UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) March 7, 2005
Globix Corporation
(Exact name of registrant as specified in its charter)
Delaware 1-14168 13-3781263
(State or other jurisdiction of (Commission (IRS Employer
incorporation) File Number) Identification No.)
139 Centre Street,
New York, New York 10013
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 334-8500
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (SEE General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
Form 8-K, Current Report
Globix Corporation
Commission File No. 001-14168
ITEM 2.01. COMPLETION OF ACQUISITION OR DISPOSITION OF ASSETS
As previously reported, on March 7, 2005 we completed our merger with
NEON Communications, Inc. ("NEON"). Pursuant to the terms of the Agreement and
Plan of Merger with NEON dated July 19, 2004, as amended by the first amendment
to the Merger Agreement dated October 8, 2004, NEON became a wholly owned
subsidiary of Globix Corporation.
On March 11, 2005, we filed a current report on Form 8-K disclosing the
merger and stating that the financial statements of NEON for the periods
specified in Rule 3-05 of Regulation S-X will be filed by amendment.
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Businesses Acquired.
(b) Pro Forma Financial Information.
(c) Exhibits
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Dated: May 20, 2005 Globix Corporation
By: /s/ Robert M. Dernnerlein
--------------------------
Name: Robert M. Dennerlein
Title: Chief Financial Officer
(a) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED.
NEON COMMUNICATIONS, INC.
CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
Report of Independent Registered Public Accounting Firm - Amper, Politziner & Mattia, P.C. 1
Report of Independent Registered Public Accounting Firm - BDO Seidman, LLP 2
Consolidated Financial Statements:
Balance Sheets 3
Statement of Operations 4
Statements of Preferred Stock and Stockholders' Equity 5
Statements of Cash Flows 6
Notes to Consolidated Financial Statements 7 - 25
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
NEON Communications, Inc.
We have audited the accompanying consolidated balance sheet of NEON
Communications, Inc, and subsidiaries as of December 31, 2004, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year 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 audit.
We conducted our audit in accordance with standards of the Public Accounting
Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. 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 NEON Communications,
Inc. and subsidiaries as of December 31, 2004 and the results of their
operations and their cash flows for the year then ended, in conformity with
United States generally accepted accounting principles.
On March 7, 2005, the Company's stockholders sold their entire equity interest
to Globix Corporation, a publicly-held company (see Note 17).
/s/ Amper, Politziner & Mattia, P.C.
------------------------------------
Edison, New Jersey
April 5, 2005
-1-
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 the related
consolidated statements of operations, preferred stock and stockholders' equity
and cash flows for each of the years in the two year period ended December 31,
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 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 the consolidated results of
their operations and their cash flows for each of the years in the two year
period ended December 31, 2003, in conformity with accounting principles
generally accepted in the United States of America.
/s/ BDO Seidman, LLP
---------------------
Boston, Massachusetts
March 23, 2004
-2-
NEON COMMUNICATIONS, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
2004 2003
==================================================================================================
CURRENT ASSETS:
Cash and cash equivalents $ 10,457,462 $ 14,934,102
Accounts receivable, net of reserves of approximately
$2,096,000 and $2,291,000 in 2004 and 2003,
respectively (Note 4) 1,925,663 1,799,123
Prepaid expenses and other current assets 1,050,711 2,225,185
--------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS 13,433,836 18,958,410
--------------------------------------------------------------------------------------------------
Restricted cash and investments (Note 4) 7,500,103 8,254,915
PROPERTY AND EQUIPMENT, net (Note 6) 116,181,055 136,605,867
OTHER ASSETS, net (Note 7) 3,626,218 3,189,223
--------------------------------------------------------------------------------------------------
Total assets $ 140,741,212 $ 167,008,415
==================================================================================================
LIABILITIES, PREFERRED STOCK AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 5,616,313 $ 3,685,991
Accrued expenses (Note 14) 7,884,828 8,902,788
Deferred revenue (Note 4) 2,524,892 2,273,483
--------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES 16,026,033 14,862,262
--------------------------------------------------------------------------------------------------
DEFERRED REVENUE, net of current portion (Note 4) 14,168,734 14,857,995
--------------------------------------------------------------------------------------------------
OTHER LONG-TERM LIABILITIES (Note 2) 1,921,716 1,767,655
--------------------------------------------------------------------------------------------------
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) 15,706,514 13,978,739
--------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Note 8):
Common stock, $0.001 par value; 100,000,000 shares
authorized, 16,117,799 and 15,771,872 shares
issued and outstanding in 2004 and 2003, respectively 16,118 15,772
Additional paid-in capital 126,343,694 124,156,895
Accumulated deficit (33,441,597) (2,630,903)
--------------------------------------------------------------------------------------------------
Total stockholders' equity 92,918,215 121,541,764
--------------------------------------------------------------------------------------------------
Total liabilities, preferred stock and stockholders'
equity $ 140,741,212 $ 167,008,415
==================================================================================================
See accompanying notes to consolidated financial statements.
-3-
NEON COMMUNICATIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
SUCCESSOR PREDECESSOR
COMPANY COMPANY
2004 2003 2002
========================================================================================================
REVENUES (Note 4):
Network services $ 43,071,255 $ 37,516,681 $ 30,507,541
Other services 4,985,931 4,071,627 3,166,672
--------------------------------------------------------------------------------------------------------
Total revenues 48,057,186 41,588,308 33,674,213
EXPENSES:
Cost of revenues 26,089,625 20,887,915 17,688,266
Selling, general and administrative 16,554,018 16,521,960 17,750,466
Depreciation and amortization (Note 4) 10,849,066 8,999,491 23,318,867
Asset impairment allowance (Note 17) 22,000,000 -- --
Transaction costs (Note 17) 2,000,000 -- --
--------------------------------------------------------------------------------------------------------
Total expenses 77,492,709 46,409,366 58,757,599
--------------------------------------------------------------------------------------------------------
Loss from operations (29,435,523) (4,821,058) (25,083,386)
OTHER INCOME (EXPENSE):
Interest and other income 357,888 569,590 446,540
Interest and other expense (5,284) (15,200) (17,108,091)
--------------------------------------------------------------------------------------------------------
Total other income (expense), net 352,604 554,390 (16,661,551)
--------------------------------------------------------------------------------------------------------
LOSS BEFORE BENEFIT FROM INCOME TAXES,
EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT
OF CHANGE IN ACCOUNTING PRINCIPLE (29,082,919) (4,266,668) (41,744,937)
BENEFIT FROM INCOME TAXES (Note 2) -- 1,287,322 --
--------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEMS AND CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (29,082,919) (2,979,346) (41,744,937)
--------------------------------------------------------------------------------------------------------
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 -- 1,930,984 26,513,191
--------------------------------------------------------------------------------------------------------
(LOSS) BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (29,082,919) (1,048,362) (15,231,746)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (Note 4) -- -- (72,311,911)
--------------------------------------------------------------------------------------------------------
NET (LOSS) $(29,082,919) $ (1,048,362) $(87,543,657)
========================================================================================================
See accompanying notes to consolidated financial statements.
-4-
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Preferred Stock Common Stock Restricted Common Stock
--------------- ------------ -----------------------
Years Ended December 31, 2002,
2003 and 2004 Shares Liquidation Shares Par Value Shares Par Value
Value
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 -- --
Exercise of stock options -- -- 3,991 4 -- --
Stock based compensation
associated with stock
options (Note 9) -- -- -- -- -- --
Sale of common stock to
Northeast Utilities in
exchange for
extinguishment of a
liability (Note 11) -- -- 341,936 342 -- --
Accretion of dividends
on preferred stock
(Note 8 ) -- 1,727,775 -- -- -- --
Net loss -- -- -- -- -- --
------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004
(successor) 1,101,887 $ 15,706,514 16,117,799 $ 16,118 -- $ --
====================================================================================================================================
(CONTINUED BELOW)
See accompanying notes to consolidated financial statements.
-5a-
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND STOCKHOLDERS' EQUITY (CONTINUED)
Years Ended December 31, 2002, Additional Total
2003 and 2004 Subscription Paid-In Accumulated Stockholders'
Value Capital Deficit Equity
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
Exercise of stock options -- 1,124 -- 1,128
Stock based compensation
associated with stock
options (Note 9) -- 113,887 -- 113,887
Sale of common stock to
Northeast Utilities in
exchange for
extinguishment of a
liability (Note 11) -- 2,071,788 -- 2,072,130
Accretion of dividends
on preferred stock
(Note 8) -- -- (1,727,775) (1,727,775)
Net loss -- -- (29,082,919) (29,082,919)
--------------------------------------------------------------------------------------------------------------
Balance, December 31, 2004
(successor) $ -- $ 126,343,694 $ (33,441,597) $ 92,918,215
==============================================================================================================
See accompanying notes to consolidated financial statements.
-5b-
NEON COMMUNICATIONS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31,
SUCCESSOR PREDECESSOR
COMPANY COMPANY
2004 2003 2002
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES: $(29,082,919) $ (1,048,362) $(87,543,657)
Net loss
Adjustments to reconcile net loss
to net cash used in
operating activities:
Cumulative effect of change in
accounting principle
(Note 4) -- -- 72,311,911
Gain on acquisition (Note 2) -- (3,218,306) --
Asset impairment allowance (Note 17) 22,000,000 -- --
Non-cash stock-based compensation
expense (Note 9) 113,887 120,147 --
Loss (gain) on disposal of property
and equipment (13,226) -- 110,319
Amortization of prepaid right-of-way
fees (Note 7) 387,369 387,369 3,610,139
Depreciation and amortization (Note 4) 10,849,066 8,999,491 23,318,867
Reorganization items (Note 3) -- -- (32,720,640)
Changes in current assets and current
liabilities, net of acquisitions:
Accounts receivable (126,540) 343,233 2,800,298
Prepaid expenses and other current assets 1,174,475 (30,841) (180,867)
Accounts payable 3,851,741 (4,095) 4,452,525
Accrued expenses (1,017,959) 940,660 6,032,788
Deferred revenue (720,971) 1,046,052 (782,236)
-----------------------------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 7,414,923 7,535,348 (8,590,553)
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 111,710 -- 99,820
Purchase of property and equipment (12,085,559) (8,292,941) (8,494,813)
Cash acquired from acquisition, net of
cash paid (Note 2) -- 4,520,115 --
Decrease (increase) in other assets (824,365) (766,780) 1,882,133
-----------------------------------------------------------------------------------------------------
(12,798,214) (4,539,606) (6,512,860)
Net cash used in investing activities
-----------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in accounts
payable - communications network 150,711 (1,480,791) (3,674,166)
(Increase) decrease in restricted cash and
investments 754,812 (5,698,288) 11,697,553
Proceeds from stock subscription receivable -- 62,452 1,207,152
Net proceeds from issuance of preferred stock -- -- 12,333,746
Proceeds from exercise of common stock options 1,128 -- --
-----------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing
activities 906,651 (7,116,627) 21,564,285
-----------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (4,476,640) (4,120,885) 6,460,872
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 14,934,102 19,054,987 12,594,115
-----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 10,457,462 $ 14,934,102 $ 19,054,987
=====================================================================================================
SUPPLEMENTAL CASH FLOW DISCLOSURES (Note 16)
=====================================================================================================
See accompanying notes to consolidated financial statements.
-6-
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 year ended December 31, 2002 is generally not comparable to the
financial information for subsequent years. The presentation of financial
information of the "Predecessor Company" represents the Company's financial
information for the 2002 year end prior to the Company's adoption of fresh start
reporting.
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, "Business Combinations".
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.
-7-
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:
-8-
3. RESTRUCTURING - (CONTINUED)
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 of 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 of 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
==========================================================================================================================
-9-
3. RESTRUCTURING - (CONTINUED)
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.
-10-
3. RESTRUCTURING - (CONTINUED)
(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.
(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 inter-company 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.
-11-
4. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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, 2004, 2003 and 2002 represented approximately 2%, 3% and 4%
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.
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 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, 2004 and 2003.
At December 31, 2004 and 2003, restricted investments included a money market
and an escrow account. These investments are used as collateral for certain
bonds and other obligations related to the Company's network.
Financial instruments that potentially subject the company to concentrations of
credit risk consist principally of cash and cash equivalents accounts in
financial institutions. Cash and cash equivalents exceeding federally insured
limits totaled $17,446,000 at December 31, 2004.
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
-12-
4. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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,
2004, 2003 and 2002 was approximately $0 million, $0 million, and $1.9 million,
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." (See Note 17).
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.
For the year ended December 31, 2004, one customer accounted for approximately
15% of net revenues. For the years ended December 31, 2003 and 2002 two
customers each accounted for approximately 10% of net revenues. As of December
31, 2004, one customer represented approximately 50% of accounts receivable.
This amount was subsequently collected in full from the customer.
The Company has no significant off-balance-sheet or other concentration of
credit risks at December 31, 2004 or 2003.
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.
-13-
4. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
INTANGIBLE ASSET IMPAIRMENT - (CONTINUED)
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.
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:
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
DECEMBER 31, 2004 2003 2002
========================================================================================================================
Net loss as reported $(29,083,000) $ (1,048,000) $(87,544,000)
Add: stock-based employee compensation expense
included in reported net loss 114,000 120,000 -
Deduct: total stock-based employee compensation determined under
fair value method for all awards (124,000) (361,000) -
------------------------------------------------------------------------------------------------------------------------
Pro forma net loss $(29,093,000) $ (1,289,000) $(87,544,000)
========================================================================================================================
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, 2004 2003 2002
========================================================================================================================
Risk free interest rate 3.0% 3.0% N/A
Expected dividend yield None None N/A
Expected lives 3 years 3 years N/A
Volatility 0% 0% N/A
The weighted average fair value of options granted during the years ended
December 31, 2004 and 2003 was $0.83 and $0.51, respectively. The weighted
average remaining contractual life of options outstanding at December 31, 2004
was approximately 8.3 years (2003 - 9.2 years).
There were no options granted during the year ended December 31, 2002.
-14-
4. SIGNIFICANT ACCOUNTING POLICIES - (CONTINUED)
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 $1.9 million and
$1.8 million at December 31, 2004 and 2003 respectively. Accretion expense for
the year ended December 31, 2004 was approximately $129,000 and was not deemed
material for 2003.
RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform to the current
period presentation.
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, 2004. 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.
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 adoption of
FIN 46 did not 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.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No 123(R), "Share-Based Payment", which is a revision of SFAS No. 123 and
supersedes APB Opinion 25. SFAS No. 123(R) requires all share based payments to
employees, including grants of employee stock options, to be valued at fair
value on the date of grant, and to be expenses over the applicable vesting
period. Pro-forma disclosure of the income statement effects of share-based
payments is no longer an alternative. SFA No. 123(R) is effective for all
stock-based awards granted on or after July 1, 2005. In addition, companies must
also recognize compensation expense related to any awards that are not fully
vested as of the effective date. Compensation expense for the unvested awards
will be measured based on the fair value of the awards previously calculated in
developing the pro forma disclosures in accordance with the provisions of SFAS
No. 123.
The Company plans to adopt SFAS No 123(R) in the first quarter of fiscal 2006.
This change in accounting is not expected to materially impact our financial
position. We have not completed the calculation of this impact. However, because
we currently account for share-based payments to our employees using the
intrinsic value method, our results of operations have not included the
recognition of compensation expenses for the issuance of stock option awards.
-15-
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, 2004. 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.
6. PROPERTY AND EQUIPMENT
Property and equipment consists of:
DECEMBER 31,
2004 2003
====================================================================================
Communications network infrastructure $ 120,599,000 $ 112,993,000
Communications network construction-in-process 11,623,000 9,064,000
Network and office equipment 21,197,000 19,520,000
Leasehold improvements 3,644,000 3,315,000
Furniture and fixtures 838,000 713,000
------------------------------------------------------------------------------------
157,901,000 145,605,000
Less:
Asset impairment allowance (See Note 17) 22,000,000 -
Accumulated depreciation and amortization 19,720,000 8,999,000
------------------------------------------------------------------------------------
$ 116,181,000 $ 136,606,000
====================================================================================
-16-
6. PROPERTY AND EQUIPMENT - (CONTINUED)
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,
2004 2003
================================================================================
Prepaid right-of-way fees, related party $ 1,787,000 $ 1,787,000
Long-term prepaid lease fees 2,402,000 1,551,000
Security deposits 212,000 238,000
--------------------------------------------------------------------------------
4,401,000 3,576,000
Less: Accumulated amortization 775,000 387,000
--------------------------------------------------------------------------------
$ 3,626,000 3,189,000
================================================================================
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, 2004, $3,310,317 in dividends had accrued on the Series A Preferred
Stock. 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.
-17-
8. PREFERRED STOCK AND STOCKHOLDERS' EQUITY - (CONTINUED)
REDEEMABLE PREFERRED STOCK AND WARRANTS
At December 31, 2004 and 2003, 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, 2004 and 2003, 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.
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, 2004 and 2003, 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).
-18-
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 year ended December 31, 2002
is as follows:
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
--------------------------------------------------------------------------------
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,
non-statutory 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. These stock options vest over a three year period. 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. These stock options vest over a one year
period. Under the 2003 Plan, the Company can issue options to purchase up to
125,000 shares of common stock.
As of December 31, 2004, a total of 330,481 and 81,342 stock options are
available for issuance under the 2002 and 2003 stock option plans, respectively.
Stock option activity under the 2003 and 2002 Plans for the years ended December
31, 2004 and 2003 is as follows:
NUMBER OF SHARES RANGE WEIGHTED 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
Granted 339,782 $0.30 - $6.06 $5.27
Exercised (3,991) $0.27 $0.27
Canceled (47,000) $5.30 - $6.06 $5.49
---------------------------------------------------------------------------------------------
Outstanding, December 31, 2004 2,182,177 $0.27 - $6.06 $5.34
=============================================================================================
Exercisable, December 31, 2004 1,025,314 $0.27 - $6.06 $5.16
=============================================================================================
Exercisable, December 31, 2003 227,316 $0.27 - $5.30 $4.77
=============================================================================================
Effective January 1, 2004, the Company awarded stock-options to purchase 19,772
shares of its common stock to the Company's non-management directors with an
exercise price of $0.30 per share. The fair market value of these options was
$6.06 per share. The options vest over a one year period. Accordingly,
compensation expense in the amount of $113,887 related to these awards was
charged to expense during the year ended December 31, 2004. This value is
included in selling, general and administrative expenses in the 2004
consolidated statement of operations.
-19-
9. STOCK OPTION PLANS - (CONTINUED)
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.
Stock option activity under the 2003 and 2002 Plans for the year ended December
31, 2004 is summarized as follows:
EXERCISE PRICE RANGE TOTAL
$0.27 TO $0.30 $5.30 TO $6.06 $0.27 TO $6.06
-------------- -------------- --------------
OUTSTANDING OPTIONS
Number outstanding 39,677 2,142,500 2,182,177
Weighted average remaining contractual life (years) 8.5 8.3 8.3
Weighted average exercise price $ 0.28 $ 5.44 $ 5.34
EXERCISE OPTIONS
Number outstanding 39,677 985,637 1,025,314
Weighted average exercise price $ 0.28 $ 5.35 $ 5.16
10. INCOME TAXES
The income tax benefit for the years ended December 31, 2004, 2003 and 2002
consisted of the following:
2004 2003 2002
================================================================================================
Current:
Federal $ - $ - $ -
State - - -
Deferred:
Federal (10,132,000) (1,435,000) (29,765,000)
State (1,774,000) (253,000) (3,467,000)
------------------------------------------------------------------------------------------------
(11,906,000) (1,688,000) (33,232,000)
Less: Valuation allowance 11,906,000 1,688,000 33,232,000
------------------------------------------------------------------------------------------------
Total $ - $ - $ -
================================================================================================
-20-
10. INCOME TAXES - (CONTINUED)
The components of the deferred taxes at December 31, 2004 and 2003 were
approximately as follows:
2004 2003
====================================================================
Net operating losses $ 35,752,000 $ 31,996,000
Asset impairment 53,468,000 44,576,000
Depreciation (19,708,000) (17,959,000)
Reserves and accruals, not
currently deductible 10,385,000 9,378,000
--------------------------------------------------------------------
79,897,000 67,991,000
Valuation allowance (79,897,000) (67,991,000)
--------------------------------------------------------------------
Net deferred tax asset $ - $ -
====================================================================
As of December 31, 2004, 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 $89 million (2003 - $79
million). These carry forwards expire through 2024 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 (See Note 17). 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 2004, Mode 1 purchased approximately 342,000
shares of the Company's common stock for approximately $2.1 million in exchange
for the extinguishment of a liability. 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. Such amount was paid as required. 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.
-21-
11. OTHER RELATED PARTY TRANSACTIONS - (CONTINUED)
NORTHEAST UTILITIES AGREEMENTS (CONTINUED)
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, 2004 and 2003, approximately $1.0 million and $1.4 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 3), 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
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 $1.2 million, $1.4
million and $26,000 in 2004, 2003 and 2002, respectively, and approximately $0
million, and $1.4 million, was included in accrued expenses at December 31, 2004
and 2003 respectively.
COMMUNICATION TECHNOLOGY ADVISORS LLC
Communication Technology Advisors LLC ("CTA") provides advisory and rent service
to the Company. Costs of approximately $453,000, $959,000 and $1,303,000 were
included in the selling, general and administrative costs for the years ended
December 31, 2004, 2003 and 2002, respectively.
During 2003, the Company issued two warrants to CTA 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).
EMPLOYMENT AGREEMENTS
The Company has an employment agreement with one officer. The agreement provides
for employment and related compensation and restricts the individual from
competing, as defined, with the Company during the terms of his agreement. The
agreement also provides for stock options under the 2002 Plan and for severance
payments upon termination under circumstances defined in the agreement.
-22-
12. OTHER COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases certain collocation facilities, vehicles, and office
equipment and facilities under non-cancelable operating leases which expire at
various dates through October 2021. Future minimum lease payments required under
these leases at December 31, 2004 were approximately as follows:
YEAR ENDING DECEMBER 31,
================================================================================
2005 $ 2,639.000
2006 2,191,000
2007 2,169,000
2008 2,070,000
2009 1,755,000
Thereafter 13,450,000
--------------------------------------------------------------------------------
Total $ 24,274,000
================================================================================
Rent expense charged to operations under the Company's operating leases was
approximately $4.3 million, $3.5 million and $4.5 million in the years ended
December 31, 2004, 2003 and 2002, respectively.
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, 2004 were
approximately as follows:
YEAR ENDING DECEMBER 31,
================================================================================
2005 $ 9,102,000
2006 9,225,000
2007 9,285,000
2008 9,263,000
2009 9,398,000
Thereafter 132,911,000
--------------------------------------------------------------------------------
Total $ 179,184,000
================================================================================
Fiber lease expense charged to operations under the above agreements was
approximately $7.5 million, $7.8 million and $6.9 million in the years ended
December 31, 2004, 2003 and 2002, respectively.
STANDBY LETTERS OF CREDIT
Commitments under standby letters of credit, issued primarily to secure certain
leases, totaled approximately $7,090,000 and $7,819,000 at December 31, 2004 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. The
Company did not match contributions to the Plan for the years ended December 31,
2004, 2003 and 2002.
-23-
14. ACCRUED EXPENSES
Accrued expenses at December 31, 2004 and 2003 consisted of the following:
2004 2003
=======================================================================
Accrued property and other taxes $ 2,819,000 $ 2,716,000
Accrued professional fees 285,000 172,000
Accrued payables to related parties 9,000 1,582,000
Accrued payroll and benefits 1,852,000 2,138,000
Accrued commissions 261,000 293,000
Accrued other 2,659,000 2,002,000
-----------------------------------------------------------------------
$ 7,885,000 $ 8,903,000
=======================================================================
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:
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
DECEMBER 31, 2004 2003 2002
=======================================================================
Revenues:
Lit fiber leases $ 36,966,000 $ 32,287,000 $ 24,077,000
Dark fiber leases 6,105,000 5,229,000 6,430,000
Collocation services 1,645,000 1,281,000 1,203,000
Other services (1) 3,341,000 2,791,000 1,964,000
-----------------------------------------------------------------------
Total Revenues $ 48,057,000 $ 41,588,000 $ 33,674,000
=======================================================================
(1) Includes amortization of nonrecurring fees for installation and design,
engineering and construction services.
-24-
16. SUPPLEMENTAL CASH FLOW DISCLOSURE
YEARS ENDED DECEMBER 31
SUCCESSOR SUCCESSOR PREDECESSOR
COMPANY COMPANY COMPANY
2004 2003 2002
---- ---- ----
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ -- $ -- $ 11,475,000
Taxes $ 957,000 $ 809,000 $ 158,000
Supplemental disclosure of non-cash investing
and financing activities:
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 $ -- $ -- $290,531,000
with POR (Note 3)
Repayment of subscription receivable
with certain property and equipment $ -- $ -- $ 12,202,000
(Note 5)
Non-cash forgiveness of long-term debt $ -- $ -- $ 10,000,000
(Note 5)
Warrants issued in lieu of cash payments $ -- $ 360,000 $ --
(Note 8)
Accretion of dividends on 12% Series A
Preferred Stock $ 1,728,000 $ 1,538,000 $ 45,000
Extinguishment of a liability in
exchange for common stock (Note 11) $ 2,072,000 $ 1,428,000 $ --
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 $ --
===================================================================================================
17. SUBSEQUENT EVENT
On March 7, 2005, the Company's stockholders sold their interests to Globix
Corporation ("Globix"), a publicly-held company, for approximately $108 million
of Globix securities and cash. The Company became a wholly-owned subsidiary of
Globix at that time. The Company incurred approximately $2 million of costs
associated with the transaction, which are reflected in the consolidated
statement of operations for the year ended December 31, 2004. In comparing the
consideration the Company's Stockholders received from the sale to the Company's
net assets as of December 31, 2004, it was determined that an asset impairment
allowance of $22 million against the carrying value of property and equipment
was required to be recorded in the consolidated statement of operations for the
year ended December 31,2004.
-25-
(b) PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statements of
operations give effect to Globix Corporation's ("Globix") acquisition of NEON
Communications, Inc. ("NEON"). The merger was completed on March 7, 2005 and
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 was allocated to NEON's assets acquired and liabilities assumed
based on their estimated fair values as of the merger date. The impact of the
inclusion of NEON's assets acquired and liabilities assumed are reflected in the
Globix's 10Q for the period ended March 31, 2005.
The unaudited pro forma condensed consolidated statements of operations
are presented as if the merger occurred on October 1, 2003.
The purchase price of $112.6 million consisted of $5.3 million in cash,
the issuance of 27,573,006 shares of common stock with a fair value of $83.5
million (based on the average share price during the three day period before and
after the announcement of the merger), the issuance of 2,971,753 shares of
cumulative convertible preferred stock with a fair market value of $12.6 million
the issuance 3,380,939 shares of stock options and warrants with a fair value of
$7.9 million and approximately $3.2 million of other direct acquisition costs.
As a condition to the closing of the acquisition of Neon, Globix debt
holders exchanged $12.5 million in principal and accrued interest of their 11%
senior notes for 4,545,455 shares of its common stock in private transactions
pursuant to separate securities exchange agreements. This exchange resulted in a
loss of $3.2 million in the quarter ended March 31, 2005.
The unaudited pro forma condensed consolidated financial statements
have been prepared by Globix management for illustrative purposes only and are
not necessarily indicative of the condensed consolidated financial 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
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, including the notes thereto, of
Globix as of and for the year ended September 30, 2004.
-26-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS OF GLOBIX COPRORATION
(IN THOUSANDS EXCEPT PER SHARE DATA)
Historical
------------------------------
NEON
Globix Twelve Months
Year Ended Ended Pro Forma
September 30, September 30, Pro Forma Condensed
2004 (A) 2004 (B) Adjustments Consolidated
------------ ------------ ------------ ------------
Revenue, net $ 61,190 $ 46,551 $ -- $ 107,741
Operating costs and expenses:
Cost of revenue 19,747 26,030 -- 45,777
Selling, general and
administrative 43,518 16,524 -- 60,042
Loss on impairment of assets 17,972 -- -- 17,972
Depreciation and amortization 13,828 10,265 (838) (C) 23,255
------------ ------------ ------------ ------------
Total operating costs and expenses: 95,065 52,819 (838) 147,046
Loss from operations (33,875) (6,268) 838 (39,305)
Other income (expense), net (9,258) 395 1,315 (E) (7,548)
Gain on debt discharge 1,747 -- -- 1,747
------------ ------------ ------------ ------------
Loss before income tax (41,386) (5,873) 2,153 (45,106)
Income tax benefit (expense) -- -- -- --
------------ ------------ ------------ ------------
Net loss (41,386) (5,873) 2,153 (45,106)
Dividends on 6% cumulative convertible
preferred stock -- -- 317 (G) 317
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (41,386) $ (5,873) $ 1,836 $ (45,423)
============ ============ ============ ============
Basic and diluted loss per share: $ (2.51) $ (0.94)
============ ============
Weighted average common shares outstanding
- basic and diluted 16,460,000 32,118,461 (H) 48,578,461
============ ============ ============
(A) Derived from the audited financial statements filed on form 10K/A for
the year ended September 30, 2004.
(B) Derived from the unaudited financial statements covering the twelve
month period of October 1, 2003 through September 30, 2004.
(C) To reflect the adjustment to fair value of acquired tangible and
intangible assets as if the merger has occurred on October 1, 2003.
(E) To eliminate interest expenses on the converted 11% Senior Notes as if
the conversion has occurred on October 1, 2003.
(G) To reflect the dividends on the Globix' 6% cumulative convertible
preferred stock as if issued at October 1, 2003.
(H) Pro Forma basic and diluted net loss per share for the year ended
September 30, 2004 is computed by dividing the pro forma net loss
attributable to common stockholders for the period by weighted average
common shares outstanding for the period. The adjustments to historical
weighted average share outstanding resulted from the inclusion of
shares issued in connection with acquisition and shares issued as part
of the conversion of the $12,500 of 11% Senior Notes, as if those
transactions occurred on October 1, 2003.
-27-
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENT OF OPERATIONS OF GLOBIX COPRORATION
(IN THOUSANDS EXCEPT PER SHARE DATA)
Historical
------------------------------
NEON
October 1,
2004
Globix to March 7,
Six Months 2005
Ended (date of Pro Forma
March 31, acquisition) Pro Forma Condensed
2005 (A) (B) Adjustments Consolidated
------------ ------------ ------------ ------------
Revenue, net $ 36,561 $ 21,345 $ -- $ 57,906
Operating costs and expenses:
Cost of revenue 21,117 11,658 -- 32,775
Selling, general and
administrative 16,507 8,701 (2,0000)(C) 23,208
Loss on impairment of assets -- 22,000 (22,000)(D) --
Depreciation and amortization 8,015 5,046 (419)(D) 12,642
------------ ------------ ------------ ------------
Total operating costs and expenses: 45,639 47,405 (24,419) 68,625
Loss from operations (9,078) (26,060) 24,419 (10,719)
Other income (expense), net (5,288) 154 658 (E) (4,476)
Loss on debt discharge (3,182) -- 3,182 (F) --
------------ ------------ ------------ ------------
Loss before income tax (17,548) (25,906) 28,258 (15,195)
Income tax benefit (expense) -- -- -- --
------------ ------------ ------------ ------------
Net loss (17,548) (25,906) 28,258 (15,195)
Dividends on 6% cumulative convertible
preferred stock -- -- 163 (G) 163
------------ ------------ ------------ ------------
Net loss attributable to common stockholders $ (17,548) $ (25,906) $ 28,096 $ (15,358)
============ ============ ============ ============
Basic and diluted loss per share: $ (0.85) $ (0.32)
============ ============
Weighted average common shares outstanding
- basic and diluted 20,707,127 27,883,059 (H) 48,590,186
============ ============ ============
(A) Derived from March 31, 2005 10Q
(B) Derived from historical unaudited results from October 1, 2004 to March
7, 2005 (date of acquisition).
(C) Eliminate Neon's direct merger costs included in results for period
presented.
(D) To reflect the adjustment to fair value of acquired tangible and
intangible assets as if the merger has occurred on October 1, 2003.
(E) To eliminate interest expenses on the converted 11% Senior Notes as if
the conversion has occurred on October 1, 2003.
(F) To eliminate loss on debt for equity swap that was a condition of the
merger.
(G) To reflect the dividends on the Globix' 6% cumulative convertible
preferred stock as if issued at October 1, 2003.
(H) Pro Forma basic and diluted net loss per share for the six months ended
March 31, 2005 is computed by dividing the pro forma net loss
attributable to common stockholders for the period by weighted average
common shares outstanding for the period. The adjustments to historical
weighted average share outstanding resulted from the inclusion of
shares issued in connection with acquisition and shares issued as part
of the conversion of the $12,500 of 11% Senior Notes, as if those
transactions occurred on October 1, 2003.
(c) Exhibit Description
23.1 Consent of Amper, Politziner & Mattia, P.C. independent
registered accounting firm
23.2 Consent of BDO Seidman, LLP, independent registered public
accounting firm
23.3 Consent of Amper, Politziner & Mattia, P.C. independent
registered accounting firm
-28-