proceedings" beginning on page 94 of this joint proxy
statement/prospectus) and no shares of our preferred stock were authorized or
outstanding. Our board of directors is authorized, subject to any limitations
prescribed by law and limitations set forth in the indenture, dated as of April
23, 2002, among Globix, the subsidiary guarantors listed therein and HSBC Bank
USA, as trustee, to provide for the issuance of preferred stock in one or more
series and to fix or alter the dividend rate, voting rights, redemption price,
liquidation preference and any other rights, powers and preferences as our board
of directors may determine from time to time. The indenture limits, among other
things, our ability to pay dividends and to issue stock with a mandatory
redemption date prior to the maturity date of the notes.
121
All shares of our common stock are identical and entitle the holders
thereof to the same rights and privileges. The issued and outstanding shares of
our common stock are validly issued, fully paid and non-assessable. The holders
of outstanding shares of our common stock are entitled to receive dividends out
of assets legally available therefore at such times and in such amounts as our
board of directors may from time to time determine in its discretion. The
holders of our common stock have no preemptive rights to purchase any of our
securities. Upon liquidation, dissolution or winding up of our company, the
holders of our common stock are entitled to receive pro rata our assets which
are legally available for distribution, after payment of all debts and other
liabilities and subject to the prior rights of any holders of any preferred
stock then outstanding. Each outstanding share of our common stock is entitled
to one vote on all matters submitted to a vote of stockholders.
DELAWARE ANTI-TAKEOVER LAW
We are subject to Section 203 of the Delaware General Corporation Law
which, subject to certain exceptions, prohibits a Delaware corporation from
engaging in any business combination with any interested stockholder for a
period of three years following the date that the stockholder became an
interested stockholder, unless:
o prior to that date, the board of directors of the corporation
approved either the business combination or the transaction
which resulted in the stockholder becoming an interested
stockholder;
o upon consummation of the transaction which resulted in the
stockholder becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced,
excluding for purposes of determining the number of shares
outstanding those shares owned by persons who are directors
and also officers and by employee stock plans in which
employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be
tendered in a tender or exchange offer; or
o on or subsequent to that date, the business combination is
approved by the board of directors of the corporation and is
authorized at an annual or special meeting of stockholders,
and not by written consent, by the affirmative vote of holders
of at least 66 2/3% of the outstanding shares of voting stock
which are not owned by the interested stockholder.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is Mellon
Investor Services LLC.
DESCRIPTION OF PREFERRED STOCK
In connection with the merger, Globix will designate 4,500,000 of the
5,000,000 shares of its authorized but undesignated preferred stock with a par
value of $0.01 per share as a new series of 6% Series A Cumulative Convertible
Preferred Stock ("Globix convertible preferred stock"). Existing shares of NEON
convertible preferred stock will be converted into cash and shares of the Globix
convertible preferred stock in the merger as described in the section entitled
"Terms of the Merger Agreement and Related Transactions - Conversion of Shares
in the Merger" beginning on page 75 of this joint proxy statement/prospectus
The designation and issuance of this new series of Globix convertible preferred
stock is permitted under the terms of Globix's indenture, dated April 23, 2002,
among Globix, the subsidiary guarantors listed therein and HSBC Bank USA, as
trustee. A copy of the certificate of designation for the Globix convertible
preferred stock is included as an exhibit to the first amendment to the merger
agreement which is attached as Appendix A-2 to this joint proxy
statement/prospectus.
All shares of Globix convertible preferred stock will be identical and
entitle the holders thereof to the same rights and privileges.
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Shares of Globix convertible preferred stock will rank senior to shares
of its common stock with respect to dividend rights and upon the liquidation,
dissolution or winding-up of Globix. So long as there are 200,000 shares of
Globix convertible preferred stock outstanding, Globix will not be permitted to
authorize or issue shares of capital stock, or securities convertible into
shares of capital stock, that rank senior to or equal to the Globix convertible
preferred stock without first obtaining the affirmative vote or consent of the
holders of 66 2/3% of the outstanding Globix convertible preferred stock.
The holders of Globix convertible preferred stock will be entitled to
cumulative preferential dividends when declared accruing at the rate of $0.216
per share per year or $0.108 per share semi-annually, payable semi-annually in
arrears on June 15 or December 15 of each year, commencing on December 15, 2004.
Dividends may be paid in cash or in additional shares of Globix convertible
preferred stock at Globix's option. Accumulated unpaid dividends will accrue and
cumulate dividends at a rate of 6% per annum.
The liquidation preference of the Globix convertible preferred stock
will be $3.60 per share, plus an amount equal to all accrued and unpaid
dividends. The Globix convertible preferred stock liquidation preference will be
payable upon any voluntary or involuntary liquidation, dissolution or winding-up
of Globix, but only after payment in full of Globix's outstanding debt
obligations and any securities of Globix that rank senior to the Globix
convertible preferred stock. Generally, a voluntary sale, conveyance, exchange
or transfer of all or substantially all of Globix's assets, or the merger or
consolidation of Globix, will not be deemed a voluntary or involuntary
liquidation, dissolution or winding-up of Globix.
The Globix convertible preferred stock will be convertible into shares
of Globix common stock at the option of a holder at any time with an initial
conversion rate of one share of Globix common stock issued for each share of
Globix convertible preferred stock converted. The conversion rate will be
subject to adjustment for certain dilutive events, including, but not limited
to, stock splits, Globix's issuance of convertible securities at a price per
share less than the current market price for shares of Globix common stock, and
certain distributions by Globix of cash, securities, indebtedness or other
non-cash assets to the holders of its common stock. No adjustments to the
conversion rate will be required unless and until an adjustment would effect at
least a 1% increase or decrease in such rate. Any adjustments below the 1%
threshold will be aggregated until together they would effect an increase or
decrease in the conversion rate of at least a 1%.
The Globix convertible preferred stock is subject to automatic
conversion upon the affirmative vote of the holders of at least 66 2/3% of the
outstanding shares of Globix convertible preferred stock or the day immediately
following the date on which the closing price of Globix common stock has equaled
or exceeded $10.80 for a period of 45 consecutive trading days.
The Globix convertible preferred stock will be entitled to one vote for
each share of common stock into which such share of Globix convertible preferred
stock is convertible and will vote with the holders of Globix common stock as a
single class with respect to any question or matter on which holders of Globix
common stock have a right to vote.
Globix may elect to redeem the Globix convertible preferred stock, in
whole or in part, for $3.816 per share in 2005 and 2006, $3.708 per share in
2007 and $3.60 per share in 2008, plus, in each case, all accrued and unpaid
dividends. In the event of a partial redemption, Globix must effect the
redemption with respect to holders of the Globix convertible preferred stock on
a pro rata basis, except that Globix may elect to redeem all of the shares of
holders with fewer than 100 shares.
In the event of a change in control of Globix, each holder of Globix
convertible preferred stock will have the option to require Globix to redeem its
shares at a price equal to $3.636 per share plus all accrued and unpaid
dividends up to the date that such shares are redeemed. Globix will not be
required to redeem any shares upon a change in control prior to repurchasing any
securities ranking senior to the Globix convertible preferred stock, including
the Globix 11% senior notes pursuant to the terms of the indenture.
A "change in control" for purposes of the Globix convertible preferred
stock generally means:
o a person or group, other than certain permitted holders,
becomes the direct or indirect beneficial owner of more than
50% of the outstanding voting securities of Globix;
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o during any consecutive two-year period, individuals who at the
beginning of the period constituted the board of directors of
Globix cease for any reason to constitute a majority of the
directors then in office;
o a merger or consolidation of Globix, or Globix conveys,
transfers or leases all or substantially all of its assets
(other than a transaction in which no person or group, other
than certain permitted holders, owns 50% of the surviving
corporation); and
o Globix is liquidated or dissolved, or adopts a plan of
liquidation or dissolution.
The "permitted holders" for purposes of the Globix convertible
preferred stock include certain major stockholders of both NEON and Globix prior
to the merger.
Shares of Globix convertible preferred stock that are redeemed for, or
converted into, shares of common stock, or that are otherwise reacquired by
Globix may not be reissued as shares of Globix convertible preferred stock, and
will instead be returned to the status of authorized, unissued shares of
undesignated preferred stock.
Holders of outstanding shares of Globix convertible preferred stock are
entitled to receive certain annual and quarterly financial reports of Globix.
However, if Globix has filed copies of such reports with the SEC, it is not
obligated to provide them to holders of outstanding shares of Globix convertible
preferred stock unless and until such holders request copies from Globix.
Globix may amend the terms of the Globix convertible preferred stock or
waive certain of its provisions with the affirmative vote or consent of a
majority of the holders of the Globix convertible preferred stock, provided that
the consent of each holder will generally be required with respect to any
amendment or waiver that would adversely affect a fundamental right of such
holder and that the provisions governing a change in control may be amended,
modified or waived only with the consent of the holders of 66 2/3% of the Globix
convertible preferred stock then outstanding.
DESCRIPTION OF GLOBIX WARRANTS
Communication Technology Advisors LLC ("CTA") provides consulting and
business development services to NEON for which certain of its current and
former affiliates and certain of such affiliates' designees have received
warrants exercisable for 300,000 shares of NEON common stock at $6.06 per share
through October 23, 2008 and warrants exercisable for 350,000 shares of NEON
common stock at $5.30 per share through December 31, 2007 as payment for such
services. CTA purchased the warrants exercisable for 350,000 shares of NEON
common stock for $25,000. CTA provides similar consulting and business
development services to Globix and certain affiliates of CTA, including Mr.
Barr, hold warrants exercisable for 500,000 shares of Globix common stock at
$3.00 per share through March 13, 2013, which were purchased for $25,000.
In connection with the merger, each outstanding NEON warrant issued to
CTA will be converted into, and will have the right to receive, a Globix warrant
with substantially the terms described below, representing the right to acquire
a number of shares of Globix common stock determined by multiplying the number
of shares of NEON common stock subject to such NEON CTA warrant immediately
prior to the merger by 1.2748, at a purchase price per share equal to the
purchase price per share of NEON common stock subject to such NEON CTA warrant
divided by 1.2748.
Each of the current Globix warrants issued to affiliates of CTA and the
Globix warrants to be issued in exchange for the NEON CTA warrants in connection
with the merger have substantially similar terms. Each Globix warrant issued in
exchange for a NEON CTA warrant in connection with the merger will grant the
holder of such warrant the right to subscribe for and purchase shares of Globix
common stock at a specified exercise price for a specified time period as set
forth in the warrant. The exercise price will be payable in cash or
alternatively will permit cashless exercise by the holder. The standard exercise
period for the Globix warrants issued in exchange for the NEON CTA warrants will
be five years and the minimum number of shares of common stock for which a
Globix warrant or any portion thereof may be exercisable at any one time is
10,000.
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If Globix at any time subdivides (by any stock split, stock dividend,
recapitalization or otherwise) its outstanding shares of common stock into a
greater number of shares, then as of the record date for effecting such
subdivision the number of shares issuable upon exercise of any Globix warrant
will be proportionately increased and the exercise price in effect immediately
prior to such subdivision shall be proportionately decreased. If Globix at any
time combines (by reverse stock split, recapitalization or otherwise) its
outstanding shares of common stock into a smaller number of shares, then as of
the record date for effecting such combination the number of shares issuable
upon exercise of any Globix warrant will be proportionately decreased and the
exercise price in effect immediately prior to such combination shall be
proportionately increased.
In the event of any consolidation or merger of Globix with or into any
other corporation, entity or person, or (a) any other corporate reorganization,
in which Globix shall not be the continuing or surviving entity of such
consolidation, merger or reorganization or in connection with which the common
stock (or other securities issuable upon exercise of a Globix warrant) shall be
changed into or exchanged for stock of any other entity or cash or other
property, (b) any transaction in which in excess of 50% of Globix's voting power
is transferred to a person not a stockholder immediately prior to the
consummation of such transaction, (c) any sale of all or substantially all of
the assets of Globix or (d) a similar capital reorganization or reclassification
of Globix common stock, then, in each case, the holder of the Globix warrant, on
exercise at any time after the consummation or effective date of such event or
transaction, will be entitled to receive the stock, other securities, cash or
other property to which such holder would have been entitled upon the date of
such event or transaction if such holder had exercised the Globix warrant
immediately prior to such event or transaction.
Until a Globix warrant has been exercised in accordance with its terms,
the holder of such warrant will not have any voting rights or other rights or
obligations as a stockholder of Globix with respect to the shares of Globix
common stock issuable upon exercise of such warrant. The terms and provisions of
the Globix Warrants will provide that they may not be amended or waived without
the prior written consent of Globix and the holder.
INFORMATION ABOUT NEON
OUR COMPANY
We are a leading facilities-based communications provider, supplying
telecommunication services to communications companies and non-carrier customers
in the twelve-state Northeast and mid-Atlantic market. NEON is an independent
provider of SONET and DWDM services to a wide range of communications carriers
including local, long distance and wireless telephone companies and Internet
service providers. We also provide services to non-carrier customers such as
financial institutions and colleges and universities.
We own and operate a high bandwidth fiber optic network, consisting of
approximately 4,600 route miles and over 218,000 fiber miles. Our network
extends from Portland, Maine to Washington, D.C. and includes metro and
intercity coverage as well as co-location space in a number of large, mid-size
and small markets in the Northeast and mid-Atlantic, including Boston, New York,
Philadelphia, Newark, Baltimore, Washington, DC, Portland, Portsmouth,
Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack,
Reston, Vienna, and smaller communities along our network routes.
We have deployed a portion of our network using utility rights of way,
which we believe provide a competitive advantage compared to alternative rights
of way in our territory, such as railbeds and highways. Our utilization of
utility rights of way allows us to provide alternative routes to our customers
which, when combined with their existing routes over more conventional rights of
way, provide reliable redundant routes that do not share common points of
failure with the other conventional routes. These utility rights of way also
enable us to provide more direct connections to our customers.
Our principal executive offices are located at 2200 West Park Drive,
Westborough, Massachusetts, 01581, and our telephone number at that location is
(508) 616-7800. Although we maintain a website at www.neoninc.com, we do not
intend that the information available through our website be incorporated into
this joint proxy statement/prospectus.
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NEON SERVICES
We connect our customers to our network's backbone through carrier
hotels, NEON points of presence ("POPs"), central offices or by building
connections to our customers' facilities. We offer our customers the following
services:
o SONET Private Line - Physically diverse looped SONET services
at bandwidth levels including DS-3, OC-3, OC-12 and OC-48.
o Wavelength (DWDM) - Flexible and scalable high capacity
transport at 2.5 Gbps and 10 Gbps, configured as either
protected or unprotected wavelengths.
o Central Office Access - Connections to major carrier networks
throughout the NEON footprint over NEON's fully protected
SONET network.
o Co-location - Secure, carrier class conditioned, and power
ready space, racks and cabinets strategically located to
facilitate high bandwidth connectivity to other POPs, carrier
hotels, local switch offices and numerous service providers.
o Network Control Center services - Includes monitoring of
circuit and node status, alarming when performance falls
outside established thresholds and producing management
reports.
o Dark Fiber - Fiber strands contained within a fiber optic
cable which has been laid but does not include optical
transmission equipment.
OUR FIBER OPTIC NETWORK
Our network is primarily optical and incorporates mid- to late-1990s
fiber optic technology. Our network consists of fiber optic communication paths,
which allow for high-speed, high-quality transmission of voice, data and video
communications. Fiber optic systems use laser generated light waves to transmit
voice, data and video in digital formats through ultra-thin strands of glass.
Fiber optic systems are generally characterized by large circuit capacity, are
resistant to external signal interference and connect directly to digital
switching equipment or digital microwave systems.
We offer end-to-end fiber optic capacity utilizing bi-directional SONET
ring architecture, which has the ability to route customer traffic in two
directions around a ring design thereby minimizing service interruptions due to
fiber cuts. Our network is continuously monitored on a 24-hour, 7 day a week
basis from our Network Control Center at our headquarters in Westborough,
Massachusetts to maintain quality control and to alert us of any degradation of
signal or loss of fiber capacity, and to pinpoint the location of such
difficulty and enable us to repair or replace impaired fiber quickly.
RIGHT-OF-WAY AGREEMENTS
We use rights-of-way and licenses from utilities for major portions of
our network in the Northeast and mid-Atlantic regions. These utility
rights-of-way and licenses provide urban and intercity coverage at lower cost
and have a simpler approval process than the lengthy and expensive approval
process for alternative rights-of-way. Furthermore, installing cable in utility
rights-of-way or via license arrangements is typically easier and faster than
alternative rights-of-way, such as easement agreements. The lower cost, simpler
approval process and easier and faster installation process are the result of
placing our cables in existing underground conduits and ducts or on existing
towers and poles. Other forms of rights-of-way, such as those along highways and
railroad tracks, require burying cables in trenches. In addition, our utility
rights-of-way and licenses provide the potential to establish communications
connections to nearly every building, business park and industrial complex in
our service territory.
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In 2003, NEON acquired all of the equity interests in Columbia
Transmission Communications Corporation ("Columbia Transmission"). Columbia
Transmission became a wholly owned subsidiary of NEON and was renamed NEON
Transcom, Inc. NEON Transcom utilizes traditional rights-of-way, in the form of
easement agreements, that were established with individual land owners by
Columbia Transmission before it was acquired by NEON. NEON Transcom and NEON now
only manage the individual rights-of-way that are presently in place. This part
of NEON's network runs from New York City to the greater Washington, D.C. area
and represents a relatively small portion of NEON's entire network. This part of
the network is a redundant section of network that parallels NEON's original
network from New York City to the Washington, D.C. areas.
OUR CUSTOMERS
We are carrier neutral and provide services to a variety of companies
providing voice and data communications services. We also provide services to
non-carrier customers that require bandwidth services such as financial
institutions, colleges and universities. Our network enables these companies to
link geographically separated central offices and points of presence with
primary or redundant connections in their networks. Our facilities also enable
our carrier customers to connect their networks directly into the premises of
their end-users.
To date, we have entered into contracts with approximately 100
customers, including several Fortune 500 companies. Our customers include common
carriers, internet infrastructure companies, wireless service providers,
international communication providers and a number of non-carrier customers. Our
revenue is derived principally from lit fiber services under contracts ranging
from one to five years that provide for monthly payments. Dark fiber service
contracts have terms of approximately 20 years and generally provide for monthly
payments. In addition, the contracts typically provide for outage related
credits, a predetermined reduction or offset against the customer's lease rate
when a customer's leased facility is non-operational or does not meet the
customer's operating parameters, and also typically require us to maintain
adequate insurance coverage, including product liability coverage.
Our customer base includes the following:
INCUMBENT LOCAL EXCHANGE CARRIERS AND INDEPENDENT TELCOS. Incumbent
local exchange carriers typically require some interstate paths for
internal communications, signal control and operator services.
Incumbent local exchange carriers also require intrastate capacity to
connect central offices to one another and to connect central offices
to points of presence and customer premises.
FACILITIES BASED INTEREXCHANGE CARRIERS. Interexchange carriers
typically require (a) regional short haul connectivity from their
national backbone facilities to originate and terminate traffic deeper
into the customer base; (b) redundant routing to ensure reliability in
their networks; and (c) additional capacity for their customers as
minutes of use and IP bandwidth requirements increase.
COMPETITIVE LOCAL EXCHANGE CARRIERS. Competitive local exchange
carriers typically require interconnection between their local networks
and extensions further into the community.
INTERNET SERVICE PROVIDERS. Internet Service Providers ("ISP")
typically require distribution channels to interexchange carriers and
local exchange carrier switches as well as interconnection to other ISP
switches to provide access to the Internet to consumers and commercial
customers via local networks.
WIRELESS COMMUNICATION COMPANIES. Wireless companies typically require
land based back hauling of traffic from towers to their switches and
also capacity between their switches with interexchange carriers, POPs,
and incumbent local exchange carriers' central offices. Microwave
carriers typically require fiber optic capacity to replace microwave
service as their primary source of communications capacity.
CABLE TELEVISION COMPANIES. Cable companies typically require fiber
optic capacity to upgrade their systems to higher speed bandwidths,
which allow them to increase the number of channels available, add
interactive programming and Internet and data transfer capabilities and
to consolidate head end facilities.
We also provide services to several international communications
providers and a number of non-carrier customers.
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SALES AND MARKETING
We employ a direct sales and marketing strategy which allows us to take
a consultative approach in selling services to our customers. Our sales force is
trained to focus on product differentiation and superior customer service. We
also offer our customers a competitive price. We incentivize our sales force to
focus on selling long-term contracts. Our sales force consists of 21 employees,
including 4 management, marketing and administrative support personnel.
SUPPLY RELATIONSHIPS
We have entered into agreements and arrangements for the supply of
equipment and services relating to the construction and maintenance of our
network. In choosing our suppliers, we use such criteria as the quality and
performance of the product for the intended purpose, pricing, and the ability of
the supplier to meet our delivery schedule and technical support requirements.
We purchase optronic network equipment and network services generally from
Nortel Networks, Cisco Systems, Lucent Technologies and ECI Telecom. We believe
that there are alternative suppliers or alternative components for all of the
components contained in our network. However, any delay or extended interruption
in the supply of any of the key components, changes in the pricing arrangements
with our suppliers and manufacturers or delay in transitioning a replacement
supplier's product into our network could disrupt our operations and, if such
disruption continued for an extended period of time, it could have a material
adverse effect on our business, financial condition and results of operations.
COMPETITION
The telecommunications industry is highly competitive, and we face
substantial competition. Many of our existing and potential competitors have
financial, management and other resources that are substantially greater than
ours, as well as other competitive advantages, including established reputations
in the communications market. Our current and projected competitors generally
fall into five segments:
INCUMBENT LOCAL EXCHANGE CARRIERS AND INTEREXCHANGE CARRIERS. Incumbent
local exchange carriers include Regional Bell Operating Companies, such
as Verizon and SBC/SNET. Interexchange carriers include such companies
as AT&T, MCI and Sprint. These communications carriers currently own or
lease fiber optic networks in our current and proposed service areas.
Incumbent local exchange carriers and interexchange carriers dominate
their respective local markets in the cities connected by our network.
NATIONAL LONG-HAUL FIBER CARRIERS. Carriers such as Qwest
Communications, Wiltel, Global Crossing and Level 3 Communications own
or lease fiber optic networks in our current and proposed service areas
and employ advanced technology comparable to that of our network.
REGIONAL CARRIERS. Regional carriers include Cavalier/Elantic, PPL
Telecom and Progress Telecom.
DARK FIBER PROVIDERS. Providers of dark fiber include AboveNet, NEESCom
(National Grid), NSTAR, FiberTech and Sunesys.
METRO CARRIERS. Metro carriers include Consolidated Edison
Communications, LGN and FiberNet.
Most communications carriers already own fiber optic cables as part of
their communications networks, and each of these carriers could, and some do,
compete directly with us in the market for leasing fiber capacity. We also face
potential competition from the utilities in certain portions of our network.
GOVERNMENTAL REGULATION
NEON's core business is that of a carrier's carrier and therefore, our
core business is not directly subject to common carrier regulation. Several of
NEON's subsidiaries however, have been certified to provide common carrier
services through their authorizations as competitive local exchange carriers, or
CLECs. These authorizations for CLEC's are granted by state governments, but
subject these subsidiaries to the Telecommunications Act of 1996 as well as
state laws. NEON's core business as a carrier's carrier is, however, part of an
industry that is highly regulated by federal, state and local governments whose
regulatory actions are often subject to judicial modification. In light of the
changes that are occurring in the regulation of telecommunications, we cannot
forecast whether or not we will be subject to additional regulation in the
future.
128
FEDERAL REGULATION
Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last eight years as the result
of the adoption by Congress of the Telecommunications Act of 1996 on February 8,
1996. The Telecommunications Act is the most comprehensive reform of the
nation's telecommunications laws since the Communications Act of 1934, as
amended, was enacted. The Telecommunications Act imposes a number of access and
interconnection requirements on telecommunications carriers and on all local
exchange providers, including competitive local exchange carriers, with
additional requirements imposed on incumbent local exchange carriers. The
Telecommunications Act provides a detailed list of items which are subject to
these interconnection requirements, as well as a detailed set of duties for all
affected carriers. All telecommunications carriers must interconnect with the
facilities of other carriers and not install features that will interfere with
the interoperability of networks.
After lengthy legal proceedings, the Federal Communications Commission
("FCC") adopted revised guidelines implementing the interconnection and local
competition provisions of the Telecommunications Act. In order to foster
competition in the local exchange market, the FCC required incumbent local
exchange carriers to offer unbundled access to their telecommunications networks
to competitive local exchange carriers at cost-based rates, including access to
dark fiber. This could decrease the demand for fiber provided by the company.
The degree of access the incumbent local exchange carriers are required to
provide to their unbundled network elements is currently under review by the
FCC. However, the long and short term effects of the FCC's guidelines have yet
to be ascertained.
Aside from the impact of the Telecommunications Act, we believe that
federal regulation does not affect our core business directly because we are not
currently regulated as a common carrier under federal law. Federal law imposes
certain legal requirements on common carriers who engage in interstate or
foreign communication by wire or radio. These legal requirements apply to
telecommunications carriers to the extent they engage in the provision of
telecommunications services. Telecommunications carriers that provide
telecommunications services and common carriers are essentially the same. Each
provides communications services directly to the public or to some group of
potential users on a nondiscriminatory basis subject to standardized rates,
terms and conditions. We do not believe our core business offers our fiber
capacity in this manner, because we enter into individual agreements on a
selective basis with prospective customers who use our services and facilities
to support their own functions such as carrier's carrier or common carriers
services. We therefore do not believe that our core business' provision of dark
or lit fiber capacity constitutes telecommunications service or common carriage
as defined by the FCC or under the common carrier provisions of the
Communications Act of 1934. Our core business' lit and dark fiber is provided on
a private basis as a carrier's carrier. There are no assurances, however, that
the leasing of lit or dark fiber will not be subject to further regulation under
the Communications Act of 1934.
Accordingly, it is conceivable that the FCC would subject our provision
of fiber capacity to common carrier regulation. In 1994, the U.S. Court of
Appeals for the District of Columbia Circuit remanded to the FCC the question of
the FCC's authority to regulate dark fiber. In addition, the FCC has been
petitioned by certain railroad, power and telecommunications associations, none
of which are affiliated with us, to clarify the regulatory status of fiber
capacity providers. To date, the FCC has not indicated an intention to rule on
this remand.
If, and to the extent that, we were deemed to be a common carrier we
would be required to comply with several regulatory requirements, including, but
not limited to, the duty to:
o provide such services indiscriminately upon any reasonable
request;
o charge rates and adopt practices, classifications and
regulations that are just and reasonable;
o avoid unreasonable discrimination in charges, practices,
regulations, facilities and services;
o pay into federal funds for Telecommunications Relay Services,
the North American Numbering Administration and Local Number
Portability;
129
o limit our use of Customer Proprietary Network Information to
provisioning of the services in connection with which the
Customer Proprietary Network was obtained; and
o comply with various reporting, regulatory fee payment and
publication of rates. We might also be required to file
tariffs setting forth the rates for our services or to make
our rates otherwise publicly available. These regulatory
requirements could impose substantial burdens on us.
Notably, however, similarly situated competitors would be subject to
comparable regulatory obligations.
As a provider of interstate telecommunications in our provision of
leased fiber capacity, our revenues from such leases to end users are subject to
contributions to the FCC's Universal Service Fund, a fund that was established
to ensure the availability of affordable basic telecommunications services. As a
general matter, revenues received from other telecommunications carriers for
fiber capacity we provide are not subject to contribution to the Universal
Service Fund. However, our revenues from the provision of fiber capacity to
telecommunications carriers who themselves are exempt from contributing to the
Universal Service Fund because their contribution would be less than $10,000
would be subject to such contribution if the carrier notifies us that it is not
contributing directly, in which case the carrier is considered to be an end
user. In addition, if a carrier purchasing our capacity uses it for its own
purposes, then we would be subject to such contribution for the revenue
generated from that carrier because it too would be considered an end user.
Because certain internet service providers are deemed end users, our revenues
received pursuant to fiber capacity leases to such entities would be subject to
contributions to the Universal Service Fund. If such contribution would be less
than $10,000, we would qualify for a de minimus exemption from contribution to
the Universal Service Fund. The assessment rate is calculated quarterly and is
currently set at 8.9% of gross end-user revenues. The assessment rate may be
higher in subsequent years. However, the majority of our current revenue does
not qualify as "end-user" revenue. Our required contributions to the Universal
Service Fund for the year ended December 31, 2003 and the six-months ended June
30, 2004 were approximately $168,000 and $94,000, respectively. The FCC is
currently reviewing its rules for recovery of Universal Service Fund
contributions and evaluating who is required to contribute to the Universal
Service Fund. The outcome of these proceedings could affect the amount we are
required to contribute to the Universal Service Fund in the future.
Federal telecommunications law may also affect our business by virtue
of the inter relationships that exist among us and incumbent local exchange
carriers and interexchange carriers. For example, the FCC is currently reviewing
existing obligations of the incumbent local exchange carriers to make available
certain unbundled network elements to their competitors at cost-based rates.
While it is not possible to predict the precise effect any changes in the
current unbundling rules will have on our business or financial condition, the
elimination or relaxing of these obligations on the incumbent local exchange
carriers could eliminate one of the principal disincentives for use of incumbent
local exchange carrier facilities by interexchange carriers, which could have a
material adverse effect on the use of our fiber optic networks by interexchange
carriers.
STATE REGULATION
The Telecommunications Act prohibits state and local governments from
enforcing any law, rule or legal requirement that prohibits or has the effect of
prohibiting any person from providing any interstate or intrastate
telecommunications service. In addition, under current FCC policies, any
dedicated transmission service or facility that is used more than 10% of the
time for the purpose of interstate or foreign communication is subject to FCC
jurisdiction to the exclusion of any state regulation. Notwithstanding these
prohibitions and limitations, states regulate telecommunications services,
including through certification of providers of intrastate services (or
competitive local exchange carriers), regulation of intrastate rates and service
offerings, and other regulations and retain jurisdiction under the
Telecommunications Act to adopt, on a competitively neutral basis, regulations
necessary to preserve and advance universal service, protect the public safety
and welfare, ensure the continued quality of telecommunications services and
safeguard the rights of consumers. Accordingly, the degree of state involvement
in local telecommunications services may be substantial.
130
The state regulatory environment varies substantially from state to
state. At present, we do not anticipate that the regulatory requirements to
which we will be subject in the Northeast and Mid-Atlantic markets will have any
material adverse effect on our operations. An exception to this statement,
however, is obtaining approvals from the states of Vermont, Delaware, New York
and New Jersey for NEON to merge with Globix. Under current regulations, each of
these four states require that when a company has been granted authorization to
be a competitive local exchange carrier and its parent company will be sold or
merged with another company, the subsidiary must receive the approval of the
state before the sale or merger of the parent company. In any state that does
not grant the approval, a material adverse effect may result to NEON's business.
In some jurisdictions, our pricing flexibility for intrastate services may be
limited because of regulation, although our direct competitors will be subject
to similar restrictions. However, there can be no assurance that future
regulatory, judicial, or legislative action will not have a material adverse
effect on us.
LOCAL GOVERNMENT REGULATION
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments, such as
the City of Boston and the City of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services. Local
authorities affect the timing and costs associated with our use of public
rights-of-way. These regulations may have an adverse effect on our business.
EMPLOYEES
At June 30, 2004, we employed 134 people. Our employees are not
represented by any labor union and we consider our relationship with employees
to be satisfactory. In the normal course of business, we have contracted with
third parties to perform a portion of the engineering, routine maintenance and
construction supervision and construction activities associated with the
construction of our fiber optic network.
PROPERTIES
The NEON network and its component assets are the principal properties
currently owned by us or with respect to which we have indefeasible rights of
use and leases. We own substantially all of the communications equipment
currently utilized in our business and hold certain ownership interests in the
cable comprising the NEON network. Our installed fiber optic cable is laid along
the various rights-of-way held by us. Other fixed assets are located at various
leased locations in geographic areas we serve. Substantially all of our assets
are held by NEON Optica, Inc. and its subsidiaries. The principal asset of NEON
Communications, Inc. is all of the outstanding capital stock of NEON Optica,
Inc.
Our executive, administrative and sales offices are located at our
principal office in Westborough, Massachusetts. We lease this space
(approximately 25,000 square feet) pursuant to a 3-year lease that commenced in
November 2002.
SELECTED CONSOLIDATED FINANCIAL DATA OF NEON
The following tables set forth our selected consolidated financial data
as of and for the periods indicated. The selected consolidated financial data as
of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002
and 2003 have been derived from the audited Consolidated Financial Statements
and Notes to Consolidated Financial Statements of NEON included elsewhere in
this joint proxy statement/prospectus. The Consolidated Financial Statements as
of and for the years ended December 31, 2003 and 2002 were audited by BDO
Seidman, LLP, an independent registered public accounting firm, while the
Consolidated Financial Statements for the year ended December 31, 2001 were
audited by Arthur Andersen, LLP. The selected consolidated financial data as of
December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and
2000 were derived from audited Consolidated Financial Statements and Notes to
Consolidated Financial Statements of the Company not included herein which were
audited by Arthur Andersen LLP. The selected consolidated financial data as of
June 30, 2004 and for the six months ended June 30, 2003 and 2004 have been
derived from the unaudited Consolidated Financial Statements of the Company
included elsewhere in this registration statement and include, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of the financial position and results of
operations as of and for such periods. NEON's results of operations for the six
131
months ended June 30, 2004 may not be representative of its results of
operations for the full year. The following financial information is qualified
by reference to and should be read in conjunction with "NEON Management's
Discussion and Analysis of Financial Condition and Results of Operations"
beginning on page 134 of this joint proxy statement/prospectus and the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
included elsewhere in this registration statement.
As a result of the application of fresh start accounting under SOP No.
90-7 as of December 31, 2002, our financial results for the fiscal year ended
December 31, 2002, include two different bases of accounting and, accordingly,
the operating results and cash flows of the Successor Company and the
Predecessor Company have been separately disclosed. For the purposes of the
joint proxy statement/prospectus, references to the "Predecessor Company" are
references to NEON for periods prior to December 31, 2002 (the last of the
calendar month in which we emerged from bankruptcy) and references to the
"Successor Company" are references to NEON for periods as of and subsequent to
December 31, 2002. The Successor Company's financial statements are not
comparable to the Predecessor Company's financial statements.
SUCCESSOR SUCCESSOR COMPANY
PREDECESSOR COMPANY COMPANY YEAR SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED ENDED JUNE 30,
----------------------------------------------------------- DECEMBER 31, -----------------------------
1999 2000 2001 2002 2003 2003 2004
-------------- -------------- -------------- -------------- -------------- -------------- --------------
STATEMENT OF OPERATIONS
DATA(1):
Revenues ................. $ 5,665,276 $ 13,182,953 $ 26,550,645 $ 33,674,213 $ 41,588,308 $ 19,877,326 $ 23,562,000
Operating expenses(2) .... 19,895,829 38,908,620 121,120,199 58,757,599 46,409,366 22,340,952 26,791,863
Loss from operations ..... (14,230,553) (25,725,667) (94,569,554) (25,083,386) (4,821,058) (2,463,626) (3,229,863)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Other income (expense),
net .................... (13,299,215) (16,085,834) (22,111,846) (16,661,551) 554,390 298,931 163,653
============== ============== ============== ============== ============== ============== ==============
Loss before benefit from
income taxes,
extraordinary
item and cumulative
effect of change in
accounting principle ... (27,529,768) (41,811,501) (116,681,400) (41,744,937) (4,266,668) (2,164,695) (3,066,210)
Benefit from income
taxes (3) .............. -- -- -- -- 1,287,322 -- --
Extraordinary items(3) ... -- -- -- 26,513,191 1,930,984 -- --
Cumulative effect of
change in accounting
principle(4) and (5) ... -- (1,724,007) -- (72,311,911) -- -- --
Net loss ................. $ (27,529,768) $ (43,535,508) $(116,681,400) $ (87,543,657) $ (1,048,362) $ (2,164,695) $ (3,066,210)
============== ============== ============== ============== ============== ============== ==============
OTHER FINANCIAL DATA(1):
Cash (used in) provided by
operating activities.... $(17,970,325) $(9,760,691) $(10,488,858) $(8,590,553) $6,107,478 $2,335,832 $3,439,105
Cash used in investing
activities ............. (68,323,061) (16,660,455) (40,927,865) (6,512,860) (4,539,606) (3,669,373) (5,737,104)
Cash (used in) provided by
financing activities.... 33,323,983 42,302,915 43,360,680 21,564,285 (5,688,757) 1,893,237 (3,171)
Net increase (decrease)
in cash and cash
equivalents............. (52,969,403) 15,881,769 (8,056,043) 6,460,872 (4,120,885) 559,696 (2,301,173)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Capital expenditures...... 48,583,642 76,716,670 41,916,091 8,494,813 8,292,941 3,334,560 5,204,413
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Deficiency to fixed
charges(6) ............. 30,454,069 45,297,677 122,057,701 N/A N/A N/A N/A
132
PREDECESSOR COMPANY SUCCESSOR COMPANY AS OF SUCCESSOR COMPANY
AS OF DECEMBER 31, DECEMBER 31, AS OF JUNE 30,
-------------------------------------------- ----------------------------- -----------------------------
1999 2000 2001 2002 2003 2003 2004
-------------- -------------- -------------- -------------- -------------- -------------- --------------
BALANCE SHEET DATA(1):
Working capital
(deficiency)(7)......... $ 67,969,107 $ (132,478) $ (38,773,810) $ 9,725,480 $ 12,351,063 $ 8,893,033 $ 7,997,812
Total assets.............. 280,633,376 281,936,691 352,268,141 165,123,095 167,008,415 162,856,390 165,712,434
Long-term debt............ 180,000,000 180,000,000 205,417,760 -- -- -- --
Total liabilities(8)...... 213,166,586 246,014,818 292,295,716 30,876,349 31,487,912 30,711,887 33,257,013
Cumulative convertible
preferred stock ........ -- -- -- 12,441,028 13,978,739 13,185,444 14,817,463
stock
Stockholders' equity...... 67,466,790 35,921,873 59,972,425 121,805,718 121,541,764 118,959,059 117,637,958
(1) As discussed more fully in the Overview section of NEON Management's
Discussion and Analysis of Financial Condition and Results of
Operations and note 3 to the Consolidated Financial Statements,
during 2002, we completed a restructuring whereby we eliminated all
of our long-term debt and related accrued interest. In connection
with our restructuring, we adopted fresh start reporting effective
December 31, 2002. Therefore, the financial information for periods
ending after December 31, 2002 and balance sheet data as of December
31, 2002 and thereafter is generally not comparable to the financial
information for prior periods.
(2) Operating expenses for 2001 include a one time, non-cash charge of
$60,000,000 related to the write-down of subscription receivable, as
discussed more fully in note 5 of our notes to the Consolidated
Financial Statements.
(3) The benefit from income taxes in 2003 represents the income tax
benefit related to current operating losses used to offset the gain
on acquisition discussed in note 2 to the Consolidated Financial
Statements. The extraordinary item in 2002 represents the net impact
of the reorganization discussed in note 1 above. The extraordinary
item in 2003 represents a gain, net of taxes, on an acquisition
discussed more fully in note 2 to the Consolidated Financial
Statements.
(4) In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition, which we
adopted in the fourth quarter of 2000. Under the guidance of SAB No.
101, we recognize revenues from nonrecurring installation charges and
design, engineering and construction services ratably over the
multi-year network services terms to which the nonrecurring charges
ultimately relate. Prior to the issuance of SAB No. 101, revenues for
these nonrecurring services were generally recognized as services
were performed since we had no further obligations. We were required
to adopt this new accounting guidance as of January 1, 2000 and we
reported a cumulative effect of change in accounting principle of
approximately $1,724,000 related to nonrecurring revenues recognized
prior to January 1, 2000.
(5) In January 2002, we adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets." In
connection with the transition to the new accounting method, we
determined that the carrying value of our assets was impaired and we
recorded a one-time, non-cash charge of approximately $72,312,000 as
the cumulative effect of a change in accounting principle to
write-off all of our goodwill and other identifiable intangible
assets.
(6) For purposes of calculating the deficiency to fixed charges:
earnings consist of loss before income tax benefit, plus fixed
charges, excluding capitalized interest, and fixed charges consist of
interest expenses and capitalized interest, plus amortization of
deferred financing costs.
(7) Working capital for the year ended December 31, 2001 reflects the
entire balance of NEON Optica's 15% equipment note as a result of our
default on the note following our election not to make the December
31, 2001 payment under this note.
(8) Total liabilities includes deferred revenue for all periods
presented. For December 31, 2003 and June 30, 2004, total liabilities
also includes an asset retirement obligation related to the
acquisition of Columbia Transmission as discussed more fully in notes
2 and 4 to the Consolidated Financial Statements.
133
NEON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with the "Selected
Consolidated Financial Data of NEON" and the Consolidated Financial Statements
and Notes to Consolidated Financial Statements included elsewhere in this joint
proxy statement/prospectus. Certain information contained in the discussion and
analysis set forth below and elsewhere in this joint proxy statement/prospectus,
including information with respect to our plans and strategy for our business,
includes forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. These forward-looking statements are based on our
current expectations and assumptions about our company and our industry and
involve risks and uncertainties. In evaluating such statements, you should
specifically consider the various factors identified in this joint proxy
statement/prospectus that could cause results to differ materially from those
expressed in such forward-looking statements, including matters set forth in the
section entitled "Risk Factors" beginning on page 20 of this joint proxy
statement/prospectus. The results shown herein are not necessarily indicative of
the results to be expected in any future periods.
As discussed below, we adopted fresh-start reporting effective December
31, 2002. Therefore, financial information for the Successor Company is
generally not comparable to such information for the Predecessor Company.
OVERVIEW
We are a leading facilities-based communications provider, supplying
telecommunication services to communications companies and non carrier customers
in the twelve-state Northeast and mid-Atlantic market. NEON is an independent
provider of SONET and DWDM services to a wide range of communications carriers
including local, long distance and wireless telephone companies and Internet
service providers. We also provide services to non-carrier customers such as
financial institutions and colleges and universities.
Our network is a high bandwidth fiber optic network with proximity to
vital markets. We provide bandwidth to cities and towns beyond the "first tier"
markets of Boston, New York, Philadelphia, Newark, Baltimore and Washington, DC.
Our "second tier" and "third tier" markets include Portland, Portsmouth,
Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack,
Reston, Vienna and smaller communities along our network routes. We intend to
further expand our network in the Northeast and mid-Atlantic market on a success
basis to serve customer needs.
Our principal services include:
o SONET Private Line - Physically diverse looped SONET services at
bandwidth levels including DS-3, OC-3, OC-12 and OC-48.
o Wavelength (DWDM) - Flexible and scalable high capacity transport
at 2.5 Gbps and 10 Gbps, configured as either protected or
unprotected wavelengths.
o Central Office Access - Connections to major carrier networks
throughout the NEON footprint over NEON's fully protected SONET
network.
o Co-location - Secure, carrier class conditioned, and power ready
space, racks and cabinets strategically located to facilitate high
bandwidth connectivity to other POPs, carrier hotels, local switch
offices and numerous service providers.
o Network Control Center services - Includes monitoring of circuit
and node status, alarming when performance falls outside
established thresholds and producing management reports.
o Dark fiber - Fiber strands contained within a fiber optic cable
which has been laid but does not include optical transmission
equipment.
134
Our network service revenues include short-term leases of lit fiber and
longer-term leases of dark fiber at fixed-cost pricing over multi-year terms.
Other services revenues include co-location services at our facilities as well
as nonrecurring design, engineering, and construction services. We generally
receive fixed monthly payments from our customers for the leasing of capacity on
our network and the use of co-location facilities and recognize revenues ratably
over the term of the applicable customer agreement. Design, engineering, and
construction services revenues are non-refundable and are generally recognized
ratably over the term of the related network services arrangement (generally
ranging from one to twenty years).
Our costs consist primarily of cost of revenues; selling, general and
administrative expenses; depreciation and amortization; and, through mid-2002,
interest expense. Cost of revenues relates to lease payments for fiber optic
facilities, operations and maintenance costs, type II circuits, right of way
fees and property taxes. Selling, general and administrative expenses relate to
expenses in connection with sales, marketing, operations and administration,
including personnel, office facilities advertising and promotion, and management
and information technology. Depreciation and amortization expense is associated
with our network.
Since our inception, we have expanded our network and increased our
annual revenue every year. We funded a substantial portion of our network
expansion and growth through 2002 with proceeds from our public offering of debt
and equity in 1998 and convertible debt issuances and vendor financing in 2001.
Such funding amounted to approximately $300 million. However, as the result of a
prolonged downturn in the telecommunications market, we continued to experience
net losses and negative cash flow from operating activities through 2002. During
2002, we entered into discussions with a group of note holders representing
approximately two-thirds of our senior notes and holders of our 15% and 18%
notes regarding the restructuring of their debt. Such restructuring was
ultimately pursued in bankruptcy in order to bind all creditors to the terms of
the plan of reorganization. Accordingly, on June 25, 2002, we filed a voluntary
petition for relief under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). Our Plan of Reorganization was confirmed by the Bankruptcy Court on
November 13, 2002 and became effective on December 20, 2002. We recorded this
transaction as of December 31, 2002, which we refer to as the "effective date."
Under the plan of reorganization, on the effective date our senior notes and 15%
equipment note were exchanged for common stock in the Successor Company. Our 18%
subordinated convertible notes, and all of our outstanding shares of common
stock were cancelled. Former creditors collectively purchased approximately
$12.4 million of new Series A 12% Cumulative Convertible Preferred Stock. In our
restructuring, we eliminated all of our debt and accrued interest amounting to
approximately $250 million. As discussed more fully in note 3 to the
Consolidated Financial Statements, in connection with the restructuring, we
adopted fresh start reporting effective on December 31, 2002. Therefore, the
financial information presented after December 31, 2002 and the balance sheet
information as of December 31, 2002 and thereafter, is generally not comparable
to the financial information for prior periods. The presentation of financial
information of the "Predecessor Company" represents the Company's financial
information for the specific periods prior to the Company's adoption of fresh
start reporting.
On September 12, 2003, we acquired Columbia Transmission Communications
Corporation ("Columbia Transmission") from Columbia Energy Group, a wholly owned
subsidiary of NiSource, Inc. Columbia Transmission became a wholly owned
subsidiary of NEON and was renamed NEON Transcom, Inc. NEON Transcom owns and
operates a diverse dark fiber network that runs from New York City to
Washington, D.C. As discussed more fully in note 2 to the Consolidated Financial
Statements, we accounted for the acquisition as a purchase under Statement of
Financial Accounting Standards No. 141 and included the operating results of
Columbia Transmission in our Consolidated Statements of Operations since the
acquisition date.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of financial condition and results of
operations are based upon our Consolidated Financial Statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, the allowance for doubtful accounts and the
135
value of long-lived tangible and intangible assets. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our Consolidated
Financial Statements.
REVENUE RECOGNITION
The services we provide include short term leases of lit fiber (fixed
amounts of capacity on fiber optic transmission lines that use optronics
equipment installed by us) and longer term leases of dark fiber (fiber optic
transmission lines leased without optronics equipment installed by us) at fixed
cost pricing over multi year terms. Revenues from telecommunications network
services are recognized ratably over the term of the applicable lease agreements
with customers, which range from one to 20 years, provided there exists
persuasive evidence of an arrangement, the fee is fixed or determinable and
collectability of the related receivables is reasonably assured. Amounts billed
in advance of the service provided are recorded as deferred revenue. We also
lease space to customers at our co-location facilities. Other service revenues
include these co-location service revenues as well as revenues from nonrecurring
installation charges and design, engineering and construction services.
We recognize revenues from nonrecurring installation charges and
design, engineering and construction services ratably over the multi-year
network services terms to which the nonrecurring charges relate provided there
exists persuasive evidence of an arrangement, the fee is fixed or determinable
and collectability of the related receivables is reasonably assured.
We have contracts with customers that provide service-level
commitments, which may obligate us to provide credits against billings if
service is interrupted or does not meet the customer's operating parameters.
These amounts are accounted for as reductions of revenue. To date, credits
granted under these arrangements have not been material.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our customers to make required payments. We
specifically analyze accounts receivable and historical bad debts, customer
concentrations and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts. If the financial condition of our customers
were to deteriorate, resulting in an impairment of their ability to make
payments, additional allowances may be required.
LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS
We review our long-lived assets, including our property and equipment
and other intangibles, for impairment whenever events or changes in
circumstances indicate that the carrying value of the assets may not be
recoverable in accordance with Statement of Financial Accounting Standards
("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED
ASSETS. SFAS No. 144 requires that one accounting model be used for long-lived
assets to be disposed of by sale, whether previously held and used or newly
acquired. We believe that the carrying values of our long-lived assets are
realizable as of June 30, 2004.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject us to significant concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. Our cash and cash equivalents are invested in financial instruments
with high credit ratings. We do not require collateral or other securities to
support customer receivables; however, we perform regular credit evaluations of
our customers' financial condition and maintain allowances for potential credit
losses. Concentration of credit risk with respect to accounts receivable is
limited to customers to whom we make significant sales.
136
For the years ended December 31, 2001 and 2003, one customer accounted
for 10% of net revenues. For the year ended December 31, 2002 and the six months
ended June 30, 2004, no customer accounted for more than 10% of net revenues. As
of December 31, 2002 and 2003, no customers had balances in excess of 10% of
accounts receivable. As of June 30, 2004, one customer represented approximately
41% of accounts receivable. This customer is currently undergoing bankruptcy
reorganization and has agreed to pay the accounts receivable balance in full.
We have no significant off-balance-sheet or other concentration of
credit risks at December 31, 2002 or 2003 or June 30, 2004.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2003
Revenues increased by $3.7 million, or 18.5%, to $23.6 million for the
six months ended June 30, 2004 compared to $19.9 million for the six months
ended June 30, 2003. Revenues in 2004 were generated by recurring lease services
of $21.1 million and other service revenues of $2.5 million which consist of
co-location revenues and amortization of nonrecurring charges for design,
engineering, construction and related services. The increase in revenues for
2004 related primarily to growth in booking and provisioning customer orders for
network services. For the six months ended June 30, 2004, revenues consisted of
lit services (76%), dark services (13%) and other services (11%) compared to
79%, 13% and 8%, respectively, for the six months ended June 30, 2003.
Cost of revenues was $13.0 million for the six months ended June 30,
2004, an increase of 41.9% as compared to $9.2 million for the six months ended
June 30, 2003. The increase in cost of revenues is due to operating costs for
Columbia Transmission which was acquired in September 2003 to expand our network
in the mid-Atlantic market as well as the overall growth in our business volume
during 2004. As a percentage of revenues, cost of revenues increased to 55.1%
for the six months ended June 30, 2004, compared to 46.1% for the six months
ended June 30, 2003. The increase in cost of revenues as a percentage of
revenues reflects the Columbia Transmission acquisition offset to some extent by
revenue growth and improving network utilization in the Northeast.
Selling, general and administrative expenses ("SG&A") decreased 1.7% to
$8.7 million for the six months ended June 30, 2004, compared to $8.8 million
for the six months ended June 30, 2003. The decrease in SG&A expenses is due to
overall cost management. As a percentage of revenues, SG&A expenses decreased to
36.8% for the six months ended June 30, 2004, compared to 44.3% for the six
months ended June 30, 2003. The improvement in SG&A expenses as a percentage of
revenues reflects the growth in our revenues and our focus on operating
efficiencies and overall cost management.
Depreciation and amortization expense increased 17.5% to $5.1 million
for the six months ended June 30, 2004, compared to $4.4 million for the six
months ended June 30, 2003. This increase reflects the expansion of our
communications network in our Northeast and mid-Atlantic service areas.
Other income decreased to $0.2 million for the six months ended June
30, 2004 compared to $0.3 million for the six months ended June 30, 2003. This
decrease was due primarily to lower interest rates and lower cash balances
during 2004 compared to 2003.
For the six months ended June 30, 2004, we recorded a net loss of $3.1
million compared to a net loss of $2.2 million for the comparable period in
2003. The increase in our net loss for 2004 is due primarily to costs related to
the operation of Columbia Transmission which was expected to be dilutive to our
results for approximately 24 months.
YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002
Revenues increased by $7.9 million, or 23.5%, to $41.6 million for the
year ended December 31, 2003 compared to $33.7 million for the year ended
December 31, 2002. Revenues in 2003 were generated by recurring lease services
of $37.5 million and other service revenues of $4.1 million. The primary reason
for the increase in revenues was the growth in booking and provisioning of
customer orders for additional network services. For 2003, revenues consisted of
lit services (78%), dark services (13%) and other services (9%) compared to 72%,
19% and 9%, respectively for 2002.
137
Cost of revenues totaled $20.9 million for the year ended December 31,
2003, an increase of 18.1% as compared to the $17.7 million for the year ended
December 31, 2002. The increase in cost of revenues reflects the overall growth
in our business volume during 2003 and costs related to the operation of
Columbia Transmission. As a percentage of revenues, cost of revenues decreased
to 50.2% for the year ended December 31, 2003, compared to 52.5% for 2002. The
improvement in cost of revenues as a percentage of revenues reflects our revenue
growth and improving network utilization offset to some extent by costs related
to Columbia Transmission.
Selling, general and administrative expenses decreased 6.9% to $16.5
million for the year ended December 31, 2003 compared to $17.8 million for the
year ended December 31, 2002. The decrease in SG&A expenses reflects the impact
of headcount reductions in 2002 and January 2003, cost reduction activities
undertaken during our restructuring in 2002 and overall cost management during
the year. As a percentage of revenues, SG&A expenses decreased to 39.7% for the
year ended December 31, 2003, compared to 52.7% for 2002. The improvement in
SG&A expenses as a percentage of revenues reflects the factors discussed above.
Depreciation and amortization expense decreased 61.4% to $9.0 million
for the year ended December 31, 2003, compared to $23.3 million for the year
ended December 31, 2002. This decrease reflects the adoption of fresh start
reporting as of December 31, 2002 in connection with our restructuring discussed
above and the related revaluation of our assets to fair value on such date.
Interest and other income increased 27.6% to $0.6 million for the year
ended December 31, 2003 compared to $0.5 million for the year ended December 31,
2002. This increase was due primarily to higher cash balances during 2003
compared to 2002. This increase was offset to some extent by the decline in
interest rates during 2003.
Interest and other expense was reduced to $15,000 for the year ended
December 31, 2003 compared to $17.1 million for the year ended December 31, 2002
as the result of our restructuring in 2002 and the related elimination of debt.
During 2002, interest expense related to NEON Optica's $180 million 12 3/4%
senior notes Due 2008, 18% subordinated convertible notes and 15% equipment note
payable.
For the year ended December 31, 2003 we recorded a net loss of $1.0
million compared to a net loss of $87.5 million in 2002. This improvement
reflects the improved operating results discussed above, the restructuring and
related elimination of debt accomplished in 2002 and a gain on the acquisition
of Columbia Transmission. Our restructuring and acquisition are discussed more
fully in the Overview section above and in notes 3 and 2, respectively, to the
Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001
Revenues increased by $7.1 million, or 26.8%, to $33.7 million for the
year ended December 31, 2002 compared to $26.6 million for the year ended
December 31, 2001. Revenues in 2002 were generated by recurring lease services
of $30.5 million and other service revenues of $3.2 million. The primary reason
for the increase in revenues was the growth in demand for our lit services
during 2002. For 2002 revenues consisted of lit services (72%), dark services
(19%) and other services (9%) compared to 69%, 18% and 13%, respectively for
2001.
Cost of revenues for the year ended December 31, 2002 was $17.7
million, an increase of 3.4% as compared to the $17.1 million for the year ended
December 31, 2001. The increase in cost of revenues reflects the overall growth
in our business volume during 2002. As a percentage of revenues, cost of
revenues improved to 52.5% from 64.4% in 2001 due primarily to improved network
utilization.
Selling, general and administrative expenses decreased 29.1% to $17.8
million for the year ended December 31, 2002 compared to $25.0 million for the
year ended December 31, 2001, reflecting headcount reductions during 2001 and
2002 and savings related to our restructuring efforts during 2002. As a
percentage of revenues, SG&A expenses decreased to 52.7% of revenues in 2002
compared to 94.3% in 2001. This improvement reflects the growth in our revenues
as well as our cost reduction activities during 2001 and 2002.
Depreciation and amortization expense increased 22.8% to $23.3 million
for the year ended December 31, 2002, compared to $19.0 million for the year
ended December 31, 2001. This increase resulted primarily from increased capital
expenditures related to the expansion of our communications network in our
Northeast and mid-Atlantic service areas.
138
Interest and other income decreased 86.6% to $0.5 million for the year
ended December 31, 2002 compared to $3.3 million for the year ended December 31,
2001. This decrease was due primarily to lower cash and investment balances for
2002 compared to 2001.
Interest and other expense decreased in 2002 as the result of our
restructuring activities whereby we stopped accruing interest expense beginning
J uly2002.
For the year ended December 31, 2002, we recorded a net loss of $87.5
million compared to a net loss of $116.7 million for the year ended December 31,
2001. The decrease in net loss is primarily attributable to the gain from our
restructuring as discussed more fully in note 3 to the Consolidated Financial
Statements, and the improved results from operations discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Through 2001, the design, construction and development of our network
and the purchase of telecommunications equipment required substantial capital
investment. We funded a substantial portion of these expenditures through our
public offerings of equity and debt completed on August 5, 1998, which resulted
in net proceeds to us of approximately $218 million (after deducting expenses),
of which $72 million was placed in escrow to cover the first seven semi annual
interest payments on our 12 3/4% senior notes due 2008, as well as additional
convertible debt issuances totaling $26.5 million in 2001 and vendor financing
of approximately $46.5 million.
As discussed in the Overview section above and in note 3 to the
Consolidated Financial Statements, during 2002, we completed a restructuring
pursuant to Chapter 11 of the Bankruptcy Code which eliminated all of our debt
and related accrued interest. In connection with our restructuring, we received
approximately $12.4 million from the issuance of Series A 12% Cumulative
Convertible Preferred Stock to fund future growth. Since 2002 we have focused
our capital spending primarily on the purchase of telecommunications equipment
and deployment of network facilities to support customer demands. We have funded
our activities from available cash and cash from operations. We expect to
continue to experience negative cash flow after investing activities for the
foreseeable future. Accordingly, our ability to continue to grow our network and
to support related customer demands will be limited by our current capital
resources and cash provided from operations until sufficient cash flow after
investing activities is generated.
Cash provided by operating activities was $3.4 million for the six
months ended June 30, 2004 compared to $2.3 million for the same period in 2003.
Cash provided by operating activities for the year ended December 31, 2003 was
$6.1 million compared to cash used in operating activities of $8.6 million for
the year 2002. The improvement in cash provided by operating activities reflects
our improved operating results and our focus on working capital management. Net
cash provided by operating activities was used primarily to fund investing
activities in 2003 and 2004.
Net cash used in investing activities was $5.7 million for the six
months ended June 30, 2004 and $4.5 million and $6.5 million for the years ended
December 31, 2003 and 2002, respectively. Cash used in investing activities
consisted primarily of capital expenditures for the purchase of
telecommunications equipment and network development to expand our
communications network in the Northeast and mid Atlantic regions to support
customer demands.
Net cash provided by (used in) financing activities was not material
(approximately $3,000) for the six months ended June 30, 2004. For the years
ended December 31, 2003 and 2002 financing activities used $5.7 million and
provided $21.6 million, respectively. In 2003 cash was used primarily to
increase short-term restricted investments. In 2002 cash was provided primarily
from the issuance of preferred stock and a decrease in restricted investments.
At June 30, 2004, we had unrestricted cash and cash equivalents of
$12.6 million compared to $14.9 million at December 31, 2003. Our ability to
generate cash from operations and achieve profitability is dependent upon our
ability to grow our revenue and to continue to control operating costs and
capital expenditures. We are dependent upon our cash on hand and cash generated
from operations to support our capital requirements and, as discussed above, we
expect to experience negative cash flow after investing activities for the
foreseeable future. We believe that our existing cash and cash equivalents in
139
addition to our cash from operations will be sufficient to fund our operations
and capital expenditures for at least the next 12 months. However, there can be
no assurance that we will be successful in implementing our business plan or
that changes in assumptions or conditions will not adversely affect our
financial condition or liquidity position.
If we elect to pursue a material strategic acquisition or expansion
opportunities, our cash needs may be increased substantially, both to finance
any such acquisitions and to finance development efforts in new markets.
COMMITMENTS
As of December 31, 2003, we had contractual cash obligations as follows
($ in 000's):
PAYMENTS DUE BY PERIOD
FISCAL 2006 AFTER FISCAL
CONTRACTUAL OBLIGATIONS TOTAL FISCAL 2004 FISCAL 2005 THROUGH 2008 2008
--------------------------------------- ----------- ----------- ----------- ------------ -----------
Operating leases ..................... $ 26,547 $ 2,676 $ 2,497 $ 6,084 $ 15,290
Fiber leases ......................... 181,533 7,917 8,825 26,523 138,268
----------- ----------- ----------- ----------- -----------
Total contractual cash obligations ... $ 208,080 $ 10,593 $ 11,322 $ 32,607 $ 153,558
=========== =========== =========== =========== ===========
Other than changes in the normal course of business, there were no
material changes in contractual cash obligations through June 30, 2004.
As discussed more fully in note 2 to the Consolidated Financial
Statements, we have recorded an other long-term liability of approximately $1.8
million for the asset retirement obligation related to the acquisition of
Columbia Transmission.
We do not maintain any off-balance sheet financing arrangements.
We have employment agreements with two officers. These agreements
provide for employment and related compensation and restrict the individuals
from competing, as defined, with us during the terms of their agreements. These
agreements also provide for stock options under the 2002 Plan and for severance
payments upon termination under circumstances defined in these agreements.
INCOME TAXES
We are in an accumulated loss position for both financial and income
tax reporting purposes. We have income tax loss carry forwards to offset future
taxable income, if any, of approximately $79 million at December 31, 2003. These
income tax loss carry forwards expire through 2023 and are subject to review and
possible adjustment by the Internal Revenue Service. As the result of our
bankruptcy restructuring in 2002 we believe the use of approximately $65 million
of our tax loss carry forwards is limited to approximately $6 million per year.
In addition, the occurrence of certain events, including significant changes in
ownership interests, may limit the amount of net operating loss carry forwards
available for use in any given year. A full valuation allowance has been
recorded in the Consolidated Financial Statements to offset these carry forwards
because their future realizability is uncertain.
TRANSACTIONS WITH RELATED PARTIES
We have agreements with Northeast Utilities which were initially
entered into in 1994 and 1995 and cover the provision of rights-of-way along
electric utility towers and inside urban electric utility ducts. Pursuant to
these agreements, we acquired indefeasible rights-of-use in fiber optic
filaments along Northeast Utilities' rights-of-way and we pay Northeast
Utilities mileage-based annual fees and a percentage of the gross revenues that
we generate on the portion of our network located on Northeast Utilities'
rights-of-way, as such gross revenues exceed predefined limits specified in the
agreements with Northeast Utilities. To date, none of the limits has been
exceeded. Northeast Utilities has waived a portion of our right-of-way fees on
140
certain route segments through September 2004. Under the agreements, 12 fibers
on designated route segments of our network in Northeast Utilities service
territory are owned by and have been set aside for Northeast Utilities use.
After June 30, 2005, Northeast Utilities may lease the 12 fibers to third
parties and is free to use these fibers to compete with us. At December 31, 2003
and 2002, approximately $1.4 million and $1.8 million associated with the
construction of the 12 fibers are included in prepaid rights-of-way fees in the
consolidated balance sheet, respectively. In accordance with the adoption of
fresh start reporting, we revalued the prepaid right-of-way fees at December 31,
2002 based upon an independent appraisal. Such fees are being recognized as a
cost of revenues ratably over 5 years, the estimated remaining useful life.
In connection with our restructuring, Mode 1, an affiliate of Northeast
Utilities, agreed to purchase up to $3.5 million of common stock, at the market
price on the date of purchase, to cover the payment of future amounts due to
Northeast Utilities through December 31, 2004. During 2003, Mode 1 purchased
approximately 236,000 shares of the Company's common stock for approximately
$1.4 million and will purchase approximately 342,000 shares of the Company's
common stock in 2004 for approximately $2.1 million. In accordance with our
agreement, we used the proceeds from such sales to pay certain 2003 and 2004
operating costs due to Northeast Utilities.
We paid Northeast Utilities approximately $428,000, $26,000 and $1.4
million (proceeds from stock sale) in 2001, 2002 and 2003, respectively, and
approximately $1.4 million was included in other long-term liabilities at
December 31, 2002 and accrued expenses at December 31, 2003.
We paid approximately $0.2 million to Central Maine Power, a related
party prior to the effective date of our restructuring, for right-of-way fees
for the year ended December 31, 2001. We also paid Central Maine Power and/or
Union Water and Power, an affiliate of Central Maine Power, approximately $1.0
million for materials, labor and other contractor charges for the year ended
December 31, 2001.
We believe that the fees payable under the agreements with related
parties are reasonable and are comparable to those which would have been
negotiated on an arm's-length basis with an unaffiliated third party.
We have employment agreements with two officers. These agreements
provide for employment and related compensation and restrict the individuals
from competing, as defined, with the company during the terms of their
agreements. These agreements also provide for stock options under our 2002 Stock
Option Plan and for severance payments upon termination under circumstances
defined in these agreements.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity." SFAS
No. 150 establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances), because that instrument
represents an obligation. Many of those instruments were previously classified
as equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatory
redeemable financial instruments of nonpublic entities, which are subject to the
provisions for the first fiscal period beginning afte rDecember15,2003.The
adoption of SFAS No. 150 did not have a material effect on our financial
position, results of operations or cash flows.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires that the criteria for consolidation be based
upon analysis of risks and rewards, not control, and represents a significant
and complex modification of previous accounting principles. FIN 46 is effective
for consolidated financial statements issued after June 30, 2003. We do not
believe the adoption of FIN 46 will have a material effect on our consolidated
results of operations, financial position or cash flows.
In December 2003, the Securities and Exchange Commission published
Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104
was effective upon issuance and supersedes SAB No. 101, "Revenue Recognition in
Financial Statements," and rescinds the accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements that was superseded by EITF
Issue No. 00-21. The adoption of SAB No. 104 did not have a material effect on
our financial position, results of operations, or cash flows.
141
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
At June 30, 2004, cash equivalents and short-term restricted
investments consist of investments in money market accounts. We do not have
operations subject to risks of foreign currency fluctuations, nor do we
currently use derivative financial instruments in our operations or investment
portfolio. We also do not have any indebtedness.
SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND MORE THAN FIVE PERCENT
STOCKHOLDERS OF NEON
The following table and the accompanying notes set forth certain
information, as of August 1, 2004 (except as set forth below), concerning the
beneficial ownership of NEON common stock and NEON convertible preferred stock
by: (1) each person who is known by NEON to beneficially own more than five
percent of NEON common stock and NEON convertible preferred stock, (2) each
director of NEON, (3) each executive officer of NEON and (4) all directors and
executive officers as a group.
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES OF NEON COMMON PERCENT OF CLASS SHARES OF NEON PERCENT OF CLASS
STOCK (1) OF COMMON STOCK CONVERTIBLE OF CONVERTIBLE
PREFERRED STOCK (1) PREFERRED STOCK
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Citadel Investment Group LLC 2,000,000 12.4% - -
131 South Dearborn
Chicago, IL 60603 (2)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
LC Capital Master Fund Ltd. 2,538,686 14.9% 171,476 15.6%
Lampe Conway & Co. LLC
730 Fifth Avenue, Ste. 1002
New York, NY 10019 (3)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Loeb Partners Corp. 2,456,326 15.0% 44,444 4.0%
61 Broadway
New York, NY 10006 (4)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Greywolf Capital Management LP 857,955 5.3% - -
411 West Putnam Avenue
Greenwich, CT 06830 (5)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
MacKay Shields LLC 7,524,804 46.5% 538,220 48.8%
9 W 57th Street, 73rd FL
New York, NY 10019 (6)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Mode 1 Communications, Inc. 2,136,550 13.2% - -
c/o Northeast Utilities Service Co.
107 Selden Street
Berlin, CT 06037(7)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
The Singer Trusts 2,081,043 11.8% 303,044 27.5%
560 Sylvan Avenue
Englewood Cliffs, NJ 07632 (8)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
JGD Management Corp. 904,333 5.6% - -
390 Park Ave., 15th Floor
New York, New York 10022 (9)
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Stephen E. Courter (10) 450,000 2.7% - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
William A. Marshall (11) 325,000 2.0% - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Jeffrey C. MacHaffie (12) 185,000 1.1% - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Kurt J. Van Wagenen (13) 275,000 1.7%
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Peter D. Aquino(14) 169,954 1.0%
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Wayne Barr, Jr. (15) 169,954 1.0% - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Jose A. Cecin, Jr. (16) 2,407 * - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
John H. Forsgren (17) 2,138,167 13.3% - -
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Robert M. Grubin (18) 2,456,326 15.0% 44,444 4.0%
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
Steven G. Lampe (19) 2,538,686 14.9% 171,476 15.6%
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
NEON directors and executive
officers as a group 8,710,494 46.3% 215,920 19.6%
----------------------------------------- ----------------------- ------------------- --------------------- ------------------
142
(*) Less than 1%.
(1) The information regarding beneficial ownership of NEON common stock
and NEON convertible preferred stock has been presented in accordance
with the rules of the Securities and Exchange Commission. Under these
rules, a person may be deemed to beneficially own any shares as to
which such person, directly or indirectly, has or shares voting power
or investment power and also any shares of our common stock as to
which such person has the right to acquire voting or investment power
within 60 days through the exercise of any stock option or other
right. The percentage of beneficial ownership as to any person as of
a particular date is calculated by dividing (a) (i) the number of
shares beneficially owned by such person plus (ii) the number of
shares as to which such person has the right to acquire voting or
investment power within 60 days by (b) the total number of shares
outstanding as of such date, plus any shares that such person has the
right to acquire from NEON within 60 days. For purposes of
calculating the beneficial ownership percentages set forth above, the
total number of shares of our common stock deemed to be outstanding
as of August 1, 2004 was 16,117,799 (including 341,936 shares that
will be issued prior to consummation of the merger to Mode 1
Communications). As used in this joint proxy statement/prospectus,
"voting power" is the power to vote or direct the voting of shares
and "investment power" is the power to dispose or direct the
disposition of shares. Except as noted, each stockholder listed has
sole voting and investment power with respect to the shares shown as
being beneficially owned by such stockholder.
(2) According to information provided to NEON, Citadel Investment Group
LLC indirectly beneficially owns 600,000 shares of NEON common stock
through Citadel Credit Trading Ltd. and 1,400,000 shares of NEON
common stock through Citadel Equity Fund Ltd. These shares are held
through a prime brokerage account.
(3) LC Capital Master Fund Ltd. directly beneficially owns 1,673,543
shares of NEON common stock and 857,689 Class A warrants and 171,476
shares of NEON convertible preferred stock. LC Capital also
indirectly beneficially owns 7,454 shares of NEON common stock
pursuant to stock options granted to Mr. Lampe, an affiliate of LC
Capital, that will accelerate, become fully vested and exercisable
immediately prior to a change of control of NEON, including a
transaction such as the merger.
(4) Loeb Partners Corp. directly beneficially owns 2,226,570 shares of
NEON common stock and 222,302 Class A warrants and 44,444 shares of
NEON convertible preferred stock. Loeb Partners also indirectly
beneficially owns 7,454 shares of NEON common stock pursuant to stock
options granted to Mr. Grubin, an affiliate of Loeb Partners Corp.,
that will accelerate, become fully vested and exercisable immediately
prior to a change of control of NEON, including a transaction such as
the merger.
(5) Greywolf Capital Management LP indirectly beneficially owns 857,955
shares of NEON common stock through Greywolf Capital Partners II LP
and Greywolf Capital Overseas Fund.
(6) This information is as of August 27, 2004 and based on information
provided to NEON by MacKay Shields LLC, the pecuniary interests in
these shares are held by a number of clients for whom MacKay Shields
LLC is the discretionary investment advisor or subadvisor. MacKay
Shields LLC has voting and investment control over these shares and,
accordingly, is deemed to beneficially own these shares. These
beneficially owned securities include 4,832,750 shares of NEON common
stock, 2,692,054 Class A warrants and 538,220 shares of NEON
convertible preferred stock.
(7) Mode 1 Communications, Inc. directly beneficially owns 2,129,096
shares of NEON common stock (including 341,936 shares that NEON
intends to issue to Mode 1 prior to consummation of the merger). Mode
1 also indirectly beneficially owns 7,454 shares of NEON common stock
pursuant to stock options granted to Mr. Forsgren, and subsequently
assigned to Northeast Utilities, the parent of Mode 1 Communications,
that will accelerate, become fully vested and exercisable immediately
prior to a change of control of NEON, including a transaction such as
the merger.
143
(8) The Singer Trusts indirectly beneficially own 565,275 shares of NEON
common stock through the Singer Children's Management Trust as record
holder, 1,296,560 Class A warrants through the Singer Children's
Management Trust as record holder, 219,208 Class A warrants through
the Second Gary & Karen Singer Children's Trust as record holder,
259,218 shares of NEON convertible preferred stock through the Singer
Children's Management Trust as record holder and 43,826 shares of
NEON convertible preferred stock through the Second Gary & Karen
Singer Children's Trust as record holder.
(9) According to information provided to NEON, JGD Management Corp.
indirectly owns 820,333 shares of NEON common stock through York
Credit Opportunities Fund, L.P. and 84,000 shares of NEON common
stock through York Global Value Partners, L.P.
(10) Mr. Courter, an officer and director of NEON, directly beneficially
owns these shares pursuant to stock options that will accelerate,
become fully vested and exercisable immediately prior to a change of
control of NEON, including a transaction such as the merger.
(11) Mr. Marshall, an officer of NEON, directly beneficially owns these
shares pursuant to stock options that will accelerate, become fully
vested and exercisable immediately prior to a change of control of
NEON, including a transaction such as the merger.
(12) Mr. MacHaffie, an officer of NEON, directly beneficially owns these
shares pursuant to stock options that will accelerate, become fully
vested and exercisable immediately prior to a change of control of
NEON, including a transaction such as the merger.
(13) Mr. Van Wagenen, an officer of NEON, directly beneficially owns these
shares pursuant to stock options that will accelerate, become fully
vested and exercisable immediately prior to a change of control of
NEON, including a transaction such as the merger.
(14) Mr. Aquino, a director of NEON, directly beneficially owns 7,454
shares of NEON common stock pursuant to stock options that will
accelerate, become fully vested and exercisable immediately prior to
a change of control of NEON, including a transaction such as the
merger. Additionally, as of August 1, 2004 he indirectly beneficially
owns 162,500 CTA warrants that are directly beneficially owned by PDA
Group, LLC, of which Mr. Aquino is an executive officer.
(15) Mr. Barr, a director of NEON, directly beneficially owns 7,454 shares
of NEON common stock pursuant to stock options that will accelerate,
become fully vested and exercisable immediately prior to a change of
control of NEON, including a transaction such as the merger.
Additionally, he indirectly beneficially owns 162,500 CTA warrants
that are directly beneficially owned by Rita Barr, Mr. Barr's spouse.
(16) Mr. Cecin, a director of NEON, directly beneficially owns these
shares pursuant to stock options that will accelerate, become fully
vested and exercisable immediately prior to a change of control of
NEON, including a transaction such as the merger.
(17) Mr. Forsgren, a director of NEON, is affiliated with Mode 1
Communications, which directly beneficially owns 2,136,550 shares of
NEON common stock (including 341,936 shares that NEON intends to
issue to Mode 1 prior to consummation of the merger and 7,454 shares
of NEON common stock pursuant to stock options granted to Mr.
Forsgren and subsequently assigned to Northeast Utilities, the parent
of Mode 1). Mr. Forsgren directly beneficially owns 1,617 shares of
NEON stock. According to information provided to NEON, Mr. Forsgren
has disclaimed beneficial ownership of all shares of NEON common
stock except for 1,617 shares.
(18) Mr. Grubin is affiliated with Loeb Partners, which directly
beneficially owns 2,226,570 shares of NEON common stock, 222,302
Class A warrants, and 44,444 shares of NEON convertible preferred
stock. Mr. Grubin directly beneficially owns 7,454 options for NEON
common stock that will accelerate, become fully vested and
exercisable immediately prior to a change of control of NEON,
including a transaction such as the merger. Mr. Grubin has voting and
investment control over these shares and, consequently, is deemed to
beneficially own these shares.
144
(19) Mr. Lampe is affiliated with LC Capital Master Fund Ltd., which
directly beneficially owns 1,673,543 shares of NEON common stock,
857,689 Class A warrants and 171,476 shares of NEON convertible
preferred stock. Mr. Lampe directly beneficially owns 7,454 options
for NEON common stock that will accelerate, become fully vested and
exercisable immediately prior to a change of control of NEON,
including a transaction such as the merger. Mr. Lampe has voting and
investment control over these shares and, consequently, is deemed to
beneficially own these shares.
MANAGEMENT OF GLOBIX AFTER MERGER
Set forth below is the name, age as of September 30, 2004, and a brief
account of the business experience of each person who will be a director or
officer of Globix after the merger.
Name Age Position
---- --- --------
Peter K. Stevenson 44 President, Chief Executive Officer and Director
Peter L. Herzig 41 Vice Chairman of the Board of Directors
Steven Lampe 45 Director
Steven G. Singer 43 Chairman of the Board of Directors
Raymond L. Steele 69 Director
Wayne Barr, Jr. (1) 40 Director
Jose A. Cecin, Jr.(1) 41 Director
Stephen E. Courter(1) 50 President and Chief Executive Officer of NEON, and Director
John Forsgren(1) 58 Director
(1) Such person is currently an officer or director of NEON and will assume
the stated position with Globix upon the effectiveness of the merger.
OUR BOARD OF DIRECTORS AND EXECUTIVE OFFICERS
Effective upon the merger, the number of directors on our board of
directors will be nine. Our directors are elected at each annual stockholders'
meeting, and serve until the next annual stockholders' meeting or the election
and qualification of their respective successors. Four of the current members of
our board of directors (Messrs. Stevenson, Herzig, Singer and Lampe) were
selected in accordance with the terms of the plan of reorganization under
Chapter 11 of the U.S. Bankruptcy Code approved April 8, 2002 to serve as the
directors of Globix following the effective date of the plan. Mr. Steele was
appointed to our board of directors in June 2003. Messrs. Barr, Cecin, Courter
and Forsgren are being appointed to our board of directors in accordance with
the terms of the merger agreement.
Peter K. Stevenson joined Globix as president and chief executive
officer in April 2002 and also serves as a member of our board of directors. Mr.
Stevenson has over 20 years of experience in the communications industry. Prior
to joining Globix, Mr. Stevenson was a senior consultant to Communication
Technology Advisors LLC, from January 2002 through April 2002, a restructuring
boutique focusing on distressed telecommunications companies through the
provision of strategic planning advice, restructuring assistance and overall
business advice. CTA currently provides Globix with a wide array of business
advisory services. Mr. Stevenson is a founder of Net One Group, Inc., a northern
Virginia based telecom investment and management company focused on developing
and operating next generation broadband services networks. From January 2001 to
January 2002, Mr. Stevenson served as a strategic advisor to the board of
directors of Net Uno, one of the largest cable television, CLEC and ISP carriers
in Venezuela. From January 1998 to December 2000, Mr. Stevenson was a corporate
officer of Net Uno and president and chief operating officer of Net Uno's Data
and Telephone Group. From February 1996 to June 1998, Mr. Stevenson was partner
in, and vice president for, Wave International, an international
telecommunications investment and management firm focused on developing
companies in international markets. Mr. Stevenson graduated with a Bachelor of
Science degree from Saint Francis University in Loretto, Pennsylvania.
Peter L. Herzig has served as vice chairman of our board of directors
since May 2002. From August 2001 through April 2002, Mr. Herzig served as our
chief executive officer. Mr. Herzig joined Globix in October 2000, served as
chief operating officer from March 2001 through August 2001 and served as senior
vice president and chief operating officer-Application Services Group from
October 2000 through March 2001. Prior to joining Globix, Mr. Herzig served as
145
executive vice president and chief financial officer at iWon.com from March 2000
to October 2000, where his responsibilities included managing iWon's
relationship with Globix. Prior to joining iWon.com, Mr. Herzig was a senior
managing director and head of global capital markets services for Bear, Stearns
& Co. Inc. from February 1998 through March 2000, where he provided strategic
capital-structure advisory services to a broad spectrum of domestic and
international clients, including many new media technology companies
experiencing growth with the expansion of the Internet. Prior to Bear Stearns,
Mr. Herzig worked at Goldman Sachs & Co. from July 1989 through February 1998.
Mr. Herzig has a Bachelor of Arts degree from Dartmouth College and a Masters in
Business Administration degree from Columbia University.
Steven Lampe has been a director of Globix since April 2002. Mr. Lampe
is a managing member of Lampe, Conway & Co. LLC, an investment management
company which he co-founded in June 1999. Prior to his work at Lampe, Conway,
Mr. Lampe managed Lone Star Securities Fund, a distressed investment fund, from
June 1997 through June 1999. Prior to his employment with Lone Star, Mr. Lampe
worked at Smith Management, a private investment company, from February 1988
through June 1997. Mr. Lampe has a Bachelor of Arts degree from Middlebury
College and a Masters in Business Administration degree from Harvard University.
Steven G. Singer has been a director of Globix since April 2002.
Effective December 15, 2002 Mr. Singer became chairman of our board of
directors. Mr. Singer is the chairman and chief executive officer of American
Banknote Corporation, a publicly-traded corporation and 200 year-old global
security printer of documents of inherent value, including currency, passports,
credit cards, stock and bond certificates, and related products and services. He
also serves as the non-executive chairman of the board of Motient Corporation, a
publicly traded corporation, and as the Chapter 7 Trustee of American Pad &
Paper Company. From 1993 through November 2000, Mr. Singer was the executive
vice president and chief operating officer of Romulus Holdings, Inc., a
family-owned investment vehicle, and, from 1994 through the present, has served
as the chairman of Pure 1 Systems, a manufacturer and distributor of water
treatment products. Mr. Singer has a Bachelor of Arts degree, summa cum laude,
from the University of Pennsylvania and a Juris Doctor degree from the Harvard
Law School.
Raymond L. Steele has been a director of Globix since June 2003. Mr.
Steele is a retired businessman. In addition to our company, Mr. Steele is a
member of the board of directors of Dualstar Technologies Corporation and
American Banknote Corporation. From August 1997 until October 2000, Mr. Steele
served as a board member of Video Services Corp. Prior to his retirement, Mr.
Steele held various senior positions such as executive vice president of
Pacholder Associates, Inc. (from August 1990 until September 1993), executive
advisor at the Nickert Group (from 1989 through 1990), and vice president, trust
officer and chief investment officer of the Provident Bank (from 1984 through
1988).
Stephen E. Courter, NEON's chairman of the board of directors,
president and chief executive officer, joined NEON in December 2000 in his
current position. Mr. Courter held his current position with NEON when the
company filed for bankruptcy in June, 2002. Prior to joining NEON, Mr. Courter
was managing director and chief executive officer of Energis N.V., a
facilities-based network service provider in Holland from June 1998 to December
2000. From December, 1995 to June, 1998, Mr. Courter was vice president of
finance and assistant general manager of GlobalOne, a joint venture between
Sprint, Deutsche Telecom and France Telecom. Prior to joining GlobalOne, from
August, 1987 to November, 1995, he served in various positions of increasing
responsibility at Sprint International. Earlier in his career, Mr. Courter
worked for IBM Corporation and KPMG Peat Marwick LLP.
John H. Forsgren has served as one of NEON's directors since May 1998
and as NEON's interim chief executive officer from August 2000 to December 2000.
Mr. Forsgren has served as vice chairman, executive vice president and chief
financial officer of Northeast Utilities and various subsidiaries since 1996.
From December 1994 to July 1996, he served as a managing director of Chase
Manhattan Bank.
Wayne Barr, Jr. is a founding member and Senior Managing Director of
Capital & Technology Advisors LLC and Communication Technology Advisors LLC,
financial and operational restructuring firms with offices in Albany, New York
and Reston, Virginia. Mr. Barr is also a founding member of TechOne Capital
Group LLC, a private investment firm based in Albany, New York. Prior to
starting these firms, Mr. Barr was the Associate General Counsel of CAI Wireless
Systems, Inc., a wireless spectrum company located in Albany, New York, which
146
was sold to MCI WorldCom in 1999. Mr. Barr began his career as an attorney in
private practice in New York City and in Albany. He received his J.D., degree
from Albany Law School of Union University and is a member of the New York State
Bar. Mr. Barr has served as a member of the board of directors of NEON since
December 2002 and is a member of the board of directors of Evident Technologies,
Inc. and a member of the Board of Trustees of the New York Racing Association,
Inc.
Jose A. Cecin, Jr. is a Managing Director of the Windsor Group, a
leading middle-market investment bank, and directs the firm's telecommunications
practice. He is also active in the firm's defense and aerospace practice. Mr.
Cecin has over eighteen years of management experience and has had a strong
focus on telecommunications, financing and corporate development over the last
thirteen years. Prior to joining the Windsor Group, Mr. Cecin was one of two
founders of Cambrian Communications, a telecommunications service provider,
where he served as chief operating officer and a director. Prior to founding
Cambrian in 1999, Mr. Cecin was on the founding team of Wave International, a
telecommunications management company focused on infrastructure opportunities in
developing markets. Prior to Wave International, Mr. Cecin served as Managing
Director of Corporate Development at Bell Atlantic Corporation (now Verizon).
Mr. Cecin has served on the board of directors and board of advisors of several
private companies. Mr. Cecin earned a BS degree in Electrical Engineering from
the United States Military Academy at West Point and an MBA from Stanford
University.
GLOBIX DIRECTORS' COMPENSATION
Under our compensation program for directors, our directors are
entitled to receive:
o $2,000 per month for directors and $4,000 per month for the
Chairman;
o an additional $250 per month for service on the Compensation
Committee of our board of directors (or $500 per month for the
Chairman of the Compensation Committee);
o an additional $500 per month for service on the Audit
Committee of our board of directors (or $1,000 per month for
the Chairman of the Audit Committee); and
o an additional $1,000 for each board of directors or committee
meeting in excess of four per year.
NEON DIRECTORS' COMPENSATION
Of the current NEON directors, Messrs. Barr, Cecin, Courter and
Forsgren are expected to become directors of Globix upon the effective date of
the merger.
Under the NEON directors' compensation program, NEON's nonemployee
directors are compensated $20,000 per year, which payments are payable at the
option of NEON in cash or with options to purchase NEON common stock. NEON's
only employee director, Mr. Courter, is not compensated for such director
services.
OTHER EXECUTIVE OFFICERS
Name Age Position
---- --- --------
Robert M. Dennerlein 44 Vice President and Chief Financial Officer
H. Jameson Holcombe 41 Senior Vice President, Operations, Chief Technology
Officer and Secretary
John D. McCarthy 40 Senior Vice President, Business Development and U.S.
Sales and Marketing
Philip J. Cheek 39 Managing and Finance Director of Globix U.K. Ltd.
James C. Schroeder 57 Vice President and General Counsel
147
Robert M. Dennerlein joined Globix in January 2003 as vice president
and corporate controller and became our chief financial officer on May 12, 2003.
Prior to joining Globix, from August 2001 until January 2003, Mr. Dennerlein
served as vice president and controller for OpNext, a global optical components
joint venture created by a spinoff from Hitachi and a venture capital investment
by Clarity Partners. From July 1999 until August 2001, Mr. Dennerlein served as
the director of accounting and external reporting for Agere Systems (formerly
the Microelectronics division of Lucent Technologies). From June 1992 until July
1999, Mr. Dennerlein held various management positions at International
Specialty Products, a global specialty chemicals manufacturer. He served as
senior director, ISP Financial Services from July 1997 until July 1999 and prior
to that controller, ISP International Operations from May 1995 until July 1997.
Mr. Dennerlein is a Certified Public Accountant and received a Masters in
International Business degree from Seton Hall University. He also holds a
Bachelor of Science in Accounting from Seton Hall University.
H. Jameson Holcombe joined Globix in July 2002 as senior vice president
of operations, a position he continues to hold. In April, 2003 he became our
corporate secretary and on August 11, 2003 he became our chief technology
officer. Prior to joining Globix, Mr. Holcombe served as chief information
officer of Cambrian Communications from February 2000 through July 2002. From
August 1997 to January 2000, Mr. Holcombe served as a senior principal
consultant at C-Change, Inc. in San Rafael CA, leading project teams to deliver
e-commerce initiatives for entertainment, telecommunications and financial
services clients. Mr. Holcombe received a Masters degree in Computer Science
from George Washington University in Washington, D.C. and a Masters in Business
Administration degree from Chaminade University in Honolulu. Mr. Holcombe
received his undergraduate degree from the United States Military Academy at
West Point.
John D. McCarthy has served as senior vice president, business
development since September 2002 and as senior vice president of US sales and
marketing since October 2003. Prior to that, he served as acting chief financial
officer from March 2002 through September 2002. Mr. McCarthy also resumed the
duties of acting chief financial officer from November 2002 to May 2003. Mr.
McCarthy served as vice president of financial planning and analysis from August
2001 through March 2002 and as managing director for the Application Services
Group from the time he joined Globix in March 2001 through August 2001. Prior to
joining Globix, Mr. McCarthy served as vice president, finance for LC39 Venture
Group LLC, a New York based technology incubator and venture capital fund, from
April 2000 to March 2001. From November 1998 through April 2000, he held
management positions with an e-commerce startup and acted as a consultant to
several entrepreneurial ventures. From 1996 to 1998, Mr. McCarthy was vice
president, director of business affairs with divisions of Young & Rubicam. Mr.
McCarthy received a Masters in Business Administration degree from The Wharton
School of Business of the University of Pennsylvania and a Masters degree in
International Studies from Wharton's Lauder Institute. Mr. McCarthy received his
undergraduate degree from Connecticut College.
Philip J. Cheek joined our United Kingdom subsidiary, Globix Ltd., in
July 2000 as European finance director. Mr. Cheek was subsequently appointed to
the additional position of managing director of Globix Ltd. on July 12, 2001. He
currently serves on the Globix Ltd. United Kingdom board of directors. Prior to
his joining Globix Ltd., Mr. Cheek served in various financial positions with
Fritz Companies, an international freight company (now part of UPS) from April
1996 through July 2000. Mr. Cheek graduated as a qualified ACCA in 1992 with a
professional training practice Maxwells Chartered Accountants.
James C. Schroeder joined Globix in February 2000 as Deputy General
Counsel. In December 2003 he was promoted to General Counsel and is responsible
for overseeing all of Globix's legal activities including real estate and sales
contracts. Prior to joining Globix, Mr. Schroeder was in private practice.
Earlier in his career Mr. Schroeder served as in-house counsel for Philips
Electronics NA and McKesson, Inc. Mr. Schroeder holds a BA from the University
of Southern California. He received his JD from Pepperdine University and his
LLM from New York University.
148
GLOBIX AND NEON EXECUTIVE COMPENSATION
GLOBIX SUMMARY COMPENSATION TABLE
The following summary compensation table sets forth the total
compensation for the fiscal years ended September 30, 2003, September 30, 2002
and September 30, 2001 for Globix's Chief Executive Officer, Globix's four other
most highly compensated executive officers during the fiscal year ended
September 30, 2003 who held office as of September 30, 2003 and one additional
individual who would have been included in the group of the most highly
compensated executive officers but who left his position prior to September 30,
2003.
ANNUAL COMPENSATION
-------------------
SECURITIES
UNDERLYING
SALARY BONUS OTHER ANNUAL OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION($) SARs(#) COMPENSATION
--------------------------- ---- ------- -------- --------------- ------------ ------------
Peter K. Stevenson(1) 2003 284,684 150,000 79,105(2) 548,667(3)
PRESIDENT AND CHIEF 2002 127,333 75,000 50,000(4) --- -------------
EXECUTIVE OFFICER 1,459(5)
Robert M. Dennerlein(6) 2003 108,077 42,916 --- 100,000 ---
CHIEF FINANCIAL OFFICER
H. Jameson Holcombe(7) 2003 170,000 53,125 79,623(8) 106,582 ---
SENIOR VICE PRESIDENT 2002 34,375 --- 27,621(9) --- ---
OF OPERATIONS, CORPORATE
SECRETARY AND CHIEF
TECHNOLOGY OFFICER
John D. McCarthy(10) 2003 190,000 62,938 --- 146,316 ---
SENIOR VICE PRESIDENT, 2002 190,000 27,000 --- 100,000(11) ---
CORPORATE DEVELOPMENT 2001 109,494 5,833 --- 20,000(11) ---
Philip J. Cheek(12) 2003 178,333 41,625 --- 30,000 17,833(13)
MANAGING AND FINANCE 2002 119,662 18,097 --- --- 11,966(13)
DIRECTOR, GLOBIX U.K. LTD. 2001 100,675 14,806 --- --- 11,703(13)
Gregory P. Leahy(14) 2003 106,421 --- --- 100,590(15) 46,247(16)
FORMER GENERAL COUNSEL 2002 152,917 20,000 --- 10,000(17) ---
AND CORPORATE SECRETARY 2001 136,820 --- --- 4,000(17) ---
(1) Mr. Stevenson became our President and Chief Executive Officer on April
15, 2002.
(2) Represents the amount that we reimbursed Mr. Stevenson for his housing
and travel costs in the fiscal year ended September 30, 2003, including
amounts reimbursed for taxes associated with these payments, as his
permanent residence is located outside of the New York area.
(3) Pursuant to Mr. Stevenson's employment agreement dated as of April 15,
2002, we agreed to grant to Mr. Stevenson options to acquire 548,667
shares of our common stock, which options were granted to Mr. Stevenson
on March 14, 2003 pursuant to our 2003 Stock Option Plan.
(4) Represents the amount that we reimbursed Mr. Stevenson for his housing
and travel costs in the fiscal year ended September 30, 2002, as his
permanent residence is located outside of the New York area.
(5) Represents the amount of premiums for life insurance benefits for Mr.
Stevenson paid by Globix in the five month period ended September 30,
2002.
(6) Mr. Dennerlein became our Chief Financial Officer on May 12, 2003. He
joined Globix in January 2003.
(7) Mr. Holcombe joined Globix in July 2002 as Senior Vice President of
Operations. He became our Corporate Secretary in April 2003 and our
Chief Technology Officer on August 11, 2003.
149
(8) Represents the amount that we reimbursed Mr. Holcombe for his housing
and travel costs in the fiscal year ended September 30, 2003, including
amounts reimbursed for taxes associated with these payments, as his
permanent residence is located outside of the New York area.
(9) Represents the amount that we reimbursed Mr. Holcombe for his housing
and travel costs in the fiscal year ended September 30, 2002, as his
permanent residence is located outside of the New York area.
(10) Mr. McCarthy has served as our Senior Vice President, Corporate
Development since September 2002. He joined Globix on March 5, 2001.
(11) These options were granted prior to the effective date of our plan of
reorganization and were cancelled on the effective date of the plan of
reorganization.
(12) Mr. Cheek joined our U.K. subsidiary, Globix Ltd., in July 2000. He was
appointed Managing and Finance Director of Globix Ltd. on July 12,
2001.
(13) Represents the amount contributed by Globix Ltd. to its profit sharing
plan.
(14) Mr. Leahy resigned from Globix on July 12, 2003, however, he provided
consulting services to the Company from April to July of 2003. He
joined Globix as Associate General Counsel in July 1999 and became our
General Counsel and Corporate Secretary in February 2002.
(15) These options were forfeited when Mr. Leahy resigned from Globix on
July 12, 2003.
(16) Represents the amount of severance paid to Mr. Leahy in connection with
his resignation from Globix.
(17) These options were granted prior to the effective date of our plan of
reorganization and were cancelled on the effective date of the plan of
reorganization.
NEON SUMMARY COMPENSATION TABLE
The following table sets forth compensation information for Stephen E.
Courter, the chief executive officer of NEON who is expected to be an executive
officer of Globix, for the fiscal years ended December 31, 2001, 2002 and 2003.
ANNUAL COMPENSATION
-------------------
----------------------------- ------- ------------- ---------- ------------ ------------ ------------
SECURITIES
OTHER ANNUAL UNDERLYING
SALARY BONUS COMPENSATION OPTIONS/ ALL OTHER
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARS (#) COMPENSATION
----------------------------- ------- ------------- ---------- ------------ ------------ ------------
Stephen E. Courter (1) 2003 268,750(2) 137,500 5,645 450,000(5) --
PRESIDENT, CHIEF 2002 244,712(3) -- 7,719 -- --
EXECUTIVE OFFICER AND 2001 239,423 89,500(4) 5,228 -- --
CHAIRMAN OF THE BOARD
----------------------------- ------- ------------- ---------- ------------ ------------ ------------
(1) Mr. Courter became NEON's President, Chief Executive Officer and
Chairman of the Board in December 2000.
(2) Mr. Courter's employment agreement dated February 13, 2003 provides
that his base compensation would be $275,000 for fiscal year 2003 but
Mr. Courter earned and was paid $268,750.
(3) Mr. Courter's base salary was $250,000 for fiscal years 2001 and 2002.
However, Mr. Courter voluntarily reduced his base salary from the
middle of 2001 through the beginning of 2002 by 10% due to NEON's
financial condition at the time.
150
(4) This bonus was earned as part of NEON's management incentive plan, but
has not been paid. Pursuant to NEON's reorganization plan, the
management incentive bonus will be paid in a lump sum on the earlier of
(i) the date NEON achieves positive cash flow from operations (after
giving effect to the payment(s) of such bonus), (ii) the date of Mr.
Courter's employment termination, or (iii) the date NEON entirely
ceases operations.
(5) Pursuant to Mr. Courter's employment agreement dated February 13, 2003,
NEON agreed to grant to Mr. Courter options to acquire 450,000 shares
of NEON common stock, which options were granted to Mr. Courter on
March 7, 2003.
GLOBIX OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on grants of Globix stock
options in fiscal 2003 to the Globix officers listed in the Summary Compensation
Table.
NUMBER OF
SECURITIES PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
UNDERLYING OPTIONS/SARs ASSUMED ANNUAL RATE OF STOCK
OPTIONS/ GRANTED TO EXERCISE OR PRICE APPRECIATION FOR OPTION
SARs EMPLOYEES IN BASE PRICE EXPIRATION TERM
GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE -----------------------------
NAME 5% ($) 10%($)
---------------------- -------------- ---------------- ----------- ----------------- --------------- -------------
Peter K. Stevenson 548,667 40.47% $3.04 4/15/12 396,571 1,619,513
Robert M. Dennerlein 35,000 2.58% $3.04 1/20/13 25,296 103,304
65,000 4.79% $3.04 6/13/13 120,034 308,180
H. Jameson Holcombe 71,582 5.28% $3.04 11/26/12 51,736 211,278
35,000 2.58% $3.04 6/13/13 64,634 165,943
John D. McCarthy 146,316 10.79% $3.04 11/26/12 105,749 431,858
Philip J. Cheek 30,000 2.21% $3.04 6/13/13 55,401 142,237
Gregory P. Leahy 100,590 7.42% $3.04 expired 72,701 296,896
(1) Fifty percent of the total number of shares granted under the 2003
Stock Option Plan will vest on the first, second and third
anniversaries of the grant date of such options. The remaining fifty
percent will vest over a period of three years based upon the
substantial achievement by Globix (as determined by the Compensation
Committee) of certain components of the Globix operating plan in
fiscal years 2003, 2004 and 2005. For Mr. Stevenson, the Compensation
Committee determined in March 2003 that the financial performance
measures had been achieved for purposes of the vesting of 50 percent
of his options. On April 15, 2003, the remaining 274,334 shares vested
under his options based on the passage of one year since the date of
his employment agreement. Upon a "change in control" (as defined in
the stock option agreements entered into by Globix with Messrs.
Stevenson, Dennerlein, Holcombe, McCarthy and Cheek), all of the
shares covered by options granted to them that have not yet vested
will fully vest. Mr. Leahy's options were forfeited when he resigned
from Globix on July 12, 2003.
151
NEON OPTION/SAR GRANTS IN LAST FISCAL YEAR
The following table provides information on grants of NEON common stock
options in fiscal 2003 to the NEON officer listed in the Summary Compensation
Table.
NUMBER OF
SECURITIES PERCENT OF TOTAL POTENTIAL REALIZABLE VALUE AT
UNDERLYING OPTIONS/SARs ASSUMED ANNUAL RATE OF STOCK
OPTIONS/ GRANTED TO EXERCISE OR PRICE APPRECIATION FOR OPTION
SARs EMPLOYEES IN BASE PRICE EXPIRATION TERM
GRANTED(#)(1) FISCAL YEAR ($/SHARE) DATE ------------------------------
NAME 5% ($) 10%($)
---------------------- -------------- ---------------- ----------- ----------------- --------------- -------------
Stephen E. Courter 450,000(1) 24% $5.30 3/7/13 1,498,500(*) 3,802,500(*)
--------------------------------------------------------------------------------------------------------------------------------
(*) Based on the fair market value of $5.30 per share of NEON common stock
on the date of grant of March 7, 2003.
(1) All of Mr. Courter's stock options will accelerate, become fully vested
and exercisable immediately prior to a change of control of NEON,
including a transaction such as the merger.
GLOBIX AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL AND FISCAL YEAR-END OPTION VALUES
The following table presents information concerning options granted to
the officers included in the Summary Compensation Table during the fiscal year
ended September 30, 2003.
VALUE
NUMBER OF REALIZED
SHARES (MARKET PRICE NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED AT EXERCISE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT
ON LESS EXERCISE OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1)
NAME EXERCISE PRICE) ---------------------------------- -------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
--------------------------- ------------ ----------------- -------------- ------------------- --------------- ---------------
Peter K. Stevenson --- --- 548,667 $0 $0
Robert M. Dennerlein --- --- --- 100,000 --- ---
H. Jameson Holcombe --- --- --- 106,582 --- ---
John D. McCarthy --- --- --- 146,316 --- ---
Philip J. Cheek --- --- --- 30,000 --- ---
Gregory P. Leahy --- --- --- 100,590 --- ---
(1) Based on a sales price of $2.66 per share of our common stock on the
OTC Bulletin Board on September 30, 2003.
NEON AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
The following table presents information concerning options granted to
Mr. Courter during the fiscal year ended December 31, 2003.
VALUE
NUMBER OF REALIZED
SHARES (MARKET PRICE NUMBER OF SECURITIES VALUE OF UNEXERCISED
ACQUIRED AT EXERCISE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT
OR LESS EXERCISE OPTIONS AT FISCAL YEAR END (1) FISCAL YEAR END (2)
NAME EXERCISED PRICE) -------------------------------- ---------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
------------------------ ----------------- -------------- ------------ ------------------- ----------------- ---------------
Stephen E. Courter --- --- 150,000 300,000 $114,000 $228,000
(1) All of Mr. Courter's stock options will accelerate, become fully vested
and exercisable immediately prior to a change of control of NEON,
including a transaction such as the merger.
(2) Based on the fair market value of $6.06 per share of NEON common stock
as of January 30, 2004, the closest date on which the fair market value
of the NEON common stock was determined. All of Mr. Courter's stock
options will accelerate, become fully vested and exercisable
immediately prior to a change of control of NEON, including a
transaction such as the merger.
152
EMPLOYMENT AGREEMENTS
PETER K. STEVENSON. Effective April 15, 2002, we entered into an
employment agreement with Peter K. Stevenson for his services as our President
and Chief Executive Officer. The original term of the agreement extended until
July 31, 2003. As of August 1, 2003, the agreement was amended to extend the
term until July 31, 2004, subject to extension for successive six month periods
with the mutual consent of Globix and Mr. Stevenson, and to make certain other
changes in Mr. Stevenson's compensation and severance arrangements. Under the
amended agreement, Mr. Stevenson's base salary is $308,000 per year. Mr.
Stevenson is also eligible for an annual bonus in an amount up to 50 percent of
his base salary, payable at the discretion of the Compensation Committee, if he
achieves the targets (objective and subjective) established by the Compensation
Committee. In addition, under the terms of Mr. Stevenson's employment agreement
we agreed to grant to Mr. Stevenson options to acquire 548,667 shares of our
common stock, or 3 percent of the outstanding shares of our common stock on a
fully diluted basis. One hundred percent of these options have vested. Under his
employment agreement, Mr. Stevenson is also entitled to reimbursement for
certain travel expenses between his home in Virginia and our offices in New York
City, and for the expense of maintaining an office in Virginia.
Mr. Stevenson's employment agreement provides that in the event that we
terminate his employment with Globix for any reason other than cause, or if Mr.
Stevenson terminates his employment with our Company for good reason, then Mr.
Stevenson is entitled to twelve months' salary.
H. JAMESON HOLCOMBE. On July 15, 2002, we entered into an agreement
with H. Jameson Holcombe outlining the terms of Mr. Holcombe's employment as our
Vice President, Operations. Mr. Holcombe's base salary is $165,000 per year,
which will be increased no less frequently than once per year in accordance with
our policies. Mr. Holcombe is also eligible to receive a bonus of 30 percent of
his base salary, which is contingent upon our Company meeting certain
performance targets mutually agreed upon by Globix and Mr. Holcombe. Further, we
are required to reimburse Mr. Holcombe for his travel each week to New York and
his reasonable living expenses while in New York. Our agreement with Mr.
Holcombe also provides that he is eligible to receive stock options under our
2003 Stock Option Plan. We are entitled to terminate Mr. Holcombe's employment
at any time.
STEPHEN E. COURTER. Effective February 13, 2003, NEON entered into an
employment agreement with Stephen E. Courter for his services as NEON's
President, Chief Executive Officer and Chairman of the board of directors. The
original term of the employment agreement was extended until December 31, 2003
and provided for the agreement to be automatically extended for successive
twelve-month periods, subject to early termination. Under the agreement, Mr.
Courter's initial base salary is $275,000 per year and will be reviewed and
determined annually by NEON's compensation committee of the board of directors.
Mr. Courter is also eligible for an annual bonus initially at 50 percent of his
base salary, payable in accordance with NEON's compensation program established
and administered by NEON's board of directors. In addition, under the terms of
Mr. Courter's employment agreement NEON agreed to grant to Mr. Courter options
to acquire 450,000 shares of NEON common stock.
Mr. Courter's employment agreement provides that in the event that NEON
terminates his employment with NEON for any reason (other than for cause, as
defined in the employment agreement), then Mr. Courter is entitled to twelve
months' salary and incentive compensation at the then current compensation rate
and twelve months' benefit continuation at the then current level. Additionally,
all unvested stock options to purchase NEON common stock will accelerate, become
fully vested and exercisable. Upon a change of control of NEON, including a
transaction such as the merger, all unvested stock options will become fully
vested and exercisable immediately prior to the change of control event.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Singer, the Chairman of Globix's board of directors and a member of
the compensation committee of the board of directors, was paid a success fee by
Globix in the amount of $169,000 in connection with sale by Globix of the
property located at 415 Greenwich Street, New York, New York in January 2004.
153
GLOBIX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In September 2002, Globix paid Peter L. Herzig a lump sum of $250,000
in connection with his resignation as Chief Executive Officer of Globix.
In January 2004, Globix paid Steven Singer, the Chairman of Globix's
board of directors and a member of the compensation committee of the board of
directors, a success fee in the amount of $169,000 in connection with sale by
Globix of the property located at 415 Greenwich Street, New York, New York. Mr.
Stevenson, Globix's president and chief executive officer, was also paid a
success fee in the amount of $169,000 by Globix in connection with the sale of
the property. Globix paid similar success fees in lesser amounts to certain
other executive officers in connection with the sale of the property.
CTA provides consulting and business development services to NEON.
Additionally, CTA agreed to present merger and acquisition advice and
opportunities to NEON for a success fee which CTA has agreed to waive in
relation to the merger. NEON has issued to certain current and former affiliates
of CTA and certain of such affiliates' designees warrants exercisable for
300,000 shares of NEON common stock at $6.06 per share through October 23, 2008
and warrants exercisable for 350,000 shares of NEON common stock at $5.30 per
share through December 3, 2007, as payment for its consulting and business
development services. CTA purchased the warrants exercisable for 350,000 shares
of NEON common stock for $25,000. One of CTA's employees, Wayne Barr, Jr.,
serves on NEON's board of directors. Mr. Barr will also serve on Globix's board
of directors after consummation of the merger. A current director of NEON, Mr.
Aquino, was affiliated with CTA at the time NEON's board of directors approved
the merger.
CTA provides similar consulting and business development services to
Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a
success fee if Globix consummates a sale, merger or a similar transaction with
CTA's assistance. CTA has agreed to waive this fee in relation to the merger.
Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for
500,000 shares of Globix common stock at $3.00 per share through March 13, 2013,
which were purchased for $25,000.
SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
GLOBIX FOLLOWING THE MERGER
The following table sets forth certain information, as of August 1, 2004,
regarding the beneficial ownership of Globix common stock and Globix convertible
preferred stock by: (i) each person who is known by Globix to own beneficially
more than 5% of the outstanding shares of Globix common stock or Globix
convertible preferred stock following the merger; (ii) each director of Globix
following the merger; (iii) each named executive officer of Globix following the
merger; and (iv) all of the directors and executive officers of Globix as a
group following the merger, assuming the merger had been consummated on August
1, 2004.
154
Except as noted below, the address of each person listed on the table is c/o
Globix Corporation, 139 Centre Street, New York, New York 10013.
----------------------------------------- ---------------------------------- ------------------------------- ---------------
NAME AND ADDRESS COMMON STOCK PREFERRED STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------- ------------------ ------------------
----------------------------------------- ---------------------------------- -------------------------------
PERCENTAGE OF
VOTING
SECURITIES
BENEFICIALLY
NUMBER PERCENTAGE(1) NUMBER PERCENTAGE(2) OWNED(3)
------ ------------- ------ ------------- --------
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
MacKay Shields LLC(4)(5) 13,456,930 27.70% 1,380,513 48.85% 28.86%
c/o MacKay Shields Financial Corp.
9 West 57th Street
New York, NY 10019
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Citadel Investment Group LLC(6) 2,549,600 5.25 - - 4.96
225 West Washington St., 7th FL
Chicago, IL 60606-3492
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
LC Capital Master Fund Ltd.(7) (8) 4,910,679 10.11 439,829 15.56 10.41
Lampe Conway & Co. LLC
730 Fifth Avenue, Ste. 1002
New York, NY 10019
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Loeb Partners Corp. (9) 3,547,995 7.30 113,997 4.03 7.12
61 Broadway
New York, NY 10006
Attn: Mr. Robert Grubin
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Mode 1 Communications, Inc.(10) 2,723,674 5.61 - - 5.30
c/o Northeast Utilities Service Co.
Jeffrey C. Miller, Esq.
107 Selden Street
Berlin, CT 06037
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
155
----------------------------------------- ---------------------------------- ------------------------------- ---------------
NAME AND ADDRESS COMMON STOCK PREFERRED STOCK
OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED
------------------- ------------------ ------------------
----------------------------------------- ---------------------------------- -------------------------------
PERCENTAGE OF
VOTING
SECURITIES
BENEFICIALLY
NUMBER PERCENTAGE(1) NUMBER PERCENTAGE(2) OWNED(3)
------ ------------- ------ ------------- --------
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
JGD Management Corp. (11) 2,980,577 6.14 - - 5.80
350 Park Avenue
New York, NY 10022
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Peter K. Stevenson(12) 548,667 1.12 - - 1.06
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Peter L. Herzig - - - -
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Steven Lampe(7) (8) 4,910,679 10.11 439,829 15.56 10.41
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Steven G. Singer(13) 4,160,002 8.56 777,296 27.50 9.60
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Raymond L. Steele - * - -
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Wayne Barr, Jr. (14) 341,657 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Jose A. Cecin, Jr.(15) 3,068 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Stephen E. Courter(16) 573,660 1.17 - - 1.10
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
John Forsgren(17) 2,725,735 5.61 - - 5.30
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Robert M. Dennerlein(18) 50,000 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
H. Jameson Holcombe(19) 53,291 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
John D. McCarthy(20) 73,160 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
Philip J. Cheek(21) 15,000 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
James C. Schroeder(22) 4,167 * - - *
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
All directors and officers of Globix 13,459,086 26.78 1,217,125 43.06 27.65
as a group (14 persons)(23)
----------------------------------------- ------------------ --------------- -------------- ---------------- ---------------
(*) Less than 1%
(1) Except as noted below, the information regarding beneficial ownership
of our common stock has been presented in accordance with the rules of
the Securities and Exchange Commission. Under these rules, a person may
be deemed to beneficially own any shares as to which such person,
directly or indirectly, has or shares voting power or investment power
and also any shares of our common stock as to which such person has the
right to acquire voting or investment power within 60 days through the
exercise of any stock option or other right. The percentage of
beneficial ownership as to any person as of a particular date is
calculated by dividing (a) (i) the number of shares beneficially owned
by such person plus (ii) the number of shares as to which such person
has the right to acquire voting or investment power within 60 days by
(b) the total number of shares outstanding as of such date, plus any
156
shares that such person has the right to acquire from Globix within 60
days. For purposes of calculating the beneficial ownership percentages
set forth above, assuming consummation of the merger on August 1, 2004
and conversion of all Class A Warrants of NEON into Globix common stock
in the merger and the issuance of 4,545,455 shares of Globix common
stock in the debt-for-equity exchange in connection with the merger,
the total number of shares of our common stock deemed to be outstanding
as of August 1, 2004 is 48,578,364. As used in this joint proxy
statement/prospectus, "voting power" is the power to vote or direct the
voting of shares and "investment power" is the power to dispose or
direct the disposition of shares. Except as noted, each stockholder
listed has sole voting and investment power with respect to the shares
shown as being beneficially owned by such stockholder.
The number of shares of common stock held by a named individual in the
chart and the number of shares of common stock deemed outstanding does
not include the shares of Globix convertible preferred stock, which
shares are convertible at any time at the option of the holder into
shares of Globix common stock, initially on a one-for-one basis, with
one vote for every share of common stock into which such convertible
preferred stock is convertible. The percentage of common stock is
intended to show voting power with respect to common stock only, to the
extent that matters before the stockholders require a class vote of the
common stock. Beneficial ownership percentages applicable to both the
Globix common stock and Globix preferred stock are listed under the
column in the chart captioned "Percentage of Voting Securities."
(2) Based on 2,826,297 shares of Globix convertible preferred stock
outstanding as of August 1, 2004, assuming consummation of the merger
on such date and the issuance of an aggregate of 2,826,297 shares of
Globix convertible preferred stock to holders of NEON convertible
preferred stock in partial exchange for all of the outstanding shares
of NEON convertible preferred stock.
(3) The percentage of beneficial ownership as to any person as of a
particular date is calculated by dividing (a) (i) the number of shares
beneficially owned by such person plus (ii) the number of shares as to
which such person has the right to acquire voting or investment power
within 60 days by (b) the total number of shares outstanding as of such
date, plus any shares that such person has the right to acquire from
Globix within 60 days. For purposes of calculating the beneficial
ownership percentages set forth above, assuming consummation of the
merger on August 1, 2004 and conversion of all Class A Warrants of NEON
into Globix common stock in the merger and the issuance of 4,545,455
shares of Globix common stock in the debt-for-equity exchange in
connection with the merger, and assuming an issuance of an aggregate of
2,826,297 shares of Globix convertible preferred stock to holders of
NEON convertible preferred stock in partial exchange for all of the
outstanding shares of NEON convertible preferred stock in the merger,
the total number of shares of our common stock and convertible
preferred stock deemed to be outstanding as of August 1, 2004 is
51,404,661.
(4) On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit described in "Information About
Globix--Legal Proceedings" beginning on page 94 of this joint proxy
statement/prospectus. The Stipulation and Order provides that 229,452
shares of our common stock and $1.968 million in aggregate principal
amount of our 11% senior notes will be held in reserve in escrow
pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action
lawsuit requires us to pay an amount in excess of our liability
insurance, we will be required to issue to the class action litigants
and their attorneys all (in the event that this excess is $10 million
or greater) or a portion of (in the event that this excess is less than
$10 million) the shares of our common stock and the notes being held in
escrow. On August 12, 2004, the United States District Court for the
Southern District of New York approved the settlement of the class
action lawsuit in an amount which would be covered by liability
insurance and accordingly, although the settlement remains subject to
appeal, Globix believes that the shares of Globix common stock and the
notes being held in escrow will be distributed in accordance with the
plan or reorganization rather than to the class action litigants and
157
their attorneys. Accordingly, MacKay Shields LLC (and each other former
holder of our 12.5% notes on the effective date of the plan of
reorganization) will be entitled to receive a portion of these 229,452
shares of common stock based on its percentage ownership of the 12.5%
notes on the effective date of the plan of reorganization.
(5) This information is as of August 27, 2004 and based on information
provided to us by MacKay Shields LLC, the pecuniary interests in these
shares are held by a number of clients for whom MacKay Shields LLC is
the discretionary investment advisor or subadvisor. MacKay Shields LLC
has voting and investment control over these shares and, accordingly,
is deemed to beneficially own these shares. These shares include
1,381,819 shares of Globix common stock to be issued in the
debt-for-equity exchange in connection with the merger.
(6) Citadel Investment Group LLC indirectly beneficially owns 764,880
shares of Globix common stock through Citadel Credit Trading Ltd. and
1,784,720 shares of Globix common stock through Citadel Equity Fund
Ltd.
(7) Mr. Lampe is affiliated with LC Capital Master Fund Ltd., which owns
these shares. Mr. Lampe has voting and investment control over these
shares and, consequently, is deemed to beneficially own these shares.
The 4,901,177 shares of Globix common stock attributed to Mr. Lampe
also include 454,595 shares of Globix common stock to be issued to LC
Capital in the debt-for-equity exchange in connection with the merger).
(8) LC Capital Master Fund Ltd. directly beneficially owns 4,901,177 shares
of Globix common stock (including 454,595 shares of Globix common stock
to be issued in the debt-for-equity exchange in connection with the
merger). LC Capital indirectly beneficially owns 9,502 shares of Globix
common stock pursuant to currently exercisable stock options granted to
Mr. Lampe, who is an affiliate of LC Capital.
(9) Loeb Partners Corp. directly beneficially owns 3,538,493 shares of
Globix common stock. Loeb Partners indirectly beneficially owns 9,502
shares of Globix common stock pursuant to currently exercisable stock
options granted to Mr. Grubin, a former director of NEON, who is an
affiliate of Loeb Partners.
(10) Mode 1 Communications, Inc. directly beneficially owns 2,723,674 shares
of Globix common stock, including 9,502 shares of Globix common stock
pursuant to currently exercisable stock options. These options were
originally granted to Mr. Forsgren, who is an affiliate of Mode 1, and
subsequently transferred to Northeast Utilities, the parent of Mode 1.
(11) According to information provided to us by JGD Management Corp. these
shares are held by certain managed accounts and investment funds for
whom JGD Management Corp. is the discretionary investment advisor.
These shares include 800,000 shares of Globix common stock to be issued
in the debt-for-equity exchange in connection with the merger.
(12) Pursuant to the terms of Mr. Stevenson's employment agreement described
in "Executive Compensation - Employment Agreements - Peter K.
Stevenson", on March 14, 2003, Globix granted to Mr. Stevenson options
to acquire 548,667 shares of Globix common stock pursuant to the Globix
2003 Stock Option Plan, all of which stock options are currently
vested.
(13) Mr. Singer is co-trustee of two trusts for the benefit of his brother's
children and as trustee has voting and investment control over the
517,979 shares of Globix common stock held in the trusts. Mr. Singer
and his sister-in-law, Karen Singer, filed a Schedule 13G to report the
beneficial ownership of these shares and an additional 589,109 shares
of Globix common stock held in a trust for the benefit of Mr. Singer's
brother's children, for which Karen Singer serves as sole trustee. Mr.
Singer and his sister-in-law disclaim membership in a group, as such
term is defined in Section 13(d)(3) of the Securities Exchange Act of
1934, and disclaim any other interest in the Globix common stock held
in the trusts. Mr. Singer indirectly beneficially owns an additional
2,373,467 shares of Globix common stock through the Singer Children's
Management Trust, and 279,446 shares of Globix common stock through the
Second Gary & Karen Singer Children's Trust. Mr. Singer disclaims any
interest in the Globix common stock held in the Singer Trusts. The
4,160,002 shares of Globix common stock attributed to Mr. Singer also
include 400,000 shares of Globix common stock to be issued to the
Singer Children's Management Trust, one of the Singer Trusts, in the
debt-for-equity exchange in connection with the merger.
158
(14) Mr. Barr directly beneficially owns 9,502 shares of Globix common stock
pursuant to currently exercisable stock options and 125,000 shares of
Globix common stock pursuant to a currently exercisable warrant.
Additionally, Mr. Barr indirectly beneficially owns a warrant currently
exercisable for 207,155 shares of Globix common stock which is directly
beneficially owned by Rita Barr, Mr. Barr's spouse.
(15) Mr. Cecin beneficially owns these shares pursuant to currently
exercisable stock options.
(16) Mr. Courter beneficially owns these shares pursuant to stock options
that are fully vested and exercisable as a result of the merger.
(17) Mr. Forsgren is affiliated with Mode 1 Communications, which
beneficially owns 2,723,674 shares of Globix common stock including
9,502 shares of Globix common stock pursuant to stock options
originally granted to Mr. Forsgren and subsequently transferred to
Northeast Utilities, the parent of Mode 1 and which are fully vested
and exercisable as a result of the merger. Mr. Forsgren directly
beneficially owns 2,061 shares of Globix common stock. Mr. Forsgren
disclaims beneficial ownership of all such shares other than the 2,061
shares held directly.
(18) Includes options to purchase 50,000 shares that are exercisable within
60 days of August 1, 2004, including 16,667 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(19) Includes options to purchase 53,291 shares that are exercisable within
60 days of August 1, 2004, including 17,764 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(20) Includes options to purchase 73,158 shares that are exercisable within
60 days of August 1, 2004, including 24,386 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(21) Includes options to purchase 15,000 shares that are exercisable within
60 days of August 1, 2004, including 5,000 options which will vest on
September 30, 2004 assuming certain performance targets are achieved.
(22) Includes 4,167 options which will vest on September 30, 2004 assuming
certain performance targets are achieved.
(23) Includes options and warrants to purchase an aggregate of 1,681,673
shares that are exercisable within 60 days of August 1, 2004, including
67,984 options which will vest on September 30, 2004 assuming certain
performance targets are achieved.
159
UNAUDITED PRO FORMA CONDENSED COMBINED
CONSOLIDATED FINANCIAL STATEMENTS
OF GLOBIX CORPORATION AND NEON COMMUNICATIONS, INC.
The following unaudited pro forma condensed combined consolidated
financial statements give effect to the proposed merger of Globix Corporation
("Globix") and NEON Communications, Inc. ("NEON"). The merger will be accounted
for under the purchase method of accounting in accordance with Statement of
Financial Accounting Standard (SFAS) No. 141, "Business Combinations." Under the
purchase method of accounting, the total estimated purchase price will be
allocated to NEON's assets acquired and liabilities assumed in connection with
the merger, based on their estimated fair values as of the completion of the
merger.
The unaudited pro forma condensed combined consolidated balance sheet
as of June 30, 2004 gives effect to the proposed merger as if it occurred on
June 30, 2004. Globix' and NEON's consolidated balance sheet information was
derived from their unaudited June 30, 2004 consolidated balance sheets. The
unaudited pro forma condensed combined consolidated statements of operations are
presented as if the proposed merger occurred on October 1, 2002. The unaudited
pro forma condensed combined consolidated statements of operations combine the
audited results of operations of Globix for its fiscal year ended September 30,
2003 with the audited results of operations of NEON for its fiscal year ended
December 31, 2003 and the unaudited results of operations of Globix and NEON for
the nine month period ended June 30, 2004. Due to different fiscal period ends,
NEON's results of operations for the three month period ended December 31, 2003
are included in the unaudited pro forma condensed combined consolidated
statements of operations for both the year ended December 31, 2003 and for the
nine month period ended June 30, 2004.
The unaudited pro forma condensed combined consolidated financial
statements have been prepared by Globix management for illustrative purposes
only and are not necessarily indicative of the condensed consolidated financial
position or results of operations in future periods or the results that actually
would have been realized had Globix and NEON been a combined company during the
specified periods. The pro forma adjustments are based on the information
available at the time of the preparation of this document. The unaudited pro
forma condensed combined consolidated financial statements, including the notes
thereto, are qualified in their entirety by reference to, and should be read in
conjunction with, the audited consolidated financial statements of Globix as of
and for the year ended September 30, 2003 included herein starting on page F-1,
the unaudited consolidated financial statements of Globix as of and for the nine
months ended June 30, 2004 included herein starting on page F-7, the audited
consolidated financial statements of NEON as of and for the year ended December
31, 2003 included herein starting on page F-42 and the unaudited consolidated
financial statements of NEON for the six months ended June 30, 2004 included
herein starting on page F-45.
160
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
BALANCE SHEET OF GLOBIX CORPORATION
(IN THOUSANDS EXCEPT SHARE DATA)
Historical Pro Forma Adjustments
---------------------------- --------------------------------------------
Pro Forma
Globix NEON Condensed
June 30, June 30, Combined
2004 2004 (A) (B) (C) Consolidated
------------ ------------ ------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalent $ 10,954 $ 12,633 $ -- $ -- $ (4,939)(1) $ 18,648
Short-term investments 8,501 -- -- -- -- 8,501
Marketable securities 507 -- -- 507
Accounts receivable, net 5,964 3,535 -- -- -- 9,499
Prepaid expenses and other current
assets 6,083 1,044 -- -- (500)(7) 6,627
Restricted cash and investments 2,068 8,255 -- -- -- 10,323
------------ ------------ ------------ ------------ ------------ ------------
Total current assets 34,077 25,467 -- -- (5,439) 54,105
Investments 2,233 -- -- -- -- 2,233
Investments, restricted 2,335 -- -- -- -- 2,335
Property, plant and equipment, net 92,450 136,662 -- -- (25,872)(5) 203,240
Intangible assets, net 8,088 -- -- -- 3,640 (6) 11,728
Other assets 426 3,583 -- -- -- 4,009
------------ ------------ ------------ ------------ ------------ ------------
Total assets $ 139,609 $ 165,712 $ -- $ -- $ (27,671) $ 277,650
============ ============ ============ ============ ============ ============
LIABILITIES, CUMULATIVE
CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease
obligation and mortgage payable $ 562 $ -- $ -- $ -- $ -- $ 562
Accounts payable 5,203 5,887 -- -- -- 11,090
Accrued liabilities and other 9,657 11,582 -- -- 1,000 (7) 22,239
------------ ------------ ------------ ------------ ------------ ------------
Total current liabilities 15,422 17,469 -- -- 1,000 33,891
Capital lease obligation, net of 185 -- -- -- -- 185
current portion
Mortgage payable 19,681 -- -- -- -- 19,681
11% Senior Notes 72,202 -- (12,278) -- -- 59,924
Accrued interest - 11% Senior Notes 1,347 -- (222) -- -- 1,125
Other long term liabilities 8,153 15,788 -- -- -- 23,941
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities 116,990 33,257 (12,500) -- 1,000 138,747
------------ ------------ ------------ ------------ ------------ ------------
CUMULATIVE CONVERTIBLE PREFERRED STOCK -- 14,817 -- (14,817) 12,295 (2) 12,295
STOCKHOLDERS' EQUITY
Common stock 165 16 45 (16) 276 (3) 486
Additional paid-in capital 99,981 124,158 13,137 (124,158) 91,213 (4) 204,331
Accumulated other comprehensive income 4,672 -- -- -- -- 4,672
Accumulated deficit (82,199) (6,536) (682) 6,536 -- (82,881)
------------ ------------ ------------ ------------ ------------ ------------
Total stockholders' equity 22,619 117,638 12,500 (117,638) 91,489 126,608
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities, cumulative
convertible preferred stock
and stockholders' equity $ 139,609 $ 165,712 $ -- $ (132,455) $ 104,784 $ 277,650
============ ============ ============ ============ ============ ============
161
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS OF GLOBIX CORPORATION
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Historical
------------------------------------
Globix NEON Pro Forma
Nine Months Nine Months Condensed
Period Ended Ended Pro Forma Combined
June 30, 2004 June 30, 2004 Adjustments Consolidated
-------------- -------------- -------------- --------------
Revenue, net $ 45,143 $ 34,314 $ -- $ 79,457
Operating costs and expenses:
Cost of revenue 14,785 19,424 -- 34,209
Selling, general and
administrative 32,554 12,380 -- 44,934
Loss on impairment of assets 17,972 -- -- 17,972
Depreciation and amortization 10,363 7,491 (956) (D) 16,898
-------------- -------------- -------------- --------------
Total operating costs and expenses: 75,674 39,295 (956) 114,013
Loss from operations (30,531) (4,981) 956 (34,556)
Other income (expense), net (6,953) 295 1,152 (E) (5,506)
Gain on debt discharge 1,747 -- -- 1,747
-------------- -------------- -------------- --------------
Loss before income tax benefit (expense)
and extraordinary item (35,737) (4,686) 2,108 (38,315)
Income tax benefit (expense) (56) 1,288 -- 1,232
-------------- -------------- -------------- --------------
Net loss before extraordinary item (35,793) (3,398) 2,108 (37,083)
Gain on acquisition, net of taxes -- 1,930 -- 1,930
-------------- -------------- -------------- --------------
Net loss (35,793) (1,468) 2,108 (35,153)
Dividends on 6% cumulative convertible
preferred stock -- -- 230 (F) 230
-------------- -------------- -------------- --------------
Net loss attributable to common
stockholders $ (35,793) $ (1,468) $ 1,878 $ (35,383)
============== ============== ============== ==============
Basic and diluted loss per share: $ (2.17) $ (0.73)
============== ==============
Weighted average common shares
outstanding - basic and diluted 16,460,000 32,118,364 (G) 48,578,364
============== ============== ==============
162
UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED
STATEMENT OF OPERATIONS OF GLOBIX CORPORATION
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Historical
------------------------------------
Globix NEON Pro Forma
Year Ended Year Ended Condensed
September 30, September 30, Pro Forma Combined
2003 2003 Adjustments Consolidated
-------------- -------------- -------------- --------------
Revenue, net $ 60,177 $ 41,588 $ -- $ 101,765
Operating costs and expenses:
Cost of revenue 19,990 20,888 -- 40,878
Selling, general and administrative 44,430 16,522 -- 60,952
Restructuring and other charges (1,020) -- -- (1,020)
Depreciation and amortization 15,523 8,999 (1,274) (D) 23,248
-------------- -------------- -------------- --------------
Total operating costs and expenses: 78,923 46,409 (1,274) 124,058
Other operating income 345 -- -- 345
-------------- -------------- -------------- --------------
Loss from operations (18,401) (4,821) 1,274 (21,948)
Other income (expense), net (12,730) 554 1,409 (E) (10,767)
Gain on debt discharge 6,023 -- -- 6,023
Loss on conversion of debt to equity -- -- (682) (A) (682)
-------------- -------------- -------------- --------------
Loss before income tax benefit (expense)
and extraordinary item (25,108) (4,267) 2,001 (27,374)
Income tax benefit (expense) (167) 1,288 -- 1,121
-------------- -------------- -------------- --------------
Net loss before extraordinary item (25,275) (2,979) 2,001 (26,253)
Gain on acquisition, net of taxes -- 1,931 -- 1,931
-------------- -------------- -------------- --------------
Net loss (25,275) (1,048) 2,001 (24,322)
Dividends on 6% cumulative convertible
preferred stock -- -- 299 (F) 299
-------------- -------------- -------------- --------------
Net loss attributable to common
stockholders $ (25,275) $ (1,048) $ 1,702 $ (24,621)
============== ============== ============== ==============
Basic and diluted loss per share: $ (1.54) $ (0.51)
============== ==============
Weighted average common shares
outstanding - basic and diluted 16,460,000 32,118,364 (G) 48,578,364
============== ============== ==============
(A) To reflect the conversion of $12,500 of Globix's 11% senior notes and accrued interest into 4,545,455 shares of Globix
common stock and the resulting loss on the debt extinguishment of approximately $682
(B) To eliminate NEON's Cumulative Convertible Preferred Stock and Stockholders' Equity
(C) To allocate the preliminary purchase price, as follows:
TOTAL PURCHASE PRICE:
Cash $ 4,939
Fair value of Globix' 12% cumulative convertible 12,295
preferred stock
Fair value of Globix' common stock 83,589
Fair value of options and warrants assumed 7,900
Estimated acquisition related costs 1,500
--------------
Total purchase price $ 110,223
==============
ALLOCATION OF PURCHASE PRICE:
Acquired tangible assets $ 139,840 Net of allocated estimated negative goodwill in the amount
of approximately $29.2 million
Acquired intangible assets 3,640 Net of allocated estimated negative goodwill in the amount
of approximately $1.0 million
Liabilities assumed 33,257
--------------
Total preliminary purchase price allocation $ 110,223
==============
163
1. The estimated cash consideration represents approximately 33% of NEON's 12% cumulative convertible preferred stock
including accumulated dividends, which will be redeemed by Globix at the closing of the merger.
2. The remaining 67% of NEON's 12% cumulative convertible preferred stock including accumulated dividends will be redeemed by
Globix through the issuance of approximately 2,826,000 6% cumulative convertible preferred stock with a fair value
estimated at $12,295.
3. The fair value of Globix' common stock was estimated using a price per share of $3.03, representing Globix' average share
price during the three days period before and after the announcement of the merger, and a total of approximately 27,600,000
common stock $.01 par value to be issued by Globix.
4. Globix is expected to assume approximately 2.8 million options and 830 thousand warrants with an average exercise price of
approximately $4.20 and $4.43, respectively. The fair value of options and warrants assumed by Globix was estimated at $7.9
million using the Black-Scholes pricing model with the following assumptions: average expected life of 3 years, risk free
interest of 2.7%, expected dividend yield of 0% and volatility of approximately 125%.
5. To increase the carrying amount of NEON's property, plant and equipment to their estimated fair value by approximately $3.3
million, net of negative goodwill allocation in the amount of approximately $29.2 million, which have an estimated useful
life of 15 years.
6. Intangible assets acquired consist of customer contracts estimated at approximately $2.8 million, net and trade names
estimated at approximately $0.8 million, net which will be amortized by the straight line method over their estimated
remaining useful lives of 10 years and 5 years, respectively.
7. Represents Globix' estimated direct costs incurred as part of the merger.
(D) To reflect the adjustment to fair value of acquired tangible and intangible assets as if the proposed merger has occurred
on October 1, 2002.
(E) To eliminate interest expenses on the converted 11% Senior Notes as if the conversion has occurred on October 1, 2002.
(F) To reflect the dividends on the Globix' 6% cumulative convertible preferred stock as if issued at October 1, 2002.
(G) Pro forma basic and diluted net loss per share for the year ended September 30, 2003 and for the nine months ended June 30,
2004 is computed by dividing the pro forma net loss attributable to common stockholders for the period by the weighted
average common shares outstanding for the period. The adjustments to historical weighted average shares outstanding
resulted from the inclusion of shares to be issued in connection with the proposed merger and shares to be issued as part
of the conversion of the $12,500 of 11% Senior Notes, as if those transactions occurred at October 1, 2002.
164
COMPARISON OF STOCKHOLDERS RIGHTS
GENERAL
Both NEON and Globix are corporations organized under the laws of the
State of Delaware and are therefore subject to the Delaware general corporation
law. However, there are some differences in the certificates of incorporation
and bylaws of NEON and Globix and other governing documents that affect the
rights of their respective stockholders.
CAPITALIZATION
GLOBIX. Globix is authorized to issue 500,000,000 shares of common
stock and 5,000,000 shares of preferred stock. On August 1, 2004, 16,460,000
shares of Globix common stock were outstanding (including 229,452 shares held in
reserve pending the outcome of a class action law suit and 164,600 shares held
in reserve pending resolution of a shareholder derivative suit, each as
described in detail in the section entitled "Information About Globix - Legal
Proceedings" beginning on page 94 of this joint proxy statement/prospectus
and no shares of Globix preferred stock were outstanding. Globix's board has the
authority, without stockholder approval, to issue shares of preferred stock from
time to time in one or more series and to fix the rights and preferences,
including dividends, redemption, liquidation, voting rights, and other rights as
the board may determine, of each such series of preferred stock. In connection
with the merger, Globix will designate 4,500,000 shares of its preferred stock
as a new 6% Series A Cumulative Convertible Preferred Stock, which will be
issued to holders of NEON's existing 12% Series A Cumulative Convertible
Preferred Stock in partial exchange for their shares as described in this joint
proxy statement/prospectus.
NEON. Under NEON's current certificate of incorporation, NEON is
authorized to issue 100,000,000 shares of common stock and 30,000,000 shares of
preferred stock, of which 21,354,000 shares have been designated as Redeemable
Preferred Stock, and 2,500,000 shares have been designated as 12% Series A
Cumulative Convertible Preferred Stock. NEON's board has the authority, without
stockholder approval, to issue shares of the remaining 6,146,000 shares of
preferred stock from time to time in one or more series and to fix the rights
and preferences, including voting rights, of each such series of preferred
stock, which rights and preferences may be superior, junior or equal to that of
NEON's other series of preferred stock.
As of August 1, 2004 there were (i) 15,775,863 shares of common stock
outstanding, (ii) 1,101,887 shares of convertible preferred stock outstanding,
and (iii) no shares of redeemable preferred stock outstanding. As of August 1,
2004, there were (i) 5,511,405 shares of NEON's common stock reserved for
issuance pursuant to outstanding Class A warrants, (ii) 650,000 shares of NEON's
common stock reserved for issuance pursuant to the NEON CTA warrants, (iii)
2,204,177 shares of NEON's common stock reserved for issuance pursuant to NEON's
equity compensation plan, (iv) 1,101,887 shares of NEON common stock reserved
for issuance pursuant to conversion of NEON convertible preferred stock, (v)
341,936 shares of NEON common stock reserved for issuance to Mode 1
Communications, Inc., and (vi) 16,598,004 shares of redeemable preferred stock
reserved for issuance pursuant to warrants.
VOTING RIGHTS
GLOBIX. Each holder of Globix common stock is entitled to one vote for
each share held. Holders of Globix convertible preferred stock will be entitled
to one vote for each share of common stock into which a share of Globix
convertible preferred stock is convertible, which initially will be one. Holders
of Globix convertible preferred stock will vote together with the holders of
common stock as a single class with respect to any question or matter that
holders of common stock have a right to vote on. Globix's stockholders are not
entitled to cumulative voting for directors. Globix's certificate of
incorporation prevents it from issuing non-voting equity securities.
NEON. Each holder of NEON common stock is entitled to one vote for each
share held. Holders of NEON's outstanding convertible preferred stock are
entitled to one vote for each share of common stock into which a share of NEON
convertible preferred stock is converted. Like Globix's stockholders, NEON's
stockholders are not entitled to cumulative voting.
165
CONSENT RIGHTS - CONVERTIBLE PREFERRED STOCK
GLOBIX. The certificate of designation with respect to the Globix
convertible preferred stock to be issued in connection with the merger will
provide that holders of convertible preferred stock are entitled to certain
consent rights. These include the requirement that the consent of the holders of
66 2/3% of the outstanding convertible preferred stock be obtained with respect
to (i) the authorization or issuance of shares of any class or series of stock
with senior or equivalent rights with respect to dividends and liquidation
preferences, (ii) any amendment, modification or waiver of the provisions
regarding changes of control, and (iii) any election by the holders to convert
all of the outstanding convertible preferred stock into shares of common stock.
NEON. The current certificate of designation for the NEON convertible
preferred stock provides that holders of convertible preferred stock are
entitled to certain consent rights. These include the requirement that the
consent of the holders of 66 2/3% of the outstanding convertible preferred stock
be obtained with respect to (i) the authorization or issuance of shares of any
class or series of stock with senior or equivalent rights with respect to
dividends and liquidation preferences, (ii) any amendment, modification or
waiver of the provisions regarding changes of control, and (iii) any election by
the holders to convert all of the outstanding convertible preferred stock into
shares of common stock.
NUMBER OF DIRECTORS
GLOBIX. Globix's amended and restated bylaws provide for a seven-member
board of directors. The stockholders or directors may by majority vote increase
or decrease the size of the board provided that the number of directors is not
less than two and that no decrease in the number of directors decreases the term
of any incumbent director. Globix currently has seven directors, however the
board of directors of Globix will be expanded to nine members in connection with
the merger. See "The Merger - Operation of Globix and NEON after the Merger,"
beginning on page 66 of this joint proxy statement prospectus. At the annual
stockholders' meeting, the stockholders elect a single class of directors who
hold office until the next annual stockholders' meeting and the election and
qualification of their respective successors. Directors need not be stockholders
of Globix.
NEON. NEON's amended and restated bylaws provide that the number of
directors comprising the board of directors shall be determined by resolution of
the board, and that the number of directors cannot be less than three nor more
than nine. Presently, the number is set at 7. The number of directors may be
decreased by a majority of the directors then in office only to eliminate
vacancies resulting from death, resignation, removal or expiration of the term
of one or more directors. NEON's amended and restated bylaws provide for a
single class of directors who are elected at the annual stockholders' meeting by
the stockholders having a right to vote on such election. Each director holds
office until the date of the first annual meeting following the annual meeting
at which such director was elected provided that the term of each director is
subject to the election and qualification of his or her successor and to his or
her earlier death, resignation or removal. Directors need not be stockholders of
NEON.
REMOVAL OF DIRECTORS
GLOBIX. Globix's amended and restated bylaws provide that a director
may be removed at any time for or without cause by stockholder vote, which under
Globix's amended and restated bylaws means a majority of the votes cast by
holders entitled to vote, and for cause by the board.
NEON. NEON's amended and restated bylaws provide that any director may
be removed with or without cause, and another person may be elected to serve the
remainder of his or her term, by the affirmative vote of the holders of at least
a majority of the shares of the capital stock issued and outstanding and
entitled to vote, which would include the common stock and convertible preferred
stock.
FILLING VACANCIES ON THE BOARD OF DIRECTORS
GLOBIX. Globix's amended and restated bylaws provide that vacancies on
the board of directors occurring for any reason, including vacancies resulting
from an increase in the number of directors, but excluding vacancies resulting
from the removal of directors without cause, may be filled by vote of the board
of directors or, if the number of directors in office is less than a quorum, by
vote of a majority of the directors then in office. Vacancies occurring for any
reason may also be filled by the stockholders.
166
NEON. NEON's amended and restated bylaws provide that any vacancy on
the board of directors, however occurring, including vacancies resulting from
enlargement of the board, shall be filled only by vote of a majority of the
directors then in office, even if less than a quorum, or by the sole remaining
director. A director elected to fill a vacancy shall be elected for the
unexpired term of his or her predecessor in office, and a director chosen to
fill a position resulting from an increase in the number of directors shall hold
office until the next election of directors, subject to the election and
qualification of his or her successor and to his or her earlier death,
resignation or removal.
NOMINATION OF DIRECTORS
GLOBIX. Nominations of persons for election to the board of directors
of Globix may be made at the annual meeting of stockholders or any special
meeting called for the purpose of electing directors. Nominations may be made by
the board of directors or by any stockholder of Globix who is a stockholder of
record and who complies in a timely manner with the notice procedures set forth
in Globix's bylaws. For a notice from a stockholder to be timely it must
generally be delivered to or received at Globix's executive offices in New York,
New York not less than 90 days or more than 120 days prior to the anniversary of
the last annual meeting of stockholders. In the case of a special meeting of
stockholders called for the purpose of electing directors, the notice must be
delivered or received not later than the close of business on the 10th day
following the day on which notice of the date of the special stockholders
meeting was mailed or the special meeting date was publicly disclosed, whichever
comes first. The notice must include certain information about the person being
nominated to serve as director and about the stockholder making the nomination,
including the type of information that would be required in a proxy statement or
other filings required in connection with the solicitation of proxies. The
notice must also include the proposed director nominee's written consent to
serve if elected. If the chairman of the annual or special stockholders meeting
determines that a nomination was not properly made, the chairman is required to
declare that the nomination is defective and will be disregarded.
NEON. NEON's amended and restated bylaws do not provide a means for
which stockholders may nominate members to the NEON board of directors.
CHARTER AMENDMENTS
GLOBIX. Globix's certificate of incorporation may be amended in
accordance with Delaware law, which provides that the certificate of
incorporation may be amended with the affirmative vote of a majority of the
voting power of all outstanding shares of the capital stock of Globix. Globix
does reserve the right to amend, alter, change or repeal any provision of its
certificate of incorporation as may be prescribed by law, and states that the
rights and powers of stockholders, directors and officers are subject to this
reservation of power. The convertible preferred stock will be authorized
pursuant to the terms of a certificate of designation which will provide that
Globix may amend the terms of the convertible preferred stock or waive certain
provisions of the certificate of designation with the affirmative vote or
consent of a majority of the holders of the convertible preferred stock,
provided that the consent of each holder will generally be required with respect
to any amendment or waiver that would adversely affect the rights of a holder
and that the provisions governing a change in control may be amended, modified
or waived only with the consent of the holders of 66 2/3% of the convertible
preferred stock then outstanding.
NEON. NEON's certificate of incorporation may be amended in accordance
with Delaware law, which provides that the certificate of incorporation may be
amended with the affirmative vote of a majority of the voting power of all
outstanding shares of the capital stock of NEON. In addition, the certificate of
designation for the convertible preferred stock provides that NEON may not amend
the certificate of designation without the consent of holders of the convertible
preferred stock if certain actions with respect to the convertible preferred
stock as described in the certificate of designation would adversely affect such
holders. Like Globix, NEON also reserves the right to amend, alter, change or
repeal any provision of its certificate of incorporation as may be prescribed by
law, and states that the rights and powers of stockholders, directors and
officers are subject to this reservation of power. The certificates of
designation for the redeemable preferred stock and the convertible preferred
stock have their own amendment provisions as described below.
167
The certificate of designation for the convertible preferred stock
provides that NEON may amend the terms of the convertible preferred stock or
waive certain of its provisions with the affirmative vote or consent of a
majority of the holders of the convertible preferred stock, provided that the
consent of each holder will generally be required with respect to any amendment
or waiver that would adversely affect the rights of a holder and that the
provisions governing a change in control may be amended, modified or waived only
with the consent of the holders of 66 2/3% of the convertible preferred stock
then outstanding.
The certificate of designation for the redeemable preferred stock
provides that NEON may amend the terms of the redeemable preferred stock or
waive certain of its provisions with the affirmative vote or consent of a
majority of the holders of the redeemable preferred stock, provided that the
consent of each holder will generally be required with respect to any amendment
or waiver that would adversely affect the rights of a holder. No shares of
redeemable preferred stock are currently outstanding.
AMENDMENTS TO BYLAWS
GLOBIX. Globix's amended and restated certificate of incorporation
provides that the affirmative vote of at least a majority of the entire board of
directors shall be required to adopt, amend, alter, or repeal the company's
bylaws. Pursuant to Globix's amended and restated certificate of incorporation
the bylaws may also be amended by the affirmative vote of the holders of at
least eighty percent of the voting power of shares entitled to vote at an
election of directors.
NEON. NEON's amended and restated bylaws provide that the bylaws may be
amended by the affirmative vote of a majority of the directors present at any
regular or special meeting of the board of directors at which a quorum is
present. The bylaws may also be amended by the affirmative vote of the holders
of a majority of the shares of the capital stock issued and outstanding and
entitled to vote at any regular or special meeting of stockholders, provided
that notice of such amendment shall have been included in the notice of such
regular or special meeting.
ACTION BY WRITTEN CONSENT
GLOBIX. Globix's amended and restated certificate of incorporation
provides that any action required or permitted to be taken by the stockholders
of the company must be effected at a duly called annual or special meeting of
stockholders. Subject to the provisions of the Globix amended and restated
certificate of incorporation requiring action to be taken at an annual or
special meeting of the stockholders, Globix's amended and restated bylaws
provide that any stockholder action may be taken without a meeting by written
consent if it is signed by the holders of outstanding shares necessary to
authorize or take such action at a meeting at which all shares entitled to vote
thereon were present and voted. In the event of any action taken without a
meeting by less than unanimous consent, prompt notice of the action must be
given to those stockholders who have not consented in writing.
NEON. NEON's amended and restated certificate of incorporation does not
limit the ability of NEON stockholders to vote by written consent in lieu of a
meeting. Consequently, under Delaware law, any action required that may be taken
at an annual or special meeting of stockholders may be taken without a meeting,
without prior notice and without a vote, if NEON obtains written consents from
the holders of outstanding stock having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote on the action were present.
NOTICE OF STOCKHOLDER ACTIONS
GLOBIX. Globix's amended and restated bylaws provide that a stockholder
may properly bring business before an annual meeting of stockholder if timely
written notice has been given to the Secretary of the company and if it is
brought by a stockholder of record (both as of the date for giving timely notice
and on the record date for stockholders entitled to vote at the meeting). In
order for notice to be timely it must be delivered or mailed to, and received
at, Globix's principal executive offices not less than 90 days nor more than 120
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders, except that if the annual meeting at which the stockholder
wishes to bring business is called for a date that is not 30 days before or
after the anniversary of the preceding annual meeting, a notice must be received
no later than the close of business on the tenth day following the earlier of
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the day on which the notice of the date of the annual meeting was mailed or the
day that public disclosure of the date was made. With respect to each matter
proposed to be brought before an annual meeting, the notice must include (i) a
brief description of the matter and the reasons for bringing it before the
annual meeting, (ii) the name and address of the stockholder providing the
notice, (iii) the class or series and number of shares of capital stock owned by
the stockholder providing the notice, (iv) a description of all arrangements or
understandings between the stockholder and anyone else (including their names)
in connection with the stockholder's proposal and any material interest of the
stockholder in the matter proposed, and (v) a representation that the
stockholder intends to appear in person or by proxy at the annual meeting for
which the notice is provided.
NEON. Under Delaware law, special meetings of stockholders may be
called by the board of directors or by persons authorized in the corporation's
certificate of incorporation or bylaws. NEON's bylaws state that special
meetings may be called by the chairman of the board of directors, the president
or the board of directors.
RIGHT TO CALL SPECIAL MEETING OF STOCKHOLDERS
GLOBIX. Globix's amended and restated bylaws provide that a special
meeting of stockholders may be called by the board of directors or the chairman
of the board of directors.
NEON. NEON's amended and restated bylaws provide that a special meeting
of stockholders may be called at any time by the chairman of the board of
directors, the president or the board of directors.
DIVIDENDS
GLOBIX. Under the Delaware law, Globix's board may declare and pay
dividends upon shares of Globix stock, but only out of funds available for the
payment of dividends as provided by law. Globix's amended and restated
certificate of incorporation allows the board of directors to fix annual
dividend rights of any series of preferred stock that it may authorize for
issuance from Globix's authorized but undesignated preferred stock. The
certificate of designation for the new Globix convertible preferred stock will
provide that shares of the convertible preferred stock are entitled to receive,
when, as and if dividends are declared by the board of directors, cumulative
preferential dividends from the issue date of the shares of convertible
preferred stock at an annual rate of $0.216 per share, or $0.108 semi-annually.
Dividends on the convertible preferred stock may be paid in cash or in
additional shares of convertible preferred stock. Accumulated unpaid dividends
will accrue and cumulate dividends at an annual rate of 6%, and dividends cannot
be declared or paid unless all dividends from preceding periods have been paid,
or sufficient amounts have been set aside for such payment. Unless full
cumulative dividends on all outstanding shares of convertible preferred stock
for all past periods have been paid, Globix may not declare dividends with
respect to its common stock.
NEON. NEON's certificate of incorporation provides that dividends may
be declared and paid on the common stock as and when determined by the board of
directors, subject to the preferential rights of any outstanding preferred
stock. NEON's certificate of incorporation also permits the board of directors
to authorize and issue shares of preferred stock from its undesignated preferred
stock, with such dividends rights as it may determine. The certificate of
designation for NEON's convertible preferred stock provides that shares of the
convertible preferred stock are entitled to receive, when, as and if dividends
are declared by the board of directors, cumulative preferential dividends from
the issue date of the shares of convertible preferred stock at an annual rate of
$1.35 per share, or $0.675 semi-annually. Dividends on the convertible preferred
stock may be paid in cash or in additional shares of convertible preferred
stock. Accumulated unpaid dividends will accrue and cumulate dividends at an
annual rate of 12%, and dividends cannot be declared or paid unless all
dividends from preceding periods have been paid, or sufficient amounts have been
set aside for such payment. Unless full cumulative dividends on all outstanding
shares of convertible preferred stock for all past periods have been paid, NEON
may not declare dividends with respect to its common stock.
169
LIQUIDATION RIGHTS
GLOBIX. The new Globix convertible preferred stock to be issued in
connection with the merger will be entitled to a liquidation preference of $3.60
per share, plus accrued unpaid dividends, prior and in preference to any
payments to holders of common stock upon any voluntary or involuntary
liquidation, dissolution or winding up of Globix and after payment in full of
Globix's outstanding debt obligations including its 11% senior notes due 2008.
Subject to the satisfaction of any preferential payments and after payment of,
or provisions for, certain claims and obligations as required under Delaware
law, any additional amounts available for distribution in the event of a
dissolution of Globix would, under Delaware law, be payable to the holders of
common stock.
NEON. NEON's convertible preferred stock is entitled to a liquidation
preference of $11.25 per share, plus accrued and unpaid dividends, prior and in
preference to any payments to holders of common stock upon any voluntary or
involuntary liquidation, dissolution or winding up of NEON and after payment in
full of NEON's outstanding debt obligations. Upon a "Liquidation Event" as
defined in NEON's certificate of incorporation, and subject to the preferential
rights of the convertible preferred stock, all remaining assets of NEON are
divided ratably among the holders of common stock. A "Liquidation Event" means
(i) the liquidation, dissolution or winding up of NEON, whether voluntary or
involuntary, (ii) a sale, lease or transfer of all or substantially all of
NEON's assets, or (iii) any consolidation, merger or share exchange of NEON in
which the holders of NEON's voting stock outstanding immediately prior to such
consolidation, merger or share exchange do not in the aggregate hold a majority
of the voting stock of the surviving or resulting entity outstanding immediately
following such consolidation, merger or share exchange (excluding, however, a
merger or other reorganization solely for the purpose of changing NEON's
jurisdiction or organization or name, and a merger of NEON with or into a wholly
owned subsidiary of NEON that is incorporated in the United States). NEON
proposes to amend the definition of "Liquidation Event" as set forth in NEON's
certificate of incorporation in connection with the merger. See "Approval of
Amendment of NEON's Certificate of Incorporation," beginning on page 87 of
this joint proxy statement/prospectus.
Additionally, NEON has authorized a series of redeemable preferred
stock. No shares of redeemable preferred stock are outstanding although there
are 16,598,004 shares subject to warrants that will expire upon consummation of
the merger. Shares of redeemable preferred stock rank junior to the NEON
convertible preferred stock and on par with the NEON common stock with respect
to liquidation rights and are entitled to receive $.01 per share upon a
liquidation of NEON after payment of NEON's outstanding debt obligations and the
senior liquidation preference of the convertible preferred stock. In certain
events, shares of redeemable preferred stock are required to be redeemed by NEON
at the price paid for shares of common stock with respect to the same event. If
that amount is not equal to or greater than $10.62, the event does not trigger a
mandatory redemption of the redeemable preferred stock.
Pursuant to the terms of the warrant agreement governing the
outstanding warrants for NEON redeemable preferred stock, the warrants currently
outstanding will expire upon consummation of the merger because the merger will
be deemed a change of control under the warrant agreement, but not an event that
triggers the ability to exercise the warrants because the consideration to be
received by holders of common stock in the merger is less than $10.62 per share.
Since the warrants expire upon a change of control and the merger will
constitute a change of control, the warrants will expire upon consummation of
the merger. Although under the terms of the warrant agreement, the holders of
warrants for redeemable preferred shares are entitled to receive payment for
their warrants equal to the difference between (i) the amount a holder would be
entitled to receive if the holder exercised the warrant prior to its expiration,
which is $.01 and (ii) the purchase price per share under the warrants, which is
$.01, there is no difference between these numbers with respect to the merger,
and consequently, no payment will be due to the holders of the warrants with
respect to the merger.
CONVERSION AND REDEMPTION
GLOBIX
CONVERSION RIGHTS. Holders of the new Globix convertible preferred
stock will have the right at any time to convert their shares of convertible
preferred stock into shares of common stock based on the applicable conversion
rate, which as of the date of initial issuance will be one share of common stock
for each share of convertible preferred stock.
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The convertible preferred stock will automatically convert into common
stock at the then effective applicable conversion ratio, upon (1) the
affirmative vote of the holders of 66 2/3% of the outstanding shares of
convertible preferred stock, or (2) the day immediately following the date on
which the closing price of the Globix common stock has equaled or exceeded
$10.80 per share (as adjusted for stock splits, combinations or similar capital
changes) for a period of 45 consecutive trading days.
The number of shares of common stock into which preferred stock is
convertible will be generally subject to adjustment in the following
circumstances, subject to certain exceptions:
o any issuance of common stock as a dividend or distribution to
all holders of common stock;
o any subdivision or combination of outstanding shares of common
stock;
o if Globix issues rights or warrants to all or substantially
all of the holders of common stock entitling them to purchase
shares of common stock at a price per share less than the
current market price of the common stock;
o if Globix issues to all or substantially all of the holders of
common stock any shares of Globix capital stock (other than
common stock), evidences of indebtedness, other non-cash
assets or rights or warrants to purchase its securities (other
than common stock);
o if Globix distributes to all or substantially all of the
holders of common stock cash that exceeds an amount equal to
10.0% of the product of the current market price of the common
stock multiplied by the number of shares of common stock
outstanding on the date of calculation; or
o any merger or consolidation with or into another corporation
or the sale of all or substantially all of Globix's assets.
REDEMPTION RIGHTS. Globix has the right or obligation to redeem the new
convertible preferred stock as follows:
o Globix may, at its option, redeem the convertible preferred
stock, in whole or in part after 2005. The redemption price
for any redemptions in 2005 or 2006 will be equal to $3.816
per share, plus accrued and unpaid dividends to the date of
redemption. The redemption price for any redemptions in 2007
will be equal to $3.708 per share, plus accrued and unpaid
dividends to the date of redemption. The redemption price for
any redemptions in 2008 and after will be $3.60 per share,
plus accrued and unpaid dividends to the date of redemption.
o In the event of a redemption as described above in which only
a portion of the outstanding shares of convertible preferred
stock will be redeemed, Globix will be obligated to effect
such redemption on a pro rata basis, except that Globix may
redeem all of the shares held by holders of fewer than 100
shares.
o In the event of a "Change in Control" as described in the
certificate of designation for the convertible preferred
stock, each holder of convertible preferred stock will have
the right to require Globix to purchase such holder's shares
for a price equal to $3.636 plus accrued and unpaid dividends
to the purchase date.
NEON
CONVERSION RIGHTS. Holders of NEON convertible preferred stock have the
right at any time to convert their shares of convertible preferred stock into
shares of common stock based on the applicable conversion rate, which as of the
record date is one share of common stock for each share of convertible preferred
stock.
171
The NEON convertible preferred stock would automatically convert into
common stock at the then effective applicable conversion ratio, upon (1) the
affirmative vote of the holders of 66 2/3% of the outstanding shares of
convertible preferred stock, or (2) the day immediately following the date on
which the closing price of the NEON common stock has equaled or exceeded $33.75
per share (as adjusted for stock splits, combinations or similar capital
changes) for a period of 45 consecutive trading days.
The number of shares of common stock into which preferred stock is
convertible is generally subject to adjustment in the following circumstances,
subject to certain exceptions:
o any issuance of common stock as a dividend or distribution to
all holders of common stock;
o any subdivision or combination of outstanding shares of common
stock;
o if NEON issues rights or warrants to all or substantially all
of the holders of common stock entitling them to purchase
shares of common stock at a price per share less than the
current market price of the common stock;
o if NEON issues to all or substantially all of the holders of
common stock any shares of NEON capital stock (other than
common stock), evidences of indebtedness, other non-cash
assets or rights or warrants to purchase its securities (other
than common stock);
o if NEON distributes to all or substantially all of the holders
of common stock cash that exceeds an amount equal to 10.0% of
the product of the current market price of the common stock
multiplied by the number of shares of common stock outstanding
on the date of calculation; or
o any merger or consolidation with or into another corporation
or the sale of all or substantially all of NEON's assets.
REDEMPTION RIGHTS. NEON has the right or obligation to redeem the
convertible preferred stock as follows:
o NEON may, at its option, redeem the convertible preferred
stock, in whole or in part after 2006. The redemption price
for any redemption in 2006 is equal to $11.925 per share, plus
accrued and unpaid dividends to the date of redemption. The
redemption price for any redemptions in 2007 is equal to
$11.5875 per share, plus accrued and unpaid dividends to the
date of redemption. The redemption price for any redemptions
in 2008 and after is $11.25 per share, plus accrued and unpaid
dividends to the date of redemption.
o In the event of a redemption as described above in which only
a portion of the outstanding shares of convertible preferred
stock will be redeemed, NEON is obligated to effect such
redemption on a pro rata basis, except that NEON may redeem
all of the shares held by holders of fewer than 100 shares.
o In the event of a "Change in Control" as described in the
certificate of designation for the convertible preferred
stock, each holder of convertible preferred stock has the
right to require NEON to purchase such holder's shares for a
price equal to $11.3625 plus accrued and unpaid dividends to
the purchase date. NEON proposes to amend the definition of
"Change in Control" as set forth in NEON's certificate of
designation in connection with the merger. See "Approval of
Amendment of Certificate of Designation for NEON Convertible
Preferred Stock," beginning on page 88 of this joint proxy
statement prospectus.
REGISTRATION RIGHTS
GLOBIX. Globix shares to be issued in the merger will be registered
under the Securities Act of 1933.
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NEON. Set forth below is a summary of the registration rights of
certain holders of common stock and the holders of convertible preferred stock
pursuant to NEON's registration rights agreement entered into among NEON and
certain of its stockholders. The term "registrable securities," as used below,
means (i) common stock issued pursuant to NEON's bankruptcy reorganization plan,
(ii) shares of common stock issuable upon conversion of the convertible
preferred stock, (iii) shares of common stock issuable upon exercise of the
class A warrants, and (iv) the redeemable preferred stock warrants. Securities
cease being "registrable securities" if and when (i) there is an effective
registration statement with respect to such securities and they have been sold
pursuant thereto, (ii) the securities are no longer outstanding, (iii) the
securities are publicly distributed in accordance with Rule 144, or (iv) the
securities may be distributed to the public free from any restrictions imposed
by Rule 144 and without the requirement of the filing of a registration
statement with respect to such securities.
DEMAND REGISTRATION RIGHTS. If holders of at least 25% of the
registrable securities then outstanding and entitled to registration request in
writing that NEON file a registration statement under the Securities Act of 1933
covering the registration, then NEON is obligated to use its reasonable best
efforts to cause the requested shares to be registered. However, NEON is not
obligated to effect:
o more than three such registrations in total;
o more than one such registration in any 12 month period; and
o any such registration within 90 days immediately following the
effective date of any registration statement pertaining to an
underwritten public offering of securities of NEON for its own
account (except registrations on Form S-4 or on Form S-8
relating solely to securities issued pursuant to a benefit
plan).
PIGGYBACK REGISTRATION RIGHTS. The holders of registrable securities
are also entitled to "piggyback" registration rights on all NEON registrations,
except registrations on Form S-4 or on Form S-8 relating solely to securities
issued pursuant to a benefit plan. NEON may at any time in its sole discretion
delay or abandon such a registration without the consent of any holder. If the
registration is an underwritten offering, and the securities requested by any
holder differ from the type of securities to be registered by NEON and the
managing underwriter of the registration advises NEON that inclusion of such
different securities would cause an adverse effect on the offering, NEON may
notify the affected holder and either reduce the number of such securities
included in the offering so that no adverse effect would occur, or exclude such
securities altogether if no amount of reduction would prevent the occurrence of
an adverse effect.
FORM S-3 REGISTRATION RIGHTS. One or more holders of at least 25% of
the registrable securities then outstanding may also request registrations on
Form S-3 provided Form S-3 is available for such offering. There is no limit on
the number of Form S-3 registrations holders may request.
STANDSTILL PERIOD. In the event of a firm commitment underwritten
public offering of registrable securities NEON agrees not to effect any public
sale of securities similar to the registrable securities without the consent of
the managing underwriter for a period of time beginning 15 days prior to the
effective date of the registration statement relating to such registrable
securities and ending on the earlier of (1) 90 days after such effective date
and (2) the end of the public distribution of such registrable securities.
SUSPENSION PERIOD. NEON may, by written notice to each holder, postpone
the filing or effectiveness of a registration statement filed pursuant to the
registration rights agreement or otherwise suspend the holders' registration
rights for any period of time determined by NEON if there is any pending or
imminent event with respect to NEON that the board of directors determines would
require the disclosure of material, non-public information in order to make the
registration statement not misleading, or NEON is not otherwise required to
disclose such event, or if public disclosure at that time would have a material
adverse effect on NEON's business, financial condition or prospects, or would
materially adversely affect a pending or proposed acquisition.
173
HOLDER STANDSTILL PERIOD. Each holder of registrable securities agrees
that it will not, without the prior written consent of a managing underwriter
for any underwritten offering of similar securities effect any disposition of
similar securities during a period commencing 15 days prior to the effective
date of any registration statement relating to such securities and ending on the
earlier of (1) 90 days after such effective date and (2) the end of the public
distribution of such registrable securities.
INDEMNIFICATION. NEON will indemnify the other parties to the agreement
and certain related parties against any losses, claims, damages, expenses or
liabilities, joint or several, to which they may become subject based on any
untrue statement or alleged untrue statement of material fact contained in, or
material fact omitted from, a registration statement covering registrable
securities.
Each holder of registrable securities included in a registration that
NEON effected must indemnify NEON, its officers and directors, and each other
person who controls NEON against any losses, claims, damages, expenses or
liabilities, joint or several, to which they may become subject based on any of
the violations enumerated above to the extent such violation occurs in reliance
upon written information supplied by such holder for use in such registration. A
holders indemnification liability is limited to the net proceeds received by
such holder in the sale of registrable securities pursuant to such registration.
EXPENSES. NEON is obligated to pay all registration and filing fees and
certain other expenses, including the reasonable fees and expenses of one
counsel to the holders participating in a registration. Individual holders are
responsible for underwriting fees, discounts or commissions, any out-of-pocket
expenses and applicable transfer taxes.
AMENDMENT. The registration rights agreement may be amended or modified
upon NEON's consent and the consent of holders holding a majority of the
registrable securities then outstanding.
OTHER MATTERS
LEGAL MATTERS
The United States federal income tax consequences described in this
joint proxy statement/prospectus are the subject of opinions issued by Day,
Berry and Howard LLP, counsel to Globix, and Andrews Kurth LLP, counsel to NEON.
EXPERTS
Globix's consolidated financial statements as of September 30, 2003 and
September 30, 2002, and for each of the years in the three year period ended
September 30, 2003 have been included in this joint proxy statement/prospectus
and in the registration statement of which this joint proxy statement/prospectus
is a part in reliance upon the reports of the following firms, upon the
authority of said firms as experts in accounting and auditing:
Arthur Andersen LLP, with regard to the consolidated financial
statements for the fiscal year ending September 30, 2001; however as described
in the section of this joint proxy statement/prospectus entitled "Risk Factors,"
Globix was unable to obtain Arthur Andersen LLP's consent with respect to the
use of its report in this joint proxy statement/prospectus and in the
registration statement of which this joint proxy statement/prospectus is a part;
The financial statements of Globix as of September 30, 2002, for the
seven months ended April 30, 2002 and for the five months ended September 30,
2002 included in this joint proxy statement/prospectus and in the reqistation
statement of which this joint proxy statement/prospectus is a part have been so
included in reliance on the reports of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said
firm as experts in auditing and accounting; and
Amper, Politziner & Mattia PC, an independent registered public
accounting firm, with regard to the consolidated financial statements for the
fiscal year ending September 30, 2003.
174
NEON's consolidated financial statements as of and for the years ended
December 31, 2003 and 2002 have been included in this joint proxy
statement/prospectus and in the registration statement of which this joint proxy
statement/prospectus is a part in reliance upon the report of BDO Seidman, LLP,
an independent registered public accounting firm, and upon the authority of said
firm as experts in accounting and auditing. NEON's consolidated financial
statements as of and for the year ended December 31, 2001 have been included in
this joint proxy statement/prospectus and in the registration statement of which
this joint proxy statement/prospectus is a part in reliance upon the report of
Arthur Andersen, LLP; however as described in the section of this joint proxy
statement/prospectus entitled "Risk Factors," NEON was unable to obtain Arthur
Andersen LLP's consent with respect to the use of its report in this joint proxy
statement/prospectus and in the registration statement of which this joint proxy
statement/prospectus is a part.
OTHER PROPOSALS
As of the date of this joint proxy statement/prospectus, neither the
NEON board of directors nor the Globix board of directors knows of any other
matter that will be presented for consideration at its respective special
meetings other than as described in this joint proxy statement/prospectus. If
any other matters come before the special meetings or any adjournments or
postponements thereof and are voted upon, the enclosed proxies will confer
discretionary authority on the individuals named as proxies therein to vote the
shares represented by such proxies as to any such matters. The individuals named
as proxies for the NEON special meeting intend to vote or not to vote in
accordance with the recommendation of the management of NEON. The individuals
named as proxies for the Globix special meeting intend to vote or not to vote in
accordance with the recommendation of the management of Globix.
WHERE YOU CAN FIND MORE INFORMATION
Globix files annual, quarterly and current reports, proxy statements
and other information with the SEC. You may read and copy any of this
information at the SEC's public reference room at 450 Fifth Street N.W., Room
1024, Washington, D.C. 20549. You may obtain information on the operation of the
SEC's Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also
maintains an Internet web site that contains reports, proxy statements and other
information regarding issuers, like Globix, that file electronically with the
SEC. The address of that site is http://www.sec.gov.
Globix has filed a registration statement on Form S-4 of which this
joint proxy statement/prospectus is a part. The registration statement registers
the distribution to NEON stockholders of the shares of Globix common stock and
preferred stock to be issued in connection with the merger.
This joint proxy statement/prospectus, which constitutes part of that
registration statement, does not contain all of the information set forth in the
registration statement and the exhibits and schedules thereto. For further
information with respect to Globix or the shares of common stock or preferred
stock being issued in the merger, reference is made to the registration
statement, including the schedules and exhibits thereto. Statements contained in
this joint proxy statement/prospectus as to the contents of any contract or
other document referred to herein are not necessarily complete and, where such
contract is an exhibit to the registration statement, each such statement is
qualified in all respects by the provisions of such exhibit, to which such
reference is made. Any document that Globix files may be inspected and copied at
the SEC's public reference room at 450 Fifth Street N.W., Room 1024, Washington,
D.C. 20549.
Exhibits and schedules to this joint proxy statement/prospectus are
available from Globix without charge, excluding any exhibits to those documents
unless the exhibit is specifically incorporated by reference as an exhibit in
this joint proxy statement/prospectus. You can also obtain such exhibits and
schedules by requesting them in writing or by telephone from Globix at the
following address:
Globix Corporation
139 Centre Street
New York, New York 10013
Attn: General Counsel
Telephone (212) 334-8500
You can also contact Globix at its website, www.Globix.com. If you
would like to request documents, please do so by [________], 2004 to receive
them before the special meeting. If you request any incorporated document from
Globix, it will mail them to you by first class mail, or another equally prompt
means, within two business days after it receives your request.
175
The SEC allows Globix to "incorporate by reference" in this joint proxy
statement/prospectus certain information which Globix will file with the SEC
from time to time after the date of this joint proxy statement/prospectus in
order to update the information provided herein. This means that Globix can
fulfill its obligations to provide you with certain important information by
referring you to other documents which Globix files with the SEC after the date
of this joint proxy statement/prospectus. All documents which Globix files under
Section 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 between
the date of this joint proxy statement/prospectus and the later of (i) the date
of the NEON special meeting or any adjournment or postponement thereof and (ii)
the date of the Globix special meeting or any adjournment or postponement
thereof.
This document constitutes the prospectus of Globix and the joint proxy
statement of NEON and Globix. Globix has supplied all information contained in
this joint proxy statement/prospectus relating to Globix and NEON has supplied
all such information relating to NEON.
Neither Globix nor NEON has authorized anyone to give any information
or make any representation about the merger, Globix or NEON that is different
from, or in addition to, that contained in this joint proxy
statement/prospectus. Therefore, if anyone does give you information of this
sort, you should not rely on it. The information contained in this document
speaks only as of the date of this document, unless the information specifically
indicates that another date applies.
176
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law, or DGCL, empowers
a corporation to indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of the corporation) by reason of the fact that he
or she was or is a director, officer, employee or agent of the corporation, or
was or is serving at the request of the corporation as a director, officer,
employee or agent of another corporation or other enterprise against expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred in connection with such action, suit or
proceeding if the person identified acted in good faith and in a manner he or
she reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his or her conduct was unlawful. Section 145 of the
DGCL further empowers a corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she was or is a director,
officer, employee or agent of the corporation, or was or is serving at the
request of the corporation as a director, officer, employee or agent of another
corporation or other enterprise against expenses (including attorneys' fees)
actually and reasonably incurred in connection with the defense or settlement of
such action or suit if the person identified acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the corporation, except that no indemnification may be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the court in which
such action or suit was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnity for such
expenses that the court shall deem proper. Section 145 further provides that to
the extent a director or officer of a corporation has been successful in the
defense of any action, suit or proceeding referred to above or in the defense of
any claim, issue or matter therein, he or she shall be indemnified against
expenses (including attorneys' fees) actually and reasonably incurred by him or
her in connection therewith. The statute provides that indemnification pursuant
to its provisions is not exclusive of other rights of indemnification to which a
person may be entitled under any bylaw, agreement, vote of stockholders or
disinterested directors or otherwise.
Our Amended and Restated Certificate of Incorporation and Amended and
Restated Bylaws, provide, in effect, that to the full extent and under the
circumstances permitted by Section 145 of the DGCL, we shall indemnify any
person who was or is a party or is threatened to be made a party to any action,
suit or proceeding of the type described above by reason of the fact that he or
she was or is a director, officer, employee or agent of our company.
Our Amended and Restated Certificate of Incorporation relieves our
directors from monetary damages to our company or our stockholders for breach of
such director's fiduciary duty as a director to the fullest extent permitted by
the DGCL. Under Section 102(b)(7) of the DGCL, a corporation may relieve its
II-1
directors from personal liability to such corporation or its stockholders for
monetary damages for any breach of their fiduciary duty as directors except (i)
for any breach of the director's duty of loyalty to our company or our
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or knowing violation of law, (iii) under Section 174 of
the DGCL or (iv) for any transaction from which the director derived an improper
personal benefit.
In addition, we carry an insurance policy for the protection of our
directors and executive officers against any liability asserted against them in
their official capacities.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
EXHIBIT NO. EXHIBIT DESCRIPTION
2.1 Agreement and Plan of Merger dated as of July 19, 2004 by and
between Globix Corporation and NEON Communications, Inc.
(included as Appendix A-1 to the joint proxy statement/prospectus
forming a part of this Registration Statement)
2.2 First Amendment to Agreement and Plan of Merger dated as of
October 8, 2004 by and between Globix Corporation and NEON
Communications, Inc. (included as Appendix A-2 to the joint proxy
statement/prospectus forming a part of this Registration
Statement)
2.3 Amended Joint Prepackaged Plan of Globix and certain of the
Globix's subsidiaries, dated April 8, 2002 (3)
2.4 Form of Securities Exchange Agreement, dated September, 2004*
3.1 Amended and Restated Certificate of Incorporation of Globix (4)
3.2 Amended and Restated Bylaws of Globix (4)
3.3 Certificate of Amendment to Amended and Restated Certificate of
Incorporation of NEON (included as Appendix B-1 to the joint
proxy statement/prospectus forming a part of this Registration
Statement)
3.4 Certificate of Amendment to Certificate of Designation of
Preferences and Relative, Participating, Optional and Other
Special Rights of Preferred Stock and Qualifications, Limitations
and Restrictions Thereof of 12% Series A Cumulative Convertible
Preferred Stock of NEON (included as Appendix B-2 to the joint
proxy statement/prospectus forming a part of this Registration
Statement)
3.5 Section 262 of the Delaware General Corporation Law (included as
Appendix C to the joint proxy statement/prospectus forming a part
of this Registration Statement)
II-2
4.1 Indenture, dated as of April 23, 2002, between Globix, as issuer,
the Subsidiary Guarantors of Globix named therein and HSBC Bank
USA, as trustee, relating to the 11% senior notes due 2008 (4)
4.2 Form of Pledge and Security Agreement, dated as of April 23,
2002, between each Subsidiary Guarantor of Globix and HSBC Bank
USA, as Collateral Agent/Trustee (4)
4.3 Form of Warrant issued to affiliates of Communication Technology
Advisors (5)
5 Opinion of Day, Berry & Howard LLP as to the validity of the
shares of common stock and preferred stock*
8.1 Opinion of Day, Berry & Howard LLP regarding certain tax aspects
of the merger *
8.2 Opinion of Andrews Kurth LLP regarding certain tax aspects of the
merger*
10.1 Purchase Agreement between Young Woo and Globix, dated as of June
2, 1998 **(1)
10.4 Employment Agreement between Peter L. Herzig and Globix, dated as
of October 2, 2001 (2)
10.8 Consulting Agreement, dated as of April 19, 2002, between Globix
and Communication Technology Advisors LLC (5)
10.9 Agreement between Globix and Communication Technology Advisors,
dated as of November 1, 2002 (5)
10.10 Agreement between Globix and Communication Technology Advisors,
dated as of February 1, 2003 (5)
10.11 Registration Rights Agreement between Globix and the holders of
Globix's securities party thereto, dated as of April 23, 2002 (5)
10.12 Employment Agreement between Globix and Peter K. Stevenson, dated
as of April 15, 2002 (5)
10.14 Letter Agreement between Globix and H. Jameson Holcombe, dated
July 15, 2002 (5)
10.15 Amendment, dated as of August 1, 2003, to the Employment
Agreement between Globix and Peter K. Stevenson (6)
10.16 Contract of Sale, dated as of October 10, 2003, between Globix
and Heritage Partners LLC (6)
II-3
12 Computation of Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends
16 Letter re: Change in Certifying Accountant (7)
21 List of Subsidiaries (6)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Amper, Politziner & Mattia PC
23.3 Consent of BDO Seidman, LLP, independent registered public
accounting firm
23.4 Consent of Day, Berry & Howard LLP (included in Exhibit 5 and
Exhibit 8.1).
23.5 Consent of Andrews Kurth LLP (included in Exhibit 8.2)
24.1 Powers of Attorney (see signature page)
99.1 Form of Proxy Card for Globix
99.2 Form of Proxy Card for NEON
99.3 Opinion of Needham & Company, Inc. (included as Appendix D to the
joint proxy statement/prospectus forming a part of this
Registration Statement)
99.4 Opinion of Adams Harkness, Inc.(f/k/a Adams, Harkness & Hill,
Inc.) (included as Appendix E to the joint proxy
statement/prospectus forming a part of this Registration
Statement)
99.5 Affirmation Letter of Adams Harkness, Inc. (f/k/a Adams, Harkness
& Hill, Inc.) (included as Appendix F to the joint proxy
statement/prospectus forming a part of this Registration
Statement)
99.6 Consent of Needham & Company, Inc.
99.7 Consent of Adams Harkness, Inc.(f/k/a Adams, Harkness & Hill,
Inc.)
--------------------------------------------------------------------------------
* To be filed by amendment.
** Confidential treatment granted for certain portions of this
Exhibit pursuant to Rule 406 promulgated under the Securities Act
of 1933.
(1) Incorporated by reference to the Company's Report on Form 8-K/A
filed on September 18, 1998.
(2) Incorporated by reference to the Company's Annual Report on Form
10-K filed on December 31, 2001.
(3) Incorporated by reference to the Company's Current Report on Form
8-K filed on April 23, 2002.
II-4
(4) Incorporated by reference to the Company's Quarterly Report on
Form 10-Q filed on May 15, 2002.
(5) Incorporated by reference to the Company's Annual Report on Form
10-K filed on March 26, 2003.
(6) Incorporated by reference to the Company's Annual Report on Form
10-K filed on December 18, 2003.
(7) Incorporated by reference to the Company's Report on Form 8-K
filed on September 19, 2003.
(b) Financial Statement Schedules.
(c) N/A
ITEM 22. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration
statement:
(i) To include any prospectus required by section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration
statement (or the most recent post-effective
amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the
information in the registration statement.
Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the
total dollar value of securities offered would not
exceed that which was registered) and any deviation
from the low or high end of the estimated maximum
offering range may be reflected in the form of
prospectus filed with the Securities and Exchange
Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent
no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of
Registration Fee" table in the effective registration
statement;
(iii) To include any material information with respect to
the plan of distribution not previously disclosed in
the registration statement or any material change to
such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to
II-5
the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
(b) The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
(d) That prior to any public reoffering of the securities registered hereunder
through use of a prospectus which is a part of this registration statement, by
any person or party who is deemed to be an underwriter within the meaning of
Rule 145(c), the Registrant undertakes that such reoffering prospectus will
contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form; and
II-6
(e) That every prospectus (a) that is filed pursuant to the immediately
preceding paragraph, or (b) that purports to meet the requirements of Section
10(a)(3) of the Securities Act of 1933 and is used in connection with an
offering of securities subject to the Rule 415, will be filed as part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act of 1933, each such post-effective amendment shall be
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: September 30, 2004 GLOBIX CORPORATION
By: /s/ Peter K. Stevenson
----------------------------------
Peter K. Stevenson
President, Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Peter K. Stevenson or Robert M.
Dennerlein, or any one of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place, and stead, in any and all capacities, to sign any and all
amendments to this Registration Statement on Form S-4 and all documents relating
thereto, and to file the same with the Securities and Exchange Commission,
hereby ratifying and confirming all that said attorneys-in-fact and agents, or
any of them, or their or his substitutes, may lawfully do or cause to be done by
virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated:
/s/ Peter K. Stevenson
--------------------------------------------
Peter K. Stevenson
President, Chief Executive Officer and
Director
(principal executive officer)
Date: September 30, 2004
/s/ Robert M. Dennerlein
--------------------------------------------
Robert M. Dennerlein
Chief Financial Officer
(principal financial and accounting officer)
Date: September 30, 2004
/s/ Peter S. Brodsky
--------------------------------------------
Peter S. Brodsky
Director
Date: September 30, 2004
/s/ Peter L. Herzig
--------------------------------------------
Peter L. Herzig
Director
Date: September 30, 2004
/s/ Steven Lampe
--------------------------------------------
Steven Lampe
Director
Date: September 20, 2004
/s/ Steven G. Singer
--------------------------------------------
Steven G. Singer
Director
Date: September 30, 2004
/s/ Raymond L. Steele
--------------------------------------------
Raymond L. Steele
Director
Date: September 17, 2004
/s/ Steven A. Van Dyke
--------------------------------------------
Steven A. Van Dyke
Director
Date: September 30, 2004
II-8
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Reports of Independent Public Accountants ................................ F-2
Reports of Independent Public Auditors ................................... F-3
Reports of Independent Public Auditors ................................... F-4
Reports of Independent Public Accountants ................................ F-5
Consolidated Balance Sheets-as of June 30, 2004 (Unaudited),
September 30, 2003 and 2002 (Successor Company) .......................... F-6
Consolidated Statements of Operations-for the Nine Months Ended
June 30, 2004 and 2003 (Unaudited) (Successor Company), Year Ended
September 30, 2003 (Successor Company), Five Months Ended September 30,
2002 (Successor Company), Seven Months Ended April 30, 2002 (Predecessor
Company) and Year Ended September 30, 2001 (Predecessor Company).......... F-7
Statements of Changes in Stockholders' Equity (Deficit) and
Comprehensive Income (Loss)- for the Nine Months Ended June 30, 2004
and 2003 (Unaudited) (Successor Company), Year Ended September 30, 2003
(Successor Company), Five Months Ended September 30, 2002 (Successor
Company), Seven Months Ended April 30, 2002 (Predecessor Company)and
Year Ended September 30, 2001 (Predecessor Company)....................... F-8
Consolidated Statements of Cash Flows- for the Nine Months Ended June
30, 2004 and 2003 (Unaudited) (Successor Company), Year Ended September
30, 2003 (Successor Company), Five Months Ended September 30, 2002
(Successor Company), Seven Months Ended April 30, 2002 (Predecessor
Company) and Year Ended September 30, 2001 (Predecessor Company).......... F-9
Notes to Consolidated Financial Statements................................ F-11
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Globix Corporation:
We have audited the accompanying consolidated balance sheet of Globix
Corporation (a Delaware Corporation) and Subsidiaries as of September 30, 2003,
and the related consolidated statement of operations, stockholders' equity and
comprehensive income, and cash flows for the year ended September 30, 2003.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Globix Corporation
and Subsidiaries as of September 30, 2003, and the results of its operations and
its cash flows for the year ended September 30, 2003 in conformity with
accounting principles generally accepted in the United States of America.
In connection with our audit of the financial statements referred to above, we
audited Schedule II - Valuation and Qualifying Accounts. In our opinion, the
financial schedule, when considered in relation to the financial statements
taken as a whole, presents fairly, in all material respects, the information
stated therein.
/s/ Amper, Politziner & Mattia PC
December 8, 2003
Edison, New Jersey
F-2
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated balance sheet as of September 30,
2002 and the related consolidated statements of operations, cash flows and
changes in stockholders' equity present fairly, in all material respects, the
consolidated financial position of Globix Corporation and its subsidiaries (the
Successor Company) at September 30, 2002 and the consolidated results of their
operations and their consolidated cash flows for the five months ended September
30, 2002 in conformity with accounting principles generally accepted in the
United States of America. In addition, in our opinion, the financial statement
schedule as of and for the five months ended September 30, 2002 presents fairly,
in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audit. We
conducted our audit of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
As discussed in Note 2, the United States Bankruptcy Court for the District of
Delaware confirmed the Company's Prepackaged Plan of Reorganization (the "plan")
on April 8, 2002. Confirmation of the plan substantially alters rights and
interests of equity security holders as provided for in the plan. The plan was
substantially consummated on April 25, 2002 and the Company emerged from
bankruptcy. In connection with its emergence from bankruptcy, the Company
adopted fresh start accounting as of May 1, 2002.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 3, 2003
F-3
REPORT OF INDEPENDENT AUDITORS
To the Stockholders and Board of Directors of Globix Corporation:
In our opinion, the accompanying consolidated statements of operations, cash
flows and changes in stockholders' deficit for the seven months ended April 30,
2002 present fairly, in all material respects, the consolidated results of
operations and cash flows of Globix Corporation and its subsidiaries (the
Predecessor Company) for the seven months ended April 30, 2002 in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule for the seven
months ended April 30, 2002 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and
financial statement schedule based on our audit. We conducted our audit of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion. The consolidated financial
statements of Globix Corporation and its subsidiaries (the Predecessor Company)
for the year ended September 30, 2001, prior to the adjustment discussed in Note
3, were audited by other independent accountants who have ceased operations.
Those independent accountants expressed an unqualified opinion on those
financial statements in their report (which included an explanatory paragraph
indicating factors that raise substantial doubt about the Company's ability to
continue as a going concern and an explanatory paragraph emphasizing a change in
the Company's method of accounting for revenue recognition) dated December 31,
2001.
As discussed in Note 2, the Company filed a petition on March 1, 2002 with the
United States Bankruptcy Court for the District of Delaware for reorganization
under the provisions of Chapter 11 of the Bankruptcy Code. The Company's
Prepackaged Plan of Reorganization was substantially consummated on April 25,
2002 and the Company emerged from bankruptcy. In connection with its emergence
from bankruptcy, the Company adopted fresh start accounting.
As discussed in Note 3, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets,"
on May 1, 2002.
As discussed above, the consolidated financial statements of Globix and its
subsidiaries (the Predecessor Company) for the year ended September 30, 2001,
were audited by other independent accountants who have ceased operations. As
described in Note 3, these financial statements have been revised to include the
transitional disclosure required by SFAS No. 142, "Goodwill and Other Intangible
Assets", which was adopted by the Successor Company as of May 1, 2002. In our
opinion, the transitional disclosure is appropriate and have been properly
applied. However, we were not engaged to audit, review, or apply any procedures
to the September 30, 2001 consolidated financial statements of the Predecessor
Company other than with respect to such transitional disclosure and accordingly,
we do not express an opinion or any other form of assurance on the September 30,
2001 financial statements taken as a whole.
/s/ PricewaterhouseCoopers LLP
New York, New York
February 3, 2003
F-4
This report is a copy of a report previously issued by Arthur Andersen LLP,
which has not been reissued by Arthur Andersen LLP. The consolidated balance
sheets at September 30, 2001 and 2000 and the consolidated statements of
operations, stockholders' (deficit) equity and cash flows for the two years
ended September 30, 2000 are not required to be presented in this Form S-4. The
note references in the opinion below are to the financial statements included in
the Form 10-K for the year ended September 30, 2001. As discussed in Note 3 to
the consolidated financial statements, the Company has revised its consolidated
financial statements for the year ended September 30, 2001 to include the
transitional disclosures required by Statement of Financial Accounting Standards
("SFAS") No. 142, "Goodwill and Other Intangible Assets", which was adopted by
the Company as of May 1, 2002. The Arthur Andersen LLP report does not extend to
these changes. The revisions related to these transitional disclosures and
reclassifications were reported on by PricewaterhouseCoopers LLP, as stated in
their report appearing herein.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (a Delaware corporation) and Subsidiaries as of September 30, 2001
and 2000, and the related consolidated statements of operations, stockholders'
(deficit) equity and cash flows for each of the three years in the period ended
September 30, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Globix Corporation and
Subsidiaries as of September 30, 2001 and 2000, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2001 in conformity with accounting principles generally accepted
in the United States.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company has incurred recurring net losses
and net operating cash deficiencies and has a significant stockholders'
deficiency. These factors raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
described in Note 1. The consolidated financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 2 to the consolidated financial statements, the Company
changed its method of accounting for revenue recognition effective October 1,
2000.
/s/ ARTHUR ANDERSEN LLP
New York, New York
December 31, 2001
F-5
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR COMPANY
------------------------------------------
SEPTEMBER 30,
JUNE 30, --------------------------
2004 2003 2002
---------- ---------- ----------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents .............................................. $ 10,954 $ 24,503 $ 47,562
Short-term investments ................................................. 8,501 7,226 5,392
Marketable securities .................................................. 507 1,531 1,327
Accounts receivable, net of allowance for doubtful accounts
of $2,163, $2,646 and $2,565, respectively ........................... 5,964 6,012 7,060
Prepaid expenses and other current assets .............................. 6,083 4,497 7,735
Restricted cash ........................................................ 2,068 2,195 1,760
---------- ---------- ----------
Total current assets ......................................... 34,077 45,964 70,836
Investments ............................................................ 2,233 697 --
Investments, restricted ................................................ 2,335 4,733 7,337
Property, plant and equipment, net ..................................... 92,450 162,630 174,710
Intangible assets, net of accumulated amortization of $3,267,
$1,997 and $543, respectively ........................................ 8,088 8,158 9,612
Other assets ........................................................... 426 100 225
---------- ---------- ----------
Total assets ................................................. $ 139,609 $ 222,282 $ 262,720
========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of capital lease obligation and mortgage payable ....... $ 562 $ 1,510 $ 1,520
Accounts payable ....................................................... 5,203 5,846 8,971
Accrued liabilities .................................................... 9,657 10,159 17,924
---------- ---------- ----------
Total current liabilities .................................... 15,422 17,515 28,415
Capital lease obligations, net of current portion ...................... 185 374 2,807
Mortgage payable ....................................................... 19,681 19,912 20,186
11% Senior Notes ....................................................... 72,202 112,321 120,000
Accrued interest - 11% Senior Notes .................................... 1,347 5,182 5,681
Other long term liabilities ............................................ 8,153 10,659 13,084
Put-option liability ................................................... -- 2,968 --
---------- ---------- ----------
Total liabilities ............................................ 116,990 168,931 190,173
---------- ---------- ----------
Commitments and contingencies (Note 19):
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value; 500,000,000 shares authorized;
16,460,000 issued and outstanding, for all periods presented ......... 165 165 165
Additional paid-in capital ............................................. 99,982 97,191 93,112
Accumulated other comprehensive income ................................. 4,671 2,401 401
Accumulated deficit .................................................... (82,199) (46,406) (21,131)
---------- ---------- ----------
Total stockholders' equity ................................... 22,619 53,351 72,547
---------- ---------- ----------
Total liabilities and stockholders' equity ................... $ 139,609 $ 222,282 $ 262,720
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-6
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------------------------------------- ---------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
--------------------------- YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2004 2003 2003 2002 2002 2001
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED) (UNAUDITED)
Revenue, net .................................. $ 45,143 $ 46,367 $ 60,177 $ 30,723 $ 51,273 $ 104,210
Operating costs and expenses:
Cost of revenue (excluding depreciation,
amortization, occupancy and certain
payroll shown below) .................... 14,785 15,499 19,990 10,458 22,123 40,609
Selling, general and administrative ....... 32,554 33,714 44,430 29,313 57,206 124,821
Loss on impairment of assets .............. 17,972 -- -- -- 2,578 3,500
Restructuring and other charges
(credits) ............................... -- -- (1,020) -- 24,834 56,109
Depreciation and amortization ............. 10,363 11,900 15,523 6,060 28,115 36,657
------------- ------------- ------------- ------------- ------------- -------------
Total operating costs and expenses... 75,674 61,113 78,923 45,831 134,856 261,696
Other operating income .................... -- 345 345 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Loss from operations .......................... (30,531) (14,401) (18,401) (15,108) (83,583) (157,486)
Interest and financing expense ............ (8, 975) (11,223) (15,141) (6,653) (34,511) (65,128)
Interest income ........................... 415 1,030 1,179 787 2,024 13,282
Other (expense) income, net ............... 1,607 606 1,232 (157) (509) (1,379)
Gain on discharge of debt ................. 1,747 5,925 6,023 -- 427,066 --
Minority interest in subsidiary ........... -- 333 -- -- 5,778 --
Reorganization items ...................... -- -- -- -- (7,762) --
Fresh start accounting adjustments ........ -- -- -- -- (148,569) --
------------- ------------- ------------- ------------- ------------- -------------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle ...................... (35,737) (17,730) (25,108) (21,131) 159,934 (210,711)
Income tax expense ............................ 56 -- 167 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) before cumulative
effect of a change in accounting
principle ................................. (35,793) (17,730) (25,275) (21,131) 159,934 (210,711)
Cumulative effect of a change in
accounting principle, net of tax .......... -- -- -- -- -- (2,332)
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) ............................. (35,793) (17,730) (25,275) (21,131) 159,934 (213,043)
Dividends and accretion on
preferred stock ........................... -- -- -- -- (3,178) (7,104)
------------- ------------- ------------- ------------- ------------- -------------
Net income (loss) attributable to
common stockholders ....................... $ (35,793) $ (17,730) $ (25,275) $ (21,131) $ 156,756 $ (220,147)
============= ============= ============= ============= ============= =============
Earnings (loss) per common share:
Basic: Before cumulative effect of a
change in accounting principle ............ $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.96 $ (5.66)
Cumulative effect of a change in
accounting principle ...................... -- -- -- -- -- (0.06)
------------- ------------- ------------- ------------- ------------- -------------
Basic income(loss) per share
attributable to common
stockholders .............................. $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.96 $ (5.72)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding--diluted ...................... 16,460,000 16,460,000 16,460,000 16,460,000 39,618,856 38,476,909
============= ============= ============= ============= ============= =============
Diluted: Before cumulative effect
of a change in accounting principle ....... $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.30 $ (5.66)
Cumulative effect of a change in
accounting principle ...................... -- -- -- -- -- (0.06)
------------- ------------- ------------- ------------- ------------- -------------
Diluted (loss) income per share
attributable to common
stockholders .............................. $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.30 $ (5.72)
============= ============= ============= ============= ============= =============
Weighted average common shares
outstanding--diluted ...................... 16,460,000 16,460,000 16,460,000 16,460,000 48,507,456 38,476,909
============= ============= ============= ============= ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
F-7
GLOBIX CORPORATION AND SUBSIDIARIES
STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY AND COMPREHENSIVE INCOME (LOSS)
(AMOUNTS IN THOUSANDS, EXCEPT SHARE DATA)
ACCUMULATED
OTHER TOTAL
ADDITIONAL COMPREHENSIVE STOCKHOLDERS'
COMMON STOCK PAID-IN DEFERRED INCOME ACCUMULATED EQUITY
SHARES AMOUNT CAPITAL COMPENSATION (LOSS) DEFICIT (DEFICIT)
------------ ---------- --------- ----------- ------------ ------------ ------------
Balance, October 1, 2000
(Predecessor Company) ....................... 37,307,315 $ 373 $ 165,890 $ -- $ 1,784 $ (186,077) $ (18,030)
Issuance of common stock in conjunction
with acquisition ............................ 80,000 1 1,199 -- -- -- 1,200
Issuance of common stock upon exercise of
options ..................................... 1,559,424 15 2,486 -- -- -- 2,501
Issuance of restricted stock .................. 3,063,490 31 8,968 (8,999) -- -- --
Amortization of deferred compensation ......... -- -- -- 1,638 -- -- 1,638
Cancellation of restricted stock .............. (90,000) (1) (263) 264 -- -- --
Dividends and accretion on preferred stock .... -- -- (7,104) -- -- -- (7,104)
Comprehensive Income (loss):
Net loss ................................. -- -- -- -- -- (213,043) --
Unrealized holding losses ................ -- -- -- -- (5,539) -- --
Foreign currency translation
adjustments ............................ -- -- -- -- 1,052 -- --
Total Comprehensive Loss ..................... -- -- -- -- -- -- (217,530)
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, September 30, 2001
(Predecessor Company) ....................... 41,920,229 419 171,176 (7,097) (2,703) (399,120) (237,325)
Amortization of deferred compensation ......... -- -- -- 7,027 -- -- 7,027
Cancellation of restricted stock ............. (23,750) -- (70) 70 -- -- --
Dividends and accretion on preferred stock .... -- -- (3,178) -- -- -- (3,178)
Comprehensive Income (loss):
Net income ............................... -- -- -- -- -- 159,934 --
Unrealized holding gains ................. -- -- -- -- 1,185 -- --
Foreign currency translation
adjustments ............................ -- -- -- -- (1,807) -- --
Total Comprehensive Income .................... -- -- -- -- -- -- 159,312
Fresh start accounting adjustments ............ (25,436,479) (254) (74,816) -- 3,325 239,186 167,441
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, May 1, 2002 (Successor Company) ...... 16,460,000 165 93,112 -- -- -- 93,277
Comprehensive Income (loss):
Net loss ................................. -- -- -- -- -- (21,131) --
Unrealized holding losses ................ -- -- -- -- (1,430) -- --
Foreign currency translation
adjustments ............................ -- -- -- -- 1,831 -- --
Total Comprehensive Loss ..................... -- -- -- -- -- -- (20,730)
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, September 30, 2002
(Successor Company) ......................... 16,460,000 165 93,112 -- 401 (21,131) 72,547
Issuance of warrants to consultants ........... -- -- 1,050 -- -- -- 1,050
Capital contribution in minority-owned
subsidiary, net ............................. -- -- 5,997 -- -- -- 5,997
Put-option .................................... -- -- (2,968) -- -- -- (2,968)
Comprehensive Income (loss):
Net loss ................................. -- -- -- -- -- (25,275) --
Unrealized holding gains ................. -- -- -- -- 195 -- --
Foreign currency translation
adjustments ............................ -- -- -- -- 1,805 -- --
Total Comprehensive Loss ...................... -- -- -- -- -- -- (23,275)
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, September 30, 2003
(Successor Company) ......................... 16,460,000 $ 165 $ 97,191 $ -- $ 2,401 $ (46,406) $ 53,351
Capital distribution in minority-owned
subsidiary, net ............................. -- -- (202) -- -- -- (202)
Exercise of warrants to consultants .......... -- -- 25 -- -- -- 25
Put-option cancellation ....................... -- -- 2,968 -- -- -- 2,968
Comprehensive Income (loss):
Net loss (Unaudited) ..................... -- -- -- -- -- (35,793) --
Unrealized holding gains (Unaudited) ..... -- -- -- -- 140 -- --
Foreign currency translation
adjustments (Unaudited) ................ -- -- -- -- 2,130 -- --
Total Comprehensive Loss (Unaudited) .......... -- -- -- -- -- -- (33,523)
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, June 30, 2004 (Successor Company)
(Unaudited) ................................. 16,460,000 $ 165 $ 99,982 $ -- $ 4,671 $ (82,199) $ 22,619
============ ========== ========== ========== ============ ============ ============
Balance, September 30, 2002
(Successor Company) ......................... 16,460,000 $ 165 $ 93,112 $ -- $ 401 $ (21,131) $ 72,547
Issuance of warrants to consultants .......... -- -- 1,050 -- -- -- 1,050
Comprehensive Income (loss):
Net loss (Unaudited) ..................... -- -- -- -- -- (17,730) --
Unrealized holding gains (Unaudited) ..... -- -- -- -- (316) -- --
Foreign currency translation
adjustments (Unaudited) ................ -- -- -- -- 1,743 -- --
Total Comprehensive Loss (Unaudited) .......... -- -- -- -- -- -- (16,303)
------------ ---------- ---------- ---------- ------------ ------------ ------------
Balance, June 30, 2003 (Successor Company)
(Unaudited) ................................. 16,460,000 $ 165 $ 94,162 $ -- $ 1,828 $ (38,861) $ 57,294
============ ========== ========== ========== ============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
F-8
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SUCCESSOR COMPANY PREDECESSOR COMPANY
-------------------------------------------- -----------------------
FOR THE NINE FIVE SEVEN
MONTHS ENDED YEAR MONTHS MONTHS YEAR
--------------------- ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, SEPT. 30, SEPT. 30, APRIL 30, SEPT. 30,
2004 2003 2003 2002 2002 2001
--------- --------- --------- --------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Cash Flows From Operating Activities
Net Income (Loss) .......................................... $(35,793) $(17,730) $(25,275) $(21,131) $ 159,934 $(213,043)
Operating activities:
Depreciation and amortization ........................... 10,363 11,900 15,523 6,060 28,115 36,657
Provision for uncollectible receivables ................. 591 1,432 1,861 1,904 4,284 14,119
Services contributed to minority-owned subsidiary ....... -- -- -- -- 372 --
Gain on debt discharge .................................. (1,747) (5,925) (6,023) -- (427,066) --
Cumulative effect of a change in accounting principle ... -- -- -- -- -- 2,332
Restructuring and other charge (net of cash payment) .... -- -- (1,020) -- 8,233 22,889
Gain on sale of short-term investments .................. -- -- -- -- -- (1,459)
Unrealized loss (gain) on short-term investment ......... (477) (356) (439) 57 -- --
Loss on impairment of investment ........................ -- -- -- -- 490 3,250
Loss on impairment of assets ............................ 17,972 -- -- -- 2,578 3,500
Gain on sale of marketable securities ................... 249 -- -- -- (27) (663)
Amortization of debt issuance costs ..................... -- -- -- -- 650 1,177
Amortization of deferred compensation and issuance
of stock warrants ..................................... -- 1,050 1,050 -- 7,027 1,638
Write-off of note receivable ............................ -- -- -- 4,078 -- --
Minority interest in subsidiary ......................... -- (333) -- -- (5,778) --
Fresh start accounting adjustment ....................... -- -- -- -- 148,569 --
Changes in assets and liabilities:
Decrease (increase) in accounts receivable .............. 346 (336) (639) 3,565 (3,449) (6,526)
Decrease (increase) in prepaid expenses and other
current assets ........................................ (942) 2,846 3,306 4,210 (4,574) (3,309)
Decrease (increase) in other assets ..................... (326) -- 125 16 54 (3,567)
Increase (decrease) in accounts payable ................. (972) (265) (3,195) 1,362 (5,181) 2,303
Increase (decrease) in accrued liabilities .............. (1,330) (7,184) (7,093) (1,762) 497 947
Increase (decrease) in accrued interest ................. 7,365 9,271 12,359 5,500 31,431 (2)
Other ................................................... (283) (3,111) (2,728) (180) (1,152) (786)
--------- --------- --------- --------- ---------- ----------
Net Cash Provided by (Used in) Operating Activities ........ (4,984) (8,741) (12,188) 3,679 (54,993) (140,543)
--------- --------- --------- --------- ---------- ----------
Cash Flows From Investing Activities
Investments in short-term and long-term investments ..... (2,641) (6,967) (2,017) (5,449) -- --
Proceeds from sale of short-term investments ............ -- -- -- 10,180
Proceeds from restricted cash and investments ........... 2,710 2,727 2,329 166 24,235 9,308
Proceeds from sale of marketable securities ............. 1,000 -- -- -- 64 1,426
Proceeds from sale of property plant and equipment ...... 48,694 -- -- -- -- --
Payment for business acquired from Aptegrity
(Appendix A) .......................................... (2,287) -- -- -- -- --
Return of strategic investments ......................... -- -- -- 51 193 --
Purchase of property, plant and equipment ............... (3,179) (1,186) (1,170) (1,229) (23,341) (134,185)
--------- --------- --------- --------- ---------- ----------
Net Cash Provided by (Used in) Investing Activities ........ 44,297 (5,426) (858) (6,461) 1,151 (113,271)
--------- --------- --------- --------- ---------- ----------
Cash Flows From Financing Activities
Repurchase of 11% Senior Notes .......................... (49,573) (14,612) (14,612) -- -- --
Proceeds from exercise of stock options and warrants,
net ................................................... 25 -- -- -- -- 2,501
Capital contribution (distribution) in minority-owned
subsidiary, net ...................................... (202) 5,997 5,997 -- -- 5,406
Payment of dividends on preferred stock ................. -- -- -- (1,500)
Settlement of capital lease obligations ................. (439) -- (850) -- -- --
Repayment of long-term note payable ..................... (2,666) -- -- -- -- --
Repayment of mortgage payable and capital lease
obligation ............................................ (424) (1,050) (1,074) (2,279) (4,946) (6,020)
--------- --------- --------- --------- ---------- ----------
Net Cash Provided by (Used in) Financing Activities ........ (53,279) (9,665) (10,539) (2,279) (4,946) 387
Effects of Exchange Rates Changes on Cash and Cash
Equivalents .............................................. 417 636 526 (99) 8 1,052
--------- --------- --------- --------- ---------- ----------
Decrease in Cash and Cash Equivalents ...................... (13,549) (23,196) (23,059) (5,160) (58,780) (252,375)
Cash and Cash Equivalent, Beginning of Period .............. 24,503 47,562 47,562 52,722 111,502 363,877
--------- --------- --------- --------- ---------- ----------
Cash and Cash Equivalent, End Period ....................... $ 10,954 $ 24,366 $ 24,503 $ 47,562 $ 52,722 $ 111,502
========= ========= ========= ========= ========== ==========
F-9
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
SUCCESSOR COMPANY PREDECESSOR COMPANY
---------------------------------------------- ----------------------
FOR THE NINE FIVE SEVEN
MONTHS ENDED YEAR MONTHS MONTHS YEAR
----------------------- ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, SEPT. 30, SEPT. 30, APRIL 30, SEPT. 30,
2004 2003 2003 2002 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Supplemental Disclosure of Cash Flow Information:
Cash paid for interest .................................... $ 5,261 $ 1,755 $ 2,294 $ 975 $ 2,101 $ 78,289
Cash paid for income taxes ................................ $ -- $ -- $ -- $ -- $ -- $ 34
Non-cash investing and financing activities:
11% Senior Notes issued in payment of accrued interest .... $ 7,155 $ 11,298 $ 11,298 $ -- $ -- $ --
Equipment acquired under capital lease obligations ........ $ -- $ -- $ -- $ -- $ 1,036 $ 19,475
Capital expenditures included in accounts payable,
capital liabilities and other long term liabilities ..... $ -- $ -- $ -- $ 168 $ 273 $ 12,557
Cumulative dividends and accretion on preferred stock ..... $ -- $ -- $ -- $ -- $ 3,178 $ 7,104
Mandatorily redeemable convertible preferred stock ........ $ -- $ -- $ -- $ -- $ 83,230 --
Restructuring of debt ..................................... $ -- $ -- $ -- $ -- $ 427,066 --
Put-option ................................................ $ (2,968) $ -- $ 2,968 $ -- $ -- $ --
APPENDIX A - PAYMENT FOR BUSINESS ACQUIRED FROM APTEGRITY:
SUCCESSOR COMPANY PREDECESSOR COMPANY
---------------------------------------------- ----------------------
FOR THE NINE FIVE SEVEN
MONTHS ENDED YEAR MONTHS MONTHS YEAR
----------------------- ENDED ENDED ENDED ENDED
JUNE 30, JUNE 30, SEPT. 30, SEPT. 30, APRIL 30, SEPT. 30,
2004 2003 2003 2002 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Current assets ............................................ $ (696) $ -- $ -- $ -- $ -- $ --
Property, plant and equipment ............................. (738) -- -- -- -- --
Current liabilities ....................................... 347 -- -- -- -- --
Other intangible assets ................................... (1,200) -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
$ (2,287) $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ========== ==========
The accompanying notes are an integral part of these consolidated financial statements.
F-10
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. GENERAL
Globix Corporation and its subsidiaries ("Globix", the "Company" or the
"Successor Company") is a provider of Internet solutions to businesses. The
solutions include secure and fault-tolerant Internet data centers with network
services providing network connectivity to the Internet and Internet-based
managed services and application services, which include co-location, dedicated
hosting, streaming media, and messaging services. The Company currently offers
services from facilities in New York City, New York, Santa Clara, California,
Atlanta, Georgia and London, England.
The financial statements presented have been prepared by the Company in
accordance with accounting principles generally accepted in the United States of
America and the rules and regulations of the Securities and Exchange Commission.
As a result of the application of fresh start accounting as of May 1, 2002, in
accordance with the American Institute of Certified Public Accountants Statement
of Position No. 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code", the Company's financial results for
the fiscal year ended September 30, 2002 include two different bases of
accounting and, accordingly, the operating results and cash flows of the
Successor Company and the Predecessor Company have been separately disclosed.
For the purposes of these financial statements, references to the "Predecessor
Company" are references to the Company for periods prior to April 30, 2002 (the
last day of the calendar month in which the Company emerged from bankruptcy) and
references to the "Successor Company" are references to the Company for periods
subsequent to April 30, 2002. The Successor Company's financial statements are
not comparable to the Predecessor Company's financial statements. Although April
25, 2002 was the effective date of Globix's emergence from bankruptcy (the
"Effective Date"), for financial reporting convenience purposes, the Company
accounted for the consummation of the Plan of Reorganization (the "Plan") as of
April 30, 2002.
The following table describes the periods presented in the financial statements
and related notes thereto:
PERIOD REFERRED TO AS
------ --------------
From May 1, 2002 through June 30, 2004 "Successor Company"
From October 1, 2001 through April 30, 2002 and
for the fiscal year ended September 30, 2001 "Predecessor Company"
The Company has historically experienced negative cash flow from operations and
has incurred net losses. For the nine months ended June 30, 2004 and for the
year ended September 30, 2003 the Company had a net loss of $35,793 (unaudited)
and $25,275, respectively, and an accumulated deficit at June 30, 2004 and
September 30, 2003of $82,199 (unaudited) and $46,406, respectively. Our ability
to generate positive cash flows from operations and achieve profitability is
dependant upon our ability to grow our revenue while maintaining our current
cost structure and network efficiencies. Our management believes that steps
taken as part of our restructuring efforts to reduce facilities and personnel,
combined with our ongoing efforts to derive efficiencies from our network, have
reduced our expenses to a level that meets our current revenue rate. The Company
believes that its internally generated funds, available cash and investments are
sufficient to meet its presently anticipated day-to-day operating expenses,
commitments, working capital, capital expenditure and interest payments under
its 11% Senior Notes when required to be made in cash. However, there can be no
assurance that we will be successful in executing our business plan, achieving
profitability, attracting new customers or maintaining our existing revenue
levels or reducing our outstanding indebtedness. In the future, the Company may
make acquisitions or repurchase indebtedness of the Company, which, in turn, may
adversely affect the Company's liquidity.
Approximately 27% (Unadited) and 38% of the Company's cost of revenue for the
nine month period ended June 30, 2004 and for the fiscal year September 30,
2003, respectively is derived from services provided by 2 major
telecommunication carriers. While the Company believes that most of these
services can be obtained from other alternative carriers, an interruption in
services from one of these carriers or other suppliers could limit the Company's
ability to serve its customers, which would adversely affect the Company's
results of operations. No single customer comprised more than 10% of the
Company's revenues for any of the periods presented.
F-11
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
2. MERGERS AND ACQUISITIONS
On October 31, 2003, Globix acquired for cash the business, substantially all of
the assets and assumed certain liabilities of Aptegrity, Inc. ("Aptegrity"), a
provider of web application and operations management services for a total net
cash consideration of approximately $2,300. The acquisition was accounted for as
a purchase; accordingly, the purchase price has been allocated to the assets
acquired. The allocation of the purchase price among the identifiable intangible
assets was based upon the Company's estimates of fair value of those assets. The
Company has recorded $800 in respect of acquired trademarks and trade names
which are being amortized on a straight-line basis over 7 years and $400 was
recorded in respect of customer contracts which are being amortized on a
straight-line basis over 2 years. The operations of Aptegrity are included in
the consolidated statements from November 1, 2003. Pro forma information has not
been provided due to immateriality of Aptegrity's results of operations.
On July 19, 2004, Globix signed a definitive merger agreement with NEON
Communications, Inc. ("Neon"), a privately held provider of optical networking
services for customers in the Northeast and mid-Atlantic markets. Neon's revenue
for the year ended December 31, 2003 was $41,600. Under the merger agreement,
holders of Neon common stock, options and warrants will receive 1.2748 shares of
Globix common stock for each share of common stock, options or warrants owned by
the holder. As a result of the merger, Neon will become a wholly owned
subsidiary of Globix, and holders of Neon common stock and warrants will receive
approximately 27.6 million shares of Globix common stock, representing
approximately 56.7% of the outstanding shares of common stock of the combined
entity. In addition at the closing, the combined entity's cash will be used to
redeem one third of Neon's preferred stock and accrued dividends at closing and
Globix will issue convertible preferred stock for the balance. Assuming a
September 30, 2004 closing, Neon preferred stockholders will receive in the
aggregate approximately $5,100 in cash and approximately 1,152,948 shares of a
class of Globix preferred stock to be created in the merger, having an aggregate
liquidation value of approximately $10,200. The new Globix preferred stock will
vote together with the common stock and will be convertible into shares of
Globix common stock. The Globix preferred stock will accrue dividends at a rate
of 12% per annum and will be redeemable only at the option of Globix, and at the
option of the holders upon a change in control.
Following the merger, the Board of Globix will include 4 members of the Board of
Directors of Neon, 4 members of the current Globix Board and 1 member who
currently serves on both the Globix and the Neon Boards.
The transaction is subject to a number of conditions, including approval of the
merger by Neon stockholders, the registration of the Globix common stock and
preferred stock to be issued in the merger and other regulatory approvals. The
merger is also conditioned upon a debt for equity exchange where, in a private
transaction, certain of Globix's senior secured note holders will exchange
$12,500 in principal and accrued interest of its 2008 11% Senior Notes for
approximately 4,545,455 shares of Globix common stock.
F-12
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
3. REORGANIZATION AND EMERGING FROM CHAPTER 11
On March 1, 2002, the Company and two of its wholly-owned subsidiaries,
Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code, together with a prepackaged Plan with the United
States Bankruptcy Court for the District of Delaware. The Company continued to
operate in Chapter 11 in the ordinary course of business and received permission
from the bankruptcy court to pay its employees, trade, and certain other
creditors in full and on time, regardless of whether these claims arose prior to
or after the Chapter 11 filing.
On April 8, 2002, the bankruptcy court confirmed the Plan. Effective April 25,
2002, all conditions necessary for the Plan to become effective were satisfied
or waived and the Company emerged from Chapter 11 bankruptcy protection.
As of the Effective Date of the Plan, all of the Company's existing securities
were cancelled and:
- Each holder of the Company's 12.5% Senior Notes due 2010 (the "12.5% Senior
Notes"), became entitled to receive, in exchange for its claims in respect
of the 12.5% Senior Notes, its pro rata share of:
- $120,000 in aggregate principal amount of the Company's 11% Senior Secured
Notes due 2008 (the "11% Senior Notes"), and
- 13,991,000 shares of the Company's common stock, representing 85% of the
shares of the Company's common stock issued and outstanding following the
Effective Date of the Plan;
- Each holder of shares of the Company's preferred stock outstanding
immediately prior to the Effective Date of the Plan became entitled to
receive, in exchange for its claims in respect of these shares of preferred
stock, its pro rata share of 2,304,400 shares of the Company's common
stock, representing 14% of the shares of the Company's common stock issued
and outstanding following the Effective Date of the Plan; and
- Each holder of shares of the Company's common stock outstanding immediately
prior to the Effective Date of the Plan became entitled to receive, in
exchange for its claims in respect of these shares of common stock, its pro
rata share of 164,600 shares of the Company's common stock, representing 1%
of the shares of the Company's common stock issued and outstanding
following the Effective Date of the Plan.
A total of 16,460,000 shares of the Company's common stock and $120,000 in
aggregate principal amount of the 11% Senior Notes were deemed to be issued and
outstanding on the Effective Date pursuant to the terms of the Plan, and are
deemed to be issued and outstanding for purposes of these financial statements.
As of September 30, 2002, however, no shares of the Company's common stock or
11% Senior Notes had been distributed. In October 2002, the Company distributed
a total of 16,295,400 shares of common stock and $120,000 in aggregate principal
amount of 11% Senior Notes. Pursuant to the terms of a Stipulation and Order
that the Company entered into with the lead plaintiffs in the class action
lawsuit described in Note 18, 229,452 of these shares of common stock and $1,968
in aggregate principal amount of these 11% Senior Notes were placed in reserve
in escrow pending the outcome of the class action lawsuit. In the event that any
judgment or settlement entered into in connection with the class action lawsuit
requires the Company to pay an amount in excess of its liability insurance, then
the Company will be required to issue to the class action litigants and their
attorneys all (in the event that this excess is $10,000 or greater) or a portion
of (in the event that this excess is less than $10,000) of the shares of common
stock and 11% Senior Notes held in escrow. Distribution of the remaining 164,600
shares of common stock deemed to have been issued on the Effective Date, which
are allocable under the terms of the Plan to the holders of the Company's common
stock outstanding immediately prior to the Effective Date of the Plan, will
occur following the resolution of the shareholder derivative suit against the
Company and certain former officers and directors described in Note 19.
F-13
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
MANAGEMENT ESTIMATES
The preparation of the Company's financial statements in accordance with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. Such estimates and
assumptions affect the reported amounts of assets, liabilities, revenue and
expenses and related disclosures of contingent assets and liabilities.
Significant estimates include estimates of the collectibility of accounts
receivable, the useful lives and ultimate realizability of property, equipment,
intangible assets, deferred tax assets and restructuring reserves. Estimates and
assumptions are reviewed periodically and the effects of revisions are reflected
in the period that they are determined to be necessary. Actual results may vary
from these estimates under different assumptions or conditions.
INTERIM FINANCIAL INFORMATION
The consolidated financial information as of June 30, 2004 and for the nine
months ended June 30, 2004 and 2003 is unaudited, but includes all adjustments,
consisting only of normal and recurring accruals, that management considers
necessary for a fair presentation of its combined results of operations,
financial position and cash flows. Results for the nine months ended June 30,
2004 and 2003 are not necessarily indicative of results to be expected for the
entire fiscal year.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Included in the Company's consolidated results is a 0.01%
owned subsidiary, 415 Greenwich GC Tenant, LLC. The Company controls all
financial aspects of this entity. All significant intercompany accounts and
transactions have been eliminated in consolidation.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities". FIN 46 classifies entities into two groups: (1) those for which
voting interest are used to determine consolidation; and (2) those for which
other interests (variable interest) are used to determine consolidation. FIN 46
deals with the identification of Variable Interest Entities ("VIE") and the
business enterprise which should include the assets, liabilities,
non-controlling interests, and results of activities of a VIE in its
consolidated financial statements. FIN 46 has become effective during 2003. The
adoption of FIN 46 did not have an effect on the Company's consolidated
financial statements.
REVENUE RECOGNITION
Revenue consists primarily of Internet Hosting, Co-Location, Managed Services,
Network Services and Internet Access.
We recognize revenue in accordance with the Securities and Exchange Commission's
Staff Accounting Bulletin, or SAB, No. 101 "Revenue Recognition in Financial
Statements," as amended when delivery has occurred, persuasive evidence of an
agreement exists, the fee is fixed or determinable and collectability is
probable. SAB No. 101 expresses the view of the Securities and Exchange
Commission's staff in applying accounting principles generally accepted in the
United States of America to certain revenue recognition issues. Under the
provisions of SAB No. 101, set up and installation revenue are deferred and
recognized over the estimated length of the customer relationship, which in the
case of our business is approximately 36 months. Prior to April 30, 2002, the
estimated length of the customer relationship was 12-18 months. Effective
October 1, 2000, we changed our revenue recognition method for set up and
service installation fees upon the adoption of SAB No. 101. Prior to our
adoption of SAB No. 101, we recognized revenue immediately upon completion of
set up or installation. The change in accounting principle resulted in a revenue
deferral and cumulative effect charge totaling $2.3 million, or $0.06 per share,
which was reflected in our consolidated statements of operations for the fiscal
year ended September 30, 2001. Our adoption of SAB No. 101 decreased our net
loss by $0.5 million for the fiscal year ended September 30, 2001. The effect of
our adoption of SAB No. 101 for the fiscal year ended September 30, 2000 was not
material.
The Company maintains a provision for potential future credits which will be
issued in respect of current revenues.
Monthly service revenue under recurring agreements related to Internet Hosting,
Co-Location, Network Services, Internet Access and Managed Services is
recognized over the period the service is provided. Revenue derived from project
or event type Managed Service engagements is recognized over the life of the
engagement. Payments received in advance of providing services are deferred
until the period that these services are provided. As of June 30, 2004,
September 30, 2003 and September 30, 2002, deferred revenue amounted to $1,637
(unaudited) and $1,740 and $1,503, respectively.
F-14
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company provided $802 and purchased $551 of data center services from a
telecommunications operator during the year ending September 30, 2002. $318 of
the transactions billed were settled monetarily, with the balance of $445
settled by offsetting or netting the remainder.
In September 2002, the EITF issued Issue No. 00-21, "Accounting for Revenue
Arrangements with Multiple Deliverables." The scope of EITF 00-21 deals with how
a company should recognize revenue when it sells multiple products or services
to a customer as part of an overall solution. In general, EITF 00-21 provides
the following broad criteria for recognizing revenue in multiple element
arrangements: (i) revenue should be recognized separately for separate units of
accounting; (ii) revenue for a separate unit of accounting should be recognized
only when the arrangement consideration is reliably measurable and the earnings
process is complete; (iii) consideration should be allocated among separate
units of measure of accounting in an arrangement based on their relative fair
values. The adoption of EITF 00-21 during the third quarter of the fiscal year
2003 did not have an impact on the Company's results of operations or financial
position.
COST OF REVENUE
Cost of revenue consists primarily of telecommunications costs for Internet
access and managed hosting and includes the cost of hardware and software
purchased for resale to customers and payroll cost which relates to certain
managed services. Cost of revenue excludes certain payroll, occupancy and
depreciation and amortization. Telecommunications costs include the cost of
providing local loop for connecting dedicated access customers to the Company's
network, leased line and associated costs related to connecting with the
Company's peering partners and costs associated with leased lines connecting the
Company's facilities to its backbone and aggregation points of presence.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations of
credit risk consist primarily of cash and cash equivalents, short-term
investments, restricted cash and restricted investments, marketable securities
and accounts receivable. The Company maintains cash and cash equivalents,
short-term investments and restricted cash and restricted investments with
various major financial institutions, which invest primarily in U.S. Government
instruments, high quality corporate obligations, certificates of deposit and
commercial paper.
The Company believes that concentrations of credit risk with respect to trade
accounts receivable are limited due to the Company's large number of customers.
The Company performs ongoing credit evaluations of its customers and maintains
reserves for potential losses. The Company's management makes estimates of the
uncollectibility of its trade accounts receivable on a monthly basis. No single
customer of the Company individually comprised more than 10% of the Company's
revenues for all periods presented.
In December 2000, the Company received a note for $4,100 relating to the
settlement of a lease of a data center property. This note was to be paid on
either the sale of the property, the lease of at least 95% of the property, or
two years from the date of the note. The obligor has indicated that it has
insufficient funds to satisfy the debt and does not intend to make payment.
While the Company has made demand and intends to vigorously pursue legal remedy,
in light of the financial condition of the obligor, the Company has written off
the entire amount during the five month period ended September 30, 2002.
Short-term investments and marketable securities are well diversified and
accordingly minimal credit risk exists with respect to these investments.
F-15
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash and cash equivalents.
Included in restricted cash are funds held in escrow related to a mortgage on
the Company's property located at 139 Centre Street, collateral funds for the
Company's corporate credit card and required share capital held in escrow for
the Company's European subsidiaries. These funds are primarily invested in
highly liquid investments with an original maturity of three months or less. The
classification is determined based on the expected term of the collateral
requirement and not the maturity date of the underlying securities.
MARKETABLE SECURITIES
Investment in marketable equity securities covered by SFAS No. 115 "Accounting
for Certain Investments in Debt and Equity Securities", were designated as
available-for-sale. Accordingly, these securities are stated at fair value, with
unrealized gains/ losses reported in accumulated other comprehensive income
(loss). Realized gain and losses are calculated based on specific identification
method. Other-than-temporary declines in value from the original cost are
charged to operations in the period in which the loss occurs. In determining
whether other-than- temporary decline in the market value has occurred, the
Company considers the duration that and the extent to which market value is
below original cost. As of September 30, 2003 no impairment has been recorded
due to those investments as a result of market condition after September 30,
2003. At September 30, 2003 and 2002, marketable securities had a cost basis of
approximately $2,800 and a balance of unrealized losses of $1,226 and $1,430,
respectively which was included in the Company's accumulated other comprehensive
loss, a separate component of the stockholders' equity.
INVESTMENTS
Short-term investments consist of an investment in a limited partnership which
invests in fixed income securities and certain investments which do not meet the
requirements to be reported as cash and cash equivalents. The limited
partnership is accounted for in accordance with APB No. 18, "The Equity Method
of Accounting for Investments in Common Stock". At September 30, 2003 and 2002
the limited partnership had a cost basis of $5,000 and $5,000, respectively and
the unrealized gain (loss) from applying the equity method amounted to $523 and
$(57), respectively, which were recorded in the Company's consolidated
statements of operations.
Also included in investments are investments in mortgage and asset backed
securities which do not meet the requirements to be reported as cash and cash
equivalents. These investments are classified as available for sale securities
and reported at fair value, with unrealized gains and losses excluded from
earnings and reported in other comprehensive income or loss in stockholders'
equity. At September 30, 2003 and 2002, these investments had a cost of $2,466
and $449, respectively and the balance of unrealized loss from the "mark to
market" adjustment of $9 and $0, respectively, which was included in the
Company's accumulated other comprehensive loss, a separate component of the
stockholders' equity.
Included in restricted investments as of September 30, 2003 and 2002 are
collateral funds for the note payable of $2,600 and amounts held in escrow
related to the lease of the Company's facility located at Prospect House, 80 New
Oxford Street, London, United Kingdom of approximately $2,000. These funds are
primarily invested in highly liquid investments with an original maturity of
three months or less. Also included in the balance for September 30, 2002 are
collateralized funds for the Rabbi Trust obligation of $2,756 described in Note
12 which is included in other long-term liabilities. The classification is
determined based on the expected term of the collateral requirement and not the
maturity date of the underlying securities. During April 2004, the Company
reached an agreement with the holder of its $2,600 note payable to prepay the
note prior to its maturity for a total consideration of $2,666, representing the
face value of the note, accrued interest of $11 and a $55 settlement fee.
Following the settlement the $2,600 included in the Company's long-term
restricted investment were released from escrow.
F-16
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at depreciated historical cost for the
Predecessor Company adjusted for impairment and include fresh start adjustments
for the Successor Company. All identifiable assets recognized in accordance with
fresh start accounting were recorded at the Effective Date of the Plan based
upon an independent appraisal. Depreciation is provided using the straight-line
method for financial reporting purposes and accelerated methods for income tax
purposes. The estimated useful lives of property are as follows:
YEARS
---------
Buildings and buildings improvements....................... 10 - 44
Computer hardware and software and network equipment ...... 2 - 7
Office furniture and equipment ............................ 3 - 7
Leasehold improvements are amortized over the term of the lease or life of the
asset, whichever is shorter. Maintenance and repairs are charged to expense as
incurred. The cost of additions and betterments are capitalized. The cost and
related accumulated depreciation of property retired or sold are removed from
the applicable accounts and any gain or loss is taken into income.
The Company's long-lived assets are reviewed for impairment in accordance with
Statement of Financial Accounting Standard No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" ("SFAS No. 144") whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to the future undiscounted cash
flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the assets.
F-17
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INTANGIBLE ASSETS
The Company adopted Statement of Financial Accounting Standards No. 141,
"Business Combinations" ("SFAS 141") and Statement of Financial Accounting
Standard No. 142, "Goodwill and other Intangible Assets "("SFAS 142") at the
Effective Date of the Plan. SFAS 141 requires all business combinations to be
accounted for using the purchase method of accounting and that certain
intangible assets acquired in a business combination must be recognized as
assets separate from goodwill. SFAS 142 addresses the recognition and
measurement of goodwill and other intangible assets subsequent to their
acquisition. SFAS 142 also addresses the initial recognition and measurement of
intangible assets acquired outside of a business combination whether acquired
individually or with a group of other assets. This statement provides that
intangible assets with indefinite lives and goodwill will not be amortized but,
will be tested at least annually for impairment. If impairment is indicated then
the asset will be written down to its fair value typically based upon its future
expected discounted cash flows.
For the seven month period ended April 30, 2002 and the fiscal years ended
September 30, 2001, goodwill amortization amounted to $1,141 and $2,604,
respectively. If the Company had adopted SFAS 142 as of October 1, 2000 and
discontinued goodwill amortization, the Company's net income and loss per common
share on a pro forma basis would have been as follows:
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------------- ---------------------------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2003 2002 2002 2001
-------------- -------------- -------------- --------------
Net income (loss) ............................. $ (25,275) $ (21,131) $ 159,934 $ (213,043)
Add back goodwill amortization .............. -- -- 1,141 2,604
Adjusted net income (loss) .................... (25,275) (21,131) 161,075 (210,439)
Dividends and accretion on
preferred stock ........................... -- -- (3,178) (7,104)
-------------- -------------- -------------- --------------
Adjusted net income (loss)
attributed to common stockholders ........... $ (25,275) $ (21,131) $ 157,897 $ (217,543)
============== ============== ============== ==============
Adjusted earnings (loss) per common share:
Basic earnings (loss) per share
attributable to common stockholders ......... $ (1.54) $ (1.28) $ 3.99 $ (5.65)
============== ============== ============== ==============
Diluted earnings (loss) per share
attributable to common stockholders ......... $ (1.54) $ (1.28) $ 3.32 $ (5.65)
============== ============== ============== ==============
Intangible assets of the Successor Company are as follows:
- trademarks and trade name;
- network build-out/know-how; and
- customer contracts.
The Company amortizes intangible assets by the straight line method over their
estimated useful lives. Trademarks and trade name are amortized over a period of
7-15 years, network build out/know how are being amortized over 8 years and the
customer contracts are amortized over 2-3 years.
Intangible assets are reviewed for impairment in accordance with SFAS No. 144.
During the seven month period ended April 30, 2002, the Company recorded an
impairment charge of $3,221 of intangible assets related to the acquisition of
Comstar.net, Inc., which ceased its operations.
F-18
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
INCOME TAXES
Deferred income taxes are provided in accordance with SFAS No. 109, "Accounting
for Income Taxes" for differences between financial statement and income tax
bases of assets and liabilities using enacted tax rates in effect in the years
in which the differences are expected to reverse. The Company provides a
valuation allowance on net deferred tax assets when it is more likely than not
that these assets will not be realized. Certain tax benefits existed as of the
Effective Date of the Plan but were offset by valuation allowances. The
utilization of these benefits to reduce income taxes paid to U.S. Federal and
state and foreign jurisdictions does not reduce the Company's income tax
expense. Realization of net operating loss, tax credits and other deferred tax
benefits from pre-emergence attributes will first reduce intangible assets until
exhausted, and thereafter will be credited to additional paid in capital.
COMPREHENSIVE INCOME
SFAS No. 130, "Reporting Comprehensive Income", requires the reporting of
comprehensive income in addition to net income from operations. Comprehensive
income is a more inclusive financial reporting method that includes amounts that
historically have not been recognized in the calculation of net income.
Comprehensive Income and Accumulated Other Comprehensive Income (Loss) includes
net income, foreign currency translation, and unrealized gain (loss) on
financial instruments and is included in the Consolidated Statements of
Stockholders' Equity (Deficit).
FOREIGN CURRENCY TRANSLATION
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with SFAS No. 52, "Foreign Currency Translation". These
subsidiaries' assets and liabilities are translated into U.S. Dollars at the
year-end rate of exchange. Income and expense items are translated at the
average exchange rate during the year. The resulting foreign currency
translation adjustment is included in stockholders' equity as a component of
accumulated other comprehensive income. Transaction gains and losses are
recorded in the consolidated statement of operations.
F-19
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
STOCK-BASED COMPENSATION
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans, the Company has elected to follow Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" for recognizing stock-based
compensation expense for financial statement purposes. For companies that choose
to continue applying the intrinsic value method, SFAS No. 123 mandates certain
pro forma disclosures as if the fair value method had been utilized. The Company
accounts for stock based compensation to consultants in accordance with EITF
96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services" and
SFAS No. 123.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement No.
123", which provides optional transition guidance for those companies electing
to voluntarily adopt the accounting provisions of SFAS No. 123. In addition,
SFAS No. 148 mandates certain new disclosures that are incremental to those
required by SFAS No. 123. The Company continued to account for stock-based
compensation in accordance with APB No. 25.
The following table illustrates the effect on income (loss) attributable to
common stockholders and earnings (loss) per share if the Company had applied the
fair value recognition provisions of SFAS No. 123 to stock-based employee
compensation.
SUCCESSOR COMPANY PREDECESSOR COMPANY
---------------------------------------------------------------- ----------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
------------------------------ YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2004 2003 2003 2002 2002 2001
------------- ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Net income (loss), as
reported
attributable to
common stockholders ...... $ (35,793) $ (17,730) $ (25,275) $ (21,131) $ 156,756 $ (220,147)
============= ============ ============ ============ ============ ============
Pro-forma net income
(loss) attributed to
common stockholders ...... $ (36,167) $ (18,814) $ (26,488) $ (21,131) $ 151,621 $ (228,599)
============= ============ ============ ============ ============ ============
Earning (loss) per
share attributable to
common stockholders
Basic - as reported ......... $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.96 $ (5.72)
============= ============ ============ ============ ============ ============
Basic - Pro-forma ........... $ (2.20) $ (1.14) $ (1.61) $ (1.28) $ 3.83 $ (5.94)
============= ============ ============ ============ ============ ============
Diluted - as reported ....... $ (2.17) $ (1.08) $ (1.54) $ (1.28) $ 3.30 $ (5.72)
============= ============ ============ ============ ============ ============
Diluted - Pro-forma ......... $ (2.20) $ (1.14) $ (1.61) $ (1.28) $ 3.19 $ (5.94)
============= ============ ============ ============ ============ ============
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:
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------------------------------------------- -----------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
---------------------------- YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2004 2003 2003 2002 2002 2001
----------- ----------- ------------- ------------- ------------ -------------
(UNAUDITED) (UNAUDITED)
Expected life (in years) ..... 5.0 4.2 4.2 -- 6.0 6.0
Risk-free interest rate....... 3.2% 2.7% 2.7% -- 4.7% 5.0%
Volatility ................... 120% 128% 128% -- 133% 133%
Dividend yield................ 0.0% 0.0% 0.0% -- 0.0% 0.0%
F-20
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
EARNINGS (LOSS) PER SHARE
Basic earnings or loss per share is calculated by dividing net loss attributable
to common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted earnings or loss per share is calculated
by dividing net income (loss) attributable to common shareholders by the
weighted average number of common shares outstanding, adjusted for potentially
dilutive securities. The following table summarizes the equivalent number of
common shares assuming the related securities that were outstanding for each of
the periods presented had been converted, but not included in the calculation of
diluted loss per share because such shares are antidilutive:
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------------------------------------------- -----------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
----------------------------- YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2004 2003 2003 2002 2002 2001
------------ ------------ ------------- ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Convertible Preferred Stock.... -- -- -- -- -- 8,617,300
Employee Stock Options......... 1,184,886 1,094,442 1,101,756 -- 10,021,258 10,394,781
Warrants....................... 500,000 500,000 500,000 -- 194,797 194,797
------------ ------------ ------------- ------------ ------------ ------------
1,684,886 1,594,442 1,601,756 -- 10,216,055 19,206,878
============ ============ ============= ============ ============ ============
The following is a reconciliation of basic earnings per share to diluted
earnings per share:
PREDECESSOR COMPANY
----------------------------------------------------
SEVEN MONTHS ENDED APRIL 30, 2002
----------------------------------------------------
NUMERATOR DENOMINATOR PER SHARE
INCOME (LOSS) SHARES AMOUNT
--------------- --------------- -------------
Basic earnings per share:
Net income....................................... $ 159,934
Dividends and accretion on preferred stock....... (3,178)
--------------- ---------------
Net income attributable to common stockholders... $ 156,756 39,618,856 $ 3.96
=============== =============== =============
Add back dividends on preferred stock............ 3,178 8,888,600
Diluted earnings per share:
--------------- ---------------
Net income attributable to common stockholders... $ 159,934 48,507,456 $ 3.30
=============== =============== =============
F-21
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECENT ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS No. 149 clarifies under
what circumstances a contract with an initial net investment meets the
characteristics of a derivative as discussed in Statement No. 133. It also
specifies when a derivative contains a financing component that warrants special
reporting in the Consolidated Statement of Cash Flows. SFAS No. 149 amends
certain other existing pronouncements in order to improve consistency in
reporting these types of transactions. The new guidance is effective for
contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. The adoption of this standard did
not have a material impact on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". SFAS No. 150
specifies that instruments within its scope embody obligations of the issuer and
that, therefore, the issuer must classify them as liabilities. SFAS No. 150
requires issuers to classify as liabilities the following three types of free
standing financial instruments: (1) mandatorily redeemable financial
instruments; (2) obligations to repurchase the issuer's equity shares by
transferring assets and (3) certain obligations to issue a variable number of
shares. SFAS No. 150 defines a "freestanding financial instrument" as a
financial instrument that (1) is entered into separately and apart from any of
the entity's other financial instruments or equity transactions or (2) is
entered into in conjunction with some other transaction and can be legally
detached and exercised on a separate basis. For all financial instruments
entered into or modified after May 31, 2003, SFAS No. 150 is effective
immediately. For all other instruments of public companies, SFAS No. 150 goes
into effect at the beginning of the first interim period beginning after June
15, 2003. For contracts that were created or modified before May 31, 2003 and
still exist at the beginning of the first interim period beginning after June
15, 2003, entities should record the transition to SFAS No. 150 by reporting the
cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits
entities from restating financial statements for earlier years presented. The
adoption of SFAS No. 150 did not have a material impact on the Company's
consolidated financial statements.
In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51", which
relates to the identification of, and financial reporting for, variable-interest
entities (VIEs). FIN No. 46 requires that if an entity is the primary
beneficiary of a variable interest entity, the assets, liabilities and results
of operations of the variable interest entity should be included in the
consolidated financial statements of the entity. The provisions of FIN No. 46
are effective immediately for all arrangements entered into after January 31,
2003. For those arrangements entered into prior to February 1, 2003, the
provisions of FIN No. 46 are required to be adopted at the beginning of the
first interim or annual period beginning after June 15, 2003. In October 2003,
FASB Staff Position deferred the effective date for existing VIE arrangements
created before February 1, 2003 to the first interim or annual reporting period
that ends after December 15, 2003. The adoption of this standard did not have a
material impact on the Company's consolidated financial statements.
5. FRESH START ACCOUNTING
In accordance with SOP 90-7, the Company determined its enterprise value as of
the emergence date at $240,000. This amount was based upon several generally
accepted valuation methodologies including discounted cash flows, comparable
public company analysis and comparable mergers and acquisitions analysis. The
tangible assets were valued using the costs and market comparables methods. The
intangible assets were valued using the income approach and the cost approach
methods. Certain of the following assumptions which were used by the Company in
determining the enterprise value are highly subjective:
o 3-15- year cash flow depending on the asset evaluated, with no
residual value assigned;
o Corporate income tax rate of 45%;
o Discount rate of 20%.
The assigned equity values are based upon the reorganized value of the ongoing
business and include significant estimates made by management based on
information available as of the Effective Date. Valuation methodologies require
the input of highly subjective assumptions. Actual future results and events
could differ substantially from current estimates and assumptions. Any changes
in valuation could affect the Company's balance sheet.
In accordance with the principles of fresh start accounting, the Company has
adjusted the value of its assets and liabilities to their fair values as of
April 30, 2002. The equity value of the Successor Company at May 1, 2002 was
calculated as follows:
Enterprise Value........................................ $ 240,000
11% Senior Notes........................................ (120,000)
Mortgage Payable........................................ (20,536)
Capitalized Leases...................................... (6,187)
----------------
Equity value of Successor Company....................... $ 93,277
================
F-22
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The net effect of all fresh start accounting adjustments resulted in a charge of
$148,569 which is reflected in the Predecessor Company's statement of operations
for the seven month period ended April 30, 2002. The interest of $11,507 on the
12.5% Senior Notes for the period March 1, 2002 through the Effective Date was
not accrued in accordance with SOP 90-7.
On the Effective Date of the Plan, the Company recognized a gain of $427,066
associated with the exchange of the 12.5% Senior Notes for the 11% Senior Notes
and shares of the Company's common stock under the Plan. As a result of the
adoption of SFAS No. 145, "Rescission of SFAS Nos. 4, 44, and 64, Amendment of
SFAS 13, and Technical Corrections as of April 2002", the gain was reclassified
from extraordinary item to a gain on extinguishment of debt included in the
Predecessor Company's Statement of Operations for the seven month period ended
April 30, 2002
The Successor Company's gain on discharge of debt at April 30, 2002 was
calculated as follows:
Carrying value of 12.5% Senior Notes....................................... $ 600,000
Carrying value of related accrued interest................................. 43,750
Carrying value of 11% Senior Notes......................................... (120,000)
Carrying value of capitalized costs associated with 12.5% Senior Notes..... (17,398)
85% of equity value of Successor Company................................... (79,286)
-------------
Gain on discharge of debt............................................. $ 427,066
=============
The effects of the transactions contemplated by the Plan and the application of
fresh start accounting on the Company's consolidated balance sheet are as
follows:
PREDECESSOR SUCCESSOR
COMPANY COMPANY
APRIL 30, DEBT FRESH START APRIL 30,
2002 DISCHARGE ADJUSTMENTS(1) 2002
------------ ------------ -------------- ------------
ASSETS
Cash and cash equivalents .................... $ 52,722 $ -- $ -- $ 52,722
Marketable securities ........................ 2,757 -- -- 2,757
Accounts receivable, net ..................... 11,959 -- -- 11,959
Prepaid expenses and other current assets .... 17,264 -- (2,024) 15,240
Restricted cash .............................. 4,018 -- -- 4,018
------------ ------------ ------------ ------------
Total current assets .................. 88,720 -- (2,024) 86,696
Investments, restricted ...................... 5,114 -- -- 5,114
Property, plant and equipment, net ........... 333,063 -- (155,693) 177,370
Debt issuance costs, net ..................... 18,250 (17,398)(a) (852) --
Intangible assets, net ....................... -- -- 10,155 10,155
Other assets ................................. 500 -- (208) 292
------------ ------------ ------------ ------------
Total assets .......................... $ 445,647 $ (17,398) $ (148,622) $ 279,627
============ ============ ============ ============
F-23
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
PREDECESSOR SUCCESSOR
COMPANY COMPANY
APRIL 30, DEBT FRESH START APRIL 30,
2002 DISCHARGE ADJUSTMENTS(1) 2002
---------- ---------- -------------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current portion of capital lease
obligation and mortgage payable .......... $ 5,239 $ -- $ (1,690) $ 3,549
Accounts payable ............................ 7,782 -- (110) 7,672
Accrued liabilities ......................... 26,067 (2,713)(b) (2,264) 21,090
Accrued restructuring ....................... 3,122 -- -- 3,122
---------- ---------- ---------- ----------
Total current liabilities ............ 42,210 (2,713) (4,064) 35,433
Liabilities not subject to compromise:
Capital lease obligation, net of current
portion .................................. 6,383 -- (3,499) 2,884
Mortgage payable ............................ 20,291 -- -- 20,291
11% Senior Notes ............................ -- 120,000(c) -- 120,000
Other long-term liabilities ................. 232 -- 7,510 7,742
---------- ---------- ---------- ----------
Total liabilities not subject to
compromise ......................... 69,116 117,287 (53) 186,350
Liabilities subject to compromise ........... 643,750 (643,750)(c),(d) -- --
---------- ---------- ---------- ----------
Total liabilities .................... 712,866 (526,463) (53) 186,350
MANDATORILY REDEEMABLE
CONVERTIBLE PREFERRED STOCK .............. 83,695 (83,695)(e) -- --
TOTAL STOCKHOLDERS' (DEFICIT) EQUITY ........ (350,914) 592,760 (148,569) 93,277
---------- ---------- ---------- ----------
Total liabilities and
stockholders' (deficit) equity ..... $ 445,647 $ (17,398) $(148,622) $ 279,627
========== ========== ========== ==========
(a) To remove debt issuance cost associated with the 12.5% Senior Notes.
(b) To remove accrued dividends payable on mandatorily redeemable convertible
preferred stock.
(c) To exchange 12.5% Senior Notes for 11.0% Senior Notes.
(d) To remove accrued interest on 12.5% Senior Notes.
(e) To remove mandatorily redeemable convertible preferred stock.
(1) To adjust assets and liabilities to fair value.
6. REORGANIZATION ITEMS
Reorganization expenses are expenses incurred by the Predecessor Company in
connection with its reorganization under Chapter 11 of the Bankruptcy Code.
Reorganization items included in the Predecessor Company's Statement of
Operations include professional fees directly related to the Predecessor
Company's bankruptcy. Reorganization expenses included in the statement of
operations were approximately $7,762 for the seven-month period ended April 30,
2002. No reorganization items were incurred by the Company in any of the other
periods presented.
7. PREPAID EXPENSES AND OTHER CURRENT ASSETS
SUCCESSOR COMPANY
--------------------------------
SEPTEMBER 30,
--------------------------------
2003 2002
-------------- -------------
Prepaid expenses.......................... $ 3,797 $ 5,999
Accrued interest income................... 7 528
Notes receivables......................... 152 192
Other..................................... 541 1,016
-------------- -------------
$ 4,497 $ 7,735
============== =============
F-24
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
SUCCESSOR COMPANY
----------------------------------
SEPTEMBER 30,
----------------------------------
2003 2002
--------------- --------------
Land....................................................... $ 2,713 $ 2,713
Building and building improvements......................... 84,380 84,094
Leasehold improvements..................................... 75,286 71,322
Computer hardware and software and network equipment....... 15,454 15,607
Furniture and equipment.................................... 3,846 3,660
--------------- --------------
181,679 177,396
Less: Accumulated depreciation and amortization............ (19,136) (5,549)
Add: Construction in progress.............................. 87 2,863
--------------- --------------
Property, plant and equipment, net......................... $ 162,630 $ 174,710
=============== ==============
Depreciation expense, were $14,069, $5,517, $26,974 and $34,053 for the year
ended September 30, 2003, the five months ended September 30, 2002, the seven
months ended April 30, 2002 and the year ended September 30, 2001, respectively.
At September 30, 2001, the Company recorded an estimated loss on impairment of
operating assets of $3,500. During the seven month period ended April 30, 2002,
the Company determined that impaired assets previously held for disposal were to
be used in operations and, accordingly, $643 of this charge was reversed.
Certain computer and network equipment are recorded under capital leases that
aggregated approximately $1,770 and $4,466 as of September 30, 2003 and 2002,
respectively. Accumulated amortization on the assets recorded under capital
leases aggregated approximately $257 and $465 as of September 30, 2003 and 2002,
respectively. During the year ended September 30, 2003, the Company purchased
certain of its equipment recorded under capital lease for a total consideration
of $850. The acquired assets had a net carrying value of $1,364 and the related
balance of the capital lease was $1,690. The transaction resulted in a net
reduction of $840 in the balance of the Company's network equipment. During the
nine month ended June 30, 2004, the Company paid $319 to terminate several
capital lease obligations totaling $785. The early termination resulted in a
gain of $466, which is included in the Company's results of operations for the
period. In addition, the Company purchased certain of its equipment recorded
under capital lease for a total consideration of $120. The acquired assets had a
carrying value of approximately $213 and the related balance of the capital
lease was $194. The transaction resulted in a net reduction of $74 to the
balance of the Company's property and equipment.
ATC Merger Corp. ("ATC Corp."), a wholly owned subsidiary of the Company, owns
the land and building located at 139 Centre Street, New York, New York ("139
Centre St. Building"). The nine-story building with approximately 160,000 square
feet of floor space houses the Company's corporate headquarters and one of its
Internet data center facilities. A former owner has the right to purchase the
Centre Street property and is entitled to additional consideration if the
Company sells the property in an amount equal to the greater of (a) $1,000
(subject to increase after June 1, 2018 by ten percent and an additional ten
percent every fifth year thereafter), or (b) 10% of the gross sales price of the
property if the sales price is greater than $17,500. As per the use of the 139
Centre St. Building to secure the Company's mortgage note see Note 15.
During October 2003 the Company reached an agreement, which was subject to
various closing conditions, to sell the property located at 415 Greenwich
Street, New York, NY ("the Property") for total cash consideration of
approximately $60,000. The sale of the Property was completed on January 22,
2004. In connection with the sale the Company recorded during the nine month
period ended June 30, 2004, an impairment charge of $17,972 to write-down the
Property to its market value less cost to sell of approximately $12,000,
reflecting a $7,000 payment required to be made to a third party investor in the
Property (See Note 9), approximately $1,800 of property taxes due in connection
with the sale, $450 of sale related bonuses (See Note 21) and other related
expenses. On March 3, 2004, the Company used approximately $44,000 of the net
proceeds to repurchase $40,274 in principal amount of its outstanding 11% Senior
Notes Due 2008 at par value plus accrued interest in the amount of $3,716. The
Company intends to use the remaining balance of the net proceeds from the sale
for working capital purposes.
F-25
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
9. MINORITY INTEREST
In September 2000, the Company purchased the Property. The Property is a
certified historic structure eligible for historic tax credits ("Tax Credits")
based on qualified expenditures, as defined in the Internal Revenue Code.
In June 2001, the Company entered into an agreement whereby the Tax Credits
generated from the renovation of the Property will be utilized by a third party
(the "Investor") via a subsidiary (the"LLC") in consideration for a capital
contribution to the LLC of approximately $16,549, which represents a 99.9%
interest in the LLC. As of September 30, 2002, the LLC had received
approximately $5,778 of such capital contribution. The LLC received an
additional $4,458 in October 2002 and an additional $1,636 in January 2003. The
remaining balance of the capital contribution is due from the Investor in annual
installments as follows:
YEAR ENDING SEPTEMBER 30,
-----------------------------------
2004............................... $ 1,557
2005............................... 1,479
2006............................... 1,400
2007............................... 241
--------------
Total.............................. $ 4,677
==============
As a result of the sale of the Property the Company will not receive the
remaining balance of capital contribution, see also Note 7.
Although the Company's ownership of the LLC is 0.1%, the Company has
consolidated the financial statements of the LLC since inception due to
effective control of the LLC by the Company resulting in a minority interest in
subsidiary in the accompanying consolidated financial statements. The following
table reflects the summary statement of operations data for the LLC for the year
ended September 30, 2003, the five months ended September 30, 2002, the seven
months ended April 30, 2002, and for the period from inception to September 30,
2001:
SUCCESSOR COMPANY PREDECESSOR COMPANY
--------------------------------------- ---------------------------------------
FIVE MONTHS SEVEN MONTHS PERIOD FROM
YEAR ENDED ENDED ENDED INCEPTION (JUNE 11,
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, 2001) TO
2003 2002 2002 SEPTEMBER 30, 2001
------------------- ------------------- ------------------ -------------------
Revenue................................. $ 7,700 $ 3,208 $ 4,492 $ 2,331
Net Loss................................ (439) (195) (7,374) (701)
=================== =================== ================== ===================
Basic and diluted loss per share
attributable to common stockholders.... $ (0.01) $ (0.01) $ (0.19) $ (0.02)
=================== =================== ================== ===================
In connection with the above transaction, the Investor had a Put Option with the
Company. The Put Option provided that during the 6 months following the 61st
month after the date of the certification of the qualifying rehabilitation
expenditures (the "Certification Date") which occurred on September 17, 2002,
the Investor may require the Company to purchase the Investor's interest in the
LLC for an amount equal to 25% of the Investor's capital contribution in the
LLC. If the Investor does not exercise its Put Option, the Company may exercise
a Call Option during a period of 24 months following the 73rd month after the
Certification Date. The Call Option allows the Company to acquire the Investor
interest in LLC for the greater of the fair market value of the Investor
interest in the LLC or an amount equal, on an after tax basis, to taxes payable
by the Investor upon the sale of its investment. In connection with the $7,000
termination payment (See Note 8), the Investor agreed to cancel the put-option.
The Put Option that the Company has written has been recorded at its fair value
and is marked to fair value through stockholders' equity. At September 30, 2003
and 2002, the fair value of this option approximated $2,968 and $0,
respectively. As a result of the cancellation of the put-option, the Company
reversed the put-option liability through stockholder's equity.
See also Note 8 as per the sale of the Property during January 2004 and the
related payment to the Investor.
F-26
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
10. INTANGIBLE ASSETS
SUCCESSOR COMPANY
----------------------------------------------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------------------------ ------------------------------------
GROSS CARRYING ACCUMULATED GROSS CARRYING ACCUMULATED
AMOUNT AMORTIZATION AMOUNT AMORTIZATION
---------------- ---------------- ---------------- ----------------
Trademarks and trade names .... $ 1,584 $ 149 $ 1,584 $ --
Network build-out know-how .... 7,453 1,320 7,453 388
Customer contracts ............ 1,118 528 1,118 155
---------------- ---------------- ---------------- ----------------
$ 10,155 $ 1,997 $ 10,155 $ 543
================ ================ ================ ================
Identifiable intangible assets amortization expense amounted to $1,454, $543, $0
and $0, for the year ended September 30, 2003, for the five months ended
September 30, 2002, for the seven months ended April 30, 2002 and for the year
ended September 30, 2001, respectively.
Estimated future annual amortization expense as of September 30, 2003 is as
follows:
YEAR ENDING SEPTEMBER 30,
---------------------------------
2004 ............................ $ 1,410
2005 ............................ 1,255
2006 ............................ 1,037
2007 ............................ 1,037
2008 ............................ 1,037
Thereafter....................... 2,382
----------
Total............................ $ 8,158
==========
11. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
SUCCESSOR COMPANY
----------------------------------
SEPTEMBER 30,
----------------------------------
2003 2002
--------------- ---------------
Franchise tax, sales tax and property tax............... $ 1,312 $ 2,177
Salaries, benefits and commissions...................... 1,372 1,636
Telecommunications accrual.............................. 2,228 1,706
Technology licenses and maintenance contracts........... 249 1,205
Deferred revenue ....................................... 1,740 1,503
Restructuring .......................................... 68 1,828
Other ................................................. 3,190 7,869
--------------- ---------------
$ 10,159 $ 17,924
=============== ===============
F-27
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
12. RESTRUCTURING AND OTHER
The Company announced a number of restructuring actions to reduce expenses and
streamline operations. These actions included a workforce reduction and
rationalization of data center and sales locations. The Company recorded
restructuring charges of $56,109 in fiscal 2001. The Company recorded net
restructuring of $24,834 in the seven month period ended April 30, 2002. This
amount is comprised of $28,395, offset by reversals of $3,561, related to
revised estimates and a $1,184 vendor settlement related to an asset impaired in
the prior year. The Company believes these actions will result in ongoing annual
operating expense savings of approximately $24,000.
During the quarter ended December 31, 2000, the Company's board of directors
approved a restructuring plan to modify its Internet data center expansion plan
to delay, scale back and eliminate certain facilities. The restructuring plan
included the termination of certain lease obligations, associated surplus power
and environmental equipment related to the proposed expansion of Globix Internet
data centers in Boston, MA; Seattle, WA; and Los Angeles, CA. When initiated,
the restructuring plan was expected to take approximately one year to complete.
The Company recorded a $38,109 charge associated with this restructuring plan in
the fiscal quarter ending December 31, 2000. Approximately $18,460 of this
charge was recorded as a write-off of construction in progress, which included
capitalized interest, consulting and legal fees, construction and
pre-construction related costs previously capitalized. Approximately $17,019 was
recorded for landlord contract settlements and $2,630 for facilities closings.
During the quarter ending September 30, 2001, the Company further modified its
business plan to eliminate certain additional Internet data center and sales
office facilities, resulting in the termination of certain employees, lease
obligations and write-off of certain equipment, leasehold improvements and
intangible assets and other costs. In connection with this modification,
additional restructuring charges of $18,000 were recorded, of which $9,947 was a
write-off of equipment, leasehold improvements and intangible assets, $4,150 for
landlord contract settlements, $2,703 for facility closings and $1,200
associated with employee terminations (106 employees).
During the quarter ended March 31, 2002, the Company made an additional
modification to its business plan pursuant to the Plan, in order to reduce
certain Internet data center lease obligations and close certain network access
points and network aggregation points, resulting in the termination of certain
employees, lease obligations and write-off of certain equipment, leasehold
improvements and other costs. In connection with this modification, the Company
recorded a restructuring charge of $28,395, of which $16,407 was for the
write-off of previously escrowed lease deposit and landlord inducement and legal
payments, $6,922 was for the write-off of equipment and leasehold improvements,
$2,120 for facilities closings and $2,946 was associated with employee
terminations (148 employees).
Reversals related to contract settlement charges and facility closings were
primarily for settling certain facility contracts and purchase commitments for
amounts lower than originally planned. Reversals related to fiscal 2001 asset
write downs were primarily related to adjustments to estimated Plant, Property
and Equipment impairment. Actual impairment amounts were less than the original
estimates.
F-28
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table displays the activity and balances of the restructuring
reserve account from inception to September 30, 2003:
RESTRUCTURING OTHER
--------------------------------------------------- ---------------------------------
EMPLOYEE CONTRACT FACILITY ASSETS
TERMINATION SETTLEMENTS CLOSING WRITE-DOWN TOTAL
-------------- ---------------- --------------- ---------------- ---------------
Restructure Charge......................... $ 1,200 $ 21,169 $ 5,333 $ 28,407 $ 56,109
Deductions-Non-Cash........................ -- -- -- (22,889) (22,889)
Deductions-Cash............................ (194) (17,119) (3,380) (3,336) (24,029)
-------------- ---------------- --------------- ---------------- ---------------
September 30, 2001 Balance
(Predecessor Company) ................... 1,006 4,050 1,953 2,182 9,191
Additional Restructure Charge.............. 2,946 16,407 2,120 6,922 28,395
Deductions-Non-Cash........................ (889) -- (422) (6,922) (8,233)
Deductions-Cash............................ (2,520) (18,480) (1,669) -- (22,669)
Reversal to Fiscal 2001 Plan............... -- (678) (701) (2,182) (3,561)
-------------- ---------------- --------------- ---------------- ---------------
April 30, 2002 Balance
(Predecessor Company) ................... 543 1,299 1,281 -- 3,123
Deductions-Cash............................ (400) -- (895) -- (1,295)
-------------- ---------------- --------------- ---------------- ---------------
September 30, 2002 Balance
(Successor Company) ..................... 143 1,299 386 -- 1,828
Deduction-Cash............................. (143) (485) (112) -- (740)
Reversal of accruals....................... -- (814) (206) -- (1,020)
-------------- ---------------- --------------- ---------------- ---------------
September 30, 2003
(Successor Company) ..................... $ -- $ -- $ 68 $ -- $ 68
============== ================ =============== ================ ===============
The remaining liability is expected to be settled in cash.
13. OTHER LONG TERM LIABILITIES
Other long-term liabilities consist of the following:
SUCCESSOR COMPANY
--------------------------------
SEPTEMBER 30,
--------------------------------
2003 2002
-------------- --------------
Note payable......................................... $ 2,600 $ 2,600
Rabbi trust obligation............................... -- 2,777
Negative leasehold obligation........................ 7,247 7,607
Deferred rent........................................ 486 100
Other................................................ 326 --
-------------- --------------
$ 10,659 $ 13,084
============== ==============
The Company has a $2,600 note payable, due November 15, 2005. The note bears
interest, payable monthly, at the rate of Prime plus 1%. The note is
collateralized by an irrevocable standby letter of credit. The related funds are
included in restricted investments on the accompanying consolidated balance
sheet. During April 2004, the Company reached an agreement with the holder of
its $2,600 note payable to prepay the note prior to its maturity for a total
consideration of $2,666, representing the face value of the note, accrued
interest of $11 and a $55 settlement fee. Following the settlement the $2,600
included in the Company's long-term restricted investment were released from
escrow.
On July 21, 1999, the Company established a trust (the "Rabbi Trust") for the
benefit of a former executive. The trust agreement was for three years beginning
in April 1999 through March 1, 2002. The agreement was amended on March 21,
2001, and provided for payments from the Rabbi Trust commencing April 2001.
Payments were made from the Trust until March 1 2002, when Globix and two of its
wholly-owned subsidiaries filed for Chapter 11. The Company was in litigation
over the trust which was settled pursuant to court order confirmation of the
settlement dated June 13, 2003. Pursuant to this settlement, Mr. Bell received a
distribution of $990 and the Company received a distribution of approximately
$1,700. The amount of approximately $100 was retained by the trustee to cover
the costs of winding up the trust. See also Note 18.
F-29
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
In connection with fresh start accounting at the Effective Date, the Company
recorded a Negative Leasehold Liability associated with three of its Internet
data centers. The Negative Leasehold Liability amount was determined by
independent appraisal and based upon research of the local market condition in
each market and estimation of the net effective market rental rates in
comparison to the Company's contractual lease rates through expiration of the
lease. Such liability will be amortized to reduce lease expense over the
remaining life of the lease as follows:
YEAR ENDING SEPTEMBER 30,
----------------------------------
2004 ............................. $ 678
2005 ............................. 678
2006 ............................. 678
2007 ............................. 678
2008.............................. 678
Thereafter........................ 4,535
--------------
Total............................. 7,925
Less: Current Portion............. (678)
--------------
Long-term Portion................. $ 7,247
==============
14. 12.5% SENIOR NOTES AND 11% SENIOR NOTES
In February 2000, the Company issued $600,000 in aggregate principal amount of
its 12.5% Senior Notes in a private placement resulting in net proceeds of
approximately $580,000. In connection with the offer of the 12.5% Senior Notes
the Company incurred costs of approximately $20,000 that were being amortized
over ten years using the effective interest method.
As of the Effective Date, all of the existing 12.5% Senior Notes were cancelled
and each holder of the 12.5% Senior Notes became entitled to receive, in
exchange for its 12.5% Senior Notes, its pro rata share of $120,000 in aggregate
principal amount of the 11% Senior Notes and 13,991,000 shares of the Company's
common stock, representing 85% of the shares of the Company's common stock
issued and outstanding following the Effective Date. The interest of $11,507 on
the 12.5% Senior Notes for the period March 1, 2002 through the Effective Date
was not accrued in accordance with SOP 90-7. See Note 4 as per the accounting
treatment applied under the Fresh Start Accounting.
The Company is deemed to have issued the 11% Senior Notes on the Effective Date
in one series that is initially limited to $120,000 aggregate principal amount
of 11% Senior Notes. However, none of the 11% Senior Notes had been distributed
as of September 30, 2002. In October 2002, the Company distributed $120,000 in
aggregate principal amount of the 11% Senior Notes, which included $1,968 in
aggregate principal amount of Senior Notes placed in reserve in escrow pursuant
to a Stipulation and Order entered into with the lead plaintiffs in the class
action lawsuit described in Note 18.
The 11% Senior Notes will mature on May 1, 2008. The 11% Senior Notes will bear
interest at 11% per annum, payable annually in May of each year, commencing on
May 1, 2003. Interest on the 11% Senior Notes for the first two year period
following the initial date of issuance is, payable in kind by the issuance of
additional notes with terms identical to the 11% Senior Notes (other than the
date of issuance) in a principal amount equal to the interest payment then due.
For the two year period thereafter, interest is payable in cash or, at the
Company's option when authorized by its board of directors, in additional notes
with terms identical to the 11% Senior Notes (other than the date of issuance),
or in any combination of cash and additional notes. For the remaining two years
until maturity, interest is payable in cash. As of September 30, 2003 the
Company issued an additional $ 11,298 in 11% Senior Notes in payment of accrued
interest on the 11% Senior Notes.
F-30
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The 11% Senior Notes were issued under an indenture dated as of April 23, 2002
(the "Indenture"), among the Company, HSBC Bank USA, as trustee (the "Trustee")
and Bluestreak Digital, Inc., Gamenet Corporation, NAFT Computer Service
Corporation, NAFT International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.net, Inc. and Comstar Telecom & Wireless, Inc., as the initial
Subsidiary Guarantors. See Note 21 for additional disclosures related to the
Subsidiary Guarantors. During 2003, the Company merged each of these subsidiary
guarantors, other than 415 Greenwich GC, 415 Greenwich GC tenant, LLC, 415
Greenwich GC MM, LLC, with into the Company.
Each holder of the 11% Senior Notes will have the right to require the Company
to repurchase all or a portion of its 11% Senior Notes for a purchase price
equal to 101% of the principal amount of that holder's 11% Senior Notes plus
accrued and unpaid interest to the date of repurchase in the event that:
- Subject to certain exceptions, any person, entity or group of persons
or entities becomes the beneficial owner, directly or indirectly, of
50% or more of the Company's outstanding voting securities;
- At any time during the two-year period following the distribution of
the 11% Senior Notes, the individuals that comprise a majority of the
Company's board of directors on the date of distribution of the 11%
Senior Notes, plus any new directors elected to the Company's board of
directors during this two-year period, cease to comprise a majority of
the Company's board of directors;
- Subject to certain exceptions, the Company consolidates with or merges
with or into another entity, the Company sells or leases all or
substantially all of its assets to another entity or any entity
consolidates with or merges with or into the Company, in each case
pursuant to a transaction in which the Company's outstanding voting
securities are changed into or exchanged for cash, securities or other
property, unless no person, entity or group of persons or entities
owns, immediately after the transaction, more than 50% of the
Company's outstanding voting stock,
The Indenture contains a number of covenants that impose significant operating
and financial restrictions on the Company and its subsidiaries. These
restrictions significantly limit, and in some cases prohibit, among other
things, the ability of the Company and certain of its subsidiaries to incur
additional indebtedness, create liens on assets, enter into business
combinations or engage in certain activities with subsidiaries. As of September
30, 2003, the Company was in compliance with the material operating and
financial restrictions imposed upon the Company contained in the Indenture.
During the year ended September 30, 2003, the Company repurchased in the open
market for $14,612 a portion of its outstanding 11% Senior Notes, which had a
principal value of approximately $19,074 and associated accrued interest of
$1,561. As a result of the repurchase the Company recorded a gain on discharge
of debt in the amount of $6,023.
On October 3, 2003, the Company repurchased in the open market for $5,583 a
portion of its outstanding 11% Senior Notes, which had a principal value of
$7,000 and associated accrued interest of $330. As a result of the repurchase
the Company recorded a gain on discharge of debt in the amount of $1,747. On
March 3, 2004, following the sale of the Property, the Company used
approximately $44,000 to repurchase $40,274 in principal amount of its
outstanding 11% Senior Notes at par value plus accrued interest in the amount of
$3,716 (See also Note 8).
15. MORTGAGE PAYABLE
On January 25, 2000, the Company borrowed $21,000 from a financial institution
pursuant to a mortgage note secured by the Company's property at 139 Centre
Street, New York. Interest is payable at 9.16% (subject to adjustment on
February 11, 2010) based on a 25 year amortization schedule. Principal and
interest payments of $178.5 are payable monthly and any balance of the principal
and all accrued and unpaid interest is due and payable in February 2025.
F-31
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
16. STOCKHOLDERS' EQUITY
RESTRICTED STOCK GRANT
In December 2000, the Company granted 3,063,490 shares of restricted stock to
certain employees and directors. The restricted stock awards vested 25% per year
over a four-year period on the anniversary date of the grant. In connection with
this restricted stock grant, the Company recorded a deferred compensation charge
of $8,999 in stockholders' equity. This deferred compensation was to be recorded
as compensation expense over the four-year vesting period. In April 2002, the
Company's board of directors approved the vesting of 100% of the remaining
unvested restricted shares. This resulted in a non-cash charge to compensation
expense of $5,100 in April 2002. Compensation expense recorded in the seven
month period ended April 30, 2002 was $7,027.
STOCK OPTION PLANS
On March 14, 2003, the Company's board of directors approved the 2003 Stock
Option Plan (the "2003 Plan"). The 2003 Plan provides for the grant of stock
options to purchase up to 1,828,889 shares of the Company's common stock to any
employee, officer, director, or consultant of the Company at an exercise price
equal to at least the fair market value at the date of grant. All options
granted under the 2003 Plan shall terminate no later than ten years from the
date of grant, 50% of options granted under the 2003 Plan vest ratably over a
period of up to 3 years with certain acceleration clauses while the remainder of
the 50% vest upon meeting certain financial conditions. As of September 30, 2003
the Company's board of directors granted a total of 1,355,976 options. Although
the 2003 Plan and the aforementioned options grants are pending on the approval
of the Company's stockholders, such options are considered as granted for
accounting purposes. None of the options granted under the 2003 Plan can be
exercised prior to an approval of the Plan by the stockholders. The 2003 Plan
was approved by the Company's stockholders during the annual stockholders
meeting in February 2004. Outstanding options, which are subject to meeting
certain financial conditions, are accounted for in accordance with FIN 28,
"Accounting for Stock Appreciation Rights and Other Variable Stock Option or
Award Plans an interpretation of APB Opinions No. 15 and 25". These options are
subject to variable accounting and are valued quarterly over their respective
periods until all performance goals are satisfied or until the options are
vested, forfeited or cancelled. During the nine month period ended June 30, 2004
the Company did not record deferred stock compensation and amortization of
deferred stock compensation as the exercise price of the unvested variable
options exceeded the price of the common stock at the end of the quarter ended
June 30, 2004.
Until the Effective Date the Company's shareholders approved several options
plans. As a result of the Company's reorganization, all outstanding options and
warrants granted under those plans were cancelled and such plans were considered
void as of the Effective Date.
Summary Stock Option Activity
The following table summarizes stock option information with respect to all
stock options for the three years ended September 30, 2003:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
------------ ----------------
Options outstanding, September 30, 2000 10,298,692 $ 9.54
Granted 2,784,160 3.11
Canceled (1,128,647) 12.77
Exercised (1,559,424) 1.61
------------
Options outstanding, September 30, 2001 10,394,781 $ 8.66
Granted 3,219,200 0.45
Canceled (3,592,723) 5.83
------------
Options outstanding, April 30, 2002 10,021,258 $ 7.03
Canceled (10,021,258) 7.03
------------
Options outstanding, May 1, 2002 and September 30, 2002 -- $ --
Granted 1,355,976 3.04
Canceled (254,220) 3.04
------------
Options outstanding, September 30, 2003 1,101,756 $ 3.04
Granted 175,000 4.10
Canceled (91,870) 3.04
------------
Options outstanding, June 30, 2004 1,184,886 $ 3.20
============
F-32
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The weighted average fair value of options granted was $1.89 and $2.83 for the
years ended September 30, 2003 and 2001, respectively, and $0.41 for the seven
months ended April 30, 2002.
On March 14, 2003, the Company's board of directors approved the sale to
Communication Technology Advisors, LLC ("CTA") of a fully vested warrant
exercisable for 500,000 shares of the Company's common stock at an exercise
price of $3.00 per share. CTA provides consulting services to the Company and
was a related party until June 24, 2003 (See Note 21). The purchase price of the
warrants is $25. If CTA elects to purchase this warrant, it will be immediately
exercisable for a period of 10 years from the date of issuance. CTA is a
provider of services to the Company and as such, the value of the warrant is
expensed as determined by using the Black Scholes valuation model. The
assumptions used in the Black- Scholes model include the risk free rate of
2.92%, volatility of 133%, no dividend yield, a contractual life of 10 years and
an expected life of five years with a fair market value of $2.50. The fair value
of the warrant of $ 1,050 was expensed as part of SG&A during the year ended
September 30, 2003. The CTA warrant is not included in the aforementioned table.
The warrant was purchased during January 2004.
In April 1998, the Company completed a $160.0 million debt financing consisting
of 160,000 units, each unit consisting of a note in the principal amount of one
thousand dollars and one warrant to purchase 14.08 shares of common stock (total
of 2,252,800 shares of common stock) at a purchase price of $3.51 per share. Of
the 2,252,800 shares underlying the original 160,000 warrants, 194,797 shares
remained, until canceled on the Effective Date.
17. 401(K) PLAN
The Company offers its eligible U.S. employees the opportunity to participate in
a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code ("the 401(k) Plan"). Each employee
is eligible to contribute, on a tax-deferred basis, a portion of annual earnings
not to exceed certain federal income tax limitations. The Company made
discretionary contributions for all eligible employees who contribute to the
401(k) Plan in an amount not exceeding 50% of each participant's first 4% of
compensation contributed as elective deferrals for the Plan year. The Company
contributed approximately $110 and $390 to the 401(k) Plan during the periods
ended April 30, 2002 and September 30, 2001, respectively. The Company
contributed approximately $110 to the 401(k) Plan during the three-months ended
December 31, 2001. The Company ceased making contributions to the 401(k) Plan
effective January 1, 2002.
F-33
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
18. INCOME TAXES
The Company accounts for income taxes under SFAS. No. 109, "Accounting for
Income Taxes". This statement applies an asset and liability approach that
requires the recognition of deferred tax assets and liabilities with respect to
the expected future tax consequences of events that have been recognized in the
consolidated financial statements and the Company's tax returns.
The provision for income taxes for the periods below differs from the amount
computed by applying the federal statutory rate due to the following:
SUCCESSOR COMPANY PREDECESSOR COMPANY
------------------------------- --------------------------------
FIVE MONTHS SEVEN MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED
SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30,
2003 2002 2002 2001
------------- ------------- ------------- -------------
Statutory Federal income tax rate ..... (35)% (35)% 35% (34)%
State and local taxes, net of
Federal benefit .................... (10)% (10)% 14% (11)%
Other: ................................ -- -- 5% --
Valuation Allowance ................... 45% 45% (54)% 45%
Effective income tax rate ............. -- -- -- --
Significant components of the deferred tax assets and liabilities are as follows:
SUCCESSOR COMPANY
---------------------------------------
SEPTEMBER 30,
---------------------------------------
2003 2002
---------------- ----------------
Deferred tax assets:
Net operating loss carryforwards..................... $ 48,318 $ 32,717
Restructuring reserve................................ 364 823
Allowance for doubtful accounts...................... 589 477
Depreciation and amortization........................ 46,771 53,893
Deferred rent........................................ 219 1,403
Deferred compensation................................ -- 429
Deferred revenue..................................... 783 52
Other................................................ 31 383
---------------- ----------------
Total deferred tax assets 97,075 90,177
Less: valuation allowance............................ (97,075) (90,177)
---------------- ----------------
Total net deferred tax assets $ -- $ --
================ ================
The Company is in an accumulated loss position for both financial and income tax
reporting purposes. The Company has U.S. Federal income tax loss carryforwards
of approximately $91,000 at September 30, 2003. These income tax loss
carryforwards expire through 2022. The U.S. Federal income tax loss
carryforwards were reduced upon emergence from bankruptcy due to the Internal
Revenue Code's rules and regulations related to the cancellation of indebtedness
income that is excluded from taxable income. Since the Plan provided for
substantial changes in the Company's ownership, the Company's use of its net
operating loss carryforward may be limited. The Company has not yet determined
the impact, if any that changes in ownership have had on net operating loss
carryforwards. As of September 30, 2003, the Company also has net operating loss
carryforwards of approximately $24,700 from its United Kingdom Subsidiaries,
which do not expire under U.K. tax rules. For financial reporting purposes,
income tax benefits through September 30, 2003 related to both U.S. Federal and
foreign income tax losses are fully offset by a valuation allowance due to the
uncertainty of the Company's ability to realize income tax benefits by
generating taxable income in the future.
F-34
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The Company's emergence from bankruptcy in fiscal 2002 did not create a new tax
reporting entity. Accordingly, the adjustments required to adopt fresh start
accounting are not applicable for the Company's tax reporting and therefore,
deferred tax items were recognized concurrently with the recognition of the
respective fresh start accounting adjustments. In addition pursuant to SOP 90-7,
reversals of the valuation allowance recorded against deferred tax assets that
existed as of the emergence date will first reduce intangibles until exhausted
and thereafter are reported as additional paid in capital as opposed to income
tax expense. The balance of the valuation allowance for which this treatment is
required was approximately $80,400 at September 30, 2003 and 2002.
19. COMMITMENTS AND CONTINGENCIES
Leases
The Company has minimum monthly usage/maintenance levels with certain of its
telecommunications carriers expiring in various years through 2008. The Company
also leases certain of its facilities and various equipment under non-cancelable
operating leases expiring in various years through 2030. Total lease expense for
all operating leases for the year ended September 30, 2003 the seven months
ended April 30, 2002, the five months ended September 30, 2002 and for the year
ended September 30, 2001 was $5,800, $6,101, $2,993and $7,128, respectively.
Future minimum payments due under these operating leases and telecommunications
carrier usage commitments as of September 30, 2003 are as follows:
YEAR ENDING SEPTEMBER 30, TELECOM LEASES TOTAL
----------------------------- ------------ ------------ -----------
2004......................... $ 13,325 $ 5,206 $ 18,531
2005......................... 11,071 4,147 15,218
2006......................... 9,881 6,350 16,231
2007......................... 4,446 6,397 10,843
2008......................... 4,203 6,445 10,648
Thereafter................... 82 44,420 44,502
------------ ------------ -----------
Total $ 43,008 $ 72,965 $ 115,973
============ ============ ===========
Capital Lease Obligation
Future minimum lease payments due under capital leases as of September 30, 2003
are as follows:
YEAR ENDING SEPTEMBER 30,
--------------------------------------------------
2004.............................................. $ 1,383
2005.............................................. 251
2006.............................................. 123
Less: Amount representing interest................ (148)
-------------
Present value of net minimum lease payments....... 1,609
Less: Principal Current Portion................... (1,235)
-------------
Long-term Portion................................. $ 374
=============
Letters of Credit
As of September 30, 2003 and 2002 the Company had collateralized letters of
credit aggregating to $2,600. The related funds are included in restricted cash
and investments on the accompanying consolidated balance sheet. Following the
payment of the long-term note payable in April 2004, the collateral was
cancelled, see also Note 13.
F-35
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Employment and Other Contractual Agreements
Peter K. Stevenson
Effective April 15, 2002, the Company entered into an employment agreement with
Peter K. Stevenson for his services as the Company's President and Chief
Executive Officer. Mr. Stevenson's employment agreement expired in July 2003,
and was extended until July 31, 2004. Mr. Stevenson's base salary is $308 per
year. Mr. Stevenson is also eligible for an annual bonus equal to up to 50% of
his base salary which is contingent upon the Company meeting certain performance
targets and a bonus contingent on the success the Company may have in the
purchase or sale of certain assets or disposition or acquisition of certain
business in sums to be determined by the Company's compensation committee. In
addition, under the terms of Mr. Stevenson's employment agreement, Mr. Stevenson
was granted options to acquire 548,667 shares of the Company's common stock. As
of September 30, 2003 all of Mr. Stevenson's options have vested.
Mr. Stevenson's employment agreement provides that in the event that the Company
terminates his employment for any reason other than cause, if Mr. Stevenson
terminates his employment for good reason or if Mr. Stevenson's employment
terminates as a result of his death or permanent disability, then Mr. Stevenson
is entitled to a years' salary.
Contingencies
On August 12, 2004, the United States District Court for the Southern District
of New York approved the settlement of a class action lawsuit entitled In re
Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as
defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a
director of Globix) and Brian Reach, and asserted claims under sections 10(b)
and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated
thereunder on behalf of all persons or entities who purchased our securities
between November 16, 2000 and December 27, 2001. The lawsuit alleged that the
defendants failed to disclose the true state of the Company's financial
condition during this period. Under the settlement, which remains subject to
appeal, the Company has agreed to pay $3,500 (all of which would be covered by
insurance) to settle all claims against it. An appeal of the settlement has been
filed by the plaintiffs' law firms whose fees were not included in the
settlement. Although there can be no assurance as to the outcome of the appeal,
the Company does not believe that the ultimate liabilities, if any, resulting
from this appeal will have a material adverse impact on it's business, financial
condition, results of operations or cash flows.
On June 25, 2002, we entered into a Stipulation and Order with the lead
plaintiffs in the class action lawsuit. The Stipulation and Order provides that
229,452 shares of our common stock and $1,968 in aggregate principal amount of
the 11% Senior Notes will be held in escrow pending the outcome of the class
action lawsuit. In the event that any judgment or settlement entered into in
connection with the class action lawsuit requires us to pay an amount in excess
of our liability insurance, we will be required to issue to the class action
litigants and their attorneys all (in the event that this excess is $10,000 or
greater) or a portion of (in the event that this excess is less than $10,000)
the shares of our common stock and the 11% Senior Notes being held in escrow.
Based on the court approval of the settlement agreement, the Company does not
believe that the shares of common stock and 11% Senior Notes that are being held
in escrow are likely to be distributed to the class action litigants and their
attorneys.
On June 12, 2002, Robert B. Bell, a former officer and director of the Company,
filed a complaint in the United States District Court for the Southern District
of New York, entitled Robert B. Bell v. Arnold M. Bressler, as Trustee, and
Globix Corporation, alleging breach of contract claims related to the failure to
make payments under a trust, which the Company refers to as the Rabbi Trust,
that Globix formed pursuant to an employment agreement with Mr. Bell. In
addition, in connection with the same underlying issues, on July 24, 2002 the
Company filed a complaint in the United States Bankruptcy Court for the District
of Delaware entitled Globix Corporation v. Arnold N. Bressler, as Trustee of the
Globix Corporation Rabbi Trust and Robert B. Bell. Subsequently, these
litigations were consolidated in the United States Bankruptcy Court matter.
This consolidated action was settled on June 13, 2003. As a result of the
settlement, Mr. Bell received a distribution of approximately $990 and Globix
received a distribution of approximately $1,700 from the Rabbi Trust.
On February 6, 2003, a putative derivative suit was filed in New York State
Supreme Court (County of New York) against the Company, as nominal defendant,
and Lehman Brothers Inc., Chase Securities, Inc., Credit Suisse First Boston
Corporation, Merrill Lynch Pierce Fenner & Smith Incorporation, Salomon Smith
Barney Inc. and ABN Amro Securities LLC (as successor to ING Barings, LLC), the
initial purchasers in our February 2000 offering of the 12.5% Senior Notes. The
suit alleges that the underwriting discount granted to the initial purchasers of
the 12.5% Notes violated Section 5-531 of the New York General Obligations Law,
which limits the amount that can be charged by a loan broker. On March 6, 2003,
the plaintiff and the initial purchasers entered into a tolling agreement that
would result in the dismissal of the action without prejudice pending action on
a motion to dismiss an amended complaint submitted in a similar case involving
debt securities issued by another corporation. On March 13, 2003, the court
dismissed the action without prejudice. On July 17, 2003, the plaintiff and the
initial purchasers extended their tolling agreement to allow the plaintiff to
re-file a complaint against the Company at any time during a period of ten days
following the disposition on appeal in the case involving the other corporation.
The Company does not anticipate that it will incur any liability in connection
with this matter.
F-36
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
On November 12, 2003, the Company was served with a complaint filed in the
United States Court for Southern District of New-York, entitled Alfred G.
Binford v. Globix Corporation, alleging breach of contract claims related to the
failure to make payments under an employment letter, as amended, seeking damages
in the amount of $2,113. Although there can be no assurance as to the outcome or
effect of this lawsuit, we do not believe, based on currently available
information, that the ultimate liabilities, if any, resulting from this lawsuit
will have a material adverse impact on our business, financial condition,
results of operations or cash flows. The Company has accrued its estimated
liability. A court date was set for November 1, 2004.
From time to time Globix is involved in legal proceedings in the ordinary course
of our business operations. Although there can be no assurance as to the outcome
or effect of any legal proceedings to which the Company is a party, the Company
does not believe, based on currently available information, that the ultimate
liabilities, if any, arising from any such legal proceedings would have a
material adverse impact on our business, financial condition, results of
operations or cash flows.
20. SEGMENT INFORMATION
The Company reports segment information under SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information". Effective April 1, 2001 and
for the fiscal year ended September 30, 2001, the Company began to evaluate its
results of operations based on one operating segment. Previously the Company
reported under two operating segments.
SUCCESSOR COMPANY PREDECESSOR COMPANY
----------------------------------------------------------- ---------------------------
FOR THE NINE MONTHS ENDED FIVE MONTHS SEVEN MONTHS
-------------------------- YEAR ENDED ENDED ENDED YEAR ENDED
JUNE 30, JUNE 30, SEPT. 30, SEPT. 30, APRIL 30, SEPT. 30,
2004 2003 2003 2002 2002 2001
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
Revenues:
United States ............. $ 26,334 $ 28,764 $ 36,833 $ 20,410 $ 37,747 $ 82,020
Europe (mainly
the United Kingdom) ..... 18,809 17,603 23,344 10,313 13,526 22,190
---------- ---------- ---------- ---------- ---------- ----------
Consolidated .............. $ 45,143 $ 46,367 $ 60,177 $ 30,723 $ 51,273 $ 104,210
========== ========== ========== ========== ========== ==========
Operating income (loss):
United States ............. $ (33,446) $ (17,066) $ (22,631) $ (15,069) $ (54,433) $(142,713)
Europe (mainly
the United Kingdom) ..... 2,915 2,665 4,230 (39) (29,150) (14,773)
---------- ---------- ---------- ---------- ---------- ----------
Consolidated .............. $ (30,531) $ (14,401) $ (18,401) $ (15,108) $ (83,583) $(157,486)
========== ========== ========== ========== ========== ==========
Long-lived assets:
United States ............. $ 66,305 $ 140,772 $ 137,279 $ 148,559 $ 297,713
United Kingdom ............ 26,145 25,618 25,351 26,151 59,526
Europe - other ............ -- -- -- -- 3,272
---------- ---------- ---------- ---------- ----------
Consolidated .............. $ 92,450 $ 166,390 $ 162,630 $ 174,710 $ 360,511
========== ========== ========== ========== ==========
Although the Company operates in one operating segment, there are 4 major
service lines as detailed in the table below. Data for fiscal year 2002 and 2001
has not been provided due to impracticability.
SUCCESSOR COMPANY
---------------------------------------------
FOR THE NINE MONTHS ENDED
--------------------------- YEAR ENDED
JUNE 30, JUNE 30, SEPTEMBER 30,
2004 2003 2003
------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
Internet Hosting and Co-Location .............. $ 17,854 $ 20,088 $ 26,048
Managed Services .............................. 13,721 10,089 13,342
Network Services and Internet Access .......... 13,197 14,643 19,034
Hardware and Software Sales, DSL and Other .... 371 1,547 1,753
------------ ------------ ------------
Revenue, net .................................. $ 45,143 $ 46,367 $ 60,177
============ ============ ============
F-37
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
21. RELATED PARTY TRANSACTIONS
CONSULTING AGREEMENT WITH COMMUNICATION TECHNOLOGY ADVISORS
The Company and Communication Technology Advisors LLC ("CTA"), are parties to a
consulting agreement. Jared E. Abbruzzese, who was a member of the Company's
board of directors as of September 30, 2002 and resigned during the year ended
September 30, 2003, is the Founder and Chairman of CTA and is actively engaged
in all aspects of CTA's business.
Under this agreement, the Company engaged CTA to act as the Office of the Chief
Restructuring Officer, providing the Company with a wide range of business
advisory services. As consideration for the services provided by CTA, the
Company pays CTA a monthly fee of $65. The Company also reimburses CTA for its
out-of-pocket expenses incurred in connection with rendering services to the
Company during the term of the agreement. In addition to the monthly fee and
expense reimbursement, CTA is also entitled to a success fee in the amount of
$1,500 upon the achievement of certain success milestones. Pursuant to this
agreement no accrual is required as of September 30, 2003.
CTA was originally introduced to the Company as a financial advisor to the
unofficial committee of holders of the 12.5% Senior Notes prior to the
commencement of the Company's Chapter 11 case. CTA received a total of $594 in
fees in connection with its service as financial advisor to the unofficial
committee and to the Company and was reimbursed a total of $46 for out-of-pocket
expenses through September 30, 2002. As a result of this engagement, the Company
was introduced to Peter K. Stevenson, currently the Company's president and
Chief Executive Officer, who was among several CTA representatives providing
advisory services to the unofficial committee and to several other clients of
CTA unrelated to the Company. Mr. Stevenson does not own an equity interest in
CTA, nor is he actively consulting for or employed by CTA.
Neither CTA, nor any of its principals or affiliates as of September 30, 2002 or
thereafter was a stockholder of the Company, nor does it hold any debt of the
Company (other than indebtedness as a result of consulting fees and expense
reimbursement owed to CTA in the ordinary course under its existing agreement
with the Company). See Note 15 for warrant granted by the Company to CTA.
From September 2002 through December 2002, CTA subleased office space from Net
One Group, Inc., a company founded by Mr. Stevenson. CTA paid a total of $4.8 in
rent to Net One Group under the sublease.
CTA has advised the Company that in connection with the conduct of its business
in the ordinary course it routinely advises clients in, and appears in
restructuring cases involving, telecommunications companies throughout the
country. CTA has also advised the Company that certain holders of the Company's
common stock and/or debt securities and/or certain of their respective
affiliates or principals are current clients of CTA in matters unrelated to the
Company, former clients of CTA in matters unrelated to the Company and
affiliates of clients who are (or were) represented by CTA in matters unrelated
to the Company.
The consulting services described above were approved by a majority of the
Company's disinterested directors.
For the fiscal year ended September 30, 2003, the Company recorded in respect of
CTA consulting expenses and reimbursement of expenses of $780 and $30,
respectively. Although CTA continues to provide the Company with ongoing
consulting services, it is no longer considered a related party as of September
30, 2003.
BONUSES PAYMENT AS PART OF THE SALE OF THE PROPERTY
As part of the sale of the Property (See Note 8), the Company paid bonuses of
$450 to certain of the Company's Executive Officers and employees, which
included a $169 payment to the Chairman of the Board of Directors for his
contributions in connection with the sale and $169 payment to the Company's
Chief Executive Officer.
LIFE INSURANCE AND DISABILITY FOR PETER K. STEVENSON
Peter K. Stevenson, the Company's President and Chief Executive Officer,
receives life insurance and disability insurance benefits in excess of the
benefits that are offered to the Company's other employees. These benefits are
payable to an entity controlled by Mr. Stevenson. The premiums for these
benefits totaled $6.3 for the five month period ended September 30, 2002. No
further amounts were paid during 2003. These benefits were approved by a
majority of the Company's disinterested directors.
F-38
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
22. GUARANTEES
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others". FIN 45 requires a liability to
be recognized at the time a company issues a guarantee for the fair value of the
obligations assumed under certain guarantee agreements. Additional disclosures
about guarantee agreements are also required in the interim and annual financial
statements. The adoption of FIN 45 did not have an effect on the Company's
results of operations or financial position.
Guaranty to the Investor
As part of the sale of the Property (See Note 8), the Company guaranteed to
indemnify and hold the Investor (See Note 8) harmless from any adverse
consequences, that the Investor may suffer by reason of any non-compliance by
the Company, that directly impaired his ability to use the Historic Tax Credits
("HTC"), associated with the Property. The guaranty is limited to the amount of
the HTC used by the Investor estimated at approximately $10,160. The Company
estimated the fair value of the guaranty as immaterial based on a discounted
cash-flow model.
Subsidiary Guarantors
Under the terms of the indenture governing the 11% Senior Notes, the following
subsidiaries of the Company have fully and unconditionally and jointly and
severally guaranteed the full and prompt performance of the Company's
obligations under the 11% Senior Notes and the Indenture, including the payment
of principal of and premium, if any, on and interest on the 11% Senior Notes:
Bluestreak Digital, Inc., Gamenet Corporation, Naft Computer Service
Corporation, Naft International Ltd., PFM Communications, Inc., GRE Consulting,
Inc., 415 Greenwich GC, LLC, 415 Greenwich GC Tenant, LLC, 415 Greenwich GC MM,
LLC, Comstar.Net, Inc. and Comstar Telecom & Wireless, Inc. The Company merged
each of these subsidiary guarantors, other than 415 Greenwich GC, LLC, 415
Greenwich GC Tenant, LLC and 415 Greenwich GC MM, LLC, with and into the
Company.
23. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, cash equivalents, restricted cash, receivables,
payables, and current portion of capital lease obligation and mortgage payable
included in the consolidated balance sheets approximate their fair value due to
the their short-term maturity.
The fair value of marketable securities and investments are based on quoted
market prices.
The fair market value of the 11% Senior Notes as of September 30, 2003 is
approximately $84,292 based on the repurchase price paid by the Company on
October 3, 2003 (see Note 14).
F-39
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
23. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
SUCCESSOR COMPANY
-------------------------------------------------------------
QUARTER ENDED
-------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
2002 2003 2003 2003
------------- ------------- ------------- -------------
Net revenues .................................... $ 16,480 $ 15,368 $ 14,519 $ 13,810
Operating costs and expenses:
Cost of revenues (excluding depreciation,
amortization, payroll and occupancy
shown below) ............................... 5,624 5,274 4,601 4,491
Selling, general and administrative .......... 11,891 12,570 9,253 10,716
Restructuring charges ........................ -- -- -- (1,020)
Depreciation and amortization ................ 3,727 4,116 4,057 3,623
------------- ------------- ------------- -------------
Total operating costs and expenses .............. 21,242 21,960 17,911 17,810
------------- ------------- ------------- -------------
Other operating income ....................... -- 345 -- --
Loss from operations: ........................... (4,762) (6,247) (3,392) (4,000)
Interest and financing expense, net .......... (3,516) (3,214) (3,463) (3,769)
Other income (expense) ....................... 182 204 220 626
Gain on debt discharge ....................... 2,727 2,044 1,154 98
Minority interest in subsidiary .............. 108 120 105 (333)
------------- ------------- ------------- -------------
Net loss before income taxes .................... (5,261) (7,093) (5,376) (7,378)
Income tax expense .............................. -- -- -- 167
------------- ------------- ------------- -------------
Net loss attributable to common stockholders .... $ (5,261) $ (7,093) $ (5,376) $ (7,545)
============= ============= ============= =============
Basic and diluted loss per share attributed
to common stockholders ........................ $ (0.32) $ (0.43) $ (0.33) $ (0.46)
============= ============= ============= =============
PREDECESSOR COMPANY SUCCESSOR COMPANY
----------------------------------------------- ------------------------------
THREE MONTHS THREE MONTHS ONE MONTH TWO MONTHS THREE MONTHS
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, MARCH 31, APRIL 30, JUNE 30, SEPTEMBER 30,
2001 2002 2002 2002 2002
------------- ------------- ------------- ------------- -------------
Net revenues .................................. $ 23,379 $ 21,389 $ 6,505 $ 12,702 $ 18,021
Operating costs and expenses:
Cost of revenues (excluding
depreciation, amortization,
payroll and occupancy
shown below) ............................. 9,663 9,737 2,723 4,505 5,953
Selling, general and
administrative ........................... 24,748 21,401 11,057 10,749 18,564
Loss (gain) on impairment of
assets ................................... -- 3,221 (643) -- --
Restructuring charges ...................... -- 24,834 -- -- --
Depreciation and amortization .............. 12,012 12,174 3,929 2,454 3,606
------------- ------------- ------------- ------------- -------------
Total operating costs and expenses ............ 46,423 71,367 17,066 17,708 28,123
------------- ------------- ------------- ------------- -------------
Loss from operations: ......................... (23,044) (49,978) (10,561) (5,006) (10,102)
Interest and financing expense,
net ...................................... (19,058) (13,161) (268) (2,363) (3,503)
Other income (expense) ..................... 110 (506) (113) (145) (12)
Gain on debt discharge ..................... -- -- 427,066 -- --
Minority interest in subsidiary ............ 389 955 4,434 -- --
Reorganization items ....................... -- (5,598) (2,164) -- --
Fresh start accounting
adjustments .............................. -- -- (148,569) -- --
------------- ------------- ------------- ------------- -------------
Net (loss) income ............................. (41,603) (68,288) 269,825 (7,514) (13,617)
Dividends and accretion on
preferred stock .......................... (1,848) (1,329) -- -- --
------------- ------------- ------------- ------------- -------------
Net (loss) income attributable to
common stockholders ......................... $ (43,451) $ (69,617) $ 269,825 $ (7,514) $ (13,617)
============= ============= ============= ============= =============
Basic (loss) earnings per share
attributed to common stockholders ........... $ (1.11) $ (1.75) $ 6.52 $ (0.46) $ (0.83)
============= ============= ============= ============= =============
Diluted (loss) earnings per share
attributed to common stockholders ........... $ (1.11) $ (1.75) $ 5.37 $ (0.46) $ (0.83)
============= ============= ============= ============= =============
F-40
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------------------------------------------- -------------- ----------------------------- ------------- ------------
ADDITIONS
-----------------------------
BALANCE AT CHARGES TO CHARGES BALANCE AT
BEGINNING OF COSTS AND TO OTHER END OF
PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD
-------------- ------------- ------------ ------------- ------------
Allowance for Doubtful Accounts
Predecessor Company (October 1,
2001 to April 30, 2002) ................. 8,052 4,284 94 (9,618) 2,812
Successor Company (May 1, 2002 to
September 30, 2002) ..................... 2,812 1,904 80 (2,231) 2,565
Successor Company (October 1,
2002 to September 30, 2003) ............. 2,565 1,997 24 (1,940) 2,646
Deferred Tax Valuation Allowance
Predecessor Company (October 1,
2001 to April 30, 2002) ................. 167,421 40,400 66,021 (193,402) 80,440
Successor Company (May 1, 2002 to
September 30, 2002) ..................... 80,440 9,737 -- -- 90,177
Successor Company (October 1,
2002 to September 30, 2003) ............. 90,177 6,898 -- -- 97,075
F-41
INDEX TO FINANCIAL STATEMENTS
NEON COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003
SIX MONTHS ENDED JUNE 30, 2003 AND 2004 (UNAUDITED)
Report of independent registered public accounting firm - BDO Seidman, LLP F-43
Report of independent auditors - Arthur Andersen LLP F-44
Consolidated financial statements:
Balance sheets F-45
Statements of operations F-46
Statements of preferred stock and stockholders' equity F-47
Statements of cash flows F-48
Notes to consolidated financial statements F-49
F-42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders of
NEON Communications, Inc.
Westborough, Massachusetts
We have audited the accompanying consolidated balance sheets of NEON
Communications, Inc. and subsidiaries as of December 31, 2003 and 2002, and the
related consolidated statements of operations, preferred stock and stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 3, the Company emerged from Chapter 11 bankruptcy on
December 20, 2002, pursuant to a plan of reorganization confirmed by the
Bankruptcy Court by order dated November 13, 2002. The Company has recorded this
transaction as of December 31, 2002. Accordingly, the accompanying consolidated
financial statements of the successor company have been prepared in conformity
with fresh start accounting provisions of the AICPA's Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code," issued November 19, 1990. In accordance with the requirements
of SOP 90-7, the reorganized company has been accounted for as a new entity (the
"Successor Company") with assets, liabilities and a capital structure having
carrying values not comparable with any prior periods of the Predecessor
Company.
As discussed in Note 4, the Company changed the manner in which it accounts for
goodwill and other intangible assets upon adoption of the accounting standards
in Statement of Financial Accounting Standards ("SFAS") No. 142 on January 1,
2002.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NEON Communications,
Inc. and subsidiaries as of December 31, 2003 and 2002 and the consolidated
results of their operations and their cash flows for the years then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ BDO Seidman, LLP
Boston, Massachusetts
March 23, 2004
F-43
Provided below, pursuant to Rule 2-02(e) of Regulation S-X, is a copy of the
accountants report issued by Arthur Andersen LLP, our former independent public
accountants, in connection with the filing of our Annual Report on Form 10-K for
the year ended December 31, 2001 as amended by Amendment No. 1 on Form 10-K/A
filed on April 30, 2001. THIS AUDIT REPORT HAS NOT BEEN REISSUED BY ARTHUR
ANDERSEN IN CONNECTION WITH THE FILING OF THIS JOINT PROXY STATEMENT/PROSPECTUS.
We are unable to obtain a reissued accountants report from Arthur Andersen, and
we will be unable to obtain future accountants reports from Arthur Andersen,
because Arthur Andersen has discontinued its auditing practice. This means that
we will also be unable to obtain consents to incorporate any financial
statements audited by Arthur Andersen into registration statements that we may
file in the future. Accordingly, investors will not be able to sue Arthur
Andersen pursuant to section 11(a) (4) of the Securities Act with respect to any
such registration statements and, therefore, ultimate recovery on a successful
claim may be limited. The ability of investors to recover from Arthur Andersen
may also be limited as a result of Arthur Andersen's financial condition or
other matters resulting from the various civil and criminal lawsuits against
that firm.
REPORT OF INDEPENDENT AUDITORS
To the Stockholders of
NEON Communications, Inc.
Westborough, Massachusetts
We have audited the accompanying consolidated balance sheets of NEON
Communications, Inc. and subsidiaries as of December 31, 2000 and 2001, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the three years ended December 31, 2001. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NEON Communications,
Inc. and subsidiaries as of December 31, 2000 and 2001 and the results of their
operations and their cash flows for each of the three years ended December 31,
2001 in conformity with accounting principles generally accepted in the United
States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company is projecting an operating loss for 2002 of
approximately $3 million and will not generate sufficient cash flow from
operations to fully fund operating costs, capital expenditures and debt service
for the year. To conserve cash for operations, the Company elected not to make
payments on an equipment note which gives the lender the right to accelerate the
due date of its note and could trigger cross-acceleration provisions in NEON
Optica's senior debt (see Note 7). These factors raise significant doubt about
the Company's ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 1. The financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts, including the Company's investment in property and
equipment ($238,040,852), or the amount and classification of liabilities that
might result should the Company be unable to continue as a going concern.
/s/ Arthur Andersen LLP
Boston, Massachusetts
April 12, 2002
F-44
NEON COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, JUNE 30,
2002 2003 2004
----------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 19,054,987 $ 14,934,102 $ 12,632,929
Short-term restricted investments (Note 4) 2,556,627 8,254,915 8,255,276
Accounts receivable, net of reserves of approximately
$1,512,000 and $2,291,000 and $2,126,000 in 2002, 2003
and 2004, respectively (Note 4) 1,969,819 1,799,123 3,535,157
Prepaid expenses and other current assets 1,463,731 2,225,185 1,044,202
----------------------------------------------------------------------------------------------------------------------------
Total current assets 25,045,164 27,213,325 25,467,564
----------------------------------------------------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT, net (Note 6) 137,312,417 136,605,867 136,662,242
OTHER ASSETS, net (Note 7) 2,765,514 3,189,223 3,582,628
----------------------------------------------------------------------------------------------------------------------------
Total assets $ 165,123,095 $ 167,008,415 $ 165,712,434
============================================================================================================================
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,170,877 $ 3,685,991 $ 5,887,155
Accrued expenses (Note 14) 8,194,577 8,902,788 9,296,387
Deferred revenue (Note 4) 1,954,230 2,273,483 2,286,210
----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 15,319,684 14,862,262 17,469,752
----------------------------------------------------------------------------------------------------------------------------
DEFERRED REVENUE, net of current portion (Note 4) 14,131,196 14,857,995 13,951,579
----------------------------------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (Notes 2 and 11) 1,425,469 1,767,655 1,835,682
----------------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 12)
----------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK (Note 8) $0.001 par value; 30,000,000 shares
authorized:
Redeemable preferred stock - 21,354,000 shares authorized;
no shares issued or outstanding -- -- --
12% Series A cumulative convertible preferred stock -
2,500,000 shares authorized; 1,101,887 shares issued and
outstanding (at liquidation value) 12,441,028 13,978,739 14,817,463
----------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 8):
Common stock, $0.001 par value; 100,000,000 shares
authorized, 15,536,250, 15,771,872 and 15,775,863 shares
issued and outstanding in 2002, 2003 and 2004, respectively 15,537 15,772 15,776
Subscription receivable (62,452) -- --
Additional paid-in capital 121,897,463 124,156,895 124,158,019
Accumulated deficit (44,830) (2,630,903) (6,535,837)
----------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 121,805,718 121,541,764 117,637,958
----------------------------------------------------------------------------------------------------------------------------
Total liabilities, preferred stock and stockholders' equity $ 165,123,095 $ 167,008,415 $ 165,712,434
============================================================================================================================
See accompanying notes to consolidated financial statements.
F-45
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
PREDECESSOR PREDECESSOR SUCCESSOR
COMPANY COMPANY COMPANY SUCCESSOR COMPANY
2001 2002 2003 2003 2004
------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
REVENUES (Note 4):
Network services $ 23,274,823 $ 30,507,541 $ 37,516,681 $ 18,146,965 $ 21,115,832
Other services 3,275,822 3,166,672 4,071,627 1,730,361 2,446,168
------------------------------------------------------------------------------------------------------------------------------------
Total revenues 26,550,645 33,674,213 41,588,308 19,877,326 23,562,000
EXPENSES:
Cost of revenues 17,099,583 17,688,266 20,887,915 9,158,048 12,991,309
Selling, general and administrative 25,026,073 17,750,466 16,521,960 8,809,839 8,663,848
Depreciation and amortization (Note 4) 18,994,543 23,318,867 8,999,491 4,373,065 5,136,706
Write-down of subscription receivable (Note 5) 60,000,000 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Total expenses 121,120,199 58,757,599 46,409,366 22,340,952 26,791,863
------------------------------------------------------------------------------------------------------------------------------------
Loss from operations (94,569,554) (25,083,386) (4,821,058) (2,463,626) (3,229,863)
OTHER INCOME (EXPENSE):
Interest and other income 3,329,722 446,540 569,590 298,931 165,520
Interest and other expense (25,441,568) (17,108,091) (15,200) -- (1,867)
------------------------------------------------------------------------------------------------------------------------------------
Total other income (expense), net (22,111,846) (16,661,551) 554,390 298,931 163,653
------------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE BENEFIT FROM INCOME TAXES,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (116,681,400) (41,744,937) (4,266,668) (2,164,695) (3,066,210)
BENEFIT FROM INCOME TAXES (Note 2) -- -- 1,287,322 -- --
------------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (116,681,400) (41,744,937) (2,979,346) (2,164,695) (3,066,210)
------------------------------------------------------------------------------------------------------------------------------------
EXTRAORDINARY ITEMS:
Reorganization items (Note 3) -- 26,513,191 -- -- --
Gain on acquisition, net of income tax
expense of $1,287,322 (Note 2) -- -- 1,930,984 -- --
------------------------------------------------------------------------------------------------------------------------------------
Total extraordinary items -- 26,513,191 1,930,984 -- --
------------------------------------------------------------------------------------------------------------------------------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (116,681,400) (15,231,746) (1,048,362) (2,164,695) (3,066,210)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 4) -- (72,311,911) -- -- --
------------------------------------------------------------------------------------------------------------------------------------
NET LOSS $(116,681,400) $(87,543,657) $ (1,048,362) $ (2,164,695) $ (3,066,210)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-46
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY
PREFERRED STOCK COMMON STOCK RESTRICTED COMMON STOCK
YEARS ENDED DECEMBER 31, ----------------------- ------------------------- ------------------------
2001, 2002 AND 2003 AND LIQUIDATION
SIX MONTHS ENDED JUNE 30, 2004 SHARES VALUE SHARES PAR VALUE SHARES PAR VALUE
--------------------------------------------------------------------- ---------------------------------------------------
BALANCE, December 31, 2000 (predecessor) -- $ -- 18,753,870 $ 187,539 2,580,412 $ 25,804
Exercise of common stock options -- -- 780 8 -- --
Issuance costs for common stock
transaction (Note 5) -- -- -- -- -- --
Amendment of stock purchase agreement
and write down of subscription
receivable (Note 5) -- -- 1,193,440 11,934 (1,193,440) (11,934)
Beneficial conversion related to
issuance of convertible notes -- -- -- -- -- --
Receipt of assets due under stock
purchase agreement (Note 5) -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------- ---------------------------------------------------
BALANCE, December 31, 2001 (predecessor) -- -- 19,948,090 199,481 1,386,972 13,870
Forgiveness of subscription receivable
(Note 5) -- -- -- -- -- --
Impairment of subscription receivable
(Note 5) -- -- -- -- -- --
Receipt of assets due under stock
purchase agreement (Note 5) -- -- -- -- -- --
Net loss -- -- -- -- -- --
Cancellation of old common stock
pursuant to the Plan of
Reorganization (Note 3) -- -- (19,948,090) (199,481) (1,386,972) (13,870)
Elimination of deficit upon adoption
of fresh start reporting (Note 3) -- -- -- -- -- --
Issuance of new common stock pursuant
to the Plan of Reorganization (Note 8) -- -- 13,984,712 13,985 -- --
Issuance of new preferred stock (Note 8) 1,101,887 12,396,198 -- -- -- --
Issuance of new common stock to
Northeast Utilities (Note 11) -- -- 1,551,538 1,552 -- --
Accretion of dividends on preferred
stock (Note 8) -- 44,830 -- -- -- --
--------------------------------------------------------------------- ---------------------------------------------------
BALANCE, December 31, 2002 (successor) 1,101,887 12,441,028 15,536,250 15,537 -- --
Payment received on subscription
receivable -- -- -- -- -- --
Stock based compensation associated
with stock options issued (Note 9) -- -- -- -- -- --
Stock-based compensation associated
with issuance of warrants (Note 8) -- -- -- -- -- --
Sale of common stock to Northeast
Utilities (Note 11) -- -- 235,622 235 -- --
Accretion of dividends on preferred
stock (Note 8) -- 1,537,711 -- -- -- --
Net loss -- -- -- -- -- --
--------------------------------------------------------------------- ---------------------------------------------------
BALANCE, December 31, 2003 (successor) 1,101,887 13,978,739 15,771,872 15,772 -- --
Accretion of dividends on preferred
stock (Note 8) (unaudited) -- 838,724 -- -- -- --
Exercise of common stock options
(unaudited) -- -- 3,991 4 -- --
Net loss (unaudited) -- -- -- -- -- --
--------------------------------------------------------------------- ---------------------------------------------------
BALANCE, June 30, 2004 (successor)
(unaudited) 1,101,887 $14,817,463 15,775,863 $ 15,776 -- $ --
===================================================================== ===================================================
(CONTINUED BELOW)
F-47a
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
YEARS ENDED DECEMBER 31, ADDITIONAL TOTAL
2001, 2002 AND 2003 AND SUBSCRIPTION PAID-IN ACCUMULATED STOCKHOLDERS'
SIX MONTHS ENDED JUNE 30, 2004 RECEIVABLE CAPITAL DEFICIT EQUITY
------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2000 (predecessor) $(167,431,217) $ 289,445,281 $ (86,305,534) $ 35,921,873
Exercise of common stock options -- 7,309 -- 7,317
Issuance costs for common stock
transaction (Note 5) -- (285,350) -- (285,350)
Amendment of stock purchase agreement
and write down of subscription
receivable (Note 5) 60,000,000 -- -- 60,000,000
Beneficial conversion related to
issuance of convertible notes -- 1,150,000 -- 1,150,000
Receipt of assets due under stock
purchase agreement (Note 5) 79,859,985 -- -- 79,859,985
Net loss -- -- (116,681,400) (116,681,400)
------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2001 (predecessor) (27,571,232) 290,317,240 (202,986,934) 59,972,425
Forgiveness of subscription receivable
(Note 5) 10,000,000 -- -- 10,000,000
Impairment of subscription receivable
(Note 5) 4,162,440 -- -- 4,162,440
Receipt of assets due under stock
purchase agreement (Note 5) 13,408,792 -- -- 13,408,792
Net loss -- -- (87,543,657) (87,543,657)
Cancellation of old common stock
pursuant to the Plan of
Reorganization (Note 3) -- (290,317,240) -- (290,530,591)
Elimination of deficit upon adoption
of fresh start reporting (Note 3) -- -- 290,530,591 290,530,591
Issuance of new common stock pursuant
to the Plan of Reorganization (Note 8) -- 112,486,015 -- 112,500,000
Issuance of new preferred stock (Note 8) (62,452) -- -- (62,452)
Issuance of new common stock to
Northeast Utilities (Note 11) -- 9,411,448 -- 9,413,000
Accretion of dividends on preferred
stock (Note 8) -- -- (44,830) (44,830)
------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2002 (successor) (62,452) 121,897,463 (44,830) 121,805,718
Payment received on subscription
receivable 62,452 -- -- 62,452
Stock based compensation associated
with stock options issued (Note 9) -- 120,147 -- 120,147
Stock-based compensation associated
with issuance of warrants (Note 8) -- 711,650 -- 711,650
Sale of common stock to Northeast
Utilities (Note 11) -- 1,427,635 -- 1,427,870
Accretion of dividends on preferred
stock (Note 8) -- -- (1,537,711) (1,537,711)
Net loss -- -- (1,048,362) (1,048,362)
------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 2003 (successor) -- 124,156,895 (2,630,903) 121,541,764
Accretion of dividends on preferred
stock (Note 8) (unaudited) -- -- (838,724) (838,724)
Exercise of common stock options
(unaudited) -- 1,124 -- 1,128
Net loss (unaudited) -- -- (3,066,210) (3,066,210)
------------------------------------------------------------------------------------------------------------
BALANCE, June 30, 2004 (successor)
(unaudited) $ -- $ 124,158,019 $ (6,535,837) $ 117,637,958
============================================================================================================
See accompanying notes to consolidated financial statements.
F-47b
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
PREDECESSOR PREDECESSOR SUCCESSOR
COMPANY COMPANY COMPANY SUCCESSOR COMPANY
2001 2002 2003 2003 2004
------------------------------------------------------------------------------------------------------------------------------------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(116,681,400) $ (87,543,657) $ (1,048,362) $ (2,164,695) $ (3,066,210)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Write-down of subscription
receivable (Note 5) 60,000,000 -- -- -- --
Cumulative effect of change in
accounting principle (Note 4) -- 72,311,911 -- -- --
Gain on acquisition (Note 2) -- -- (3,218,306) -- --
Noncash stock-based compensation
expense (Note 9) -- -- 120,147 -- --
Loss (gain) on disposal of
property and equipment (1,489,785) 110,319 -- -- (53)
Amortization of prepaid
right-of-way fees (Note 7) 4,388,246 3,610,139 387,369 193,685 193,685
Depreciation and amortization
(Note 4) 18,994,543 23,318,867 8,999,491 4,373,065 5,136,706
Reorganization items (Note 3) -- (32,720,640) -- -- --
Changes in current assets and
current liabilities, net
of acquisitions:
Accounts receivable (2,044,385) 2,800,298 343,233 (469,511) (1,736,034)
Prepaid expenses and other
current assets (1,171,366) (180,867) (30,841) 247,387 1,180,986
Accounts payable 7,494,237 4,452,525 (4,095) 959,411 2,205,101
Accrued expenses 7,878,164 6,032,788 (487,210) (1,455,932) 393,599
Deferred revenue 12,142,888 (782,236) 1,046,052 652,422 (868,679)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by
(used in) operating
activities (10,488,858) (8,590,553) 6,107,478 2,335,832 3,439,102
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment 4,034,830 99,820 -- -- 54,400
Purchase of property and equipment (41,916,091) (8,494,813) (8,292,941) (3,334,560) (5,204,413)
Cash acquired from acquisition, net
of cash paid (Note 2) -- -- 4,520,115 -- --
Decrease (increase) in other assets (3,046,604) 1,882,133 (766,780) (334,813) (587,091)
------------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing
activities (40,927,865) (6,512,860) (4,539,606) (3,669,373) (5,737,104)
------------------------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in accounts payable
- communications network (370,078) (3,674,166) (1,480,791) (320,424) (3,938)
Proceeds from issuance of
convertible debt 26,500,000 -- -- -- --
Payments of long-term obligations (5,781,250) -- -- -- --
(Increase) decrease in restricted
cash and investments 21,049,452 11,697,553 (5,698,288) 2,151,209 (361)
Proceeds from stock subscription
receivable 2,240,589 1,207,152 62,452 62,452 --
Net proceeds from issuance of
preferred stock -- 12,333,746 -- -- --
Proceeds from sale of common
stock -- -- 1,427,870 -- 1,128
Payment of common stock issuance
costs (285,350) -- -- -- --
Proceeds from exercise of common
stock options 7,317 -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Net cash (used in)
provided by financing
activities 43,360,680 21,564,285 (5,688,757) 1,893,237 (3,171)
------------------------------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (8,056,043) 6,460,872 (4,120,885) 559,696 (2,301,173)
CASH AND CASH EQUIVALENTS,
BEGINNING OF YEAR 20,650,158 12,594,115 19,054,987 19,054,987 14,934,102
====================================================================================================================================
CASH AND CASH EQUIVALENTS,
END OF PERIOD $ 12,594,115 $ 19,054,987 $ 14,934,102 $ 19,614,683 $ 12,632,929
====================================================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES (Note 16)
====================================================================================================================================
See accompanying notes to consolidated financial statements.
F-48
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS AND BASIS OF PRESENTATION
NATURE OF BUSINESS
NEON Communications, Inc. (the "Company" or "NEON") and its subsidiaries are
engaged in the ownership, management, operation and installation of fiber optic
telecommunication networks. The Company is a leading provider of advanced
optical networking solutions and services in the Northeast and Mid-Atlantic
regions of the United States.
To date, the Company has recorded revenues principally from network transport
and related services contracts. The market for fiber optic telecommunications in
which the Company operates is changing rapidly due to technological
advancements, the introduction of new products and services, the increasing
demands placed on equipment in worldwide telecommunications networks and the
demand for telecommunications capacity compared to the supply currently
available.
FACTORS AFFECTING COMPARABILITY OF FINANCIAL INFORMATION
As a consequence of the implementation of fresh start reporting effective on
December 31, 2002 (Note 3), the financial information presented in the
consolidated statements of operations, and consolidated statements of cash flows
for the years ended December 31, 2001 and 2002 is generally not comparable to
the financial information for prior or subsequent periods. The presentation of
financial information of the "Predecessor Company" represents the Company's
financial information for the specified periods prior to the Company's adoption
of fresh start reporting.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements as of June 30, 2004 and for the six months
ended June 30, 2004 and 2003 are unaudited. In the opinion of management, the
unaudited financial statements include all adjustments (consisting of normal
recurring accruals) necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented. The
results of operations for the period ended June 30, 2004 and 2003 are not
necessarily indicative of the operating results to be expected for the full
year. Additionally, certain disclosures have been omitted for the interim
periods.
2. BUSINESS COMBINATIONS
ACQUISITION OF TRANSCOM
On September 12, 2003, the Company acquired Columbia Transmission Communications
Corporation ("Transcom") from Columbia Energy Group, a wholly owned subsidiary
of NiSource, Inc. Transcom owns a diverse dark fiber network that runs from New
York City to Washington, D.C. Additionally, since the transaction resulted in
negative goodwill, all long-term assets were written down to a zero value in
accordance with SFAS No. 141, "Accounting for the Impairment or Disposal of
Long-Lived Assets".
The aggregate purchase price for Transcom of approximately $1,058,000 consisted
of $500,000 in cash and approximately $558,000 in direct acquisition costs.
The aggregate purchase price of Transcom was allocated to the acquired assets
and assumed liabilities as follows:
Cash and cash equivalents $ 5,226,000
Accounts receivable 172,000
Prepaid and other current assets 775,000
Accounts payable and accrued expenses (129,000)
Asset retirement obligation (1,768,000)
Extraordinary gain on acquisition (3,218,000)
-------------------------------------------------------------------------------
$ 1,058,000
===============================================================================
The acquisition of Transcom is accounted for as a purchase under Statement of
Financial Accounting Standards (SFAS") No. 141, "Business Combinations."
Accordingly, the operating results of Transcom have been included in the
Company's consolidated statements of operations since the acquisition date.
F-49
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. RESTRUCTURING
The Company engaged Credit Suisse First Boston ("CSFB") as its financial advisor
during the fourth quarter of 2001. Along with CSFB, the Company was in
discussions with a group of note holders, representing more than two-thirds of
NEON Optica's, a subsidiary of the Company, $180 million Senior Notes and the
holders of the 15% equipment note and the Company's 18% subordinated convertible
notes, regarding the restructuring of their debt. Such restructuring was
ultimately pursued in bankruptcy in order to bind all creditors to the terms of
the Plan of Reorganization. Accordingly, on June 25, 2002, the Company filed a
voluntary petition for relief under Chapter 11 of the United States Bankruptcy
Code ("the Bankruptcy Code") in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court").
The Company's Plan of Reorganization ("POR") was confirmed by the Bankruptcy
Court on November 13, 2002 and became effective on December 20, 2002 (the
"Effective Date"). The Company has recorded this transaction as of December 31,
2002. Under the POR, on the Effective Date:
o The Company's outstanding Senior Notes having a principal
amount of $180 million, plus accrued and unpaid interest of
$8.3 million were exchanged for common stock in the Successor
Company.
o The Company's 15% equipment note having a principal amount of
$40.5 million, plus accrued and unpaid interest of $4.5
million were exchanged for common stock in the Successor
Company.
o All of the Company's outstanding 18% subordinated convertible
notes, having a total principal amount of $16.5 million, plus
accrued and unpaid interest of $4 million, were cancelled.
o All of the Company's outstanding shares of common stock and
restricted common stock were cancelled.
o Former creditors collectively purchased in a private offering,
1,101,887 shares of the new Series A 12% Cumulative
Convertible Preferred Stock (the "12% preferred stock"), for a
purchase price of approximately $12.4 million.
Reorganization items are composed of expenses that were realized or incurred by
the Company as a result of its reorganization under Chapter 11 of the Bankruptcy
Code. Reorganization items consisted of the following:
Professional fees and related expenses $ (6,416,000)
Interest income 64,000
Loss from write-down of assets to fair value (104,525,000)
Write-off of deferred financing fees and other assets (6,167,000)
Gain from cancellation of debt, net of value of
common stock issued 143,557,000
-------------------------------------------------------------------------------
Total reorganization items $ 26,513,000
===============================================================================
Professional fees and related expenses represent legal, financial advisory and
other expenses directly related to the bankruptcy proceedings. Under the
Bankruptcy Code, interest on the outstanding senior notes, the 18% subordinated
convertible notes and the 15% equipment note ceased to accrue during the
Bankruptcy Proceedings.
FRESH START REPORTING
Effective December 31, 2002, the Company adopted fresh start reporting in
accordance with the provisions of Statement of Position (SOP) 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code." Fresh start
reporting resulted in a new operating entity for accounting purposes with assets
and liabilities adjusted to fair value and beginning retained earnings set to
zero. Under SFAS No. 141, "Business Combinations," fair value is defined as the
amount at which an asset (or liability) could be bought (or incurred) or sold
(or settled) in a current transaction, other than a forced or liquidation sale.
Pursuant to SFAS No. 141, the Company used the purchase method of accounting to
allocate its reorganization value to its net assets. The reorganization value
was determined to be $125 million, including the sale of 1,101,887 shares of
preferred stock for $12.4 million as of December 31, 2002 and was supported by
an independent financial advisor, which applied the following two valuation
methodologies:
F-50
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o DISCOUNTED CASH FLOW APPROACH. The discounted cash flow
approach is a fundamental analysis of evaluating the Company's
cash flows over the planning period [6.5 years] and
discounting the annual future values [including a terminal
value of 6 times earnings before interest, taxes, depreciation
and amortization] to the present period using a discount rate
[18%].
o MARKET APPROACH. The market approach measures the estimated
value of assets by compiling and analyzing data with respect
to actual purchase-and-sale market transactions for, and
listings of, similar assets. Adjustments to the market values
of the similar assets are made to compensate for differences
in location, time of sale, profitability and physical
characteristics between the subject assets and the similar
assets, and to indicate a fair value for the subject assets.
Whether an approach was used, and the extent to which an approach was relied
upon, depended on the nature of the asset, the context of the valuation and the
quality and quantity of information available. General procedures used to
perform the fair value analysis included the following:
o Discussions with management and site engineers concerning the
fixed assets, customers, company structure, strategy,
technology and trade name;
o Industry analysis specifically related to customer turnover,
profitability, growth and other key variables relating to the
valuation of the customer relationships, technology and trade
name; and
o Historical financial analysis of the Company to compare
operating and financial data of the Company to those of the
industry.
The Company's reorganization value represented the value of the reorganized
consolidated entity. This value was viewed as the fair value of the Company's
capital, comprising the value of long-term capital investment, including both
long-term debt and equity, and the approximate amount a willing buyer would have
paid for the Company's net assets immediately after the reorganization was
completed. The calculated reorganization value was based upon a variety of
estimates and assumptions about circumstances and events, not all of which have
taken place to date. These estimates and assumptions are inherently subject to
significant economic and competitive uncertainties beyond the Company's control,
including, but not limited to, the Company's ability to obtain and perform new
contracts in a profitable manner.
As discussed more fully in Note 11, the Company also exchanged common stock for
cash and assets from Mode 1 Communications, Inc. and Northeast Utilities having
an aggregate value of approximately $9.4 million.
The effects of the POR and the application of fresh start reporting on the
Company's consolidated balance sheet as of December 31, 2002 were as follows:
Fresh Start
Effects of Accounting
Predecessor Plan of Adjustments/ Successor
Company Reorganization Other Company
------------------------------------------------------------------------------------------------------------------------
Current assets:
Cash and cash equivalents $ 6,583,000 $12,472,000 (a) $ - $ 19,055,000
Short-term restricted investments 2,556,000 - - 2,556,000
Accounts receivable, net 1,970,000 - - 1,970,000
Prepaid expenses and other current assets 1,521,000 (57,000)(b) - 1,464,000
------------------------------------------------------------------------------------------------------------------------
Total current assets 12,630,000 12,415,000 - 25,045,000
------------------------------------------------------------------------------------------------------------------------
Property and equipment, net 235,203,000 5,352,000 (c) (103,243,000) (n) 137,312,000
Other assets, net 9,734,000 (5,686,000)(d) (1,282,000) (n) 2,766,000
------------------------------------------------------------------------------------------------------------------------
Total assets $257,567,000 $12,081,000 $(104,525,000) $165,123,000
========================================================================================================================
F-51
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fresh Start
Effects of Accounting
Predecessor Plan of Adjustments/ Successor
Company Reorganization Other Company
------------------------------------------------------------------------------------------------------------------------
Current liabilities:
Accounts payable $ 11,638,000 $ (6,467,000) (e) $ - $ 5,171,000
Accrued expenses 26,691,000 (18,496,000) (f) - 8,195,000
Deferred revenue 1,954,000 - - 1,954,000
Current portion of long-term obligations 38,230,000 (38,230,000) (g) - -
------------------------------------------------------------------------------------------------------------------------
Total current liabilities 78,513,000 (63,193,000) - 15,320,000
------------------------------------------------------------------------------------------------------------------------
Deferred revenue, net of current portion 14,131,000 - - 14,131,000
------------------------------------------------------------------------------------------------------------------------
Long-term obligations, net of current
portion 196,363,000 (196,363,000) (g) - -
------------------------------------------------------------------------------------------------------------------------
Other long-term liabilities - related
party 1,425,000 - - 1,425,000
------------------------------------------------------------------------------------------------------------------------
Successor - preferred stock - 12,396,000 (j) 45,000 (m) 12,441,000
------------------------------------------------------------------------------------------------------------------------
Stockholders' equity (deficit):
Successor - common stock - 16,000 (i) - 16,000
Predecessor - common stock 199,000 (199,000) (h) - -
Predecessor - restricted common stock 14,000 (14,000) (h) - -
Successor - subscription receivable - (62,000) (j) - (62,000)
Additional paid-in-capital 290,317,000 (168,420,000) (k) - 121,897,000
Accumulated deficit (323,395,000) 427,920,000 (l) (104,570,000) (n) (45,000)
------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (32,865,000) 259,241,000 (104,570,000) 121,806,000
------------------------------------------------------------------------------------------------------------------------
Total liabilities, preferred stock
and stockholders' equity $ 257,567,000 $ 12,081,000 $(104,525,000) $165,123,000
========================================================================================================================
(a) Represents the purchase price of the new 12% preferred stock of
approximately $12.4 million and the write-down of old outstanding checks of
approximately $0.1 million
(b) Represents the write-off of deposits on facilities that have been abandoned
in accordance with the POR.
(c) Represents the receipt of fixed assets in exchange for new common stock and
the discharge of debt owed, net of the write-off of fixed assets abandoned
in accordance with the POR.
(d) Represents the write-off of deferred financing fees associated with the
senior notes, the convertible notes and the equipment note of approximately
$3.8 million, $0.6 million, and $1.0 million, respectively, and the
write-off of other assets of approximately $0.3 million.
(e) Represents the settlement of accounts payable claims with stock.
(f) Represents the settlement of accrued expenses claims with stock, the
write-down of certain liabilities and the write-down of accrued interest
associated with the senior notes, the convertible notes and the equipment
note of approximately $8.3 million, $4.0 million, and $4.5 million,
respectively.
(g) Represents the discharge of indebtedness in accordance with the POR.
(h) Represents the cancellation of common stock and restricted common stock of
the Predecessor Company in accordance with the POR.
(i) Represents the issuance of new common stock in accordance with the POR.
(j) Represents the issuance of the new 12% preferred stock and its related
subscription receivable.
F-52
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(k) Represents the issuance of new common stock, new 12% preferred stock and
the write-down of additional-paid-in-capital associated with the
cancellation of the common stock and restricted common stock of the
Predecessor Company in accordance with the POR.
(l) Represents the elimination of historical accumulated deficit.
(m) Records the accretion of dividends on the new 12% preferred stock from the
date of issuance, December 20, 2002.
(n) Represents an adjustment to fair value of property and equipment and other
assets of approximately $104.5 million and the accretion of dividends on
the new 12% preferred stock of $45,000.
4. SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements reflect the application of
certain accounting policies as described below and elsewhere in the notes to
consolidated financial statements.
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of NEON Communications, Inc. and its wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in
consolidation.
MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, management evaluates its
estimates, including those related to the allowance for doubtful accounts, and
the value of long-lived tangible and intangible assets. Actual amounts could
differ from those estimates.
REVENUE RECOGNITION AND ALLOWANCE FOR DOUBTFUL ACCOUNTS
The network services the Company provides includes short-term leases of lit
fiber (fixed amounts of capacity on fiber optic transmission lines that use
optronics equipment installed by the Company) and long-term leases of dark fiber
(fiber optic transmission lines leased without optronics equipment installed by
the Company) at fixed-cost pricing over multiple year terms. Revenues from
telecommunications network services are recognized ratably over the term of the
applicable lease agreements with customers, which range from one to 20 years,
provided there exists persuasive evidence of an arrangement, the fee is fixed or
determinable and collectibility of the related receivables is reasonably
assured. Amounts billed in advance of the services provided are recorded as
deferred revenue. Certain of the Company's lease agreements provide for a refund
of the unrecognized deferred income if the Company is unable to provide such
services described in the lease agreement. The Company also leases space to
customers at its collocation facilities. Other services revenues include these
collocation service revenues as well as revenues from nonrecurring installation
charges and design, engineering and construction services.
The Company recognizes revenues from nonrecurring installation charges and
design, engineering and construction services ratably over the multiple year
network services terms to which the nonrecurring charges relate, provided there
exists persuasive evidence of an arrangement, the fee is fixed or determinable
and collectibility of the related receivable is reasonably assured.
The Company has contracts with customers that provide service-level commitments,
which may obligate the Company to provide credits against billings if service is
interrupted or does not meet the customer's operating parameters. These amounts
are accounted for as reductions of revenue. To date, credits granted under these
arrangements have not been material.
Revenues are recorded net of provisions for allowances, which are estimated
based on current economic factors. The provisions for allowances for the years
ended December 31, 2001, 2002 and 2003 represented approximately 2%, 4% and 3%
of gross revenues, respectively.
The Company maintains an allowance for doubtful accounts to cover estimated
losses resulting from the inability of the Company's customers to make required
payments. The Company specifically analyzes accounts receivable and historical
bad debts, customer concentrations and current economic trends when evaluating
the adequacy of its allowance for doubtful accounts.
F-53
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income
Taxes," the objective of which is to recognize the amount of current and
deferred income taxes payable or refundable at the date of the financial
statements as a result of all events that have been recognized in the
accompanying consolidated financial statements, as measured by enacted tax laws.
CASH, CASH EQUIVALENTS AND SHORT-TERM RESTRICTED INVESTMENTS
The Company accounts for investments under SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." Cash equivalents are highly liquid
investments with original maturities of three months or less. Cash equivalents
consist of money market accounts at December 31, 2002 and 2003, and June 30,
2004.
At December 31, 2002 and 2003, and June 30, 2004, short-term restricted
investments included a money market and an escrow account with original
maturities of greater than three months with maturities less than a year from
the balance sheet date. These investments are used as collateral for certain
bonds and other obligations related to the Company's network.
DEPRECIATION AND AMORTIZATION
As part of fresh start reporting (Note 3), all property, equipment and other
long-term assets were revalued to estimated fair value, which became the
Successor Company's new cost basis for financial reporting purposes, as of
December 31, 2002. All capital additions made subsequent to December 31, 2002
are stated at cost.
The Company provides for depreciation and amortization using the straight-line
method to allocate the cost of property and equipment and long-term assets over
their estimated useful lives, as follows:
Assets Years
------------------------------------------------------------------------------
Communications network infrastructure 15-20 years
Network and office equipment 5-7 years
Leasehold improvements Lesser of estimated useful
life or term of lease
Furniture and fixtures 7 years
Prepaid right-of-way fees Term of agreement
Applicable interest charges incurred during the construction of new facilities
are capitalized as elements of cost and are depreciated over the assets'
estimated useful lives. Interest capitalized for the years ended December 31,
2001, 2002 and 2003 was approximately $6.0 million, $1.9 million, and $0,
respectively.
LONG-LIVED ASSETS
The Company reviews its long-term assets, including its property and equipment
and other intangibles for impairment whenever events or changes in circumstances
indicate that the carrying value of the assets may not be recoverable in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." The Company believes that the carrying values of its
long-lived assets were realizable as of December 31, 2003 and 2002 and June 30,
2004.
CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to significant concentrations of
credit risk consist primarily of cash and cash equivalents and accounts
receivable. The Company's cash and cash equivalents are invested in financial
instruments with high credit ratings. The Company does not require collateral or
other securities to support customer receivables; however, it performs regular
credit evaluations of its customers' financial condition and maintains
allowances for potential credit losses. Concentration of credit risk with
respect to accounts receivable is limited to customers to whom the Company makes
significant sales.
F-54
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the years ended December 31, 2001 and 2003, one customer accounted for 10%
of net revenues. For the year ended December 31, 2002 and the six months June
30, 2004, no customer accounted for more than 10% of net revenues. As of
December 31, 2002 and 2003, no customers had balances in excess of 10% of
accounts receivable. As of June 30, 2004, one customer represented approximately
41% of accounts receivable.
The Company has no significant off-balance-sheet or other concentration of
credit risks at December 31, 2002 or 2003 or June 30, 2004.
FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure about the fair value of financial instruments. Financial instruments
consist of cash and cash equivalents, accounts receivable and accounts payable.
The estimated fair values of the cash and cash equivalents, accounts receivable
and accounts payable approximates their carrying values due to their short-term
nature.
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income," requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from non owner sources. Comprehensive loss is the same as reported net loss for
all periods presented.
INTANGIBLE ASSET IMPAIRMENT
In January 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets," which requires that goodwill and other intangible assets
with indefinite lives no longer be amortized but instead be measured for
impairment at least annually, or when events indicate that there may be
impairment. In connection with the transition to this new accounting standard,
the Company was required to assess whether there was an indication that goodwill
and other intangible assets were impaired as of the date of adoption by
comparing the fair value and the carrying value of its assets and liabilities,
including goodwill and other intangible assets, at such date. Based on this fair
value assessment, the Company recorded a one-time, non-cash transitional
impairment loss, which is recognized as the cumulative effect of a change in
accounting principle in the accompanying 2002 consolidated statement of
operations, of approximately $72.3 million, to write off all of its goodwill and
other identifiable intangible assets of $49.4 million and $22.9 million,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for its stock-based compensation plans under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and, accordingly, accounts for employee stock-based compensation
utilizing the intrinsic value method. SFAS No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123"), established a fair value based method of accounting
for stock-based compensation plans. The Company has adopted the disclosure only
alternative under SFAS 123, which requires disclosure of the pro forma effects
on earnings and earnings per share as if SFAS 123 had been adopted as well as
certain other information.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of SFAS Statement No.
123." This statement amends SFAS 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS 148 amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. SFAS 148 also requires that those effects be disclosed more prominently
by specifying the form, content, and location of those disclosures. The Company
has adopted the increased disclosure requirements of SFAS 148. The Company will
continue to use the intrinsic value method of accounting for stock-based
employee compensation.
F-55
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Had compensation cost for the Company's option plans been determined using the
fair value method at the grant dates in accordance with SFAS No. 123, the effect
on the Company's net loss would have been as follows:
(PREDECESSOR (PREDECESSOR (SUCCESSOR
COMPANY) COMPANY) COMPANY)
DECEMBER 31, 2001 2002 2003
--------------------------------------------------------------------------------------------------------------
Net loss as reported $(116,681,000) $ (87,544,000) $ (1,048,000)
Add: stock-based employee compensation expense
included in reported net loss -- -- 120,000
Deduct: total stock-based employee compensation
determined under fair value method for all awards (5,554,000) -- (361,000)
--------------------------------------------------------------------------------------------------------------
Pro forma net loss $(122,235,000) $ (87,544,000) $ (1,289,000)
==============================================================================================================
Following are the assumptions that were used to estimate the fair value of each
option grant using the Black-Scholes option pricing model:
DECEMBER 31, 2001 2002 2003
--------------------------------------------------------------------------------------------------------------
Risk free interest rate 3.3% N/A 3.0%
Expected dividend yield None N/A None
Expected lives 3 years N/A 3 years
Volatility 307% N/A 0%
The weighted average fair value of options granted during the years ended
December 31, 2001 and 2003 was $7.73 and $0.51, respectively. The weighted
average remaining contractual life of options outstanding at December 31, 2003
was approximately 9.2 years.
There were no options granted during the year ended December 31, 2002.
RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the current
period presentation.
ASSET RETIREMENT OBLIGATIONS
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 requires entities to record the fair value of a
liability for an asset retirement obligation in the period in which it is
incurred. When the liability is initially recorded, the entity capitalizes the
cost, thereby increasing the carrying amount of the related long-lived asset.
Over time, the liability is accreted, and the capitalized cost is depreciated
over the useful life of the related asset. Through the acquisition of Transcom,
the Company acquired assets and a related asset retirement obligation (Note 2).
The asset retirement obligation liability totaled approximately $1.8 million at
December 31, 2003. Accretion expense from the date of acquisition to December
31, 2003 was not deemed material. Accretion for the six months ended June 30,
2004 was approximately $68,000.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity and
requires that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances), because that instrument
represents an obligation. Many of those instruments were previously classified
as equity. The statement is effective for financial instruments entered into or
modified after May 31, 2003, and otherwise is effective at the beginning of the
first interim period beginning after June 15, 2003, except for mandatorily
redeemable financial instruments of nonpublic entities, which are subject to the
provisions for the first fiscal period beginning after December 15, 2003. The
adoption of SFAS No. 150 is not expected to have a material effect on the
Company's financial position, results of operations or cash flows.
F-56
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities." FIN 46 requires that the criteria for consolidation be based upon
analysis of risks and rewards, not control, and represents a significant and
complex modification of previous accounting principles. FIN 46 is effective for
consolidated financial statements issued after June 30, 2003. The Company does
not believe the adoption of FIN 46 will have a material effect on the Company's
consolidated results of operations, financial position or cash flows.
In December 2003, the Securities and Exchange Commission ("SEC") published Staff
Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 was
effective upon issuance and supersedes SAB No. 101, "Revenue Recognition in
Financial Statements," and rescinds the accounting guidance contained in SAB No.
101 related to multiple-element revenue arrangements that was superseded by EITF
Issue No. 00-21. The adoption of SAB No. 104 did not have a material effect on
the Company's financial position, results of operations, or cash flows.
5. NETWORK CONNECTIVITY PURCHASES IN EXCHANGE FOR STOCK
On September 14, 2000, the Company entered into an agreement with Consolidated
Edison Communications, Inc. ("CEC") under which CEC agreed to grant the Company
an indefeasible right to use ("IRU") fiber optic facilities on the CEC network,
to provide connectivity from NEON's backbone network to CEC's local distribution
facilities, and to contribute to the Company cash totaling $11.3 million through
April 15, 2005. As part of the agreement, the Company issued 2,476,735 shares of
common stock to CEC, of which 56% was restricted as of December 31, 2001. In
connection with this transaction, the Company recorded a subscription receivable
for the value of these assets, based upon an independent appraisal of the value
of the tangible and intangible assets received in consideration for the stock
provided under this agreement. As network assets were received under this
agreement, the related subscription receivable amount was transferred to fixed
and intangible assets. As of December 31, 2001 and 2002, approximately $77.6
million and $89.8 million of the subscription receivable had been transferred to
fixed and intangible assets and $1.8 million and $3.0 million had been received
in cash, respectively. As discussed more fully in Note 4, the Company wrote off
all of its intangible assets during the year ended December 31, 2002. During
2002, in connection with the POR, the Company and CEC entered into an agreement
whereby CEC granted the Company an IRU for the original fiber optic facilities
provided and additional fiber optic facilities in New York City in exchange for
CEC's remaining obligations under the September 2000 agreement. The Company and
CEC also entered into standard commercial agreements to cover future
transactions between the parties.
On September 14, 2000, the Company entered into a similar agreement with Exelon.
Under the initial agreement, the Company issued 2,131,143 shares of common stock
to Exelon and received cash totaling approximately $3.3 million from Exelon. In
connection with this agreement, the Company recorded a subscription receivable
for the value of the assets, based on an independent appraisal of the value of
the tangible and intangible assets to be received. On August 10, 2001, the
Company closed financing of $11.5 million in the form of an 18% subordinated
convertible note with Exelon and modified the September 2000 agreement. The
Exelon convertible note purchase agreement provided for an additional $10
million from Exelon, payable either in cash or forgiveness of indebtedness
represented by the Exelon convertible note in lieu of providing the IRU,
services and other cash proceeds required under the September 2000 agreement
with Exelon.
Upon closing the Exelon convertible note, the Company recorded a one-time,
non-cash charge to operations of $60 million to write-down the subscription
receivable related to the Exelon transaction. Prior to the modification of the
September 2000 agreement in August 2001, the Company had received $4.5 million
of cash from Exelon under this agreement. During 2002, Exelon delivered notice
to the Company to apply the $10 million as forgiveness of indebtedness under the
Exelon convertible note.
The Company incurred approximately $285,000 of non-reimbursable costs related to
these transactions which are shown as a reduction of additional paid-in capital
in the 2001 statement of stockholders' equity.
F-57
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31, JUNE 30,
2002 2003 2004
(UNAUDITED)
---------------------------------------------------------------------------------------------------
Communications network infrastructure $105,690,000 $112,993,000 $112,993,000
Communications network construction-in-process 13,344,000 9,064,000 13,987,000
Network and office equipment 14,434,000 19,520,000 19,667,000
Leasehold improvements 3,315,000 3,315,000 3,315,000
Furniture and fixtures 529,000 713,000 793,000
---------------------------------------------------------------------------------------------------
137,312,000 145,605,000 150,755,000
Less: Accumulated depreciation and amortization -- 8,999,000 14,093,000
---------------------------------------------------------------------------------------------------
$137,312,000 $136,606,000 $136,662,000
===================================================================================================
In accordance with the adoption of fresh start reporting (Note 3), the Company
revalued its property and equipment to estimated fair value at December 31, 2002
based upon an independent valuation. Additions beginning in 2003 are stated at
cost.
7. OTHER ASSETS
Other assets consist of the following:
DECEMBER 31, JUNE 30,
2002 2003 2004
(UNAUDITED)
--------------------------------------------------------------------------------------------------
Prepaid right-of-way fees, related party $1,787,000 $1,787,000 $1,787,000
Long-term lease receivable 130,000 -- --
Other 848,000 1,789,000 2,377,000
--------------------------------------------------------------------------------------------------
2,765,000 3,576,000 4,164,000
Less: Accumulated amortization -- 387,000 581,000
--------------------------------------------------------------------------------------------------
$2,765,000 $3,189,000 $3,583,000
===================================================================================================
In accordance with the adoption of fresh start reporting (Note 3), the Company
revalued its remaining long-term assets at December 31, 2002.
LONG-TERM LEASE RECEIVABLE
In January 2001, the Company entered into an agreement with CEC, a related party
prior to the effective date of the POR, in which the Company granted CEC a
20-year IRU in certain fibers and a 36-month lease of certain other fibers along
a route segment between White Plains, NY and New York City. The 36-month lease
will convert into a 17-year IRU at the end of the lease period upon a one-time
payment of $1.00. The agreement provided for an up-front payment from CEC of
$4.0 million and an additional $3.2 million due from CEC in monthly payments of
$88,125 over the 36-month lease period. The Company accounted for this
transaction as a fixed asset sale and sales type lease and recorded a gain in
2001 of approximately $1.5 million as other income. The Company received
payments under this agreement of approximately $0.7 million, $1.3 million, and
$1.1 million during the years ended December 31, 2001, 2002 and 2003,
respectively. At December 31, 2003, approximately $0.2 million is due to the
Company under this agreement. This amount is included in prepaid expenses and
other current assets on the 2003 accompanying consolidated balance sheet.
F-58
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PREFERRED STOCK AND STOCKHOLDERS' EQUITY
GENERAL
Under the terms of the Amended and Restated Certificate of Incorporation, the
Board of Directors is authorized, subject to any limitations prescribed by law,
without stockholder approval, to issue authorized shares of preferred stock in
one or more series. Each series of preferred stock shall have rights,
preferences, privileges and restrictions, including voting rights, dividend
rights, conversion rights, redemption privileges and liquidation preferences, as
shall be determined by the Board of Directors.
SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
The Company had designated 2,500,000 shares of its preferred stock as 12% Series
A Cumulative Convertible Preferred Stock (Series A Preferred Stock). Each share
of Series A Preferred Stock is convertible into one share of the Company's
common stock at the option of the holder, is entitled to one vote, has a
liquidation preference of $11.25 per share plus accrued dividends, and is senior
to the Company's common stock and Redeemable Preferred Stock. Dividends on such
shares are payable semi-annually on June 15 and December 15 of each year at a
rate of $0.675 per share when and if declared by the Board of Directors. As of
December 31, 2003, $1,582,541 in dividends had accrued on the Series A Preferred
Stock. At the Company's option, dividends are payable in cash or additional
shares of Series A Preferred Stock. At the Company's option, shares of Series A
Preferred Stock can be redeemed in whole or in part at $11.93 per share in 2006,
$11.59 per share in 2007 and $11.25 per share in 2008 and thereafter. In the
event of a change of control, as defined, each holder of Series A Preferred
Stock can require the Company to redeem its shares for $11.36 per share plus
accrued and unpaid dividends. Accordingly, in accordance with SEC requirements,
the Series A Preferred Stock is not included in stockholders' equity.
Additionally, each share of Series A Preferred Stock shall be automatically
converted into shares of common stock at the conversion rate then in effect upon
the affirmative vote of the holders of at least 66 2/3% of the outstanding
shares of the Series A Preferred Stock or on the day immediately following the
date on which the closing price of the common stock has equaled or exceeded
$33.75 for a period of 45 consecutive trading days, if and when it is publicly
traded.
REDEEMABLE PREFERRED STOCK AND WARRANTS
At December 31, 2003 and 2002, the Company had designated 21,354,000 shares of
its preferred stock as Redeemable Preferred Stock to reserve for shares issuable
upon the exercise of the same number of Redeemable Preferred Stock Warrants
issued or issuable in connection with the Company's POR. The Redeemable
Preferred Stock Warrants were issued to the Company's unsecured creditors and
Series A Preferred Stock and Class A Warrant holders. Additional Redeemable
Preferred Stock Warrants will be issued to certain option holders as such
options vest and for paid-in-kind (PIK) dividends, if any, on Series A Preferred
Stock. Each Redeemable Preferred Stock Warrant entitles the holder to purchase
one share of Redeemable Preferred Stock at $0.01 per share through December 20,
2012 upon a change of control, as defined, where the consideration equals or
exceeds $10.62 per share of common stock (a Triggering Event). Each share of
Redeemable Preferred Stock is entitled to one vote, has a liquidation preference
of $0.01 per share, and is junior to the Series A Preferred Stock. Upon the
closing of a Triggering Event, the Company shall redeem the Redeemable Preferred
Stock for the lesser of $8.02 per share or the excess of the fully diluted per
share proceeds over $10.62. In the event that the Triggering Event does not
close within a 12 month period, the redemption price per share for the
Redeemable Preferred Stock is reduced to $0.01 per share and the Company shall
redeem the outstanding Redeemable Preferred Stock and issue new warrants to
purchase such shares with the same terms as the previously issued Redeemable
Preferred Stock Warrants. At December 31, 2003 and 2002, approximately
16,600,000 Redeemable Preferred Stock Warrants were issued.
COMMON STOCK
At December 31, 2002, the Company had 15,536,250 shares of new common stock
reserved for issuance in connection with the Company's POR. These shares were
issued in 2003, but are recorded as issued and outstanding as of December 20,
2002, the deemed effective date of the POR.
F-59
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CLASS A WARRANTS
In connection with the sale of the Series A Preferred Stock, the Company issued
5,511,405 Class A Warrants to the holders of such preferred stock. Each Class A
Warrant entitles the holder to purchase one share of the Company's common stock
for $0.01 per share on or before December 20, 2012. Prior to the exercise of the
Class A Warrants, holders do not have any rights as stockholders. At December
31, 2003 and 2002, the Company has reserved 5,511,405 shares, of its common
stock for shares issuable upon the exercise of the Class A Warrants.
REGISTRATION RIGHTS AGREEMENT
On December 20, 2002, the Company entered into a Registration Rights Agreement
(the Agreement) with certain purchasers of the Series A Preferred Stock and
certain other stockholders (the holders) as provided for by the POR. Pursuant to
the Agreement, the holders of at least 25% of the registerable securities of the
Company, as defined, may request up to three demand registrations, subject to
certain limitations set forth in the Agreement. The holders also have certain
piggyback registration rights. Under the Agreement, registration expenses are
generally borne by the Company and underwriting fees and commissions are
allocated on a pro-rata basis among the Company and the participating holders.
WARRANTS
During 2003, the Company issued two warrants to financial consultants in
exchange for services to purchase a total of 650,000 shares of the Company's
common stock at exercise prices ranging from $5.30 - $6.06. The fair value of
these warrants was approximately $712,000. Approximately $360,000 of this value
related to amounts owed at December 31, 2002, that were included in
reorganization items in the 2002 consolidated statement of operations. The
remaining $352,000 was included as a direct acquisition cost in the purchase
price for Transcom (see Note 2).
9. STOCK OPTION PLANS
The Company's 1998 Stock Incentive Plan (the "1998 Plan") was adopted by the
Board of Directors in May 1998. In connection with the Company's POR, the 1998
Plan was terminated.
Stock option activity under the 1998 Plan for the years ended December 31, 2001
and 2002 is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------------------------------------------------------------------------------
Outstanding, December 31, 2000 2,140,000 $ 26.16
Granted 1,702,000 7.72
Exercised (1,000) 9.38
Canceled (368,000) 39.05
--------------------------------------------------------------------------------
Outstanding, December 31, 2001 3,473,000 15.76
Canceled (336,000) 19.30
Canceled due to POR (3,137,000) 15.38
--------------------------------------------------------------------------------
Outstanding, December 31, 2002 -- $ --
================================================================================
Exercisable, December 31, 2002 -- $ --
================================================================================
The Company's 2002 Stock Incentive Plan (the "2002 Plan") was adopted under the
POR. The 2002 Plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards, including the grant of shares based on certain conditions, the grant of
securities convertible into common stock and the grant of stock appreciation
rights. Under the 2002 Plan, the Company can issue options to purchase up to
2,469,000 shares of common stock.
The Company's 2003 Directors' Stock Option Plan ("2003 Plan") was adopted by the
Board of Directors in October 2003. Under the 2003 Plan, the Company can issue
options to purchase up to 125,000 shares of common stock.
As of December 31, 2003, a total of 599,500 and 101,114 stock options are
available for issuance under the 2002 and 2003 stock option plans, respectively.
F-60
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock option activity under the 2003 and 2002 Plans for the years ended
December 31, 2003 and 2002 is as follows:
Exercise Price
Weighted
Number Of Shares Range Average
--------------------------------------------------------------------------------------------------------
Outstanding, December 31, 2002 -- $ -- $ --
Granted 2,021,886 $0.27 - $6.06 5.27
Exercised -- -- --
Canceled (128,500) 5.30 5.30
--------------------------------------------------------------------------------------------------------
Outstanding, December 31, 2003 1,893,386 $0.27 - $6.06 $ 5.27
========================================================================================================
Exercisable, December 31, 2003 227,316 $0.27 - $5.30 $ 4.77
========================================================================================================
Effective January 1, 2003, the Company awarded stock-options to purchase 23,886
shares of its common stock to the Company's non-management directors with an
exercise price of $0.27 per share. The fair market value of these options was
$5.30 per share. The options vest over a one year period. Accordingly,
compensation expense in the amount of $120,147 related to these awards was
charged to expense during the year ended December 31, 2003. This value is
included in selling, general and administrative expenses in the 2003
consolidated statement of operations.
10. INCOME TAXES
The income tax benefit for the years ended December 31, 2001, 2002 and 2003
consisted of the following:
2001 2002 2003
--------------------------------------------------------------------------------------
Current:
Federal $ -- $ -- $ --
State -- -- --
Deferred:
Federal (39,672,000) (29,765,000) (1,435,000)
State (4,667,000) (3,467,000) (253,000)
--------------------------------------------------------------------------------------
(44,339,000) (33,232,000) (1,688,000)
Less: Valuation allowance 44,339,000 33,232,000 1,688,000
--------------------------------------------------------------------------------------
Total $ -- $ -- $ --
--------------------------------------------------------------------------------------
The components of the deferred taxes at December 31, 2002 and 2003 were
approximately as follows:
2002 2003
---------------------------------------------------------------------
Net operating losses $ 24,876,000 $ 31,996,000
Gain from asset impairment 44,576,000 44,576,000
Depreciation (11,516,000) (17,959,000)
Reserves and accruals, not
currently deductible 8,355,000 9,378,000
---------------------------------------------------------------------
66,291,000 67,991,000
Valuation allowance (66,291,000) (67,991,000)
---------------------------------------------------------------------
Net deferred tax asset $ -- $ --
=====================================================================
F-61
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2003, the Company had federal and state net operating loss
carry forwards for the period subsequent to the reorganization available to
offset future taxable income, if any, of approximately $79 million. These carry
forwards expire through 2023 and are subject to the review and possible
adjustment by the Internal Revenue Service. Changes in the ownership of the
Company stock as a result of the plan of reorganization has caused there to be
an annual limitation on the use of net operating loss carry forwards that arose
prior to the effective date of the Company's plan of reorganization. Additional
limitations may be imposed as a result of future changes of ownership, including
changes of ownership pursuant to the proposed merger, that would apply to
subsequently generated net operating loss carry forwards as well. A full
valuation allowance has been recorded in the accompanying consolidated financial
statements to offset these carry forwards because their future realizability is
uncertain.
11. OTHER RELATED PARTY TRANSACTIONS
NORTHEAST UTILITIES AGREEMENTS
In connection with the Company's POR, the Company entered into a Stock Purchase
Agreement with Mode 1 Communications, Inc. ("Mode 1"), a subsidiary of Northeast
Utilities ("NU") and amended certain agreements ("Amended Agreements"),
concerning the provisions of certain rights-of-way use of electric utility
towers and inside urban electric utility ducts, with the three principal
operating subsidiaries of NU (collectively, "Northeast Utilities").
Under the Stock Purchase Agreement, Mode 1 acquired approximately 1,552,000
shares of the Company's common stock in exchange for approximately $3.4 million
due to Northeast Utilities and other consideration. Mode 1 also agreed to
purchase up to $3.5 million of common stock, at the market price on the date of
purchase, to cover the payment of future amounts due to Northeast Utilities
through December 31, 2004. During 2003, Mode 1 purchased approximately 236,000
shares of the Company's common stock for approximately $1.4 million. In
accordance with the Stock Purchase Agreement, the Company used the proceeds from
such sale to pay certain 2003 operating costs due to Northeast Utilities. The
Company and Mode 1 also entered into the Registration Rights Agreement discussed
in Note 8 and a Stockholders Agreement. The Stockholders Agreement between the
Company, Mode 1 and certain purchasers of the Series A Preferred Stock and
certain other stockholders provides for Mode 1 to designate one member of the
Company's Board of Directors for as long as Mode 1 owns at least 67% of its
initial shares or not less then 4% of the Company's outstanding shares.
The Amended Agreements with Northeast Utilities provide the Company with an
option to purchase up to eight of the fibers initially designated for Northeast
Utilities, at the then market price, through June 30, 2005 and a right-of-first
refusal through June 30, 2010 for all of the fiber assets owned or controlled by
Northeast Utilities. Under the Amended Agreements, Northeast Utilities also
agreed to defer approximately $1.4 million due from the Company until December
31, 2004. Mode 1 and Northeast Utilities also agreed not to compete with the
Company in the provision of wholesale telecommunications transport services
through June 30, 2005.
The Amended Agreements with Northeast Utilities were initially entered into in
1994 and 1995 and cover the provision of rights-of-way along electric utility
towers and inside urban electric utility ducts. Pursuant to these agreements,
the Company acquired indefeasible rights-of-use in fiber optic filaments along
Northeast Utilities' rights-of-way and pays Northeast Utilities mileage-based
annual fees and a percentage of the gross revenues that the Company generates on
the portion of its network located on Northeast Utilities' rights-of-way, as
such gross revenues exceed predefined limits specified in the agreements with
Northeast Utilities. To date, none of the limits has been exceeded. Northeast
Utilities has waived a portion of the Company's right-of-way fees on certain
route segments through September 2004. Under the agreements, 12 fibers on
designated route segments of the Company's network in Northeast Utilities
service territory are owned by and have been set aside for Northeast Utilities
use. After June 30, 2005, Northeast Utilities may lease the 12 fibers to third
parties and is free to use these fibers to compete with the Company. At December
31, 2003 and 2002, approximately $1.4 million and $1.8 million associated with
the construction of the 12 fibers is included in prepaid rights-of-way fees in
the accompanying consolidated balance sheet, respectively. In accordance with
the adoption of fresh start reporting (Note 2), the Company revalued the prepaid
right-of-way fees at December 31, 2002 based upon an independent appraisal. Such
fees are being recognized as a cost of revenues ratably over 5 years, the
estimated remaining useful life.
The Amended Agreements with Northeast Utilities have a term of 40 years and
expire in September 2034. Thereafter, they automatically renew for five-year
terms, unless one of the parties has given a one-year advance notice of
termination. In the event that Northeast Utilities gives such a notice and
terminates the agreements, it must either, at its option, pay to the Company an
F-62
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
amount equal to the fair market value of the network built on Northeast
Utilities' rights-of-way less the 12 fibers set aside for Northeast Utilities'
use, or allow NEON to retain its indefeasible rights-of-way and receive from the
Company an annual payment equal to 10% of the Company's gross revenue from the
fiber optic network on Northeast Utilities' rights-of-way, which payment would
be in addition to the other annual payments under the agreements with Northeast
Utilities.
The Company paid Northeast Utilities approximately $428,000, $26,000 and $1.4
million in 2001, 2002 and 2003, respectively, and approximately $1.4 million was
included in other long-term liabilities at December 31, 2001 and 2002 and
accrued expenses at December 31, 2003.
The Company paid approximately $0.2 million to Central Maine Power, a related
party prior to the effective date of the POR, for right-of-way fees for the year
ended December 31, 2001. The Company also paid Central Maine Power and/or Union
Water and Power, an affiliate of Central Maine Power, approximately $1 million
for materials, labor and other contractor charges for the year ended December
31, 2001.
The Company believes that the fees payable under the agreements with related
parties are reasonable and are comparable to those which would have been
negotiated on an arm's-length basis with an unaffiliated third party.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with two officers. These agreements
provide for employment and related compensation and restrict the individuals
from competing, as defined, with the Company during the terms of their
agreements. These agreements also provide for stock options under the 2002 Plan
and for severance payments upon termination under circumstances defined in these
agreements.
12. OTHER COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain collocation facilities, vehicles, and office
equipment and facilities under noncancelable operating leases which expire at
various dates through October 2021. Future minimum lease payments required under
these leases at December 31, 2003 were approximately as follows:
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------------
2004 $ 2,676,000
2005 2,497,000
2006 2,081,000
2007 2,054,000
2008 1,949,000
Thereafter 15,290,000
--------------------------------------------------------------------------------
Total $ 26,547,000
================================================================================
Rent expense charged to operations under the Company's operating leases was
approximately $5.4 million, $4.5 million and $3.5 million in the years ended
December 31, 2001, 2002 and 2003, respectively.
F-63
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company leases fibers for various segments of its network under operating
leases that expire at various dates through December 2034. Future minimum lease
payments required under these fiber optic leases at December 31, 2003 were
approximately as follows:
YEAR ENDING DECEMBER 31,
--------------------------------------------------------------------------------
2004 $ 7,917,000
2005 8,825,000
2006 8,868,000
2007 8,850,000
2008 8,805,000
Thereafter 138,268,000
--------------------------------------------------------------------------------
Total $ 181,533,000
================================================================================
Fiber lease expense charged to operations under the above agreements was
approximately $5.3 million, $6.9 million and $7.8 million in the years ended
December 31, 2001, 2002 and 2003, respectively.
LITIGATION
Certain claims arising in the ordinary course of business are pending against
the Company. In the opinion of management, these claims are not expected to have
a material effect on operations.
13. 401(K) PLAN
The Company maintains the NEON Communications, Inc. 401(k) Plan (the "Plan")
under Section 401(k) of the Internal Revenue Code ("IRC") covering all eligible
employees. Under the Plan, a participant may elect to defer receipt of a stated
percentage of his or her compensation, subject to limitation under the IRC,
which would otherwise be payable to the participant for any plan year. For the
year ended December 31, 2001, the Company made matching contributions of
approximately $165,000. The Company did not match contributions to the Plan for
the years ended December 31, 2002 and 2003.
14. ACCRUED EXPENSES
Accrued expenses at December 31, 2002 and 2003 consisted of the following:
2002 2003
--------------------------------------------------------------------------------
Accrued property and other taxes $ 2,338,000 $ 2,716,000
Accrued professional fees 1,625,000 172,000
Accrued payables to related parties 152,000 1,582,000
Accrued payroll and benefits 1,828,000 2,138,000
Accrued commissions 194,000 293,000
Accrued other 2,058,000 2,002,000
--------------------------------------------------------------------------------
$ 8,195,000 $ 8,903,000
================================================================================
F-64
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. SEGMENT DISCLOSURE
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information," requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable operating segment
of an enterprise. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision makers are the Company's Executive Management Team.
The Company operates in one business segment, the provision of advanced optical
networking solutions and services. The Company analyzes and reports revenues
based on lit fiber, dark fiber, collocation and other services. The Company does
not allocate for management reporting or segment reporting purposes its cost of
revenues and property and equipment, which represent the primarily operating
costs, communications network and equipment that support its revenues.
Similarly, selling, general and administrative expenses are not allocated to
revenue components for management or segment reporting purposes.
Management utilizes several measurements to evaluate its operations and allocate
resources. However, the principal measurements are consistent with the Company's
financial statements. The accounting policies of the segments are the same as
those described in Note 4. All of the Company's revenues are generated and all
of its assets are located in the United States.
Revenue information for the Company was approximately as follows:
PREDECESSOR COMPANY SUCCESSOR COMPANY
DECEMBER 31, 2001 2002 2003
--------------------------------------------------------------------------------------------------
Revenues:
Lit fiber leases $18,395,000 $24,077,000 $32,287,000
Dark fiber leases 4,880,000 6,430,000 5,229,000
Collection services 1,363,000 1,203,000 1,281,000
Other services (1) 1,913,000 1,964,000 2,791,000
--------------------------------------------------------------------------------------------------
Total Revenues $26,551,000 $33,674,000 $41,588,000
==================================================================================================
(1) Includes amortization of nonrecurring fees for installation and design, engineering and
construction services.
F-65
NEON COMMUNICATIONS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW DISCLOSURE
YEARS ENDED SIX MONTHS ENDED
DECEMBER 31, JUNE 30,
====================================================================================
PREDECESSOR PREDECESSOR SUCCESSOR SUCCESSOR SUCCESSOR
COMPANY COMPANY COMPANY COMPANY COMPANY
2001 2002 2003 2003 2004
====================================================================================================================================
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Interest $ 25,606,000 $ 11,475,000 $ -- $ -- $ --
====================================================================================================================================
Taxes $ 229,000 $ 158,000 $ 809,000 $ 257,000 $ 527,000
====================================================================================================================================
Supplemental disclosure of noncash
investing and financing activities:
Beneficial conversion related to issuance
of convertible notes (Note 7) $ 1,150,000 $ -- $ -- $ -- $ --
====================================================================================================================================
Decrease in stock subscription receivable $(79,860,000) $ -- $ -- $ -- $ --
====================================================================================================================================
Issuance of equipment note payable $ 46,250,000 $ -- $ -- $ -- $ --
====================================================================================================================================
Issuance of common stock in exchange for
assets and reduction in accounts payable $ -- $ 9,411,000 $ -- $ -- $ --
====================================================================================================================================
Cancellation of old common stock and
restricted common stock in connection
with POR (Note 3) $ -- $290,531,000 $ -- $ -- $ --
====================================================================================================================================
Repayment of subscription receivable with
certain property and equipment (Note 5) $ -- $ 12,202,000 $ -- $ -- $ --
====================================================================================================================================
Noncash forgiveness of long-term debt $ -- $ 10,000,000 $ -- $ -- $ --
(Note 5)
====================================================================================================================================
Warrants issued in lieu of cash payments $ -- $ -- $ 360,000 $ 360,000 $ --
(Note 8)
====================================================================================================================================
Accretion of dividends on 12% Series A
Preferred Stock $ -- $ 45,000 $ 1,538,000 $ 744,000 $ 839,000
====================================================================================================================================
On September 12, 2003, the Company
acquired Columbia Transmission
Communications Corporation (Note 2):
Accounts receivable $ -- $ -- $ 172,000 $ -- $ --
Prepaid expenses and other current assets $ -- $ -- $ 775,000 $ -- $ --
Accounts payable and accrued expenses $ -- $ -- $ (129,000) $ -- $ --
Asset retirement obligation $ -- $ -- $ (1,768,000) $ -- $ --
Warrants issued in lieu of cash payment
for acquisition costs (Note 8) $ -- $ -- $ (352,000) $ -- $ --
Cash acquired from purchase, net of cash
paid $ -- $ -- $ 4,520,000 $ -- $ --
------------------------------------------------------------------------------------------------------------------------------------
Gain on acquisition $ -- $ -- $ 3,218,000 $ -- $ --
====================================================================================================================================
F-66
APPENDIX A-1
---------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
BETWEEN
GLOBIX CORPORATION
and
NEON COMMUNICATIONS, INC.
DATED AS OF July 19, 2004
-----------------------------------------------------------------
NOTE: This agreement has been conformed to include the amendments thereto that
have been made by the first amendment to the merger agreement dated as of
October 8, 2004 among the parties to this agreement. Provisions of this
---------
agreement that have been deleted by virtue of the first amendment are shown by
brackets (i.e., [..old language in merger agreement...]). New provisions added
to this agreement by virtue of the first amendment are shown by all capital
letters and underlining (i.e., ...NEW LANGUAGE IN MERGER AGREEMENT...). This
--------------------------------
conformed version of the agreement does not contain the exhibits referenced
herein, including Exhibit 1.8(c)(ii), which Exhibit 1.8(c)(ii) has been
modified pursuant to the first amendment and is attached as Exhibit A to the
first amendment. A copy of the original agreement prior to the first amendment,
including all original exhibits, was filed with the Securities and Exchange
Commission by Globix Corporation on July 21, 2004 as Exhibit 2.1 to a filing on
Form 8-K.
TABLE OF CONTENTS
-----------------
PAGE
----
ARTICLE I THE MERGER...........................................................1
Section 1.1 The Merger..................................................1
Section 1.2 Closing.....................................................2
Section 1.3 Effective Time..............................................2
Section 1.4 Effects of the Merger.......................................2
Section 1.5 Charter.....................................................2
Section 1.6 Bylaws......................................................2
Section 1.7 Officers and Directors of the Surviving Corporation.........2
Section 1.8 Effect on Capital Stock.....................................2
Section 1.9 Treatment of NEON Options...................................4
ARTICLE II EXCHANGE OF CERTIFICATES............................................5
Section 2.1 Exchange of Certificates....................................5
Section 2.2 Exchange Procedures.........................................5
Section 2.3 Dividends; Transfer Taxes; Withholding......................5
Section 2.4 Return of Exchange Fund.....................................6
Section 2.5 No Further Ownership Rights in NEON Securities..............6
Section 2.6 Closing of NEON Transfer Books..............................7
Section 2.7 Lost Certificates...........................................7
Section 2.8 Dissenting Shares...........................................7
Section 2.9 Further Assurances..........................................8
ARTICLE III REPRESENTATIONS AND WARRANTIES.....................................8
Section 3.1 Representations and Warranties of NEON......................8
Section 3.2 Representations and Warranties of Globix...................27
ARTICLE IV COVENANTS RELATING TO CONDUCT OF BUSINESS..........................47
Section 4.1 Covenants of NEON..........................................47
Section 4.2 Covenants of Globix........................................50
Section 4.3 No Control.................................................53
ARTICLE V ADDITIONAL AGREEMENTS...............................................53
Section 5.1 Preparation of Proxy Statement; Stockholders Meetings......53
Section 5.2 Access to Information......................................54
Section 5.3 Reasonable Efforts.........................................55
Section 5.4 Public Announcements.......................................56
Section 5.5 Employee Benefits Matters..................................56
Section 5.6 Fees and Expenses..........................................56
Section 5.7 Directors' and Officers' Indemnity.........................57
Section 5.8 Consents, Waivers and Other Approvals......................57
Section 5.9 Committee for Transition Issues............................58
Section 5.10 Schedules..................................................58
Section 5.11 Financial Review...........................................58
Section 5.12 Cooperation................................................58
-i-
ARTICLE VI CONDITIONS PRECEDENT...............................................59
Section 6.1 Conditions to Each Party's Obligation to Effect the Merger.59
Section 6.2 Additional Conditions to Obligations of Globix.............60
Section 6.3 Additional Conditions to Obligations of NEON...............61
ARTICLE VII TERMINATION AND AMENDMENT.........................................63
Section 7.1 Termination................................................63
Section 7.2 Effect of Termination......................................65
Section 7.3 Amendment..................................................65
Section 7.4 Extension; Waiver..........................................65
ARTICLE VIII SURVIVAL.........................................................65
Section 8.1 Non-Survival of Representations, Warranties and Agreements.65
ARTICLE IX GENERAL PROVISIONS.................................................66
Section 9.1 Amendment and Waiver.......................................66
Section 9.2 Notices....................................................66
Section 9.3 Interpretation.............................................67
Section 9.4 Counterparts...............................................67
Section 9.5 Entire Agreement; No Third Party Beneficiaries.............67
Section 9.6 Governing Law..............................................67
Section 9.7 Severability...............................................68
Section 9.8 Assignment.................................................68
Section 9.9 Submission to Jurisdiction; Waivers........................68
Section 9.10 Enforcement................................................68
Section 9.11 Definitions................................................69
Section 9.12 Additional Definitions.....................................72
EXHIBITS
--------
Exhibit 1.5 - Certificate of Incorporation of the Surviving
Corporation
Exhibit 1.6 - Bylaws of the Surviving Corporation
Exhibit 1.7 - Officers and Directors of the Surviving Corporation
and Globix After the Effective Time
Exhibit 1.8(c)(ii) - Certificate of Designation of Globix Preferred Stock
Exhibit 1.8 (c)(iii) - Amendment to Class A Warrant Agreement
Exhibit 1.8(c)(v) - Globix Warrant
Exhibit 5.11 - Financial Review Procedures
-ii-
This AGREEMENT AND PLAN OF MERGER, dated as of July 19, 2004 (this
"AGREEMENT"), between GLOBIX CORPORATION, a Delaware corporation ("GLOBIX"), and
NEON COMMUNICATIONS, INC., a Delaware corporation ("NEON").
WITNESSETH:
WHEREAS, prior to the Closing Date (as defined below) Globix shall
incorporate a new wholly-owned subsidiary Delaware corporation to be called
"Cornerstone Merger Corp." or such other name as Globix may determine ("MERGER
SUB" and together with NEON, the "CONSTITUENT CORPORATIONS");
WHEREAS, the respective Boards of Directors of Globix and NEON have
each determined that the merger of Merger Sub with and into NEON (the "MERGER"),
upon the terms and subject to the conditions set forth in this Agreement, is
advisable and in the best interests of their respective stockholders, and such
Boards of Directors have approved such Merger pursuant to which each outstanding
share of Common Stock, par value $0.001 per share of NEON (the "NEON COMMON
STOCK") and each outstanding share of 12% Series A Cumulative Convertible
Preferred Stock, par value $0.001 per share (the "NEON CONVERTIBLE PREFERRED
STOCK"), issued and outstanding immediately prior to the Effective Time (as
defined in Section 1.3), and certain other securities of NEON, other than shares
owned or held directly or indirectly by Globix or directly by NEON, will be
converted into the right to receive the Merger Consideration (as defined in
Section 1.8(c));
WHEREAS, for federal income tax purposes, it is intended by the
parties hereto that the Merger shall qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the
"CODE"); and the parties intend, by executing this Agreement, to adopt a plan of
reorganization within the meaning of Section 368 of the Code;
WHEREAS, Globix and NEON desire to make certain representations,
warranties, covenants and agreements in connection with the transactions
contemplated hereby and also to prescribe various conditions to the transactions
contemplated hereby.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
ARTICLE I
THE MERGER
----------
Section 1.1 THE MERGER. Upon the terms and subject to the conditions
set forth in this Agreement, and in accordance with the Delaware General
Corporation Law (the "DGCL"), Merger Sub shall be merged with and into NEON at
the Effective Time. From and after the Effective Time, the separate corporate
existence of Merger Sub shall cease and NEON shall continue its corporate
existence under the DGCL as the surviving corporation (the "SURVIVING
CORPORATION").
-1-
Section 1.2 CLOSING. Subject to the terms and conditions hereof, the
closing of the Merger (the "CLOSING") will take place on the third Business Day
after the satisfaction or waiver (subject to applicable law) of the conditions
set forth in Article VI (excluding conditions that, by their terms, cannot be
satisfied until the Closing Date), unless another time or date is agreed to in
writing by the parties hereto (any such date, the "CLOSING DATE"). The Closing
shall be held at the offices of Day, Berry & Howard LLP, One Canterbury Green,
Stamford, Connecticut, unless another place is agreed to by the parties hereto.
Section 1.3 EFFECTIVE TIME. As soon as practicable following the
Closing, the parties shall (i) file a certificate of merger (the "CERTIFICATE OF
Merger") in such form as is required by, and executed in accordance with the
relevant provisions of, the DGCL, and (ii) make all other filings required under
the DGCL. The Merger shall become effective at such time as the Certificate of
Merger is duly filed with, and accepted by, the Secretary of State of the State
of Delaware, or at such subsequent time as Globix and NEON shall agree and
specify in the Certificate of Merger (the date and time the Merger becomes
effective being the "EFFECTIVE TIME").
Section 1.4 EFFECTS OF THE MERGER. At and after the Effective Time,
the Merger will have the effects set forth in the DGCL. Without limiting the
generality of the foregoing, and subject thereto, at the Effective Time all the
property, rights, privileges, powers and franchises of the Constituent
Corporations shall be vested in the Surviving Corporation, and all debts,
liabilities, obligations and duties of the Constituent Corporations shall become
the debts, liabilities, obligations and duties of the Surviving Corporation.
Section 1.5 CHARTER. The certificate of incorporation of NEON as in
effect immediately prior to the Effective Time, shall upon the Effective Time
and by virtue of the Merger be amended to read in its entirety as set forth in
Exhibit 1.5, and as so amended shall be the certificate of incorporation of the
Surviving Corporation until thereafter changed or amended as provided therein or
by applicable law.
Section 1.6 BYLAWS. The bylaws of NEON as in effect immediately prior
to the Effective Time shall upon the Effective Time be amended to read in their
entirety as set forth in Exhibit 1.6, and as so amended shall be the bylaws of
the Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
Section 1.7 OFFICERS AND DIRECTORS OF THE SURVIVING CORPORATION. The
officers and directors of the Surviving Corporation and of Globix after the
Effective Time will be as set forth on Exhibit 1.7.
Section 1.8 EFFECT ON CAPITAL STOCK. As of the Effective Time, by
virtue of the Merger and without any action on the part of Merger Sub, NEON or
the holders of any securities of the Constituent Corporations:
(a) Each issued and outstanding share of common stock, par value $0.01
per share, of Merger Sub shall be converted into one validly issued, fully paid
and nonassessable share of common stock of the Surviving Corporation.
-2-
(b) All shares of NEON Common Stock and NEON Convertible Preferred
Stock that are held in the treasury of NEON and any shares of NEON Common Stock
and NEON Convertible Preferred Stock owned by Globix or Merger Sub shall
automatically be canceled and retired and shall cease to exist and no capital
stock of Globix or other consideration shall be delivered in exchange therefor.
(c) Subject to the provisions of Sections 2.4 and 2.9 hereof:
(i) each share of NEON Common Stock issued and outstanding
immediately prior to the Effective Time (other than shares to be
canceled in accordance with Section 1.8(b)) shall be converted into
the right to receive 1.2748 shares (with the aggregate of all such
converted shares of each stockholder rounded up to the nearest whole
share) (such number being referred to herein as the "EXCHANGE RATIO")
of common stock, par value $0.01 per share, of Globix ("GLOBIX COMMON
STOCK");
(ii) [(A)] (B) all accrued and unpaid dividends to the
---
Closing Date shall be treated as if paid in shares of NEON Convertible
PREFERRED Stock issued immediately prior to the Effective Time;
---------
(A) each share of NEON Convertible Preferred Stock
issued and outstanding immediately prior to the Effective Time (other
than shares to be canceled in accordance with Section 1.8(b), but
including those shares treated as issued in accordance with Section
1.8(c)(ii)(A) above), shall be converted into the right to receive (1)
$3.75 in cash (the "PREFERRED CASH CONSIDERATION") and (2) [0.85034]
2.08333 shares of Globix preferred stock with substantially the
-------
terms set forth in Exhibit 1.8(c)(ii) (the "GLOBIX PREFERRED STOCK");
(iii) each outstanding Class A Warrant of NEON issued under
the Class A Warrant Agreement, dated as of December 23, 2002 (the
"CLASS A WARRANT AGREEMENT"), between NEON and American Stock Transfer
& Trust Company, as warrant agent (a "CLASS A WARRANT"), shall be
converted into the right to receive 1.2748 shares of Globix Common
Stock (with the aggregate of all such converted shares of each holder
rounded up to the nearest whole share) in accordance with the
provisions of Exhibit 1.8(c)(iii);
(iv) each outstanding Redeemable Preferred Stock Warrant of
NEON issued under the Redeemable Preferred Stock Warrant Agreement,
dated as of December 23, 2002, between NEON and American Stock
Transfer & Trust Company, as warrant agent (the "REDEEMABLE PREFERRED
STOCK WARRANTS") shall expire at the Effective Time according to their
terms, and the holders thereof shall not have any rights to receive
payments therefor or with respect thereto; and
(v) each outstanding NEON CTA Warrant shall be converted
into the right to receive a Globix Warrant with substantially the
terms set forth on Exhibit 1.8(c)(v) (a "GLOBIX WARRANT") representing
the right to acquire a number of shares of Globix Common Stock
(rounded to the nearest whole number) determined by multiplying the
number of shares of NEON Common Stock subject to such warrant
-3-
immediately prior to the Effective Time by the Exchange Ratio, at a
purchase price per share (rounded to the nearest whole cent) equal to
the purchase price per share of NEON Common Stock subject to such
warrant immediately prior to the Effective Time, divided by the
Exchange Ratio.
The shares of Globix Common Stock referred to in Sections 1.8(c)(i)
and (iii), the Globix Preferred Stock and Preferred Cash Consideration referred
to in Section 1.8(c)(ii), and the Globix Warrants referred to in Section
1.8(c)(v) are together referred to as the "MERGER CONSIDERATION". All such
shares of NEON Common Stock and NEON Convertible Preferred Stock and NEON
warrants (sometimes collectively referred to herein as, "NEON SECURITIES"), when
so converted, shall no longer be outstanding and shall automatically be canceled
and retired and each holder of a certificate representing any such shares shall
cease to have any rights with respect thereto, except the right to receive the
Merger Consideration into which such NEON Securities are converted and any
dividends and other distributions in accordance with Section 2.3.
(d) At the Effective Time, each then outstanding NEON Option, whether
or not then vested or exercisable, shall be modified as set forth in Section
1.9; provided that any right of a holder of any such NEON Option to acquire
Redeemable Preferred Stock or Redeemable Preferred Stock Warrants, as
applicable, shall terminate at the Effective Time.
Section 1.9 TREATMENT OF NEON OPTIONS. At the Effective Time, each
then outstanding NEON Option, whether or not then vested or exercisable, shall
be modified and become and represent an option to acquire, on the same terms and
conditions (including, without limitation, vesting (with credit for amounts
already vested) and acceleration) as were applicable to such NEON Option prior
to the Effective Date, a number of shares of Globix Common Stock (rounded to the
nearest whole number) determined by multiplying the number of shares of NEON
Common Stock subject to such NEON Option immediately prior to the Effective Time
by the Exchange Ratio, at an exercise price per share (rounded to the nearest
whole cent) equal to the exercise price per share of NEON Common Stock subject
to such NEON Option immediately prior to the Effective Time, divided by the
Exchange Ratio. It is the intention of the parties hereto that each NEON Option
so modified will, to the extent permitted by applicable laws, continue to
qualify as an "incentive stock option" within the meaning of Section 422 of the
Code to the same extent such NEON Option qualified as an incentive stock option
immediately prior to the Effective Time. As soon as practicable after the
Effective Time, the Surviving Corporation shall deliver to each Person who,
immediately prior to the Effective Time, was a holder of an outstanding NEON
Option, an instrument evidencing the modification of such NEON Option as
provided in this Section 1.9. As of the Effective Time, Globix and NEON shall
have taken all corporate action necessary to approve the modification of the
NEON Options and the amendment of the NEON Stock Option Plans, to authorize the
issuance of Globix Common Stock upon exercise of the NEON Options as modified
pursuant hereto, to cause Globix, as the sole shareholder of the Surviving
Corporation, to vote all of its shares in the Surviving Corporation in favor of
approval of the NEON Stock Option Plans as so modified in accordance with the
shareholder approval requirements of Section 422 of the Code and the regulations
promulgated and proposed thereunder, and to reserve for issuance a sufficient
number of shares of Globix Common Stock for delivery upon exercise of the NEON
Options as modified pursuant hereto. Globix shall use commercially reasonable
efforts to cause the issuance of shares of Globix Common Stock issuable upon
-4-
exercise of any modified NEON Options to be registered as soon as is reasonably
practicable following the Effective Time pursuant to an effective registration
statement on Form S-8 under the Securities Act of 1933, as amended (the
"SECURITIES ACT"), and to maintain the effectiveness of such registration
statement thereafter for so long as any of such modified NEON Options remain
outstanding; and if the Globix Common Stock is then listed for trading on any
exchange or market, Globix shall use commercially reasonable efforts to cause
shares issuable upon exercise of modified NEON Options to be so listed.
ARTICLE II
EXCHANGE OF CERTIFICATES
------------------------
Section 2.1 EXCHANGE OF CERTIFICATES. Globix shall authorize a bank,
trust company, or such other person or persons as shall be reasonably acceptable
to Globix and NEON, to act as Exchange Agent hereunder (the "EXCHANGE AGENT").
As soon as practicable after the Effective Time, Globix shall deposit with the
Exchange Agent, in trust for the holders of NEON Securities converted in the
Merger, the Merger Consideration (other than the Globix Warrants) (such Merger
Consideration, together with any dividends or distributions with respect
thereto, being hereinafter referred to as the "EXCHANGE FUND"). The Exchange
Agent shall deliver the Globix Common Stock contemplated to be issued pursuant
to Sections 1.8(c)(i) and (iii) and the Globix Preferred Stock and Preferred
Cash Consideration to be issued pursuant to Section 1.8(c)(ii), in each case out
of the Exchange Fund. The Exchange Fund shall not be used by Globix for any
purpose other than as contemplated by Section 1.8.
Section 2.2 EXCHANGE PROCEDURES. Five Business Days after the
Effective Time, the Exchange Agent shall mail to each record holder of a
certificate or certificates (including warrant certificates as applicable) which
immediately prior to the Effective Time represented outstanding NEON Securities
converted in the Merger (the "CERTIFICATES") a letter of transmittal (which
shall specify that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon actual delivery of the Certificates to the
Exchange Agent, and shall contain instructions for use in effecting the
surrender of the Certificates in exchange for the Merger Consideration). Subject
to Section 2.1, upon surrender for cancellation to the Exchange Agent of a
Certificate together with such letter of transmittal, duly executed, and the
Class A Warrant Exercise Price, if applicable, the holder of such Certificate
shall be entitled to receive in exchange therefor the Merger Consideration into
which the NEON Securities represented by the surrendered Certificate shall have
been converted pursuant to Section 1.8, and certain dividends and other
distributions in accordance with Section 2.3. Any Certificate so surrendered
shall forthwith be canceled.
Section 2.3 DIVIDENDS; TRANSFER TAXES; WITHHOLDING.
(a) No dividends or other distributions that are declared on or after
the Effective Time on Globix Common Stock or Globix Preferred Stock, or are
payable to the holders of record thereof on or after the Effective Time, will be
paid to any person entitled by reason of the Merger to receive a certificate
representing Globix Common Stock or Globix Preferred Stock until such person
surrenders the related Certificate or Certificates, as provided in Section 2.2.
Subject to the effect of applicable law, there shall be paid to each record
holder of a new certificate representing such Globix Common Stock or Globix
-5-
Preferred Stock: (a) at the time of such surrender, the amount of any dividends
or other distributions theretofore paid with respect to the shares of Globix
Common Stock or Globix Preferred Stock represented by such new certificate and
having a record date on or after the Effective Time and a payment date prior to
such surrender and (b) at the appropriate payment date, the amount of any
dividends or other distributions payable with respect to such shares of Globix
Common Stock or Globix Preferred Stock and having a record date on or after the
Effective Time but prior to such surrender and a payment date on or subsequent
to such surrender. In no event shall the person entitled to receive such
dividends or other distributions be entitled to receive interest on such
dividends or other distributions.
(b) If any Merger Consideration is to be paid to or issued in a name
other than that in which the Certificate surrendered in exchange therefor is
registered, it shall be a condition of such exchange that the Certificate so
surrendered shall be properly endorsed and otherwise in proper form for transfer
and that the person requesting such exchange shall pay to the Exchange Agent any
transfer or other taxes required by reason of the issuance of certificates for
such shares of Globix Common Stock or Globix Preferred Stock, as the case may
be, in a name other than that of the registered holder of the Certificate
surrendered, or shall establish to the satisfaction of the Exchange Agent that
such tax has been paid or is not applicable.
(c) Globix or the Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable pursuant to this Agreement to
any holder of NEON Securities such amounts as Globix or the Exchange Agent is
required to deduct and withhold with respect to the making of such payment under
the Code or under any provision of state, local or foreign tax law. To the
extent that amounts are so withheld by Globix or the Exchange Agent, such
withheld amounts shall be treated for all purposes of this Agreement as having
been paid to the holder of the NEON Securities in respect of which such
deduction and withholding was made by Globix or the Exchange Agent.
Section 2.4 RETURN OF EXCHANGE FUND. Any portion of the Exchange Fund
which remains undistributed to the former holders of NEON Securities for six
months after the Effective Time shall be delivered to Globix, upon demand of
Globix, and any such former security holders who have not theretofore complied
with this Article II shall thereafter look only to Globix for payment of their
claim for Merger Consideration and any dividends or distributions with respect
to Globix Common Stock or Globix Preferred Stock. Neither Globix nor the
Surviving Corporation shall be liable to any former holder of NEON Securities
for any such Merger Consideration and dividends and distributions held in the
Exchange Fund which are delivered to a public official pursuant to any
applicable abandoned property, escheat or similar law. If any Certificates shall
not have been surrendered prior to such date on which any Merger Consideration
or any dividends or distributions with respect to Globix Common Stock or Globix
Preferred Stock in respect of such Certificate would escheat to or become the
property of any Governmental Entity, any Merger Consideration in respect of such
Certificates shall, to the extent permitted by applicable Laws, become the
property of Globix, free and clear of all claims or interest of any person
previously entitled thereto.
Section 2.5 NO FURTHER OWNERSHIP RIGHTS IN NEON SECURITIES. The Merger
Consideration issued upon the surrender for exchange of Certificates in
accordance with the terms hereof (including any cash paid pursuant to Section
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2.3) shall be deemed to have been issued in full satisfaction of all rights
pertaining to the NEON Securities represented by such Certificates and the
modification of the NEON Options pursuant to and in accordance with Section 1.9
shall be deemed to be in full satisfaction of all rights pertaining to NEON
Options including any right to acquire Redeemable Preferred Stock or Redeemable
Preferred Warrants, as applicable.
Section 2.6 CLOSING OF NEON TRANSFER BOOKS. At the Effective Time, the
stock transfer books of NEON shall be closed and no transfer of shares of NEON
capital stock shall thereafter be made on the records of NEON. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, the
Exchange Agent or Globix, such Certificates shall be canceled and exchanged as
provided in this Article II.
Section 2.7 LOST CERTIFICATES. If any Certificate shall have been
lost, stolen or destroyed, upon the making of an affidavit of that fact by the
person claiming such Certificate to be lost, stolen or destroyed and, if
required by Globix or the Exchange Agent, the posting by such person of a bond,
in such reasonable amount as Globix or the Exchange Agent may direct as
indemnity against any claim that may be made against them with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate, Merger Consideration and any dividends or other
distributions to which the holders thereof are entitled pursuant to Section 2.3.
Section 2.8 DISSENTING SHARES.
(a) Notwithstanding any other provision of this Agreement to the
contrary, shares of NEON Common Stock and NEON Convertible Preferred Stock that
are outstanding immediately prior to the Effective Time and which are held by
stockholders of NEON who shall not have voted in favor of the Merger or
consented thereto in writing and who shall have demanded properly in writing
appraisal for such shares in accordance with Section 262 of the DGCL and who
shall not have withdrawn such demand or otherwise have forfeited appraisal
rights (collectively, the "DISSENTING SHARES") shall not be converted into or
represent the right to receive the Merger Consideration. Such stockholders of
NEON shall be entitled to receive payment of the appraised value of such shares
of NEON Common Stock and/or NEON Convertible Preferred Stock held by them in
accordance with the provisions of such Section 262, except that all Dissenting
Shares held by stockholders of NEON who shall have failed to perfect or who
effectively shall have withdrawn or lost their rights to appraisal of such
shares of NEON Common Stock or NEON Convertible Preferred Stock under such
Section 262 shall thereupon be deemed to have been converted into and to have
become exchangeable, as of the Effective Time, for the right to receive, without
interest, the Merger Consideration upon surrender, in the manner provided in
Section 2.2 of the Certificate or Certificates which immediately prior to the
Effective Time represented such shares of NEON Common Stock and NEON Convertible
Preferred Stock and the delivery of the other documents required to be delivered
pursuant to such Section 2.2.
(b) NEON shall give Globix prompt notice of any demands for appraisal
received by NEON, withdrawals of such demands, and any other instruments served
pursuant to the DGCL and received by NEON and NEON and Globix shall participate
jointly prior to the Closing in all negotiations and proceedings with respect to
demands for appraisal under the DGCL. NEON shall not, except with the prior
written consent of Globix, make any payment with respect to any demands for
appraisal, or offer to settle, or settle, any such demands.
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Section 2.9 FURTHER ASSURANCES. If at any time after the Effective
Time the Surviving Corporation shall consider or be advised that any deeds,
bills of sale, assignments or assurances or any other acts or things are
necessary, desirable or proper (a) to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation its right, title or interest in, to or
under any of the rights, privileges, powers, franchises, properties or assets of
either of the Constituent Corporations, or (b) otherwise to carry out the
purposes of this Agreement, the Surviving Corporation and its proper officers
and directors or their designees shall be authorized to execute and deliver, in
the name and on behalf of either of the Constituent Corporations, all such
deeds, bills of sale, assignments and assurances and to do, in the name and on
behalf of either Constituent Corporation, all such other acts and things as may
be necessary, desirable or proper to vest, perfect or confirm the Surviving
Corporation's right, title or interest in, to or under any of the rights,
privileges, powers, franchises, properties or assets of such Constituent
Corporation and otherwise to carry out the purposes of this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
------------------------------
Section 3.1 REPRESENTATIONS AND WARRANTIES OF NEON. Except as set
forth in the NEON Disclosure Schedule delivered by NEON to Globix in connection
with the execution of this Agreement (the "NEON DISCLOSURE SCHEDULE") (each
Section of which qualifies the correspondingly numbered representation and
warranty or covenant to the extent specified therein), NEON represents and
warrants to Globix as follows:
(a) ORGANIZATION, STANDING AND POWER.
(i) Each of NEON and its Subsidiaries (i) is a corporation
or other entity duly incorporated or organized, validly existing and
in good standing under the laws of its state of incorporation or
organization, (ii) has all requisite power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted, and (iii) as set forth in Section 3.1(a)(i) of the NEON
Disclosure Schedule, is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification
necessary, except in the case of clause (iii) for such failures as
could not, individually or in the aggregate, reasonably be expected to
have a NEON Material Adverse Effect.
(ii) Section 3.1(a)(ii) of the NEON Disclosure Schedule sets
forth a complete and accurate list of all of NEON's Subsidiaries and
NEON's direct or indirect equity interest therein. Except as set forth
in Section 3.1(a)(ii) of the NEON Disclosure Schedule, neither NEON,
nor any of its Subsidiaries, (A) directly or indirectly owns any
equity, membership, partnership or similar interest in, or any
interest convertible into or exchangeable or exercisable for any
equity, membership, partnership or similar interest in, any
corporation, partnership, joint venture, limited liability company or
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other business association or entity, whether incorporated or
unincorporated, or (B) has, since the NEON Confirmation Effective
Date, been a general partner or managing member of any general
partnership, limited partnership, limited liability company or other
entity as to which NEON or any of its Subsidiaries has any material
liability.
(iii) The copies of the charter, articles or certificate of
incorporation and by-laws (or similar governing documents) of NEON and
each of its Subsidiaries which were made available to Globix are true,
complete and correct copies of such documents as in effect on the date
of this Agreement.
(iv) All minute books and stock record books of NEON and its
Subsidiaries have been made available to Globix or its counsel prior
to the execution of this Agreement.
(b) CAPITAL STRUCTURE.
(i) The authorized capital stock of NEON consists of
100,000,000 shares of NEON Common Stock and 30,000,000 shares of
Preferred Stock, $0.001 par value per share (the "NEON PREFERRED
STOCK"), of which NEON Preferred Stock 2,500,000 such shares are
designated as NEON Convertible Preferred Stock, 21,354,000 such shares
are designated as Redeemable Preferred Stock (the "NEON REDEEMABLE
PREFERRED STOCK"), and the remaining shares of NEON Preferred Stock
are undesignated. The rights and privileges of each class of NEON's
capital stock are as set forth in NEON's certificate of incorporation
and the certificates of designation thereto, as amended to the date
hereof. As of the date hereof, (A) 15,775,863 shares of NEON Common
Stock are issued and outstanding and 341,936 shares of NEON Common
Stock are reserved for issuance to Mode 1 Communications, Inc., (B)
1,101,887 shares of NEON Convertible Preferred Stock are issued and
outstanding, (C) no shares of NEON Redeemable Preferred Stock are
issued or outstanding, (D) 5,511,405 shares of NEON Common Stock are
reserved for issuance pursuant to the terms of the outstanding Class A
Warrants and 650,000 shares of NEON Common Stock are reserved for
issuance pursuant to the terms of the outstanding NEON CTA Warrants,
and (E) no shares of NEON capital stock are held in the treasury of
NEON or by any Subsidiaries of NEON. All of the issued and outstanding
shares of NEON Common Stock and NEON Convertible Preferred Stock have
been duly authorized, and are validly issued, fully paid,
nonassessable and free of preemptive rights created by statute, NEON's
certificate of incorporation or bylaws. None of the issued and
outstanding shares of NEON Common Stock and NEON Convertible Preferred
Stock have been issued in violation of any applicable federal or state
law or any preemptive rights or rights to subscribe for or purchase
securities.
(ii) Except as set forth in Section 3.1(b)(ii) of the NEON
Disclosure Schedule, there are no voting trusts, proxies or other
agreements or understandings with respect to any NEON Common Stock or
NEON Convertible Preferred Stock to which NEON or, to the Knowledge of
NEON, any other Person is a party or by which it or any such other
Person is bound. Section 3.1(b)(ii) of the NEON Disclosure Schedule
lists all issued and outstanding shares of NEON Common Stock and NEON
Convertible Preferred Stock that are otherwise subject to a repurchase
or redemption right or right of first refusal in favor of NEON or any
other Person. NEON has delivered to Globix a certificate certifying
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(A) the name and address of each record holder of NEON Common Stock
and NEON Convertible Preferred Stock, (B) the number and type of
shares held by each such stockholder, and (C) any restrictions imposed
by NEON on the transfer of such shares. Except as set forth in Section
3.1(b)(ii) of the NEON Disclosure Schedule and as contemplated by this
Agreement, there are no registration rights, and there are no rights
agreements, "poison pill" anti-takeover plans or other similar
agreement or restrictive arrangement to which NEON or any of its
Subsidiaries is a party or by which it or they are bound with respect
to any equity security of any class of NEON or any of its Subsidiaries
or with respect to any equity security, partnership interest or
similar ownership interest of any class of any of its Subsidiaries.
(iii) Section 3.1(b)(iii) of the NEON Disclosure Schedule
lists the number of shares of NEON Common Stock and NEON Preferred
Stock reserved for future issuance pursuant to stock options granted
and outstanding as of the date of this Agreement and the plans or
other arrangements under which such options were granted
(collectively, the "NEON STOCK OPTION PLANS") and NEON has delivered
to Globix a certificate with respect to the outstanding options to
purchase shares of NEON Common Stock and NEON Preferred Stock
(including restricted stock) (the "NEON OPTIONS") under the NEON Stock
Option Plans, certifying with respect to each NEON Option (A) the name
of each holder, (B) the number of shares of NEON Common Stock or NEON
Preferred Stock subject to such NEON Option, (C) the relationship of
the holder to NEON, (D) the exercise price, (E) the date of grant, (F)
the vesting schedule, if any, and expiration date thereof, and
including the extent to which any vesting has occurred as of the date
of this Agreement, and (G) whether (and to what extent) the vesting of
such NEON Option will be accelerated in any way by the transactions
contemplated by this Agreement or by the termination of employment or
engagement or change in position of any holder thereof following
consummation of the Merger. Section 3.1(b)(iii) of the NEON Disclosure
Schedule shows the number of shares of NEON Common Stock and NEON
Preferred Stock reserved for future issuance pursuant to warrants,
convertible securities or other outstanding rights (other than NEON
Options) to purchase, or obligations to otherwise issue, shares of
NEON Common Stock or NEON Preferred Stock outstanding as of the date
of this Agreement (such outstanding warrants, convertible securities
or other rights, the "NEON CONVERTIBLE SECURITIES"). NEON has
delivered to Globix a certificate certifying with respect to such NEON
Convertible Securities (A) the agreement or document under which such
NEON Convertible Securities were granted, (B) a complete and accurate
list of the names of all holders of NEON Convertible Securities, (C)
the number and type of shares subject to such NEON Convertible
Securities, (D) the exercise price, (E) the date of grant and (F) the
expiration date thereof. As of and at the Effective Time, the
Redeemable Preferred Stock Warrants will expire according to their
terms, and the holders thereof shall cease to have any rights to
receive payments therefor or with respect thereto. Except for NEON
Options, neither NEON nor any of its Subsidiaries has outstanding any
stock appreciation rights, phantom stock, performance based stock
awards or similar stock rights or obligations. NEON has made available
to Globix accurate and complete copies of all NEON Stock Option Plans
and the forms of all stock option agreements evidencing NEON Options
and NEON Convertible Securities.
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(iv) The shares of stock of each of NEON's Subsidiaries held
by NEON (directly or indirectly) are the only shares of each such
Subsidiary issued and outstanding, and there are no options, warrants,
equity securities, calls, rights, commitments or agreements of any
character to which any of Subsidiary of NEON is a party or by which
any such Subsidiaries is bound obligating it to issue, exchange,
transfer, deliver or sell, or cause to be issued, exchanged,
transferred, delivered or sold, additional shares of capital stock or
other equity interests of such Subsidiary or any security or rights
convertible into or exchangeable or exercisable for any such shares or
other equity interests, or obligating any Subsidiary to grant, extend,
accelerate the vesting of, otherwise modify or amend or enter into any
such option, warrant, equity security, call, right, commitment or
agreement. All the outstanding shares of capital stock or other
ownership interests of each Subsidiary of NEON have been validly
issued and are fully paid and nonassessable and are owned (of record
and beneficially) by NEON, free and clear of all Liens. Except as set
forth in Section 3.1(b)(iv) of the NEON Disclosure Schedule and (A)
for the capital stock or other ownership interests of its
Subsidiaries, (B) as acquired in the ordinary course of business
pursuant to foreclosure, workout, settlement, bankruptcy arrangements
or similar transactions, and (C) for security interests held in the
ordinary course of business, neither NEON nor any of its Subsidiaries
directly or indirectly owns any equity, membership, partnership or
similar interest in, or any interest convertible into or exchangeable
or exercisable for any equity, membership, partnership or similar
interest in, any corporation, partnership, joint venture, limited
liability company or other business association or entity, whether
incorporated or unincorporated that is material to the business of
NEON and its Subsidiaries, taken as a whole. Except as set forth in
Section 3.1(b)(iv) of the NEON Disclosure Schedule, no action is
required to be taken by NEON, its Board of Directors or any trustee
under any NEON Stock Option Plans or any holder of NEON Options, to
effect the treatment of NEON Options described in Section 1.9 hereof.
(v) Except as set forth in Section 3.1(b)(v) of the NEON
Disclosure Schedule, NEON has never declared, nor is there accrued,
any dividend or other distribution with respect to any NEON Common
Stock or NEON Preferred Stock.
(c) AUTHORITY; NO CONFLICTS.
(i) NEON has all requisite corporate power and authority to
enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby, subject to the
receipt of the NEON Required Vote. The execution and delivery of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary corporate action on the
part of NEON, subject to the receipt of the NEON Required Vote.
Without limiting the generality of the foregoing, the Board of
Directors of NEON, at a meeting duly called and held, by the requisite
vote of all directors (i) received a fairness opinion that the
Exchange Ratio is fair from a financial point of view to the holders
of NEON Common Stock (as stockholders of NEON) and determined that the
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Merger is in the best interests of NEON and its stockholders, (ii)
adopted this Agreement in accordance with the provisions of the DGCL,
(iii) directed that this Agreement and the Merger be submitted to the
stockholders of NEON for their adoption and approval and resolved to
recommend that the stockholders of NEON vote in favor of the adoption
of this Agreement and the approval of the Merger, and (iv) fixed a
record date for the determination of stockholders of NEON entitled to
vote to adopt this Agreement (the "RECORD DATE"). This Agreement has
been duly executed and delivered by NEON and constitutes a valid and
binding agreement of NEON, enforceable against it in accordance with
its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and similar laws relating to or
affecting creditors generally, or by general equity principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(ii) The execution and delivery of this Agreement does not,
and the consummation of the Merger and the other transactions
contemplated hereby will not, conflict with, or result in any
violation of, or constitute a default (with or without notice or lapse
of time, or both) under, or require an offer to purchase to be made
under, or give rise to a right of termination, amendment, cancellation
or acceleration of any obligation or the loss of a material benefit
under, or the creation of a Lien on any assets (any such conflict,
violation, default, right of termination, amendment, cancellation or
acceleration, loss or creation, a "VIOLATION"): (A) subject to the
receipt of the NEON Required Vote, pursuant to any provision of the
certificate of incorporation or by-laws of NEON or similar governing
documents of any of its Subsidiaries, or (B) except as could not,
individually or in the aggregate, reasonably be expected to have a
NEON Material Adverse Effect and subject to obtaining or making the
NEON Required Consents, pursuant to any Contract or NEON Plan or any
Law applicable to NEON or its Subsidiaries or their respective
properties or assets. Section 3.1(c)(ii) of the NEON Disclosure
Schedule lists all material consents, waivers and approvals under any
NEON Material Contract required to be obtained in connection with the
consummation of the Merger and the other transactions contemplated
hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Person or any
Governmental Entity is required by or with respect to NEON or any
Subsidiary of NEON as a result of the execution and delivery of this
Agreement by NEON or the consummation of the Merger and the other
transactions contemplated hereby, except for those required under or
in relation to (A) the Hart-Scott-Rodino Antitrust Improvements Act of
1976, as amended (the "HSR ACT"), (B) filing of the Proxy Statement
with the SEC and its effectiveness under the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT"), (C) the filing of the
Certificate of Merger pursuant to the DGCL, (D) the NEON Required
Vote, (E) notices and consents from Governmental Entities and other
Persons that regulate CLEC's, franchises and licenses, (F) the matters
listed in Section 3.1(c)(ii) of the NEON Disclosure Schedule and (G)
such consents, approvals, orders, authorizations, registrations,
declarations and filings, the failure of which to make or obtain could
not, individually, or in the aggregate, reasonably be expected to have
a NEON Material Adverse Effect. Consents, approvals, orders,
authorizations, registrations, declarations and filings required under
or in relation to any of the foregoing clauses (A) through (G) are
hereinafter referred to as "NEON REQUIRED CONSENTS."
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(d) FINANCIAL STATEMENTS.
(i) NEON has delivered to Globix true and correct copies of
(a) audited consolidated balance sheets of NEON and its consolidated
Subsidiaries as at December 31 of the years 2001, 2002 and 2003 and
the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the fiscal years then
ended, including the notes thereto, together with the reports thereon
(1) of BDO Seidman, independent auditors, with respect to 2002 and
2003 only, and (2) Arthur Anderson, independent auditors, with respect
to 2001 only, and (b) an unaudited consolidated balance sheet as at
May 31, 2004 (the "INTERIM BALANCE SHEET") and the related unaudited
consolidated statements of operations and cash flows for the five
months then ended (the "NEON FINANCIAL STATEMENTS"). The NEON
Financial Statements fairly present in all material respects the
consolidated financial condition, results of operations, changes in
stockholders' equity and cash flows of NEON and its consolidated
Subsidiaries as at the respective dates and for the periods referred
to in such financial statements, all in accordance with United States
generally accepted accounting principles ("GAAP") applied on a basis
consistent with prior periods (except as indicated in footnotes to the
NEON Financial Statements), subject in the case of interim statements
to normal and recurring year-end adjustments that have not been and
are not likely to be material in amount, and the absence of a
statement of stockholders' equity and the absence of notes that, if
presented, would not differ materially from the notes included in the
immediately preceding year-end financial statements.
(ii) No financial statements of any entity other than NEON
and its Subsidiaries are required by GAAP to be included in the
consolidated financial statements of NEON.
(e) NO UNDISCLOSED LIABILITIES; INDEBTEDNESS.
(i) Except (a) as and to the extent of the amounts
specifically reflected or reserved on the audited balance sheet as at
December 31, 2003 (including the notes thereto) (the "NEON AUDITED
BALANCE SHEET") included in the NEON Financial Statements or
intercompany accounts not reflected in the Audited Balance Sheet, (b)
obligations under NEON Material Contracts entered into in the ordinary
course of business and consistent with past practice which are not
required by GAAP to be reflected on the Audited Balance Sheet, (c)
liabilities and obligations incurred in the ordinary course of
business consistent with past practice since the date of the Audited
Balance Sheet, (d) obligations under this Agreement and liabilities
permitted to be incurred pursuant to Section 4.1, and (e) as set forth
in Section 3.1(e)(i) of the NEON Disclosure Schedule, neither NEON nor
any of its Subsidiaries has any liabilities or obligations of any
nature whether absolute, accrued, contingent or otherwise, which
individually or in the aggregate would reasonably be expected to have
a NEON Material Adverse Effect.
(ii) Section 3.1(e)(ii) of the NEON Disclosure Schedule sets
forth a complete and accurate list of all loan or credit agreements,
notes, bonds, mortgages, indentures and other agreements and
instruments pursuant to which any indebtedness of NEON or any of its
Subsidiaries in an aggregate principal amount in excess of $100,000 is
outstanding or may be incurred and the respective principal amounts
outstanding thereunder as of the date of this Agreement.
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(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 3.1(f) of the NEON Disclosure Schedule, and except for actions that
would be permitted pursuant to Section 4.1, and except as otherwise contemplated
hereby, from the date of the Audited Balance Sheet to the date hereof: (i) NEON
and its Subsidiaries have conducted their business in all material respects in
the ordinary course in the same manner as heretofore conducted; (ii) there has
not been any NEON Material Adverse Effect; (iii) NEON has not (A) declared, set
aside or paid any dividends or other distribution (whether in cash, stock or
property) in respect of any of its capital stock; (B) split, combined or
reclassified any of its capital stock or issued or authorized any issuance of
any other securities in respect of, in lieu of or in substitution for shares of,
its capital stock, (iv) NEON has not changed its methods of accounting for
financial accounting or tax purposes in any manner that could be reasonably
expected to have a significant adverse effect on its financial statements; (v)
NEON has not made or revoked any material express or deemed election relating to
Taxes; and (vi) neither NEON nor any of its Subsidiaries has (A) waived in
writing any material rights, (B) suffered any extraordinary loss or
extraordinary losses (as defined in Opinion No. 30 of the Accounting Principles
Board of the American Institute of Certified Public Accountants and any
amendments or interpretations thereof) which could reasonably be expected to
have a NEON Material Adverse Effect, (C)(1) granted any severance or termination
payment, (2) entered into any employment, deferred compensation, consulting,
severance, indemnification, change in control, retention or other similar
agreement or arrangement, (3) increased any compensation or benefits payable or
to become payable under any existing severance or termination pay policy or
employment, deferred compensation, stock loan, consulting, severance, change in
control, retention or other similar agreement or arrangement, or (4) increased
the compensation, bonus, incentive or other benefits payable to (or to become
payable to) former or current directors, officers, employees or consultants of
NEON or any of its Subsidiaries, other than an increase in annual salary or
hourly wage rates granted to current employees (other than officers) in the
ordinary course of business, consistent with past practice or otherwise not
material, (D) made or agreed to make any increase in any NEON Plan or adopt a
new employee benefit plan, which in either case could result in a material
increase in liability to NEON, (E) other than in the ordinary course of business
or as otherwise not material, sold or transferred any of the assets of NEON or
its Subsidiaries, or (F) made any capital expenditures in respect of its
business or operations not in the ordinary course of business or otherwise
material. NEON and its Subsidiaries have not agreed or committed (directly or
indirectly) to do any of the foregoing.
(g) INFORMATION SUPPLIED. None of the information supplied or to be
supplied in writing by NEON for inclusion or incorporation by reference in the
registration statement on Form S-4 (together with any amendments or supplements
thereto, the "REGISTRATION STATEMENT") and the proxy statement/prospectus
included therein (together with any amendments or supplements thereto, the
"PROXY STATEMENT") relating to the issuance of Globix Common Stock in connection
with the Merger, the NEON Stockholders Meeting and the Globix Stockholders
Meeting (if applicable) with the Securities and Exchange Commission (the "SEC")
will (A) in the case of the Registration Statement, at the time it becomes
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effective, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not misleading, or (B) in the case of the Proxy Statement, at
the time of the mailing of the Proxy Statement, at the time of the NEON
Stockholders Meeting and the Globix Stockholders Meeting (if applicable) and at
the Effective Time, contain any untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances under which they are
made, not misleading, or necessary to correct any statement in any earlier
communication with respect to the solicitation of proxies for the NEON
Stockholders Meeting or Globix Stockholders Meeting (if applicable) which has
become false or misleading. If at any time prior to the Effective Time any event
with respect to NEON, its officers and directors or any of its Subsidiaries
shall occur which is required to be described in the Proxy Statement or the
Registration Statement, such event shall be so described, and an appropriate
amendment or supplement shall be promptly filed with the SEC and, as required by
law, disseminated to the stockholders of NEON and Globix. The Registration
Statement will comply (with respect to NEON) as to form in all material respects
with the provisions of the Securities Act, and the Proxy Statement will comply
(with respect to NEON) as to form in all material respects with the provisions
of the Exchange Act. Notwithstanding the foregoing provisions of this Section
3.1(g), no representation or warranty is made by NEON with respect to statements
made or incorporated by reference in the Proxy Statement or the Registration
Statement based on information supplied in writing by Globix or Merger Sub for
inclusion or incorporation by reference therein. For purposes of the foregoing,
it is understood and agreed that information concerning or related to NEON and
the NEON Stockholders Meeting will be deemed to have been supplied by NEON and
information concerning or related to Globix and Merger Sub and the Globix
Stockholders Meeting (if applicable) shall have been supplied by Globix.
(h) ASSETS. Except as set forth in Section 3.1(h) of the NEON
Disclosure Schedule, NEON has good and valid title or a valid leasehold interest
in, free and clear of all Liens other than Permitted Liens, to (i) all of its
assets and properties as reflected on the Audited Balance Sheet, except for
assets and properties disposed of in the ordinary course of business, or as
permitted by Section 4.1, since the date of the Audited Balance Sheet, and (ii)
all of NEON's other assets, real property, interests in real property, rights,
franchises, licenses and properties, tangible or intangible, real or personal,
wherever located which are material to the conduct of its business, other than
property that is leased or licensed, with respect to which NEON or any of its
Subsidiaries has valid and enforceable leases or licenses under which there
exists no default, event of default or event which, with notice or lapse of time
or both, would constitute a default, except for such defaults which have not had
or are not reasonably likely to have, either individually or in the aggregate, a
NEON Material Adverse Effect.
(i) VOTE REQUIRED. The affirmative vote of the holders of (i) a
majority of the outstanding shares of NEON Common Stock and NEON Convertible
Preferred Stock entitled to vote and voting as a single class on the Merger,
(ii) a majority of the outstanding shares of NEON Common Stock and NEON
Convertible Preferred Stock entitled to vote and voting as a single class and a
majority of the outstanding shares of NEON Common Stock entitled to vote and
voting as a separate class on the amendment to the Certificate of Incorporation
of NEON and (iii) two-thirds of the outstanding shares of the NEON Convertible
Preferred Stock voting as a separate class on the amendment of the Certificate
of Designation of the NEON Convertible Preferred Stock (collectively, the "NEON
REQUIRED VOTE") are the only votes of the holders of any class or series of NEON
capital stock necessary to approve the Merger and the other transactions
contemplated hereby, including the amendments to NEON's charter contemplated
hereby.
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(j) OPINION OF FINANCIAL ADVISOR. NEON has received the opinion of
Adams, Harkness & Hill, Inc. (the "NEON FINANCIAL ADVISOR"), dated the date of
this Agreement, to the effect that, as of such date, the Exchange Ratio is fair,
from a financial point of view, to the holders of NEON Common Stock (as
stockholders of NEON).
(k) RELATED PARTY TRANSACTIONS.
(i) For purposes of this Section 3.1(k), the term "NEON
AFFILIATED PERSON" means (A) any holder of 5% or more of NEON Common
Stock or NEON Convertible Preferred Stock, (B) any director, officer
or senior executive of NEON or any Subsidiary, (C) any Person, firm or
corporation that directly or indirectly controls, is controlled by, or
is under common control with, NEON or any Subsidiary, or (D) any
member of the immediate family of any of such persons.
(ii) Except as set forth in Section 3.1(k)(ii) of the NEON
Disclosure Schedule, since December 31, 2003, NEON and its
Subsidiaries have not, in the ordinary course of business or
otherwise, (A) purchased, leased or otherwise acquired any material
property or assets or obtained any material services from, (B) sold,
leased or otherwise disposed of any material property or assets or
provided any material services to (except with respect to remuneration
for services rendered in the ordinary course of business as director,
officer or employee of NEON or any Subsidiary), (C) entered into or
modified in any manner any contract with, or (D) borrowed any money
from, or made or forgiven any loan or other advance (other than
expenses or similar advances made in the ordinary course of business)
to, any NEON Affiliated Person.
(iii) Except as set forth in Section 3.1(k)(iii) of the NEON
Disclosure Schedule, since December 31, 2003, (A) the contracts of
NEON and its Subsidiaries do not include any material obligation or
commitment between NEON or any Subsidiary and any NEON Affiliated
Person, (B) the assets of NEON or any Subsidiary do not include any
receivable or other obligation or commitment from an NEON Affiliated
Person to NEON or any Subsidiary, and (C) the liabilities of NEON and
its Subsidiaries do not include any payable or other obligation or
commitment from NEON or any Subsidiary to any NEON Affiliated Person.
(iv) Section 3.1(k)(iv) of the NEON Disclosure Schedule sets
forth a complete and accurate list of each Contract to which NEON or
any of its Subsidiaries is a party or bound with any NEON Affiliated
Person (other than any Subsidiary which is a direct or indirect wholly
owned Subsidiary of NEON). Section 3.1(k)(iv) of the NEON Disclosure
Schedule sets forth a complete and accurate description of all
transactions with any NEON Affiliated Person or any of its
Subsidiaries or any transaction that would be subject to proxy
statement disclosure pursuant to Item 404 of Regulation S-K to which
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NEON or any of its Subsidiaries is a party or bound. Complete and
accurate copies of all the agreements, contracts and arrangements set
forth in Section 3.1(k)(iv) of the NEON Disclosure Schedule have been
made available to Globix.
(l) LITIGATION. Except as disclosed in writing to Globix, there are no
Claims pending or, to the Knowledge of NEON, threatened against NEON or any of
its Subsidiaries, or any properties or rights of NEON or any of its
Subsidiaries, before any Governmental Entity, nor is there any judgment, decree,
injunction, ruling or order of any Governmental Entity or arbitrator outstanding
specifically against NEON or any of its Subsidiaries, except for any of the
foregoing as could not, individually or in the aggregate, reasonably be expected
to have a NEON Material Adverse Effect. To the Knowledge of NEON, there has not
been any investigation of NEON or any of its Subsidiaries conducted by any
Governmental Entity during the two years prior to the date hereof which was
concluded and resulted in a significant adverse effect on the ability of NEON
and its Subsidiaries to conduct their respective businesses.
(m) COMPLIANCE WITH LAWS; PERMITS.
(i) Since the NEON Confirmation Effective Date, except as
disclosed to Globix in a certificate, NEON and each of its
Subsidiaries has complied with, is not in violation of, and has not
received any notice alleging any violation with respect to, any
applicable provisions of any statute, law or regulation with respect
to the conduct of its business, the employment of any current or
former employees, or the ownership or operation of its properties or
assets, except for failures to comply or violations that, individually
or in the aggregate, have not had, and are not reasonably likely to
have, a NEON Material Adverse Effect.
(ii) Except as set forth in Section 3.1(m)(ii) of the NEON
Disclosure Schedule, NEON and each of its Subsidiaries have all
permits, licenses and franchises from Governmental Entities required
to conduct their businesses as now being conducted or as presently
contemplated to be conducted (the "NEON Permits"), except for such
permits, licenses and franchises the absence of which, individually or
in the aggregate, has not had, and is not reasonably likely to have, a
NEON Material Adverse Effect. NEON and each of its Subsidiaries are in
compliance with the terms of the NEON Permits, except for such
failures to comply that, individually or in the aggregate, have not
had, and are not reasonably likely to have, a NEON Material Adverse
Effect. Except as set forth in Section 3.1(m)(ii) of the NEON
Disclosure Schedule, all NEON Permits are in full force and effect,
and no NEON Permit shall cease to be effective as a result of the
consummation of the transactions contemplated by this Agreement. NEON
and its Subsidiaries have not received any notice of any material
default under or material violation of, any such NEON Permit.
(n) ACCOUNTS RECEIVABLE; WARRANTIES.
(i) Except as set forth in Section 3.1(n)(i) of the NEON
Disclosure Schedule, all accounts receivable of NEON, whether
reflected in the Interim Balance Sheet or otherwise, represent sales
actually made in the ordinary course of business, have been reflected
properly in its books and records in accordance with GAAP and are not
subject to any material contractual setoffs or counterclaims.
-17-
(ii) Except as set forth in Section 3.1(n)(ii) of the NEON
Disclosure Schedule, no product or service manufactured, sold, leased,
licensed, delivered or otherwise provided by NEON or any of its
Subsidiaries is subject to any guaranty or warranty.
(o) CUSTOMERS AND SUPPLIERS. As of the date of this Agreement, except
as set forth in Section 3.1(o) of the NEON Disclosure Schedule, (i) no material
customer of NEON or any of its Subsidiaries has indicated to NEON or any of its
Subsidiaries that it will stop, or decrease the rate of, buying products or
services from NEON or any of its Subsidiaries, and (ii) no material supplier or
exclusive supplier of NEON or any of its Subsidiaries has indicated to NEON or
any of its Subsidiaries that it will stop, or decrease the rate of, supplying
materials, products or services to them.
(p) CERTAIN BUSINESS PRACTICES. Neither NEON nor any Subsidiary has
(i) used any funds for unlawful contributions, gifts, entertainment or other
unlawful payments related to a political activity, (ii) made any unlawful
payment to any foreign or domestic government official or employee or to any
foreign or domestic political party or campaign or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, or (iii) consummated any
transaction or made any payment or entered into any agreement or arrangement or
taken any other action in violation of Section 1128B(b) of the Social Security
Act, as amended.
(q) TAXES.
(i) Except as set forth in Section 3.1(q)(i) of the NEON
Disclosure Schedule or to the extent otherwise not material, as to
amount or otherwise, individually or in the aggregate, including all
matters subject to the representations in this Section 3.1(q)(i):
(A) NEON and its Subsidiaries have timely filed or,
if not yet due, will timely file all Tax Returns required to be filed
by them on or before the Closing Date and all such Tax Returns are or,
in the case of Tax Returns not yet filed, will be, true, correct and
complete in all material respects and NEON and its Subsidiaries have
paid when due all Taxes reported thereon or, in the case of Taxes not
yet due, will pay such Taxes when due.
(B) NEON and its Subsidiaries have paid or have
established on the most recent financial statements required to be
provided to Globix hereunder, in accordance with GAAP, adequate
accruals for the payment of all Taxes (whether or not shown on a Tax
Return), including contingent Tax liabilities, with respect to all
Taxable periods ending on or before the Closing Date and all Taxable
periods starting before and ending after the Closing Date, but only to
the extent attributable to the portion of such periods up to and
including the Closing Date and, in each case, only to the extent
properly accrued as of the date of such most recent financial
statements required to be provided to Globix hereunder.
(C) NEON has made or will make available to Globix
signed copies of all Tax Returns filed by NEON and its Subsidiaries
relating to the four (4) most recent Taxable years ending on or before
the Closing Date.
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(D) No extension of time has been requested or
granted for NEON or any of its Subsidiaries to file any Tax Return
that has not yet been filed or to pay any Tax that has not yet been
paid and NEON and its Subsidiaries have not granted a power of
attorney that remains outstanding with regard to any Tax matter.
(E) There is no pending or, to the Knowledge of NEON,
threatened examination, investigation, audit, suit, action, claim or
proceeding relating to Taxes (a "TAX AUDIT") of NEON or any of its
Subsidiaries.
(F) Globix has received copies of all material audit
reports and correspondence between NEON or its Subsidiaries and any
Tax Authority issued or made during the last three (3) years and a
complete summary of all oral communications between NEON or its
Subsidiaries and any Tax Authority relating to any Tax Audits of NEON
or its Subsidiaries during such years, including without limitation
any Tax Audit that is in progress or for which a still effective
extension of the statute of limitations was granted.
(G) Neither NEON nor any of its Subsidiaries has
within the last four (4) years received notice of a determination by a
Tax Authority that Taxes are owed by NEON or any of its Subsidiaries
(such determination to be referred to as a "TAX DEFICIENCY") and, to
the Knowledge of NEON, no Tax Deficiency is proposed or threatened.
(H) All Tax Deficiencies have been paid or finally
settled and all amounts determined by settlement to be owed have been
paid.
(I) There are no Liens, other than Permitted Liens,
arising from or related to Taxes on or pending against NEON, its
Subsidiaries or any of their properties.
(J) There are no presently outstanding waivers or
extensions or requests for waiver or extension of the time within
which a Tax Deficiency may be asserted or assessed.
(K) No issue has been raised in any Tax Audit which,
by application of similar principles to any past, present or future
period, would result in an adjustment to the amounts reported in a
subsequent period.
(L) NEON has not changed any Tax accounting method
during any of the seven (7) most recent Taxable years ending on or
before the Closing Date. NEON and its Subsidiaries have not taken any
action, whether or not required, that has resulted or will result in
deferring a liability for Taxes of NEON or its Subsidiaries from any
taxable period ending on or before the Closing Date to any taxable
period ending after such date, unless such action is in accordance
with past practice.
(M) Neither NEON nor its Subsidiaries has ever been
required to include in income any adjustment pursuant to section 481
of the Code and no Tax Authority has ever made or proposed any such
adjustment. Neither NEON nor its Subsidiaries has entered into a
closing agreement, as described in section 7121 of the Code, or an
advance pricing agreement or other agreement with a taxing authority
relating to Taxes.
-19-
(N) Neither NEON nor its Subsidiaries owns any
property that is tax-exempt use property within the meaning of section
168(h) of the Code, that is described in section 168(f)(8) of the Code
as in effect prior to its amendment by the Tax Reform Act of 1986,
that is tax-exempt bond financed property within the meaning of
Section 168(g) of the Code or that is "limited use property" within
the meaning of Rev. Proc. 76-30.
(O) Neither NEON nor its Subsidiaries is a party to
any arrangement to which sections 162(m) or 280G of the Code could
under any circumstances apply.
(P) Neither NEON nor its Subsidiaries has filed a
consent pursuant to section 341(f) of the Code or agreed to have
section 341(f)(2) apply to the disposition of any asset.
(Q) Neither NEON nor its Subsidiaries has
participated in or cooperated with any international boycott within
the meaning of section 999 of the Code.
(R) Neither NEON nor its Subsidiaries is now or has
ever been (a) an includable member of an "affiliated group" within the
meaning of section 1504(a) of the Code other than an affiliated group
consisting only of NEON and one or more of its current Subsidiaries or
otherwise liable for the Taxes of a person other than NEON pursuant to
Treasury Regulation section 1.1502-6 or any similar provision of
state, local or foreign law, whether or not as a transferee, a
successor, by operation of law, by contract or otherwise, (b) a member
of any consolidated, combined or unitary Tax Return filing group other
than a group consisting only of NEON and one or more of its current
Subsidiaries, (c) a party to any Tax sharing agreement, Tax indemnity
agreement or similar agreement, arrangement or practice with respect
to Taxes, including an agreement that obligates it to make any payment
computed by reference to the Taxes, Taxable income or Tax losses of
any other individual or entity, (d) a personal holding company as
defined in section 542 of the Code, (e) the owner of an interest in an
entity that is or is treated as a Tax partnership, trust, regulated
investment company as defined in section 851 of the Code, real estate
investment trust as defined in section 856 of the Code or foreign
personal holding company as defined in section 552(a) of the Code, (f)
a United States shareholder as defined in section 951(b) of the Code
of a controlled foreign corporation as defined in section 957 of the
Code, (g) a United States real property holding company within the
meaning of section 897(c)(2) of the Code or (h) a shareholder of a
passive foreign investment company, as defined in section 1297 of the
Code.
(S) NEON has not entered into a gain recognition or
other agreement requiring it to take into account Taxable income or to
incur a Tax liability that it would not have had to take into account
or would not have had to incur but for such agreement.
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(T) NEON has disclosed on its federal, state, local
and foreign income Tax Returns all positions taken therein that could
give rise to a penalty under section 6662 of the Code or any
corresponding provision of state, local or foreign Tax law.
(U) NEON and its Subsidiaries have never
participated, directly or indirectly, in a transaction which is
described in Treasury Regulation sections 1.6011-4(b)(2) or
1.6011-4(b)(3) nor have they ever held "an interest" in a "tax
shelter," as those terms are defined in Treasury Regulation section
301.6112-1.
(V) NEON has no deferred intercompany gains or losses
that have not been fully taken into income for income Tax purposes and
there is no excess loss account with respect to stock of any of its
Subsidiaries.
(W) No unresolved claim and to the Knowledge of NEON,
no claim has ever been made by a Tax Authority in a jurisdiction in
which NEON does not pay Taxes or file Tax Returns that such entity is
or may be subject to Tax in such jurisdiction.
(X) NEON and its Subsidiaries have never requested a
private ruling from a Tax Authority on any matter.
(Y) Neither NEON nor its Subsidiaries has been a
"distributing corporation" or a "controlled corporation" in connection
with a distribution described in Section 355 of the Code.
(Z) Neither NEON nor its Subsidiaries nor, to the
Knowledge of NEON, any NEON Affiliated Person has taken any action or
failed to take any action that would cause the Merger to fail to
qualify as a tax-free reorganization under Section 368(a) of the Code,
and no facts exist that would cause the Merger to fail to so qualify.
(AA) The net operating losses, alternative minimum
tax net operating losses, net capital losses, alternative minimum tax
net capital losses, Tax credits, alternative minimum tax credits and
other Tax attributes of NEON and its subsidiaries are not subject to
any consolidated return limitation, limitation under section 382 of
the Code or any other limitation on their use, allowance or
availability.
(BB) NEON has retained all supporting and backup
papers, receipts, spreadsheets and other information necessary for the
preparation of all Tax Returns that have not yet been filed and the
defense of Tax Audits involving all Taxable periods either (I) ended
on or during the six (6) years prior to the Closing Date or (II) from
which there are unutilized net operating loss, capital loss or
investment tax credit carryovers.
(CC) NEON has collected and remitted to the
appropriate Tax Authorities all sales and use and similar Taxes
required to have been collected and remitted on or prior to the
Closing Date and has been furnished, and if required has filed,
properly completed exemption certificates for all exempt transactions.
NEON has maintained and has in its possession all records, supporting
documents and exemption and resale certificates required by applicable
sales Tax statutes and regulations to be retained in connection with
the collection and remittance of sales and use and similar Taxes for
all periods up to and including the Closing Date.
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Each reference to a provision in this Section 3.1(q) shall be treated
for state, local and foreign Tax purposes as a reference to analogous
or similar provisions of state and local law.
(r) EMPLOYEE BENEFITS; EMPLOYEES.
(i) Section 3.1(r)(i) of the NEON Disclosure Schedule sets
forth a list of each "employee benefit plan" (within the meaning of
Section 3(3) of the Employee Retirement Income Security Act of 1974,
as amended ("ERISA")), severance, change in control or employment
plan, program or agreement, and vacation, incentive, bonus, stock
option, stock purchase, stock loan, and restricted stock plan, program
or policy to which NEON is a party or that is sponsored or maintained
by NEON, any of its Subsidiaries, any of their affiliates and any
trade or business (whether or not incorporated) which is or has ever
been under common control, or which is or has ever been treated as a
single employer, with any of them under Section 4.14(b), (c), (m) or
(o) of the Code ("ERISA AFFILIATE"), in which present or former
employees of NEON or any of its Subsidiaries or ERISA Affiliates
("NEON EMPLOYEES") participate (collectively, the "NEON PLANS"). All
NEON Plans set forth on Section 3.1(r)(i) of the NEON Disclosure
Schedule, if any, that would result in the payment to any NEON
Employee of any money or other property or accelerate or provide any
other rights or benefits thereto as a result of the transactions
contemplated by this Agreement, whether or not such payment or
acceleration would constitute a parachute payment within the meaning
of Section 280G of the Code, are so indicated by an asterisk. The NEON
Plans are in compliance in all material respects with all applicable
requirements of ERISA, the Code, and other applicable Laws and have
been administered in all material respects in accordance with their
terms and such Laws, and there has been no material violation of any
reporting or disclosure requirement imposed by ERISA or the Code. Each
NEON Plan which is intended to be qualified within the meaning of
Section 401 of the Code has received a Favorable Letter (as such term
is defined in Rev. Proc. 2003-44 Section 5.01(4)) as to its
qualification, and nothing has occurred that could reasonably be
expected to cause the loss of such qualification or the loss of the
tax-exempt status for any trust maintained with respect to any such
NEON Plan.
(ii) Except as set forth in Section 3.1(r)(ii) of the NEON
Disclosure Schedule, neither NEON nor Globix shall, at or after the
Effective Time, have any liability with respect to any change in
control, "continuity" or severance agreement, plan, program or policy
with or with respect to any NEON Employee. In accordance with
applicable law, each NEON Plan can be amended or terminated at any
time, without consent from any other party and without liability other
than for notice obligations with respect to amendment or termination,
if any, and benefits accrued as of the date of such amendment or
termination. NEON and its ERISA Affiliates have made full and timely
payment of all material amounts required to be contributed or paid as
expenses under the terms of each NEON Plan and applicable law.
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(iii) No NEON Plan is subject to Title IV of ERISA
(including any "multiemployer plan" (as defined in Section 4001(a)(3)
of ERISA)), and neither NEON nor any of its ERISA Affiliates has ever
contributed or been obligated to contribute to any pension plan
subject to Title IV of ERISA (including any multiemployer plan), nor
could NEON or any ERISA Affiliate have any liability under Title IV of
ERISA.
(iv) No event or condition has occurred in connection with
which NEON or any of its ERISA Affiliates would be subject to any
liability, encumbrance or Lien with respect to any NEON Plan under
ERISA, the Code or any other applicable Law or under any agreement or
arrangement pursuant to or under which NEON or any of its ERISA
Affiliates are required to indemnify any person against such
liability.
(v) True, correct and complete copies of the following
documents with respect to each of the NEON Plans have been made
available to Globix by NEON, to the extent applicable: (A) any plans
or agreements, all amendments thereto and related trust documents, and
amendments thereto; (B) the three most recent Forms 5500 and all
schedules thereto and the most recent actuarial report, if any; (C)
the most recent IRS determination letter; and (D) any summary plan
descriptions or other employee communications.
(vi) With respect to any NEON Plan, no actions, suits or
claims (other than routine claims for benefits in the ordinary course)
are pending or, to the Knowledge of NEON, threatened.
(vii) Except as set forth in Section 3.1(r)(vii) of the NEON
Disclosure Schedule, none of the NEON Plans provide for
post-employment life or health insurance, benefits or coverage for any
participant or any beneficiary of a participant, except as may be
required under the Consolidated Omnibus Budget Reconciliation Act of
1985, as amended ("COBRA") and any such participation is at the
expense of the participant or the participant's beneficiary.
(viii) Except as set forth in Section 3.1(r)(viii) of the
NEON Disclosure Schedule, neither NEON, nor, to the Knowledge of NEON,
any other fiduciary or party-in-interest of any NEON Plan, has
participated in, engaged in or been a party to any transaction that is
prohibited under Section 4975 of the Code or Section 406 of ERISA and
not exempt under Section 4975 of the Code or Section 408 of ERISA,
respectively. With respect to any NEON Plan, (A) neither NEON nor any
of its ERISA Affiliates has had asserted against it any claim for
taxes under Chapter 43 of Subtitle D of the Code and Section 5000 of
the Code, or for penalties under ERISA Section 502(c), 502 (i) or 502
(l), nor, to the Knowledge of NEON, is there a basis for any such
claim, and (B) no officer, director or employee of NEON or any ERISA
Affiliate has committed a breach of any fiduciary responsibility or
obligation imposed by Title I of ERISA.
(ix) Except as set forth in Section 3.1(r)(ix) of the NEON
Disclosure Schedule, there will be no payment, accrual of additional
benefits, acceleration of payments or vesting of any benefit under any
NEON Plan or any other agreement or arrangement to which NEON or any
of its Subsidiaries is a party, and no employee, officer or director
of NEON or its Subsidiaries will become entitled to severance,
termination allowance or similar payments, solely by reason of
entering into or in connection with the transactions contemplated by
this Agreement.
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(x) Except as set forth in Section 3.1(r)(x) of the NEON
Disclosure Schedule, no NEON Plan is subject to the laws of any
country other than the United States.
(xi) None of the NEON Employees is represented in his or her
capacity as an employee of NEON or any of its Subsidiaries by any
labor organization, nor has NEON or any of its Subsidiaries recognized
any labor organization nor has any labor organization been elected as
the collective bargaining agent of any such employees. To the
Knowledge of NEON, there is no union organization activity involving
any of the NEON Employees, pending or threatened in writing, nor has
there been any union representation involving such employees within
the past two years. To the Knowledge of NEON, except as set forth in
Section 3.1(r)(xi) of the NEON Disclosure Schedule, there are no
complaints, charges or claims against NEON or any of its Subsidiaries
pending or, threatened in writing, by or before any Governmental
Entity based on, arising out of, in connection with, or otherwise
relating to the employment or termination of employment or failure to
employ by NEON or any of its Subsidiaries, of any individual. NEON and
its Subsidiaries are in compliance in all material respects with all
laws, regulations and orders relating to the employment of labor,
including all such laws, regulations and orders relating to wages,
hours, the Worker Adjustment and Retraining Notification Act ("WARN")
and any similar state or local "mass layoff' or "plant ---- closing"
law, collective bargaining, discrimination, civil rights, safety and
health, workers' compensation and the collection and payment of
withholding and/or social security taxes and any similar tax. There
has been no "mass layoff" or "plant closing" as defined by WARN with
respect to NEON or any of its Subsidiaries in the 90 day period
immediately prior to the date hereof.
(xii) No more than fifteen (15) "leased employees," as that
term is defined in Section 414(n) of the Code or any other person who
is not classified as a common law employee of NEON, perform services
for NEON or any ERISA Affiliate. No person who is not classified by
NEON as a common law employee is eligible to participate in, nor does
such person participate in, any NEON Plan and no retroactive
participation in any NEON Plan would result due to reclassification of
such an individual as a common law employee of NEON.
(xiii) To the Knowledge of NEON, no employee of NEON or any
Subsidiary of NEON is in material breach as of the date of this
Agreement of any term of any employment contract, inventions
disclosure agreement, confidentiality agreement, non-competition
agreement, or any restrictive covenant to a former employer relating
to the right of any such employee to be employed by NEON or any
Subsidiary of NEON because of the nature of the business conducted or
presently proposed to be conducted by NEON or any Subsidiary of NEON
or relating to the use of trade secrets or proprietary information of
others.
-24-
(s) ENVIRONMENTAL MATTERS. Except as set forth in Section 3.1(s) of
the NEON Disclosure Schedules, (i) NEON, its Subsidiaries, and their activities
and operations are in compliance in all material respects with applicable local,
state or federal environmental statute, regulation, requirement, ordinance,
decree, judgment or order relating to pollution or protection of the environment
and human health or safety, including the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended and in effect (collectively,
the "ENVIRONMENTAL LAWS"); (ii) to the Knowledge of NEON, there are no legal,
administrative, arbitral or other proceedings, claims, actions, causes of
action, private environmental investigations or remediation activities or
governmental investigations of any nature with respect to any Environmental Laws
(collectively, "ENVIRONMENTAL CLAIMS") pending or, to the Knowledge of NEON,
threatened against NEON or its Subsidiaries; (iii) to the Knowledge of NEON,
there are no conditions or circumstances that reasonably could be expected to
result in the imposition on NEON or any of its Subsidiaries of, any material
liability or obligation under Environmental Laws; and (iv) to the Knowledge of
NEON, there has not been any release, discharge or disposal of any hazardous or
toxic materials or wastes at, on or under the facilities owned or leased by NEON
or its Subsidiaries that require notification, investigation or remediation by
NEON or its Subsidiaries pursuant to, or that are reasonably anticipated to give
rise to material liabilities or costs to NEON or its Subsidiaries under,
applicable Environmental Laws.
(t) PROPERTIES.
(i) Section 3.1(t)(i) of the NEON Disclosure Schedule sets
forth a complete and accurate list of all real property that either
NEON or any of its Subsidiaries owns.
(ii) Section 3.1(t)(ii) of the NEON Disclosure Schedule sets
forth a complete and accurate list all real property leased, subleased
or licensed by NEON or any of its Subsidiaries, except for easements,
rights of way and regeneration facilities and, with respect to
licensed real property, any such agreements with respect to (A)
Collocation Sites and (B) central office sites under tariff (the
"LEASED REAL PROPERTY"). Except as set forth in Section 3.1(t)(ii) of
the NEON Disclosure Schedule and except for any exceptions to the
following as could not, individually or in the aggregate, reasonably
be expected to have a NEON Material Adverse Effect: (i) each of NEON
and its Subsidiaries has valid leasehold interests in the Leased Real
Property (as landlord or as tenant) by or from it, free and clear of
all Liens other than Permitted Liens (as defined in Section 9.11);
(ii) all leases pursuant to which NEON or any of its Subsidiaries
leases (as landlord or as tenant) any Leased Real Property are in full
force and effect and grant in all respects the leasehold estates or
rights of occupancy or use they purport to grant; and (iii) NEON and
its Subsidiaries have not received any written notice of any default
either on the part of NEON or any of its Subsidiaries under any such
lease and, to the Knowledge of NEON, no event has occurred which, with
notice or the lapse of time, or both, would constitute a default on
the part of NEON or any of its Subsidiaries under any of such leases.
(u) AGREEMENTS, CONTRACTS AND COMMITMENTS.
(i) NEON has made available to Globix a complete and
accurate list of all Contracts that are material to the business,
assets, liabilities, capitalization, condition (financial or
otherwise) or results of operations of NEON and its Subsidiaries,
taken as a whole (collectively, the "NEON MATERIAL Contracts"). For
purposes of this section, materiality is defined as any Contract that
requires or is reasonably anticipated to involve aggregate payments to
or from NEON or its Subsidiaries in excess of $500,000 in any one
year. NEON has made available to Globix a complete and accurate copy
-25-
of each NEON Material Contract (excluding individual orders related
thereto). As of the date of this Agreement, except as set forth in
Section 3.1(u)(i) of the NEON Disclosure Schedule, each NEON Material
Contract is in full force and effect. Except as set forth on Section
3.1(u)(i) of the NEON Disclosure Schedule, neither NEON nor any of its
Subsidiaries is in material default under (x) any Contract to which it
is a party or by which it or any of its properties or assets is bound,
which violations or defaults would, individually or in the aggregate,
have, or are reasonably likely to have, a NEON Material Adverse
Effect, or (y) any NEON Material Contract.
(ii) Except as set forth on Section 3.1(u)(ii) of the NEON
Disclosure Schedule, there is no non-competition or other similar
agreement, commitment, judgment, injunction or order, or any agreement
materially restricting the right to sell services, to which NEON or
any of its Subsidiaries is a party or is subject that has or could
reasonably be expected to have the effect of prohibiting or impairing
in any material respect the conduct of the business of NEON or any of
its Subsidiaries as currently conducted and as proposed to be
conducted.
(iii) Neither NEON nor any of its Subsidiaries is or has
been suspended or debarred from bidding on contracts or subcontracts
with any Governmental Entity; no such suspension or debarment has been
initiated or, to the Knowledge of NEON, threatened; and the
consummation of the transactions by NEON contemplated by this
Agreement will not result in any such suspension or debarment that,
individually or in the aggregate, is reasonably likely to have a NEON
Material Adverse Effect. To the Knowledge of NEON, there is no valid
basis for (a) the suspension or debarment of NEON or any of its
Subsidiaries from bidding on contracts or subcontracts with any
Governmental Entity or (b) any claim pursuant to an audit or
investigation by any of the entities named in the foregoing sentence
that, individually or in the aggregate, is reasonably likely to have a
NEON Material Adverse Effect. To the Knowledge of NEON, neither NEON
nor any of its Subsidiaries has any Contracts which require it to
obtain or maintain a security clearance with any Governmental Entity.
(v) BROKERS OR FINDERS. No agent, broker, investment banker, financial
advisor or other firm or Person is or will be entitled to any broker's or
finder's fee or any other similar commission or fee in connection with any of
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of NEON, except the NEON Financial Advisor, whose fees and expenses
will be paid by NEON in accordance with NEON's agreement with such firm, based
upon arrangements made by or on behalf of NEON and previously disclosed to
Globix.
(w) INSURANCE. NEON has made available to Globix a summary of all
material fire and casualty, general liability, business interruption, and
sprinkler and water damage insurance policies maintained by NEON or any of its
Subsidiaries. NEON and each of its Subsidiaries have made any and all payments
required to maintain such policies in full force and effect. Neither NEON nor
any of its Subsidiaries has received written notice of default under any such
policy, and has not received written notice of any pending or threatened
termination or cancellation, coverage limitation or reduction with respect to
such policy.
(x) INTELLECTUAL PROPERTY.
(i) Except as disclosed in writing to Globix, NEON and its
Subsidiaries own, or otherwise possess licenses or other valid rights
to use all Intellectual Property used to conduct the business of NEON
and its Subsidiaries as currently conducted or contemplated to be
conducted (in each case excluding generally commercially available,
off-the-shelf software programs licensed pursuant to shrinkwrap or
"click-and-accept" licenses).
-26-
(ii) Except as would not have a NEON Material Adverse
Effect, the execution and delivery of this Agreement and consummation
of the Merger will not result in the breach of, or create on behalf of
any third party the right to terminate or modify, (A) any license,
sublicense or other agreement relating to any Intellectual Property
owned by NEON (the "NEON INTELLECTUAL PROPERTY") or (B) any license,
sublicense and other agreement as to which NEON or any of its
Subsidiaries is a party and pursuant to which NEON or any of its
Subsidiaries is authorized to use any third party Intellectual
Property (the "THIRD PARTY INTELLECTUAL PROPERTY"). NEON has delivered
to Globix a certificate certifying a complete and accurate list of the
NEON Intellectual Property (other than unregistered copyrights, trade
secrets and confidential information) and NEON has made available to
Globix a complete and accurate list of all Third Party Intellectual
Property.
(iii) Except as disclosed in writing to Globix, to the
Knowledge of NEON, as of the date of this Agreement, (A) no person is
challenging, infringing on, misappropriating or otherwise violating
any material right of NEON or any of its Subsidiaries with respect to
any Intellectual Property owned by and/or licensed to NEON or its
Subsidiaries, (B) the use of any Intellectual Property by NEON and its
Subsidiaries does not infringe on, constitute a misappropriation of,
or otherwise violate the rights of any person and is in accordance
with any applicable license pursuant to which NEON or any of its
Subsidiaries acquired the right to use any Intellectual Property, and
(C) neither NEON nor any of its Subsidiaries has received any written
notice of any assertion or claim of infringement, pending or not, with
respect to any Intellectual Property used by NEON or its Subsidiaries.
(iv) Except as disclosed in writing to Globix, all patents,
trademarks, service marks and copyrights, and registrations and
applications therefor, which are held by NEON or any of its
Subsidiaries are valid and subsisting. NEON and its Subsidiaries have
taken reasonable measures to protect the proprietary nature of the
NEON Intellectual Property.
(v) No Intellectual Property owned or licensed by NEON or
its Subsidiaries is being used or enforced in a manner that would
result in the abandonment, cancellation or unenforceability of such
Intellectual Property.
(vi) Sections 3.1(h), 3.1(t) and 3.1(u) shall not apply to
the NEON Intellectual Property and this Section 3.1(x) shall prevail
in the event of any conflict between this Section 3.1(x) on the one
hand and Sections 3.1(h), 3.1(t) and 3.1(u) on the other hand.
Section 3.2 REPRESENTATIONS AND WARRANTIES OF GLOBIX. Except as set
forth in the Globix Disclosure Schedule delivered by Globix to NEON in
connection with the execution of this Agreement (the "GLOBIX DISCLOSURE
SCHEDULE") (each Section of which qualifies the correspondingly numbered
representation and warranty or covenant to the extent specified therein), Globix
represents and warrants to NEON as follows:
-27-
(a) ORGANIZATION, STANDING AND POWER.
(i) Each of Globix and its Subsidiaries (i) is a corporation
or other entity duly incorporated or organized, validly existing and
in good standing under the laws of its state of incorporation or
organization, (ii) has all requisite power and authority to own, lease
and operate its properties and to carry on its business as now being
conducted, and (iii) as set forth in Section 3.2(a)(i) of the Globix
Disclosure Schedule, is duly qualified and in good standing to do
business in each jurisdiction in which the nature of its business or
the ownership or leasing of its properties makes such qualification
necessary, except in the case of clause (iii) for such failures as
could not, individually or in the aggregate, reasonably be expected to
have a Globix Material Adverse Effect.
(ii) Section 3.2(a)(ii) of the Globix Disclosure Schedule
sets forth a complete and accurate list of all of Globix's
Subsidiaries and Globix's direct or indirect equity interest therein.
Except as set forth in Section 3.2(a)(ii) of the Globix Disclosure
Schedule, neither Globix, nor any of its Subsidiaries, (A) directly or
indirectly owns any equity, membership, partnership or similar
interest in, or any interest convertible into or exchangeable or
exercisable for any equity, membership, partnership or similar
interest in, any corporation, partnership, joint venture, limited
liability company or other business association or entity, whether
incorporated or unincorporated, or (B) has, since the Globix
Confirmation Effective Date, been a general partner or managing member
of any general partnership, limited partnership, limited liability
company or other entity as to which Globix or any of its Subsidiaries
has any material liability.
(iii) The copies of the charter, articles or certificate of
incorporation and by-laws (or similar governing documents) of Globix
and each of its Subsidiaries which were made available to NEON are
true, complete and correct copies of such documents as in effect on
the date of this Agreement.
(iv) All minute books and stock record books of Globix and
its Subsidiaries have been made available to NEON or its counsel prior
to the execution of this Agreement.
(v) Prior to the Closing Date, Globix shall incorporate
Merger Sub solely for the purpose of engaging in the transactions
contemplated hereby. As of the Closing Date, Merger Sub (A) will be a
corporation duly incorporated, validly existing and in good standing
under the laws of the State of Delaware, (B) will have all requisite
power to take such action as required pursuant to this Agreement, (C)
will have no debt or other liabilities, and will not have engaged in
any business activities or conducted any operations other than in
connection with the transactions contemplated hereby, other than
executing the subsidiary guaranty required pursuant to the Globix
Indenture.
(b) CAPITAL STRUCTURE.
-28-
(i) The authorized capital stock of Globix consists of
500,000,000 shares of Globix Common Stock, and 5,000,000 shares of
preferred stock, par value $.01 per share, all of which shares of
preferred stock are undesignated shares. The rights and privileges of
each class of Globix's capital stock are as set forth in Globix's
certificate of incorporation. As of the date hereof, (A) 16,460,000
shares of Globix Common Stock are issued and outstanding, and (B) no
shares of Globix Common Stock are held in the treasury of Globix or by
any Subsidiaries of Globix. All of the issued and outstanding shares
of Globix Common Stock have been duly authorized, and are validly
issued, fully paid, nonassessable and free of preemptive rights
created by statute, certificate of incorporation or bylaws. None of
the issued and outstanding shares of Globix Common Stock has been
issued in violation of any applicable federal or state law or any
preemptive rights or rights to subscribe for or purchase securities.
The authorized capital stock of Merger Sub shall consist of 1,000
shares of common stock, par value $0.01 per share ("MERGER SUB COMMON
STOCK"). The rights and privileges of each class of Merger Sub's
capital stock shall be set forth in Merger Sub's certificate of
incorporation. As of the Closing Date, (A) 1,000 shares of Merger Sub
Common Stock will be issued and outstanding and held beneficially and
of record by Globix, and (B) no shares of Merger Sub Common Stock will
be held in the treasury of Merger Sub or by any Subsidiaries of Merger
Sub. As of the Closing Date, all of the issued and outstanding shares
of Merger Sub Common Stock will be duly authorized, validly issued,
fully paid, nonassessable and free of preemptive rights created by
statute, certificate of incorporation or bylaws. None of the issued
and outstanding shares of Merger Sub Common Stock will be issued in
violation of any applicable federal or state law or any preemptive
rights or rights to subscribe for or purchase securities.
(ii) Except as set forth in Section 3.2(b)(ii) of the Globix
Disclosure Schedule, there are no voting trusts, proxies or other
agreements or understandings with respect to any Globix Common Stock
to which Globix or, to the Knowledge of Globix, any other Person is a
party or by which it or any such other Person is bound. Section
3.2(b)(ii) of the Globix Disclosure Schedule lists all issued and
outstanding shares of Globix Common Stock that are otherwise subject
to a repurchase or redemption right or right of first refusal in favor
of Globix or any other Person and Globix has delivered to NEON a
certificate certifying (A) the name and address of each record holder
of Globix Common Stock, (B) the number of shares held by each such
stockholder, and (C) any restrictions imposed by Globix on the
transfer of such shares. Except as set forth in Section 3.2(b)(ii) of
the Globix Disclosure Schedule and as contemplated by this Agreement,
there are no registration rights, and there are no rights agreements,
"poison pill" anti-takeover plans or other similar agreement or
restrictive arrangement which Globix or any of its Subsidiaries is a
party or by which it or they are bound with respect to any equity
securities of any class of Globix or any of its Subsidiaries or with
respect to any equity security, partnership interest or similar
ownership interest of any class of any of its Subsidiaries. THE
---
FOREGOING NOTWITHSTANDING, THE SHARES OF GLOBIX COMMON STOCK ISSUABLE
----------------------------------------------------------------------
IN THE GLOBIX DEBT PURCHASE WILL BE SUBJECT TO REGISTRATION RIGHTS,
----------------------------------------------------------------------
AND GLOBIX WILL GRANT THE PARTICIPANTS IN THE GLOBIX DEBT PURCHASE THE
----------------------------------------------------------------------
RIGHT TO PURCHASE UP TO AN ADDITIONAL 5% OF THE SHARES ACQUIRED BY THE
----------------------------------------------------------------------
PARTICIPANTS AT A PURCHASE PRICE OF $2.75 PER SHARE IF THE
----------------------------------------------------------------------
REGISTRATION STATEMENT IS NOT EFFECTIVE WITHIN 90 DAYS OF THE CLOSING
----------------------------------------------------------------------
UNDER THE MERGER AGREEMENT AND AN ADDITIONAL 5% OF THE SHARES ACQUIRED
----------------------------------------------------------------------
IN THE GLOBIX DEBT PURCHASE AT A PURCHASE PRICE OF $2.75 PER SHARE IF
----------------------------------------------------------------------
THE REGISTRATION STATEMENT IS NOT EFFECTIVE FOR MORE THAN 90 DAYS
----------------------------------------------------------------------
DURING THE FIRST TWELVE MONTHS COMMENCING ON THE 90TH DAY FOLLOWING
----------------------------------------------------------------------
THE CLOSING.
------------
(iii) Section 3.2(b)(iii) of the Globix Disclosure Schedule
lists the number of shares of Globix Common Stock reserved for future
issuance pursuant to stock options granted and outstanding as of the
date of this Agreement and the plans or other arrangements under which
such options were granted (collectively, the "GLOBIX STOCK OPTION
PLANS") and Globix has delivered to NEON a certificate with respect to
the outstanding options to purchase shares of Globix Common Stock
(including restricted stock) (the "GLOBIX OPTIONS") under the Globix
Stock Option Plans, certifying with respect to each Globix Option (A)
the number of shares of Globix Common Stock subject to such Globix
Option, (B) the relationship of the holder to Globix, (C) the exercise
-29-
price, (D) the date of grant, (E) the vesting schedule, if any, and
expiration date thereof, and including the extent to which any vesting
has occurred as of the date of this Agreement, and (F) whether (and to
what extent) the vesting of such Globix Option will be accelerated in
any way by the transactions contemplated by this Agreement or by the
termination of employment or engagement or change in position of any
holder thereof following consummation of the Merger. Section
3.2(b)(iii) of the Globix Disclosure Schedule shows the number of
shares of Globix Common Stock reserved for future issuance pursuant to
warrants, convertible securities or other outstanding rights (other
than Globix Options) to purchase, or obligations to otherwise issue,
shares of Globix Common Stock outstanding as of the date of this
Agreement (such outstanding warrants, convertible securities or other
rights, the "GLOBIX CONVERTIBLE SECURITIES"). Globix has delivered to
NEON a certificate certifying with respect to such Globix Convertible
Securities (A) the agreement or document under which such Globix
Convertible Securities were granted, (B) a complete and accurate list
of all holders of Globix Convertible Securities, (C) the number and
type of shares subject to such Globix Convertible Securities, (D) the
exercise price, (E) the date of grant and (F) the expiration date
thereof. Except for Globix Options, neither Globix nor any of its
Subsidiaries has outstanding any stock appreciation rights, phantom
stock, performance based stock awards or similar stock rights or
obligations. Globix has made available to NEON accurate and complete
copies of all Globix Stock Option Plans, the forms of all stock option
agreements evidencing Globix Options and Globix Convertible
Securities. THE FOREGOING NOTWITHSTANDING, THE SHARES OF GLOBIX COMMON
----------------------------------------------------------
STOCK ISSUABLE IN THE GLOBIX DEBT PURCHASE WILL BE SUBJECT TO
----------------------------------------------------------------------
REGISTRATION RIGHTS, AND GLOBIX WILL GRANT THE PARTICIPANTS IN THE
----------------------------------------------------------------------
GLOBIX DEBT PURCHASE THE RIGHT TO PURCHASE UP TO AN ADDITIONAL 5% OF
----------------------------------------------------------------------
THE SHARES ACQUIRED BY THE PARTICIPANTS AT A PURCHASE PRICE OF $2.75
----------------------------------------------------------------------
PER SHARE IF THE REGISTRATION STATEMENT IS NOT EFFECTIVE WITHIN 90
----------------------------------------------------------------------
DAYS OF THE CLOSING UNDER THE MERGER AGREEMENT AND AN ADDITIONAL 5% OF
----------------------------------------------------------------------
THE SHARES ACQUIRED IN THE GLOBIX DEBT PURCHASE AT A PURCHASE PRICE OF
----------------------------------------------------------------------
$2.75 PER SHARE IF THE REGISTRATION STATEMENT IS NOT EFFECTIVE FOR
----------------------------------------------------------------------
MORE THAN 90 DAYS DURING THE FIRST TWELVE MONTHS COMMENCING ON THE
----------------------------------------------------------------------
90TH DAY FOLLOWING THE CLOSING.
-------------------------------
(iv) The shares of stock of each of Globix's Subsidiaries
held by Globix (directly or indirectly) are the only shares of each
such Subsidiary issued and outstanding, and there are no options,
warrants, equity securities, calls, rights, commitments or agreements
of any character to which any of Subsidiary of Globix is a party or by
which any such Subsidiaries is bound obligating it to issue, exchange,
transfer, deliver or sell, or cause to be issued, exchanged,
transferred, delivered or sold, additional shares of capital stock or
other equity interests of such Subsidiary or any security or rights
convertible into or exchangeable or exercisable for any such shares or
other equity interests, or obligating any Subsidiary to grant, extend,
accelerate the vesting of, otherwise modify or amend or enter into any
such option, warrant, equity security, call, right, commitment or
agreement. All the outstanding shares of capital stock or other
ownership interests of each Subsidiary of Globix have been validly
issued and are fully paid and nonassessable and are owned (of record
and beneficially) by Globix, free and clear of all Liens. Except as
set forth in Section 3.2(b)(iv) of the Globix Disclosure Schedule and
(A) for the capital stock or other ownership interests of its
Subsidiaries, (B) as acquired in the ordinary course of business
pursuant to foreclosure, workout, settlement, bankruptcy arrangements
or similar transactions, and (C) for security interests held in the
ordinary course of business, neither Globix nor any of its
-30-
Subsidiaries directly or indirectly owns any equity, membership,
partnership or similar interest in, or any interest convertible into
or exchangeable or exercisable for any equity, membership, partnership
or similar interest in, any corporation, partnership, joint venture,
limited liability company or other business association or entity,
whether incorporated or unincorporated that is material to the
business of Globix and its Subsidiaries, taken as a whole. Except as
set forth in Section 3.2(b)(iv) of the Globix Disclosure Schedule, no
action is required to be taken by Globix, its Board of Directors or
any trustee under any Globix Stock Option Plans or the stockholders of
Globix to effect the treatment of NEON Options described in Section
1.9 hereof.
(v) Except as set forth in Section 3.2(b)(v) of the Globix
Disclosure Schedule, Globix has never declared, nor is there accrued,
any dividend or other distribution with respect to any Globix Common
Stock.
(vi) All of the shares of Globix Common Stock issuable at
the Effective Time in accordance with this Agreement will be, when so
issued, duly authorized, validly issued, fully paid and nonassessable
and free of preemptive rights created by statute, Globix's certificate
of incorporation or bylaws and will, when issued, be registered for
sale under the Securities Act, registered under the Exchange Act and
registered or exempt from registration under applicable state
securities laws. All of the shares of Globix Preferred Stock issuable
in exchange for NEON Convertible Preferred Stock at the Effective Time
in accordance with this Agreement, will be, when so issued, duly
authorized, validly issued, fully paid and nonassessable and free of
preemptive rights created by statute, Globix's certificate of
incorporation or bylaws and will, when issued, be registered for sale
under the Securities Act and registered or exempt from registration
under applicable state securities laws.
(c) AUTHORITY; NO CONFLICTS.
(i) Each of Globix and its Subsidiaries has all requisite
corporate power and authority to enter into this Agreement, to perform
its obligations hereunder and to consummate the transactions
contemplated hereby, subject to the receipt of the Globix Stockholder
Vote (if applicable). The execution and delivery of this Agreement by
Globix and the consummation by Globix of the transactions contemplated
hereby have been duly authorized by all necessary corporate action on
the part of Globix, subject to the Globix Stockholder Vote (if
applicable). As of the Closing Date, the consummation by Merger Sub of
the transactions contemplated hereby shall have been duly authorized
by all necessary corporate action on the part of Merger Sub and on the
part of Globix as the sole stockholder of Merger Sub. Without limiting
the generality of the foregoing, the Board of Directors of Globix, at
a meeting duly called and held, by the requisite vote of all directors
(i) received a fairness opinion that the Exchange Ratio is fair from a
financial point of view to the holders of the Globix Common Stock and
determined that the Merger is in the best interests of Globix and its
-31-
stockholders, (ii) adopted this Agreement in accordance with the
provisions of the DGCL and (iii) in the event of a Globix Stockholder
Vote, fixed a record date for the determination of stockholders of
Globix entitled to vote at the Globix Stockholders Meeting (if
applicable). This Agreement has been duly executed and delivered by
Globix and constitutes a valid and binding agreement of Globix,
enforceable against Globix in accordance with its terms, except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and similar laws relating to or affecting
creditors generally, or by general equity principles (regardless of
whether such enforceability is considered in a proceeding in equity or
at law).
(ii) The execution and delivery of this Agreement does not,
and the consummation of the Merger and the other transactions
contemplated hereby will not, result in a Violation: (A) pursuant to
any provision of the certificate of incorporation or bylaws of Globix
or similar governing documents of any of its Subsidiaries, or (B)
except as could not, individually or in the aggregate, reasonably be
expected to have a Globix Material Adverse Effect and subject to
obtaining or making the Globix Required Consents, pursuant to any
Contract or Globix Plan or any Law applicable to Globix or its
Subsidiaries or their respective properties or assets. Section
3.2(c)(ii) of the Globix Disclosure Schedule lists all material
consents, waivers and approvals under any Globix Material Contracts
required to be obtained in connection with the consummation of the
Merger and the other transactions contemplated hereby.
(iii) No consent, approval, order or authorization of, or
registration, declaration or filing with, any Person or any
Governmental Entity is required by or with respect to Globix or any
Subsidiary of Globix as a result of the execution and delivery of this
Agreement by Globix or the consummation of the Merger and the other
transactions contemplated hereby, except for those required under or
in relation to (A) the HSR Act, (B) the filing of the Registration
Statement with the SEC and its effectiveness under the Securities Act,
(C) the filing of the Certificate of Merger pursuant to the DGCL, (D)
compliance with applicable state securities laws (if applicable) in
connection with the issuance of the Globix Common Stock in the Merger,
(E) the Globix Stockholder Vote (if applicable), (F) the matters
listed in Section 3.2(c)(ii) of the Globix Disclosure Schedule, and
(G) such consents, approvals, orders, authorizations, registrations,
declarations and filings the failure of which to make or obtain could
not, individually or in the aggregate, reasonably be expected to have
a Globix Material Adverse Effect. Consents, approvals, orders,
authorizations, registrations, declarations and filings required under
or in relation to any of the foregoing clauses (A) through (G) are
hereinafter referred to as "GLOBIX REQUIRED CONSENTS".
-32-
(d) SEC FILINGS; FINANCIAL STATEMENTS.
(i) Globix has filed all periodic reports required to be
filed with the SEC under the Exchange Act for the fiscal year ended
September 30, 2003 and thereafter (collectively, the "GLOBIX SEC
REPORTS"), each of which, as finally amended, has complied as to form
in all material respects with the applicable requirements of the
Securities Act and the rules and regulations promulgated thereunder,
or the Exchange Act and the rules and regulations promulgated
thereunder, each as in effect on the date so filed.
(ii) The consolidated financial statements of Globix
(including any related notes thereto) (a) included in the Globix SEC
Reports and (b) an unaudited consolidated balance sheet as of May 31,
2004 and the related unaudited consolidated statements of operations
and cash flows for the eight months then ended (the "GLOBIX SEC
FINANCIAL STATEMENTS"), fairly present in all material respects the
consolidated financial position of Globix and its consolidated
subsidiaries as of the dates thereof and the consolidated results of
their operations, changes in stockholders' equity and cash flows for
the respective periods set forth therein, in each case, in accordance
with GAAP applied on a basis consistent with prior periods (except, in
the case of unaudited consolidated statements, including quarterly
statements, (A) as permitted by Form 10-Q of the SEC, (B) as may be
indicated in footnotes thereto or in the Globix SEC Reports and (C)
that they are subject to normal and recurring year-end adjustments
that have not been and are not likely to be material in amount, and
the absence of notes that, if presented, would not differ materially
from the notes included in the immediately preceding year-end
financial statements).
(iii) No financial statements of any entity other than
Globix and its Subsidiaries are required by GAAP to be included in the
consolidated financial statements of Globix.
(e) NO UNDISCLOSED LIABILITIES; INDEBTEDNESS.
(i) Except (a) as and to the extent of the amounts
specifically reflected or reserved on the audited balance sheet of
Globix as of September 30, 2003 (including, the notes thereto) (the
"GLOBIX AUDITED BALANCE SHEET") included in the Globix SEC Financial
Statements or intercompany accounts not reflected in the Globix
Audited Balance Sheet, (b) obligations under Globix Material Contracts
entered into in the ordinary course of business and consistent with
past practice which are not required by GAAP to be reflected on the
Globix Audited Balance Sheet, (c) liabilities and obligations incurred
in the ordinary course of business consistent with past practice since
the date of the Globix Audited Balance Sheet, (d) obligations under
this Agreement and liabilities permitted to be incurred pursuant to
Section 4.2 and (e) as set forth in Section 3.2(e)(i) of the Globix
Disclosure Schedule, neither Globix nor any of its Subsidiaries has
any liabilities or obligations of any nature whether absolute,
accrued, contingent or otherwise, which individually or in the
aggregate would reasonably be expected to have a Globix Material
Adverse Effect.
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(ii) Section 3.2(e)(ii) of the Globix Disclosure Schedule
sets forth a complete and accurate list of all loan or credit
agreements, notes, bonds, mortgages, indentures and other agreements
and instruments pursuant to which any indebtedness of Globix or any of
its Subsidiaries in an aggregate principal amount in excess of
$100,000 is outstanding or may be incurred and the respective
principal amounts outstanding thereunder as of the date of this
Agreement.
(f) ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in
Section 3.2(f) of the Globix Disclosure Schedule, and except for actions that
would be permitted pursuant to Section 4.2 and except as otherwise contemplated
hereby, from the date of the Globix Audited Balance Sheet to the date hereof:
(i) Globix and its Subsidiaries have conducted their business in all material
respects in the ordinary course in the same manner as heretofore conducted; (ii)
there has not been any Globix Material Adverse Effect; (iii) Globix has not (A)
declared, set aside or paid any dividends or other distribution (whether in
cash, stock or property) in respect of any of its capital stock; (B) split,
combined or reclassified any of its capital stock or issued or authorized any
issuance of any other securities in respect of, in lieu of or in substitution
for shares of, its capital stock, (iv) Globix has not changed its methods of
accounting for financial accounting or tax purposes in any manner that could be
reasonably expected to have a significant adverse effect on its financial
statements; (v) Globix has not made or revoked any material express or deemed
election relating to Taxes; and (vi) neither Globix nor any of its Subsidiaries
has (A) waived in writing any material rights, (B) suffered any extraordinary
loss or extraordinary losses (as defined in Opinion No. 30 of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
any amendments or interpretations thereof) which could reasonably be expected to
have a Globix Material Adverse Effect, (C)(1) granted any severance or
termination payment, (2) entered into any employment, deferred compensation,
consulting, severance, indemnification, change in control, retention or other
similar agreement or arrangement, (3) increased any compensation or benefits
payable or to become payable under any existing severance or termination pay
policy or employment, deferred compensation, stock loan, consulting, severance,
change in control, retention or other similar agreement or arrangement, or (4)
increased the compensation, bonus, incentive or other benefits payable to (or to
become payable to) former or current directors, officers, employees or
consultants of Globix or any of its Subsidiaries, other than an increase in
annual salary or hourly wage rates granted to current employees (other than
officers) in the ordinary course of business, consistent with past practice or
otherwise not material), (D) made or agreed to make any increase in any Globix
Plan or adopt a new employee benefit plan, which in either case could result in
a material increase in liability to Globix, (E) other than in the ordinary
course of business or as otherwise not material, sold or transferred any of the
assets of Globix or its Subsidiaries, or (F) made any capital expenditures in
respect of its business or operations not in the ordinary course of business or
otherwise material. Globix and its Subsidiaries have not agreed or committed
(directly or indirectly) to do any of the foregoing.
(g) INFORMATION SUPPLIED. None of the information supplied or to be
supplied in writing by Globix or Merger Sub for inclusion or incorporation by
reference in the Registration Statement and the Proxy Statement will (A) in the
case of the Registration Statement, at the time it becomes effective, contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the statements
therein not misleading, or (B) in the case of the Proxy Statement, at the time
of the mailing of the Proxy Statement, at the time of the NEON Stockholders
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Meeting and the Globix Stockholders Meeting (if applicable) and at the Effective
Time, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading, or necessary to correct any statement in any earlier communication
with respect to the solicitation of proxies for the NEON Stockholders Meeting or
the Globix Stockholders Meeting (if applicable) which has become false or
misleading. If at any time prior to the Effective Time any event with respect to
Globix, its officers and directors or any of its Subsidiaries shall occur which
is required to be described in the Proxy Statement or the Registration
Statement, such event shall be so described, and an appropriate amendment or
supplement shall be promptly filed with the SEC and, as required by law,
disseminated to the stockholders of NEON and Globix. The Registration Statement
will comply (with respect to Globix) as to form in all material respects with
the provisions of the Securities Act, and the Proxy Statement will comply (with
respect to Globix) as to form in all material respects with the provisions of
the Exchange Act. Notwithstanding the foregoing provisions of this Section
3.2(g), no representation or warranty is made by Globix with respect to
statements made or incorporated by reference in the Proxy Statement based on
information supplied by NEON for inclusion or incorporation by reference
therein. For purposes of the foregoing, it is understood and agreed that
information concerning or related to Globix or Merger Sub or the Globix
Stockholders Meeting (if applicable) will be deemed to have been supplied by
Globix and information concerning or related to NEON and the NEON Stockholders
Meeting shall be deemed to have been supplied by NEON.
(h) ASSETS. Except as set forth in Section 3.2(h) of the Globix
Disclosure Schedule, Globix has good and valid title or a valid leasehold
interest in, free and clear of all Liens other than Permitted Liens, to (i) all
of its assets and properties as reflected on the Globix Audited Balance Sheet,
except for assets and properties disposed of in the ordinary course of business,
or as permitted pursuant to Section 4.2, since the date of the Globix Audited
Balance Sheet, and (ii) all of Globix's other assets, real property, interests
in real property, rights, franchises, licenses and properties, tangible or
intangible, real or personal, wherever located which are material to the conduct
of its business, other than property that is leased or licensed, with respect to
which Globix or any of its Subsidiaries has valid and enforceable leases or
licenses under which there exists no default, event of default or event which,
with notice or lapse of time or both, would constitute a default, except for
such defaults which have not had or are not reasonably likely to have, either
individually or in the aggregate, a Globix Material Adverse Effect.
(i) VOTE REQUIRED. On or prior to the Closing Date, Globix shall duly
execute and deliver a written consent as the only stockholder of Merger Sub, (i)
approving the Merger and (ii) approving the modification of the NEON Stock
Option Plans in accordance with the shareholder approval requirements of Section
422 of the Code and the regulations promulgated and proposed thereunder (the
"MERGER SUB APPROVAL"), which will not be amended, modified or withdrawn prior
to Closing. The Globix Stockholder Vote, if applicable, is the only vote of the
holders of any class or series of Globix capital stock necessary to approve the
Merger and the other transactions contemplated hereby, including the issuance of
the shares of Globix Common Stock included in the Merger Consideration and the
transactions contemplated by Section 1.9, if applicable.
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(j) OPINION OF FINANCIAL ADVISOR. Globix has received the opinion of
Needham & Company, Inc. (the "GLOBIX FINANCIAL ADVISOR"), dated the date of this
Agreement, to the effect that, as of such date, the Exchange Ratio is fair, from
a financial point of view, to the holders of the Globix Common Stock.
(k) RELATED PARTY TRANSACTIONS.
(i) For purposes of this Section 3.2(k), the term "GLOBIX
AFFILIATED PERSON" means (A) any holder of 5% or more of the Globix
Common Stock, (B) any director, officer or senior executive of Globix
or any Subsidiary, (C) any Person, firm or corporation that directly
or indirectly controls, is controlled by, or is under common control
with, Globix or any Subsidiary, or (D) any member of the immediate
family of any of such persons.
(ii) Except as set forth in Section 3.2(k)(ii) of the Globix
Disclosure Schedule, since September 30, 2003, Globix and its
Subsidiaries have not, in the ordinary course of business or
otherwise, (A) purchased, leased or otherwise acquired any material
property or assets or obtained any material services from, (B) sold,
leased or otherwise disposed of any material property or assets or
provided any material services to (except with respect to remuneration
for services rendered in the ordinary course of business as director,
officer or employee of Globix or any Subsidiary), (C) entered into or
modified in any manner any contract with, or (D) borrowed any money
from, or made or forgiven any loan or other advance (other than
expenses or similar advances made in the ordinary course of business)
to, any Globix Affiliated Person.
(iii) Except as set forth in Section 3.2(k)(iii) of the
Globix Disclosure Schedule, since September 30, 2003, (A) the
contracts of Globix and its Subsidiaries do not include any material
obligation or commitment between Globix or any Subsidiary and any
Globix Affiliated Person, (B) the assets of Globix or any Subsidiary
do not include any receivable or other obligation or commitment from a
Globix Affiliated Person to Globix or any Subsidiary, and (C) the
liabilities of Globix and its Subsidiaries do not include any payable
or other obligation or commitment from Globix or any Subsidiary to any
Globix Affiliated Person.
(iv) Section 3.2(k)(iv) of the Globix Disclosure Schedule
sets forth a complete and accurate list of each Contract to which
Globix or any of its Subsidiaries is a party or bound with any Globix
Affiliated Person (other than any Subsidiary which is a direct or
indirect wholly owned Subsidiary of Globix). Section 3.2(k)(iv) of the
Globix Disclosure Schedule sets forth a complete and accurate
description of all transactions with any Globix Affiliated Person or
any of its Subsidiaries or any transaction that would be subject to
proxy statement disclosure pursuant to Item 404 of Regulation S-K to
which Globix or any of its Subsidiaries is a party or bound. Complete
and accurate copies of all the agreements, contracts and arrangements
set forth in Section 3.2(k)(iv) of the Globix Disclosure Schedule have
been made available to NEON.
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(l) LITIGATION. Except as disclosed in writing to NEON, there are no
Claims pending or, to the Knowledge of Globix, threatened against Globix or any
of its Subsidiaries, or any properties or rights of Globix or any of its
Subsidiaries, before any Governmental Entity, nor is there any judgment, decree,
injunction, ruling or order of any Governmental Entity or arbitrator outstanding
specifically against Globix or any of its Subsidiaries, except for any of the
foregoing as could not, individually or in the aggregate, reasonably be expected
to have a Globix Material Adverse Effect. To the Knowledge of Globix, there has
not been any investigation of Globix or any of its Subsidiaries conducted by any
Governmental Entity during the two years prior to the date hereof which was
concluded and resulted in a significant adverse effect on the ability of Globix
and its Subsidiaries to conduct their respective businesses.
(m) COMPLIANCE WITH LAWS; PERMITS.
(i) Since the Globix Confirmation Effective Date, except as
disclosed to NEON in a certificate, Globix and each of its
Subsidiaries has complied with, is not in violation of, and has not
received any notice alleging any violation with respect to, any
applicable provisions of any statute, law or regulation with respect
to the conduct of its business, the employment of any current or
former employees, or the ownership or operation of its properties or
assets, except for failures to comply or violations that, individually
or in the aggregate, have not had, and are not reasonably likely to
have, a Globix Material Adverse Effect.
(ii) Except as set forth in Section 3.2(m)(ii) of the Globix
Disclosure Schedule, Globix and each of its Subsidiaries have all
permits, licenses and franchises from Governmental Entities required
to conduct their businesses as now being conducted or as presently
contemplated to be conducted (the "GLOBIX PERMITS"), except for such
permits, licenses and franchises the absence of which, individually or
in the aggregate, has not had, and is not reasonably likely to have, a
Globix Material Adverse Effect. Globix and each of its Subsidiaries
are in compliance with the terms of the Globix Permits, except for
such failures to comply that, individually or in the aggregate, have
not had, and are not reasonably likely to have, a Globix Material
Adverse Effect. Except as set forth in Section 3.2(m)(ii) of the
Globix Disclosure Schedule, all Globix Permits are in full force and
effect, and no Globix Permit shall cease to be effective as a result
of the consummation of the transactions contemplated by this
Agreement. Globix and its Subsidiaries have not received any notice of
any material default under or material violation of, any such Globix
Permit.
(n) ACCOUNTS RECEIVABLE; WARRANTIES.
(i) All accounts receivable of Globix, whether reflected in
the most recent Globix SEC Financial Statements or otherwise,
represent sales actually made in the ordinary course of business, have
been reflected properly in its books and records in accordance with
GAAP and are not subject to any material contractual setoffs or
counterclaims.
(ii) Except as set forth in Section 3.2(n)(ii) of the Globix
Disclosure Schedule, no product or service manufactured, sold, leased,
licensed, delivered or otherwise provided by Globix or any of its
Subsidiaries is subject to any guaranty, or warranty.
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(o) CUSTOMERS AND SUPPLIERS. As of the date of this Agreement, except
as set forth in Section 3.2(o) of the Globix Disclosure Schedule, (i) no
material customer of Globix or any of its Subsidiaries has indicated to Globix
or any of its Subsidiaries that it will stop, or decrease the rate of, buying
products or services from Globix or any of its Subsidiaries, and (ii) no
material supplier or exclusive supplier of Globix or any of its Subsidiaries has
indicated to Globix or any of its Subsidiaries that it will stop, or decrease
the rate of, supplying materials, products or services to them.
(p) CERTAIN BUSINESS PRACTICES. Neither Globix nor any Subsidiary has
(i) used any funds for unlawful contributions, gifts, entertainment or other
unlawful payments related to a political activity, (ii) made any unlawful
payment to any foreign or domestic government official or employee or to any
foreign or domestic political party or campaign or violated any provision of the
Foreign Corrupt Practices Act of 1977, as amended, or (iii) consummated any
transaction or made any payment or entered into any agreement or arrangement or
taken any other action in violation of Section 1128B(b) of the Social Security
Act, as amended.
(q) TAXES.
(i) Except as set forth in Section 3.2(q)(i) of the Globix
Disclosure Schedule or to the extent otherwise not material, as to
amount or otherwise, individually or in the aggregate, including all
matters subject to the representations in this Section 3.2(q)(i):
(A) Globix and its Subsidiaries have timely filed or,
if not yet due, will timely file all Tax Returns required to be filed
by them on or before the Closing Date and all such Tax Returns are or,
in the case of Tax Returns not yet filed, will be, true, correct and
complete in all material respects and Globix and its Subsidiaries have
paid when due all Taxes reported thereon or, in the case of Taxes not
yet due, will pay such Taxes when due.
(B) Globix and its Subsidiaries have paid or have
established on the most recent financial statements required to be
provided to NEON hereunder, in accordance with GAAP, adequate accruals
for the payment of all Taxes (whether or not shown on a Tax Return),
including contingent Tax liabilities, with respect to all Taxable
periods ending on or before the Closing Date and all Taxable periods
starting before and ending after the Closing Date, but only to the
extent attributable to the portion of such periods up to and including
the Closing Date and, in each case, only to the extent properly
accrued as of the date of such most recent financial statements
required to be provided to NEON hereunder.
(C) Globix has made or will make available to NEON
all Tax Returns filed by Globix and its Subsidiaries relating to the
four (4) most recent Taxable years ending on or before the Closing
Date.
(D) No extension of time has been requested or
granted for Globix or any of its Subsidiaries to file any Tax Return
that has not yet been filed or to pay any Tax that has not yet been
paid and Globix and its Subsidiaries have not granted a power of
attorney that remains outstanding with regard to any Tax matter.
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(E) There is no pending or, to the Knowledge of
Globix, threatened Tax Audit of Globix or any of its Subsidiaries.
(F) NEON has received copies of all material audit
reports and correspondence between Globix or its Subsidiaries and any
Tax Authority issued or made during the last three (3) years and a
complete summary of all oral communications between Globix or its
Subsidiaries and any Tax Authority relating to any Tax Audits of
Globix or its Subsidiaries during such years, including without
limitation any Tax Audit that is in progress or for which a still
effective extension of the statute of limitations was granted.
(G) Neither Globix nor any of its Subsidiaries has
within the last four (4) years received notice of a Tax Deficiency
and, to the Knowledge of Globix, no Tax Deficiency is proposed or
threatened.
(H) All Tax Deficiencies have been paid or finally
settled and all amounts determined by settlement to be owed have been
paid.
(I) There are no Liens, other than Permitted Liens,
arising from or related to Taxes on or pending against Globix, its
Subsidiaries or any of their properties.
(J) There are no presently outstanding waivers or
extensions or requests for waiver or extension of the time within
which a Tax Deficiency may be asserted or assessed.
(K) No issue has been raised in any Tax Audit which,
by application of similar principles to any past, present or future
period, would result in an adjustment to the amounts reported in a
subsequent period.
(L) Globix has not changed any Tax accounting method
during any of the seven (7) most recent Taxable years ending on or
before the Closing Date. Globix and its Subsidiaries have not taken
any action, whether or not required, that has resulted or will result
in deferring a liability for Taxes of Globix or its Subsidiaries from
any taxable period ending on or before the Closing Date to any taxable
period ending after such date, unless such action is in accordance
with past practice.
(M) Neither Globix nor its Subsidiaries has ever been
required to include in income any adjustment pursuant to section 481
of the Code and no Tax Authority has ever made or proposed any such
adjustment. Neither Globix nor its Subsidiaries has entered into a
closing agreement, as described in section 7121 of the Code or an
advance pricing agreement or other agreement with a taxing authority
relating to Taxes.
(N) Neither Globix nor its Subsidiaries owns any
property that is tax-exempt use property within the meaning of section
168(h) of the Code, that is described in section 168(f)(8) of the Code
as in effect prior to its amendment by the Tax Reform Act of 1986,
that is tax-exempt bond financed property within the meaning of
Section 168(g) of the Code or that is "limited use property" within
the meaning of Rev. Proc. 76-30.
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(O) Neither Globix nor its Subsidiaries is a party to
any arrangement to which sections 162(m) or 280G of the Code could
under any circumstances apply.
(P) Neither Globix nor its Subsidiaries has filed a
consent pursuant to section 341(f) of the Code or agreed to have
section 341(f)(2) apply to the disposition of any asset.
(Q) Neither Globix nor its Subsidiaries has
participated in or cooperated with any international boycott within
the meaning of section 999 of the Code.
(R) Neither Globix nor its Subsidiaries is now or has
ever been (a) an includable member of an "affiliated group" within the
meaning of section 1504(a) of the Code other than an affiliated group
consisting only of Globix and one or more of its current Subsidiaries
or otherwise liable for the Taxes of a person other than Globix
pursuant to Treasury Regulation section 1.1502-6 or any similar
provision of state, local or foreign law, whether or not as a
transferee, a successor, by operation of law, by contract or
otherwise, (b) a member of any consolidated, combined or unitary Tax
Return filing group other than a group consisting only of Globix and
one or more of its current Subsidiaries, (c) a party to any Tax
sharing agreement, Tax indemnity agreement or similar agreement,
arrangement or practice with respect to Taxes, including an agreement
that obligates it to make any payment computed by reference to the
Taxes, Taxable income or Tax losses of any other individual or entity,
(d) a personal holding company as defined in section 542 of the Code
or foreign personal holding company as defined in section 552(a) of
the Code, (e) the owner of an interest in an entity that is or is
treated as a Tax partnership, trust, regulated investment company as
defined in section 851 of the Code, real estate investment trust as
defined in section 856 of the Code or foreign personal holding company
as defined in section 552(a) of the Code, (f) a United States
shareholder as defined in section 951(b) of the Code of a controlled
foreign corporation as defined in section 957 of the Code, (g) a
United States real property holding company within the meaning of
section 897(c)(2) of the Code or (h) a shareholder of a passive
foreign investment company, as defined in section 1297 of the Code.
(S) Globix has not entered into a gain recognition or
other agreement requiring it to take into account Taxable income or to
incur a Tax liability that it would not have had to take into account
or would not have had to incur but for such agreement.
(T) Globix has disclosed on its federal, state, local
and foreign income Tax Returns all positions taken therein that could
give rise to a penalty under section 6662 of the Code or any
corresponding provision of state, local or foreign Tax law.
(U) Globix and its Subsidiaries have never
participated, directly or indirectly, in a transaction which is
described in Treasury Regulation sections 1.6011-4(b)(2) or
1.6011-4(b)(3) nor have they ever held "an interest" in a "tax
shelter," as those terms are defined in Treasury Regulation section
301.6112-1.
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(V) Globix has no deferred intercompany gains or
losses that have not been fully taken into income for income Tax
purposes and there is no excess loss account with respect to stock of
any of its Subsidiaries.
(W) No unresolved claim and to the Knowledge of
Globix, no claim has ever been made by a Tax Authority in a
jurisdiction in which Globix does not pay Taxes or file Tax Returns
that such entity is or may be subject to Tax in such jurisdiction.
(X) Globix and its Subsidiaries have never requested
a private ruling from a Tax Authority on any matter.
(Y) Neither Globix nor its Subsidiaries has been a
"distributing corporation" or a "controlled corporation" in connection
with a distribution described in Section 355 of the Code.
(Z) Neither Globix nor its Subsidiaries nor, to the
Knowledge of Globix, any Globix Affiliated Person has taken any action
or failed to take any action that would cause the Merger to fail to
qualify as a tax-free reorganization under Section 368(a) of the Code,
and no facts exist that would cause the Merger to fail to so qualify.
(AA) The net operating losses, alternative minimum
tax net operating losses, net capital losses, alternative minimum tax
net capital losses, Tax credits, alternative minimum tax credits and
other Tax attributes of Globix and its subsidiaries are not subject to
any consolidated return limitation, limitation under section 382 of
the Code or any other limitation on their use, allowance or
availability.
(BB) Globix has retained all supporting and backup
papers, receipts, spreadsheets and other information necessary for the
preparation of all Tax Returns that have not yet been filed and the
defense of Tax Audits involving all Taxable periods either (I) ended
on or during the six (6) years prior to the Closing Date or (II) from
which there are unutilized net operating loss, capital loss or
investment tax credit carryovers.
(CC) Globix has collected and remitted to the
appropriate Tax Authorities all sales and use and similar Taxes
required to have been collected and remitted on or prior to the
Closing Date and has been furnished, and if required has filed,
properly completed exemption certificates for all exempt transactions.
Globix has maintained and has in its possession all records,
supporting documents and exemption and resale certificates required by
applicable sales Tax statutes and regulations to be retained in
connection with the collection and remittance of sales and use and
similar Taxes for all periods up to and including the Closing Date.
Each reference to a provision in this Section 3.2(q) shall be treated
for state, local and foreign Tax purposes as a reference to analogous
or similar provisions of state and local law.
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(r) EMPLOYEE BENEFITS; EMPLOYEES.
(i) Section 3.2(r)(i) of the Globix Disclosure Schedule sets
forth a list of each "employee benefit plan" (within the meaning of
Section 3(3) of ERISA), severance, change in control or employment
plan, program or agreement, and vacation, incentive, bonus, stock
option, stock purchase, stock loan, and restricted stock plan, program
or policy to which Globix is a party or that is sponsored or
maintained by Globix, any of its Subsidiaries, any of their ERISA
Affiliates, in which present or former employees of Globix or any of
its Subsidiaries or ERISA Affiliates ("GLOBIX EMPLOYEES") participate
(collectively, the "GLOBIX PLANS"). All Globix Plans set forth on
Section 3.2(r)(i) of the Globix Disclosure Schedule, if any, that
would result in the payment to any Globix Employee of any money or
other property or accelerate or provide any other rights or benefits
thereto as a result of the transactions contemplated by this
Agreement, whether or not such payment or acceleration would
constitute a parachute payment within the meaning of Section 280G of
the Code, are so indicated by an asterisk. The Globix Plans are in
compliance in all material respects with all applicable requirements
of ERISA, the Code, and other applicable Laws and have been
administered in all material respects in accordance with their terms
and such Laws, and there has been no material violation of any
reporting or disclosure requirement imposed by ERISA or the Code. Each
Globix Plan which is intended to be qualified within the meaning of
Section 401 of the Code has received a Favorable Letter (as such term
is defined in Rev. Proc. 2003-44 Section 5.01(4)) as to its
qualification, and nothing has occurred that could reasonably be
expected to cause the loss of such qualification or the loss of the
tax-exempt status for any trust maintained with respect to any such
Globix Plan.
(ii) Except as set forth in Section 3.2(r)(ii) of the Globix
Disclosure Schedule, neither NEON nor Globix shall, at or after the
Effective Time, have any liability with respect to any change in
control, "continuity" or severance agreement, plan, program or policy
with or with respect to any Globix Employee. In accordance with
applicable law, each Globix Plan can be amended or terminated at any
time, without consent from any other party and without liability other
than for notice obligations with respect to amendment or termination,
if any, and benefits accrued as of the date of such amendment or
termination. Globix and its ERISA Affiliates have made full and timely
payment of all material amounts required to be contributed or paid as
expenses under the terms of each Globix Plan and applicable law.
(iii) No Globix Plan is subject to Title IV of ERISA
(including any "multiemployer plan" (as defined in Section 4001(a)(3)
of ERISA)), and neither Globix nor any of its ERISA Affiliates has
ever contributed or been obligated to contribute to any pension plan
subject to Title IV of ERISA (including any multiemployer plan), nor
could Globix or any ERISA Affiliate have any liability under Title IV
of ERISA.
(iv) No event or condition has occurred in connection with
which Globix or any of its ERISA Affiliates would be subject to any
liability, encumbrance or Lien with respect to any Globix Plan under
ERISA, the Code or any other applicable Law or under any agreement or
arrangement pursuant to or under which Globix or any of its ERISA
Affiliates are required to indemnify any person against such
liability.
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(v) True, correct and complete copies of the following
documents with respect to each of the Globix Plans have been made
available to NEON by Globix, to the extent applicable: (A) any plans
or agreements, all amendments thereto and related trust documents, and
amendments thereto; (B) the three most recent Forms 5500 and all
schedules thereto and the most recent actuarial report, if any; (C)
the most recent IRS determination letter; and (D) any summary plan
descriptions or other employee communications.
(vi) With respect to any Globix Plan, no actions, suits or
claims (other than routine claims for benefits in the ordinary course)
are pending or, to the Knowledge of Globix, threatened.
(vii) Except as set forth in Section 3.2(r)(vii) of the
Globix Disclosure Schedule, none of the Globix Plans provide for
post-employment life or health insurance, benefits or coverage for any
participant or any beneficiary of a participant, except as may be
required under COBRA and any such participation is at the expense of
the participant or the participant's beneficiary.
(viii) Except as set forth in Section 3.2(r)(viii) of the
Globix Disclosure Schedule neither Globix, nor to the Knowledge of
Globix, any other fiduciary or party-in-interest of any Globix Plan
has participated in, engaged in or been a party to any transaction
that is prohibited under Section 4975 of the Code or Section 406 of
ERISA and not exempt under Section 4975 of the Code or Section 408 of
ERISA, respectively. With respect to any Globix Plan, (A) neither
Globix nor any of its ERISA Affiliates has had asserted against it any
claim for taxes under Chapter 43 of Subtitle D of the Code and Section
5000 of the Code, or for penalties under ERISA Section 502(c), 502 (i)
or 502 (l), nor, to the Knowledge of Globix, is there a basis for any
such claim, and (B) no officer, director or employee of Globix or any
ERISA Affiliate has committed a breach of any fiduciary responsibility
or obligation imposed by Title I of ERISA.
(ix) Except as set forth in Section 3.2(r)(ix) of the Globix
Disclosure Schedule, there will be no payment, accrual of additional
benefits, acceleration of payments or vesting of any benefit under any
Globix Plan or any other agreement or arrangement to which Globix or
any of its Subsidiaries is a party, and no employee, officer or
director of Globix or its Subsidiaries will become entitled to
severance, termination allowance or similar payments, solely by reason
of entering into or in connection with the transactions contemplated
by this Agreement.
(x) Except as set forth in Section 3.2(r)(x) of the Globix
Disclosure Schedule, no Globix Plan is subject to the laws of any
country other than the United States.
(xi) None of the Globix Employees is represented in his or
her capacity as an employee of Globix or any of its Subsidiaries by
any labor organization, nor has Globix or any of its Subsidiaries
recognized any labor organization nor has any labor organization been
elected as the collective bargaining agent of any such employees. To
the Knowledge of Globix, there is no union organization activity
involving any of Globix Employees, pending or threatened in writing,
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nor has there been any union representation involving such employees
within the past two years. To the Knowledge of Globix, except as set
forth in Section 3.2(r)(xi) of the Globix Disclosure Schedule, there
are no complaints, charges or claims against Globix or any of its
Subsidiaries pending or, threatened in writing, by or before any
Governmental Entity based on, arising out of, in connection with, or
otherwise relating to the employment or termination of employment or
failure to employ by Globix or any of its Subsidiaries, of any
individual. Globix and its Subsidiaries are in compliance in all
material respects with all laws, regulations and orders relating to
the employment of labor, including all such laws, regulations and
orders relating to wages, hours, WARN and any similar state or local
"mass layoff' or "plant closing" law, collective bargaining,
discrimination, civil rights, safety and health, workers' compensation
and the collection and payment of withholding and/or social security
taxes and any similar tax. There has been no "mass layoff" or "plant
closing" as defined by WARN with respect to Globix or any of its
Subsidiaries in the 90 day period immediately prior to the date
hereof.
(xii) No more than fifteen (15) "leased employees," as that
term is defined in Section 414(n) of the Code or any other person who
is not classified as a common law employee of Globix, perform services
for Globix or any ERISA Affiliate. No person who is not classified by
Globix as a common law employee is eligible to participate in, nor
does such person participate in, any Globix Plan and no retroactive
participation in any Globix Plan would result due to reclassification
of such an individual as a common law employee of Globix.
(xiii) To the Knowledge of Globix, no employee of Globix or
any Subsidiary of Globix is in material breach as of the date of this
Agreement of any term of any employment contract, inventions
disclosure agreement, confidentiality agreement, non-competition
agreement, or any restrictive covenant to a former employer relating
to the right of any such employee to be employed by Globix or any
Subsidiary of Globix because of the nature of the business conducted
or presently proposed to be conducted by Globix or any Subsidiary of
Globix or relating to the use of trade secrets or proprietary
information of others.
(s) ENVIRONMENTAL MATTERS. Except as set forth in Section 3.2(s) of
the Globix Disclosure Schedule, (i) Globix, its Subsidiaries, and their
activities and operations are in compliance in all material respects with
Environmental Laws; (ii) to the Knowledge of Globix, there are no Environmental
Claims pending or, to the Knowledge of Globix, threatened against Globix or its
Subsidiaries; (iii) to the Knowledge of Globix, there are no conditions or
circumstances that reasonably could be expected to result in the imposition on
Globix or any of its Subsidiaries of, any material liability or obligation under
Environmental Laws; and (iv) to the Knowledge of Globix, there has not been any
release, discharge or disposal of any hazardous or toxic materials or wastes at,
on or under the facilities owned or leased by Globix or its Subsidiaries that
require notification, investigation or remediation by Globix or its Subsidiaries
pursuant to, or that are reasonably anticipated to give rise to material
liabilities or costs to Globix or its Subsidiaries under, applicable
Environmental Laws.
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(t) PROPERTIES.
(i) Section 3.2(t)(i) of the Globix Disclosure Schedule sets
forth a complete and accurate list of all real property that either
Globix or any of its Subsidiaries owns.
(ii) Section 3.2(t)(ii) of the Globix Disclosure Schedule
sets forth a complete and accurate list all real property leased,
subleased or licensed by Globix or any of its Subsidiaries, except for
easements, rights of way and regeneration facilities and, with respect
to licensed real property, any such agreements with respect to (A)
Collocation Sites and (B) central office sites under tariff (the
"GLOBIX LEASED REAL PROPERTY"). Except as set forth in Section
3.2(t)(ii) of the Globix Disclosure Schedule and except for any
exceptions to the following as could not, individually or in the
aggregate, reasonably be expected to have a Globix Material Adverse
Effect: (i) each of Globix and its Subsidiaries has valid leasehold
interests in the Globix Leased Real Property (as landlord or as
tenant) by or from it, free and clear of all Liens other than
Permitted Liens; (ii) all leases pursuant to which Globix or any of
its Subsidiaries leases (as landlord or as tenant) any Globix Leased
Real Property are in full force and effect and grant in all respects
the leasehold estates or rights of occupancy or use they purport to
grant; and (iii) Globix and its Subsidiaries have not received any
written notice of any default either on the part of Globix or any of
its Subsidiaries under any such lease and, to the Knowledge of Globix,
no event has occurred which, with notice or the lapse of time, or
both, would constitute a default on the part of Globix or any of its
Subsidiaries under any of such leases.
(u) AGREEMENTS, CONTRACTS AND COMMITMENTS.
(i) Globix has made available to NEON a complete and
accurate list of all Contracts that are material to the business,
assets, liabilities, capitalization, condition (financial or
otherwise) or results of operations of Globix and its Subsidiaries,
taken as a whole (collectively, the "GLOBIX MATERIAL CONTRACTS"). For
purposes of this section, materiality is defined as any Contract that
requires or is reasonably anticipated to involve aggregate payments to
or from Globix or its Subsidiaries in excess of $500,000 in any one
year. Globix has made available to NEON a complete and accurate copy
(excluding individual orders related thereto) of each Globix Material
Contract. As of the date of this Agreement, except as set forth in
Section 3.2(u)(i) of the Globix Disclosure Schedule, each Globix
Material Contract is in full force and effect. Except as set forth on
Section 3.2(u)(i) of the Globix Disclosure Schedule, neither Globix
nor any of its Subsidiaries is in material default under (x) any
Contract to which it is a party or by which it or any of its
properties or assets is bound, which violations or defaults would,
individually or in the aggregate, have, or are reasonably likely to
have, a Globix Material Adverse Effect, or (y) any Globix Material
Contract.
(ii) Except as set forth on Section 3.2(u)(ii) of the Globix
Disclosure Schedule, there is no non-competition or other similar
agreement, commitment, judgment, injunction or order, or any agreement
materially restricting the right to sell services, to which Globix or
any of its Subsidiaries is a party or is subject that has or could
reasonably be expected to have the effect of prohibiting or impairing
in any material respect the conduct of the business of Globix or any
of its Subsidiaries as currently conducted and as proposed to be
conducted.
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(iii) Neither Globix nor any of its Subsidiaries is or has
been suspended or debarred from bidding on contracts or subcontracts
with any Governmental Entity; no such suspension or debarment has been
initiated or, to the Knowledge of Globix, threatened; and the
consummation of the transactions by Globix contemplated by this
Agreement will not result in any such suspension or debarment that,
individually or in the aggregate, is reasonably likely to have a
Globix Material Adverse Effect. To the Knowledge of Globix, there is
no valid basis for (a) the suspension or debarment of Globix or any of
its Subsidiaries from bidding on contracts or subcontracts with any
Governmental Entity or (b) any claim pursuant to an audit or
investigation by any of the entities named in the foregoing sentence
that, individually or in the aggregate, is reasonably likely to have a
Globix Material Adverse Effect. To the Knowledge of Globix, neither
Globix nor any of its Subsidiaries has any Contracts which require it
to obtain or maintain a security clearance with any Governmental
Entity.
(v) BROKERS OR FINDERS. No agent, broker, investment banker, financial
advisor or other firm or Person is or will be entitled to any broker's or
finder's fee or any other similar commission or fee in connection with any of
the transactions contemplated by this Agreement based upon arrangements made by
or on behalf of Globix, except the Globix Financial Advisor, whose fees and
expenses will be paid by Globix in accordance with Globix's agreement with such
firm based upon arrangements made by or on behalf of Globix and previously
disclosed to NEON.
(w) INSURANCE. Globix has made available to NEON a summary of all
material fire and casualty, general liability, business interruption, and
sprinkler and water damage insurance policies maintained by Globix or any of its
Subsidiaries. Globix and each of its Subsidiaries have made any and all payments
required to maintain such policies in full force and effect. Neither Globix nor
any of its Subsidiaries has received written notice of default under any such
policy, and has not received written notice of any pending or threatened
termination or cancellation, coverage limitation or reduction with respect to
such policy.
(x) INTELLECTUAL PROPERTY.
(i) Except as disclosed in writing to NEON, Globix and its
Subsidiaries own, or otherwise possess licenses or other valid rights
to use all Intellectual Property used to conduct the business of
Globix and its Subsidiaries as currently conducted or contemplated to
be conducted (in each case excluding generally commercially available,
off-the-shelf software programs licensed pursuant to shrinkwrap or
"click-and-accept" licenses).
(ii) Except as would not have a Globix Material Adverse
Effect, the execution and delivery of this Agreement and consummation
of the Merger will not result in the breach of, or create on behalf of
any third party the right to terminate or modify, (A) any license,
sublicense or other agreement relating to any Intellectual Property
owned by Globix (the "GLOBIX INTELLECTUAL PROPERTY") or (B) any
license, sublicense and other agreement as to which Globix or any of
its Subsidiaries is a party and pursuant to which Globix or any of its
-46-
Subsidiaries is authorized to use any Third Party Intellectual
Property. Globix has delivered to NEON a certificate certifying a
complete and accurate list of the Globix Intellectual Property (other
than unregistered copyrights, trade secrets and confidential
information) and Globix has made available to NEON a complete and
accurate list of all Third Party Intellectual Property.
(iii) Except as disclosed in writing to NEON, to the
Knowledge of Globix, as of the date of this Agreement (A) no person is
challenging, infringing on, misappropriating or otherwise violating
any right of Globix or any of its Subsidiaries with respect to any
Intellectual Property owned by and/or licensed to Globix or its
Subsidiaries, (B) the use of any Intellectual Property by Globix and
its Subsidiaries does not infringe on, constitute a misappropriation
of, or otherwise violate the rights of any person and is in accordance
with any applicable license pursuant to which Globix or any of its
Subsidiaries acquired the right to use any Intellectual Property, and
(C) neither Globix nor any of its Subsidiaries has received any
written notice of any assertion or claim of infringement, pending or
not, with respect to any Intellectual Property used by Globix or its
Subsidiaries.
(iv) Except as disclosed in writing to NEON, all patents,
trademarks, service marks and copyrights, and registrations and
applications therefor, which are held by Globix or any of its
Subsidiaries are valid and subsisting. Globix and its Subsidiaries
have taken reasonable measures to protect the proprietary nature of
the Globix Intellectual Property.
(v) No Intellectual Property owned or licensed by Globix or
its Subsidiaries is being used or enforced in a manner that would
result in the abandonment, cancellation or unenforceability of such
Intellectual Property.
(vi) Sections 3.2(h), 3.2(t) and 3.2(u) shall not apply to
the Globix Intellectual Property and this Section 3.2(x) shall prevail
in the event of any conflict between this Section 3.2(x) on the one
hand and Sections 3.2(h), 3.2(t) and 3.2(u) on the other hand.
ARTICLE IV
COVENANTS RELATING TO CONDUCT OF BUSINESS
-----------------------------------------
Section 4.1 COVENANTS OF NEON. During the period from the date of this
Agreement and continuing until the Effective Time, NEON agrees as to itself and
its Subsidiaries that (except as contemplated by this Agreement (including the
Schedules thereto), as required by Law or by the rules and regulations of a
Governmental Entity, or to the extent that Globix shall otherwise consent in
writing, which consent shall not be unreasonably withheld or delayed):
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(a) ORDINARY COURSE.
(i) Except as otherwise provided or permitted in this
Section 4.1, NEON and its Subsidiaries shall and shall be permitted to
carry on their respective businesses in the usual, regular and
ordinary course in all material respects, in substantially the same
manner as heretofore conducted, and shall and shall be permitted to
use all commercially reasonable efforts to preserve intact their
present lines of business, maintain their rights and franchises and
preserve their relationships with customers, suppliers and others
having business dealings with them to the end that their ongoing
businesses shall not be impaired in any material respect at the
Effective Time, and shall pay, discharge or satisfy claims,
liabilities or obligations (whether absolute, accrued, asserted or
unasserted, contingent or otherwise), only in the usual, regular and
ordinary course of business.
(ii) NEON shall not, and shall not permit any of its
Subsidiaries to, enter into any new material line of business.
(b) DIVIDENDS; CHANGES IN SHARE CAPITAL. NEON shall not, and shall not
permit any of its Subsidiaries to, (i) declare or pay any dividends on or make
other distributions in respect of any of its capital stock, except for dividends
by Subsidiaries of NEON to NEON or another wholly owned Subsidiary of NEON and
except for accrual of dividends on the NEON Convertible Preferred Stock, (ii)
split, combine or reclassify any of its capital stock or issue or authorize or
propose the issuance of any other securities in respect of, in lieu of or in
substitution for, shares of its capital stock, except for any such transaction
by a wholly owned Subsidiary of NEON which remains a wholly owned Subsidiary
after consummation of such transaction, or (iii) repurchase, redeem or otherwise
acquire any shares of its capital stock or any securities convertible into or
exercisable for any shares of its capital stock other than the purchase from
time to time by NEON of NEON Common Stock in the ordinary course of business
consistent with past practice in connection with the NEON Stock Option Plans.
(c) ISSUANCE OF SECURITIES. NEON shall not, and shall not permit any
of its Subsidiaries to, issue or sell, or authorize or propose the issuance or
sale of, any shares of its capital stock of any class, any indebtedness with
voting rights or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such shares or any indebtedness with
voting rights, or any stock appreciation, phantom stock or similar stock rights
with respect to NEON or its Subsidiaries, or enter into any agreement or
commitment with respect to any of the foregoing, other than (i) the issuance of
341,936 shares of NEON Common Stock to Mode 1 Communications, Inc., (ii) the
issuance of NEON Common Stock upon the exercise of NEON Options, Class A
Warrants or the NEON CTA Warrants, or the conversion of NEON Convertible
Preferred Stock, in each case outstanding as of the date hereof in accordance
with their respective terms, or (iii) issuances by a wholly-owned Subsidiary of
NEON of capital stock to NEON or another wholly-owned Subsidiary of NEON.
(d) GOVERNING DOCUMENTS. NEON and its Subsidiaries shall not amend, in
the case of Subsidiaries, in any material respect, their respective charter,
articles or certificates of incorporation, by-laws or other governing documents.
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(e) NO ACQUISITIONS. NEON shall not, and shall not permit any of its
Subsidiaries to, acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof.
(f) NO DISPOSITIONS. Other than (i) internal reorganizations or
consolidations involving existing Subsidiaries of NEON, (ii) in the ordinary
course of business, (iii) pursuant to Permitted Liens of the type described in
clauses (i) and (ii) of the definition of Permitted Liens, or (iv) as set forth
in Section 3.1(f) of the NEON Disclosure Schedule, NEON shall not, and shall not
permit any Subsidiary of NEON to, sell, lease, encumber or otherwise dispose of,
or agree to sell, lease, encumber or otherwise dispose of, any of its assets
(including capital stock of Subsidiaries of NEON) which are material,
individually or in the aggregate, to NEON and its Subsidiaries.
(g) INVESTMENTS; INDEBTEDNESS. NEON shall not, and shall not permit
any of its Subsidiaries to (i) make any loans, advances or capital contributions
to, or investments in, any other Person, other than (A) by NEON or a Subsidiary
of NEON to or in NEON or any wholly owned Subsidiary of NEON, or (B) financing
transactions in the ordinary course of business (including in connection with
any financing transactions of the type or similar to those previously engaged in
by NEON and its Subsidiaries, in amounts consistent therewith, taking into
account any growth in the business of NEON and its Subsidiaries) or (ii) create,
incur, assume or suffer to exist any indebtedness, issuances of debt securities,
guarantees, loans or advances, or engage in any asset securitization transaction
(whether accounted for as a sale of assets or as a financing transaction) not in
existence as of the date of this Agreement except (A) intercompany indebtedness
between NEON and any of its wholly owned Subsidiaries or between such wholly
owned Subsidiaries, or (B) in the ordinary course of business.
(h) ACCOUNTING METHODS; INCOME TAX ELECTIONS. NEON shall not (i)
materially change its methods of accounting or accounting principles or
practices used by it, except as required by changes in GAAP as concurred in by
NEON's independent accountants, (ii) change its fiscal year, (iii) make or
revoke any material express or deemed election relating to Taxes, (iv) settle or
compromise any Tax liability material to NEON and its Subsidiaries taken as a
whole or (v) change (or make a request to any Tax Authority to change) any
material aspect of its method of accounting for Tax purposes. NEON shall, and
shall cause each of its Subsidiaries to, duly and timely file all Tax Returns
and other documents required to be filed with federal, state, local and other
Tax Authorities, subject to timely extensions permitted by law and except where
any failure to file timely would not have a material cost; PROVIDED, HOWEVER,
that NEON shall promptly notify Globix if it is availing itself of such
extensions.
(i) COMPENSATION. Except as required by Law or an existing agreement,
NEON shall not, and shall not permit any of its Subsidiaries to: (i) enter into,
adopt or amend or terminate any (A) employment, consulting, indemnification,
bonus, profit sharing, compensation, termination, stock option, stock
appreciation right, restricted stock, performance unit, stock equivalent, stock
purchase, pension, retirement, deferred compensation or other employee benefit
agreement, trust, plan, fund, award or other arrangement for the benefit or
welfare of any director, officer or employee of NEON or any of its Subsidiaries
in any manner (other than amendments to maintain the tax qualified status of any
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NEON Plan under the Code), other than in the ordinary course of business
consistent with past practice or to the extent not material, or (B) change in
control, "continuity", retention or severance agreement or other similar plan,
program, policy, agreement or arrangement for the benefit or welfare of any
director, officer or employee of NEON or any of its Subsidiaries in any manner
(other than amendments to maintain the tax qualified status of any NEON Plan
under the Code); (ii) increase any compensation or benefits payable or to become
payable under any existing (A) employment, stock loan, or consulting or other
similar agreement or arrangement, other than in the ordinary course of business
consistent with past practice or to the extent not material, or (B) severance or
termination pay policy, deferred compensation, change in control, retention or
other similar agreement or arrangement; (iii) increase the compensation, bonus,
incentive or other benefits payable to (or to become payable to) former or
current directors, officers, employees or consultants of NEON or any of its
Subsidiaries, other than an increase in annual salary or hourly wage rates
granted to current employees (other than officers) in the ordinary course of
business, consistent with past practice; (iv) make any contribution, other than
regularly scheduled contributions, to any NEON Plan; or (v) make a commitment or
agree to do any of the foregoing.
(j) FUNDAMENTAL TRANSACTIONS. NEON shall not, and shall not permit any
of its material Subsidiaries to, adopt a plan of complete or partial
liquidation, dissolution, restructuring, recapitalization or other
reorganization (other than the Merger) or alter through merger, liquidation,
reorganization, or restructuring the corporate structure or ownership of any of
its Subsidiaries (other than the liquidation of dormant Subsidiaries or the
merger of dormant Subsidiaries into NEON or another Subsidiary of NEON).
(k) MATERIAL CONTRACTS. Except in the ordinary course of business
consistent with past practices or in connection with an action permitted
pursuant to this Section 4.1, neither NEON nor any of its Subsidiaries shall
enter into, renew or modify any Contract which, if in effect on the date hereof,
would have been a NEON Material Contract.
(l) COMMITMENTS. NEON shall not and shall not permit any of its
Subsidiaries to enter into an agreement, contract, commitment or arrangement to
take any of the actions prohibited by the foregoing provisions of this Section
4.1.
Section 4.2 COVENANTS OF GLOBIX. During the period from the date of
this Agreement and continuing until the Effective Time, Globix agrees as to
itself and its Subsidiaries that (except as contemplated by this Agreement
(including the Schedules thereto), as required by Law or by the rules and
regulations of a Governmental Entity, or to the extent that NEON shall otherwise
consent in writing, which consent shall not be unreasonably withheld or
delayed):
(a) ORDINARY COURSE.
(i) Except as otherwise provided or permitted in this
Section 4.2, Globix and its Subsidiaries shall carry on their
respective businesses in the usual, regular and ordinary course in all
material respects, in substantially the same manner as heretofore
conducted, and shall use all commercially reasonable efforts to
preserve intact their present lines of business, maintain their rights
and franchises and preserve their relationships with customers,
suppliers and others having business dealings with them to the end
that their ongoing businesses shall not be impaired in any material
respect at the Effective Time, and shall pay, discharge or satisfy
claims, liabilities or obligations (whether absolute, accrued,
asserted or unasserted, contingent or otherwise), only in the usual,
regular and ordinary course of business.
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(ii) Globix shall not, and shall not permit any of its
Subsidiaries to, enter into any new material line of business.
(b) DIVIDENDS; CHANGES IN SHARE CAPITAL. Globix shall not, and shall
not permit any of its Subsidiaries to, (i) declare or pay any dividends on or
make other distributions in respect of any of its capital stock, except for
dividends by Subsidiaries of Globix to Globix or another wholly owned Subsidiary
of Globix, (ii) split, combine or reclassify any of its capital stock or issue
or authorize or propose the issuance of any other securities in respect of, in
lieu of or in substitution for, shares of its capital stock, except for any such
transaction by a wholly owned Subsidiary of Globix which remains a wholly owned
Subsidiary after consummation of such transaction, or (iii) repurchase, redeem
or otherwise acquire any shares of its capital stock or any securities
convertible into or exercisable for any shares of its capital stock other than
the purchase from time to time by Globix of Globix Common Stock in the ordinary
course of business consistent with past practice in connection with the Globix
Stock Option Plans.
(c) ISSUANCE OF SECURITIES. Globix shall not, and shall not permit any
of its Subsidiaries to, issue or sell, or authorize or propose the issuance or
sale of, any shares of its capital stock of any class, any indebtedness with
voting rights or any securities convertible into or exercisable for, or any
rights, warrants or options to acquire, any such shares or any indebtedness with
voting rights, or any stock appreciation, phantom stock or similar stock rights
with respect to Globix or its Subsidiaries, or enter into any agreement or
commitment with respect to any of the foregoing, other than (i) the issuance of
Globix Common Stock upon the exercise of Globix Options and the Globix CTA
Warrants outstanding as of the date hereof in accordance with their terms, (ii)
issuances by a wholly-owned Subsidiary of Globix of capital stock to Globix or
another wholly-owned Subsidiary of Globix, and (iii) any exchange of outstanding
11% Senior Secured Notes due 2008 of Globix ("SENIOR SECURED NOTES") for shares
of Globix Common Stock in one or more public or private transactions pursuant to
the Globix Debt Purchase, provided that, in the event that Globix desires to
exchange additional Senior Secured Notes for Globix Common Stock, the parties
agree to negotiate in good faith all of the modifications to the provisions of
this Agreement that are necessary or appropriate to reflect any such additional
exchange.
(d) GOVERNING DOCUMENTS. Globix and its Subsidiaries shall not amend,
in the case of Subsidiaries, in any material respect, their respective charter,
articles or certificates of incorporation, by-laws or other governing documents.
(e) NO ACQUISITIONS. Globix shall not, and shall not permit any of its
Subsidiaries to, acquire or agree to acquire by merging or consolidating with,
or by purchasing a substantial equity interest in or a substantial portion of
the assets of, or by any other manner, any business or any corporation,
partnership, association or other business organization or division thereof.
(f) NO DISPOSITIONS. Other than (i) internal reorganizations or
consolidations involving existing Subsidiaries of Globix, (ii) in the ordinary
course of business, (iii) pursuant to Permitted Liens of the type described in
clauses (i) and (ii) of the definition of Permitted Liens or (iv) as set forth
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in Section 3.2(f) of the Globix Disclosure Schedule, Globix shall not, and shall
not permit any Subsidiary of Globix to, sell, lease, encumber or otherwise
dispose of, or agree to sell, lease, encumber or otherwise dispose of, any of
its assets (including capital stock of Subsidiaries of Globix) which are
material, individually or in the aggregate, to Globix and its Subsidiaries.
(g) INVESTMENTS; INDEBTEDNESS. Globix shall not, and shall not permit
any of its Subsidiaries to (i) make any loans, advances or capital contributions
to, or investments in, any other Person, other than (A) by Globix or a
Subsidiary of Globix to or in Globix or any wholly owned Subsidiary of Globix,
or (B) financing transactions in the ordinary course of business (including in
connection with any financing transactions of the type or similar to those
previously engaged in by Globix and its Subsidiaries, in amounts consistent
therewith, taking into account any growth in the business of Globix and its
Subsidiaries) or (ii) create, incur, assume or suffer to exist any indebtedness,
issuances of debt securities, guarantees, loans or advances, or engage in any
asset securitization transaction (whether accounted for as a sale of assets or
as a financing transaction) not in existence as of the date of this Agreement
except (A) intercompany indebtedness between Globix and any of its wholly owned
Subsidiaries or between such wholly owned Subsidiaries, or (B) in the ordinary
course of business.
(h) ACCOUNTING METHODS; INCOME TAX ELECTIONS. Globix shall not (i)
materially change its methods of accounting or accounting principles or
practices used by it, except as required by changes in GAAP as concurred in by
Globix's independent accountants, (ii) change its fiscal year, (iii) make or
revoke any material express or deemed election relating to Taxes, (iv) settle or
compromise any Tax liability material to Globix and its Subsidiaries taken as a
whole or (v) change (or make a request to any Tax Authority to change) any
material aspect of its method of accounting for Tax purposes. Globix shall, and
shall cause each of its Subsidiaries to, duly and timely file all Tax Returns
and other documents required to be filed with federal, state, local and other
Tax Authorities, subject to timely extensions permitted by law and except where
any failure to file timely would not have a material cost; PROVIDED, HOWEVER,
that Globix shall promptly notify NEON if it is availing itself of such
extensions.
(i) COMPENSATION. Except as required by Law or an existing agreement,
Globix shall not, and shall not permit any of its Subsidiaries to: (i) enter
into, adopt or amend or terminate any (A) employment, consulting,
indemnification, bonus, profit sharing, compensation, termination, stock option,
stock appreciation right, restricted stock, performance unit, stock equivalent,
stock purchase, pension, retirement, deferred compensation or other employee
benefit agreement, trust, plan, fund, award or other arrangement for the benefit
or welfare of any director, officer or employee of Globix or any of its
Subsidiaries in any manner (other than amendments to maintain the tax qualified
status of any Globix Plan under the Code), other than in the ordinary course of
business consistent with past practice or to the extent not material, or (B)
change in control, "continuity", retention or severance agreement or other
similar plan, program, policy, agreement or arrangement for the benefit or
welfare of any director, officer or employee of Globix or any of its
Subsidiaries in any manner (other than amendments to maintain the tax qualified
status of any Globix Plan under the Code); (ii) increase any compensation or
benefits payable or to become payable under any existing (A) employment, stock
loan, or consulting or other similar agreement or arrangement, other than in the
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ordinary course of business consistent with past practice or to the extent not
material, or (B) severance or termination pay policy, deferred compensation,
change in control, retention or other similar agreement or arrangement; (iii)
increase the compensation, bonus, incentive or other benefits payable to (or to
become payable to) former or current directors, officers, employees or
consultants of Globix or any of its Subsidiaries, other than an increase in
annual salary or hourly wage rates granted to current employees (other than
officers) in the ordinary course of business, consistent with past practice;
(iv) make any contribution, other than regularly scheduled contributions, to any
Globix Plan; or (v) make a commitment or agree to do any of the foregoing.
(j) FUNDAMENTAL TRANSACTIONS. Globix shall not, and shall not permit
any of its material Subsidiaries to, adopt a plan of complete or partial
liquidation, dissolution, restructuring, recapitalization or other
reorganization (other than the Merger) or alter through merger, liquidation,
reorganization, or restructuring the corporate structure or ownership of any of
its Subsidiaries (other than the liquidation of dormant Subsidiaries or the
merger of dormant Subsidiaries into Globix or another Subsidiary of Globix.)
(k) MATERIAL CONTRACTS. Except in the ordinary course of business
consistent with past practice or in connection with an action permitted pursuant
to this Section 4.2, neither Globix nor any of its Subsidiaries shall enter
into, renew or modify any Contract which, if in effect on the date hereof, would
have been a Globix Material Contract.
(l) COMMITMENTS. Globix shall not and shall not permit any of its
Subsidiaries to enter into an agreement, contract, commitment or arrangement to
take any of the actions prohibited by the foregoing provisions of this Section
4.2.
Section 4.3 NO CONTROL.
(a) Nothing contained in this Agreement shall give Globix, directly or
indirectly, the right to control or direct NEON's or its Subsidiaries'
operations prior to the Effective Time. NEON shall exercise, consistent with the
terms and conditions of this Agreement, complete control and supervision over
its and its Subsidiaries' operations prior to the Effective Time.
(b) Nothing contained in this Agreement shall give NEON, directly or
indirectly, the right to control or direct Globix's or its Subsidiaries'
operations prior to the Effective Time. Globix shall exercise, consistent with
the terms and conditions of this Agreement, complete control and supervision
over its and its Subsidiaries' operations prior to the Effective Time.
ARTICLE V
ADDITIONAL AGREEMENTS
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Section 5.1 PREPARATION OF PROXY STATEMENT; STOCKHOLDERS MEETINGS
(a) NEON and Globix shall promptly prepare and file with the SEC the
Proxy Statement and Globix shall prepare and file with the SEC the Registration
Statement, in which the Proxy Statement will be included as a prospectus. Each
of Globix and NEON shall use its reasonable best efforts to have the
Registration Statement declared effective under the Securities Act as promptly
as practicable after such filing. As promptly as practicable after the
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Registration Statement shall have become effective, NEON shall mail the Proxy
Statement to its stockholders and Globix shall mail the Proxy Statement to its
stockholders. NEON shall promptly notify Globix if, at any time prior to the
Effective Time, any event with respect to NEON, its officers and directors or
any of its Subsidiaries shall occur that is required to be described in the
Proxy Statement or the Registration Statement, filed with the SEC or, as
required by law, disseminated to the stockholders of NEON or Globix. Globix
shall promptly notify NEON if, at any time prior to the Effective Time, any
event with respect to Globix, its officers and directors or any of its
Subsidiaries shall occur that is required to be described in the Proxy Statement
or the Registration Statement, filed with the SEC or, as required by law,
disseminated to the stockholders of NEON or Globix. Globix shall also take any
action (other than qualifying to do business in any jurisdiction in which it is
now not so qualified) required to be taken under any applicable state securities
laws in connection with the issuance of Globix Common Stock in the Merger, and
NEON shall furnish all information concerning NEON and the holders of NEON
Common Stock and NEON Convertible Preferred Stock as may be reasonably requested
in connection with any such action.
(b) NEON will, as soon as practicable following the date of this
Agreement and the finalizing of the Proxy Statement for distribution, duly call,
give notice of, convene and hold a meeting of stockholders (the "NEON
STOCKHOLDERS MEETING") for the purpose of considering the matters to be
considered under the NEON Required Vote, solicit proxies in favor of approval
and adoption of this Agreement and the other matters contemplated by the NEON
Required Vote and at such meeting call for a vote and cause proxies solicited by
NEON giving the proxyholder voting discretion or authority to be voted in favor
of approval and adoption of this Agreement and the other matters contemplated by
the NEON Required Vote or otherwise according to the instructions provided in
such proxies. NEON has, through its Board of Directors, recommended to its
stockholders the adoption and approval of this Agreement and shall not withdraw,
modify or change such recommendation; PROVIDED, HOWEVER, that the Board of
Directors of NEON may withdraw, modify or change such recommendation in order to
comply with its fiduciary duties if it (i) has concluded in good faith that it
is required to do under applicable law, and (ii) enters into a merger,
acquisition or other agreement (including an agreement in principle) to effect a
competing acquisition or other business combination proposal or the Board of
Directors resolves to do so (a "NEON ALTERNATIVE PROPOSAL").
(c) In the event of a Globix Stockholder Vote, Globix will, as soon as
practicable following the date of this Agreement, or (if later) the date such
Globix Stockholder Vote shall become required, and the finalizing of the Proxy
Statement for distribution, duly call, give notice of, convene and hold a
meeting of stockholders (the "GLOBIX STOCKHOLDERS MEETING") for the purpose of
considering the matters to be considered under the Globix Stockholder Vote,
solicit proxies in favor of the matters contemplated by the Globix Stockholder
Vote and at such meeting call for a vote and cause proxies solicited by Globix
giving the proxyholder voting discretion or authority to be voted in favor of
the matters contemplated by the Globix Stockholder Vote or otherwise according
to the instructions provided in such proxies. In the event of a Globix
Stockholder Vote, Globix has, through its Board of Directors, recommended to its
stockholders the [adoption and approval of this agreement,] ISSUANCE OF THE
---------------
SHARES OF GLOBIX COMMON STOCK INCLUDED IN THE MERGER CONSIDERATION, and it shall
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not withdraw, modify or change such recommendation; PROVIDED, HOWEVER, that the
Board of Directors of Globix may withdraw, modify or change such recommendation
in order to comply with its fiduciary duties if it (i) has concluded in good
faith that it is required to do so under applicable law, and (ii) enters into a
merger, acquisition or other agreement (including an agreement in principle) to
effect a competing acquisition or other business combination proposal or the
Board of Directors resolves to do so (a "GLOBIX ALTERNATIVE PROPOSAL").
(d) Globix shall use commercially reasonable efforts to maintain the
effectiveness of the Registration Statement for a period of one year following
the Closing Date to enable holders of 10% of Globix Common Stock following the
Closing who are not affiliated with directors or officers of Globix or NEON to
sell their shares of Globix Common Stock received in the Merger.
Section 5.2 ACCESS TO INFORMATION.
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(a) Upon reasonable notice, NEON and Globix shall, during the period
after the execution and delivery of this Agreement and prior to the Effective
Time, (i) afford to the officers, employees, accountants, counsel, investment
bankers and other representatives of one another reasonable access, during
normal business hours, to their respective properties, books, records and
Contracts, (ii) furnish to one another information concerning the business,
properties, prospects, assets (tangible and intangible), liabilities, financial
statements, ratings, regulatory compliance, risk management, books, records,
contracts, agreements, commitments and personnel as each may reasonably request,
and (iii) make reasonably available, during normal business hours, to one
another their respective appropriate officers and employees for discussion of
their respective businesses, properties, prospects, assets, liabilities,
financial statements, ratings, regulatory compliance, risk management, books,
records, contracts, agreements, commitments and personnel as each may reasonably
request (subject to contractual limitations).
(b) Globix and NEON and their respective representatives will hold any
such information in confidence to the extent required by, and in accordance
with, the provisions of the confidentiality agreement dated on or about January
29, 2004, between NEON and Globix (the "CONFIDENTIALITY AGREEMENT").
(c) Any investigation by Globix shall not qualify the representations
and warranties of NEON, and any investigation by NEON shall not qualify the
representations and warranties of Globix.
Section 5.3 REASONABLE EFFORTS.
(a) Subject to the terms and conditions of this Agreement, each of
Globix and NEON shall, and shall cause its Subsidiaries to, use commercially
reasonable efforts (i) to take, or cause to be taken, all actions necessary,
proper or advisable to comply promptly with all legal requirements which may be
imposed on such party or its Subsidiaries with respect to the Merger and,
subject to the conditions set forth in Article VI hereof, to consummate the
Merger as promptly as practicable and (ii) to obtain (and to cooperate with the
other party to obtain) the NEON Required Consents and the Globix Required
Consents, and to comply with the terms and conditions of any NEON Required
Consent and Globix Required Consent.
(b) Without limiting the foregoing, NEON and Globix shall duly file
with the United States Federal Trade Commission and the Antitrust Division of
the Department of Justice the premerger notification and report form (the "HSR
FILING") required under the HSR Act with respect to the Merger as promptly as
practical following the date hereof. The HSR Filings shall be in substantial
compliance with the requirements of the HSR Act. Each party shall cooperate with
the other party to the extent necessary to assist the other party in the
preparation of its HSR Filing, to request early termination of the waiting
period required by the HSR Act and, if requested, to promptly amend or furnish
additional information thereunder. Globix and NEON shall furnish to each other
all such information as is necessary to prepare any such registration,
declaration or filing. Globix and NEON each shall pay the filing fees with
respect to the HSR Filing as provided in Section 5.6(a), as well as any other
such registration, declaration or filing. Globix and NEON shall keep each other
apprised of the status of any communications with, and any inquiries or requests
for additional information from, any Governmental Entity with respect to the
Merger.
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(c) Notwithstanding anything to the contrary, (i) neither NEON nor
Globix shall be under any obligation to litigate before or with, or contest any
order or decree, or defend against any such actions or proceedings commenced by
any Governmental Entity in respect of the antitrust, competition, merger control
or similar laws and rules or regulations, and (ii) neither Globix nor any of its
Subsidiaries or affiliates shall be obligated to propose or agree to accept any
undertaking or condition, to enter into any consent decree, to make any
divestiture or accept any operational restriction, or take or commit to take any
action that could reasonably be expected to limit (A) the freedom of action of
Globix or its Subsidiaries or Affiliates with respect to the operation of, or
Globix's or its Subsidiaries' or Affiliates' ability to retain, NEON or any
businesses, product lines or assets of NEON, or (B) the ability to retain, own
or operate any portion of the businesses, product lines, or assets, of Globix or
any of its Subsidiaries or Affiliates, or alter or restrict in any way the
business or commercial practices of NEON, Globix, their respective Subsidiaries
or their respective Affiliates. If any such party or any Affiliate thereof
receives a request for additional information or documentary material from any
such Governmental Entity with respect to the Merger, then such party will
endeavor in good faith to make, or cause to be made, as soon as possible and
after consultation with the other parties, an appropriate response in compliance
with such request. Globix, on the one hand, and NEON, on the other hand, shall
promptly inform the other of any material communication from the United States
Federal Trade Commission, the Department of Justice or any other Governmental
Entity regarding the Merger.
(d) Prior to the Closing, each party shall use commercially reasonable
efforts to refrain from taking any action or failing to take any action, which
action or failure to act would cause, or be reasonably likely to cause, the
Merger to fail to qualify as a reorganization within the meaning of Section
368(a) of the Code.
Section 5.4 PUBLIC ANNOUNCEMENTS. No public or other announcement
concerning the transactions contemplated hereby will be made except by the
mutual consent of Globix and NEON, subject in any event to the public reporting
and disclosure requirements of Globix. Subject to the foregoing, Globix will use
its reasonable efforts to submit to NEON any release or public announcements for
its comment prior to issuance, and NEON agrees to provide Globix with comments
on any such release or public announcement within one Business Day of receipt.
Section 5.5 EMPLOYEE BENEFITS MATTERS. Until December 31, 2004,
employees of NEON who remain employed by NEON following the Merger shall be
entitled to employee benefits that are substantially the same as those provided
to employees of NEON immediately prior to the Merger. After December 31, 2004,
and until the end of a period to be determined by the Transition Committee,
employees of NEON shall continue to be provided with such employee benefits or
shall be provided with employee benefits as determined by the Transition
Committee. After such transition period, the employee benefits of NEON employees
shall be determined by the Board of Directors of Globix. If there is any change
in the benefit plans provided to employees of NEON between December 31, 2004 and
the end of the transition period as determined by the Transition Committee, all
such employees participating in such benefit plans shall be offered immediate
participation in the most nearly comparable Globix benefit plans. Except as
required by law, no preexisting condition exclusions shall be applicable to
employees electing immediate participation in such Globix benefit plans, and no
waiting period or exclusions shall be applicable to employees electing immediate
participation in such new benefit plans. All of such employees' periods of
service with NEON shall be counted for all purposes of any Globix employee
benefit plans in which they may become participants.
Section 5.6 FEES AND EXPENSES. If the Merger is not consummated, all
costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby, including transfer Taxes and the fees and
disbursements of counsel, financial advisors and accountants, as well as fees of
separate counsel, financial advisors, or accountants for employees or others,
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shall be paid by the party incurring such costs and expenses out of the separate
funds of such party, not to be reimbursed by the other, provided that all
printing expenses and all filing fees (including filing fees under the Exchange
Act, any Blue Sky laws and the HSR Act) shall be divided equally between Globix
and NEON. If the Merger is consummated, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby
described in the preceding sentence, to the extent not already paid, shall be
paid by Globix and the Surviving Corporation.
Section 5.7 DIRECTORS' AND OFFICERS' INDEMNITY.
(a) Globix shall and shall cause the Surviving Corporation to
indemnify and hold harmless each present and former director and officer of NEON
and other Persons entitled to indemnification ("COVERED PERSONS") under the
certificate of incorporation and bylaws or similar organizational documents of
NEON or any of its Subsidiaries as in effect on the date of this Agreement (the
"NEON DOCUMENTS") against any costs or expenses (including attorneys' fees),
judgments, fines, losses, claims, amounts paid in settlement, damages or
liabilities (collectively, "COSTS") reasonably incurred in connection with any
threatened, pending or completed claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, brought
against a Covered Person and arising out of or pertaining to matters existing or
occurring with respect to NEON or any of its Subsidiaries at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent permitted under the NEON Documents and applicable
Law. Each Covered Person will be entitled to advancement of expenses incurred in
the defense of any claim, action, suit, proceeding or investigation from Globix
and the Surviving Corporation within ten (10) Business Days of receipt from the
Covered Person of a request therefor to the fullest extent permitted by the DGCL
and the Sarbanes-Oxley Act of 2002; PROVIDED, HOWEVER, that any person to whom
expenses are advanced provides an undertaking, to the extent required by the
DGCL, to repay such advances if it is ultimately determined that such person is
not entitled to indemnification.
(b) Globix shall cause the Surviving Corporation to maintain for a
period of at least five years policies of directors' and officers' liability
insurance and fiduciary liability insurance for the benefit of the Covered
Persons with respect to claims arising from facts or events that occurred on or
before the Effective Time, including in respect of the transactions contemplated
by this Agreement, such insurance coverage to be the same coverage as in effect
for NEON prior to the Effective Time.
(c) If Globix, the Surviving Corporation, any of its Subsidiaries or
any of their respective successors or assigns (i) consolidates with or merges
with or into any other Person and shall not be the continuing or surviving
corporation or entity of such consolidation or merger, or (ii) transfers or
conveys all or substantially all of its properties and assets to any Person,
then, and in each such case, to the extent necessary, proper provision shall be
made so that the successors and assigns of Globix, the Surviving Corporation,
such Subsidiary or such successor or assign assume the obligations set forth in
this Section 5.7.
(d) This Section 5.7 shall survive the consummation of the Merger and
the Effective Time and is intended to benefit and shall be enforceable by the
Covered Persons and their respective heirs, executors and personal
representatives and shall be binding on and enforceable against Globix and the
Surviving Corporation and their respective successors and assigns.
Section 5.8 CONSENTS, WAIVERS AND OTHER APPROVALS.
(a) NEON and its Subsidiaries shall use their commercially reasonable
efforts to obtain all consents, waivers and other approvals necessary in order
to avoid the occurrence, as a result of the Merger, of any (i) Violation under
any NEON Material Contract, or (ii) the loss or diminution in value of any NEON
Permit.
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(b) Globix and its Subsidiaries shall use their commercially reasonable efforts
to obtain all consents, waivers and other approvals necessary in order to avoid
the occurrence, as a result of the Merger, of any (i) Violation under any Globix
Material Contract, or (ii) the loss or diminution in value of any Globix Permit.
Section 5.9 COMMITTEE FOR TRANSITION ISSUES. Subject in all cases to
Section 4.3, upon the execution of this Agreement, NEON and Globix shall cause
their respective Chief Executive Officers, and Globix shall cause its Chairman
of the Board, to form a committee (the "TRANSITION COMMITTEE") to develop
transition plans for the post-Closing period, including employee benefits
arrangements for NEON employees as specified in Section 5.5. In addition, the
Chief Executive Officer of NEON shall have the right to appoint a qualified
member of the Board of Directors of NEON to such joint committee. A qualified
member shall be one of those directors set forth on Exhibit 1.7 of this
Agreement.
Section 5.10 SCHEDULES. Disclosure on a schedule that is part of, or
provided pursuant to, this Agreement will not signify or be deemed an
acknowledgment that the disclosure is material or required to be included in the
schedule. NEON or Globix may, from time to time prior to the Closing by written
notice to the other party, supplement or amend their respective Disclosure
Schedules or additional disclosure documents provided pursuant to this Agreement
to correct any matter that could constitute a breach of any representation or
warranty of NEON or Globix contained in this Agreement. No such supplement or
amendment will act to cure or correct a breach of a representation or warranty
for purposes of Sections 6.2 or 6.3 until after the Closing Date. If the Closing
occurs, then all matters disclosed pursuant to any such supplement or amendment
at or prior to the Closing shall be waived, and the Disclosure Schedules or
additional disclosure documents, as the case may be, as so supplemented or
amended at the time of Closing shall thereafter constitute the Disclosure
Schedules or additional disclosure documents, as the case may be, for purposes
of this Agreement (including Article VIII).
Section 5.11 FINANCIAL REVIEW. Following the date of this Agreement
and prior to the delivery of the Proxy Statement, Globix and NEON shall each
cause their respective independent auditors to perform a financial due diligence
review of the other party in accordance with the procedures described on Exhibit
5.11 attached hereto, which review shall be completed no later than August 15,
2004, and to prepare a report of such review that shall be presented for review
by the Board of Directors and Special Committee of each of NEON and Globix. Each
party agrees that it shall notify the other party no later than September 15,
2004 of any issue that arises as a result of such report and requires further
discussion between the parties.
Section 5.12 COOPERATION. NEON agrees, during the period after the
execution and delivery of this Agreement and prior to the Effective Time, to use
its commercially reasonable efforts to manage its business so that, assuming the
Merger were to occur on September 30, 2004, NEON would have approximately
$7,000,000 in unrestricted cash on a consolidated basis immediately prior to the
Merger and any payment of Preferred Cash Consideration pursuant to Section
1.8(c)(ii). Globix agrees, during the period after the execution and delivery of
this Agreement and prior to the Effective Time, to use its commercially
reasonable efforts to manage its business so that, assuming that the Merger were
to occur on September 30, 2004, Globix would have approximately $18,000,000 in
unrestricted cash on a consolidated basis immediately prior to the Merger.
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ARTICLE VI
CONDITIONS PRECEDENT
--------------------
Section 6.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The obligations of NEON and Globix to effect the Merger are subject to
the satisfaction or waiver on or prior to the Closing Date of the following
conditions:
(a) STOCKHOLDER APPROVAL. NEON shall have obtained the NEON Required
Vote approving the Merger and the other transactions contemplated hereby,
including the amendment to NEON's certificate of incorporation contemplated
hereby. Globix shall have received the Globix Stockholder Vote, if applicable.
(b) NO ORDER. No court or other Governmental Entity having
jurisdiction over NEON or Globix, or any of their respective Subsidiaries, shall
have enacted, issued, promulgated, enforced or entered any law, rule,
regulation, executive order, decree, injunction or other order (whether
temporary, preliminary or permanent) which is then in effect and has the effect
of, directly or indirectly, restraining, prohibiting or restricting the Merger
or any of the transactions contemplated hereby; PROVIDED, HOWEVER, that the
provisions of this Section 6.1(b) shall not be available to any party whose
failure to fulfill its obligations pursuant to Section 5.3 shall have been the
cause of, or shall have resulted in, the enforcement or entering into of any
such law, rule, regulation, executive order, decree, injunction or other order.
(c) HSR AND OTHER APPROVALS/CONSENTS OR WAIVERS.
(i) The waiting period (and any extension thereof)
applicable to the consummation of the Merger under the HSR Act shall
have expired or been terminated.
(ii) All authorizations, consents, orders, declarations or
approvals of, or filings with, or terminations or expirations of
waiting periods imposed by, any Person or Governmental Entity, which
the failure to obtain, make or occur would have the effect of,
directly or indirectly, restraining, prohibiting or restricting the
Merger or any of the transactions contemplated hereby or would have,
individually or in the aggregate, a Globix Material Adverse Effect
(assuming the Merger had taken place), shall have been obtained, shall
have been made or shall have occurred.
(d) REGISTRATION STATEMENT. The Registration Statement shall have
become effective in accordance with the provisions of the Securities Act. No
stop order suspending the effectiveness of the Registration Statement shall have
been issued by the SEC and no proceedings for that purpose shall have been
initiated or, to the Knowledge of Globix or NEON, threatened by the SEC. All
necessary state securities or blue sky filings shall have been made and required
authorizations shall have been received.
(e) DISSENTING SHARES. The number of shares of NEON Common Stock that
are Dissenting Shares shall be no greater than fifteen percent (15%) of the
outstanding NEON Common Stock and the number of shares of NEON Convertible
Preferred Stock that are Dissenting Shares shall be no greater than fifteen
percent (15%) of the outstanding NEON Convertible Preferred Stock, each as of
the Record Date.
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Section 6.2 ADDITIONAL CONDITIONS TO OBLIGATIONS OF GLOBIX. The
obligations of Globix to effect the Merger are subject to the satisfaction of,
or waiver by Globix, on or prior to the Closing Date of the following additional
conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of NEON set forth in this Agreement (i) that is qualified as to
materiality and Material Adverse Effect shall have been true and correct at and
as of the Closing Date as if made at and as of the Closing Date, and (ii) that
is not so qualified shall have been true and correct in all material respects at
and as of the Closing Date as if made at and as of the Closing Date (except, in
each case, for those representations and warranties which address matters only
as of a particular date, in which case, they shall be true and correct, or true
and correct in all material respects, as applicable, as of such date); and
Globix shall have received a certificate of the chief executive officer and the
chief financial officer of NEON certifying to the satisfaction of the conditions
set forth in this Section 6.2(a).
(b) PERFORMANCE OF OBLIGATIONS OF NEON. NEON shall have performed or
complied with all agreements and covenants required to be performed by it under
this Agreement at or prior to the Closing Date that are qualified as to
materiality and shall have performed or complied in all material respects with
all other agreements and covenants required to be performed by it under this
Agreement at or prior to the Closing Date that are not so qualified as to
materiality, and Globix shall have received a certificate of the chief executive
officer and the chief financial officer of NEON to such effect.
(c) OPINIONS. Globix shall have received an opinion of Day, Berry &
Howard LLP, in form and substance reasonably satisfactory to Globix, dated as of
the Effective Time, on the basis of facts, representations and assumptions that
are consistent with the state of facts existing as of the Effective Time
substantially to the effect that, for federal income tax purposes, the Merger
will constitute a "reorganization" within the meaning of Section 368(a) of the
Code. In rendering such opinion, Day, Berry & Howard LLP may receive and rely
upon customary representations from Globix and NEON.
(d) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement
through and including the time immediately prior to the Effective Time, there
shall not have been any changes, circumstances or effects which, individually or
in the aggregate, have had or could reasonably be expected to have, a NEON
Material Adverse Effect.
(e) LITIGATION. There shall not be pending or threatened (as evidenced
by a writing), any suit, action or proceeding by a federal, state or foreign
governmental entity or any other Person (other than a suit, action or proceeding
based on facts solely relating to Globix or Merger Sub or any of their
respective Subsidiaries) which could reasonably be expected to (i) restrain,
prohibit or declare illegal the consummation of the Merger, (ii) in connection
with the Merger, prohibit or impose any material limitations on Globix's or
Merger Sub's ownership or operation (or that of any of their respective
Affiliates) of all or a material portion of NEON's businesses or assets after
giving effect to the Merger, or (iii) in connection with the Merger, compel
Globix or Merger Sub or their respective Subsidiaries and Affiliates to dispose
of or hold separate any portion of the business or assets of NEON or any of its
Subsidiaries (after giving effect to the Merger).
(f) GLOBIX INDENTURE REQUIREMENTS. NEON and each of NEON's
Subsidiaries shall have entered into a Subsidiary Guaranty Agreement and a
Security Agreement pursuant to the terms of the Indenture, dated as of April 23,
2002, among Globix, certain of its Subsidiaries and HSBC Bank USA, as Trustee
(the "GLOBIX INDENTURE").
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(g) FIRPTA CERTIFICATE. Globix shall have received a statement meeting
the requirements of Treasury Regulation Section 1.1445-2(c)(3) that neither NEON
nor any of NEON's Subsidiaries is a United States real property holding
corporation.
(h) THIRD PARTY/GOVERNMENTAL CONSENTS. NEON or the applicable
Subsidiary shall have obtained all consents, waivers and other approvals
necessary in order to avoid the occurrence, as a result of the Merger, of loss
or material diminution in value of any NEON Permits and NEON Material Contracts.
(i) EXERCISE OF CLASS A WARRANTS; AMENDMENT OF CLASS A WARRANT
AGREEMENT. The holders of ninety percent (90%) or more of the Class A Warrants
shall have exercised their respective Class A Warrants prior to or as of the
Effective Time, and NEON shall have used commercially reasonable efforts to
assist with and facilitate the exercise of all of the Class A Warrants prior to
or as of the Effective Time. The Class A Warrant Agreement shall have been
amended with the consent of at least a majority of the holders of the Class A
Warrant Agreement as provided in Exhibit 1.8(c)(iii) to permit the conversion of
Class A Warrants into shares of Globix Common Stock.
Section 6.3 ADDITIONAL CONDITIONS TO OBLIGATIONS OF NEON. The
obligations of NEON to effect the Merger are subject to the satisfaction of, or
waiver by NEON, on or prior to the Closing Date of the following additional
conditions:
(a) REPRESENTATIONS AND WARRANTIES. Each of the representations and
warranties of Globix set forth in this Agreement (i) that is qualified as to
materiality and Material Adverse Effect shall have been true and correct at and
as of the Closing Date as if made at and as of the Closing Date, and (ii) that
is not so qualified shall have been true and correct in all material respects at
and as of the Closing Date as if made at and as of the Closing Date (except, in
each case, for those representations and warranties which address matters only
as of a particular date, in which case, they shall be true and correct, or true
and correct in all material respects, as applicable, as of such date), and NEON
shall have received a certificate of the chief executive officer and the chief
financial officer of Globix certifying to the satisfaction of the conditions set
forth in this Section 6.3(a).
(b) PERFORMANCE OF OBLIGATIONS OF GLOBIX AND MERGER SUB. Each of
Globix and Merger Sub shall have performed or complied with all agreements and
covenants required to be performed by it under this Agreement at or prior to the
Closing Date that are qualified as to materiality and shall have performed or
complied in all material respects with all agreements and covenants required to
be performed by it under this Agreement at or prior to the Closing Date that are
not so qualified as to materiality, and NEON shall have received a certificate
of the chief executive officer and the chief financial officer of Globix to such
effect.
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(c) OPINION. NEON shall have received an opinion of Andrews Kurth LLP,
in form and substance reasonably satisfactory to NEON, dated as of the Effective
Time, on the basis of facts, representations and assumptions that are consistent
with the state of facts existing as of the Effective Time substantially to the
effect that, for federal income tax purposes, the Merger will constitute a
"reorganization" within the meaning of Section 368(a) of the Code. In rendering
such opinion, Andrews Kurth LLP may receive and rely upon customary
representations from Globix, Merger Sub and NEON.
(d) NO MATERIAL ADVERSE CHANGE. Since the date of this Agreement
through and including the time immediately prior to the Effective Time, there
shall not have been any changes, circumstances or effects which, individually or
in the aggregate, have had or could reasonably be expected to have, a Globix
Material Adverse Effect.
(e) LITIGATION. There shall not be pending or threatened (as evidenced
by a writing), any suit, action or proceeding by a federal, state or foreign
governmental entity or any other Person (other than a suit, action or proceeding
based on facts solely relating to NEON or any of its Subsidiaries) which could
reasonably be expected to (i) restrain, prohibit or declare illegal the
consummation of the Merger, (ii) in connection with the Merger, prohibit or
impose any material limitations on Globix's or Merger Sub's ownership or
operation (or that of any of their respective Affiliates) of all or a material
portion of NEON's businesses or assets after giving effect to the Merger, or
(iii) in connection with the Merger, compel Globix or Merger Sub or their
respective Subsidiaries and Affiliates to dispose of or hold separate any
portion of the business or assets of NEON or any of its Subsidiaries (after
giving effect to the Merger).
(f) THIRD PARTY/GOVERNMENTAL CONSENTS. Globix or the applicable
Subsidiary shall have obtained all consents, waivers and other approvals
necessary in order to avoid the occurrence, as a result of the Merger, of loss
or material diminution in value of any Globix Permits and Globix Material
Contracts.
(g) DEBT PURCHASE. Prior to the Effective Time, Globix shall have
acquired Senior Secured Notes in an amount equal to $12,500,000.00 including
principal and interest accrued thereon in exchange for shares of Globix Common
Stock valued at $2.75 per share (the "GLOBIX DEBT PURCHASE").
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ARTICLE VII
TERMINATION AND AMENDMENT
-------------------------
Section 7.1 TERMINATION. Anything herein or elsewhere to the contrary
notwithstanding, this Agreement may be terminated and the Merger contemplated
herein may be abandoned at any time prior to the Effective Time, whether before
or after stockholder approval thereof:
(a) By the mutual consent duly authorized by the Boards of Directors
of Globix and NEON.
(b) By either of NEON or Globix if:
(i) any Governmental Entity shall have issued an order,
decree or ruling or taken any other action in each case permanently
restraining, enjoining or otherwise prohibiting the Merger and such
order, decree, ruling or other action shall have become final and
non-appealable; PROVIDED, that the right to terminate this Agreement
pursuant to this Section 7.1(b)(i) shall not be available to any party
whose failure to fulfill any of its obligations contained in this
Agreement has been the cause of, or resulted in, the issuance of such
order, decree or ruling;
(ii) the Merger has not been effected on or prior to the
close of business on the date that is 150 days after the earlier of
the expiration or termination of the waiting period applicable to the
consummation of the Merger under the HSR Act; PROVIDED, that the right
to terminate this Agreement pursuant to this Section 7.1(b)(ii) shall
not be available to any party whose failure to fulfill any of its
obligations contained in this Agreement has been the cause of, or
resulted in, the failure of the Merger to have occurred on or prior to
the aforesaid date;
(iii) the other party shall have failed to comply in any
material respect with any of its covenants or agreements contained in
this Agreement required to be complied with prior to the date of such
termination, which failure to comply has not been cured within five
Business Days following receipt by such other party of written notice
of such failure to comply;
(iv) the holders of NEON Common Stock and NEON Convertible
Preferred Stock do not approve the matters submitted for the NEON
Required Vote;
(v) in the event of a Globix Stockholder Vote, if the
holders of the Globix Common Stock do not approve the matters
submitted for the Globix Stockholder Vote; or
(vi) if shares of NEON Common Stock representing greater
than fifteen percent (15%) of the outstanding NEON Common Stock or
shares of NEON Convertible Preferred Stock representing greater than
fifteen percent (15%) of the outstanding NEON Convertible Preferred
Stock, each as of the Record Date, shall be Dissenting Shares.
(c) By NEON if:
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(i) in the event of a Globix Stockholder Vote, and the Board
of Directors of Globix shall not have recommended, or shall have
resolved not to recommend, or shall have qualified, changed, modified
or withdrawn its recommendation [of] TO ITS STOCKHOLDERS OF THE
--------------------------
ISSUANCE OF THE SHARES OF GLOBIX COMMON STOCK INCLUDED IN the Merger
---------------------------------------------------------
or declaration that the Merger CONSIDERATION is advisable and in the
-------------
best interest of Globix and its stockholders, or shall have resolved
to do so;
(ii) the Board of Directors of Globix shall have recommended
to the stockholders of Globix any transaction involving the
acquisition of all or substantially all of Globix's business other
than the Merger or shall have resolved to do so;
(iii) there has been a breach of a representation or
warranty of Globix that gives rise to a failure of the fulfillment of
a condition of NEON's obligations to effect the Merger pursuant to
Section 6.3, which breach has not been cured within five Business Days
following receipt by Globix of written notice of the breach;
(iv) there shall have been any changes, circumstances or
effects, which individually or in the aggregate, have had or could
reasonably be expected to have a Globix Material Adverse Effect;
(v) on or prior to September 15, 2004, NEON shall have
notified Globix in writing that the results of the review by NEON of
the financial due diligence report by the auditors of NEON provided to
the Board of Directors of NEON pursuant to Section 5.11 are not
satisfactory and reflect a Globix Material Adverse Effect, as
determined in good faith by the Special Committee of NEON, after a
full discussion with Globix of all issues raised in such review; or
(vi) the Board of Directors of NEON has approved a NEON
Alternative Proposal.
(d) By Globix if:
(i) the Board of Directors of NEON shall not have
recommended, or shall have resolved not to recommend, or shall have
qualified, changed, modified or withdrawn its recommendation of the
Merger or declaration that the Merger is advisable and in the best
interest of NEON and its stockholders, or shall have resolved to do
so;
(ii) the Board of Directors of NEON shall have recommended
to the stockholders of NEON any transaction involving the acquisition
of all or substantially all of NEON's business other than the Merger
or shall have resolved to do so;
(iii) there has been a breach of a representation or
warranty of NEON that gives rise to a failure of the fulfillment of a
condition of Globix's obligations to effect the Merger pursuant to
Section 6.2, which breach has not been cured within five Business Days
following receipt by NEON of written notice of the breach;
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(iv) there shall have been any changes, circumstances or
effects, which individually or in the aggregate, have had or could
reasonably be expected to have a NEON Material Adverse Effect;
(v) on or prior to September 15, 2004, Globix shall have
notified NEON in writing that the results of the review by Globix of
the financial due diligence report by the auditors of Globix provided
to the Board of Directors of Globix pursuant to Section 5.11 are not
satisfactory and reflect a NEON Material Adverse Effect, as determined
in good faith by the Special Committee of Globix, after a full
discussion with NEON of all issues raised in such review; or
(vi) the Board of Directors of Globix has approved a Globix
Alternative Proposal.
Section 7.2 EFFECT OF TERMINATION. In the event of the termination of
this Agreement as provided in Section 7.1, written notice thereof shall
forthwith be given to the other party or parties specifying the provision hereof
pursuant to which such termination is made, and this Agreement (other than
Sections 5.2(b), 5.6 and 7.2 hereof) shall forthwith become null and void, and
there shall be no liability on the part of Globix, Merger Sub, NEON or their
respective officers and directors, except (i) as provided in Section 5.6, and
(ii) nothing shall relieve any party from liability for fraud or any willful
breach of a covenant contained in this Agreement.
Section 7.3 AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors,
at any time before or after receipt of the NEON Required Vote or Globix
Stockholder Vote (if applicable) or approval of the Merger by Merger Sub's
stockholder, but, after any such approval, no amendment shall be made which by
law or in accordance with the rules of any relevant stock exchange requires
further approval by such stockholders without such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
Section 7.4 EXTENSION; WAIVER. At any time prior to the Effective
Time, the parties hereto may to the extent legally allowed, (i) extend the time
for the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties
contained herein or in any document delivered pursuant hereto, and (iii) waive
compliance with any of the agreements or conditions contained herein. Any
agreement on the part of a party hereto to any such extension or waiver shall be
valid only if set forth in a written instrument signed on behalf of such party.
The failure of any party to this Agreement to assert any of its rights under
this Agreement or otherwise shall not constitute a waiver of those or any other
rights.
ARTICLE VIII
SURVIVAL
--------
Section 8.1 NON-SURVIVAL OF REPRESENTATIONS, WARRANTIES AND
AGREEMENTS. None of the representations, warranties, covenants or other
agreements in this Agreement or in any instrument delivered pursuant to this
Agreement, including any rights arising out of any breach of such
representations, warranties, covenants or other agreements, shall survive the
Effective Time, except (i) for those covenants and agreements contained herein
and therein that by their terms apply or are to be performed in whole or in part
after the Effective Time, and (ii) for this Article VIII.
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ARTICLE IX
GENERAL PROVISIONS
------------------
Section 9.1 AMENDMENT AND WAIVER. No amendment of any provision of
this Agreement shall be effective, unless the same shall be in writing and
signed by Globix and NEON. Any failure of any party to comply with any
obligation, agreement or condition hereunder may only be waived in writing by
the other parties, but such waiver shall not operate as a waiver of, or estoppel
with respect to, any subsequent or other failure. No failure by any party to
take any action with respect to any breach of this Agreement or default by
another party shall constitute a waiver of such party's right to enforce any
provision hereof or to take any such action.
Section 9.2 NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed duly given (i) on the date of delivery
if delivered personally, or if by facsimile upon confirmation of receipt, (ii)
on the first business day following the date of dispatch if delivered by a
recognized next-day courier service, or (iii) on the day of receipt if delivered
by registered or certified mail, return receipt requested, postage prepaid. All
notices hereunder shall be delivered in one of the means set forth above to the
addresses set forth below, or pursuant to such other instructions as may be
designated in writing by the party to receive such notice:
(a) if to Globix or Merger Sub, to:
Globix Corporation
139 Centre Street
New York, New York 10013
Attn: James C. Schroeder, Esq., General Counsel
Facsimile: (212) 625-7725
with a copy (which shall not constitute notice) to:
Day, Berry & Howard, LLP
One Canterbury Green
Stamford, Connecticut 06901-2047
Attn: Bonnie J. Roe, Esq.
Facsimile: (203) 977-7301
(b) if to NEON, to:
NEON Communications, Inc.
2200 West Park Drive
Westborough, MA 01581
Attn: Christopher E. Dalton, Esq., Senior Counsel
Facsimile: (508) 616-7895
with a copy (which shall not constitute notice) to:
Andrews Kurth LLP
450 Lexington Ave., 15th Floor
New York, New York 10017
Attention: Paul N. Silverstein, Esq.
Facsimile: (212) 850-2929
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Section 9.3 INTERPRETATION. When a reference is made in this Agreement
to Sections, Exhibits or Schedules, such reference shall be to a Section of or
Exhibit or Schedule to this Agreement (or Section of a Disclosure Schedule, if
so stated) unless otherwise indicated. The table of contents, index of defined
terms and headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
Whenever the words "include", "includes" or "including" are used in this
Agreement, they shall be deemed to be followed by the words "without
limitation". The words "hereof", "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement. The term "or" is not
exclusive.
Section 9.4 COUNTERPARTS. This Agreement may be executed in one or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when one or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 9.5 ENTIRE AGREEMENT; NO THIRD PARTY BENEFICIARIES.
(a) This Agreement constitutes the entire agreement and supersedes all
prior agreements and understandings, both written and oral, among the parties
with respect to the subject matter hereof, other than the Confidentiality
Agreement, which shall survive the execution and delivery of this Agreement. The
parties hereto acknowledge and agree that, except as otherwise expressly set
forth in this Agreement, the rights and obligations of NEON and Globix under any
other agreement between the parties not relating to the subject matter hereto
shall not be affected by any provision of this Agreement.
(b) This Agreement shall be binding upon and inure solely to the
benefit of each party hereto, and nothing in this Agreement, express or implied,
is intended to or shall confer upon any other Person any right, benefit or
remedy of any nature whatsoever under or by reason of this Agreement, other than
Section 5.7 and as necessary to permit or require Merger Sub to consummate the
transactions contemplated hereby.
Section 9.6 GOVERNING LAW. Except to the extent that rights of the
stockholders of NEON and Globix and the transactions contemplated hereby,
including the Merger, are governed by the laws of the State of Delaware, this
Agreement shall be governed and construed in accordance with the laws of the
State of New York that apply to contracts entered into and performed in the
State of New York.
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Section 9.7 SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any law or
public policy, all other terms and provisions of this Agreement shall
nevertheless remain in full force and effect so long as the economic or legal
substance of the transactions contemplated hereby is not affected in any manner
materially adverse to any party. Upon such determination that any term or other
provision is invalid, illegal or incapable of being enforced, the parties hereto
shall negotiate in good faith to modify this Agreement so as to effect the
original intent of the parties as closely as possible in an acceptable manner in
order that the transactions contemplated hereby are consummated as originally
contemplated to the greatest extent possible.
Section 9.8 ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto, in whole or in part (whether by operation of law or otherwise), without
the prior written consent of the other parties, and any attempt to make any such
assignment without such consent shall be null and void. Subject to the preceding
sentence, this Agreement will be binding upon, inure to the benefit of and be
enforceable by the parties and their respective successors and assigns.
Section 9.9 SUBMISSION TO JURISDICTION; WAIVERS. Each of Globix and
NEON irrevocably agrees that any legal action or proceeding with respect to this
Agreement or for recognition and enforcement of any judgment in respect hereof
brought by another party hereto or its successors or assigns may be brought and
determined in the Chancery Courts of the State of Delaware and any Federal court
of the United States of America sitting in the State of Delaware, and each of
Globix and NEON hereby irrevocably submits with regard to any such action or
proceeding for itself and in respect to its property, generally and
unconditionally, to the nonexclusive jurisdiction of the aforesaid courts. Each
of Globix and NEON hereby irrevocably waives, and agrees not to assert, by way
of motion, as a defense, counterclaim or otherwise, in any action or proceeding
with respect to this Agreement, (a) any claim that it is not personally subject
to the jurisdiction of the above-named courts for any reason other than the
failure to serve process in accordance with applicable law, (b) that it or its
property is exempt or immune from jurisdiction of any such court or from any
legal process commenced in such courts (whether through service of notice,
attachment prior to judgment, attachment in aid of execution of judgment,
execution of judgment or otherwise), and (c) to the fullest extent permitted by
applicable law, that (i) the suit, action or proceeding in any such court is
brought in an inconvenient forum, (ii) the venue of such suit, action or
proceeding is improper and (iii) this Agreement, or the subject matter hereof,
may not be enforced in or by such courts.
Section 9.10 ENFORCEMENT. The parties agree that irreparable damage
would occur in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms. It is accordingly agreed that
the parties shall be entitled to specific performance of the terms hereof, this
being in addition to any other remedy to which they are entitled at law or in
equity.
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Section 9.11 DEFINITIONS. As used in this Agreement:
"AFFILIATE" of a specified Person shall mean any Person who would be an
affiliate of the specified Person pursuant to Rule 12b-2 under the Securities
Exchange Act of 1934, as amended.
"BUSINESS DAY" means any day on which banks are not required or
authorized to close in New York, New York.
"CLAIM" means any claim, action, suit, proceeding or investigation.
"CLASS A WARRANT EXERCISE PRICE" means $0.01 per share of NEON Common
Stock.
"COLLOCATION SITES" means premises at which the telecommunications
equipment of one party are located and are terminated or will be terminated with
the telecommunications equipment necessary to provide interconnection or access
to the telecommunications equipment of a second party, where such premises are
owned, leased or licensed by the second party.
"CONTRACT" means any agreement, contract, obligation, promise, or
undertaking (whether written or oral) that is intended to be legally binding.
"CLEC" means a company, known as a Competitive Local Exchange Carrier,
authorized to provide telecommunications services in competition with an
Incumbent Local Exchange Carrier (or "ILEC"), where the ILEC is, with respect to
a certain geographic area, the local telecommunications service provider that
provided such services within that certain geographic area as of the date of
enactment of the Telecommunications Act of 1996 (Telecommunications Act of 1996,
Pub. LA. No. 104-104, 110 Stat. 56 (1996)) and continues to provide
telecommunications services in the same area.
"GLOBIX CONFIRMATION EFFECTIVE DATE" means April 25, 2002.
"GLOBIX CTA WARRANTS" means those warrants of Globix disclosed in
writing to NEON pursuant to Section 3.2(b)(iii).
"GLOBIX MATERIAL ADVERSE EFFECT" means, with respect to Globix, any
event, change, circumstance or effect that, individually or together with any
other event, change, circumstance or effect, is or could reasonably be expected
to be materially adverse to the business, operations, properties, prospects,
assets, liabilities, financial condition or results of operations of Globix and
its Subsidiaries taken as a whole (other than events, changes, circumstances or
effects that result from economic factors affecting the economy as a whole).
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"GLOBIX STOCKHOLDER VOTE" means if (i) prior to the Effective Time,
the Globix Common Stock is traded on the Nasdaq Small Cap Market OR THE AMERICAN
---------------
STOCK EXCHANGE or (ii) the Board of Directors of Globix shall otherwise so
--------------
require as of the date of this Agreement, the affirmative vote of the holders of
the percentage of the shares of Globix Common Stock required to approve the
matters submitted to a vote of the stockholders of Globix, which may consist of
the following matters: (A) the election of directors of Globix to serve on the
Board of Directors of Globix following the Merger, (B) the issuance of shares of
Globix Common Stock pursuant to the terms of this Agreement, and (C) the
issuance of shares of Globix Common Stock in respect of NEON Options granted
prior to the Merger under the NEON Stock Option Plans in accordance with the
terms of Section 1.9 of this Agreement.
"GOVERNMENTAL ENTITY" means the United States government or any United
States domestic state, municipal or local government, any instrumentality,
subdivision, court, administrative agency or commission or other authority
thereof, or any United States domestic quasi-governmental or private body
exercising any regulatory, taxing, importing or other United States domestic
governmental or quasi-governmental authority.
"INTELLECTUAL PROPERTY" means (i) all trademarks, trademark rights,
trade names, trade name rights, trade dress and other indications of origin,
corporate names, brand names, domain names, logos, certification rights, service
marks, applications for trademarks and for service marks, know-how and other
proprietary rights and information, the goodwill associated with the foregoing
and registration in any jurisdiction of, and applications in any jurisdictions
to register, the foregoing, including any extension, modification or renewal of
any such registration or application; (ii) all inventions, discoveries and ideas
(whether patentable or unpatentable and whether or not reduced to practice), in
any jurisdiction, all improvements thereto, and all patents, patent rights,
applications for patents (including divisions, continuations, continuations in
part and renewal applications), and any renewals, extensions or reissues
thereof, in any jurisdiction; (iii) nonpublic information, trade secrets and
confidential information and rights in any jurisdiction to limit the use or
disclosure thereof by any person; (iv) writings and other works, whether
copyrightable or not, in any jurisdiction, and all registrations or applications
for registration of copyrights in any jurisdiction, and any renewals or
extensions thereof; (v) all computer software and applications (including data
and related documentation); (vi) processes, formulae, methods, schematics,
technology, know-how and any similar intellectual property or proprietary
rights; and (vii) all copies and tangible documentation thereof and any claims
or causes of action arising out of or relating to any infringement or
misappropriation of any of the foregoing.
"KNOWLEDGE" with respect to (i) NEON or similar references means the
actual knowledge of any of Stephen E. Courter, William A. Marshall, Kurt J. Van
Wagenen, Jeffrey C. MacHaffie and Christopher E. Dalton, after reasonable
inquiry of the executive or senior managerial employees responsible for the
relevant matters, and (ii) Globix or similar references means the actual
knowledge of any of Peter K. Stevenson, Robert M. Dennerlein, H. Jameson
Holcombe, John D. McCarthy, James C. Schroeder and John Washuta (with respect to
Taxes only), after reasonable inquiry of the executive or senior managerial
employees responsible for the relevant matters.
"LAW" means any federal, state, local or foreign law, statute,
ordinance, rule, regulation, order, judgment or decree, administrative or
judicial decision, and any other executive or legislative proclamation.
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"LIENS" means any pledges, claims, liens, charges, encumbrances and
security interests of any kind or nature whatsoever.
"NEON CONFIRMATION EFFECTIVE DATE" means December 20, 2002.
"NEON CTA WARRANTS" means those warrants of NEON other than the Class A
Warrants disclosed in writing to Globix pursuant to Section 3.1(b)(iii).
"NEON MATERIAL ADVERSE EFFECT" means, with respect to NEON, any event,
change, circumstance or effect that, individually or together with any other
event, change, circumstance or effect, is or could reasonably be expected to be
materially adverse to the business, operations, properties, prospects, assets,
liabilities, financial condition or results of operations of NEON and its
Subsidiaries taken as a whole (other than events, changes, circumstances or
effects that result from economic factors affecting the economy as a whole).
"PERMITTED LIENS" means, with respect to a Person, the collective
reference to (i) Liens for current property taxes, assessments and other
governmental charges not yet due and payable or delinquent or being contested in
good faith by appropriate proceedings and for which adequate reserves have been
established in accordance with GAAP, (ii) statutory liens of landlords,
mechanics, carriers, warehousemen, and other Liens imposed by law incurred in
the ordinary course of business, original purchase price conditional sales
contracts and equipment leases with third parties and liens securing purchase
money security interests entered into in the ordinary course of business, (iii)
easements, patent reservations, covenants, rights of way and other similar
restrictions of record, (iv) any conditions that may be shown by a current,
accurate survey or physical inspection of any Real Property, and (v) (A) zoning,
building and other similar restrictions, (B) mortgages, liens, security interest
or encumbrances that have been placed by any developer, landlord or third party
on Real Property over which the Person or any Subsidiary has easement rights or
on any of the leased real property of such Person and subordination or similar
agreements relating thereto, and (C) unrecorded easements, covenants, rights of
way and other similar restrictions, none of which items set forth in clauses
(A), (B) and (C), individually or in the aggregate, materially impair the
continued use and operation of the Real Property to which they relate in the
business of the Person and its Subsidiaries taken as a whole as presently
conducted.
"PERSON" means an individual, corporation, limited liability company,
partnership, association, trust, unincorporated organization, other entity or
group (as defined in the Exchange Act).
"SUBSIDIARY" when used with respect to any Person means any corporation
or other organization, whether incorporated or unincorporated, (i) of which such
party or any other Subsidiary of such party is a general partner (excluding
partnerships the general partnership interests of which held by such party or
any Subsidiary of such party do not have a majority of the voting interests in
such partnership), or (ii) at least a majority of the securities or other
interests of which having by their terms ordinary voting power to elect a
majority of the Board of Directors or others performing similar functions with
respect to such corporation or other organization is directly or indirectly
owned or controlled by such party or by any one or more of its Subsidiaries, or
by such party and one or more of its Subsidiaries.
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"TAX" (including, with correlative meaning, "TAXES" and "TAXABLE")
means (i)(A) any net income, gross income, business and occupation, admissions,
gross receipts, sales, use, value added, ad valorem, transfer, transfer gains,
franchise, profits, license, withholding, payroll, employment, excise,
severance, stamp, rent, recording, occupation, premium, real or personal
property, intangibles, environmental or windfall profits tax, alternative or
add-on minimum tax, customs duty or other tax, fee, duty, levy, impost,
assessment or charge of any kind whatsoever (including but not limited to taxes
assessed to or on real property and water and sewer rents relating thereto),
together with (B) any interest and any penalty, addition to tax or additional
amount imposed by any governmental body (domestic or foreign) (a "TAX
AUTHORITY") responsible for the imposition of any such tax; (ii) any liability
for the payment of any amount of the type described in the immediately preceding
clause (i) as a result of being a member of an affiliated, unitary or combined
group with any other corporation at any time prior to the Closing Date; and
(iii) any liability for the payment of any amount of the type described in the
preceding clause (i) as a result of a contractual obligation to any other
Person.
"TAX RETURN" means any report, return or other information (including
any attached schedules or any amendments to such report, return, document,
declaration or any other information) required to be supplied to or filed with
any taxing authority or jurisdiction (foreign or domestic) with respect to any
Tax, including an information return, any document with respect to or
accompanying payments or estimated Taxes, or with respect to or accompanying
requests for the extension of time in which to file any such report, return
document, declaration or other information.
Section 9.12 ADDITIONAL DEFINITIONS. As defined elsewhere in this
Agreement:
"AGREEMENT" is defined in the Preamble on page 1.
"AICPA" is defined in Section 3.1(f).
"CERTIFICATE OF MERGER" is defined in Section 1.3.
"CERTIFICATES" is defined in Section 2.2.
"CLASS A WARRANT" is defined in Section 1.8(c)(iii).
"CLOSING" is defined in Section 1.2.
"CLOSING DATE" is defined in Section 1.2.
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"CODE" is defined in the Preamble on page 1.
"COBRA" is defined in Section 3.1(r)(vii).
"CONFIDENTIALITY AGREEMENT" is defined in Section 5.2(b).
"CONSTITUENT CORPORATIONS" is defined in the Preamble on page 1.
"COSTS" is defined in Section 5.7(a).
"COVERED PERSONS" is defined in Section 5.7(a).
"DGCL" is defined in Section 1.1.
"DISSENTING SHARES" is defined in Section 2.9(a).
"EFFECTIVE TIME" is defined in Section 1.3.
"ENVIRONMENTAL CLAIMS" is defined in Section 3.1(s).
"ENVIRONMENTAL LAWS" is defined in Section 3.1(s).
"ERISA" is defined in Section 3.1(r)(i).
"ERISA AFFILIATE" is defined in Section 3.1(r)(i).
"EXCHANGE ACT" is defined in Section 3.1(c)(iii).
"EXCHANGE AGENT" is defined in Section 2.1(a).
"EXCHANGE FUND" is defined in Section 2.1(a).
"GAAP" is defined in Section 3.1(d)(i).
"GLOBIX" is defined in the Preamble on page 1.
"GLOBIX AFFILIATED PERSON" is defined in Section 3.2(k)(i).
"GLOBIX ALTERNATIVE PROPOSAL" is defined in Section 5.1(c).
"GLOBIX AUDITED BALANCE SHEET" is defined in Section 3.2(e)(i).
"GLOBIX COMMON STOCK" is defined in Section 1.8(c)(i).
"GLOBIX CONVERTIBLE SECURITIES" is defined in Section 3.2(b)(iii).
"GLOBIX DEBT PURCHASE" is defined in Section 6.3(h).
"GLOBIX DISCLOSURE SCHEDULE" is defined in Section 3.2.
"GLOBIX EMPLOYEES" is defined in Section 3.2(r)(i).
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"GLOBIX FINANCIAL ADVISOR" is defined in Section 3.2(j).
"GLOBIX INDENTURE" is defined in Section 6.2(g).
"GLOBIX INTELLECTUAL PROPERTY" is defined in Section 3.2(x)(ii).
"GLOBIX LEASED REAL PROPERTY" is defined in Section 3.2(t)(ii).
"GLOBIX MATERIAL CONTRACTS" is defined in Section 3.2(u)(i).
"GLOBIX OPTIONS" is defined in Section 3.2(b)(iii).
"GLOBIX PERMITS" is defined in Section 3.2(m)(ii).
"GLOBIX PLANS" is defined in Section 3.2(r)(i).
"GLOBIX PREFERRED STOCK" is defined in Section 1.8(c)(ii).
"GLOBIX SEC FINANCIAL STATEMENTS" is defined in Section 3.2(d)(ii).
"GLOBIX SEC REPORTS" is defined in Section 3.2(d)(i).
"GLOBIX STOCK OPTION PLANS" is defined in Section 3.2(b)(iii).
"GLOBIX STOCKHOLDERS MEETING" is defined in Section 5.1(c).
"GLOBIX WARRANT" is defined in Section 1.8(c)(v).
"HSR ACT" is defined in Section 3.1(c)(iii).
"HSR FILING" is defined in Section 5.3(b).
"INTERIM BALANCE SHEET" is defined in Section 3.1(d)(i).
"LEASED REAL PROPERTY" is defined in Section 3.1(t)(ii).
"MERGER" is defined in the Preamble on page 1.
"MERGER CONSIDERATION" is defined in Section 1.8(c).
"MERGER SUB" is defined in the Preamble on page 1.
"MERGER SUB APPROVAL" is defined in Section 3.2(i).
"MERGER SUB COMMON STOCK" is defined in Section 3.2(b)(i).
"NEON" is defined in the Preamble on page 1.
"NEON AFFILIATED PERSON" is defined in Section 3.1(k)(i).
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"NEON ALTERNATIVE PROPOSAL" is defined in Section 5.1(b).
"NEON AUDITED BALANCE SHEET" is defined in Section 3.1(e)(i).
"NEON COMMON STOCK" is defined in the Preamble on page 1.
"NEON CONVERTIBLE PREFERRED STOCK" is defined in the Preamble on page
1.
"NEON CONVERTIBLE SECURITIES" is defined in Section 3.1(b)(iii).
"NEON DISCLOSURE SCHEDULE" is defined in Section 3.1.
"NEON DOCUMENTS" is defined in Section 5.7(a).
"NEON EMPLOYEES" is defined in Section 3.1(r)(i).
"NEON FINANCIAL ADVISOR" is defined in Section 3.1(j).
"NEON FINANCIAL STATEMENTS" is defined in Section 3.1(d)(i).
"NEON INTELLECTUAL PROPERTY" is defined in Section 3.1(x)(ii).
"NEON MATERIAL CONTRACTS" is defined in Section 3.1(u)(i).
"NEON OPTIONS" is defined in Section 3.1(b)(iii).
"NEON PERMITS" is defined in Section 3.1(m)(ii).
"NEON PLANS" is defined in Section 3.1(r)(i).
"NEON PREFERRED STOCK" is defined in Section 3.1(b)(i).
"NEON REDEEMABLE PREFERRED STOCK" is defined in Section 3.1(b)(i).
"NEON REQUIRED CONSENTS" is defined in Section 3.1(c)(iii).
"NEON REQUIRED VOTE" is defined in Section 3.1(i).
"NEON SECURITIES" is defined in Section 1.8(c).
"NEON STOCK OPTION PLANS" is defined in Section 3.1(b)(iii).
"NEON STOCKHOLDERS MEETING" is defined in Section 5.1(b).
"PREFERRED CASH CONSIDERATION" is defined in Section 1.8(c)(ii).
"PROXY STATEMENT" is defined in Section 3.1(g).
"RECORD DATE " is defined in Section 3.1(c)(i).
"REDEEMABLE PREFERRED STOCK WARRANTS" is defined in Section 1.8(c)(iv).
"REGISTRATION STATEMENT" is defined in Section 3.1(g).
"SEC" is defined in Section 3.1(g).
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"SECURITIES ACT" is defined in Section 1.9.
"SENIOR SECURED NOTES" is defined in Section 4.2(c).
"SURVIVING CORPORATION" is defined in Section 1.1.
"TAX DEFICIENCY" is defined in Section 3.1(q)(i)(G).
"THIRD PARTY INTELLECTUAL PROPERTY" is defined in Section 3.1(x)(ii).
"TRANSITION COMMITTEE" is defined in Section 5.9.
"VIOLATION" is defined in Section 3.1(c)(ii).
"WARN" is defined in Section 3.1(r)(xi).
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, each of the parties hereto have caused this
Agreement to be signed by their respective officers or authorized
representatives thereunto duly authorized, all as of the date first above
written.
NEON COMMUNICATIONS, INC.
By: /S/ STEPHEN E. COURTER
----------------------------------
Name: Stephen E. Courter
Title: Chairman of the Board, Chief
Executive Officer and President
GLOBIX CORPORATION
By: /S/ PETER K. STEVENSON
-----------------------------------
Name: Peter K. Stevenson
Title: President and Chief Executive
Officer
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APPENDIX A-2
FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER
This FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER (the "First Amendment") is
dated as of October 8, 2004, between GLOBIX CORPORATION, a Delaware
---------
corporation ("Globix") and NEON COMMUNICATIONS, INC., a Delaware corporation
("NEON").
WITNESSETH:
WHEREAS, Globix and NEON are parties to an Agreement and Plan of
Merger, dated as of July 19, 2004 (the "Merger Agreement");
WHEREAS, Globix and NEON wish to amend the Merger Agreement in
accordance with Section 9.1 of the Merger Agreement as mutually agreed to and as
set forth herein.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, and
intending to be legally bound hereby, the parties hereto agree as follows:
1. Section 1.8(c)(ii) of the Merger Agreement is hereby amended in its
entirety to read as follows:
"(ii) (A) all accrued and unpaid dividends to the Closing Date shall be
treated as if paid in shares of NEON Convertible Preferred Stock issued
immediately prior to the Effective Time;
(B) each share of NEON Convertible Preferred Stock issued and
outstanding immediately prior to the Effective Time (other than shares
to be canceled in accordance with Section 1.8(b), but including those
shares treated as issued in accordance with Section 1.8(c)(ii)(A)
above), shall be converted into the right to receive (1) $3.75 in cash
(the "Preferred Cash Consideration") and (2) 2.08333 shares of Globix
preferred stock with substantially the terms set forth in Exhibit
1.8(c)(ii) (the "Globix Preferred Stock");"
2. Exhibit 1.8(c)(ii) of the Merger Agreement is hereby superseded and
replaced in its entirety with a new Exhibit 1.8(c)(ii) in the form attached
hereto as Exhibit A.
3. Section 5.1(c) of the Merger Agreement is hereby amended by amending
the second sentence thereof in its entirety to read as follows:
"In the event of a Globix Stockholder Vote, Globix has, through its
Board of Directors, recommended to its stockholders the issuance of the
shares of Globix Common Stock included in the Merger Consideration, and
it shall not withdraw, modify or change such recommendation; provided,
however, that the Board of Directors of Globix may withdraw, modify or
change such recommendation in order to comply with its fiduciary duties
if it (i) has concluded in good faith that it is required to do so
under applicable law, and (ii) enters into a merger, acquisition or
other agreement (including an agreement in principle) to effect a
competing acquisition or other business combination proposal or the
Board of Directors resolves to do so (a "Globix Alternative
Proposal")."
4. Section 7.1(c)(i) of the Merger Agreement is hereby amended in its
entirety to read as follows:
" (i) in the event of a Globix Stockholder Vote, and the Board of
Directors of Globix shall not have recommended, or shall have resolved
not to recommend, or shall have qualified, changed, modified or
withdrawn its recommendation to its stockholders of the issuance of the
shares of Globix Common Stock included in the Merger Consideration or
declaration that the Merger is advisable and in the best interest of
Globix and its stockholders, or shall have resolved to do so;"
5. Section 9.11 of the Merger Agreement is hereby amended by amending
the defined term "Globix Stockholder Vote" in its entirety to read as follows:
""GLOBIX STOCKHOLDER VOTE" means if (i) prior to the Effective Time,
the Globix Common Stock is traded on the Nasdaq Small Cap Market or The
American Stock Exchange or (ii) the Board of Directors of Globix shall
otherwise so require as of the date of this Agreement, the affirmative
vote of the holders of the percentage of the shares of Globix Common
Stock required to approve the matters submitted to a vote of the
stockholders of Globix, which may consist of the following matters: (A)
the election of directors of Globix to serve on the Board of Directors
of Globix following the Merger, (B) the issuance of shares of Globix
Common Stock pursuant to the terms of this Agreement, and (C) the
issuance of shares of Globix Common Stock in respect of NEON Options
granted prior to the Merger under the NEON Stock Option Plans in
accordance with the terms of Section 1.9 of this Agreement."
6. Sections 3.2(b)(ii) and (iii) of the Merger Agreement are hereby
amended to add the following sentence to the end of each of Sections 3.2(b)(ii)
and (iii):
"The foregoing notwithstanding, the shares of Globix Common Stock
issuable in the Globix Debt Purchase will be subject to registration
rights, and Globix will grant the participants in the Globix Debt
Purchase the right to purchase up to an additional 5% of the shares
acquired by the participants at a purchase price of $2.75 per share if
the registration statement is not effective within 90 days of the
Closing under the Merger Agreement and an additional 5% of the shares
acquired in the Globix Debt Purchase at a purchase price of $2.75 per
share if the registration statement is not effective for more than 90
days during the first twelve months commencing on the 90th day
following the Closing."
7. Each party represents and warrants that (i) the execution and
delivery of this First Amendment has been duly and validly authorized and
approved by its Board of Directors, and (ii) this First Amendment has been duly
and validly executed and delivered and constitutes its valid and binding
agreement, enforceable against it in accordance with its terms.
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8. This First Amendment may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall become
effective when one or more counterparts have been signed by each of the parties
and delivered to the other parties, it being understood that all parties need
not sign the same counterpart.
9. Capitalized terms used and not otherwise defined herein shall have
the meanings attributed thereto in the Merger Agreement. Upon execution hereof,
each reference in the Merger Agreement to "this Agreement," "hereby," "herein,"
"hereof" or words of similar import referring to the Merger Agreement shall mean
and refer to the Merger Agreement as amended by this First Amendment.
10. Except as expressly provided herein, the Merger Agreement remains
in full force and effect. The Merger Agreement, as amended by this First
Amendment, constitutes the entire understanding of the parties regarding the
subject matter hereof and cannot be modified except by written agreement of the
parties.
[SIGNATURE PAGE FOLLOWS]
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IN WITNESS WHEREOF, each of the parties hereto have caused this First
Amendment to be signed by their respective officers or authorized
representatives thereunto duly authorized, all as of the date first above
written.
NEON COMMUNICATIONS, INC.
By: /s/ Stephen B. Courter
---------------------------------------
Name: Stephen B. Courter
Title: Chairman of the Board, Chief
Executive Officer and President
GLOBIX CORPORATION
By: /s/ Peter K. Stevenson
---------------------------------------
Name: Peter K. Stevenson
Title: President and Chief
Executive Officer
EXHIBIT A
---------
EXHIBIT 1.8(c)(ii)
------------------
CERTIFICATE OF DESIGNATION OF PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF
PREFERRED STOCK AND QUALIFICATIONS,
LIMITATIONS AND RESTRICTIONS THEREOF
OF
6% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
GLOBIX CORPORATION
---------------------------------------------
PURSUANT TO SECTION 151 OF THE
GENERAL CORPORATION LAW OF THE STATE OF DELAWARE
----------------------------------------------
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Globix Corporation (the "Company"), a corporation organized and
existing under the General Corporation Law of the State of Delaware, does hereby
certify that (i) pursuant to authority conferred upon the board of directors
(the "Board of Directors") by its Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation"), and pursuant to the
provisions of Section 151 of the General Corporation Law of the State of
Delaware, said Board of Directors is authorized to issue Preferred Stock of the
Company in one or more series; and (ii) the resolutions set forth below (the
"Resolutions") were duly adopted by the Board of Directors, by a vote at a
meeting duly called and duly held on ________ __, 2004;
"WHEREAS, the Board of Directors of the Company is authorized, within
the limitations and restrictions stated in the Certificate of Incorporation of
the Company, to provide by resolution or resolutions for the issuance of shares
of its preferred stock, par value $0.01 per share (the "Preferred Stock"), and
by filing a certificate of designation in the manner prescribed under the laws
of the State of Delaware, to fix and amend the voting powers, full or limited,
or no voting powers, and the designation, preferences and relative,
participating, optional and other special rights, if any, and qualification,
limitations and restrictions thereof;
WHEREAS, the Board of Directors of the Company desires to authorize and
fix the terms of a series of Preferred Stock and the number of shares
constituting such series; and
WHEREAS, capitalized terms used herein and not otherwise defined shall
have the meanings specified in Section 14 hereof;
NOW, THEREFORE, BE IT RESOLVED that, pursuant to the authority vested
in the Board of Directors by its Certificate of Incorporation, the Board of
Directors does hereby designate, create, authorize and provide for the issuance
of 6% Series A Cumulative Convertible Preferred Stock, par value $0.01 per
share, with a liquidation preference of $3.60 per share, consisting of 4,500,000
shares having the designation, preferences, relative, participating, optional
and other special rights and the qualification, limitations and restrictions
thereof that are set forth in the Certificate of Incorporation and in this
Resolution as follows:
1. DESIGNATION. There is hereby created out of the authorized and
unissued shares of Preferred Stock of the Company a series of Preferred Stock
designated as the "6% Series A Cumulative Convertible Preferred Stock" (the
"Convertible Preferred Stock"). The authorized number of shares constituting the
Convertible Preferred Stock shall be 4,500,000. The liquidation preference of
the Convertible Preferred Stock shall be $3.60 per share (the "Liquidation
Preference"). The date the Convertible Preferred Stock is first issued is
referred to as the "Issue Date."
2. RANK. The Convertible Preferred Stock will, with respect to dividend
rights and rights upon the liquidation, dissolution or winding up of the
Company, rank (i) junior to each class of Capital Stock or series of Preferred
Stock, established hereafter by the Board of Directors, the terms of which
expressly provide that such class or series will rank senior to the Convertible
Preferred Stock as to dividend rights and upon liquidation, dissolution or
winding up of the Company ("Senior Capital Stock"); (ii) pari passu with each
class of Capital Stock or series of Preferred Stock, established hereafter by
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the Board of Directors, the terms of which expressly provide that such class or
series will rank on a parity with the Convertible Preferred Stock as to dividend
rights and upon the liquidation, dissolution or winding up of the Company
("Parity Capital Stock") and (iii) senior to all series of common stock, par
value $0.01 per share, of the Company (the "Common Stock") and to any Capital
Stock or series of Preferred Stock, established hereafter by the Board of
Directors, that expressly provides that it will rank junior to the Convertible
Preferred Stock as to dividend rights and upon the liquidation, dissolution or
winding up of the Company ("Junior Capital Stock").
3. DIVIDENDS.
(a) The Holder of shares of the Convertible Preferred Stock
will be entitled to receive, when, as and if dividends are declared by
the Board of Directors out of funds of the Company legally available
therefor, cumulative preferential dividends from the Issue Date of the
Convertible Preferred Stock accruing at the rate of $0.216 per share of
Convertible Preferred Stock per annum, or $0.108 per share of
Convertible Preferred Stock semi-annually, payable semi-annually in
arrears on June 15 and December 15 of each year, commencing on December
15, 2004 or, if any such date is not a Business Day, on the next
succeeding business day (each, a "Dividend Payment Date"), to the
Holders of record on the 10th day prior to the relevant Dividend
Payment Date (each, a "Record Date"). Accrued but unpaid dividends, if
any, may be paid on such dates as determined by the Board of Directors.
(b) Dividends payable on the Convertible Preferred Stock will
be computed on the basis of a 360-day year of twelve 30-day months and
will be deemed to accrue on a daily basis. Dividends on the Convertible
Preferred Stock will accrue from the Issue Date.
(c) Any dividend on the Convertible Preferred Stock shall be,
at the option of the Company, payable (i) in cash, or (ii) through the
issuance of a number of additional shares (including fractional shares)
of Convertible Preferred Stock (the "Additional Shares") equal to the
dividend amount divided by the Liquidation Preference of such
Additional Shares.
(d) The Convertible Preferred Stock will not be redeemable
unless all dividends accrued through such redemption date shall have
been paid in full. Notwithstanding anything to the contrary herein
contained, the Company shall not be required to declare or pay a
dividend if another person (including, without limitation, any of its
subsidiaries) pays an amount to the Holders equal to the amount of such
dividend on behalf of the Company and, in such event, the dividend will
be deemed paid for all purposes.
(e) Dividends on the Convertible Preferred Stock will accrue
whether or not the Company has earnings or profits, whether or not
there are funds legally available for the payment of such dividends and
whether or not dividends are declared. Dividends will accumulate to the
extent they are not paid on the Dividend Payment Date for the
semi-annual period to which they relate. Accumulated unpaid dividends
will accrue and cumulate dividends at a rate of 6% per annum. The
Company will take all reasonable actions required or permitted under
Delaware law to permit the payment of dividends on the Convertible
Preferred Stock.
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(f) No dividend whatsoever shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any outstanding
share of the Convertible Preferred Stock with respect to any dividend
period unless all dividends for all preceding dividend periods have
been declared and paid upon, or declared and a sufficient sum set apart
for the payment of such dividend upon, all outstanding shares of
Convertible Preferred Stock. Unless full cumulative dividends on all
outstanding shares of Convertible Preferred Stock due for all past
dividend periods shall have been declared and paid, or declared and a
sufficient sum for the payment thereof set apart, then: (i) no dividend
(other than, in the case of Junior Capital Stock, a dividend payable
solely in shares of Junior Capital Stock or options, warrants or rights
to purchase Junior Capital Stock, or in the case of Parity Capital
Stock, a dividend payable solely in shares of Junior Capital Stock or
Parity Capital Stock or options, warrants or rights to purchase Junior
Capital Stock or Parity Capital Stock) shall be declared or paid upon,
or any sum set apart for the payment of dividends upon, any shares of
Parity Capital Stock or Junior Capital Stock; (ii) no other
distribution shall be declared or made upon, or any sum set apart for
the payment of any distribution upon, any shares of Parity Capital
Stock or Junior Capital Stock; (iii) no shares of Parity Capital Stock
or Junior Capital Stock or any warrants, rights, calls or options
exercisable for or convertible into any Parity Capital Stock or Junior
Capital Stock shall be purchased, redeemed or otherwise acquired or
retired for value (excluding an exchange for shares of other Parity
Capital Stock or Junior Capital Stock or a purchase, redemption or
other acquisition from the proceeds of a substantially concurrent sale
of Parity Capital Stock or Junior Capital Stock, and repurchases of
Capital Stock held by an employee in connection with the termination of
such employee's termination) by the Company or any of its subsidiaries;
and (iv) no monies shall be paid into or set apart or made available
for a sinking or other like fund for the purchase, redemption or other
acquisition or retirement for value of any shares of a Parity Capital
Stock or Junior Capital Stock or any warrants, rights, calls or options
exercisable for or convertible into any Parity Capital Stock or Junior
Capital Stock by the Company or any of its subsidiaries. Holders of the
Convertible Preferred Stock shall not be entitled to any dividends,
whether payable in cash, property or stock, in excess of the full
cumulative dividends as herein described.
(g) Dividends on account of arrears and dividends in
connection with any optional redemption may be declared and paid at any
time, without reference to any regular Dividend Payment Date, to
holders of record on such date, not more than 45 days prior to the
payment thereof, as may be fixed by the Board of Directors of the
Company.
4. LIQUIDATION RIGHTS. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company after payment in full of the
outstanding debt obligations of the Company and the liquidation preference (and
any accrued and unpaid dividends) on Senior Capital Stock, if any, each Holder
of shares of the Convertible Preferred Stock shall be entitled to payment out of
the assets of the Company available for distribution of the Liquidation
Preference per share of the Convertible Preferred Stock held by such Holder,
plus an amount equal to the accrued and unpaid dividends on the Convertible
Preferred Stock to the date fixed for liquidation, dissolution or winding up,
-4-
before any distribution is made on any Junior Capital Stock, including, without
limitation, any series of Common Stock of the Company. After payment in full of
the Liquidation Preference and an amount equal to the accrued and unpaid
dividends to which Holders of Convertible Preferred Steak are entitled, such
Holders will not be entitled to any further participation in any distribution of
assets of the Company. However, neither the voluntary sale, conveyance, exchange
or transfer (for cash, shares of stock, securities or other consideration) of
all or substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with or into one or more corporations
will be deemed to be a voluntary or involuntary liquidation, dissolution or
winding up of the Company, unless such sale, conveyance, exchange, transfer,
consolidation or merger shall be in connection with a liquidation, dissolution
or winding up of the Company.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION. The Convertible Preferred Stock may
be redeemed, in whole or in part, at the option of the Company after
2005 at the redemption prices specified below (expressed as percentages
of the Liquidation Preference thereof), in each case, together with an
amount equal to accrued and unpaid dividends on the Convertible
Preferred Stock and Additional Shares (if any), to the date of
redemption, upon not less than 15 nor more than 60 days' prior written
notice, during the 12-month period commencing on December 16 of each of
the years set forth below:
Period Redemption Price
2005 and 2006 106%
2007 103%
2008 and thereafter 100.000%
(b) GENERAL. On and after any date fixed for redemption (the
"Redemption Date"), provided that the Company has made available at the
office of the Transfer Agent a sufficient amount of cash to effect the
redemption, dividends will cease to accrue on the Convertible Preferred
Stock called for redemption (except that, in the case of a Redemption
Date after a dividend payment Record Date and prior to the related
Dividend Payment Date, holders of Convertible Preferred Stock on the
dividend payment Record Date will be entitled on such Dividend Payment
Date to receive the dividend payable on such shares), such shares shall
no longer be deemed to be outstanding and all rights of the holders of
such shares as holders of Convertible Preferred Stock shall cease
except the right to receive the cash deliverable upon such redemption,
without interest from the Redemption Date.
(c) PARTIAL REDEMPTION. In the event of a redemption of only a
portion of the then outstanding shares of Convertible Preferred Stock,
the Company shall effect such redemption on a pro rata basis, except
that the Company may redeem all of the shares held by Holders of fewer
than 100 shares (or all of the shares held by Holders who would hold
less than 100 shares as a result of such redemption), as may be
determined by the Company.
-5-
(d) MECHANICS. With respect to a redemption pursuant hereto,
the Company will send a written notice of redemption by first class
mail to each holder of record of shares of Convertible Preferred Stock,
not fewer than 15 days nor more than 60 days prior to the Redemption
Date at its registered address (the "Redemption Notice"); provided,
however, that no failure to give such notice nor any deficiency therein
shall affect the validity of the procedure for the redemption of any
shares of Convertible Preferred Stock to be redeemed except as to the
holder or holders to whom the Company has failed to give said notice or
except as to the holder or holders whose notice was defective. The
Redemption Notice shall state:
(i) the redemption price;
(ii) whether all or less than all the outstanding
shares of the Convertible Preferred Stock
are to be redeemed and the total number of
shares of the Convertible Preferred Stock
being redeemed;
(iii) the Redemption Date;
(iv) that the holder is to surrender to the
Company, in the manner, at the place or
places and at the price designated, his
certificate or certificates representing the
shares of Convertible Preferred Stock to be
redeemed; and
(v) that dividends on the shares of the
Convertible Preferred Stock to be redeemed
shall cease to accumulate on such Redemption
Date unless the Company defaults in the
payment of the redemption price.
Each holder of Convertible Preferred Stock shall surrender the certificate or
certificates representing such shares of Convertible Preferred Stock to the
Company, duly endorsed (or otherwise in proper form for transfer, as determined
by the Company), in the manner and at the place designated in the Redemption
Notice, and on the Redemption Date the full redemption price for such shares
shall be payable in cash to the person whose name appears on such certificate or
certificates as the owner thereof, and each surrendered certificate shall be
canceled and retired. In the event that less than all of the shares represented
by any such certificate are redeemed, a new certificate shall be issued
representing the unredeemed shares.
6. VOTING RIGHTS/CONSENT.
(a) GENERAL. Except as otherwise required under the Delaware
General Corporation Law, the holder of each share of Convertible
Preferred Stock shall have the right to one vote for each share of
Common Stock into which such share of Common Stock could then be
converted (with any fractional share determined on an aggregate
conversion basis being rounded to the nearest whole share), and with
respect to such vote such holder shall have full voting rights and
powers equal to the voting rights and powers of the holders of Common
Stock, and shall be entitled, notwithstanding any provision hereof, to
notice of any stockholders' meeting in accordance with the Amended and
Restated Bylaws of the Company, and shall be entitled to vote, together
with holders of Common Stock as a single class, with respect to any
question or matter upon which holders of Common Stock have to right to
vote.
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(b) ISSUANCE OF ADDITIONAL STOCK. For so long as there are at
least 200,000 shares of Convertible Preferred Stock outstanding, the
Company may not authorize, create (by way of reclassification or
otherwise) or issue any Senior Capital Stock or Parity Capital Stock
(including additional shares of Convertible Preferred Stock (other than
the issuance of shares of Convertible Preferred Stock in payment of
dividends on the Convertible Preferred Stock as provided in Section
3(c) hereof)), or any obligation or security convertible or
exchangeable into, or evidencing a right to purchase, shares of any
class or series of Senior Capital Stock or Parity Capital Stock
(including additional shares of Convertible Preferred Stock), without
the affirmative vote or consent of the holders of at least 66 2/3% of
the outstanding shares of Convertible Preferred Stock.
7. CHANGE OF CONTROL.
(a) GENERAL. In the event of a Change of Control, each Holder
shall have the right to require the Company to purchase all or a
portion of such Holder's Convertible Preferred Stock (the "Change of
Control Offer") as of the date that is no earlier than 30 days and no
more than 60 days after the Change of Control Notice Date (the "Change
of Control Purchase Date") for a purchase price equal to 101% of the
Liquidation Preference together with accrued and unpaid dividends to
but not including the Change of Control Purchase Date (the "Change of
Control Purchase Price"). No funds shall be paid by the Company
pursuant to a Change of Control Offer prior to the Company's repurchase
of any securities ranking senior to the Convertible Preferred Stock and
requiring repurchase pursuant to the change of control provisions
governing such senior securities, including, without limitation, the
repurchase of the Company's 11% Senior Secured Notes due 2008 issued
pursuant to that certain Indenture, dated as of April 23, 2002, between
the Company, certain subsidiaries of the Company and HSBC Bank USA, as
Trustee (the "Indenture").
(b) COMPANY NOTICE. Within 30 days after the occurrence of a
Change of Control, the Company shall mail to all Holders of record of
the Convertible Preferred Stock a written notice of the Change of
Control, the date of such notice being the "Change of Control Notice
Date." The notice shall include the form of Change of Control Purchase
Notice (as defined in subsection (c) below) to be completed by the
Holder and shall state:
(i) the date of such Change of Control and,
briefly, the events causing such Change of
Control;
(ii) the date by which the Change of Control
Purchase Notice pursuant to this Section 7
must be given;
(iii) the Change of Control Purchase Date;
(iv) the Change of Control Purchase Price;
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(v) briefly, the conversion rights of the
Convertible Preferred Stock;
(vi) the name and address of the Paying Agent and
the Transfer Agent;
(vii) the then current Conversion Rate;
(viii) that Convertible Preferred Stock as to which
a Change of Control Purchase Notice has been
given may be converted into Common Stock
only to the extent that the Change of
Control Purchase Notice has been withdrawn
in accordance with the terms of this
Certificate of Designation;
(ix) the procedures that the Holder must follow
to exercise rights under this Section 7;
(x) the procedures for withdrawing a Change of
Control Purchase Notice, including a form of
notice of withdrawal; and
(xi) that the Holder must satisfy the
requirements set forth in the Convertible
Preferred Stock in order to convert the
Convertible Preferred Stock.
(c) EXERCISE. A Holder may exercise its rights specified in
subsection (a) of this Section 7 upon delivery of a written notice of
the exercise of such rights (a "Change of Control Purchase Notice") to
the Paying Agent at any time prior to the close of business on the
third Business Day next preceding the Change of Control Purchase Date,
stating:
(i) the name of the Holder;
(ii) the certificate numbers of the Convertible
Preferred Stock that the Holder will deliver
to be purchased;
(iii) the number of shares of Convertible
Preferred Stock that the Holder will deliver
to be purchased; and
(iv) that such Convertible Preferred Stock shall
be purchased pursuant to the terms and
conditions specified in this Certificate of
Designations.
The delivery of such Convertible Preferred Stock to the Paying Agent (together
with all necessary endorsements) at the office of the Paying Agent shall be a
condition to the receipt by the Holder of the Change of Control Purchase Price
therefor; provided, however, that such Change of Control Purchase Price shall be
so paid pursuant to this Section 7 only if the Convertible Preferred Stock so
delivered to the Paying Agent shall conform in all respects to the description
thereof set forth in the related Change of Control Purchase Notice.
-8-
(d) PAYMENT. Upon receipt by the Paying Agent of the Change of
Control Purchase Notice specified in subsection (c) of this Section 7,
the Paying Agent shall promptly so notify the Company, and the Holder
of the Convertible Preferred Stock in respect of which such Change of
Control Purchase Notice was given shall (unless such Change of Control
Purchase Notice is withdrawn as specified below) thereafter be entitled
to receive solely the Change of Control Purchase Price with respect to
such Convertible Preferred Stock. Such Change of Control Purchase Price
shall be paid to such Holder promptly following the later of (i) the
Change of Control Purchase Date with respect to such Convertible
Preferred Stock (provided the conditions in subsection (c) of this
Section 7 have been satisfied) and (ii) the time of delivery of such
Convertible Preferred Stock to the Paying Agent by the Holder thereof
in the manner required by subsection (c) of this Section 7. Convertible
Preferred Stock in respect of which a Change of Control Purchase Notice
has been given by the Holder thereof may not be converted into shares
of Common Stock on or after the date of the delivery of such Change of
Control Purchase Notice unless such Change of Control Purchase Notice
has first been validly withdrawn.
(e) WITHDRAWAL. A Change of Control Purchase Notice may be
withdrawn by means of a written notice of withdrawal delivered by the
Holder to the office of the Paying Agent at any time prior to the close
of business on the Business Day immediately preceding the Change of
Control Purchase Date, specifying:
(i) the name of the Holder;
(ii) the certificate numbers of the Convertible
Preferred Stock in respect of which such
notice of withdrawal is being submitted;
(iii) the number of shares of Convertible
Preferred Stock with respect to which such
notice of withdrawal is being submitted; and
(iv) the number of shares, if any, of each
Convertible Preferred stock that remains
subject to the original Change of Control
Purchase Notice and that has been or will be
delivered for purchase by the Company.
(f) COMPANY DEPOSIT WITH PAYING AGENT. At or before 11:00
a.m., New York City time, on the second Business Day immediately
following a Change of Control Purchase Date, the Company shall deposit
with the Paying Agent an amount of money sufficient to pay the
aggregate Change of Control Purchase Price of all of the shares of
Convertible Preferred Stock that are to be purchased as of such Change
of Control Purchase Date plus accrued and unpaid dividends thereon up
to but not including the Change of Control Purchase Date. The manner in
which the deposit required by this subsection (f) is made by the
Company shall be at the option of the Company, provided that such
deposit shall be made in a manner such that the Paying Agent shall have
immediately available funds on the second Business Day immediately
following the Change of Control Purchase Date.
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(g) FAILURE TO EXERCISE. If a Holder does not exercise the
right to require the Company to purchase such Holder's Convertible
Preferred Stock, each share of such Convertible Preferred Stock shall
thereafter be convertible into the right to receive the consideration
receivable as a result of the Change of Control by a holder of the
number of shares of Common Stock into which such Convertible Preferred
Stock was convertible immediately prior to the Change of Control.
(h) DEFINITION OF CHANGE OF CONTROL. A Change of Control shall
be deemed to have occurred if any of the following occurs: (a) any
"person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange
Act")), other than Permitted Holders, is or becomes the "beneficial
owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act,
except that a person shall be deemed to have "beneficial ownership" of
all shares that such person has or has the right to acquire, whether
such right is exercisable immediately or only after the passage of
time), directly or indirectly, of more than 50% of the total
outstanding Voting Stock of the Company; (b) during any consecutive
two-year period, individuals who at the beginning of such period
constituted the Board of Directors of the Company (together with any
new directors whose election to such Board or whose nomination for
election by the stockholders of the Company was approved by a vote of a
majority of the directors then still in office who were either
directors at the beginning of such period or whose election or
nomination for election was previously so approved), cease for any
reason to constitute a majority of the Board of Directors then in
office; (c) the Company consolidates with or merges with or into any
person or conveys, transfers or leases all or substantially all of its
assets to any person, or any corporation consolidates with or merges
into or with the Company, in any such event, pursuant to a transaction
in which the outstanding Voting Stock of the Company is changed into or
exchanged for cash, securities or other property, except (i) to the
extent necessary to reflect a change in the jurisdiction of
incorporation of the Company or (ii) where no "person" or "group" (as
such terms are used in Sections 13(d) and 14(d) of the Exchange Act)
owns, other than Permitted Holders, immediately after such transaction,
directly or indirectly, more than 50% of the total outstanding Voting
Stock of the surviving corporation; or (d) the Company is liquidated or
dissolved or adopts a plan of liquidation or dissolution. The good
faith determination by the Board, based upon advice of outside counsel,
of the beneficial ownership of securities of the Company within the
meaning of Rules 13d-3 or 13d-5 under the Exchange Act shall be
conclusive, absent contrary controlling precedent or contrary written
interpretation published by the Commission. No inference shall be
created that officers or employees of the Company are acting as a
"person" or "group" (as such terms are used in Sections 13(d) or 14(d)
of the Exchange Act) with the power to designate a majority of the
members of the Board solely because such officers or employees
constitute a majority of the members of the Board.
(i) The provisions of this Section 7 may be amended, modified
or waived only with the consent of holders of not less than sixty-six
and two-thirds percent (66-2/3%) of the shares of Convertible Preferred
Stock then outstanding.
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8. CONVERSION RATES.
(a) Each share of Convertible Preferred Stock will be
convertible at the option of the Holder, at any time, unless previously
redeemed or repurchased, into the number of fully paid and
non-assessable shares of Common Stock (calculated as to each conversion
rounded up to the nearest 1/100th of a share) obtained by dividing the
Liquidation Preference by the Conversion Price (as defined below) (the
"Conversion Rate"). The Conversion Price shall initially be $3.60 per
share of the Convertible Preferred Stock (subject to the adjustments
described below, the "Conversion Price"). The right to convert a share
of the Convertible Preferred Stock called for redemption or delivered
for repurchase will terminate at the close of business on the
Redemption Date for such Convertible Preferred Stock or in accordance
with the terms of Section 7 hereof, with respect to a repurchase in
connection with a Change of Control.
(b) The right of conversion attaching to any share of
Convertible Preferred Stock may be exercised by the Holder thereof by
delivering the share to be converted to the office of the Transfer
Agent, or any agency or office of the Company maintained for that
purpose, accompanied by a duly signed and completed notice of
conversion in form reasonably satisfactory to the Transfer Agent of the
Company. The conversion date will be the date on which the shares and
the duly signed and completed notice of conversion are so delivered. As
promptly as practicable on or after the conversion date, the Company
will issue and deliver to the Transfer Agent a certificate or
certificates for the number of full shares of Common Stock, issuable
upon conversion, with any fractional shares rounded up to full shares
or, at the Company's option, payment in cash in lieu of any fraction of
a share, based on the Closing Price of the Common Stock on the Trading
Day preceding the conversion date. Such certificate or certificates
will be delivered by the Transfer Agent to the appropriate Holder on a
book-entry basis or by mailing certificates evidencing the additional
shares to the Holders at their respective addresses set forth in the
register of Holders maintained by the Transfer Agent. All shares of
Common Stock issuable upon conversion of the Convertible Preferred
Stock will be fully paid and nonassessable and will rank pari passu
with the other shares of Common Stock outstanding from time to time.
Any shares of Convertible Preferred Stock surrendered for conversion
during the period from the close of business on any Record Date to the
opening of business on the next succeeding Dividend Payment Date must
be accompanied by payment of an amount equal to the dividends payable
on such Dividend Payment Date on the shares of Convertible Preferred
Stock being surrendered for conversion. No other payment or adjustment
for dividends, or for any dividends in respect of shares of Common
Stock, will be made upon conversion. Except as otherwise provided
herein, dividends accrued shall not be paid on Convertible Preferred
Stock converted. If any Holder surrenders shares of Convertible
Preferred Stock for conversion between a Record Date and the related
Dividend Payment Date, then notwithstanding such conversion, the
dividend payable on such Dividend Payment Date will be paid to the
Holder on such Record Date. Holders of Common Stock issued upon
conversion will not be entitled to receive any dividends payable to
holders of Common Stock as of any record time before the close of
business on the conversion date.
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(c) Each share of Convertible Preferred Stock shall be
automatically converted into shares of Common Stock at the Conversion
Rate then in effect (i) upon the affirmative vote of the holders of at
least sixty-six and two-thirds percent (66-2/3%) of the outstanding
shares of such Convertible Preferred Stock, or (ii) on the day
immediately following the date on which the Closing Price of the Common
Stock has equaled or exceeded $10.80 (as adjusted for stock splits,
combinations or similar capital changes) for a period of 45 consecutive
Trading Days. Upon the occurrence of either of the foregoing events,
the outstanding shares of Convertible Preferred Stock shall be
converted automatically without any further action by the holders of
such shares and whether or not the certificates representing such
shares are surrendered to the Company or its transfer agent; provided,
however, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon such conversion
unless the certificates evidencing such shares of Convertible Preferred
Stock are either delivered to the Company or its transfer agent as
provided below, or the holder notifies the Company or its Transfer
Agent that such certificates have been lost, stolen or destroyed and
executes an agreement satisfactory to the Company to indemnify the
Company from any loss incurred by it in connection with such
certificates.
(d) The Conversion Rate shall be adjusted from time to time by
the Company as follows:
(i) In case the Company shall (A) pay a dividend in
shares of Common Stock to all holders of Common
Stock, (B) make a distribution in shares of Common
Stock to all holders of Common Stock, (C) subdivide
its outstanding Common Stock into a greater number of
shares or (D) combine its outstanding Common Stock
into a smaller number of shares, the Conversion Rate
in effect immediately prior thereto shall be adjusted
so that the Holder of any share of Convertible
Preferred Stock thereafter surrendered for conversion
shall be entitled to receive that number of shares of
Common Stock which it would have owned had such share
of Convertible Preferred Stock been converted
immediately prior to the happening of such event. An
adjustment made pursuant to this subsection (i) shall
become effective immediately after the record date in
the case of a dividend in shares or distribution and
shall become effective immediately after the
effective date in the case of subdivision or
combination.
(ii) In case the Company shall issue rights or warrants to
all or substantially all holders of any series of its
Common Stock entitling them to subscribe for or
purchase shares of Common Stock (or securities
convertible into Common Stock) at a price per share
less than the current Market Price per share of
Common Stock at the record date for the determination
of shareholders entitled to receive such rights or
warrants, the Conversion Rate in effect immediately
prior thereto shall be adjusted so that the same
shall equal the rate determined by multiplying the
Conversion Rate in effect immediately prior to such
record date by a fraction, of which the denominator
-12-
shall be the number of shares of Common Stock
outstanding on such record date, plus the number of
shares which the aggregate offering price of the
total number of shares of Common Stock so offered (or
the aggregate conversion price of the convertible
securities so offered) would purchase at such current
Market Price, and of which the numerator shall be the
number of shares of Common Stock outstanding on such
record date plus the number of additional shares of
Common Stock offered (or into which the convertible
securities so offered are convertible). Such
adjustment shall be made successively whenever any
such rights or warrants are issued, and shall become
effective immediately after such record date. If at
the end of the period during which such rights or
warrants are exercisable not all rights or warrants
shall have been exercised, the adjusted Conversion
Rate shall be immediately readjusted to what it would
have been based upon the number of additional shares
of Common Stock actually issued (or the number of
shares of Common Stock issuable upon conversion of
convertible securities actually issued).
(iii) In case the Company shall distribute to all or
substantially all holders of its Common Stock any
shares of Capital Stock of the Company (other than
Common Stock), evidence of indebtedness or other
non-cash assets (including securities of any company
other than the Company) or shall distribute to all or
substantially all holders of its Common Stock rights
or warrants to subscribe for or purchase any of its
securities (excluding those referred to in subsection
(ii) above), then in each such case the Conversion
Rate shall be adjusted so that the same shall equal
the rate determined by multiplying the Conversion
Rate in effect immediately prior to the date of such
distribution by a fraction, of which the denominator
shall be the current Market Price per share of the
Common Stock on the record date mentioned below less
the fair market value on such record date (as
determined by the Board of Directors, whose
determination shall be conclusive evidence of such
fair market value) of the portion of the Capital
Stock, evidences of indebtedness or other non-cash
assets so distributed or of such rights or warrants
applicable to one share of Common Stock (determined
on the basis of the number of shares of Common Stock
outstanding on the record date), and of which the
numerator shall be the current Market Price per share
of the Common Stock on such record date. Such
adjustment shall become effective immediately after
the record date for the determination of shareholders
entitled to receive such distribution.
Notwithstanding the foregoing, in the event that the
Company shall distribute rights or warrants (other
than those referred to in subsection (ii) above)
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("Rights") pro rata to holders of Common Stock, the
Company may, in lieu of making any adjustment
pursuant to this Section 8, make proper provision so
that each Holder of a share of Convertible Preferred
Stock who converts such shares of Convertible
Preferred Stock (or any portion thereof) after the
record date for such distribution and prior to the
expiration or redemption of the Rights shall be
entitled to receive upon such conversion, in addition
to the shares of Common Stock issuable upon such
conversion (the "Conversion Shares"), a number of
Rights to be determined as follows: (i) if such
conversion occurs on or prior to the date for the
distribution to the holders of Rights of separate
certificates evidencing such Rights (the
"Distribution Date"), the same number of Rights to
which a holder of a number of shares of Common Stock
equal to the number of Conversion Shares is entitled
at the time of such conversion in accordance with the
terms and provisions of and applicable to the Rights,
and (ii) if such conversion occurs after the
Distribution Date, the same number of Rights to which
a holder of the number of shares of Common Stock into
which the number of shares of Convertible Preferred
Stock so converted was convertible immediately prior
to the Distribution Date would have been entitled on
the Distribution Date in accordance with the terms
and provisions of and applicable to the Rights.
(iv) In case the Company shall, by dividend or otherwise,
at any time distribute (a "Triggering Distribution")
to all or substantially all holders of its Common
Stock cash in an aggregate amount that, together with
the aggregate amount of all cash distributions to all
or substantially all holders of its Common Stock made
within the 12 months preceding the date of payment of
the Triggering Distribution and in respect of which
no Conversion Rate adjustment pursuant to this
Section 8 has been made, exceeds 10.0% of the product
of the current Market Price per share of Common Stock
on the Business Day immediately preceding the day on
which such Triggering Distribution is declared by the
Company (the "Determination Date") multiplied by the
number of shares of Common Stock outstanding on such
date (excluding shares held in the treasury of the
Company), the Conversion Rate shall be increased so
that the same shall equal the rate determined by
multiplying such Conversion Rate in effect
immediately prior to the Determination Date by a
fraction, of which the denominator shall be the
current Market Price per share of the Common Stock on
the Determination Date less the amount of cash (plus
-14-
the fair market value of such other consideration) so
distributed within such 12 months (including, without
limitation, the Triggering Distribution) applicable
to one share of Common Stock (determined on the basis
of the number of shares of Common Stock outstanding
on the Determination Date) and the numerator shall be
such current Market Price per share of the Common
Stock on the Determination Date, such increase to
become effective immediately prior to the opening of
business on the day following the date on which the
Triggering Distribution is paid.
(v) In case any transaction or event (including, without
limitation, any merger, consolidation, sale of
assets, tender or exchange offer, reclassification,
compulsory share exchange or liquidation) shall occur
in which all or substantially all outstanding Common
Stock is converted into or exchanged for stock, other
securities, cash or assets (each, a "Fundamental
Change"), the holder of each share of Convertible
Preferred Stock outstanding immediately prior to the
occurrence of such Fundamental Change shall have the
right upon any subsequent conversion to receive (but
only out of legally available funds, to the extent
required by applicable law) the kind and amount of
stock, other securities, cash and assets that such
holder would have received if such share had been
converted immediately prior thereto.
(vi) In any case in which this Section 8 shall require
that an adjustment be made following a record date or
a Determination Date, as the case may be, established
for purposes of this Section 8, the Company may elect
to defer (but only until five Business Days following
the filing by the Company with the Transfer Agent of
the certificate described in subsection (i) of this
Section 8) issuing to the Holder of any Convertible
Preferred Stock converted after such record date or
Determination Date the shares of Common Stock and
other Capital Stock of the Company issuable upon such
conversion over and above the shares of Common Stock
and other Capital Stock of the Company issuable upon
such conversion only on the basis of the Conversion
Rate prior to adjustment; and, in lieu of the shares
the issuance of which is so deferred, the Company
shall issue or cause its transfer agents to issue due
bills or other appropriate evidence prepared by the
Company of the right to receive such shares. If any
distribution in respect of which an adjustment to the
Conversion Rate is required to be made as of the
record date, effective date or Determination Date
therefor is not thereafter made or paid by the
Company for any reason, the Conversion Rate shall be
readjusted to the Conversion Rate which would then be
in effect if such record date had not been fixed or
such effective date or Determination Date had not
occurred.
(vii) No adjustment in the Convention Price or the
corresponding Conversion Rate shall be required
unless such adjustment would require an increase or
decrease of at least 1% in such rate; provided,
however, that any adjustments which by reason of this
paragraph are not required to be made shall be
carried forward and taken into account in any
-15-
subsequent adjustment. All calculations under this
paragraph shall be made by the Company and shall be
made to the nearest cent or to the nearest
one-hundredth of a share, as the case may be. No
adjustment need be made for a change in the par value
or no par value of the Common Stock.
(viii) No adjustment need be made for a transaction referred
to in this Section 8 if all holders of all of the
Company's securities are entitled to participate in
the transaction on a basis and with notice that the
Board of Directors determines to be fair and
appropriate in light of the basis and notice on which
holders of Common Stock participate in the
transaction. The Company shall give notice to the
Transfer Agent of any such determination.
(ix) No adjustment need to be made for rights to purchase
Common Stock or issuances of Common Stock pursuant to
a Company plan for reinvestment of dividends of
interest. No adjustment need be made for a change to
the par value or a change to no par value of the
Common Stock. To the extent that the Convertible
Preferred Stock becomes convertible into the right to
receive cash, no adjustment need be made thereafter
as to the cash. Interest will not accrue on the cash.
(x) To the extent that any occurrence specified in this
Section 8(d) shall affect only a particular series of
Common Stock, then any adjustment in respect thereof
shall be computed as though all reference to Common
Stock were to such series of Common Stock. To the
extent that any occurrence specified in this Section
8(d) shall affect a particular series of Common Stock
differently from other series of Common Stock, then
any adjustment in respect thereof shall be computed
separately for each series of Common Stock.
(e) The Company shall be entitled to make such adjustments in
the Conversion Rate, in addition to those required by Section 8, as it
in its discretion shall determine to be advisable in order that any
stock dividends, subdivisions of shares, distributions of rights to
purchase stock or securities or distributions of securities convertible
into or exchangeable for stock hereafter made by the Company to its
shareholders shall not be taxable.
(f) The Company may from time to time reduce the Conversion
Rate by an amount for any period of time if the period is at least 20
days or such longer period as required by law and if the reduction is
irrevocable during the period; provided, however, that in no event may
the Conversion Rate be reduced such that the Conversion Price is less
than the par value of a share of Common Stock.
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(g) Whenever the Conversion Rate is adjusted, the Company
shall promptly file with the Transfer Agent an Officers' Certificate
briefly stating the facts requiring the adjustment and the manner of
computing it.
(h) The Company shall provide to the Holders reasonable notice
of any event that would result in an adjustment to the Conversion rate
so as to permit the Holders to effect a conversion of Convertible
Preferred Stock into shares of Common Stock prior to the occurrence of
such event.
9. CERTAIN COVENANTS.
(a) PAYMENTS FOR CONSENT. Neither the Company nor any of its
subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of dividend or other distribution, fee or
otherwise, to any Holder of shares of the Convertible Preferred Stock
for or as an inducement to any consent, waiver or amendment of any of
the terms or provisions of the Certificate of Designation or the
Convertible Preferred Stock unless such consideration is offered to be
paid and is paid to all Holders of the Convertible Preferred Stock that
consent, waive or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver or agreement.
(b) REPORTS. Whether or not required by the rules and
regulations of the Commission, so long as any shares of the Convertible
Preferred Stock are outstanding, the Company shall furnish to the
Holders of the Convertible Preferred Stock (i) as soon as practicable
after the end of each fiscal year of the Company a consolidated balance
sheet, as at the end of such fiscal year, a consolidated statement of
operations for such year and a consolidated statement of cash flows for
such year, accompanied by a report and opinion thereon by independent
public accountants of national standing selected by the Board of
Directors; (ii) as soon as practicable after the end of each quarterly
accounting period of the Company, a consolidated balance sheet of the
Company as of the end of each such fiscal quarter, and a consolidated
statement of income and a consolidated statement of cash flows of the
Company for such period and for the current fiscal year to date as well
as any additional information necessary to satisfy the information
requirements of Rule 144A(d)(4) promulgated under the Securities Act of
1933, as amended. In the event the Company has filed any such report
with the Commission, it shall not be obligated to separately furnish
the report to any Holder unless and until such Holder requests a copy
of the report.
10. REISSUANCE OF CONVERTIBLE PREFERRED STOCK. Shares of Convertible
Preferred Stock redeemed for or converted into Common Stock or that have been
reacquired in any manner shall not be reissued as shares of Convertible
Preferred Stock and shall (upon compliance with any applicable provisions of the
laws of Delaware) have the status of authorized and unissued shares of Preferred
Stock undesignated as to series and may be redesignated and reissued as part of
any series of Preferred Stock; provided, however, that so long as any shares of
Convertible Preferred Stock are outstanding, any issuance of such shares must be
in compliance with the terms hereof.
-17-
11. BUSINESS DAY. If any payment, redemption or exchange shall be
required by the terms hereof to be made on a day that is not a Business Day,
such payment redemption or exchange shall be made on the immediately succeeding
Business Day,
12. AMENDMENT, SUPPLEMENT AND WAIVER. The Company may amend this
Certificate of Designation with the affirmative vote or consent of the holders
of a majority of the shares of Convertible Preferred Stock then outstanding
(including votes or consents obtained in connection with a tender offer or
exchange offer for the Convertible Preferred Stock) and, except as otherwise
provided by applicable law, any past default or failure to comply with any
provision of this Certificate of Designation may also be waived with the consent
of such holders. Notwithstanding the foregoing, however, without the consent of
each Holder affected, an amendment (including any amendment or restatement of
the Company's Certificate of Incorporation) or waiver may not (with respect to
any shares of the Convertible Preferred Stock held by a non-consenting Holder);
(i) alter the voting rights with respect to the Convertible Preferred Stock or
reduce the number of shares of the Convertible Preferred Stock whose Holders
must consent to an amendment, supplement or waiver, (ii) reduce the Liquidation
Preference of any share of the Convertible Preferred Stock or adversely alter
the provisions with respect to the redemption of the Convertible Preferred
Stock, (iii) reduce the rate of or change the time for payment of dividends on
any share of the Convertible Preferred Stock, (iv) waive a default in the
payment of dividends on the Convertible Preferred Stock, (v) make any share of
the Convertible Preferred Stock payable in money other than United States
dollars, (vi) make any change in the provisions of the Certificate of
Designation relating to waivers of the rights of Holders of the Convertible
Preferred Stock to receive the Liquidation Preference, to receive dividends on
the Convertible Preferred Stock or (vii) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of the
Convertible Preferred Stock, the Company may (to the extent permitted by, and
subject to the requirements of, Delaware law) amend or supplement this
Certificate of Designation to cure any ambiguity, defect or inconsistency, to
provide for uncertificated shares of the Convertible Preferred Stock in addition
to or in place of certificated shares of the Convertible Preferred Stock, to
make any change that would provide any additional rights or benefits to the
Holders of the Convertible Preferred Stock or to make any change that the Board
of Directors determines, in good faith, is not materially adverse to Holders of
the Convertible Preferred Stock or is required for the Company to comply with
the Indenture as in effect on the Issue Date.
13. TRANSFER AND EXCHANGE. When Convertible Preferred Stock is
presented to the Transfer Agent with a request to register the transfer of such
Convertible Preferred Stock or to exchange such Convertible Preferred Stock for
an equal number of shares of Convertible Preferred Stock of other authorized
denominations, the Transfer Agent shall register the transfer or make the
exchange as requested if its reasonable requirements for such transaction are
met and such transfer or exchange is in compliance with applicable laws or
regulations.
14. CERTAIN DEFINITIONS. As used in this Certificate of Designation,
the following terms shall have the following meanings (and (1) terms defined in
the singular have comparable meanings when used in the plural and vice versa,
(2) "including" means including without limitation, (3) "or" is not exclusive
and (4) an accounting term not otherwise defined has the meaning assigned to it
in accordance with United States generally accepted accounting principles as in
effect on Issue Date and all accounting calculations will be determined in
accordance with such principles), unless the content otherwise requires:
-18-
"Affiliate" of any specified Person means (i) any other Person which,
directly or indirectly, controls, is controlled by or is under direct or
indirect common control with, the specified Person, (ii) any other Person that
owns, directly or indirectly, 10% or more of the specified Person's Voting Stock
or (iii) any executive officer or director of the specified Person.
"Board of Directors" mean the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of the Board.
"Business Day" means each day which is not a legal holiday.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in, or other equivalents (however designated
and whether voting and/or non-voting) of, such Person's capital stock, including
Preferred Stock, and any and all rights (other than any evidence of
indebtedness), warrants or options exchangeable for or convertible into such
capital stock.
"Closing Price" means on any day the reported last sale price on such
day, or in case no sale takes place on such day, the average of the reported
closing bid and ask prices on the principal national securities exchange (which
shall include the Nasdaq National Market) on which such stock is listed or
admitted to trading (and if the Common Stock is listed or admitted to trading on
more than one U.S. national or non-U.S. securities exchange, the Company shall
determine, in its reasonable discretion, the principal securities exchange on
which such Common Stock is listed or admitted to trading), or if not listed or
admitted to trading on any securities exchange, the average of the closing bid
and ask prices as furnished by any independent registered broker-dealer firm,
selected by the Company for that purpose, in each case adjusted for any stock
split during the relevant period.
"Commission" means the Securities and Exchange Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Holders" means the registered holders from time to time of the
Convertible Preferred Stock.
"Market Price," for any security as of any date, means the average of
the daily Closing Price for the five consecutive trading days ending on such
date for such security or, if no Closing Prices are available for such security,
the current market value shall be an amount equal to the fair market value of
such security determined in the good faith judgment of the Board of Directors of
the Company.
"Officers' Certificate" means a certificate signed by two officers of
the Company.
"Paying Agent" means the paying agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be Mellon Investor
Services.
-19-
"Permitted Holders" means (i) AIG/SUN America Investments, Inc., (ii)
American General, (iii) AIM Capital Management, (iv) American Express Financial
Advisors, (v) Goldman, Sachs & Co. Special Situations Investing, (vi) LC Capital
Partners, LP, (vii) Lehman Brothers, (viii) Lord Abbett, (ix) Mackay Shields,
(x) Morgan Stanley Asset Management, (xi) Oppenheimer Funds, (xii) Putnam
Investments, (xiii) Romulus Holdings, Inc., (xiv) Triage Capital Management,
(xv) Commonwealth Advisors, Inc., (xvi) Lutheran Brotherhood, (xvii) Lampe
Conway & Co. LLC, (xviii) Bay Harbour Management, (xix) Loeb Partners Corp., and
(xx) with respect to each of the foregoing, any majority-owned Affiliate
thereof.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated) of
such Person's preferred or preference stock, and including, without limitation,
all classes and series of preferred or preference stock of such Person.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means, in respect of any securities exchange or
securities market, each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are not traded on the applicable securities
exchange or in the applicable securities market.
"Transfer Agent" means the transfer agent for the Convertible Preferred
Stock appointed by the Company, which initially shall be Mellon Investor
Services.
"Voting Stock" means, with respect to any Person, the Capital Stock of
any class or kind ordinarily having the power to vote for the election of
directors or other members of the governing body of such Person."
-20-
IN WITNESS WHEREOF, said Globix Corporation, has caused this
Certificate of Designation to be signed by __________________, its
________________________, this ____ day of _________, 2004.
GLOBIX CORPORATION
By:
------------------------------------
Name:
Title:
-21-
APPENDIX B-1
FORM OF
CERTIFICATE OF AMENDMENT
TO
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NEON COMMUNICATIONS, INC.
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware (the "DGCL"), NEON Communications, Inc., a Delaware corporation (the
"Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is NEON Communications, Inc.
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation (the "Certificate of Incorporation") was originally filed with the
Secretary of State of the State of Delaware on December 20, 2002.
THIRD: On _________________, 2004 the Board of Directors of the
Corporation (the "Board of Directors") duly adopted a resolution setting forth
the following amendment to the Certificate of Incorporation (the "Amendment"),
as amended to date:
The definition of "Liquidation Event" set forth in Article FOURTH,
Section A(4) of the Certificate of Incorporation is hereby amended and restated
to read in its entirety as follows:
""Liquidation Event" shall mean (i) the liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, (ii) a
sale, lease or transfer of all or substantially all of the assets of
the Corporation, or (iii) any consolidation, merger or share exchange
of the Corporation in which the holders of the Corporation's voting
stock outstanding immediately prior to such consolidation, merger or
share exchange do not in the aggregate hold a majority of the voting
stock of the surviving or resulting entity outstanding immediately
following such consolidation, merger or share exchange, excluding,
however, (x) a merger or other reorganization solely for the purpose of
changing the Corporation's jurisdiction of organization or name, (y) a
merger of the Corporation with or into a wholly-owned subsidiary of the
Corporation that is incorporated in the United States and (z) a merger
of a wholly owned subsidiary of Globix Corporation with and into the
Corporation that has been duly approved by the stockholders of the
Corporation."
FOURTH: On ______________, 2004, at a special meeting of the
stockholders of the Corporation, duly called and held upon notice in accordance
with Section 222 of the DGCL, the necessary number of shares as required by
statute were voted for the Amendment.
FIFTH: The Amendment was duly adopted in accordance with the provisions
of Section 242 of the DGCL.
(Signature page follows)
IN WITNESS WHEREOF, the Corporation has caused this Amendment to be
signed pursuant to Section 103(a)(2) of the DGCL by the undersigned duly
authorized officer of the Corporation, as of the ___ day of ____________, 2004.
NEON COMMUNICATIONS, INC.
By:
---------------------------------------
Name:
-------------------------------------
Title:
------------------------------------
APPENDIX B-2
FORM OF
CERTIFICATE OF AMENDMENT
TO
CERTIFICATE OF DESIGNATION OF PREFERENCES AND RELATIVE,
PARTICIPATING, OPTIONAL AND OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS AND RESTRICTIONS THEREOF
OF
12% SERIES A CUMULATIVE CONVERTIBLE PREFERRED STOCK
OF
NEON COMMUNICATIONS, INC.
Pursuant to Section 151(g) and Section 242 of the General Corporation
Law of the State of Delaware (the "DGCL"), NEON Communications, Inc., a Delaware
corporation (the "Corporation"), does hereby certify as follows:
FIRST: The name of the Corporation is NEON Communications, Inc.
SECOND: The Amended and Restated Certificate of Incorporation of the
Corporation was originally filed with the Secretary of State of the State of
Delaware on December 20, 2002 and the Certificate of Designation of Preferences
and Relative, Participating, Optional and Other Special Rights of Preferred
Stock and Qualifications, Limitations and Restrictions Thereof of 12% Series A
Cumulative Convertible Preferred Stock of the Corporation (the "Certificate of
Designation") was originally filed with the Secretary of State of the State of
Delaware on December 20, 2002.
THIRD: On _________________, 2004 the Board of Directors of the
Corporation (the "Board of Directors") duly adopted a resolution setting forth
the following amendment to the Certificate of Designation (the "Amendment"), as
amended to date:
The first sentence of Section 7(h) of the Certificate of Designation is
hereby amended and restated to read in its entirety as follows:
"A Change of Control shall be deemed to have occurred if any
of the following occurs: (a) any "person" or "group" (as such terms are
used in Sections 13(d) or 14(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act")), excluding Permitted Holders, is or
becomes the "beneficial owner" (as defined in Rules 13d-3 or 13d-5
under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has or
acquires the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly,
of more than 50% of the total voting power of all Voting Stock of the
Company (except that the person or group shall not be deemed the
"beneficial owner" of shares tendered pursuant to a tender or exchange
offer made by that person or group of any of their Affiliates until the
tendered shares are accepted for purchase or exchange) or has, directly
or indirectly, the right to elect or designate a majority of the Board
of Directors of the Company, or (b) the Company consolidates with, or
merges with or into, another person other than any such transaction
where (i) the "beneficial owners" (as so defined) of the Voting Stock
of the Company immediately before such transaction own, directly or
indirectly, immediately after such transaction, at least a majority of
the voting power of all Voting Stock of the surviving or transferee
corporation or its parent corporation immediately after such
transaction, as applicable, and (ii) immediately after such
transaction, no "person" or "group" (as such terms are defined above),
excluding the Permitted Holders, is the "beneficial owner" (as defined
above), directly or indirectly, of more than 50% of the Voting Stock of
such surviving or transferee corporation or its parent corporation, as
applicable, or has, directly or indirectly, the right to elect or
designate a majority of the board of directors of the surviving or
transferee corporation or its parent corporation, as applicable, or (c)
during any consecutive two-year period, individuals who at the
beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by the Board or
whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office
who were either directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease
for any reason to constitute a majority of the Board then in office, or
(d) the Company sells, assigns, or otherwise disposes of all or
substantially all of its assets; provided, however, that a Change of
Control shall not be deemed to have occurred as a result of a merger of
a wholly owned subsidiary of Globix Corporation with and into the
Company that has been duly approved by the stockholders of the
Company."
FOURTH: On ___________, 2004, at a special meeting of the stockholders
of the Corporation, duly called and held upon notice in accordance with Section
222 of the DGCL, the necessary number of shares as required by statute were
voted for the Amendment.
FIFTH: The Amendment was duly adopted in accordance with the provisions
of Section 242 of the DGCL.
(Signature page follows)
IN WITNESS WHEREOF, NEON Communications, Inc. has caused this
Certificate of Amendment to Certificate of Designation to be signed pursuant to
Section 103(a)(2) of the DGCL by the undersigned duly authorized officer of the
Corporation, as of this ___ day of ______________, 2004.
NEON COMMUNICATIONS, INC.
By:
-----------------------------------
Name:
-----------------------------
Title:
-----------------------------
APPENDIX C
----------
DELAWARE GENERAL CORPORATION LAW
SECTION 262
APPRAISAL RIGHTS
SS. 262. APPRAISAL RIGHTS
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this
section shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof, at the
record date fixed to determine the stockholders entitled to receive
notice of and to vote at the meeting of stockholders to act upon the
agreement of merger or consolidation, were either (i) listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000
holders; and further provided that no appraisal rights shall be
available for any shares of stock of the constituent corporation
surviving a merger if the merger did not require for its approval the
vote of the stockholders of the surviving corporation as provided in
subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection,
appraisal rights under this section shall be available for the shares
of any class or series of stock of a constituent corporation if the
holders thereof are required by the terms of an agreement of merger or
consolidation pursuant to ss.ss. 251, 252, 254, 257, 258, 263 and 264
of this title to accept for such stock anything except:
C-1
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or depository
receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares of stock
(or depository receipts in respect thereof) or depository
receipts at the effective date of the merger or consolidation
will be either listed on a national securities exchange or
designated as a national market system security on an
interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a. and b. of this paragraph; or
d. Any combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or fractional
depository receipts described in the foregoing subparagraphs
a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is
not owned by the parent corporation immediately prior to the merger,
appraisal rights shall be available for the shares of the subsidiary
Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation
that appraisal rights under this section shall be available for the shares of
any class or series of its stock as a result of an amendment to its certificate
of incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for approval
at a meeting of stockholders, the corporation, not less than 20 days
prior to the meeting, shall notify each of its stockholders who was
such on the record date for such meeting with respect to shares for
which appraisal rights are available pursuant to subsection (b) or (c)
hereof that appraisal rights are available for any or all of the shares
of the constituent corporations, and shall include in such notice a
copy of this section. Each stockholder electing to demand the appraisal
of such stockholder's shares shall deliver to the corporation, before
the taking of the vote on the merger or consolidation, a written demand
for appraisal of such stockholder's shares. Such demand will be
C-2
sufficient if it reasonably informs the corporation of the identity of
the stockholder and that the stockholder intends thereby to demand the
appraisal of such stockholder's shares. A proxy or vote against the
merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate
written demand as herein provided. Within 10 days after the effective
date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent
corporation who has complied with this subsection and has not voted in
favor of or consented to the merger or consolidation of the date that
the merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
ss. 228 or ss. 253 of this title, then, either a constituent
corporation before the effective date of the merger or consolidation,
or the surviving or resulting corporation within 10 days thereafter,
shall notify each of the holders of any class or series of stock of
such constituent corporation who are entitled to appraisal rights of
the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of
such constituent corporation, and shall include in such notice a copy
of this section. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the
date of mailing of such notice, demand in writing from the surviving or
resulting corporation the appraisal of such holder's shares. Such
demand will be sufficient if it reasonably informs the corporation of
the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice
did not notify stockholders of the effective date of the merger or
consolidation, either (i) each such constituent corporation shall send
a second notice before the effective date of the merger or
consolidation notifying each of the holders of any class or series of
stock of such constituent corporation that are entitled to appraisal
rights of the effective date of the merger or consolidation or (ii) the
surviving or resulting corporation shall send such a second notice to
all such holders on or within 10 days after such effective date;
provided, however, that if such second notice is sent more than 20 days
following the sending of the first notice, such second notice need only
be sent to each stockholder who is entitled to appraisal rights and who
has demanded appraisal of such holder's shares in accordance with this
subsection. An affidavit of the secretary or assistant secretary or of
the transfer agent of the corporation that is required to give either
notice that such notice has been given shall, in the absence of fraud,
be prima facie evidence of the facts stated therein. For purposes of
determining the stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date that shall
be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of
the merger or consolidation, the record date shall be such effective
date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the
day next preceding the day on which the notice is given.
C-3
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
C-4
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted
such stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and
taxed upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation,
no stockholder who has demanded appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of such
stockholder's demand for an appraisal and an acceptance of the merger or
consolidation, either within 60 days after the effective date of the merger or
consolidation as provided in subsection (e) of this section or thereafter with
the written approval of the corporation, then the right of such stockholder to
an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding
in the Court of Chancery shall be dismissed as to any stockholder without the
approval of the Court, and such approval may be conditioned upon such terms as
the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
C-5
APPENDIX D
September 28, 2004
Special Committee of the Board of Directors
Globix Corporation
139 Centre Street
New York, NY 10013
Gentlemen:
We understand that Globix Corporation ("Globix") and NEON
Communications, Inc. ("NEON") propose to enter into a First Amendment to
Agreement and Plan of Merger (the "Amendment") that amends certain terms of the
Agreement and Plan of Merger dated July 19, 2004 between Globix and NEON (the
"Merger Agreement"). Under the Merger Agreement, as proposed to be amended by
the Amendment (the "Amended Merger Agreement"), upon the terms and subject to
the conditions set forth in the Amended Merger Agreement, a wholly-owned
subsidiary of Globix will be merged with and into NEON and NEON will become a
wholly-owned subsidiary of Globix (the "Merger"). The terms of the Merger will
be set forth more fully in the Amended Merger Agreement.
Pursuant to the Amended Merger Agreement, we understand that at the
Effective Time (as defined in the Merger Agreement), (a) each issued and
outstanding share of 12% Series A Cumulative Convertible Preferred Stock, par
value $0.001 per share, of NEON ("NEON Preferred Stock") (after treating all
accrued dividends as having been paid in additional shares of NEON Preferred
Stock) will be converted into the right to receive (x) $3.75 in cash and (y)
2.08333 of a share of Globix preferred stock with substantially such terms as
are set forth in the Amended Merger Agreement ("Globix Preferred Stock") (the
"Preferred Stock Exchange") and (b) each issued and outstanding share of Common
Stock, par value $0.001 per share, of NEON ("NEON Common Stock") will be
converted into the right to receive the number of shares of common stock, par
value $0.01 per share, of Globix ("Globix Common Stock") equal to the Exchange
Ratio (as defined below). The Exchange Ratio shall equal 1.2748 shares of Globix
Common Stock for each share of NEON Common Stock.
We also understand that, pursuant to the Amended Merger Agreement, a
condition to the obligations of NEON to effect the Merger is that Globix shall
have acquired $12.5 million in the aggregate of principal amount and interest
accrued thereon to the date of exchange of its 11% Senior Secured Notes due 2008
in exchange for an aggregate of approximately 4,545,455 shares of Globix Common
Stock (the "Globix Debt Purchase").
D-1
Special Committee of the Board of Directors
Globix Corporation
September 28, 2004
Page 2
You have asked us to advise you as to the fairness, from a financial
point of view, of the Exchange Ratio to the holders of Globix Common Stock.
For purposes of this opinion we have, among other things: (i) reviewed
the Merger Agreement and a draft of the Amendment dated September 16, 2004; (ii)
reviewed certain publicly available information concerning Globix and NEON and
certain other relevant financial and operating data of Globix and NEON furnished
to us by Globix and NEON; (iii) reviewed the historical stock prices and trading
volumes of the Globix Common Stock; (iv) held discussions with members of
management of Globix and NEON concerning the respective companies' current and
future business prospects and joint prospects for the combined companies,
including the potential cost savings and other synergies that may be achieved by
the combined companies; (v) reviewed certain financial forecasts with respect to
Globix and NEON prepared by the respective managements of Globix and NEON; (vi)
compared certain publicly available financial data of companies whose securities
are traded in the public markets and that we deemed relevant to similar data for
NEON; (vii) reviewed the financial terms of certain other business combinations
that we deemed generally relevant; and (viii) performed and/or considered such
other studies, analyses, inquiries and investigations as we deemed appropriate.
In connection with our review and in arriving at our opinion, we have
assumed and relied on the accuracy and completeness of all of the financial and
other information reviewed by us for purposes of this opinion and have neither
attempted to verify independently nor assumed responsibility for verifying any
of such information. In addition, we have assumed, with your consent, that the
Merger will qualify as a reorganization within the meaning of Section 368(a) of
the Internal Revenue Code of 1986 and that the Merger will be consummated upon
the terms and subject to the conditions set forth in the draft Amended Merger
Agreement dated September 16, 2004 without material alteration or waiver
thereof. With respect to the financial forecasts for Globix and NEON provided to
us by their respective managements and the joint prospects of the combined
companies, we have assumed, with your consent and based upon discussions with
the management of Globix and NEON, that such forecasts have been reasonably
prepared on bases reflecting the best currently available estimates and
judgments of such managements, at the time of preparation, of the future
operating and financial performance of Globix and NEON and the combined
companies, and we have relied, without independent verification, upon the
estimates of such managements of the potential cost savings and other synergies,
including the amount and timing thereof, that may be achieved as a result of the
proposed Merger. We express no opinion with respect to any of such forecasts,
projections or estimates or the assumptions on which they were based. We have
relied on advice of counsel and independent accountants to Globix as to all
legal and financial reporting matters with respect to Globix, the Merger and the
Amended Merger Agreement. We have not assumed any responsibility for or made or
obtained any independent evaluation, appraisal or physical inspection of the
assets or liabilities of Globix or NEON. Further, our opinion is based on
D-2
Special Committee of the Board of Directors
Globix Corporation
September 28, 2004
Page 3
economic, monetary and market conditions as they exist and can be evaluated as
of the date hereof and we assume no responsibility to update or revise our
opinion based upon circumstances and events occurring after the date hereof. Our
opinion as expressed herein is limited to the fairness, from a financial point
of view, of the Exchange Ratio to the holders of Globix Common Stock and does
not address Globix's underlying business decision to engage in the Merger and
the Globix Debt Purchase or the relative merits of the Merger and the Globix
Debt Purchase as compared to other strategies that might be available to Globix.
Our opinion does not constitute a recommendation to any stockholder of Globix as
to how such stockholder should vote on the proposed Merger.
We are not expressing any opinion as to what the value of Globix Common
Stock or Globix Preferred Stock will be when issued pursuant to the Merger or
the prices at which Globix Common Stock will actually trade at any time.
Needham & Company, Inc., as part of its investment banking business, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, negotiated underwritings, secondary
distributions of securities, private placements and other purposes. We have been
engaged by Globix as financial advisor to render this opinion and will receive a
fee for our services, none of which is contingent upon consummation of the
Merger. In addition, Globix has agreed to indemnify us for certain liabilities
arising out of our role as financial advisor and out of the rendering of this
opinion. In the ordinary course of our business, we may actively trade the
equity securities of Globix for our own account or for the accounts of customers
and, accordingly, may at any time hold a long or short position in such
securities.
This letter and the opinion expressed herein are provided at the
request and for the information of the Special Committee of the Board of
Directors of Globix and may not be quoted or referred to or used for any purpose
without our prior written consent, except that this letter may be disclosed in
connection with any registration statement or proxy statement used in connection
with the Merger so long as this letter is quoted in full in such registration
statement or proxy statement.
Based upon and subject to the foregoing, it is our opinion that, as of
the date hereof, and after taking into account the Preferred Stock Exchange and
the Globix Debt Purchase, the Exchange Ratio is fair to the holders of Globix
Common Stock from a financial point of view.
Very truly yours,
/s/ NEEDHAM & COMPANY, INC.
D-3
APPENDIX E
July 16, 2004
Special Committee of the Board of Directors
NEON Communications, Inc.
2200 West Park Drive
Westborough, MA 01581
Members of the Special Committee:
You have requested our opinion (the "Fairness Opinion") as to the fairness, from
a financial point of view, to the holders of common stock of NEON
Communications, Inc. (the "Company") (as stockholders of the Company) of the
Exchange Ratio (as hereinafter defined) set forth in the Agreement and Plan of
Merger dated as of July 16, 2004 (the "Agreement"), by and among the Company and
Globix Corporation ("Globix"). The Agreement provides for, among other things,
the merger of a new wholly-owned subsidiary of Globix ("Merger Sub") with and
into the Company (the "Transaction"), pursuant to which each issued and
outstanding share of common stock in the Company shall be converted into the
right to receive 1.2748 shares (the "Exchange Ratio") of common stock, par value
$0.01 per share, of Globix ("Globix Common Stock"). The Transaction is intended
to qualify as a reorganization within the meaning of Section 368 (a) of the
United States Internal Revenue Code of 1986, as amended. The terms and
conditions of the Transaction are more fully described in the Agreement.
Adams, Harkness & Hill, Inc., as part of its investment banking activities, is
regularly engaged in the valuation of businesses and their securities in
connection with mergers and acquisitions, underwritings, distributions of listed
and unlisted securities, private placements and valuations for corporate and
other purposes. In the ordinary course of our business we may hold long or short
positions of Globix's common stock for either our customers or our own account.
We will receive a fee for providing this Fairness Opinion that is not contingent
upon the consummation of the Transaction.
In developing our Fairness Opinion, we have, among other things:
(i) reviewed the terms of the Agreement dated July 16, 2004 furnished to us
by legal counsel to the Special Committee which, for the purposes of this
Fairness Opinion, we have assumed, with your permission, to be identical
in all material respects to the agreement to be executed;
(ii) analyzed and discussed with management of the Company and Globix certain
historic and projected financial statements and other financial and
operating data concerning each company;
(iii) reviewed and analyzed the historical common stock trading history of
Globix;
(iv) conducted due diligence discussions with members of senior management of
the Company and Globix concerning the financial performance, operations,
business strategy and prospects for such company, respectively;
(v) reviewed and analyzed the potential pro forma financial effects of the
Transaction on the projected financial results of the consolidated
entity;
(vi) compared the results of operations of Globix with those of certain
companies we deemed to be relevant and comparable;
(vii) compared the terms and conditions of the Transaction with certain mergers
and acquisitions we deemed to be relevant and comparable;
(viii) reviewed and analyzed the current capitalization of each of the Company
and Globix, as well as the projected pro forma capitalization of Globix
after giving effect to the Transaction;
(ix) performed such other financial studies, investigations and analyses and
took into account such other matters as we deemed necessary, including
our assessment of general economic, market and monetary conditions as of
the date hereof.
E-1
In connection with our review and arriving at our Fairness Opinion, we have not
independently verified any information received from the Company or Globix, have
relied on such information, and have assumed that all Special Committee of the
Board of Directors NEON Communications, Inc. July 16, 2004 Page 2 such
information is complete and accurate in all material respects. We have also
relied on the assurances of management of the Company that they are not aware of
any facts that would make such information misleading. With respect to any
forecasts reviewed relating to the prospects of the Company or Globix, we have
assumed that they have been reasonably prepared on bases reflecting the best
currently available estimates and judgments of management of the Company and
Globix, respectively, as to the future financial performance of such company.
Our Fairness Opinion is rendered on the basis of securities market conditions
prevailing as of the date hereof and on the conditions and prospects, financial
and otherwise, of the Company and as known to us on the date hereof. It should
be understood that (i) subsequent developments may affect the conclusions
expressed in this opinion if this opinion were rendered as of a later date, and
(ii) Adams, Harkness & Hill, Inc. disclaims any obligation to advise any person
of any change in any manner affecting this opinion that may come to our
attention after the date of this opinion. We have also assumed that, in the
course of obtaining necessary regulatory and third party approvals and consents
for the Transaction, no modification, delay, limitation, restriction, or
conditions will be imposed that will have an adverse effect on the Company,
Globix or the contemplated benefits of the Transaction, and the Transaction will
be consummated in accordance with the terms of the Agreement, without waiver,
modification or amendment of any material term, condition or agreement therein.
We have also assumed that the final Agreement, when executed, will conform to
the draft reviewed by us in all respects material to our analysis. We have not
conducted, nor have we received copies of, any independent valuation or
appraisal of any of the assets of the Company or Globix. In addition, we have
assumed that any material liabilities (contingent or otherwise, known or
unknown) of the Company or Globix are as set forth in the historic and projected
financial statements of the Company and Globix, respectively. This Fairness
Opinion is necessarily based upon the information available to us and facts and
circumstances as they exist and are subject to evaluation on the date hereof;
events occurring after the date hereof could materially affect the assumptions
used in preparing this Fairness Opinion.
We are not expressing any opinion herein as to the price at which Globix shares
have traded, the actual value of the Globix Common Stock when issued in the
Transaction or the price at which Globix Common Stock may trade at any time in
the future. We have not undertaken to reaffirm or revise this Fairness Opinion
or otherwise comment upon any events occurring after the date hereof and do not
have any obligation to update, revise or reaffirm this Fairness Opinion.
It is agreed between the Special Committee of the Board of Directors and Adams,
Harkness & Hill, Inc. that this letter is directed to, may be relied upon by and
is for the information of the Special Committee and the Board of Directors of
the Company only, may not be relied upon by any other person, and may not be
used for any other purpose without our prior written consent. It is also agreed
that this Fairness Opinion does not address the relative merits of the
Transaction or the other business strategies that might be available to the
Company, nor does it address the decision of the Board of Directors to proceed
with the Transaction. We have been engaged by the Company solely to render this
Fairness Opinion to the Special Committee in connection with the Transaction. We
have not participated in, or provided any advice with respect to, the pricing
determination, structuring or negotiation of the Transaction. This letter does
not constitute a recommendation to any shareholder as to how such shareholder
should vote on the proposed Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair, from a financial point of view to holders of
Company common stock (as stockholders of the Company).
Sincerely,
ADAMS, HARKNESS & HILL, INC.
E-2
APPENDIX F
October 8, 2004
Special Committee of the Board of Directors
NEON Communications, Inc.
2200 West Park Drive
Westborough, MA 01581
Members of the Special Committee:
You have requested an affirmation of our opinion (the "Fairness Opinion"), dated
July 16, 2004, as to the fairness, from a financial point of view, to the
holders of common stock of NEON Communications, Inc. (the "Company") (as
stockholders of the Company) of the Exchange Ratio (as hereinafter defined) set
forth in the Agreement and Plan of Merger dated as of July 16, 2004 (the
"Agreement"), by and among the Company and Globix Corporation ("Globix"). The
Agreement, as amended October 8, 2004, provides for, among other things, the
merger of a new wholly-owned subsidiary of Globix ("Merger Sub") with and into
the Company (the "Transaction"), pursuant to which each issued and outstanding
share of common stock of the Company shall be converted into the right to
receive 1.2748 shares (the "Exchange Ratio") of common stock, par value $0.01
per share, of Globix ("Globix Common Stock"). The Transaction is intended to
qualify as a reorganization within the meaning of Section 368 (a) of the United
States Internal Revenue Code of 1986, as amended. The terms and conditions of
the Transaction are more fully described in the Agreement.
Adams Harkness, Inc., as part of its investment banking activities, is regularly
engaged in the valuation of businesses and their securities in connection with
mergers and acquisitions, underwritings, distributions of listed and unlisted
securities, private placements and valuations for corporate and other purposes.
In the ordinary course of our business we may hold long or short positions of
Globix's common stock for either our customers or our own account. We will
receive a fee for providing the Fairness Opinion and this affirmation thereof is
not contingent upon the consummation of the Transaction.
In connection with our affirmation of the Fairness Opinion, we have, among other
things:
(i) reviewed the terms of the Agreement dated October 8, 2004, as amended,
furnished to us by legal counsel to the Special Committee;
(ii) analyzed and discussed with management of the Company and Globix certain
historic and projected financial statements and other financial and
operating data concerning each company;
(iii) reviewed and analyzed the historical common stock trading history of
Globix;
(iv) conducted due diligence discussions with members of senior management of
the Company and Globix concerning the financial performance, operations,
business strategy and prospects for such company, respectively;
(v) reviewed and analyzed the potential pro forma financial effects of the
Transaction on the projected financial results of the consolidated
entity;
(vi) compared the results of operations of Globix with those of certain
companies we deemed to be relevant and comparable;
(vii) compared the terms and conditions of the Transaction with certain
mergers and acquisitions we deemed to be relevant and comparable;
(viii) reviewed and analyzed the current capitalization of each of the Company
and Globix, as well as the projected pro forma capitalization of Globix
after giving effect to the Transaction;
(ix) performed such other financial studies, investigations and analyses and
took into account such other matters as we deemed necessary, including
our assessment of general economic, market and monetary conditions as of
the date hereof.
F-1
Special Committee of the Board of Directors
NEON Communications, Inc.
October 8, 2004
Page 2
In connection with our review and arriving at the Fairness Opinion and this
affirmation thereof, we have not independently verified any information received
from the Company or Globix, have relied on such information, and have assumed
that all such information is complete and accurate in all material respects. We
have also relied on the assurances of management of the Company that they are
not aware of any facts that would make such information misleading. With respect
to any forecasts reviewed relating to the prospects of the Company or Globix, we
have assumed, and have received written confirmation thereof, that they have
been reasonably prepared on bases reflecting the best currently available
estimates and judgments of management of the Company and Globix, respectively,
as to the future financial performance of such company. In particular, with
permission of the Special Committee, in connection with our affirmation of the
Fairness Opinion, we have relied on the financial projections prepared by Globix
management and utilized in the analysis supporting our Fairness Opinion of July
16, 2004, and not any subsequently shared financial modeling scenarios.
Our affirmation of the Fairness Opinion is rendered on the basis of securities
market conditions prevailing as of the date hereof and on the conditions and
prospects, financial and otherwise, of the Company and Globix as known to us on
the date hereof. It should be understood that (i) subsequent developments may
affect the conclusions expressed in this opinion if this opinion were rendered
as of a later date, and (ii) Adams Harkness, Inc. disclaims any obligation to
advise any person of any change in any manner affecting this opinion that may
come to our attention after the date of this opinion. We have also assumed that,
in the course of obtaining necessary regulatory and third party approvals and
consents for the Transaction, no modification, delay, limitation, restriction,
or conditions will be imposed that will have an adverse effect on the Company,
Globix or the contemplated benefits of the Transaction, and the Transaction will
be consummated in accordance with the terms of the Agreement, without waiver,
modification or amendment of any material term, condition or agreement therein.
We have not conducted, nor have we received copies of, any independent valuation
or appraisal of any of the assets of the Company or Globix. In addition, we have
assumed that any material liabilities (contingent or otherwise, known or
unknown) of the Company or Globix are as set forth in the historic and projected
financial statements of the Company and Globix, respectively. This affirmation
of our Fairness Opinion is necessarily based upon the information available to
us and facts and circumstances as they exist and are subject to evaluation on
the date hereof; events occurring after the date hereof could materially affect
the assumptions used in preparing our affirmation of the Fairness Opinion.
We are not expressing any opinion herein as to the price at which Globix shares
have traded, the actual value of the Globix Common Stock when issued in the
Transaction or the price at which Globix Common Stock may trade at any time in
the future. We have not undertaken to subsequently reaffirm or revise this
affirmation of the Fairness Opinion or otherwise comment upon any events
occurring after the date hereof and do not have any obligation to update, revise
or reaffirm this affirmation of the Fairness Opinion.
It is agreed between the Special Committee of the Board of Directors and Adams
Harkness, Inc. that this letter is directed to, may be relied upon by and is for
the information of the Special Committee and the Board of Directors of the
Company only, may not be relied upon by any other person, and may not be used
for any other purpose without our prior written consent. It is also agreed that
neither our Fairness Opinion nor this affirmation thereof addresses the relative
merits of the Transaction or the other business strategies that might be
available to the Company, nor does it address the decision of the Board of
Directors to proceed with the Transaction. We have been engaged by the Company
solely to render the Fairness Opinion and this affirmation thereof to the
Special Committee in connection with the Transaction. We have not participated
in, or provided any advice with respect to, the pricing determination,
structuring or negotiation of the Transaction. This letter does not constitute a
recommendation to any shareholder as to how such shareholder should vote on the
proposed Transaction.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Exchange Ratio is fair, from a financial point of view to holders of
Company common stock (as stockholders of the Company).
Sincerely,
ADAMS HARKNESS, INC.
F-2