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NEON Communications Group, Inc. – ‘S-4/A’ on 12/8/04

On:  Wednesday, 12/8/04, at 8:50pm ET   ·   As of:  12/9/04   ·   Accession #:  1019687-4-2766   ·   File #:  333-119666

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

12/09/04  NEON Communications Group, Inc.   S-4/A                  9:1.3M                                   Publicease Inc/FA

Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction   —   Form S-4
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: S-4/A       Pre-Effective Amendment to Registration of           397   2.00M 
                          Securities Issued in a                                 
                          Business-Combination Transaction                       
 2: EX-5        Opinion re: Legality                                   1      9K 
 3: EX-12       Statement re: Computation of Ratios                    2±    10K 
 4: EX-23.1     Consent of Experts or Counsel                          1      6K 
 5: EX-23.2     Consent of Experts or Counsel                          1      6K 
 6: EX-23.3     Consent of Experts or Counsel                          1      7K 
 7: EX-99.1     Miscellaneous Exhibit                                  2     10K 
 8: EX-99.2     Miscellaneous Exhibit                                  2     12K 
 9: EX-99.7     Miscellaneous Exhibit                                  1      7K 


S-4/A   —   Pre-Effective Amendment to Registration of Securities Issued in a Business-Combination Transaction
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
"Peter K. Stevenson
2Calculation of Registration Fee
6Neon Communications, Inc
9Table of Contents
11Questions and Answers About the Proposed Merger
17Summary
26Selected Unaudited Pro Forma Condensed Combined Consolidated Financial Information
27Comparative Historical and Pro Forma Per Share Data
29Market Price Data and Dividend Information
30Cautionary Statement Concerning Forward-Looking Statements
31Risk Factors
35Risk Factors Related to Globix
49The Special Meeting of Globix Corporation Stockholders
51Quorum, Adjournment, Abstentions and Broker Non-Votes for Shares Held in a Brokerage Account
52The Special Meeting of Neon Communications, Inc. Stockholders
57The Merger
63The Globix Special Committee's and Globix's Reasons for the Merger
64Opinion of Globix's Financial Advisor
67Selected Company Analysis
68Selected Transaction Analysis
70The NEON Special Committee's and NEON's Reasons for the Merger
"The NEON Special Committee's Reasons for the Merger
72Opinion of NEON's Financial Advisor
80Interests of Certain Persons in the Merger
81Debt-for-Equity Exchange
82Operation of Globix and NEON after the Merger
83Material United States Federal Income Tax Consequences
92Terms of the Merger Agreement and Related Transactions
"Conversion of Shares in the Merger
94Procedures for Exchanging Stock and Warrant Certificates
99Conditions Precedent to Each Party's Obligation to Effect the Merger
104Approval of Amendment of NEON's Certificate of Incorporation
"Approval of Amendment of Certificate of Designation for NEON Convertible Preferred Stock
105Information About Globix
109Our Chapter 11 Bankruptcy Reorganization
110Properties
111Legal Proceedings
112Selected Consolidated Financial Data of Globix
115Globix Management's Discussion and Analysis of Financial Condition and Results of Operations
117Other
"Revenue Recognition
118Estimates
119Accounting for Income Taxes
"Revenue
127Successor Company
130Changes In and Disagreements With Accountants on Accounting and Financial Disclosure
132Share Ownership of Certain Beneficial Owners and Management of Globix
136Description of Globix Capital Stock
137Description of Preferred Stock
139Description of Globix Warrants
141Information About Neon
149Selected Consolidated Financial Data of NEON
152NEON Management's Discussion and Analysis of Financial Condition and Results of Operations
162Security Ownership of Directors, Executive Officers and More Than Five Percent Stockholders of NEON
166Management of Globix After Merger
175Employment Agreements
177Globix Certain Relationships and Related Transactions
178Securities Ownership of Certain Beneficial Owners and Management of Globix Following The Merger
183Unaudited Pro Forma Condensed Combined Consolidated Financial Statements of Globix Corporation and Neon Communications, Inc
188Comparison of Stockholders' Rights
"Globix
"Neon
198Amendment
199Other Matters
200Where You Can Find More Information
202Report of Independent Registered Public Accounting Firm
218Foreign Currency Translation
220Predecessor Company
260Common Stock
270Article I the Merger
"Section 1.1 The Merger
271Section 1.2 Closing
"Section 1.3 Effective Time
"Section 1.4 Effects of the Merger
"Section 1.5 Charter
"Section 1.6 Bylaws
"Section 1.7 Officers and Directors of the Surviving Corporation
"Section 1.8 Effect on Capital Stock
273Section 1.9 Treatment of NEON Options
274Article Ii Exchange of Certificates
"Section 2.1 Exchange of Certificates
"Section 2.2 Exchange Procedures
"Section 2.3 Dividends; Transfer Taxes; Withholding
275Section 2.4 Return of Exchange Fund
"Section 2.5 No Further Ownership Rights in NEON Securities
276Section 2.6 Closing of NEON Transfer Books
"Section 2.7 Lost Certificates
"Section 2.8 Dissenting Shares
277Section 2.9 Further Assurances
"Article Iii Representations and Warranties
"Section 3.1 Representations and Warranties of NEON
296Section 3.2 Representations and Warranties of Globix
316Article Iv Covenants Relating to Conduct of Business
"Covenants Relating to Conduct of Business
"Section 4.1 Covenants of NEON
319Section 4.2 Covenants of Globix
322Section 4.3 No Control
"Article V Additional Agreements
"Section 5.1 Preparation of Proxy Statement; Stockholders Meetings
323Section 5.2 Access to Information
324Section 5.3 Reasonable Efforts
325Section 5.4 Public Announcements
"Section 5.5 Employee Benefits Matters
"Section 5.6 Fees and Expenses
326Section 5.7 Directors' and Officers' Indemnity
"Section 5.8 Consents, Waivers and Other Approvals
327Section 5.9 Committee for Transition Issues
"Section 5.10 Schedules
"Section 5.11 Financial Review
"Section 5.12 Cooperation
328Article Vi Conditions Precedent
329Section 6.2 Additional Conditions to Obligations of Globix
330Section 6.3 Additional Conditions to Obligations of NEON
332Article Vii Termination and Amendment
"Section 7.1 Termination
334Section 7.2 Effect of Termination
"Section 7.3 Amendment
"Section 7.4 Extension; Waiver
"Article Viii Survival
335Article Ix General Provisions
"Section 9.1 Amendment and Waiver
"Section 9.2 Notices
336Section 9.3 Interpretation
"Section 9.4 Counterparts
"Section 9.5 Entire Agreement; No Third Party Beneficiaries
"Section 9.6 Governing Law
337Section 9.7 Severability
"Section 9.8 Assignment
"Section 9.9 Submission to Jurisdiction; Waivers
"Section 9.10 Enforcement
338Section 9.11 Definitions
341Section 9.12 Additional Definitions
3516% Series A Cumulative Convertible Preferred Stock
389Item 20. Indemnification of Directors and Officers
390Item 21. Exhibits and Financial Statement Schedules
393Item 22. Undertakings
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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 9, 2004 Registration No. 333-119666 -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------- AMENDMENT NO. 1 TO FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------------------------- GLOBIX CORPORATION (Exact Name of Registrant as Specified in Its Charter) DELAWARE 13-3781263 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER) 7389 (PRIMARY STANDARD INDUSTRIAL CLASSIFICATION CODE NUMBER) ----------------------------------- 139 CENTRE STREET NEW YORK, NEW YORK 10013 (212) 334-8500 (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) PETER K. STEVENSON PRESIDENT AND CHIEF EXECUTIVE OFFICER GLOBIX CORPORATION 139 CENTRE STREET NEW YORK, NEW YORK 10013 (212) 334-8500 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE) ----------------------------------- COPIES TO: BONNIE J. ROE, ESQ. MELINDA BRUNGER, ESQ. DAY, BERRY & HOWARD LLP ANDREWS KURTH LLP 875 THIRD AVENUE 600 TRAVIS, SUITE 4200 NEW YORK, NY 10022 HOUSTON, TX 77002 TELEPHONE: (212) 829-3600 TELEPHONE: (713) 220-4200 ----------------------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective and all other conditions to the merger described in the joint proxy statement/prospectus have been satisfied or waived.
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If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. |_| If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. |_| If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act of 1933, check the following box and list the Securities Act of 1933 registration statement number of the earlier effective registration statement for the same offering. |_| ----------------------------------- [Enlarge/Download Table] CALCULATION OF REGISTRATION FEE ----------------------------------------- -------------------- -------------------- ------------------------ ---------------------- TITLE OF EACH CLASS OF AMOUNT TO BE PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION FEE SHARE PRICE ----------------------------------------- -------------------- -------------------- ------------------------ ---------------------- Common Stock, $.01 par value(1) 33,818,269 $ 4.28 $ 132,386,818 $16,773.41 (2) Convertible Preferred Stock, $.01 2,908,614 $ 3.60 $ 10,471,028 $ 1,326.68 (4) par value(3) TOTAL $18,100.09 (5) ----------------------------------------- -------------------- -------------------- ------------------------ ---------------------- (1) This Registration Statement covers the maximum number of shares of Globix Corporation ("Globix") common stock, par value $.01 per share, that are estimated to be issued, directly or indirectly, upon the consummation of the proposed merger of a new wholly owned subsidiary of Globix with and into NEON Communications, Inc. ("NEON"), including (x) 30,909,655 shares of Globix common stock calculated based on the number of shares of NEON common stock, par value $0.001 per share, issued and outstanding, including shares underlying all outstanding options and warrants to purchase NEON common stock that are exercisable as of October 30, 2004 or that become fully exercisable immediately prior to the consummation of the merger, calculated as of October 30, 2004 (24,246,670) and an exchange ratio of 1.2748 shares of Globix common stock for each such share of NEON common stock and (y) 2,908,614 shares of Globix common stock issuable pursuant to the conversion of Globix convertible preferred stock described in footnote 3 below. (2) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, because there is currently no public trading market for NEON common stock, the registration fee was computed on the basis of the book value of such securities computed as of December 1, 2004 ($5.46). This amount does not include 2,908,614 shares of Globix common stock that are issuable upon conversion of the Globix convertible preferred stock at the option of the holder at any time, by virtue of Rule 457(i) of the Securities Act of 1933. (3) This Registration Statement covers the maximum number of shares of Globix convertible preferred stock that are estimated to be issued upon the consummation of the proposed merger of a new wholly owned subsidiary of Globix with and into NEON, calculated based on the product of (a) the number of shares of NEON 12% Series A Cumulative Convertible Preferred Stock, par value $0.001 per share, issued and outstanding, after treating all accrued and unpaid dividends on the NEON convertible preferred stock immediately prior to the merger as if paid in additional shares of NEON convertible preferred stock, calculated as if the closing occurred on December 31, 2004 (1,396,137) and (b) an exchange ratio of 2.08333 shares of Globix convertible preferred stock to be created in connection with the merger for each such share of NEON convertible preferred stock.
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(4) Pursuant to Rule 457(f)(2) of the Securities Act of 1933, because there is currently no public trading market for NEON 12% Series A Cumulative Convertible Preferred Stock, the registration fee was computed on the basis of the book value of such securities computed as of December 1, 2004 ($11.25), reduced by the maximum amount of cash ($3.75) to be paid by the Registrant in exchange for such securities. (5) The amount of the registration fee has been paid as follows: (a) $8.56 is being paid with this amendment no 1 to the registration statement; and (b) $18,091.53 was previously paid in connection with the initial filing of the registration statement on October 12, 2004. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. -------------------------------------------------------------------------------- --------------------------------------------------------------------------------
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-------------------------------------------------------------------------------- THE INFORMATION IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THE REGISTRANT MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE REGISTRANT IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. -------------------------------------------------------------------------------- SUBJECT TO COMPLETION, DATED DECEMBER ____, 2004. [GLOBIX LOGO] [NEON LOGO] Dear Globix and NEON Stockholders: After careful consideration, the board of directors of NEON Communications, Inc. ("NEON") has approved (with one director, Mr. Steven Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Robert Grubin, abstaining) and the board of directors of Globix Corporation ("Globix") has approved (with one director, Mr. Lampe, abstaining) the merger of a new wholly owned subsidiary of Globix with and into NEON, resulting in NEON becoming a wholly owned subsidiary of Globix. If the merger is consummated, each outstanding share of common stock of NEON would be converted into the right to receive 1.2748 shares of Globix common stock and each outstanding share of NEON's 12% Series A Cumulative Convertible Preferred Stock ("NEON convertible preferred stock") would be converted into the right to receive (a) $3.75 in cash and (b) 2.08333 shares of a new class of Globix convertible preferred stock to be created in connection with the merger ("Globix convertible preferred stock") in exchange for each share of NEON convertible preferred stock immediately prior to the merger, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. The terms of the conversion are described in detail in the section entitled "Terms of the Merger Agreement and Related Transactions" beginning on page [___] of this joint proxy statement/prospectus. Globix common stock is traded on the OTC Bulletin Board under the symbol "GBXX.OB." The closing price for Globix common stock reported on the OTC Bulletin Board on December 1, 2004 was $3.05 per share. Application has been made to list Globix common stock on the American Stock Exchange. At the Globix special meeting, Globix stockholders will be asked to consider and vote upon a proposal to approve the issuance of Globix common stock to the security holders of NEON in the merger. At the NEON special meeting, NEON stockholders will be asked to consider and vote upon a proposal to approve the merger, the merger agreement and the transactions contemplated by the merger agreement and to approve a proposed amendment to the amended and restated certificate of incorporation and a proposed amendment to the certificate of designation with respect to the NEON convertible preferred stock, which is a constituent part of the certificate of incorporation. YOUR VOTE IS VERY IMPORTANT. Whether or not you plan to attend your company's special meeting, please take the time to vote by promptly completing and mailing the enclosed proxy card in the postage-paid envelope provided. BEFORE YOU VOTE, PLEASE REVIEW THIS JOINT PROXY STATEMENT/PROSPECTUS AND IN PARTICULAR REVIEW THE MATTERS REFERRED TO UNDER "RISK FACTORS" BEGINNING ON PAGE 20 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. On Behalf of the Board of Directors On Behalf of the Board of Directors of of Globix Corporation, NEON Communications, Inc., /s/ Peter K. Stevenson /s/ Stephen E. Courter ------------------------------------- ------------------------------------- Peter K. Stevenson Stephen E. Courter, President, President and Chief Executive Officer Chief Executive Officer and Chairman of the Board NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS JOINT PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS JOINT PROXY STATEMENT/PROSPECTUS IS DATED ___________, 2004 AND WAS FIRST MAILED TO STOCKHOLDERS OF GLOBIX AND STOCKHOLDERS OF NEON ON OR ABOUT ____________, 2004. --------------------------------------------------------------------------------
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GLOBIX CORPORATION 139 Centre Street New York, New York 10013 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 13, 2005 To the stockholders of Globix: A special meeting of the stockholders of Globix Corporation ("Globix"), will be held at the offices of Globix at 139 Centre Street, New York, New York on January 13, 2005 at 10:00 a.m., local time, for the following purposes: 1. To consider and vote upon a proposal to issue shares of common stock with a par value of $0.01 per share pursuant to the Agreement and Plan of Merger, dated as of July 19, 2004, as amended by the First Amendment to Agreement and Plan of Merger, dated as of October 8, 2004 (as amended, the "merger agreement"), by and among Globix and NEON Communications, Inc. ("NEON"), pursuant to which a new wholly owned subsidiary of Globix will be merged with and into NEON and NEON will become a wholly owned subsidiary of Globix (the "merger"). A copy of the merger agreement and the first amendment to the merger agreement are attached as Appendices A-1 and A-2, respectively, to the joint proxy statement/prospectus accompanying this notice. 2. To grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the Globix special meeting, if necessary. 3. To consider and act upon any other matter that may properly come before the special meeting or any adjournment or postponement of the special meeting. The accompanying joint proxy statement/prospectus and proxy card are being furnished to the stockholders of Globix in connection with the solicitation of proxies by Globix's board of directors for use at the special meeting of stockholders. Globix's board of directors (with one director, Mr. Steven Lampe, abstaining) has approved the merger, the merger agreement and the transactions contemplated by the merger agreement and recommends that you vote "FOR" the proposed issuance of Globix common stock in connection with the merger and "FOR" the proposal to grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the Globix special meeting, if necessary. The proposals are described in more detail in the accompanying joint proxy statement/prospectus, which you should read in its entirety before voting. The board of directors has fixed the close of business on December 6, 2004 as the record date for determining the stockholders entitled to receive this notice, and to vote their shares at the special meeting or any adjournment or postponement of the special meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY TIME PRIOR TO ITS USE. PROMPTLY SIGNING AND RETURNING YOUR PROXY CARD WILL HELP ENSURE THE PRESENCE OF A QUORUM FOR THE SPECIAL MEETING. A postage-paid, self-addressed envelope is enclosed for your convenience. Your shares will be voted at the special meeting in accordance with your proxy. By Order of the Board of Directors of Globix Corporation, /s/ PETER K. STEVENSON ------------------------------------- Peter K. Stevenson President and Chief Executive Officer
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NEON COMMUNICATIONS, INC. 2200 West Park Drive Westborough, Massachusetts 01581 NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON JANUARY 13, 2005 To the stockholders of NEON: A special meeting of the stockholders of NEON Communications, Inc. ("NEON"), will be held at the offices of NEON at 2200 West Park Drive, Westborough, Massachusetts on January 13, 2005 at 10:00 a.m., local time, for the following purposes: 1. To approve and adopt the Agreement and Plan of Merger, dated as of July 19, 2004, as amended by the First Amendment to Agreement and Plan of Merger, dated as of October 8, 2004 (as amended, the "merger agreement"), by and among Globix Corporation ("Globix") and NEON, pursuant to which a new wholly owned subsidiary of Globix will be merged with and into NEON, and the transactions contemplated by the merger agreement (the "merger"). As a result of the merger, NEON will become a wholly owned subsidiary of Globix. A copy of the merger agreement and the first amendment to the merger agreement are attached as Appendices A-1 and A-2, respectively, to the joint proxy statement/prospectus accompanying this notice. 2. To approve and adopt an amendment to the amended and restated certificate of incorporation ("certificate of incorporation") of NEON to provide that the merger of a new wholly owned subsidiary of Globix with and into NEON is not a "Liquidation Event" of NEON that would trigger the liquidation provision, which provides that upon the occurrence of a liquidation event (including a transaction such as the merger), all assets of NEON remaining after payment of all liabilities and subject to any preferential payments would be distributed ratably to its common stockholders. A copy of the proposed amendment to NEON's certificate of incorporation is included in the joint proxy statement/prospectus in Appendix B-1. 3. To approve and adopt an amendment to the certificate of designation with respect to NEON's 12% Series A Cumulative Convertible Preferred Stock to provide that the merger of a new wholly owned subsidiary of Globix with and into NEON is not a "Change of Control" of NEON that would trigger the change of control provisions in the certificate of designation, including the right of each holder of NEON convertible preferred stock to require NEON to purchase its shares of NEON convertible preferred stock for cash. A copy of the proposed amendment to NEON's certificate of designation is included in the joint proxy statement/prospectus in Appendix B-2. 4. To grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. 5. To consider and act upon any other matter that may properly come before the special meeting or any adjournment or postponement of the special meeting. The accompanying joint proxy statement/prospectus and proxy card are being furnished to the stockholders of NEON in connection with the solicitation of proxies by NEON's board of directors for use at the special meeting of stockholders.
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NEON's board of directors (with one director, Mr. Steven Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Robert Grubin, abstaining) has approved the merger, the merger agreement and the transactions contemplated by the merger agreement and the amendments to the certificate of incorporation and the certificate of designation and recommends that you vote "FOR" approval and adoption of the merger, the merger agreement and the transactions contemplated by the merger agreement, "FOR" approval and adoption of the amendment of NEON's certificate of incorporation, "FOR" approval and adoption of the amendment of the certificate of designation for the NEON convertible preferred stock and "FOR" the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. The proposals are described in more detail in the accompanying joint proxy statement/prospectus, which you should read in its entirety before voting. The board of directors has fixed the close of business on December 7, 2004 as the record date for determining the stockholders entitled to receive this notice, and to vote their shares at the special meeting or any adjournment or postponement of the special meeting. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE SIGN, DATE AND PROMPTLY RETURN THE ENCLOSED PROXY CARD, WHICH YOU MAY REVOKE AT ANY TIME PRIOR TO ITS USE. PROMPTLY SIGNING AND RETURNING YOUR PROXY CARD WILL HELP ENSURE THE PRESENCE OF A QUORUM FOR THE SPECIAL MEETING. A postage-paid, self-addressed envelope is enclosed for your convenience. Your shares will be voted at the special meeting in accordance with your proxy. By Order of the Board of Directors of NEON Communications, Inc., /s/ STEPHEN E. COURTER ---------------------------------- Stephen E. Courter President, Chief Executive Officer and Chairman of the Board
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ADDITIONAL INFORMATION Important business and financial information about Globix is contained in documents filed with the Securities and Exchange Commission, referred to as the SEC, that are not included in, or delivered with, this joint proxy statement/prospectus. Globix will provide you with copies of this information, without charge, upon written or oral requests to: Globix Corporation 139 Centre Street New York, NY 10013 (212) 334-8500 Attention: Eran Hertz PLEASE REQUEST DOCUMENTS FROM GLOBIX NOT LATER THAN JANUARY 5, 2005. UPON REQUEST, GLOBIX WILL MAIL ANY DOCUMENTS TO YOU BY FIRST CLASS MAIL BY THE NEXT BUSINESS DAY. See the section entitled "Where You Can Find More Information" beginning on page 175 of this joint proxy statement/prospectus for more information about the documents referred to in this joint proxy statement/prospectus. You should rely only on the information contained in this joint proxy statement/prospectus in deciding how to vote on the respective proposals described in this joint proxy statement/prospectus. No one has been authorized to provide you with information that is different from that contained in this joint proxy statement/prospectus. This joint proxy statement/prospectus is dated [ ], 2004. You should not assume that the information contained in this joint proxy statement/prospectus is accurate as of any date other than that date. This joint proxy statement/prospectus does not constitute an offer to sell, or a solicitation of an offer to buy, any securities or the solicitation of a proxy, in any jurisdiction to or from any person to whom it is unlawful to make any such offer or solicitation in such jurisdiction. Information contained in this joint proxy statement/prospectus regarding Globix and its wholly owned subsidiary to be created in connection with the merger has been provided by Globix and information contained in this joint proxy statement/prospectus regarding NEON has been provided by NEON.
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TABLE OF CONTENTS PAGE ---- QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER................................1 SUMMARY........................................................................7 SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION................................................................16 COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA...........................17 MARKET PRICE DATA AND DIVIDEND INFORMATION....................................19 CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS....................20 RISK FACTORS..................................................................21 THE SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS........................39 THE SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS.................43 THE MERGER....................................................................48 TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS........................83 APPROVAL OF AMENDMENT OF NEON'S CERTIFICATE OF INCORPORATION..................95 APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION FOR NEON CONVERTIBLE PREFERRED STOCK................................................95 INFORMATION ABOUT GLOBIX......................................................96 Selected Consolidated Financial Data of Globix......................103 Globix Management's Discussion and Analysis of Financial Condition and Results of Operations..............................106 Share Ownership of Certain Beneficial Owners and Management of Globix........................................................123 Description of Globix Capital Stock.................................127 INFORMATION ABOUT NEON.......................................................132 Selected Consolidated Financial Data of NEON........................140 NEON Management's Discussion and Analysis of Financial Condition and Results of Operations..............................143 Security Ownership of Directors, Executive Officers and More Than Five Percent Stockholders of NEON...........................153 MANAGEMENT OF GLOBIX AFTER MERGER............................................157 GLOBIX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................168 SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBIX FOLLOWING THE MERGER...............................................169 UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL STATEMENTS OF GLOBIX CORPORATION AND NEON COMMUNICATIONS, INC.............174 COMPARISON OF STOCKHOLDERS' RIGHTS...........................................179 OTHER MATTERS................................................................190 i
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WHERE YOU CAN FIND MORE INFORMATION..........................................191 GLOBIX FINANCIAL STATEMENTS..................................................F-1 NEON FINANCIAL STATEMENTS...................................................F-42 APPENDIX A-1 AGREEMENT AND PLAN OF MERGER APPENDIX A-2 FIRST AMENDMENT TO AGREEMENT AND PLAN OF MERGER APPENDIX B-1 FORM OF CERTIFICATE OF AMENDMENT TO AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF NEON APPENDIX B-2 FORM OF CERTIFICATE OF AMENDMENT TO CERTIFICATE OF DESIGNATION FOR NEON CONVERTIBLE PREFERRED STOCK APPENDIX C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW APPENDIX D OPINION OF NEEDHAM & COMPANY, INC. APPENDIX E OPINION OF ADAMS HARKNESS, INC. APPENDIX F AFFIRMATION LETTER OF ADAMS HARKNESS, INC. ii
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QUESTIONS AND ANSWERS ABOUT THE PROPOSED MERGER Q: WHAT IS THE PROPOSED TRANSACTION UPON WHICH I AM BEING ASKED TO VOTE? A: NEON and Globix propose to enter into a business combination pursuant to the terms of a merger agreement. In the merger, a new wholly owned subsidiary of Globix will merge with and into NEON with NEON surviving the merger. As a result, NEON will become a wholly owned subsidiary of Globix. In order to complete the merger, Globix stockholders must approve the issuance of shares of Globix common stock in connection with the merger and NEON stockholders must approve and adopt the merger, the merger agreement, and the transactions contemplated by the merger agreement, as well as an amendment to NEON's certificate of incorporation and an amendment to NEON's certificate of designation with respect to its convertible preferred stock. Each of Globix and NEON will hold a special meeting of its respective stockholders to obtain these approvals. Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE? A: Globix and NEON independently concluded that the merger will benefit the two companies and thus the stockholders of each company. To review the reasons for the transaction in greater detail, see "The Merger - The NEON Special Committee's and NEON's Reasons for the Merger" beginning on page 61 of this joint proxy statement/prospectus and "The Merger - The Globix Special Committee's and Globix's Reasons for the Merger" beginning on page 54 of this joint proxy statement/prospectus. Q: WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON COMMON STOCK? A: If the merger is completed, you will receive 1.2748 shares of Globix common stock in exchange for each share of NEON common stock that you own. Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON CONVERTIBLE PREFERRED STOCK? A. If the merger is completed, you will receive (a) $3.75 in cash and (b) 2.08333 shares of a new class of Globix convertible preferred stock to be created in connection with the merger in exchange for each share of NEON convertible preferred stock that you own immediately prior to the merger, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON STOCK OPTIONS? A. If the merger is completed, each option to acquire NEON common stock that was granted under NEON's stock plans or otherwise granted by NEON and that is outstanding and unexercised immediately prior to the effective time of the merger will be modified and become an option to purchase Globix common stock. The number of shares of Globix common stock issuable pursuant to a NEON stock option will be equal to the number of shares of NEON common stock subject to the NEON stock option, assuming full vesting, multiplied by 1.2748 and the exercise price per share of Globix common stock will be equal to the exercise price per share of NEON common stock subject to the NEON stock option divided by 1.2748. 1
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Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON CLASS A WARRANTS? A. If the merger is completed, your Class A warrant will be converted into the right to receive 1.2748 shares of Globix common stock in exchange for each Class A warrant that you own. It is a condition to the merger that at least 90% of the Class A warrants be exercised immediately prior to consummation of the merger. The NEON common stock receivable upon their exercise will be converted into shares of Globix common stock in the merger. Q. WHAT WILL I RECEIVE IN THE MERGER IF I OWN NEON REDEEMABLE PREFERRED STOCK WARRANTS? A. If the merger is completed, the redeemable preferred stock warrants will expire in accordance with their terms and you will not receive any payment with respect to those warrants in connection with the merger. Q: WHAT IS THE EXCHANGE RATIO FOR THE NEON COMMON STOCK AND WHAT HAPPENS AS THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES? A: The exchange ratio for the NEON common stock is fixed at 1.2748 shares of Globix common stock for each share of NEON common stock. The exchange ratio is a fixed number and therefore will not be affected by any fluctuations in the market price of Globix common stock; however, the value of the Globix common stock received by NEON stockholders in exchange for their NEON common stock will be dependent on the current market price of Globix common stock. Q: WHAT IS THE EXCHANGE RATIO FOR THE NEON CONVERTIBLE PREFERRED STOCK AND WHAT HAPPENS AS THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES? A: The NEON convertible preferred stock will be exchanged for a combination of cash and a new class of Globix convertible preferred stock to be created in connection with the merger. The cash consideration for each share of NEON convertible preferred stock is fixed at $3.75 and the exchange ratio for the NEON convertible preferred stock is fixed at 2.08333 shares of Globix convertible preferred stock for each share of NEON convertible preferred stock, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. The Globix convertible preferred stock will be created in connection with the merger so there currently exists no market price for the Globix convertible preferred stock. The Globix convertible preferred stock will be convertible into shares of Globix common stock initially at a rate of one share of Globix convertible stock into one share of Globix common stock; however, given the liquidation preference of $3.60, which is not tied to the market price of Globix common stock, and other rights and preferences associated with the Globix convertible preferred stock, the underlying value of the Globix convertible preferred stock may bear no relation to the current market price of Globix common stock. Q: WHAT IS THE EXCHANGE RATIO FOR THE CLASS A WARRANTS AND WHAT HAPPENS AS THE MARKET PRICE OF GLOBIX COMMON STOCK FLUCTUATES? A. The exchange ratio for the Class A warrants is fixed at 1.2748 shares of Globix common stock for each Class A warrant. The exchange ratio is a fixed number and therefore will not be affected by any fluctuations in the market price of Globix common stock; however, the value of the Globix common stock received by you in exchange for the Class A warrants will be dependent on the current market price of Globix common stock. 2
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Q: WILL GLOBIX STOCKHOLDERS RECEIVE ANY NEW SHARES AS A RESULT OF THE MERGER? A. No. Globix stockholders will continue to hold the Globix shares they currently own. Q: WHEN AND WHERE WILL THE SPECIAL MEETINGS TAKE PLACE? A: The special meeting of NEON stockholders will be held on January 13, 2005 at 10:00 a.m., local time, at the offices of NEON at 2200 West Park Drive, Westborough, Massachusetts 01581. The special meeting of Globix stockholders will be held on January 13, 2005 at 10:00 a.m., local time, at the offices of Globix at 139 Centre Street, New York, New York 10013. Q: WHO MUST APPROVE THE ISSUANCE OF SHARES OF GLOBIX COMMON STOCK IN CONNECTION WITH THE MERGER? A: The listing requirements of the American Stock Exchange require the holders of a majority of votes cast by Globix stockholders eligible to vote at the Globix special meeting to approve the issuance of Globix common stock in connection with the merger. Q: WHO MUST APPROVE THE PROPOSAL TO GRANT DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE GLOBIX SPECIAL MEETING TO SOLICIT ADDITIONAL VOTES, IF NECESSARY? A: The approval of the holders of a majority of votes cast by stockholders eligible to vote at the Globix special meeting is required to approve the proposal to grant discretionary authority to adjourn or postpone the special meeting, if necessary, to solicit additional votes to approve the proposal to issue Globix common stock in the merger. Q: WHO MUST APPROVE THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT? A: In addition to the approvals of the board of directors of Globix (with one director, Mr. Steven Lampe, abstaining) and the board of directors NEON (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Robert Grubin, abstaining), which have already been obtained, the holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class on an as-converted into common stock basis, must approve the merger, the merger agreement and the transactions contemplated by the merger agreement. Each holder of NEON convertible preferred stock is entitled to one vote for each share of NEON convertible preferred stock. Q: WHO MUST APPROVE THE AMENDMENT TO NEON'S CERTIFICATE OF INCORPORATION? A: In addition to the approval of the board of directors of NEON, which has already been obtained (with one director, Mr. Lampe, abstaining), the following approvals of the stockholders of NEON must be obtained: o holders of a majority of NEON's outstanding common stock entitled to vote at any annual or special meeting of NEON stockholders, voting as a separate class; and o holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class. 3
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Q: WHO MUST APPROVE THE AMENDMENT TO THE NEON CERTIFICATE OF DESIGNATION? A: In addition to the approval of the board of directors of NEON, which has already been obtained (with one director, Mr. Lampe, abstaining), the following approvals of the stockholders of NEON must be obtained: o holders of two-thirds of NEON's outstanding convertible preferred stock voting together as a single class; and o holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class. Q: WHO MUST APPROVE THE GRANT OF DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE NEON SPECIAL MEETING TO SOLICIT ADDITIONAL VOTES, IF NECESSARY? A: The approval of the holders of a majority of NEON's capital stock present in person or represented by proxy and entitled to vote at any annual or special meeting of NEON stockholders, considered on an as-converted into common stock basis, is required to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. Q: DO NEON STOCKHOLDERS HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE TRANSACTION? A: Under Delaware law, holders of NEON outstanding common stock and convertible preferred stock who comply with the governing statutory provisions are entitled to appraisal rights to receive a judicially determined (through the Delaware state courts) fair value for their shares instead of the merger consideration. A copy of the applicable statute is attached to this joint proxy statement/prospectus as Appendix C. Q: DO GLOBIX STOCKHOLDERS HAVE DISSENTERS' OR APPRAISAL RIGHTS IN THE TRANSACTION? A: No. Q: WHAT DO I NEED TO DO NOW? A: You should carefully read and consider the information contained in this joint proxy statement/prospectus. You should then complete and sign your proxy card and return it in the enclosed return envelope as soon as possible so that your shares will be represented at your company's special meeting. If you are the record holder of NEON shares and you sign, date and mail your proxy card without identifying how you want to vote, your proxy will be voted "FOR" the merger, the merger agreement and the transactions contemplated by the merger agreement, "FOR" the amendment to NEON's certificate of incorporation, "FOR" the amendment to the certificate of designation for the NEON convertible preferred stock and "FOR" the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. Except with respect to the adjournment/postponement proposal as to which a failure to vote will have no effect, if you do not vote, it will have the same effect as a vote "AGAINST" the proposals. You may also vote by appearing at the special meeting and voting in person. 4
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If you are the record holder of Globix shares and you sign, date and mail your proxy card without identifying how you want to vote, your proxy will be voted "FOR" approval of the issuance of Globix common stock pursuant to the merger, and "FOR" the proposal to grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the Globix special meeting, if necessary. If you do not vote, you will have no effect on the outcome of these proposals. You may also vote by appearing at the special meeting and voting in person. Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER AUTOMATICALLY VOTE MY SHARES FOR ME? A: No. Your broker is not permitted to vote your shares without specific instructions from you. Unless you follow the directions your broker provides you regarding how to instruct your broker to vote your shares, your shares will not be voted. Please check the voting information form used by your broker to see if it offers telephone or Internet voting. Q: WHAT IF I FAIL TO INSTRUCT MY BROKER? A: The broker holding your shares in "street name" may vote the shares only if you provide the broker with appropriate instructions. If you fail to instruct your broker to vote your shares and the broker submits an unvoted proxy, the resulting "broker non-vote" will be counted for the purpose of determining the existence of a quorum at your company's special meeting, but will not be voted on any of the proposals at the special meeting. A broker non-vote will therefore have the same effect as a vote against the proposals being submitted to stockholders at the NEON special meeting. A broker non-vote will not be considered a vote cast at the Globix special meeting and will therefore have no effect on the outcome of the proposals being submitted to stockholders at the Globix special meeting. Q: CAN I CHANGE MY VOTE AFTER I MAIL MY SIGNED PROXY? A: Yes. You can change your vote at any time before your proxy is voted at your company's special meeting of stockholders. You can do this in one of three ways. First, you can send a written notice to NEON or Globix, as applicable, stating that you would like to revoke your proxy. Second, you can complete and submit a new proxy. If you choose either of these two methods, you must submit your notice of revocation or your new proxy at the address for NEON on page 45 of this joint proxy statement/ prospectus if you are a NEON stockholder or page 41 of this joint proxy statement/prospectus if you are a Globix stockholder. Third, you can attend your company's special meeting of stockholders and vote in person. Your attendance alone will not revoke your proxy. Q: CAN I ATTEND THE SPECIAL MEETING AND VOTE MY SHARES IN PERSON? A: Yes. You are invited to attend your company's stockholder meeting. If your shares are held in "street name," then you are not the stockholder of record and you must ask the bank, broker, or other nominee holding your shares how you can vote in person at the meeting. Q: ARE THERE RISKS THAT I SHOULD CONSIDER IN CONNECTION WITH THE MERGER? A: Yes. For example, the number of shares of Globix common stock that NEON common stockholders will receive at closing will not change even if the market price of Globix common stock increases or decreases before the completion of the proposed transaction. In evaluating the merger, you should carefully consider this and other factors discussed in the section entitled "Risk Factors," beginning on page 21 of this joint proxy statement/prospectus. 5
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Q: IF I OWN NEON COMMON STOCK WILL I RECOGNIZE A GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES ON THE PROPOSED TRANSACTION? A: It is intended that the merger will constitute a reorganization within the meaning of section 368(a) of the Internal Revenue Code. As a result of reorganization treatment, a holder of NEON common stock would not recognize taxable gain or loss as a result of the merger. To review certain federal income tax consequences of the merger to holders of NEON common stock in greater detail, see "The Merger - Material United States Federal Income Tax Consequences," beginning on page 74 of this joint proxy statement/prospectus. Q: IF I OWN NEON CONVERTIBLE PREFERRED STOCK WILL I RECOGNIZE A GAIN OR LOSS FOR FEDERAL INCOME TAX PURPOSES ON THE PROPOSED TRANSACTION? A: A holder of NEON convertible preferred stock may recognize gain, but not loss, with respect to cash received in exchange for such stock in the merger. To review certain federal income tax consequences of the merger to holders of NEON convertible preferred stock in greater detail, see "The Merger - Material United States Federal Income Tax Consequences," beginning on page 74 of this joint proxy statement/prospectus. Q: WILL I BE ABLE TO TRADE THE GLOBIX COMMON STOCK THAT I RECEIVE IN THE MERGER? A: Yes. The Globix common stock that you will receive in the merger will be freely tradable unless you are an affiliate of Globix or NEON. Q: SHOULD I SEND IN MY NEON STOCK OR WARRANT CERTIFICATES NOW? A: No, you should not send in your stock or warrant certificates with your proxy. You will receive instructions for exchanging your stock or warrant certificates if the merger is consummated. Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER? A: We expect to complete the merger promptly after we receive approval by the NEON stockholders at the NEON special meeting and the Globix stockholders at the Globix special meeting, we receive all necessary regulatory approvals and all other conditions in the merger agreement have been met or waived. See "Terms of the Merger Agreement and Related Transactions - Conditions Precedent to Each Party's Obligation to Effect the Merger" beginning on page 90 of this joint proxy statement/prospectus. Q: WHO CAN HELP ANSWER MY QUESTIONS? A: If you are a Globix stockholder with questions about the merger, how to vote or revoke your proxy, or if you need additional copies of this joint proxy statement/prospectus or the enclosed proxy card, you should contact Mr. James C. Schroeder, Globix's General Counsel at (212) 625-7231. If you are a NEON stockholder with questions about the merger, how to vote or revoke your proxy, or if you need additional copies of this joint proxy statement/prospectus or the enclosed proxy card, you should contact Mr. Christopher E. Dalton, NEON's Senior Counsel, at (508) 621-1714. 6
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SUMMARY FOR YOUR CONVENIENCE, WE HAVE PROVIDED A BRIEF SUMMARY OF CERTAIN INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS JOINT PROXY STATEMENT/PROSPECTUS AND DOES NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. TO UNDERSTAND THE MERGER FULLY AND FOR A MORE COMPLETE DESCRIPTION OF THE LEGAL TERMS OF THE MERGER AS WELL AS OTHER MATTERS TO BE CONSIDERED AT YOUR COMPANY'S STOCKHOLDER MEETING, YOU SHOULD CAREFULLY READ THIS ENTIRE JOINT PROXY STATEMENT/ PROSPECTUS, THE MERGER AGREEMENT WHICH WE HAVE ATTACHED AS APPENDIX A-1 ALONG WITH THE FIRST AMENDMENT TO THE MERGER AGREEMENT WHICH WE HAVE ATTACHED AS APPENDIX A-2 TO THIS JOINT PROXY STATEMENT/PROSPECTUS. SEE "WHERE YOU CAN FIND MORE INFORMATION" ON PAGE 191 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. WE HAVE INCLUDED PAGE REFERENCES PARENTHETICALLY TO DIRECT YOU TO MORE COMPLETE DESCRIPTIONS OF THE TOPICS PRESENTED IN THE SUMMARY. IN THIS JOINT PROXY STATEMENT/ PROSPECTUS, "WE," "US" AND "OUR" MAY REFER TO EITHER GLOBIX OR NEON, DEPENDING ON THE CONTEXT IN WHICH THEY ARE USED, AND "YOU" AND "YOUR" REFER TO STOCKHOLDERS OF NEON OR GLOBIX, DEPENDING ON THE CONTEXT IN WHICH THEY ARE USED. THE COMPANIES (PAGES 96 AND 132) GLOBIX CORPORATION 139 Centre Street New York, New York 10013 (212) 334-8500 Globix is a provider of application, media and infrastructure management services. Globix provides flexible business solutions which combine skills, support, technology and experience to enable its customers to use the Internet as a way to provide business benefits and sustain a competitive advantage. By managing complex applications, media and infrastructure environments, Globix helps its clients protect Internet revenue streams, improve user satisfaction and reduce technology operating costs and risks. Globix's clients include operating divisions of Fortune 100 companies as well as mid-sized enterprises in a number of vertical markets including media and publishing, technology, financial services, health care and government. Globix and its subsidiaries have operations in New York, NY, London, UK, Santa Clara, CA, Fairfield, NJ, and Atlanta, GA. Globix common stock is traded on the OTC Bulletin Board under the symbol "GBXX.OB" NEON COMMUNICATIONS, INC. 2200 West Park Drive Westborough, Massachusetts 01581 (508) 616-7800 NEON is a facilities-based communications provider, supplying telecommunication services to communications companies and non-carrier customers in the twelve-state Northeast and mid-Atlantic market. NEON is an independent provider of SONET and dense wave division multiplexing ("DWDM") services to a wide range of communications carriers including local, long distance and wireless telephone companies and Internet service providers. NEON also provides services to non-carrier customers such as financial institutions and colleges and universities. NEON owns and operates a high bandwidth fiber optic network, consisting of approximately 4,600 route miles and over 218,000 fiber miles. Its network extends from Portland, ME to Washington, D.C. and includes metro and intercity coverage as well as co-location space in a number of large, mid-size and small markets in the Northeast and mid-Atlantic, including Boston, New York, Philadelphia, Newark, Baltimore, Washington, DC, Portland, Portsmouth, Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack, Reston, Vienna, and smaller communities along our network routes. 7
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SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS (PAGE 39) A special meeting of the stockholders of Globix will be held at the offices of Globix at 139 Centre Street, New York, New York on January 13, 2005 at 10:00 a.m., local time. The board of directors of Globix has fixed the close of business on December 6, 2004 as the record date for determining the stockholders entitled to receive this notice, and to vote their shares at the special meeting or any adjournment or postponement of the special meeting. There were 16,460,000 shares of Globix common stock issued and outstanding as of the Globix record date, although of these shares of common stock only 16,065,948 shares have been distributed. Of the 16,460,000 shares of common stock deemed issued and outstanding, 229,452 of these shares were placed in reserve in escrow pending the outcome of a class action lawsuit described in "Information About Globix - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus and are not entitled to vote at the special meeting. Another 164,600 shares of common stock will be distributed following resolution of a shareholder derivative suit filed against Globix and certain of our former officers and directors, as described in "Information About Globix - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus and are also not entitled to vote. Therefore, although 16,460,000 shares of common stock are deemed issued and outstanding as of the Globix record date, only 16,065,948 shares of common stock are entitled to vote at the meeting. Each holder of Globix common stock is entitled to one vote for each share held. GLOBIX STOCKHOLDER VOTE REQUIRED FOR THE GLOBIX COMMON STOCK ISSUANCE IN THE MERGER (PAGE 40) Globix has submitted an application to list its common stock on the American Stock Exchange. Under the rules of the American Stock Exchange, Globix stockholders must vote to approve the issuance of Globix common stock in connection with the merger in order for Globix and NEON to complete the merger. At the special meeting the Globix stockholders will vote to approve the issuance of Globix common stock in connection with the merger and to grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the special meeting, if necessary. The listing requirements of the American Stock Exchange and the Globix bylaws require the approval of a majority of votes cast at the Globix special meeting of stockholders by Globix stockholders entitled to vote on the issuance of Globix common stock in connection with the merger. The approval of a majority of votes cast at the Globix special meeting of stockholders by Globix stockholders entitled to vote is required to approve the proposal to grant discretionary authority to adjourn or postpone the special meeting to solicit additional votes to approve the matter considered at the special meeting, if necessary. SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS (PAGE 43) A special meeting of the stockholders of NEON will be held at the offices of NEON at 2200 West Park Drive, Westborough, Massachusetts 01581 on January 13, 2005 at 10:00 a.m., local time. The board of directors of NEON has fixed the close of business on December 7, 2004 as the record date for determining the stockholders entitled to receive this notice, and to vote their shares at the special meeting or any adjournment or postponement of the special meeting. There were 16,117,799 shares of NEON common stock and 1,101,887 shares of NEON convertible preferred stock issued and outstanding as of the record date. Each holder of NEON common stock is entitled to one vote per share and each holder of NEON convertible preferred stock is entitled to one vote for each share of NEON convertible preferred stock. NEON STOCKHOLDER VOTE REQUIRED FOR THE MERGER AND OTHER PROPOSALS (PAGE 44) At the special meeting the NEON stockholders will vote on the following four agenda items: o to approve and adopt the merger agreement, the merger and the transactions contemplated by the merger agreement; 8
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o to approve and adopt an amendment to NEON's certificate of incorporation to provide that the merger of a new wholly owned subsidiary of Globix with and into NEON is not a "Liquidation Event" of NEON that would trigger the liquidation provision set forth in the certificate of incorporation which provides that upon the occurrence of a liquidation event all assets of NEON remaining after payment of all liabilities and subject to any preferential payments would be distributed ratably to its common stockholders; o to approve and adopt an amendment to the certificate of designation with respect to the NEON's convertible preferred stock to provide that the merger of the new wholly owned subsidiary of Globix with and into NEON is not a "Change of Control" of NEON that would trigger the change of control provisions set forth in the certificate of designation which would require the immediate repurchase of the NEON convertible preferred stock in cash; and o to approve the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. The required vote for each agenda item is described below. APPROVAL OF MERGER Under Delaware law and NEON's certificate of incorporation, the affirmative vote by the holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class, is required to approve the merger, the merger agreement and transactions contemplated by the merger agreement. APPROVAL OF AMENDMENT TO CERTIFICATE OF INCORPORATION Under Delaware law and NEON's certificate of incorporation, the affirmative vote by the holders of a majority of NEON's outstanding common stock entitled to vote at any annual or special meeting of NEON stockholders voting as a separate class, and the affirmative vote by the holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class, are required to approve the amendment to NEON's certificate of incorporation. APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION Under Delaware law and NEON's certificate of incorporation (which includes the certificate of designation), the affirmative vote by the holders of two-thirds of NEON's outstanding convertible preferred stock, voting together as a single class, and the affirmative vote by the holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class, are required to approve the amendment to the certificate of designation for the NEON convertible preferred stock. APPROVAL OF PROPOSAL TO GRANT DISCRETIONARY AUTHORITY TO ADJOURN OR POSTPONE THE SPECIAL MEETING The approval of the holders of a majority of NEON's capital stock present in person or represented by proxy and entitled to vote, is required to approve the proposal to grant discretionary authority to adjourn or postpone the special meeting to solicit additional votes to approve the matters considered at the special meeting. THE MERGER (PAGE 48) The merger agreement provides that a new wholly owned subsidiary of Globix will merge with and into NEON. NEON will be the surviving corporation in the merger and will become a wholly owned subsidiary of Globix. RECOMMENDATION OF GLOBIX'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER (PAGE 55) The Globix board of directors (with one director, Mr. Lampe, abstaining) has determined that the merger is advisable and in the best interests of Globix and its stockholders. The Globix board of directors (with one director, Mr. Lampe, abstaining) recommends that Globix stockholders vote "FOR" the proposed issuance of Globix common stock in connection with the merger and the other proposal. 9
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See "The Merger -- The Globix Special Committee's and Globix's Reasons for the Merger" beginning at page 54 of this joint proxy statement/prospectus for reasons supporting the decision of the Globix board of directors. OPINION OF GLOBIX'S FINANCIAL ADVISOR (PAGE 55) Needham & Company, Inc. has delivered an opinion to a special committee of the Globix board of directors, dated September 28, 2004, that, as of that date and based on and subject to the matters described in its opinion, the common stock exchange ratio was fair to the holders of Globix common stock from a financial point of view. See "The Merger - Opinion of Globix's Financial Advisor" beginning on page 55 of this joint proxy statement/prospectus. The full text of the written opinion of Needham & Company is attached to this joint proxy statement/prospectus as Appendix D. Globix stockholders should read this opinion in its entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken in delivering the opinion. The Needham & Company opinion is addressed to the special committee of the Globix board of directors and does not constitute a recommendation to any Globix stockholder as to how that stockholder should vote or act on any matter relating to the merger. RECOMMENDATION OF NEON'S BOARD OF DIRECTORS AND REASONS FOR THE MERGER (PAGE 62) The NEON board of directors (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining) has determined that the merger, the merger agreement and the transactions contemplated by the merger agreement and the proposed amendments to NEON's certificate of incorporation and certificate of designation for NEON convertible preferred stock are advisable and in the best interests of NEON and its stockholders. The NEON board of directors (with one director, Mr. Lampe, abstaining), recommends that NEON stockholders vote "FOR" the proposal to approve and adopt the merger, the merger agreement and the transactions contemplated by the merger agreement and each of the other proposals. See "The Merger -- The NEON Special Committee's and NEON's Reasons for the Merger" beginning on page 61 of this joint proxy statement/prospectus for the reasons supporting the NEON board of directors' recommendations. OPINION OF NEON'S FINANCIAL ADVISOR (PAGE 63) Adams Harkness, Inc. (f/k/a Adams, Harkness & Hill, Inc.) provided a fairness opinion to the NEON special committee and the board of directors on July 16, 2004 that, as of that date and based on and subject to the matters described in its written opinion, the proposed consideration to be received by the common stockholders of NEON in the merger was fair to the common stockholders of NEON from a financial point of view. On October 8, 2004 Adams Harkness provided an affirmation of its fairness opinion. See "The Merger - Opinion of NEON's Financial Advisor" beginning on page 63 of this joint proxy statement/prospectus. The full text of the written opinion of Adams Harkness dated July 16, 2004 is attached to this joint proxy statement/prospectus as Appendix E. A copy of the affirmation letter dated October 8, 2004 is attached to this joint proxy statement/prospectus as Appendix F. NEON stockholders should read the opinion and the affirmation letter in their entirety for a description of the procedures followed, assumptions made, matters considered and limitations on the review undertaken in delivering the opinion. Adams Harkness' opinion and affirmation letter are directed to the NEON special committee and the board of directors and do not constitute a recommendation to any NEON stockholder as to any matter relating to the merger. WHAT NEON STOCKHOLDERS WILL RECEIVE IN THE MERGER (PAGE 83) In the merger, you will receive Globix common stock for each share of NEON common stock that you own and a combination of cash and a new class of Globix convertible preferred stock to be created in connection with the merger for each share of NEON convertible preferred stock that you own. In the case of NEON common stock, each share is exchangeable for 1.2748 shares of Globix common stock. In the case of NEON convertible preferred stock, each share is exchangeable for (a) $3.75 in cash and (b) 2.08333 shares of Globix convertible preferred stock, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. 10
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Following the merger, based on 16,460,000 outstanding shares of Globix common stock as of December 1, 2004, and assuming the issuance of an additional 4,545,455 shares of Globix common stock in a debt-for-equity exchange that is a condition to the merger and is described in the section entitled "Terms of the Merger Agreement and Related Transactions - Debt-for-Equity Exchange" beginning on page 94 of this joint proxy statement/ prospectus, NEON common stockholders would beneficially own approximately 56.7% of the outstanding shares of common stock of the combined company (ignoring current cross ownership between the holders of Globix and NEON common stock, as further described in the section entitled "The Merger - Interests of Certain Persons in the Merger" beginning on page 71 of this joint proxy statement/prospectus) and current Globix common stockholders known to Globix would beneficially own approximately 76.4% of the outstanding shares of common stock of the combined company (due to current cross ownership). The foregoing ownership percentages do not include the shares of NEON convertible preferred stock that are beneficially owned by certain common stockholders of NEON and that will be exchanged for Globix convertible preferred stock in the merger or currently exercisable options or warrants (other than the Class A warrants) held by NEON or Globix common stockholders. See "Securities Ownership of Certain Beneficial Owners and Management of Globix Following The Merger" beginning on page 169 of this joint proxy statement/prospectus for a more complete description of the beneficial ownership of Globix management, the Globix board of directors and owners of more than 5% of Globix common stock following the completion of the merger. TREATMENT OF NEON OPTIONS AND WARRANTS (PAGE 84) Each option to acquire NEON common stock granted under NEON's stock plans or otherwise granted by NEON that is outstanding and unexercised immediately prior to the effective time of the merger will be modified and become an option to purchase Globix common stock. At the effective time of the merger, Globix will modify NEON's options to provide for the purchase of Globix common stock, adjusting the number of shares issuable upon exercise and the exercise price of such option to reflect the exchange ratio in the merger applicable to the NEON common stock underlying such NEON option. The duration and other terms of each such modified option, including the vesting schedule (with credit for options already vested), will be the same as under the prior NEON stock option. NEON has three types of outstanding warrants: Class A warrants, redeemable preferred stock warrants and warrants for NEON common stock issued to Communications Technology Advisors LLC ("CTA"), which we refer to as "CTA warrants". The Class A warrants will be exercised immediately prior to the merger or will be converted into shares of Globix common stock in the merger. The redeemable preferred stock warrants will expire upon the merger in accordance with their terms. At the effective time of the merger, Globix will replace the CTA warrants with warrants to purchase Globix common stock, adjusting the number of shares issuable upon exercise and the exercise price of such warrants to reflect the exchange ratio in the merger applicable to the NEON common stock. TOTAL CONSIDERATION GLOBIX WILL PAY (PAGE 83) In the merger, Globix will issue or reserve for issuance a total of up to approximately 31.0 million shares of Globix common stock to be allocated among NEON's outstanding shares of common stock and outstanding warrants and options to purchase NEON common stock. In the merger, Globix will issue a new class of convertible preferred stock to be created in connection with the merger to the holders of NEON convertible preferred stock and also pay $3.75 in cash per share of outstanding NEON convertible preferred stock, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. Globix will reserve a sufficient number of shares of Globix common stock for issuance upon conversion of the Globix convertible preferred stock. Assuming a December 31, 2004 closing date, Globix would pay approximately $5.2 million in cash and issue a total of up to approximately 2,908,614 shares of Globix convertible preferred stock, having an aggregate liquidation value of approximately $10.5 million, to the holders of NEON convertible preferred stock. 11
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EXCHANGE OF NEON CERTIFICATES (PAGE 85) After the merger occurs, the exchange agent will send a letter to NEON stockholders that will provide instructions on exchanging your NEON stock certificates for Globix stock certificates. PLEASE DO NOT SEND ANY STOCK CERTIFICATES TO ANY TRANSFER AGENT AT THIS TIME. APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS (PAGE 79) The holders of Globix stock do not have dissenters' rights or appraisal rights in connection with the merger. ANY NEON STOCKHOLDER WHO OBJECTS TO THE MERGER IS PERMITTED BY DELAWARE LAW TO SEEK RELIEF AS A DISSENTING STOCKHOLDER AND HAVE THE "FAIR VALUE" OF ITS SHARES OF NEON COMMON STOCK AND CONVERTIBLE PREFERRED STOCK DETERMINED BY A COURT AND PAID IN CASH. If you are a NEON stockholder and wish to dissent, you must deliver to NEON, prior to the vote on the merger at the special meeting, a written demand for appraisal of your shares. You also must not vote in favor of the merger agreement. To not vote in favor of the merger agreement, you can either: o vote "no" in person at the special meeting or by proxy; o abstain from voting; o fail to vote; or o if you returned a duly executed proxy, revoke your proxy prior to the special meeting. The relevant provisions of Delaware law are technical in nature and complex. If you wish to exercise appraisal rights and obtain appraisal of the fair value of your shares, you may wish to consult with legal counsel, because the failure to comply strictly with these provisions may result in waiver or forfeiture of your appraisal rights. Beneficial owners of NEON common stock or NEON convertible preferred stock, whose shares are held of record by another person, such as a bank, broker or nominee, and who wish to seek appraisal, should instruct the record holder to follow the appraisal procedures of Delaware law. A COPY OF THE RELEVANT SECTION OF DELAWARE LAW GOVERNING THIS PROCESS IS ATTACHED AS APPENDIX C TO THIS JOINT PROXY STATEMENT/PROSPECTUS. VOTING OF PROXIES AT THE SPECIAL MEETINGS (PAGES 40 AND 45) Properly executed proxies received prior to or at your company's meeting, and not revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instruction is indicated, then unless the shares covered by the proxy are in a brokerage account, such proxies will be voted for each proposal at your company's special meeting. If you submit a proxy that indicates an abstention from voting in all matters, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, but they will not be voted on any matter at the special meeting. Consequently, if you are a NEON stockholder your abstention will have the same effect as a vote against each proposal at the NEON special meeting. If your proxy indicates an abstention only as to a particular proposal, that abstention will have the same effect as a vote against that particular proposal only. If you are a Globix stockholder your abstention will have no effect on the outcome of the proposals at the Globix special meeting. If you hold your shares of Globix common stock or NEON common stock or convertible preferred stock in a brokerage account, the broker holding such shares in "street name" may vote the shares only if you provide the broker with appropriate instructions. If an executed proxy statement is returned to your company by a broker holding shares of your company's common stock or convertible preferred stock in street name, which indicates that the broker does not have discretionary authority to vote on one or more of the agenda items for the special meeting, the shares will be considered present at the meeting for purposes of determining a quorum, but will not be considered to have been voted in favor of or against the applicable proposal. 12
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INTERESTS OF CERTAIN PERSONS IN THE MERGER (PAGE 71) In addition to their interests as stockholders, some of the directors and officers of NEON and of Globix may have interests in the merger that are different from, or in addition to, your interests. All officers and directors of NEON, including Mr. Courter and William A. Marshall, Chief Financial Officer of NEON, have stock option agreements (and employment agreements in the case of Mr. Courter and Mr. Marshall) that provide that, upon a change of control of NEON, including a transaction such as the merger, their unvested options will accelerate and become fully vested and exercisable. Options to purchase approximately 1,349,677 shares of NEON common stock held by NEON's officers and directors at a weighted average exercise price of $5.24 per share will be fully vested and exercisable immediately prior to the completion of the merger. Pursuant to the merger agreement, Messrs. Barr, Cecin, Courter and Forsgren, currently members of the board of directors of NEON, will join the nine member board of directors of Globix, and Mr. Lampe, currently a member of the board of directors of both NEON and Globix, will remain on the board of directors of Globix. Messrs. Stevenson, Herzig, Singer and Steele, currently members of the board of directors of Globix, will continue to serve on the board of directors of Globix. In addition, Globix will indemnify the officers and directors of NEON for events occurring before and in connection with the merger and will continue NEON's directors' and officers' liability insurance coverage and fiduciary liability insurance coverage for at least five years after the merger. Certain NEON stockholders who are affiliated with directors of NEON and/or Globix beneficially own a significant number of NEON securities and a significant number of Globix securities. Some of these significant stockholders include LC Capital Master Fund Ltd., Loeb Partners Corp. and three trusts for the benefit of the children of the brother of Mr. Singer, who is the non-executive chairman of the board of directors of Globix, which we refer to collectively as the "Singer Trusts." See "The Merger - Interests of Certain Persons in the Merger" beginning on page 71 of this joint proxy statement/prospectus. CTA provides consulting and business development services to NEON. Additionally, under a letter agreement between NEON and CTA, CTA agreed to provide merger and acquisition advice and opportunities to NEON for a success fee. CTA has agreed to waive this fee in relation to the merger. NEON has issued warrants for its common stock to certain current and former affiliates of CTA and to certain of such affiliates' designees as payment for CTA's services. One of CTA's employees, Wayne Barr, Jr., serves on NEON's board of directors and Mr. Barr will serve on the Globix board of directors following the merger. A current director of NEON, Mr. Peter Aquino, was affiliated with CTA at the time NEON's board of directors approved the merger. CTA also provides consulting and business development services to Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a success fee if Globix consummates a sale, merger or a similar transaction with CTA's assistance. CTA has agreed to waive this fee in relation to the merger. Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for 500,000 shares of Globix common stock at $3.00 per share through March 13, 2013, which were purchased for $25,000. See "Description of Globix Capital Stock - Description of Globix Warrants" beginning on page 130 of this joint proxy statement/prospectus. The NEON board of directors and special committee and the Globix board or directors and special committee were aware of and discussed these potentially conflicting interests when they approved the merger. WHAT IS NEEDED TO COMPLETE THE MERGER (PAGE 90) Several conditions must be satisfied before the merger will be completed. These include: o adoption of the merger, the merger agreement and the transactions contemplated by the merger agreement by the NEON stockholders as described above; o approval of the amendments to NEON's certificate of incorporation and certificate of designation for the NEON convertible preferred stock by the NEON stockholders; 13
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o approval of the issuance of Globix common stock in connection with the merger by the Globix stockholders; o approval of the merger in accordance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended; o Globix's 11% senior note holders exchange $12.5 million in principal and accrued interest of Globix's 11% senior notes for approximately 4,545,455 shares of Globix common stock; o the holders of 90% or more of the NEON Class A warrants exercise their Class A warrants and the Class A warrant agreement is amended to provide for the conversion of NEON Class A warrants into shares of Globix common stock in the merger; and o other contractual conditions set forth in the merger agreement. If the law permits, Globix or NEON may each waive conditions for their benefit and their stockholders' benefit and complete the merger even though one or more of these conditions has not been met. NEON's stockholder approval of the merger, the merger agreement and the transactions contemplated by the merger agreement cannot be waived. We cannot assure you that the conditions will be satisfied or waived or that the merger will occur. TERMINATION OF THE MERGER AGREEMENT (PAGE 92) Globix and NEON may mutually agree at any time to terminate the merger agreement without completing the merger, even if the NEON stockholders have approved it. Also either company may decide, without the consent of the other, to terminate the merger agreement, subject to a variety of conditions, in a number of circumstances. These circumstance include, among others: o certain breaches under the merger agreement; o any court or governmental entity issuing a final order or judgment preventing completion of the merger; o NEON stockholders not approving the merger; o Globix stockholders not approving the issuance of Globix common stock in the merger; o the board of directors of NEON having recommended to its stockholders an alternative sale or business transaction or having withdrawn its recommendation of the merger (permitting Globix to terminate) or having approved an agreement with respect to such transaction (permitting NEON to terminate); o the board of directors of Globix having recommended to its stockholders an alternative sale or business transaction or having withdrawn its recommendation with respect to the issuance of Globix common stock in connection with the merger (permitting NEON to terminate) or having approved an agreement with respect to such transaction (permitting Globix to terminate); or o the merger not having been completed by January 17, 2005, which is 150 days from August 20, 2004, the expiration date of the waiting period applicable to the completion of the merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended. Generally, each company has agreed to pay its own fees and expenses if the merger is not completed. NEON and Globix have also agreed that all expenses incurred in connection with the filing, printing and mailing of this joint proxy statement/prospectus and the registration statement of which it is a part and the Hart-Scott-Rodino filing would be borne equally by Globix and NEON if the merger agreement is terminated. No specific termination or similar fees are imposed on a party terminating the merger agreement. 14
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AMENDMENT OF NEON'S CERTIFICATE OF INCORPORATION (PAGE 95) Before completing the merger and after receiving the requisite vote, NEON will file an amendment to its certificate of incorporation to amend the liquidation provision to exclude the merger from the definition of "Liquidation Event" in the certificate of incorporation. NEON's certificate of incorporation currently provides that upon the occurrence of a liquidation event (including a transaction such as the merger), all assets of NEON remaining after payment of all liabilities and subject to any preferential payments would be distributed ratably to its common stockholders. See "Approval of Amendment of NEON's Certificate of Incorporation" beginning on page 95 of this joint proxy statement/prospectus for a description of the effect of this amendment. AMENDMENT OF NEON'S CERTIFICATE OF DESIGNATION (PAGE 95) Before completing the merger and after receiving the requisite vote, NEON will file an amendment to the certificate of designation for the NEON convertible preferred stock to provide that the merger is not a "Change of Control" of NEON that would trigger the change of control provisions in the certificate of designation and would require the immediate repurchase by NEON of the NEON convertible preferred stock in cash. See "Approval of Amendment of NEON's Certificate of Designation" beginning on page 95 of this joint proxy statement/prospectus for a description of the effect of this amendment. DIFFERENCES IN THE RIGHTS OF STOCKHOLDERS (PAGE 179) When the merger is completed, holders of NEON common stock and convertible preferred stock will become holders of Globix common stock and convertible preferred stock. Their rights after the merger will be governed by the Globix certificate of incorporation and bylaws rather than the NEON certificate of incorporation and bylaws, but will continue to be governed by Delaware law. See "Comparison of Stockholders Rights" beginning on page 179 of this joint proxy statement/prospectus. U.S. FEDERAL INCOME TAX CONSEQUENCES (PAGE 74) The merger will qualify as a tax-free reorganization for U.S. federal income tax purposes. These opinions of counsel with regard to the merger are subject to various assumptions, limitations and qualifications and will rely, among other things, upon information to be provided and representations to be made by Globix, NEON the transitory merger subsidiary to Day, Berry & Howard LLP and Andrews Kurth LLP that have not yet been received by counsel. The consequence of a tax-free reorganization is that, neither Globix, NEON nor the newly formed wholly owned subsidiary of Globix to be merged with and into NEON will recognize gain or loss as a result of the merger. Holders of NEON common stock, Class A warrants, and CTA warrants will not recognize gain or loss as a result of their exchange of those securities for shares of Globix common stock (or with respect to CTA warrants, for Globix warrants) in the merger. Holders of NEON convertible preferred stock may recognize gain, but not loss, with respect to their receipt of cash in exchange for their shares of NEON convertible preferred stock, but such holders will not recognize gain or loss with respect to their receipt of Globix convertible preferred stock in exchange for shares of NEON convertible preferred stock in the merger. See "The Merger - Material United States Federal Income Tax Consequences" beginning on page 74 of this joint proxy statement/prospectus for greater detail. YOU SHOULD CONSULT YOUR TAX ADVISOR FOR A FULL EXPLANATION OF THE TAX CONSEQUENCES OF THE MERGER TO YOU. ACCOUNTING TREATMENT (PAGE 73) The merger will be accounted for using the purchase method of accounting and Globix will be deemed the acquirer for accounting and financial reporting purposes. Under the purchase method of accounting, the purchase price in the merger will be allocated among the NEON assets acquired and the NEON liabilities assumed to the extent of their fair value. The excess of the fair value of the identifiable net assets acquired over NEON's purchase price (i.e., negative goodwill) will be reduced by assigning it on a pro-rated basis to the estimated fair value of all identified noncurrent acquired assets. GOVERNMENTAL AND REGULATORY APPROVALS (PAGE 73) The Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act") and its related rules and regulations prohibit Globix and NEON from completing the merger until Globix and NEON each file notifications with the Antitrust Division of the Department of Justice and the Federal Trade Commission, and the HSR Act waiting period requirements have been satisfied. Globix and NEON each filed HSR Act notifications with the Federal Trade Commission and the Antitrust Division on August 13, 2004, and the waiting period was terminated on August 20, 2004. 15
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Several of NEON's subsidiaries have authorizations from certain states in the Northeast and mid-Atlantic regions to be competitive local exchange carriers, or CLECs. NEON and Globix must request approval of the merger from the applicable agencies of some of these states and must notify the applicable agencies of the other states of the merger. NEON and Globix have filed all applicable documents required to be filed prior to completion of the merger to either seek authorization of the proposed merger or to give notification of the proposed merger. SELECTED UNAUDITED PRO FORMA CONDENSED COMBINED CONSOLIDATED FINANCIAL INFORMATION The following selected unaudited pro forma consolidated combined financial information has been derived from, and should be read in conjunction with, the Unaudited Pro Forma Condensed Combined Consolidated Financial Information and related notes included in this joint proxy statement/prospectus on page 174. This information is based on the historical consolidated balance sheets and related historical consolidated statements of operations of Globix and the historical consolidated balance sheets and related historical consolidated statements of operations of NEON, using the purchase method of accounting for business combinations. Due to different fiscal year ends for Globix and NEON, the unaudited pro forma condensed combined consolidated statement of operations data combines the audited historical consolidated statement of operations data of Globix for the year ended September 30, 2004 with the unaudited historical consolidated statement of operations data of NEON for the twelve months ended September 30, 2004, giving effect to the merger as if it had occurred on October 1, 2003. This information is for illustrative purposes only. The companies might have performed differently had they been combined as of the dates for which information is presented. You should not rely on the unaudited pro forma condensed combined consolidated financial information as being indicative of the historical results that would have been achieved had the companies always been combined or the future results that the combined company will experience after the merger. [Download Table] TWELVE MONTH PERIOD ENDED SEPTEMBER 30, 2004 ------------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) ------------------ PRO FORMA CONDENSED COMBINED CONSOLIDATED STATEMENT OF OPERATIONS DATA (UNAUDITED): Revenue, net $ 107,741 Loss from operations (39,177) Loss before income tax benefit (expense) and extraordinary item (46,190) Net loss before extraordinary item (44,902) Net loss (42,972) Net loss attributable to common stockholders (43,289) Basic and diluted loss per share (0.89) SEPTEMBER 30, 2004 ------------------ (IN THOUSANDS) ------------------ PRO FORMA CONDENSED COMBINED CONSOLIDATED BALANCE SHEET DATA (UNAUDITED): Cash, cash equivalent, short-term investments and marketable securities $ 26,242 Restricted cash and investments 12,993 Working capital 12,914 Total assets 279,699 Current portion of long-term debt 555 Long-term debt, less current portion 82,778 6% cumulative convertible preferred stock 12,295 Stockholders' equity 120,864 16
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COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE DATA The following table presents specified historical per share data of Globix and NEON and combined per share data on an unaudited pro forma basis after giving effect to the merger. This data is derived from, and should be read in conjunction with, the separate historical consolidated financial statements of NEON and the separate historical consolidated financial statements of Globix, each included in this joint proxy statement/prospectus, as well as the unaudited pro forma condensed combined consolidated financial statements included in this joint proxy statement/prospectus. The unaudited pro forma combined per share data do not necessarily indicate the operating results that would have been achieved had the merger been completed as of the beginning of the earliest period presented and should not be taken as representative of future operations. The results might have been different if the companies had always been combined. The number of shares used in the calculations assumes that all NEON shares of common stock outstanding as of December 7, 2004, including shares issuable upon exercise of the NEON Class A warrants, are converted into shares of Globix common stock at the exchange ratio of 1.2748 and the issuance of 4,545,455 shares of Globix common stock in the debt-for-equity exchange in connection with the merger. The unaudited pro forma combined book value per share represents Globix's historical book value as adjusted for the fair value and number of shares issued in connection with the merger. Tangible book value per share represents Globix's historical tangible book value as adjusted for the fair value and number of shares issued in connection with the merger and the estimated goodwill and other intangible assets recorded in connection with the merger. The NEON pro forma equivalent amounts are calculated by multiplying the unaudited pro forma combined amounts by the exchange ratio of 1.2748. The information in the following table is based on, and should be read together with, the historical financial information that Globix and NEON have presented in this joint proxy statement/prospectus beginning on page F-1 and F-42, respectively. 17
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[Enlarge/Download Table] ------------------------------------------------------------------------------- HISTORICAL PRO FORMA -------------------------------------- ------------------------------------- NEON GLOBIX AS OF AND FOR AS OF AND FOR THE TWELVE THE YEAR ENDED MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, NEON 2004 2004 GLOBIX EQUIVALENT ----------------- ---------------- ---------------- ---------------- Net loss per share: Basic and diluted $ (2.51) $ (0.27) $ (0.89) $ (1.13) Book value per common share at period end $ 1.03 $ 7.35 $ 2.49 $ 3.17 Tangible book value per share at period end $ 0.56 $ 7.35 $ 2.25 $ 2.87 --------------- Neither Globix nor NEON pays any dividends on its shares of common stock. 18
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MARKET PRICE DATA AND DIVIDEND INFORMATION Globix common stock is quoted on the OTC Bulletin Board under the symbol "GBXX.OB." Quotations on the OTC Bulletin Board reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Globix has submitted an application to have its shares of common stock listed on the American Stock Exchange. The following table sets forth the high and low closing sale prices for Globix common stock as reported on the OTC Bulletin Board for the periods indicated: [Enlarge/Download Table] ------------------------------- -------------------------------------- ---------------------------- Fiscal 2003 High Low --------------- --------- ------- ------------------------------- -------------------------------------- ---------------------------- First Quarter (commencing 10/31/02(1).................. $2.50 $1.25 ------------------------------- -------------------------------------- ---------------------------- Second Quarter...................... 2.95 2.00 ------------------------------- -------------------------------------- ---------------------------- Third Quarter...................... 3.10 1.70 ------------------------------- -------------------------------------- ---------------------------- Fourth Quarter...................... 3.25 2.66 ------------------------------- -------------------------------------- ---------------------------- ------------------------------- -------------------------------------- ---------------------------- Fiscal 2004 High Low --------------- --------- ------- ------------------------------- -------------------------------------- ---------------------------- First Quarter...................... $5.05 $2.55 ------------------------------- -------------------------------------- ---------------------------- Second Quarter...................... 4.65 2.70 ------------------------------- -------------------------------------- ---------------------------- Third Quarter...................... 4.00 2.30 ------------------------------- -------------------------------------- ---------------------------- Fourth Quarter............... 3.37 2.60 ------------------------------- -------------------------------------- ---------------------------- ------------------------------- -------------------------------------- ---------------------------- Fiscal 2005 High Low --------------- --------- ------- ------------------------------- -------------------------------------- ---------------------------- First Quarter..(through December 1, 2004)............ $3.30 $2.51 ------------------------------- -------------------------------------- ---------------------------- (1) Globix common stock outstanding immediately prior to the effective date of the plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code, April 25, 2002, was cancelled as of the effective date of such plan. The first reported trade of our common stock following the effective date of the plan of reorganization occurred on October 31, 2002. On December 1, 2004, there were 337 record holders of Globix stock. In addition, the plan of reorganization provides that the 268 record holders of the common stock of Globix on the effective date of the plan will be entitled to receive, in exchange for claims in respect of such stock, their pro rata portion (which, under the terms of the Globix plan of reorganization, may be equal to zero) of 164,600 shares of the common stock following the effective date. While the distribution of these shares will not occur until the resolution of the stockholders' class action suit described in "Information About Globix - Business - Legal Proceedings," we estimate that the total number of holders of our common stock following this distribution will be approximately 431. 19
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On July 16, 2004, the business day before the public announcement that Globix and NEON had entered into the merger agreement, the closing price per share of Globix common stock on the OTC Bulletin Board was $2.85. On December 1, 2004, the latest practicable trading day before the printing of this joint proxy statement/prospectus, the closing price per share of Globix common stock on the OTC Bulletin Board was $3.05. Because the market price of Globix common stock is subject to fluctuation, the market value of the shares of Globix common stock that holders of NEON common stock will receive in the merger may increase or decrease prior to and following the vote on the merger. We urge stockholders to obtain current market quotations for Globix common stock. We cannot assure you of the future prices or trading markets for Globix common stock. The Globix convertible preferred stock to be issued in the merger is not currently traded in any securities market. NEON MARKET PRICE DATA Neither NEON's common stock nor its convertible preferred stock is traded in any securities market. On December 1, 2004, there were 155 record holders of NEON common stock and 46 record holders of NEON convertible preferred stock. DIVIDEND INFORMATION Neither Globix nor NEON has ever paid any cash dividends on its shares of common stock. Under the merger agreement, each company has agreed not to pay dividends pending the completion of the merger, without the written consent of the other, except that NEON may pay accrued but unpaid dividends on its convertible preferred stock in additional shares of NEON convertible preferred stock. The Globix board of directors presently intends to retain all earnings for use in its business and has no present intention to pay cash dividends before or after the merger, except that it will retain the option to pay accrued dividends on the Globix convertible preferred stock issued in the merger in additional shares of Globix convertible preferred stock. CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS This joint proxy statement/prospectus contains forward-looking statements about the merger, Globix and NEON within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Statements containing the words "believes," "expects," "anticipates," "estimates," "plans," "projects," "predicts," "intends," "seeks," "will," "may," "should," "would," "continues" and similar expressions, or the negative of these terms, constitute forward-looking statements that involve risks and uncertainties. Such statements are based on current expectations and are subject to risks, uncertainties and changes in condition, significance, value and effect. These risks include those discussed in the section entitled "Risk Factors" beginning on page 21 of this joint proxy statement/prospectus. Such risks, uncertainties and changes in condition, significance, value and effect could cause Globix's or NEON's actual results to differ materially from those anticipated events. In evaluating the merger agreement and the merger for purposes of the NEON special meeting and the issuance of Globix common stock in the merger for purposes of the Globix special meeting, you should carefully consider the discussion of risks and uncertainties discussed in the section entitled "Risk Factors" beginning on page 21 of this joint proxy statement/prospectus as well as elsewhere in this document. All subsequent written and oral forward-looking statements concerning the merger or other matters addressed in this joint proxy statement/prospectus and attributable to Globix or NEON or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except to the extent required by applicable law or regulations, Globix and NEON undertake no obligation to update such forward-looking statements to reflect events or circumstances after the date of this joint proxy statement/prospectus or to reflect the occurrence of unanticipated events. In evaluating forward-looking statements, you should consider these risks and uncertainties, together with the other risks described from time to time in Globix's reports and documents filed with the Securities and Exchange Commission. 20
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RISK FACTORS IN THE MERGER, NEON COMMON STOCKHOLDERS WILL RECEIVE SHARES OF GLOBIX COMMON STOCK IN EXCHANGE FOR THEIR SHARES OF NEON COMMON STOCK AND NEON PREFERRED STOCKHOLDERS WILL RECEIVE GLOBIX CONVERTIBLE PREFERRED STOCK AND CASH IN EXCHANGE FOR THEIR SHARES OF NEON CONVERTIBLE PREFERRED STOCK. BY VOTING IN FAVOR OF THE ISSUANCE OF GLOBIX COMMON STOCK IN CONNECTION WITH THE MERGER, GLOBIX STOCKHOLDERS WILL BE VOTING FOR A BUSINESS COMBINATION WITH NEON. BEFORE DECIDING WHETHER OR NOT TO APPROVE THE MERGER AND THE OTHER PROPOSALS, BOTH NEON STOCKHOLDERS AND GLOBIX STOCKHOLDERS SHOULD CONSIDER THE FOLLOWING RISKS AND UNCERTAINTIES THAT ARE APPLICABLE TO THE MERGER, GLOBIX AND NEON. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS, NEON STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO VOTE IN FAVOR OF THE MERGER, THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED BY THE MERGER AGREEMENT AND THE OTHER PROPOSALS AND GLOBIX STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS IN DECIDING WHETHER TO VOTE IN FAVOR OF THE ISSUANCE OF GLOBIX COMMON STOCK IN CONNECTION WITH THE MERGER. YOU ALSO SHOULD KEEP THE FOLLOWING RISK FACTORS IN MIND WHEN YOU READ FORWARD-LOOKING STATEMENTS IN THIS JOINT PROXY STATEMENT/PROSPECTUS. PLEASE REFER TO THE SECTION ENTITLED "CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS" BEGINNING ON PAGE 20 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. MERGER RELATED RISK FACTORS THE EXCHANGE RATIO FOR GLOBIX COMMON STOCK THAT HOLDERS OF NEON COMMON STOCK WILL RECEIVE IN THE MERGER IS FIXED AND WILL NOT BE ADJUSTED IN THE EVENT OF ANY CHANGE IN THE PRICE OF GLOBIX COMMON STOCK. Holders of NEON common stock will receive 1.2748 shares of Globix common stock for each share of NEON common stock owned. The exchange ratio for NEON common stock is fixed and will not be adjusted for any increase or decrease in the market price of Globix common stock. Accordingly, the specific dollar value of Globix common stock to be received by NEON common stockholders in the merger will depend on the market value of Globix common stock at the time of the merger. The market price of Globix common stock may decline, causing the value of the consideration received by NEON common stockholders in the merger to decline. Globix common stock is thinly traded on the OTC Bulletin Board. The market price of Globix common stock is extremely volatile and has fluctuated over a wide range. From August 31, 2003 to November 30, 2004, Globix common stock traded as high as $5.10 per share and as low as $2.00 per share. From July 16, 2004, the last trading day prior to the date on which the merger was announced, through November 30, 2004, the price of Globix common stock has fluctuated between $2.50 and $3.61. In addition, there will be a period between the completion of the merger and the time at which former NEON stockholders receiving stock consideration actually receive certificates evidencing Globix common stock. Accordingly, the value of the Globix common stock NEON stockholders actually receive may be more or less than the value of Globix common stock at the effective time of the merger resulting from the exchange. Until stock certificates are received, NEON stockholders will not be able to sell their Globix shares in the open market and, thus, will not be able to avoid losses resulting from any decline in the trading price of the Globix common stock during this period. Fluctuations in Globix's quarterly and annual results may affect the market price for Globix common stock and there are a number of factors that may affect Globix's future quarterly and annual results of operations. See "Risk Factors - Risk Factors Related to Globix," beginning on page 25 of this joint proxy statement/prospectus. NEON IS NOT PERMITTED TO TERMINATE THE MERGER DUE TO A DECREASE IN GLOBIX'S STOCK PRICE. NEON is not permitted to terminate the merger solely due to decreases in Globix's stock price, even if those fluctuations would materially affect the value of the consideration NEON stockholders will receive in the merger. 21
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DIRECTORS AND OFFICERS OF NEON AND GLOBIX MAY REAP MORE BENEFITS FROM THE MERGER THAN ARE AVAILABLE TO STOCKHOLDERS OF NEON OR GLOBIX IN GENERAL, DUE TO CROSS OWNERSHIP OF INTERESTS IN THE COMPANIES BY CERTAIN DIRECTORS OR BECAUSE OF OTHER INTERESTS THAT DIRECTORS AND OFFICERS HAVE OR BENEFITS THAT ARE AVAILABLE TO THEM. AS A RESULT, DIRECTORS AND OFFICERS OF NEON AND GLOBIX HAVE CONFLICTS OF INTEREST THAT MAY HAVE INFLUENCED THEIR DECISIONS TO APPROVE THE MERGER. When considering the NEON board of directors' recommendation of the merger, the merger agreement and the transactions contemplated by the merger agreement and the other proposals and the Globix board of directors' recommendation of the issuance of Globix common stock in the merger, you should consider that some directors and executive officers of NEON and Globix have interests in the merger and the other proposals that are in addition to, or different from, their interests as NEON stockholders or Globix stockholders, as the case may be. These interests are described in the section entitled "The Merger -- Interests of Certain Persons in the Merger," beginning on page 71 of this joint proxy statement/prospectus. These interests include: o CROSS OWNERSHIP. Two directors of NEON (Mr. Lampe and Mr. Grubin) are affiliated with entities that own interest in Globix, while two directors of Globix (Mr. Lampe and Mr. Singer) are affiliated with entities that also own interests in NEON. These entities together own approximately 41.5% of the NEON common stock and 47.1% of the NEON convertible preferred stock as of December 1, 2004. In the case of Mr. Singer, who is the non-executive chairman of the board of Globix, the affiliated entities are three trusts for the benefit of the children of his brother, which we refer collectively as the "Singer Trusts." Various other significant stockholders of NEON own common stock of Globix. The interests of stockholders with cross ownership in Globix and NEON in completing the merger may be different from the interests of other NEON or Globix stockholders. o DEBT-FOR-EQUITY EXCHANGE. LC Capital Master Fund Ltd. and the Singer Children's Management Trust, one of the Singer Trusts, are entitled to participate in the Globix debt-for-equity exchange which is described in more detail in the section entitled "Terms of the Merger Agreement and Related Transactions - Debt-for-Equity Exchange" beginning on page 94 of this joint proxy statement/prospectus. o OFFICER AND DIRECTOR BENEFITS. All officers and directors of NEON, including Mr. Courter and Mr. Marshall, have stock option agreements (and employment agreements in the case of Mr. Courter and Mr. Marshall) that provide that, upon a change of control of NEON, including a transaction such as the merger, their unvested options will accelerate and become fully vested and exercisable. o BOARD OF DIRECTORS AND MANAGEMENT OF GLOBIX. Four of NEON's current directors, Messrs. Courter, Barr, Cecin and Forsgren, will become directors of Globix in the merger and one of NEON's current directors, Mr. Lampe, is also a director of Globix and will remain on the Globix board of directors following the merger. Four of Globix's current directors, Messrs. Stevenson, Singer, Steele and Herzig will remain directors of Globix following the merger. NEON's Chairman, President and Chief Executive Officer, Mr. Courter, will remain the Chairman, President and Chief Executive Officer of NEON and will be considered an executive officer of Globix following the merger, and the current officers of NEON will continue to be officers of NEON after consummation of the merger. o INDEMNIFICATION. Under the merger agreement, Globix and NEON will provide indemnification for present and former directors and officers of NEON with respect to matters existing prior to the closing of the merger, including matters relating to the merger. NEON will maintain directors' and officers' liability insurance and fiduciary liability insurance for at least five years after the merger benefiting such persons with respect to matters existing prior to or relating to the merger. 22
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o BUSINESS ADVISORS OF NEON AND GLOBIX. Communication Technology Advisors LLC, which we refer to as "CTA," provides consulting and business development services to NEON. NEON has issued warrants for its common stock to certain current and former affiliates of CTA and certain of such affiliates' designees as payment for such services. One of CTA's employees, Wayne Barr, Jr., serves on NEON's board of directors and Mr. Barr will serve on the Globix board of directors following the merger. A current director of NEON, Mr. Aquino, was affiliated with CTA at the time NEON's board of directors approved the merger. Under a letter agreement between NEON and CTA, CTA agreed to provide merger and acquisition advice and opportunities to NEON for a success fee. CTA has agreed to waive this fee in relation to the merger. CTA also provides consulting and business development services to Globix and certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for 500,000 shares of Globix common stock at $3.00 per share through March 13, 2013, which were purchased for $25,000. See "Description of Globix Capital Stock - Description of Globix Warrants" beginning on page 130 of this joint proxy statement/prospectus. Under a letter agreement between Globix and CTA, CTA is entitled to a success fee if Globix consummates a sale, merger or a similar transaction with CTA's assistance. CTA has agreed to waive this fee in relation to the merger. THE HOLDERS OF NEON CONVERTIBLE PREFERRED STOCK WILL RECEIVE A SMALLER CASH PAYMENT IN CONNECTION WITH THE MERGER THAN THEY WOULD IF THE MERGER WERE TREATED AS A "CHANGE OF CONTROL" UNDER NEON'S CERTIFICATE OF DESIGNATION. As a result of the amendment to NEON's certificate of designation being proposed to the NEON stockholders in this joint proxy statement/prospectus and the terms of the merger agreement, holders of NEON convertible preferred stock will receive a smaller cash payment in connection with the merger than they would if the merger were treated as a "Change of Control" under NEON's certificate of designation with respect to the NEON convertible preferred stock. If the merger were deemed a change of control, each of the 1,101,887 shares of NEON convertible preferred stock outstanding as of the effective date of the merger would be entitled to be paid $11.3625, plus accrued but unpaid dividends of approximately $2.87 as of November 30, 2004, in cash, for an aggregate immediate cash payment of approximately $15,706,524. Under the terms of the merger, the holders of NEON convertible preferred stock will receive $3.75 in cash plus 2.08333 shares of a new class of Globix convertible preferred stock with a liquidation preference of $3.60 per share to be created in connection with the merger, for each share of NEON convertible preferred stock, treating all accrued and unpaid dividends on the NEON convertible preferred stock as if paid in additional shares of NEON convertible preferred stock immediately prior to the merger. THE STRUCTURE AND IMPLEMENTATION OF THE MERGER INVOLVES A NUMBER OF RISKS, INCLUDING RISKS OF INTEGRATING THE TWO BUSINESSES AND UNKNOWN LIABILITIES. The merger involves the combination of two companies that previously operated independently in markets with different economic, demographic and competitive characteristics, and is a complex transaction. The process of integrating operations could cause an interruption of, or loss of momentum in, the activities of one or more of the combined company's businesses and the loss of key personnel. Among the risks the merger involves are risks of successful integration, potential liabilities that may be incurred as a result of the merger and numerous other risks, including: o failure to successfully cross-sell services to customers of the two businesses; o failure to achieve expected cost savings in integrating operations; o diversion of management attention from business matters to integration issues; o identifying and retaining key personnel, which may be difficult in the combined company; o integrating accounting, engineering, information technology and administrative systems, which may be unexpectedly difficult or costly; 23
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o making significant cash expenditures that may be required to retain personnel, eliminate unnecessary resources and integrate the two businesses; o maintaining uniform standards, controls, procedures and policies, which may be harder than Globix and NEON anticipate and interfere with efficient administration of the combined company; and o changes in the businesses as a result of the merger that impair relationships with employees, customers or vendors. In addition, as a result of the merger, each of Globix and NEON will succeed to any liabilities of the other company now existing or arising out of the other company's businesses prior to closing, including unknown liabilities. These liabilities may include liabilities to customers, suppliers or employees, as well as potential liabilities that can arise in the ordinary course of business. Failure to overcome these risks or any other problems encountered in connection with the merger could have a material adverse effect on business, results of operations and financial condition of the combined companies. LIMITATIONS MAY BE IMPOSED ON THE USE OF EITHER OR BOTH COMPANIES' NET OPERATING LOSSES FOR INCOME TAX PURPOSES. Changes in the ownership of NEON securities as a result of NEON's plan of reorganization have caused there to be an annual limitation on the use of net operating loss carry forwards that arose prior to the effective date of NEON's plan of reorganization. Similarly, changes in the ownership of Globix securities as a result of Globix's plan of reorganization have caused there to be an annual limitation on the use of net operating loss carry forwards that arose prior to the effective date of Globix's plan of reorganization. As a result of the merger, NEON or Globix, or both, may experience another ownership change. Further, whether or not the merger causes an ownership change, NEON or Globix may each experience an ownership change after the merger as a result of changes of ownership pursuant to the merger and future changes of ownership. Additional limitations would be imposed as a result of any such ownership change. See "The Merger - Material United States Federal Income Tax Consequences," beginning on page 74 of this joint proxy statement/prospectus. UNANTICIPATED ADDITIONAL COSTS RELATING TO THE MERGER COULD REDUCE GLOBIX'S FUTURE EARNINGS PER SHARE. Globix believes that it has reasonably estimated the likely costs of integrating the operations of NEON into Globix, and the incremental costs, of operating as a combined company. However, it is possible that additional transaction costs such as fees or professional expenses, or additional future operating expenses, such as increased personnel costs or increased taxes, as well as other types of adverse developments, could have a material adverse effect on the results of operations and financial condition of Globix after the merger. IF THE MERGER IS NOT COMPLETED, GLOBIX AND NEON WILL EACH HAVE INCURRED SUBSTANTIAL EXPENSES WITHOUT REALIZING THE EXPECTED BENEFITS. Globix and NEON have incurred substantial expenses in connection with the transactions described in this joint proxy statement/prospectus. The completion of the merger depends on the satisfaction of specified conditions and the receipt of regulatory approvals and we cannot guarantee that the conditions to completion of the merger will be met. In particular, it is a closing condition to the merger that some of Globix's 11% senior note holders exchange $12.5 million in principal and accrued interest of 11% senior notes for approximately 4,545,455 shares of Globix common stock, and it is possible that Globix may not be able to complete the exchange based on a failure to receive the requisite approvals or that such 11% senior note holders will fail to consummate the exchange. In addition, each of Globix and NEON have the right to terminate the merger agreement in the event of a material adverse change in the other's business or in certain cases if they receive another acquisition proposal. If the merger is not completed, these expenses could have a material adverse impact on the financial condition of Globix and/or NEON because they would not have realized the expected benefits of the merger. 24
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AFTER THE MERGER, STOCKHOLDERS OF NEON WILL HAVE DIFFERENT RIGHTS THAT MAY BE LESS ADVANTAGEOUS THAN THEIR CURRENT RIGHTS. Upon completion of the merger, NEON stockholders will become Globix stockholders. Although both companies are incorporated in Delaware, differences in NEON's certificate of incorporation and bylaws and Globix's certificate of incorporation and bylaws will result in changes to the rights of NEON stockholders when they become Globix stockholders. For more information, see the section entitled "Comparison of Stockholders Rights," beginning on page 179 of this joint proxy statement/prospectus. A stockholder of NEON may conclude that his, her or its rights under Globix's certificate of incorporation and bylaws are more limited than his, her or its current rights under NEON's certificate of incorporation, certificate of designation with respect to the convertible preferred stock and bylaws. RISK FACTORS RELATED TO GLOBIX There are a number of important factors that could affect our business and future operating results, including, without limitation, the factors set forth below. The information contained in this joint proxy statement/prospectus should be read in light of such factors. Any of the following factors could have a material adverse effect on our business and our future operating results. WE HAVE A HISTORY OF LOSSES WHICH IF IT CONTINUES IN THE FUTURE WILL EVENTUALLY MAKE US UNABLE TO MEET OUR FINANCIAL OBLIGATIONS. We have experienced significant losses since we began operations. Despite improvement in our operating margins since our emergence from bankruptcy, we may continue to incur losses in the future. For the year ended September 30, 2004, we had a loss from operations of $33.9 million and a net loss of $41.4 million. $18.0 million of the loss from operations and net loss during the year ended September 30, 2004 was attributable to a writedown of our property located at 415 Greenwich Street in New York City, which we sold in January 2004. For the year ended September 30, 2003, we had a loss from operations of $18.4 million and a net loss of approximately $25.3 million. Our ability to achieve and sustain operating profits depends on our ability to reduce our indebtedness and operating expenses and increase our revenue base. If we are unable to reduce expenses sufficiently or build up our revenue base, we will not become profitable. If we are unable to become profitable, we will eventually become unable to meet our financial obligations. OUR REVENUES COULD DECLINE SIGNIFICANTLY IF WE CONTINUE TO LOSE CUSTOMERS OR HAVE OUR EXISTING CUSTOMERS REDUCE THEIR LEVEL OF SPENDING ON OUR SERVICES. We have experienced and may continue to experience declines in revenue due to customers leaving us or staying with us but choosing to decrease their spending on our services. One of our biggest challenges has been to limit these revenue declines. Although we have reduced the level of revenue declines due to customer loss, we continue to experience declines in price per service. Continued declines in revenue could harm our business, financial condition and results of operations. OUR ABILITY TO PAY THE PRINCIPAL AMOUNT OF THE 11% SENIOR NOTES WHEN DUE DEPENDS ON OUR FUTURE OPERATING PERFORMANCE, AND FAILURE TO SATISFY THESE OBLIGATIONS COULD RESULT IN THESE OBLIGATIONS BECOMING DUE AND PAYABLE, RESULTING IN BANKRUPTCY. Historically, we have not generated positive cash flows from operations. Our ability to pay principal and interest on the 11% senior notes and on our other indebtedness depends on our future operating performance. Our outstanding indebtedness as of September 30, 2004 was approximately $95.8 million and may increase to approximately $104 million on September 30, 2005 if our board of directors elects to pay interest in kind and not in cash on the notes. Future operating performance is subject to market conditions and business factors that are often beyond our control. Consequently, we cannot assure you that we will have sufficient cash flows to pay the principal and interest on our indebtedness. If our cash flows and capital resources are insufficient to allow us to make scheduled payments on our indebtedness, we may have to reduce or delay capital expenditures, sell assets, seek additional capital, restructure or refinance our indebtedness or file for bankruptcy. The terms of our indebtedness may restrict the use of these alternative measures, and we cannot assure you that these measures would satisfy our scheduled debt service obligations. If we cannot make scheduled payments on our indebtedness, we will be in default and, as a result: o our debt holders could declare all outstanding principal and interest to be due and payable; and 25
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o we could be forced into bankruptcy. OUR OUTSTANDING INDEBTEDNESS RESTRICTS OUR FINANCIAL AND OPERATING FLEXIBILITY. THIS COULD PLACE US AT A COMPETITIVE DISADVANTAGE THAT COULD IN TURN AFFECT OUR ABILITY TO GENERATE CASH FLOW AND FULFILL OUR OBLIGATIONS. As of September 30, 2004, we were highly leveraged and our outstanding indebtedness was approximately $95.8 million. Our indebtedness could: o limit our ability to obtain additional financing to operate or grow our business; o require us to use the proceeds of certain asset sales to redeem indebtedness; o limit our financial flexibility in planning for and reacting to industry changes; o place us at a competitive disadvantage as compared to less leveraged companies; and o in 2007, after the fourth anniversary of the issuance of the 11% senior notes, require us to dedicate a significant portion of our cash flow to payments on our debt, reducing the availability of our cash flow for other purposes. COVENANTS IN THE INDENTURE GOVERNING THE 11% SENIOR NOTES IMPOSE LIMITATIONS ON OUR ABILITY TO BORROW AND INVEST, WHICH COULD SEVERELY IMPAIR OUR ABILITY TO EXPAND OR FINANCE OUR FUTURE OPERATIONS. The indenture governing the 11% senior notes contains a number of covenants that impose significant operating and financial restrictions on us and our subsidiaries. These restrictions limit our ability to incur additional indebtedness, create liens on assets, dispose of assets, enter into business combinations or engage in certain activities with our subsidiaries. OUR LEVERAGE WILL INCREASE AS A RESULT OF THE PAYMENT OF INTEREST IN KIND WHICH COULD MAKE IT MORE DIFFICULT TO REPAY OR REFINANCE OUR INDEBTEDNESS AND PLACE US AT AN OPERATIONAL AND COMPETITIVE DISADVANTAGE. The indenture under which our 11% senior notes were issued requires us to pay interest in kind through 2004 and permits us to pay interest in kind at the discretion of our board of directors through 2006. The additional issuances of 11% senior notes could further restrict our financial and operating flexibility, limit our ability to obtain additional financing, place us at a competitive disadvantage when compared to our competitors with less debt, and make it more difficult to meet our financial obligations upon the maturity of the 11% senior notes. The payment of interest in kind on May 1, 2004 resulted in an additional $7.2 million in 11% senior notes. OUR ACQUISITION STRATEGY MAY PROVE TO BE UNSUCCESSFUL WHICH COULD RESULT IN FURTHER LOSSES AND AN INABILITY TO MEET OUR FINANCIAL OBLIGATIONS. In order to increase our revenue base, we may make investments in or acquire businesses, products, services or technologies. Consequently, we are subject to the following risks: o we may not be able to make investments or acquisitions on terms which prove advantageous; o acquisitions may cause a disruption in our ongoing business, distract our management and other resources and make it difficult to maintain the operations, organization and procedures of our company or the acquired business; and o we may not be able to retain key employees of the acquired business or to maintain good relations with its customers or suppliers. OUR REORGANIZATION MAY HAVE ADVERSELY AFFECTED SOME OF OUR RELATIONSHIPS WITH CUSTOMERS AND SUPPLIERS, AND TOGETHER WITH OUR HIGHLY LEVERAGED FINANCIAL STRUCTURE MAY CONTINUE TO AFFECT THE WAY WE ARE VIEWED IN THE MARKET. The continuing impact of our April 2002 bankruptcy reorganization cannot be accurately quantified. However, our bankruptcy may have adversely affected our ability to negotiate favorable terms with vendors or retain customers. Our bankruptcy and continued leverage may cause customers to question our financial soundness and may also affect the contractual terms that are available to us. 26
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OUR BUSINESS COULD SUFFER FROM A LOSS OF MANAGEMENT PERSONNEL, WHICH COULD RESULT IN OUR INABILITY TO OPERATE AS EFFECTIVELY AS WE ANTICIPATED AND COULD REDUCE OUR REVENUE. Since our emergence from bankruptcy, we have undertaken a number of changes in management as well as reductions in staffing. In the year following our bankruptcy, we replaced our Chief Executive Officer and Chief Financial Officer as well as other members of senior management. As a result, our business experienced a lack of continuity in management. Our success depends largely on the experience, skills and performance of our senior management team. The loss or unavailability to us of any member of our senior management team could result in our inability to operate the company as effectively as we anticipate and could reduce our revenue. WE MAY NOT BE ABLE TO ATTRACT OR RETAIN THE PERSONNEL WE NEED IN EACH OF THE CRITICAL AREAS OF OUR BUSINESS, WHICH COULD ADVERSELY AFFECT THE ABILITY OF OUR BUSINESS TO PERFORM ITS FUNCTIONS. Our future success depends on our ability to attract and retain key personnel for management, technical, sales and marketing and customer support positions. The failure to attract or retain qualified personnel in each of these critical areas could adversely affect the ability of our business to perform its functions. Further efforts to control management costs, given our flat organizational structure, could have an additional adverse impact on employee morale. COMPETITION FOR THE INTERNET SERVICES THAT WE PROVIDE IS INTENSE AND WE EXPECT THAT COMPETITION WILL CONTINUE TO INTENSIFY, WHICH COULD RESULT IN OUR ENCOUNTERING SIGNIFICANT PRICING PRESSURE. Our competitors include other Internet service providers with a significant national or global presence that focus on business customers, such as IBM, Digex, EDS, NaviSite, Savvis, Akamai, Speedera, Data Return, Rackspace and Equinix. Our competitors also include telecommunications companies, such as AT&T, British Telecom, Level 3, MCI and Sprint. Many of our existing competitors, as well as a number of potential new competitors, have: o longer operating histories; o greater name recognition; o larger customer bases; o larger networks; o more and larger facilities; and o significantly greater financial, technical and marketing resources. New competitors, including large computer hardware, software, media and other technology and telecommunications companies, may enter our market and rapidly acquire significant market share. As a result of increased competition and vertical and horizontal integration in the industry, we expect to continue to encounter significant pricing pressures. These pricing pressures could result in significantly lower average selling prices for our services. For example, telecommunications companies operating outside of NEON's geographic market may be able to provide customers with reduced communications costs in connection with their Internet access services, significantly increasing pricing pressures on us. We may not be able to offset the effects of any price reductions with an increase in the number of our customers, higher revenue from value-added services, cost reductions or otherwise. OUR SUCCESS WILL DEPEND ON OUR ABILITY TO INTEGRATE, OPERATE AND MAINTAIN AND UPGRADE OUR NETWORK AND FACILITIES, AND OUR FAILURE TO DO SO COULD CAUSE US TO LOSE CUSTOMERS OR BE UNABLE TO OFFER COMPETITIVE SERVICES. A key element of our business strategy is the maintenance and upgrading of our facilities and network, which has required, and will continue to require, management time and the periodic expenditure of capital. Any interruption in our ability to deliver services over our network due to market disruptions or third party insolvencies may make us less attractive to future customers and may hamper our ability to retain our current customers which, in turn, could adversely affect our entire business. 27
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OUR BUSINESS RELIES ON THIRD-PARTY DATA COMMUNICATIONS AND TELECOMMUNICATIONS PROVIDERS THAT COULD INCREASE PRICES OR INTERRUPT SERVICE, WHICH IN TURN COULD CAUSE US TO LOSE BUSINESS OR BE UNABLE TO OPERATE IN A COMPETITIVE MANNER. Our existing network relies on many third-party data communications and telecommunications providers, located in the United States and abroad. These carriers are subject to price constraints, including tariff controls, that in the future may be relaxed or lifted. In addition, certain of these providers, including MCI, Global Crossing and Cable and Wireless, have filed for protection under Chapter 11 under the U.S. Bankruptcy Code, which may affect the availability and quality of the services that these entities provide. Price increases or the lack of service availability and quality could adversely affect the costs of maintaining our network and our ability to maintain or grow our business. WE MAY NOT BE ABLE TO OBTAIN COMPUTER HARDWARE AND SOFTWARE ON THE SCALE AND AT THE TIMES WE NEED AT AN AFFORDABLE COST, AND FAILURE TO DO SO OVER AN EXTENDED PERIOD OF TIME COULD CAUSE US TO LOSE CUSTOMERS OR BE UNABLE TO OFFER COMPETITIVE SERVICE. We rely on outside vendors to supply us with computer hardware, software and networking equipment. We primarily use products from Cisco, Compaq, Juniper Networks and Sun Microsystems, either leased or purchased from the manufacturer or a third-party vendor. Consequently, our expertise is concentrated in products from these manufacturers. We also rely on Cisco for network design and installation services. If we are unable over an extended period of time to obtain the products and services that we need on a timely basis and at affordable prices, it will harm our business, financial condition and results of operations. BECAUSE WE ARE DEPENDENT ON COMPUTER AND COMMUNICATION SYSTEMS, A SYSTEMS FAILURE WOULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS. Our business depends on the efficient and uninterrupted operation of our computer and communications hardware systems and infrastructure. We currently maintain most of our computer systems in our facilities in New York, New York; Atlanta, Georgia; Santa Clara, California; and London, England. While we have taken precautions against systems failure, interruptions could result from natural disasters as well as power loss, our inability to acquire fuel for our backup generators, telecommunications failure, terrorist attacks and similar events. We also lease telecommunications lines from local, regional and national carriers, whose service may be interrupted. Our business, financial condition and results of operations could be harmed by any damage or failure that interrupts or delays our operations. OUR DEPENDENCE ON A LIMITED NUMBER OF SUPPLIERS EXPOSES US TO POSSIBLE INTERRUPTIONS THAT COULD DELAY OR PREVENT US FROM PROVIDING OUR SERVICES. Approximately 39% of our cost of revenues for the year ended September 30, 2004 is derived from services provided by three major telecommunication carriers, MCI, Verizon and British Telecom. While we believe that most of these services can be obtained from other alternative carriers, an interruption in service from one of these carriers or other suppliers could limit our ability to serve customers, which would adversely affect our results of operations. IF OUR SECURITY MEASURES PROVED TO BE INADEQUATE, OUR ABILITY TO ATTRACT, RETAIN AND SERVICE CUSTOMERS WOULD BE ADVERSELY AFFECTED. Our infrastructure is potentially vulnerable to physical or electronic break-ins, viruses, denial of service attacks or similar problems. If someone were to circumvent our security measures, he or she could jeopardize the security of confidential information stored on our systems, misappropriate proprietary information or cause interruptions in our operations. We may be required to make significant additional investments and efforts to protect against or remedy security breaches. Security breaches that result in access to confidential information could damage our reputation and expose us to a risk of loss or liability. The security services that we offer in connection with our customers' networks cannot assure complete protection from computer viruses, break-ins and other disruptive problems. Although we attempt to contractually limit our liability in such instances, the occurrence of these problems may result in claims against us or liability on our part. These claims, regardless of their ultimate outcome, could result in costly litigation and could harm our business and reputation and impair our ability to attract and retain customers for our services. 28
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BECAUSE OUR BUSINESS DEPENDS ON THE CONTINUED GROWTH, USE AND IMPROVEMENT OF THE INTERNET, ANY DECREASE IN INTERNET USAGE COULD DECREASE THE DEMAND FOR OUR SERVICES, AND REDUCE OUR REVENUES. Our services are targeted toward businesses that use the Internet. The Internet is subject to a high level of uncertainty and is characterized by rapidly changing technology, evolving industry standards and frequent new service introductions. Accordingly, we are subject to the risks and difficulties frequently encountered in new and rapidly evolving markets. Critical issues concerning the commercial use of the Internet remain unresolved and may affect the growth of Internet use, especially in the market we target. Despite growing interest in the many commercial uses of the Internet, many businesses have been deterred from purchasing Internet services for a number of reasons, including: o inadequate protection of the confidentiality of stored data and information moving across the Internet; o inconsistent quality of service; o inability to integrate business applications on the Internet; o the need to deal with multiple vendors, whose products are frequently incompatible; o lack of availability of cost-effective, high-speed services; and o concern over the financial viability of Internet service providers. Capacity constraints caused by growth in Internet usage may, unless resolved, impede further growth in Internet use. If the number of users on the Internet does not increase and commerce over the Internet does not become more accepted and widespread, demand for our services may decrease and, as a result, our business would be harmed. OUR BUSINESS REQUIRES US TO ADAPT TO TECHNOLOGICAL CHANGES, AND SIGNIFICANT TECHNOLOGICAL CHANGES COULD RENDER OUR EXISTING SERVICES OBSOLETE. We must adapt to our rapidly changing market by continually improving the responsiveness, functionality and features of our services to meet our customers' needs. If we are unable to respond to technological advances and conform to emerging industry standards in a cost-effective and timely basis, our business, financial condition and results of operations will be harmed. CHANGES IN GOVERNMENT REGULATIONS RELATED TO THE INTERNET COULD RESTRICT OUR ACTIVITIES, EXPOSE US TO LIABILITY OR OTHERWISE ADVERSELY AFFECT OUR BUSINESS. There are an increasing number of laws and regulations pertaining to the Internet. These laws or regulations relate to liability for content and information received from or transmitted over the Internet, user privacy and security, taxation, the enforcement of online contracts, consumer protection and other issues concerning services. The government may also seek to regulate some aspects of our activities as basic telecommunications services. Moreover, the applicability to the Internet of existing laws governing copyright, trademark, trade secret, obscenity, libel, consumer protection, privacy and other issues is uncertain and developing. We cannot predict the impact that future regulation or regulatory changes may have on our business. WE COULD BE LIABLE FOR VIOLATING THE INTELLECTUAL PROPERTY RIGHTS OF THIRD PARTIES, WHICH COULD RESULT IN US HAVING TO PAY A LICENSE FEE OR DAMAGES TO THIRD PARTIES, WHICH WOULD REDUCE OUR REVENUE. Despite our efforts to protect the intellectual property that is important to the operation of our business, a third party could bring a claim of infringement against us or any of our material suppliers. If such a claim were settled or adjudicated against us or one of our material suppliers, we could be forced to pay for a license to continue using the intellectual property. There is no guarantee that we could obtain such a license, or that it would be available on reasonable terms. Alternatively, we could be forced to defend ourselves against infringement claims, which could be costly and which could result in us having to pay damages to third parties. 29
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WE MAY BE LIABLE FOR THE MATERIAL THAT OUR CUSTOMERS DISTRIBUTE OVER THE INTERNET, WHICH COULD RESULT IN LEGAL CLAIMS AGAINST US. The law relating to the liability of online service providers, private network operators and Internet service providers for content and information carried on or disseminated through their networks is currently unsettled. While we have taken steps to contractually limit our liability in these areas, we could become subject to legal claims relating to the content of the web sites we host. For example, lawsuits could be brought against us claiming that material inappropriate for viewing by young children can be accessed from the web sites that we host. Claims could also involve matters such as defamation, invasion of privacy, violations of "anti-spamming" legislation, copyright and trademark infringement. Internet service providers have been sued in the past, sometimes successfully, based on the material disseminated over their networks. We may take additional measures to reduce our exposure to these risks, which could be costly or result in some customers not doing business with us. In addition, defending ourselves against claims, or paying damage awards to third parties, could strain our management and financial resources. WE FACE RISKS ASSOCIATED WITH DIFFERING REGULATORY REGIMES AND MARKETS AS A RESULT OF OUR INTERNATIONAL OPERATIONS WHICH COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS. A substantial percentage of our business is located in the United Kingdom. We face problems of managing our business under differing regulatory regimes in areas such as intellectual property, telecommunications and employee relations. As a result, we may find it more difficult and expensive to hire and train employees and to manage international operations together with our United States operations. Because we have limited experience operating in markets outside the United States and the United Kingdom, we may have difficulty adapting our services to different international market needs. We may also be unsuccessful in our efforts to market and sell these services to customers abroad. If we fail to successfully address these risks, our international operations may be adversely affected. CURRENCY EXCHANGE RATE FLUCTUATIONS MAY HAVE A SIGNIFICANT IMPACT ON OUR REVENUES AFFECTING OUR RESULTS FROM OPERATIONS. We are subject to market risk associated with foreign currency exchange rates. Approximately 42% of our revenues and approximately 28% of our operating costs and expenses for the year ended September 30, 2004 were denominated in British Pounds. We believe that an immediate increase or decrease of 5% of the Dollar in comparison to the British Pound would not have a material impact on our operating results or cash flows; however, it may have a significant impact on our revenues. To date, we have not utilized financial instruments to minimize our exposure to foreign currency fluctuations. We will continue to analyze risk management strategies to minimize foreign currency exchange risk in the future. OUR RESULTS OF OPERATIONS FLUCTUATE ON A QUARTERLY AND ANNUAL BASIS AND WE EXPECT TO CONTINUE EXPERIENCING FLUCTUATIONS IN OUR FUTURE QUARTERLY AND ANNUAL RESULTS OF OPERATIONS, WHICH COULD AFFECT THE MARKET PRICE OF OUR SECURITIES. Our results of operations fluctuate on a quarterly and annual basis. We expect to continue experiencing fluctuations in our future quarterly and annual results of operations due to a variety of factors, many of which are outside our control, including: o timing of contractual cancellations and renewals; o demand for and market acceptance of our services; o introductions of new services by us and our competitors; o customer retention; o capacity utilization of our data centers and assets; o timing of customer installations; o our mix of services sold; o the timing and magnitude of our capital expenditures; o changes in our pricing policies and those of our competitors; o fluctuations in bandwidth used by customers; 30
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o our retention of key personnel; o reliable continuity of service and network availability; o costs related to the acquisition of network capacity; o arrangements for interconnections with third-party networks; o the provision of customer discounts and credits; o the introduction by third parties of new Internet and networking technologies; o licenses and permits required to construct facilities, deploy networking infrastructure or operate in the United States and foreign countries; and o other general economic factors. Fluctuations in our quarterly or annual results as a result of one or more of these factors could affect the market price of our securities. BECAUSE OUR COMMON STOCK IS THINLY TRADED, PRICES ARE MORE LIKELY TO BE VOLATILE AND IT MAY BE HARDER FOR OUR STOCKHOLDERS TO SELL ANY SIZABLE NUMBER OF SHARES. Our common stock is currently quoted on the OTC Bulletin Board (the "OTCBB"). Although the OTCBB is a quotation service operated by The Nasdaq Stock Market and displays real-time quotes, last sale prices, and volume information on equity securities like our common stock, the stocks quoted on the OTCBB may not be viewed within the investment community as equivalent to stocks quoted on other markets, where there is a more active public trading market. In addition, because of the relatively small number of shares that are traded, prices may be volatile and it may be difficult to find a purchaser for any sizable amount of the stock. Although we have applied to have our common stock listed on the American Stock Exchange, we cannot assure you that an active and liquid trading market will develop in our common stock, or if one does develop that it will continue. The development of an active public trading market depends upon the existence of willing buyers and sellers and is not within our control. For these reasons, we cannot assure NEON stockholders that they will be able to resell the shares of Globix common stock received in connection with the merger for a price that is equal to or greater than the price of Globix common stock on the date the merger is completed. FUTURE SALES OF OUR COMMON STOCK, INCLUDING THOSE ISSUED IN THE MERGER, MAY DEPRESS OUR STOCK PRICE. If our stockholders or option holders, including NEON stockholders and option holders who are receiving Globix common stock and stock options in the merger, sell substantial amounts of our common stock in the public market, the market price of our common stock could fall. All the shares sold in this offering will be freely tradable, subject to limitations applicable to affiliates of NEON. In addition, we are obligated to register approximately 5 million shares of our common stock received by certain stockholders in our bankruptcy, and we intend to complete the public offer and sale of such shares within a short time after the completion of the merger. We also have obligations to register the approximately 4,545,455 shares issuable to certain holders of our 11% senior notes in the debt-for-equity exchange described in this joint proxy statement/prospectus within ninety days after the merger is completed. WE ARE NOT CURRENTLY REQUIRED TO MEET THE CORPORATE GOVERNANCE REQUIREMENTS APPLICABLE TO LISTED COMPANIES. Currently Globix common stock is quoted on the OTCBB where we are not required to comply with any listing standards for our common stock. If our application for listing of our common stock on the American Stock Exchange is approved, we will have to meet a number of additional listing standards relating to the independence of our board of directors and committees of our board, some of which we currently do not meet. We cannot assure you that our application for listing on the America Stock Exchange will be approved. 31
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IF OUR BOARD OF DIRECTORS DETERMINES TO ENGAGE IN CERTAIN CHANGE OF CONTROL TRANSACTIONS, OR IF A THIRD PARTY WERE TO ACQUIRE MORE THAN 50% OF OUR STOCK OR ACQUIRE CONTROL OF OUR BOARD OF DIRECTORS, WE OR THE THIRD PARTY COULD BE REQUIRED TO PURCHASE OUR 11% SENIOR NOTES AND OUR CONVERTIBLE PREFERRED STOCK TO BE ISSUED IN THE MERGER, AND THE FAILURE TO DO SO WOULD RESULT IN AN EVENT OF DEFAULT UNDER THE INDENTURE GOVERNING THE NOTES AND/OR A BREACH OF OUR OBLIGATIONS WITH RESPECT TO OUR CONVERTIBLE PREFERRED STOCK. In the event that: o subject to certain exceptions, any person, entity or group of persons or entities becomes the beneficial owner, directly or indirectly, of more than 50% of our outstanding voting securities; o at any time during any two-year period following the distribution of the 11% senior notes, the individuals who comprised a majority of our board of directors at the beginning of such two year period, plus any new directors whose election to our board was approved by a majority of those directors, cease to comprise a majority of our board of directors; or o subject to certain exceptions, we consolidate with or merge with or into another entity, we sell or lease all or substantially all of our assets to another entity or any entity consolidates with or merges into or with our company, in each case pursuant to a transaction in which our outstanding voting securities are changed into or exchanged for cash, securities or other property, unless no person, entity or group of persons or entities owns, immediately after the transaction, more than 50% of our outstanding voting stock, then each holder of the 11% senior notes will have the right to require us to repurchase all or a portion of its 11% senior notes for a purchase price equal to 101% of the principal amount of that holder's 11% senior notes plus accrued and unpaid interest to the date of repurchase. There can be no assurance that we will have sufficient funds available to make any required repurchases of 11% senior notes or that the terms of our other indebtedness will permit us to make any required repurchases of 11% senior notes. If we are unable to repurchase a holder's 11% senior notes in connection with one of the events described above, then this would constitute an event of default under the indenture governing the 11% senior notes. Additionally, in the event of a change in control, each holder of our convertible preferred stock will have the option to require us to redeem its shares at a price equal to $3.636 per share plus all accrued and unpaid dividends up to the date that such shares are redeemed. We cannot redeem any shares of our convertible preferred stock upon a change in control prior to repurchasing any securities ranking senior to our convertible preferred stock, including the 11% senior notes. Therefore, if we are unable to repurchase all of the 11% senior notes in connection with a change in control we would not be able to redeem any shares of our convertible preferred stock. Given the overlapping stock ownership between Globix and NEON, Globix does not believe that the proposed merger of NEON with a wholly owned subsidiary of Globix will constitute a change in control under the indenture. AS A RESULT OF VARIOUS FINANCIAL ACCOUNTING COMPLEXITIES, ACCOUNTING STAFF TURNOVER AND ACCOUNTING STAFF SHORTAGES, WE EXPERIENCED MATERIAL WEAKNESSES IN OUR ACCOUNTING AND INTERNAL CONTROL ENVIRONMENT IN SUMMER 2003 THAT RESULTED IN THE DELAY AND LATE FILING OF SEC REPORTS FILED DURING SUMMER 2003. Since our emergence from bankruptcy effective April 25, 2002, Globix has had to face many challenging and complex accounting and financial reporting issues, including fresh start accounting, restructuring and the restatement of amounts in its financial statements as of and for the quarter ended March 31, 2002. In addition, Globix experienced significant turnover in its financial reporting staff, as well as limited management resources. Globix fell behind in its SEC reporting for the year ended September 30, 2002, and experienced 32
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difficulty in catching up with its filing obligations for the year ended September 30, 2002 while fulfilling its responsibilities for the fiscal year 2003. The combined effect of these challenges placed a strain on our internal accounting resources in summer 2003 and resulted in further delays in the preparation and filing of periodic reports that were filed in summer 2003. The strain on our internal accounting resources and the delays in the preparation and filing of periodic reports created material weaknesses in our accounting and internal control environment in summer 2003. For further information concerning our internal controls, see "Changes In and Disagreements With Accountants on Accounting and Financial Disclosure" beginning on page 121 of this joint proxy statement/prospectus. AS A RESULT OF OUR APPLICATION OF FRESH START ACCOUNTING UNDER AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION NO. 90-7, "FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE" (OTHERWISE KNOWN AS "SOP NO. 90-7"), AS OF MAY 1, 2002, OUR FINANCIAL STATEMENTS AS OF AND FOR PERIODS SUBSEQUENT TO MAY 1, 2002 ARE NOT COMPARABLE TO OUR FINANCIAL STATEMENTS AS OF AND FOR PERIODS PRIOR TO MAY 1, 2002, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO ASSESS OUR FINANCIAL PERFORMANCE. In connection with our emergence from bankruptcy on April 25, 2002, we applied the principles of SOP No. 90-7 as of May 1, 2002. Accordingly, our assets and liabilities as of May 1, 2002 were revalued to fair market value, and therefore our financial statements for periods subsequent to May 1, 2002 are not comparable to our financial statements for periods prior to May 1, 2002. This may make it more difficult for third parties to assess our financial performance. YOU ARE UNLIKELY TO BE ABLE TO EXERCISE EFFECTIVE REMEDIES AGAINST ARTHUR ANDERSEN LLP, THE FORMER INDEPENDENT PUBLIC ACCOUNTANTS FOR GLOBIX, FOR ANY LIABILITY THAT THEY MIGHT OTHERWISE HAVE UNDER THE SECURITIES ACT OF 1933 OR OTHER SECURITIES LAWS. Globix's Consolidated Financial Statements for the year ended September 30, 2001 (its predecessor company financial statements prior to its emergence from bankruptcy in April 2002) were audited by Arthur Andersen LLP. On March 14, 2002, Arthur Andersen LLP was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corp. On June 15, 2002, a jury in Houston, Texas, found Arthur Andersen LLP guilty of these federal obstruction of justice charges. In light of the jury verdict and the underlying events, Arthur Andersen LLP subsequently substantially discontinued operations and dismissed essentially its entire workforce. You are, therefore, unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen LLP. 33
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RISK FACTORS RELATED TO NEON After the merger, NEON's operating results will have a significant impact on the operating results of Globix. NEON's contribution to the combined results will depend upon the extent to which NEON achieves its own strategic plan. The following risk factors are ones that NEON believes may inhibit its ability to achieve its plan. The information contained in this joint proxy statement/prospectus should be read in light of such factors. Any of the following factors could have a material adverse effect on the business and future operating results of the combined company. In addition, these risks may have a material adverse effect on the business, financial condition or results of operations of NEON if the merger is not consummated. RISKS RELATING TO OUR BUSINESS STRATEGY OUR BUSINESS STRATEGY DEPENDS UPON ANTICIPATED CUSTOMER DEMAND FOR OUR SERVICES, AND OUR FAILURE TO OBTAIN CUSTOMERS FOR OUR SERVICES AT PROFITABLE RATES WOULD REDUCE OUR REVENUES. Our ability to become profitable depends upon our ability to secure a market for our services and obtain service contracts with our communications customers. Many of our targeted customers may also be our potential competitors. If our services are not satisfactory or cost competitive, our targeted customers may utilize other providers where available, or construct their own networks, which would reduce their need for our services and create future sources of competition for us. INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FROM A BROAD RANGE OF COMPETITORS MAY PREVENT US FROM OBTAINING CUSTOMERS, REQUIRE US TO LOWER PRICES AND REDUCE OUR REVENUES. The telecommunications industry is highly competitive. We face substantial competition from companies with significantly greater financial and other resources, whose capacity is interchangeable with the capacity we offer, including incumbent local telephone companies, national long-haul and regional carriers, dark fiber providers and metro carriers. In addition, potential competitors capable of offering services similar to those offered by us include other communications service providers that own and operate their own networks and equipment, including cable television companies, electric utilities, microwave carriers, satellite carriers, wireless communication system operators and end-users with private communications networks. BECAUSE WE OFFER A RELATIVELY NARROW RANGE OF SERVICES IN COMPARISON TO SOME OF OUR COMPETITORS, WE CANNOT ACHIEVE REVENUES COMPARABLE TO COMPANIES OFFERING A BROADER ARRAY OF SERVICES AND MAY BE AT A COMPETITIVE DISADVANTAGE WITH RESPECT TO THE SERVICES WE OFFER. Unlike more diversified telecommunications companies, we derive and expect to continue to derive substantially all of our revenues from the leasing of fiber optic capacity on a wholesale basis to our customers, most of whom are telecommunications companies and Internet service providers serving end-users. The limited nature of our current services could limit our potential revenues and result in our having lower revenues than competitors which provide a wider array of services. While we are currently attempting to expand the breadth of our product offering, we cannot assure you that any new product offerings will achieve market acceptance. DUE TO RAPIDLY EVOLVING TECHNOLOGIES IN OUR INDUSTRY AND THE UNCERTAINTY OF FUTURE GOVERNMENT REGULATION, OUR CURRENT BUSINESS PLAN MAY BECOME OBSOLETE AND WE MAY BE UNABLE TO MAINTAIN A COMPETITIVE POSITION IF WE ARE UNABLE TO SUCCESSFULLY ADJUST OUR PRODUCTS, SERVICES AND BUSINESS STRATEGIES AS REQUIRED. In the future, we may become subject to more intense competition due to the development of new technologies, an increased supply of domestic and international transmission capacity, the consolidation in the industry among local and long distance service providers and the effects of deregulation resulting from the Telecommunications Act of 1996. The introduction of new services and products or the emergence of new technologies may change the cost or increase the supply of services and products similar to those that we provide. We cannot predict which of many possible future product and service offerings will be crucial to maintain our competitive position or what expenditures will be required to develop profitably and provide such products and services. Prices for our services to carriers specifically, and interstate services in general, may decline over the next several years due primarily to price competition to the extent that network providers continue to install networks that compete with our network. We also believe that there will be technological advances that will permit substantial increases in the transmission capacity of both new and existing fiber. 34
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A LIMITED NUMBER OF CUSTOMERS HAVE ACCOUNTED FOR A SIGNIFICANT PERCENTAGE OF OUR REVENUES AND ACCOUNTS RECEIVABLE. Historically, a limited number of customers have accounted for a significant percentage of our revenues and accounts receivable. In 2001 and 2003, one customer accounted for 10% of net revenues. In 2002 and for the nine months ended September 30, 2004, no customer accounted for more than 10% of net revenues. As of December 31, 2002 and 2003, no customers had balances in excess of 10% of accounts receivable. As of September 30, 2004, one customer represented approximately 30% of accounts receivable. This amount was subsequently collected in full from the customer. OUR SUCCESS DEPENDS ON OUR RETENTION OF CERTAIN KEY PERSONNEL, OUR ABILITY TO HIRE ADDITIONAL QUALIFIED PERSONNEL AND THE MAINTENANCE OF GOOD LABOR RELATIONS. We depend on the performance of our executive officers and key employees. In particular, our senior management has significant experience in the telecommunications industry and the loss of any of them could negatively affect our ability to execute our business strategy. Our future success also depends on our continuing ability to identify, hire, train and retain other highly qualified technical, operations, sales, marketing, financial, legal, human resource, and managerial personnel as we grow our business. Competition for such qualified personnel is high. Our business will be harmed if we cannot attract and retain the necessary qualified personnel. AS A RESULT OF OUR APPLICATION OF FRESH START ACCOUNTING UNDER AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS STATEMENT OF POSITION NO. 90-7, "FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE" (OTHERWISE KNOWN AS "SOP NO. 90-7"), AS OF DECEMBER 31, 2002, OUR FINANCIAL STATEMENTS AS OF AND FOR PERIODS SUBSEQUENT TO DECEMBER 31, 2002 ARE NOT COMPARABLE TO OUR FINANCIAL STATEMENTS FOR PERIODS PRIOR TO DECEMBER 31, 2002, WHICH MAY MAKE IT MORE DIFFICULT FOR YOU TO ASSESS OUR FINANCIAL PERFORMANCE. In connection with our emergence from bankruptcy on December 20, 2002, we have applied the principles of SOP No. 90-7 as of December 31, 2002. Accordingly our financial statements as of and for periods subsequent to December 31, 2002 are not comparable to our financial statements for periods prior to December 31, 2002. This may make it more difficult for third parties to assess our financial performance. CONTINUING WEAKNESS IN THE TELECOMMUNICATIONS INDUSTRY MAY RESULT IN A LOSS OF REVENUE. The continued downturn in the telecommunications industry may have a significant impact on us. Several of our competitors and customers have filed for protection under the bankruptcy laws and we may be unable to collect receivables due to bankruptcies and business difficulties among our customers. Oversupply of capacity and an ongoing downward trend in bandwidth prices may continue if our competitors do not successfully consolidate. Even if they do successfully consolidate, they may do so to our detriment. Competitors who successfully complete restructuring or bankruptcy reorganization processes or who introduce new product offerings may put us at a competitive disadvantage. TERRORIST ATTACKS OR WAR MAY ADVERSELY AFFECT OUR FINANCIAL CONDITION AND OPERATING RESULTS. The occurrence of terrorist attacks or armed conflicts may directly impact our facilities or the facilities of our suppliers or customers. In addition, such attacks or conflicts may result in increased volatility in the United States and global financial markets. Any of these occurrences could potentially have a material impact on our financial condition and operating results. UNCERTAINTY OR NEGATIVE PUBLICITY MAY HINDER OUR ABILITY TO OBTAIN NEW CUSTOMERS OR UNDERMINE OUR COMMERCIAL RELATIONSHIP WITH EXISTING CUSTOMERS. There is a possibility that uncertainty or adverse publicity concerning negative perceptions about the industry as a whole could hinder our ability to obtain new customers or undermine our commercial relationship with existing customers. Potential customers may associate our bankruptcy with negative business implications and question the state of our finances and future prospects. 35
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RISKS RELATING TO THE EXPANSION AND OPERATION OF OUR FIBER OPTIC NETWORK THE SUCCESSFUL, TIMELY AND COST-EFFECTIVE EXPANSION OF OUR FIBER OPTIC NETWORK WITHIN THE NORTHEAST AND MID-ATLANTIC REGIONS IS CRUCIAL TO OUR BUSINESS PLAN, AND DEPENDS UPON NUMEROUS FACTORS BEYOND OUR CONTROL. Our ability to achieve our strategic objectives depends in large part upon the successful, timely and cost-effective expansion of our fiber optic network within the Northeast and mid-Atlantic regions. The failure of both affiliated and third party suppliers or contractors to meet their obligations to construct and maintain significant portions of our fiber optic network in a timely and cost-effective manner could affect our ability to execute our business plan. THE EXPENDITURES NECESSARY TO SUFFICIENTLY EXPAND OUR FIBER OPTIC NETWORK AND DEVELOP OUR SERVICES IN ORDER TO SATISFY THE CURRENT AND FORECASTED DEMANDS OF OUR CUSTOMERS MAY SURPASS OUR AVAILABLE CASH, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL CAPITAL TO DEVELOP OUR SERVICES ON A TIMELY BASIS AND ON ACCEPTABLE TERMS. Although we have expended significant resources in building our network and the development of our customer base, we will require additional cash in order to expand our geographic coverage and the range of services which we can offer throughout our service area in order to be competitive in our market and to meet customer demands. These expenditures for expansion and for more services, together with associated operating expenses, will reduce our cash flow and profitability until we establish an adequate customer base throughout all of our coverage areas. To date, we have expended substantial amounts on construction of our network from the proceeds of our financing activities and have generated negative cash flow. WE OBTAIN SOME OF THE KEY COMPONENTS USED IN OUR FIBER OPTIC NETWORK FROM A SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS OF ONE OF THESE SUPPLIERS COULD DISRUPT OUR OPERATIONS AND RESULT IN A SUBSTANTIAL LOSS OF REVENUES. We depend upon a small group of suppliers for some of the key components and parts used in our network. In particular, we purchase fiber optic equipment from Nortel Networks, Cisco Systems, Lucent Technologies and ECI Telecom. Any delay or extended interruption in the supply of any of the key components, changes in the pricing arrangements with our suppliers and manufacturers or delay in transitioning a replacement supplier's product into our network could disrupt our operations. OUR FIBER OPTIC NETWORK, WHICH IS OUR SOLE SOURCE OF REVENUE, IS VULNERABLE TO PHYSICAL DAMAGE, CATASTROPHIC OUTAGES, POWER LOSS AND OTHER DISRUPTIONS BEYOND OUR CONTROL, AND THE OCCURRENCE OF ANY OF THESE FAILURES COULD RESULT IN IMMEDIATE LOSS OF REVENUES, PAYMENT OF OUTAGE CREDITS TO OUR CUSTOMERS AND, MORE IMPORTANTLY, THE LOSS OF OUR CUSTOMERS' CONFIDENCE AND OUR BUSINESS REPUTATION. Our success in marketing our services to our customers requires that we provide high reliability, high bandwidth and a secure network. Our network and the infrastructure upon which it depends are subject to physical damage, power loss, capacity limitations, software defects, breaches of security and other disruptions beyond our control that may cause interruptions in service or reduced capacity for customers. Our agreements with our customers typically provide for the payment of outage related credits (a predetermined reduction or offset against our lease rate when a customer's leased facility is non-operational or otherwise does not meet certain operating parameters) or damages in the event of a disruption in service. These credits or damages could be substantial and could significantly decrease our net revenues. Significant or lengthy outages would also undermine our customers' confidence in our fiber optic network and injure our business reputation. 36
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RISKS RELATING TO OUR RIGHTS-OF-WAY WE COULD LOSE THE CONTRACT RIGHTS UPON WHICH WE RELY TO OPERATE AND MAINTAIN OUR NETWORK IN THE EVENT OF BANKRUPTCY PROCEEDINGS RELATING TO ONE OR MORE OF THE THIRD PARTIES THAT HAVE GRANTED TO US THE RIGHT TO BUILD AND OPERATE OUR NETWORK USING THEIR RIGHTS-OF-WAY. The construction and operation of significant portions of our fiber optic network depends upon contract rights known as indefeasible rights-of-use. Indefeasible rights-of-use are commonly used in the telecommunications industry, but remain a relatively new concept in property law. Although indefeasible rights-of-use give the holder a number of rights to control the relevant rights-of-way or fiber optic filaments, legal title remains with the grantor of the rights. Therefore, the legal status of indefeasible rights-of-use remains uncertain, and our indefeasible rights-of-use might be voidable in the event of bankruptcy of the grantor. If we were to lose an indefeasible right-of-use in a key portion of our network, our ability to service our customers could become seriously impaired and we could be required to incur significant expense to resume the operation of our fiber optic network in the affected areas. DESPITE OUR EXISTING RIGHTS-OF-WAY, WE MAY BE FORCED TO MAKE SUBSTANTIAL ADDITIONAL PAYMENTS TO THE AFFECTED LANDOWNERS OR REMOVE OUR NETWORK FROM THEIR PROPERTY, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS AND OUR RESULTS OF OPERATIONS. Our indefeasible rights-of-use and other rights-of-way depend on the grantor's interest in the property on which our network is located. To the extent that a grantor of an indefeasible right-of-use or other rights-of-way has a limited easement in the underlying property and not full legal title, the adequacy of our indefeasible rights-of-use or other rights-of-way could be challenged in court. We believe that the easements granted by a substantial number of landowners to grantors of our indefeasible rights-of-use are similar in scope to those with respect to which claims have been asserted, and we cannot guarantee that claims will not be made in the future. BECAUSE SIGNIFICANT PORTIONS OF OUR FIBER OPTIC NETWORK ARE CONSTRUCTED UPON RIGHTS-OF-WAY CONTROLLED BY UTILITY COMPANIES AND MUNICIPALITIES WHICH GENERALLY PLACE THE OPERATION OF THEIR FACILITIES AHEAD OF THE OPERATION OF OUR FIBER OPTIC NETWORK, WE MAY BE UNABLE TO CONSTRUCT AND OPERATE OUR FIBER OPTIC NETWORK IN THE AFFECTED AREAS WITHOUT PERIODIC INTERRUPTIONS AND DELAYS CAUSED BY THE DAY-TO-DAY OPERATIONS OF THESE ENTITIES. Our rights-of-way agreements with Northeast Utilities, Central Maine Power and Consolidated Edison Communications, Inc. and various other entities contain provisions which acknowledge the right of these entities to make the provision of their services to their own customers their top priority. These companies are required only to exercise "reasonable care" with respect to our facilities and are otherwise free to take whatever actions they deem appropriate with respect to ensuring or restoring service to their customers, any of which actions could impair operation of our network. MUNICIPAL REGULATION OF OUR ACCESS TO PUBLIC RIGHTS-OF-WAY IS SUBJECT TO CHANGE AND COULD IMPOSE ADMINISTRATIVE BURDENS THAT WOULD RESULT IN ADDITIONAL COSTS TO US OR LIMIT OUR OPERATIONS. Local governments typically retain the ability to license public rights-of-way, subject to the federal requirement that local governments may not prohibit the provision of telecommunications services. Changes in local government regulation could impose additional costs on our business and limit our operations. Local authorities affect the timing and costs associated with our use of public rights-of-way. WE ARE CURRENTLY INVOLVED IN LITIGATION CONCERNING THE COST OF OUR RIGHTS OF WAY IN THE WASHINGTON, D.C. AREA. IF THIS LITIGATION IS NOT RESOLVED IN OUR FAVOR, WE MAY NOT BE ABLE TO OPERATE PROFITABLY IN THIS GEOGRAPHIC AREA. Our business in the Washington, D.C. metropolitan area depends on rights of way granted by the Washington Metropolitan Area Transportation Authority (the "WMATA"). In litigation with the WMATA, we have claimed that the rates charged by the WMATA violate the Telecommunications Act of 1996, because we are required to pay a higher price per foot than other carriers and because the rates we are required to pay are prohibitively expensive. If this litigation is not resolved in our favor, we could be required to pay the higher rates through 2009. 37
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RISKS RELATING TO GOVERNMENT REGULATION FEDERAL REGULATION OF THE TELECOMMUNICATIONS INDUSTRY IS CHANGING RAPIDLY AND WE COULD BECOME SUBJECT TO UNFAVORABLE NEW RULES AND REQUIREMENTS WHICH COULD IMPOSE SUBSTANTIAL FINANCIAL AND ADMINISTRATIVE BURDENS ON US AND INTERFERE WITH OUR ABILITY TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGIES. Regulation of the telecommunications industry is changing rapidly. Existing and future federal, state, and local governmental regulations will greatly influence our viability. Consequently, undesirable regulatory changes could adversely affect our business, financial condition and results of operations. For example, the FCC recently issued rules under the Telecommunications Act of 1996 which would have required that competitive local exchange carriers, such as NEON, be allowed to purchase the use of certain elements of the telecommunications network owned and operated by incumbent local exchange carriers. By purchasing these elements, competitive local exchange carriers would have been able to provide services in a cost-effective manner to their customers. However, the FCC's rules were challenged in court by the incumbent local exchange carriers. The U.S. Court of Appeals for the District of Columbia Circuit sided with the incumbent local exchange carriers and has required the FCC to formulate new rules. Any new rules issued by the FCC may not provide competitive local exchange carriers with the ability to purchase the use of all of the elements of the incumbent local exchange carrier's network, and as a result the competitive local exchange carriers may not be able to continue providing services to their customers that they are currently providing. REVENUES FROM TELECOMMUNICATIONS PROVIDED TO END-USERS, WHICH REPRESENT A PORTION OF OUR REVENUES, ARE SUBJECT TO CONTRIBUTIONS TO THE FCC'S UNIVERSAL SERVICE FUND. While we generally do not deal directly with end-users of telecommunications and are therefore generally exempt from contributing to the FCC's Universal Service Fund, the FCC treats certain Internet service providers purchasing telecommunications as end-users. Our revenues from providing telecommunications to end-users, which represent a portion of our revenues, are therefore currently subject to an assessment of 8.9%. Such assessments vary and may increase from quarter to quarter. If the annual contribution amount would be less than $10,000, we would qualify for a de minimus exemption from contribution to the Fund. Our required contributions to the Universal Service Fund for the year ended December 31, 2003 and the nine months ended September 30, 2004 were approximately $168,000 and $140,000, respectively. IF WE BECOME SUBJECT TO REGULATION AS A COMMON CARRIER IN THE FUTURE, WE WOULD BE SUBJECT TO ADDITIONAL REGULATORY REQUIREMENTS. We do not believe that we are currently a "common carrier," but that status could change based on differing interpretations of current regulations, regulatory changes and changes in the way we conduct our business. If we become regulated as a common carrier by the FCC, we would have to publicize the rates for our services and submit other reports, and would be required to contribute to federal funds including, but not limited to, those established for Telecommunications Relay Services, for the management of the North American Numbering Plan and for Local Number Portability. These regulatory requirements could impose substantial burdens on us. The Telecommunications Act of 1996 requires incumbent local telephone companies to provide elements of their networks to competitors on an unbundled basis. The FCC determined that dark fiber is a network element that incumbent local telephone companies must provide to others. The availability of this alternative source of supply may increase competition among providers of dark fiber services and could decrease the demand for our services. STATE REGULATION OF COMPANIES PROVIDING TELECOMMUNICATIONS SERVICES VARIES SUBSTANTIALLY FROM STATE TO STATE AND WE MAY BECOME SUBJECT TO BURDENSOME AND RESTRICTIVE STATE REGULATIONS AS WE EXPAND OUR FIBER OPTIC NETWORK INTO A BROADER GEOGRAPHIC AREA, WHICH COULD INTERFERE WITH OUR OPERATIONS AND OUR ABILITY TO MEET OUR STRATEGIC OBJECTIVES. We may be subject to state regulation, which can vary substantially from state to state. NEON subsidiaries have obtained authority to provide intrastate telecommunications services on a competitive common carrier basis in our market area. Therefore, these subsidiaries are subject to the obligations that applicable law places on all similarly certificated common carriers including the filing of tariffs, state regulation of certain service offerings, pricing, payment of regulatory fees and reporting requirements. The costs of 38
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compliance with these regulatory obligations, or any of the regulatory requirements of other states to which we might become subject, could have a material adverse effect on our operations. Moreover, some of our rights-of-way depend on our status as a common carrier in these states, and if that status were to be successfully challenged, those rights-of-way could be terminated. YOU ARE UNLIKELY TO BE ABLE TO EXERCISE EFFECTIVE REMEDIES AGAINST ARTHUR ANDERSEN LLP, THE FORMER INDEPENDENT PUBLIC ACCOUNTANTS FOR NEON FOR ANY LIABILITY THAT THEY MIGHT OTHERWISE HAVE UNDER THE SECURITIES ACT OF 1933 OR OTHER SECURITIES LAWS. NEON's Consolidated Financial Statements as of December 31, 2001, and for the year then ended (its predecessor company financial statements prior to its emergence from bankruptcy in December 2002), were audited by Arthur Andersen LLP. On March 14, 2002, Arthur Andersen LLP was indicted on federal obstruction of justice charges arising from the government's investigation of Enron Corp. On June 15, 2002, a jury in Houston, Texas, found Arthur Andersen LLP guilty of these federal obstruction of justice charges. In light of the jury verdict and the underlying events, Arthur Andersen LLP subsequently substantially discontinued operations and dismissed essentially its entire workforce. You are, therefore, unlikely to be able to exercise effective remedies or collect judgments against Arthur Andersen LLP. In addition, Arthur Andersen LLP has not consented to the inclusion of its report for NEON in this joint proxy statement/prospectus, and the requirement to file its consent with respect to such report has been dispensed with in reliance on Rule 437a under the Securities Act of 1933. Because Arthur Andersen LLP has not consented to the inclusion of its report in this joint proxy statement/prospectus, you will not be able to recover against Arthur Andersen LLP under Section 11 of the Securities Act of 1933 for any untrue statement of a material fact contained in the financial statements audited by Arthur Andersen LLP or any omissions to state a material fact required to be stated in those financial statements. THE SPECIAL MEETING OF GLOBIX CORPORATION STOCKHOLDERS GENERAL Globix is furnishing this joint proxy statement/prospectus to its stockholders in connection with the solicitation of proxies by the Globix board of directors for use at the special meeting of stockholders of Globix to be held on January 13, 2005, and at any adjournment or postponement of the special meeting. This document was first mailed to stockholders of Globix on or about December [__], 2004. DATE, TIME AND PLACE The special meeting will be held on January 13, 2005 at 10:00 a.m., local time, at the offices of Globix at 139 Centre Street, New York, NY 10013. Globix's telephone number is (212) 334-8500. PURPOSE OF THE SPECIAL MEETING The purpose of the Globix special meeting is to consider and vote upon proposals to: 1. Issue Globix common stock pursuant to the merger agreement; 2. Grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the Globix special meeting, if necessary; and 3. Consider and act upon any other matter that may properly come before the special meeting or any adjournment or postponement of the special meeting. RECORD DATE AND VOTING Holders of record of common stock at the close of business on December 6, 2004 (referred to in this joint proxy statement/prospectus as the Globix record date) that are entitled to vote at any annual or special meeting of Globix stockholders are entitled to vote at the special meeting and any adjournment or postponement of the special meeting. 39
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On the Globix record date, there were 16,460,000 shares of common stock outstanding. Of these shares of common stock, only 16,065,948 shares have been distributed. Of the 16,460,000 shares of common stock deemed issued and outstanding, 229,452 shares were placed in reserve in escrow pending the outcome of a class action lawsuit described in "Information About Globix - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus and are not entitled to vote at the special meeting. Another 164,600 shares of common stock will be distributed following resolution of a shareholder derivative suit filed against Globix and certain of our former officers and directors, as described in "Information About Globix - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus and are also not entitled to vote. Therefore, although 16,460,000 shares of common stock are deemed issued and outstanding as of the Globix record date, only 16,065,948 shares of common stock are entitled to vote at the special meeting. Each share of common stock entitled to vote at the special meeting is entitled to one vote on each matter properly brought before the special meeting. Under the applicable rules of the American Stock Exchange, the issuance of shares of Globix common stock in connection with the merger requires the approval of a majority of votes cast by stockholders eligible to vote at the Globix special meeting. The approval of the holders of a majority of votes cast by stockholders eligible to vote at the Globix special meeting is also required to approve the proposal to grant discretionary authority to adjourn or postpone the special meeting, if necessary, to solicit additional votes to approve the proposal to issue Globix common stock in the merger. As of the close of business on the Globix record date for the special meeting, Globix's directors and their respective affiliates beneficially owned and were entitled to vote approximately 5,348,581 shares of Globix common stock. As of the close of business on the record date, directors of NEON and their respective affiliates beneficially owned 1,219,817 shares of Globix common stock. VOTING OF PROXIES AT THE GLOBIX SPECIAL MEETING AND REVOCATION OF PROXIES All shares of Globix common stock that are entitled to vote and are represented at the Globix special meeting by properly executed proxies received prior to or at such meeting, and not revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instruction is indicated, then unless the shares covered by the proxy are in a brokerage account, such proxies will be voted "FOR" the proposed issuance of Globix common stock pursuant to the merger and "FOR" the proposal to grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the Globix special meeting, if necessary. If your shares are held in a brokerage account, please review "Quorum, Adjournment, Abstentions and Broker Non-Votes for Shares Held in a Brokerage Account" below. The Globix board of directors does not know of any matters other than those described in the notice of the Globix special meeting that are to come before such meeting. If any other matters are properly presented at the Globix special meeting for consideration, the persons named in the enclosed proxy card and acting thereunder generally will have discretion to vote on such matters in accordance with their best judgment. Any proxy given pursuant to the solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by: o filing with James C. Schroeder, the General Counsel of Globix, at or before the taking of a vote at the Globix special meeting, a written notice of revocation bearing a later date than the proxy; o duly executing a later dated proxy relating to the same shares and delivering it to James C. Schroeder before the taking of the vote at the Globix special meeting; or o attending the Globix special meeting and voting in person (although attendance at the Globix special meeting will not in and of itself constitute a revocation of a proxy). 40
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Any written notice of revocation or subsequent proxy should be sent to Globix Corporation, 139 Centre Street, New York, New York 10013, Attn: James C. Schroeder, or hand-delivered to James C. Schroeder at or before the taking of the vote at the Globix special meeting in New York. Globix will be soliciting proxies on its own behalf. Globix intends to solicit proxies through this joint proxy statement/prospectus and directly through its directors, officers and regular employees. Solicitation of some stockholders may be made in person or by mail, telephone, facsimile transmission or other means of electronic transmission. Globix will bear its own expenses in connection with the solicitation of proxies for its special meeting of stockholders. QUORUM, ADJOURNMENT, ABSTENTIONS AND BROKER NON-VOTES FOR SHARES HELD IN A BROKERAGE ACCOUNT The representation in person, or by properly executed proxy, of the holders of one-third of all shares of capital stock entitled to vote at the special meeting is necessary to constitute a quorum for the transaction of business at the special meeting of Globix. Globix has appointed Mellon Investor Services LLC, its transfer agent, to function as the inspector of elections of the special meeting. The inspector of elections will ascertain whether a quorum is present, tabulate votes and determine the voting results on all matters presented to Globix stockholders at the special meeting. If fewer shares of Globix common stock are voted for the approval of the proposal being considered at the special meeting than are required for approval of such proposal, and if stockholders approve the proposal to grant discretionary authority to adjourn or postpone the special meeting, the special meeting may be adjourned or postponed for the purpose of allowing additional time for obtaining additional proxies or votes, and, at any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent reconvening of the special meeting. If you submit a proxy that indicates an abstention from voting in all matters, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, but they will not be voted on any matter at the special meeting. Consequently, your abstention will not be considered a vote cast and will have no effect in the outcome of the proposal to approve the issuance of Globix common stock in connection with the merger or the proposal to grant discretionary authority to adjourn or postpone the special meeting to solicit additional votes to approve the matter considered at the special meeting, if necessary. If your proxy indicates an abstention only as to a particular proposal, that abstention will have no effect on the outcome of that particular proposal only. If you hold your shares of Globix common stock in a brokerage account, the broker holding such shares in "street name" may vote the shares only if you provide the broker with appropriate instructions. If an executed proxy statement is returned to Globix by a broker holding shares of Globix common stock in street name, which indicates that the broker does not have discretionary authority to vote on one or more of the agenda items for the special meeting, the shares will be considered present at the meeting for purposes of determining a quorum, but will not be considered to be votes cast in favor of or against the applicable proposal and will have no effect on the outcome of such proposal. YOUR BROKER WILL VOTE YOUR SHARES ONLY IF YOU PROVIDE INSTRUCTIONS ON HOW TO VOTE BY FOLLOWING THE INSTRUCTIONS PROVIDED TO YOU BY YOUR BROKER. You are urged to mark the applicable box on the proxy to indicate how to vote your shares. In addition, please note that if your shares are held in "street name" by a broker, bank or other nominee, and you wish to vote in person at the Globix special meeting, you must bring to the special meeting a letter from your broker, bank or other nominee in order to vote your shares in person. GLOBIX BOARD OF DIRECTORS RECOMMENDATION The Globix board of directors (with one director, Mr. Lampe, abstaining) has determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Globix and its stockholders. Accordingly, the Globix board of directors (with one director, Mr. Lampe, abstaining) has approved the merger, the merger agreement and the transactions contemplated by the merger agreement (including the issuance of Globix common stock in the merger) and recommends that Globix stockholders vote "FOR" approval of the issuance of Globix common stock in connection with the merger and "FOR" the proposal to grant 42
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discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the special meeting, if necessary. In considering such recommendations, Globix stockholders should be aware that some Globix directors and officers have interests in the merger that are different from, or in addition to, those of Globix stockholders. See "The Merger -- Interests of Certain Persons in the Merger," beginning on page 71 of this joint proxy statement/prospectus. THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF GLOBIX. ACCORDINGLY, GLOBIX STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. THE SPECIAL MEETING OF NEON COMMUNICATIONS, INC. STOCKHOLDERS GENERAL NEON is furnishing this joint proxy statement/prospectus to its stockholders in connection with the solicitation of proxies by the NEON board of directors for use at the special meeting of stockholders of NEON to be held on January 13, 2005, and at any adjournment or postponement of the special meeting. This document is also being furnished to NEON stockholders by Globix as a prospectus of Globix in connection with the issuance by Globix of shares of Globix common stock and convertible preferred stock as contemplated by the merger agreement. This document was first mailed to stockholders of NEON on or about [ ], 2004. DATE, TIME AND PLACE The special meeting will be held on January 13, 2005 at 10:00 a.m., local time, at the offices of NEON at 2200 West Park Drive, Westborough, Massachusetts 01581. NEON's telephone number is (508) 616-7800. PURPOSE OF THE SPECIAL MEETING The purpose of the NEON special meeting is to consider and vote upon proposals to: 1. Approve and adopt the merger, the merger agreement and the transactions contemplated by the merger agreement; 2. Approve and adopt an amendment to the certificate of incorporation of NEON to provide that the merger is not a "Liquidation Event" that would trigger the liquidation provision in the certificate of incorporation, which provides that upon the occurrence of a liquidation event, all assets of NEON remaining after payment of all liabilities and subject to any preferential payments would be distributed ratably to its common stockholders; 3. Approve and adopt an amendment to the certificate of designation with respect to NEON's 12% Series A Cumulative Convertible Preferred Stock to provide that the merger is not a "Change of Control" of NEON that would trigger the change of control provisions in the certificate of designation, including the right of each holder of NEON convertible preferred stock to require NEON to purchase its shares of NEON convertible preferred stock; 4. Grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the special meeting, if necessary; and 5. Consider and act upon any other matter that may properly come before the special meeting. A copy of the merger agreement and the first amendment to the merger agreement are included in Appendices A-1 and A-2, respectively, to this joint proxy statement/prospectus. A copy of the proposed amendments to NEON's certificate of incorporation and the certificate of designation are included in this joint proxy statement/prospectus in Appendices B-1 and B-2, respectively. NEON stockholders are encouraged to read the merger agreement and the proposed amendments in their entirety. 43
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RECORD DATE AND VOTING Holders of record of common stock and convertible preferred stock of NEON at the close of business on December 7, 2004 (referred to in this joint proxy statement/prospectus as the NEON record date) that are entitled to vote at any annual or special meeting of NEON stockholders are entitled to vote at the special meeting and any adjournment or postponement of the special meeting. On the NEON record date, the following voting securities were outstanding: o 16,117,799 shares of common stock; and o 1,101,887 shares of convertible preferred stock. Each share of common stock entitled to vote at the special meeting is entitled to one vote on each matter properly brought before the special meeting. Each share of NEON convertible preferred stock entitled to vote at the special meeting is entitled to one vote, which is the number of votes equal to the number of shares of common stock into which such share of NEON convertible preferred stock would be convertible as provided in the certificate of designation for the NEON convertible preferred stock. Approval of the merger agreement and the amendments of NEON's certificate of incorporation and the certificate of designation require special votes as described below. Under Delaware law and NEON's certificate of incorporation, the affirmative vote by the holders of a majority of NEON's outstanding common stock and convertible preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class, is required to approve the merger. Under Delaware law and NEON's certificate of incorporation the following stockholder approvals are required to approve the amendment to NEON's certificate of incorporation to amend the liquidation provision to exclude the merger from the definition of "Liquidation Event": o holders of a majority of NEON's outstanding common stock entitled to vote at any annual or special meeting of NEON stockholders, voting as a separate class; and o holders of a majority of NEON's outstanding common stock and preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class. Under Delaware law and NEON's certificate of incorporation of which the certificate of designation is a part, the following stockholder approvals are required to approve the amendment to the certificate of designation with respect to the NEON convertible preferred stock to exclude the merger from the definition of "Change of Control": o holders of two-thirds of NEON's outstanding convertible preferred stock, voting as a separate class; and o holders of a majority of NEON's outstanding common stock and preferred stock that are entitled to vote at any annual or special meeting of NEON stockholders, voting together as a single class. The approval of the holders of a majority of NEON's capital stock present in person or represented by proxy and entitled to vote at any annual or special meeting of NEON stockholders, considered on an as-converted into common stock basis, is required to approve the proposal to grant discretionary authority to adjourn or postpone the special meeting to solicit additional votes to approve the matters considered at the special meeting. As of the close of business on the NEON record date for the special meeting, NEON's directors and their respective affiliates, beneficially owned and were entitled to vote approximately 5,687,273 shares of NEON common stock and 215,920 shares of NEON convertible preferred stock or approximately 36.0% and 19.6% of the shares of NEON's outstanding common stock and convertible preferred stock, respectively, entitled to vote at the special meeting and 34.6 % of NEON's common stock and preferred stock entitled to vote at the special meeting as a single class. 44
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As of the close of business on the NEON record date, directors of Globix and their affiliates beneficially owned 4,577,684 shares of NEON common stock and 474,520 shares of NEON convertible preferred stock. VOTING OF PROXIES AT THE NEON SPECIAL MEETING AND REVOCATION OF PROXIES All shares of NEON capital stock that are entitled to vote and are present in person or represented at the NEON special meeting by properly executed proxies received prior to or at such meeting, and not revoked, will be voted at such meeting in accordance with the instructions indicated on such proxies. If no instruction is indicated, then unless the shares covered by the proxy are in a brokerage account, such proxies will be voted "FOR" approval and adoption of the merger, the merger agreement and the transactions contemplated by the merger agreement, "FOR" approval and adoption of the amendment of NEON's certificate of incorporation, "FOR" approval and adoption of the amendment of the certificate of designation for the NEON convertible preferred stock and "FOR" the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. If your shares are held in a brokerage account, please review "Quorum, Adjournment, Abstentions and Broker Non-Votes for Shares Held in a Brokerage Account" beginning on page 42 of this joint proxy statement/prospectus. The NEON board of directors does not know of any matters other than those described in the notice of the NEON special meeting that are to come before such meeting. If any other matters are properly presented at the NEON special meeting for consideration, the persons named in the enclosed proxy card and acting thereunder generally will have discretion to vote on such matters in accordance with their best judgment. Any proxy given pursuant to the solicitation may be revoked by the person giving it at any time before it is voted. Proxies may be revoked by: o filing with Stephen Bogiages, the Secretary of NEON, at or before the taking of a vote at the NEON special meeting, a written notice of revocation bearing a later date than the proxy; o duly executing a later dated proxy relating to the same shares and delivering it to Mr. Bogiages before the taking of the vote at the NEON special meeting; or o attending the NEON special meeting and voting in person (although attendance at the NEON special meeting will not in and of itself constitute a revocation of a proxy). Any written notice of revocation or subsequent proxy should be sent to NEON Communications, Inc., 2200 West Park Drive, Westborough, Massachusetts 01581, Attn: Stephen Bogiages, Secretary, or hand-delivered to Mr. Bogiages at or before the taking of the vote at the NEON special meeting in Westborough, Massachusetts. NEON will be soliciting proxies on its own behalf. NEON intends to solicit proxies through this joint proxy statement/prospectus and directly through its directors, officers and regular employees. Solicitation of some stockholders may be made in person or by mail, telephone, facsimile transmission or other means of electronic transmission. NEON will bear its own expenses in connection with the solicitation of proxies for its special meeting of stockholders. Globix will bear one half of all other expenses incurred in connection with the preparation and printing of this document and the preparation and filing of the registration statement of which this document forms a part. 45
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QUORUM, ADJOURNMENT, ABSTENTIONS AND BROKER NON-VOTES FOR SHARES HELD IN A BROKERAGE ACCOUNT The representation in person, or by properly executed proxy, of the holders of a majority of all shares of capital stock entitled to vote at the special meeting is necessary to constitute a quorum for the transaction of business at the special meeting of NEON. In connection with the separate vote by the holders of NEON's common stock with respect to the amendment to the certificate of incorporation, a majority of the total outstanding shares of NEON's common stock present in person or represented by proxy shall constitute a quorum entitled to take action at the NEON special meeting. In connection with the separate vote by the holders of NEON's convertible preferred stock with respect to the amendment to the certificate of designation, a majority of the total outstanding shares of NEON's convertible preferred stock present in person or represented by proxy shall constitute a quorum entitled to take action at the NEON special meeting. NEON has appointed Stephen Bogiages, its Secretary, to function as the inspector of elections of the special meeting. The inspector of elections will ascertain whether a quorum is present, tabulate votes and determine the voting results on all matters presented to NEON stockholders at the special meeting. If fewer shares of NEON common and convertible preferred stock are voted for the approval of the proposals being considered at the special meeting than are required for approval of each such proposal, and if stockholders approve the proposal to grant discretionary authority to adjourn or postpone the special meeting, the special meeting may be adjourned or postponed for the purpose of allowing additional time for obtaining additional proxies or votes, and, at any subsequent reconvening of the special meeting, all proxies will be voted in the same manner as the proxies would have been voted at the original convening of the special meeting, except for any proxies that have been effectively revoked or withdrawn prior to the subsequent reconvening of the special meeting. If you submit a proxy that indicates an abstention from voting in all matters, your shares will be counted as present for the purpose of determining the existence of a quorum at the special meeting, but they will not be voted on any matter at the special meeting. Consequently, your abstention will have the same effect as a vote against the proposal to approve the merger, the merger agreement and the transactions contemplated by the merger agreement, the amendment to the certificate of incorporation and the amendment to the certificate of designation and the proposal to grant discretionary authority to adjourn or postpone the special meeting to solicit additional votes to approve the matters considered at the special meeting, if necessary. If your proxy indicates an abstention only as to a particular proposal, that abstention will have the same effect as a vote against that particular proposal only. If you hold your shares of NEON common stock or convertible preferred stock in a brokerage account, the broker holding such shares in "street name" may vote the shares only if you provide the broker with appropriate instructions. If an executed proxy statement is returned to NEON by a broker holding shares of NEON common stock or convertible preferred stock in street name, which indicates that the broker does not have discretionary authority to vote on one or more of the agenda items for the special meeting, the shares will be considered present at the meeting for purposes of determining a quorum, but will not be considered to have been voted in favor of or against the applicable proposal. Consequently, your failure to instruct your broker as to a specific proposal will have the same effect as a vote against that proposal. YOUR BROKER WILL VOTE YOUR SHARES ONLY IF YOU PROVIDE INSTRUCTIONS ON HOW TO VOTE BY FOLLOWING THE INSTRUCTIONS PROVIDED TO YOU BY YOUR BROKER. You are urged to mark the applicable box on the proxy to indicate how to vote your shares. In addition, please note that if your shares are held in "street name" by a broker, bank or other nominee, and you wish to vote in person at the NEON special meeting, you must bring to the special meeting a letter from your broker, bank or other nominee in order to vote your shares in person. 46
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NEON BOARD OF DIRECTORS RECOMMENDATION The NEON board of directors has determined (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining) that the merger, the merger agreement and the transactions contemplated by the merger agreement, and the amendments of NEON's certificate of incorporation and the certificate of designation for the NEON convertible preferred stock are advisable and in the best interests of NEON and its stockholders. Accordingly, the NEON board of directors has approved (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining) the merger, the merger agreement and the transactions contemplated by the merger agreement, and the amendments of NEON's certificate of incorporation and the certificate of designation for the NEON convertible preferred stock and recommends that NEON stockholders vote "FOR" adoption and approval of the merger, the merger agreement and the transactions contemplated by the merger agreement, "FOR" adoption and approval of the amendment of NEON's certificate of incorporation, "FOR" adoption and approval of the amendment of the certificate of designation for the NEON convertible preferred stock and "FOR" the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the special meeting, if necessary. In considering such recommendations, NEON stockholders should be aware that some NEON directors and officers have interests in the merger that are different from, or in addition to, those of NEON stockholders, and that NEON and Globix have provided indemnification arrangements to directors and officers of NEON. See "The Merger -- Interests of Certain Persons in the Merger," beginning on page 71 of this joint proxy statement/prospectus. THE MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING ARE OF GREAT IMPORTANCE TO THE STOCKHOLDERS OF NEON. ACCORDINGLY, NEON STOCKHOLDERS ARE URGED TO READ AND CAREFULLY CONSIDER THE INFORMATION PRESENTED IN THIS DOCUMENT AND TO COMPLETE, DATE, SIGN AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED, POSTAGE-PAID ENVELOPE. NEON'S STOCKHOLDERS SHOULD NOT SEND ANY STOCK OR WARRANT CERTIFICATES WITH THEIR PROXY CARDS. A TRANSMITTAL FORM WITH INSTRUCTIONS FOR THE SURRENDER OF NEON COMMON AND CONVERTIBLE PREFERRED STOCK CERTIFICATES AND CLASS A WARRANTS WILL BE MAILED TO NEON STOCKHOLDERS PROMPTLY FOLLOWING COMPLETION OF THE MERGER. FOR MORE INFORMATION REGARDING THE PROCEDURES FOR EXCHANGING NEON STOCK AND WARRANT CERTIFICATES FOR GLOBIX STOCK CERTIFICATES, SEE "TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS -- PROCEDURES FOR EXCHANGING STOCK AND WARRANT CERTIFICATES," BEGINNING ON PAGE 85 OF THIS JOINT PROXY STATEMENT/PROSPECTUS. 47
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THE MERGER GENERAL The board of directors of NEON (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining) and the board of directors of Globix (with one director, Mr. Lampe, abstaining) have each approved the merger agreement, which provides for the merger of a new wholly owned subsidiary of Globix with and into NEON. NEON will be the surviving corporation in the merger and as a result will be a wholly owned subsidiary of Globix. Each share of NEON common stock outstanding immediately prior to the merger will be converted into the right to receive shares of Globix common stock, and each share of NEON convertible preferred stock issued and outstanding immediately prior to the merger will be converted into the right to receive a combination of cash and shares of a new class of Globix convertible preferred stock created in connection with the merger. The shares of NEON common stock and convertible preferred stock will be converted in accordance with the terms specified in the merger agreement, as described under "Terms of the Merger Agreement and Related Transactions -- Conversion of Shares in the Merger," beginning on page 83 of this joint proxy statement/prospectus. BACKGROUND OF THE MERGER In October 2003, representatives of CTA approached Peter K. Stevenson, Globix's Chief Executive Officer and President, about the possibility of Globix acquiring or merging with NEON. From November 2003 until mid-January 2004, Mr. Stevenson and Stephen Courter, Chairman, President and Chief Executive Officer of NEON, had preliminary conceptual discussions regarding a possible combination involving NEON and Globix. Members of Globix's management, together with Globix's outside counsel, Day Berry & Howard LLP, studied the possibility of a combination between Globix and NEON, but determined that it would not be possible to pursue the transaction until the completion of Globix's sale of the property located at 415 Greenwich Street in New York City, which took place in January 2004, and the purchase of a portion of Globix's 11% senior notes with a portion of the proceeds of that sale. In December 2003, Globix was approached by certain investment banks regarding the possible acquisition by Globix of the domestic assets of a foreign Internet company. Globix had previously entered into a confidentiality agreement with the company in July 2003 to enable the parties to explore a potential transaction, and Globix determined at that time and again in December 2003 not to pursue the acquisition. On January 15, 2004, NEON's board of directors met to discuss and consider, among other things, the status of preliminary discussions regarding the possibility of a business combination between Globix and NEON. In late January 2004, after further discussions between Mr. Stevenson and Mr. Courter, Globix and NEON entered into a confidentiality agreement to enable them to share information concerning their respective businesses on a confidential basis to assist in analyzing a possible combination involving Globix and NEON. During that time Globix also entered into a confidentiality agreement with Needham & Company, Inc., with a view toward engaging Needham & Company to serve as its financial advisor with respect to the possible combination. From mid-January 2004 to mid-February 2004, Mr. Stevenson and Mr. Courter continued periodic discussions regarding a possible combination of NEON and Globix. 48
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On February 3, 2004, Mr. Stevenson and Robert M. Dennerlein, the Chief Financial Officer of Globix, met with representatives of Needham & Company and CTA to discuss the potential combination. CTA provides consulting and business development services to NEON and also provides similar services to Globix. At that meeting, the parties discussed the fact that both companies had completed significant cost cutting and restructuring of their respective businesses since their respective bankruptcies in 2002, but both companies faced considerable pricing pressure from larger competitors that could offer a wider range of services. The presentation prepared by Globix noted that NEON and Globix had complementary portfolios of customers, which would enable each to offer their services to the others' customers, and that the combination could be expected to provide various operational synergies to both NEON and Globix. Over the course of February 2004, members of Globix's management, together with Day, Berry & Howard, reviewed in greater detail the issues surrounding a potential combination with NEON. In response to feedback from representatives of NEON, to the effect that NEON viewed Globix's level of debt as a significant negative factor in considering a potential combination, Globix's management considered whether it would be possible to reduce Globix's indebtedness prior to the completion of such combination. After reviewing various alternatives, Globix's management concluded that there was no attractive opportunity for reducing indebtedness prior to the completion of the possible combination. On February 26, 2004, NEON's board of directors met to discuss and consider, among other things, an overview of the possible combination between NEON and Globix and the benefits that may arise from such combination. Additionally, the NEON board of directors received preliminary financial and business materials related to the possible combination. After discussing and considering the possible combination and the related materials, the NEON board of directors authorized NEON to engage legal counsel to assist the due diligence efforts in order to further investigate a possible merger between Globix and NEON. Joshua Revitz's resignation as a NEON director was also presented at the same meeting. In early March, 2004, NEON engaged the law firm of Andrews Kurth LLP as its counsel in regards to the possible combination. On March 2, 2004, Globix's board of directors met by conference telephone call to discuss, among other things, the possible combination with NEON. At this meeting, management presented the opportunity of merging with NEON to the board, indicating that a merger could strengthen Globix's competitive position by expanding the number of services that it could offer and that it also offered the possibility of improving Globix's balance sheet and financial position. In light of the potential conflict of interests of certain members of the Globix board of directors in the possible combination, the board established a special committee to consider and negotiate the possible combination with NEON and authorized the special committee to begin negotiations with NEON. The initial members of the special committee were Mr. Stevenson and Mr. Herzig; on March 9, 2004, Raymond Steele joined the special committee and Mr. Stevenson became a nonvoting member of the special committee. In its deliberations on March 2, 2004, the Globix board considered the conflicts of interest that Mr. Singer, Mr. Lampe and Mr. Van Dyke have through direct or indirect ownership of equity interests in NEON and also, in the case of Mr. Lampe, his service on the board of directors of both Globix and NEON. On March 3, 2004, the Globix special committee met to review the status of the negotiations and discuss the engagement of an investment banking firm to provide a fairness opinion. Pursuant to instructions from the special committee, Mr. Stevenson forwarded to Mr. Courter an initial draft of a term sheet and indicated that Day, Berry & Howard had been authorized to begin preparation of a draft merger agreement. On March 8, 2004, the Globix special committee considered various proposals of investment banking firms to provide a fairness opinion and serve as financial advisors to Globix. On March 9, 2004, the Globix special committee approved the engagement of Needham & Company to provide a fairness opinion and on March 11, 2004, an engagement letter was signed with Needham & Company. 49
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Comments on the initial draft term sheet were received on March 11, 2004 from Andrews Kurth LLP, as outside counsel to NEON. On March 15, 2004, Day, Berry & Howard delivered the first draft of the merger agreement to NEON and Andrews Kurth. On March 21, 2004, Andrews Kurth sent comments on the first draft to Globix and Day, Berry & Howard on behalf of NEON. The Globix special committee continued to meet in person or telephonically regularly in March and once in April in order to monitor progress of the draft term sheet and draft merger agreement and the due diligence review. On March 24, 2004, NEON's board of directors met to consider presentations by NEON's outside legal counsel regarding the possible merger. The board of directors also discussed and considered the formation and appointment of a special committee to consider, investigate and negotiate the possible merger. The board of directors also discussed appointing a new director to replace Mr. Revitz and that such director would be an independent director. On March 25 and 26, 2004, Andrews Kurth conducted a legal due diligence review of Globix at Globix's offices in New York. On March 26 and 27, Day, Berry & Howard conducted a legal due diligence review of NEON at NEON's offices in Westborough, Massachusetts, and representatives of Day, Berry & Howard subsequently returned to NEON's offices at various times to continue Globix's legal due diligence review, with the last such on-site due diligence being conducted on May 12, 2004. Following the parties' on-site review activities, Andrews Kurth's and Day, Berry & Howard's legal due diligence reviews continued via mail and electronic-mail through mid-July as the parties continued to gather and exchange documents and information responsive to the due diligence requests of each respective counsel. On April 22, 2004, NEON's board of directors appointed Jose A. Cecin, Jr. to the NEON board of directors. Additionally, it received additional information and materials regarding the possible merger and considered a presentation by Mr. Courter regarding the materials and the status of negotiations. After discussing and considering the materials and the presentation, the NEON board of directors created a special committee of the NEON board of directors to review and further investigate the possible merger and designated John H. Forsgren and Mr. Cecin as members of the special committee. On April 30, 2004, NEON's special committee of the board of directors held an initial meeting. At the meeting, the special committee members discussed, among other things, the engagement of a financial advisor to issue a fairness opinion on the potential merger and selected Adams Harkness, Inc. (f/k/a Adams, Harkness & Hill, Inc.) as its financial advisor. On May 3, 2004, Day, Berry & Howard sent a revised draft of the merger agreement to NEON and Andrews Kurth, and on May 13, 2004, Andrews Kurth provided comments to the revised draft on behalf of NEON. The Globix special committee reviewed the status of negotiations on May 10 (when the status was also discussed with the entire Globix board of directors) and again on May 17, 2004. On May 20, 2004, NEON's special committee retained the law firm of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. as counsel to the special committee. On May 21, 2004, NEON's special committee met and was briefed by Adams Harkness on the progress of its analysis. The NEON special committee was also briefed on the status of negotiations with Globix. On May 27, 2004, the NEON special committee met with NEON's board of directors to report on its efforts in regard to the potential merger, including its progress on due diligence. NEON's board of directors and the special committee also discussed and considered the terms of the potential merger. From May 21, 2004 until July 16, 2004, a number of drafts of the merger agreement were negotiated and exchanged between the parties. During the period from May 21, 2004 through July 16, 2004, the parties and their respective special committees discussed and negotiated several issues, including, but not limited to, the exchange ratio for shares of NEON common stock, the consideration to be given to holders of NEON's convertible preferred stock, the directors of the surviving corporation and Globix following the merger, the scope of representations and warranties to be made by each of NEON and Globix, whether representations and warranties would survive the merger, conduct of business by NEON and Globix in the period between the signing of the merger agreement and the merger closing, the completion of a financial due diligence review process after signing the merger agreement, events that would give either or both of NEON and Globix the right to terminate the merger agreement, and provisions that would allow each of NEON and Globix to consider alternative acquisition proposals if the fiduciary duties of the board of directors of either company required such consideration. 50
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On June 18, 2004, Day, Berry & Howard circulated the initial draft of the certificate of designation for the proposed new series of Globix convertible preferred stock. The proposed exchange ratio of 1.2748 shares of Globix common stock for each share of NEON common stock was incorporated into a revised draft of the merger agreement circulated by Andrews Kurth on July 2, 2004, based on the discussions between the parties. From June 3, 2004 to July 14, 2004, the NEON special committee met with its financial advisor and legal counsel numerous times to consider various valuation parameters for NEON and Globix, revised drafts of the merger agreement and the terms of the potential merger. The NEON special committee also discussed its fiduciary duties in considering the possible merger. During this period, Adams Harkness also continued its due diligence review of NEON and Globix. Also during this time period, the NEON special committee, NEON's management and/or their respective legal advisors and Adams Harkness met or held telephonic conversations to discuss various due diligence issues. Among other things, the participants discussed NEON management's view of Globix's and NEON's relative business strengths and NEON's reasons for pursuing a merger of the two companies at this time, which are described in more detail below under "-- The NEON Special Committee's and NEON's Reasons for the Merger." From June 1, 2004 to July 14, 2004, the Globix special committee met on numerous occasions, both with and without legal counsel and members of management, to consider the status of negotiations, the terms and conditions of the merger agreement and the Globix convertible preferred stock, the calculation of the exchange rate, the due diligence review and other matters relating to the merger. On June 18, 2004 the Globix special committee hired Dechert LLP as independent legal counsel. On June 21, 2004, the Globix special committee met with Needham & Company to discuss its preliminary financial analysis of the proposed merger. On July 12, the Globix special committee met jointly with the nominating committee of the Globix board of directors to consider the possible appointment of certain members of the NEON board of directors to the Globix board of directors following the merger. On July 14, 2004, NEON's board of directors and NEON's special committee separately heard and considered the presentation of Mr. Courter and legal counsel to both NEON and NEON's special committee regarding the status of operational, financial, business and legal due diligence. On July 14, 2004, the Globix special committee met with representatives of Needham & Company, Day, Berry & Howard and Dechert, as well as members of management, to consider the proposed merger agreement and to review the presentation of Needham & Company concerning its financial analysis of the proposed merger. The special committee met thereafter in executive session with its independent counsel and then met with the full board of directors, again with representatives of Needham & Company, Day, Berry & Howard and Dechert, as well as members of management. The full board reviewed presentations by Needham & Company, members of management and legal counsel and posed various questions concerning the terms of the merger. At that time, representatives of Needham & Company indicated that, in accordance with the terms of the merger agreement, Needham & Company was in a position to deliver, as of the expected July 19 date of the merger agreement, its written opinion as to the fairness, from a financial point of view, to the holders of Globix common stock of the ratio for exchanging NEON common stock for Globix common stock pursuant to the merger agreement, after taking into account the consideration to be offered to the holders of NEON preferred stock in the merger and the exchange of shares of Globix common stock for Globix 11% senior notes that is a condition to closing of the merger. Following these discussions, the Globix board of directors, by the unanimous vote of all of the Globix directors, other than Mr. Lampe who abstained, determined that, subject to receipt of final approval of the special committee and receipt of the written opinion of Needham & Company, the transaction was advisable and in the best interests of Globix and its stockholders and approved the entry into the merger agreement and the transactions contemplated thereby. On July 15, 2004, the NEON special committee had a telephonic meeting with its legal and financial advisors. The special committee's advisors summarized the status of the merger agreement negotiations. Adams Harkness also presented its valuation analyses relating to NEON, Globix and the combined entity. On July 15, 2004, NEON's board of directors also met to discuss and consider the merger and the merger agreement. 51
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On July 16, 2004, the NEON special committee had a telephonic meeting with its various advisors, as well as Mr. Courter and legal counsel. Mr. Courter and legal counsel reported to the special committee the results of the completed due diligence with respect to Globix. Representatives of Mintz Levin informed the special committee of the results of the negotiations with Globix regarding the merger agreement based on information from NEON's legal counsel and NEON. In addition, Adams Harkness delivered its opinion that the ratio for exchanging NEON common stock for Globix common stock pursuant to the merger agreement is fair, from a financial point of view, to the holders of NEON common stock (as stockholders of NEON), which opinion was subsequently confirmed in writing. Upon completing its deliberations, and subject to finalizing the merger agreement, the special committee unanimously determined that the merger agreement and the transactions contemplated thereby are advisable, and in the best interests of, the holders of NEON common stock and NEON convertible preferred stock (as stockholders of NEON) and unanimously recommended that NEON's board of directors adopt and approve the merger agreement and the transactions contemplated by the merger agreement and declare advisable and recommend that the stockholders of NEON adopt and approve the merger agreement and the transactions contemplated by the merger agreement. Immediately following the NEON special committee meeting, a telephonic meeting of NEON's board of directors was held. All of the members of NEON's board of directors were present. The NEON special committee delivered its recommendation to the NEON board of directors that the board of directors approve the merger, the merger agreement and the transactions contemplated by the merger agreement and declare advisable and recommend that the stockholders of NEON adopt and approve the merger, the merger agreement and the transactions contemplated by the merger agreement. The NEON board of directors, by the unanimous vote of all of the NEON directors, other than Mr. Lampe who abstained, determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are advisable, and in the best interests of, the holders of NEON common stock and NEON convertible preferred stock (as stockholders of NEON), approved the merger, the merger agreement and the transactions contemplated by the merger agreement and declared advisable and recommended that the stockholders of NEON adopt and approve the merger, the merger agreement and the transactions contemplated by the merger agreement. On July 16, 2004, the parties exchanged final versions of their disclosure documents and the merger agreement, which were sent out that evening to the parties and their financial advisors and legal counsel, and the independent board committees and their financial advisors and legal counsel. On the afternoon of July 16, 2004, the Globix special committee held a telephonic meeting at which representatives of Day, Berry & Howard, Dechert and Needham & Company were also present. The Globix special committee discussed the changes made to the draft merger agreement since July 14 and gave its final approval to the merger agreement and the transactions contemplated by the merger agreement. On the morning of July 19, 2004, Needham & Company delivered to the Globix special committee its written opinion to the effect that, as of that date and based upon and subject to the matters described in the opinion, and after taking into account the consideration to be offered to the holders of NEON preferred stock in the merger and the exchange of shares of Globix common stock for Globix 11% senior notes that is a condition to closing of the merger, the common stock exchange ratio pursuant to the merger agreement was fair to the holders of Globix common stock from a financial point of view. The merger agreement was executed on July 19, 2004 following the receipt by Globix of the written opinion of Needham & Company, and Globix and NEON issued a joint press release announcing the signing of the merger agreement. In late August, 2004, NEON received communications from certain holders of NEON's convertible preferred stock to the effect that such holders believed that the conversion price of the proposed Globix convertible preferred stock, which was originally set at $8.82 per share, was too high in light of the then current trading values of the Globix common stock of approximately $3.00 per share. As the conversion price is based on the amount of the liquidation preference that is surrendered upon conversion of the preferred stock into common stock, the holders believed that they should have the right to receive more shares of common stock for the aggregate liquidation preference of the preferred stock. On August 23, Mr. Courter shared these concerns with Mr. Stevenson. Given the fact that a favorable vote of the holders of the NEON 52
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convertible preferred stock is required for the merger, NEON and Globix, together with CTA, discussed the possibility of lowering the conversion price per share of the Globix convertible preferred stock (and proportionately increasing the aggregate number of shares that could be acquired upon conversion of the Globix convertible preferred stock into Globix common stock) in exchange for a reduction of the rate at which dividends accrue on the Globix convertible preferred stock. Globix management then consulted with Needham & Company and discussed the possible impact of the revised terms on the fairness, from a financial point of view, to the holders of Globix common stock of the common stock exchange ratio. On September 1, 2004, the board of directors of Globix held a telephonic meeting to consider and approve an amendment to the merger agreement to revise the conversion price and liquidation preference per share and to reduce the dividend rate of the preferred stock. At the meeting, management presented two possible scenarios: o a conversion price and liquidation preference per share of $3.60 per share and a dividend rate of 6 percent per annum; and o a conversion price and liquidation preference per share of $4.64 per share and a dividend rate of 9 percent per annum. The Globix board of directors noted that both scenarios would result in a dilution of the Globix common stock, but that the lowered dividend rate would offset some of the dilution on a going forward basis. In addition, the Globix board of directors noted that the lowered conversion price and liquidation preference per share would encourage Globix preferred stockholders to convert their preferred stock into common stock and to think of their interests as allied with the holders of the Globix common stock, rather than relying on their rights as preferred stockholders. The Globix board of directors directed management to negotiate a revised conversion price, liquidation preference and dividend rate following either of the two scenarios that were presented at the meeting, or at a conversion price, liquidation preference and dividend rate falling between the two scenarios. The Globix board of directors (with Mr. Lampe abstaining) and the special committee then approved and adopted an amendment to the merger agreement containing such terms, subject to receipt of a bring down letter or new fairness opinion from Needham & Company reflecting the revised terms and final approval of the special committee. In considering the amendment to the merger agreement, the Globix board of directors took into account the fact that Mr. Lampe indirectly holds, and Mr. Singer's family holds, interests in the NEON preferred stock. On September 2, 2004, at the instruction of Globix management, Day, Berry & Howard delivered to NEON and its counsel a draft amendment to the merger agreement changing the Globix convertible preferred stock conversion rate to $3.60 per share and the dividend rate to 6 percent per annum. Minor changes were then discussed by counsel to both parties. On the morning of September 17, 2004, the NEON board of directors (with two directors, Messrs. Lampe and Grubin, abstaining) approved the amendment to the merger agreement. In approving the amendment, the NEON board of directors considered a report from the special committee. The special committee reported that, after discussions with their legal and financial advisors, they had concluded that the amendment did not change their approval and recommendation of the merger agreement, as amended. On October 8, 2004, the special committee received a letter from Adams Harkness, which affirmed that the exchange ratio provided in the merger agreement, as amended, was fair, from a financial point of view, to the holders of NEON common stock (as stockholders of NEON). The Globix special committee met by telephone conference call on September 20, 2004 and approved the amendment to the merger agreement, subject to receipt of a revised fairness opinion. On September 28, 2004, Needham & Company delivered to the Globix special committee its written opinion to the effect that, as of that date and based upon and subject to the matters described in the opinion, and after taking into account the consideration to be offered to the holders of NEON preferred stock in the merger and the exchange of shares of Globix common stock for Globix 11% senior notes that is a condition to closing of the merger, the common stock exchange ratio pursuant to the amended merger agreement was fair to the holders of Globix common stock from a financial point of view. The parties exchanged executed copies of the amendment to the merger agreement on October 8, 2004. 53
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THE GLOBIX SPECIAL COMMITTEE'S AND GLOBIX'S REASONS FOR THE MERGER Since Globix emerged from bankruptcy reorganization in April 2002, its board of directors has actively reviewed various strategies for increasing stockholder value. A key objective has been to redress the imbalance between revenues and costs that has historically been a feature of Globix's business, either by increasing the revenue base or by cutting costs. A second objective has been to reduce leverage by buying back or paying off higher cost indebtedness. Growth through acquisition of related businesses has been one of the strategies reviewed by the Globix board of directors in this process. Such acquisitions could enable Globix to offer a broader range of services to compete more effectively with larger companies, while providing a larger revenue base to support Globix's existing indebtedness. The ability to achieve operating efficiencies by combining administrative or other functions has also been a consideration in reviewing possible acquisitions. In addition, market conditions have made it possible to acquire related businesses at what are perceived to be discounted prices. In pursuing its acquisition strategy, the Globix board of directors has reviewed potential transactions involving smaller companies, like Aptegrity, Inc., whose acquisition could gradually expand the range of services that Globix provides, as well as larger companies, such as NEON, that could significantly increase the size of Globix's business and enhance its ability to compete against the much larger companies that offer managed Internet applications and infrastructure services. At the same time, the board has considered the various risks presented by acquisitions, the other demands on the company's resources and the uncertainty that the potential benefits of any acquisition will be achieved. In reviewing the proposed merger with NEON and making its final determination to approve the merger agreement, Globix and the Globix special committee considered, among other things: o the Globix special committee's view that Globix, on a stand alone basis, runs a long term risk of not being able to meet its business plan due to its heavy debt load; o the Globix special committee's view that the combination of the two companies would be beneficial because: o the two companies have complementary products that, when offered together, would be more attractive to a wider range of potential customers than the single offerings of either company; o the two companies have different customer bases and would be able to cross-sell their products to each others' customers; o the combination would result in various administrative cost savings; o the common ownership of the two companies would ease some transition issues; o Globix would benefit from a larger platform from which to sell its services; and o Globix would benefit from a larger asset base to support its indebtedness. o the Globix special committee's view that the combination presented the following risks: o the disruption in the business of both companies caused by the transaction and the management time required to integrate the two businesses; o the lack of geographic diversity in NEON's business; o the fact that the range of NEON's service offerings is very narrow; and o the fact that the anticipated synergies and cost savings are speculative. o the business, financial condition, results of operations, prospects, current business strategy and competitive position of each of Globix, NEON and the combined company, as well as general economic and stock market conditions; 54
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o discussions with management and information provided by management as to its analysis of the transaction and the businesses of the two companies; and o the ability of the combined companies to use their historical net operating losses to offset income tax liabilities following completion of the transaction. In considering the valuation of NEON and the fairness of the transaction to Globix and its stockholders, the Globix board of directors and the Globix special committee considered, among other things: o the historical trading values of the Globix common stock and the fact that the NEON common stock is not publicly traded; o the impact of Globix's proportionately high level of debt on the trading values of the Globix common stock; o the contribution analysis, accretion/dilution analysis, selected company analysis, selected transaction analysis and other financial analyses presented by Needham & Company to the special committee; o the opinion delivered to the special committee by Needham & Company as to the fairness, from a financial point of view, of the common stock exchange ratio to the holders of the Globix common stock; and o the value of the debt-for-equity exchange to Globix and its contribution to the reduction of Globix's indebtedness. In reviewing the transaction, the Globix board and special committee concluded that the potential benefits of the transaction outweighed the potential risks and that, in light of the potential benefits of the transaction, the consideration to be offered to the holders of NEON stock and warrants is fair to the stockholders of Globix. The preceding discussion of the information and factors considered by the Globix board and special committee is not intended to be exhaustive, but is believed to include all material factors considered by the board and the special committee. In evaluating the merger, the members of the Globix board and the special committee took into account their knowledge of the business, financial condition and prospects of Globix and the advice of its advisors. In light of the number and variety of the factors considered by the board and the special committee, the board and the special committee did not find it practicable to assign relative weights to the foregoing factors. Rather, the board and the special committee made their determinations based on the total mix of information available to them. RECOMMENDATIONS OF GLOBIX'S BOARD OF DIRECTORS The Globix board of directors (with one director, Mr. Lampe, abstaining) has determined that the merger, the merger agreement and the transactions contemplated by the merger agreement are advisable and in the best interests of Globix and its stockholders. Accordingly, the Globix board of directors (with one director, Mr. Lampe, abstaining) has approved the merger, the merger agreement and the transactions contemplated by the merger agreement (including the issuance of Globix common stock in the merger) and recommends that stockholders vote "FOR" approval of the issuance of Globix common stock in connection with the merger and "FOR" the proposal to grant discretionary authority to adjourn or postpone the Globix special meeting to solicit additional votes to approve the matter considered at the special meeting, if necessary. OPINION OF GLOBIX'S FINANCIAL ADVISOR Globix retained Needham & Company to render an opinion as to the fairness, from a financial point of view, of the exchange ratio pursuant to the merger agreement to the holders of Globix common stock. The exchange ratio was determined through arm's length negotiations between Globix and NEON and not by Needham & Company. 55
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On July 19, 2004, Needham & Company delivered to the special committee of the Globix board of directors its written opinion that, as of that date and based upon and subject to the assumptions and other matters described in the opinion, the common stock exchange ratio pursuant to the merger agreement was fair to the holders of Globix common stock from a financial point of view. On September 28, 2004, Needham & Company delivered to the special committee its written opinion that, as of that date and based upon and subject to the assumptions and other matters described in the opinion, the common stock exchange ratio pursuant to the amended merger agreement was fair to the holders of Globix common stock from a financial point of view. THE NEEDHAM & COMPANY OPINION IS ADDRESSED TO THE SPECIAL COMMITTEE OF THE GLOBIX BOARD OF DIRECTORS, IS DIRECTED ONLY TO THE FINANCIAL TERMS OF THE MERGER AGREEMENT, AS AMENDED, AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY GLOBIX STOCKHOLDER AS TO HOW THAT STOCKHOLDER SHOULD VOTE ON, OR TAKE ANY OTHER ACTION RELATING TO, THE ISSUANCE OF SHARES IN THE MERGER. The complete text of the September 28, 2004 Needham & Company opinion, which sets forth the assumptions made, matters considered, limitations on and scope of the review undertaken by Needham & Company, is attached to this joint proxy statement/prospectus as Appendix D. The summary of the September 28, 2004 Needham & Company opinion set forth in this joint proxy statement/prospectus is qualified in its entirety by reference to the Needham & Company opinion. GLOBIX STOCKHOLDERS SHOULD READ THE NEEDHAM & COMPANY OPINION CAREFULLY AND IN ITS ENTIRETY FOR A DESCRIPTION OF THE PROCEDURES FOLLOWED, THE FACTORS CONSIDERED, AND THE ASSUMPTIONS MADE BY NEEDHAM & COMPANY. In arriving at its opinion, Needham & Company, among other things: o reviewed a draft of the amended merger agreement dated September 28, 2004; o reviewed certain publicly available information concerning Globix and NEON and certain other relevant financial and operating data of Globix and NEON furnished to Needham & Company by Globix and NEON; o reviewed the historical stock prices and trading volumes of Globix common stock; o held discussions with members of management of Globix and NEON concerning the respective companies' current and future business prospects and joint prospects for the combined companies, including potential cost savings and other synergies that may be achieved by the combined companies; o reviewed certain financial forecasts with respect to Globix and NEON prepared by the respective managements of Globix and NEON, including, with respect to Globix, forecasts characterized by Globix management as a downside scenario; o compared certain publicly available financial data of companies whose securities are traded in the public markets and that Needham & Company deemed relevant to similar data for NEON; o reviewed the financial terms of certain other business combinations that Needham & Company deemed generally relevant; and o performed and/or considered such other studies, analyses, inquiries and investigations as Needham & Company deemed appropriate. In arriving at its opinion, Needham & Company did not independently verify, nor did Needham & Company assume responsibility for independent verification of, any of the information reviewed by or discussed with it and assumed and relied on the accuracy and completeness of that information. Needham & Company assumed that the financial forecasts for Globix and NEON provided to it by their respective managements and the joint prospects of the combined companies were reasonably prepared on bases reflecting the best currently available estimates and judgments of management of Globix and NEON, at the time of preparation, of the future operating and financial performance of Globix and NEON and the combined companies. Needham & Company relied upon the estimates of Globix and NEON of the potential cost savings and other synergies, including the amount and timing thereof, that may be achieved as a result of the merger. 56
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Needham & Company did not assume any responsibility for or make or obtain any independent evaluation, appraisal or physical inspection of the assets or liabilities of Globix or NEON. Needham & Company's opinion states that it was based on economic, monetary and market conditions existing as of its date. Needham & Company expressed no opinion as to what the value of Globix common stock will be when issued to the stockholders of NEON pursuant to the merger or the prices at which Globix common stock will actually trade at any time. In addition, Needham & Company was not asked to consider, and the Needham & Company opinion does not address, Globix's underlying business decision to engage in the merger or the Globix debt-for-equity exchange or the relative merits of the merger or the Globix debt-for-equity exchange as compared to other business strategies that might be available to Globix. No limitations were imposed by Globix on Needham & Company with respect to the investigations made or procedures followed by Needham & Company in rendering its opinion. In preparing its opinion, Needham & Company performed a variety of financial and comparative analyses. The following paragraphs summarize the material financial analyses performed by Needham & Company in arriving at its opinion. Some of the summaries of the financial analyses include information presented in tabular format. The tables are not intended to stand alone, and in order to more fully understand the financial analyses used by Needham & Company, the tables must be read together with the full text of each summary. For purposes of the contribution, selected companies and selected transaction analyses, the terms transaction value and market value represent the value, or deemed value based upon the merger consideration or exchange ratio, of the relevant company's common equity, and the terms aggregate transaction value and enterprise value represent, with respect to the relevant company, market value plus debt, less cash. CONTRIBUTION ANALYSIS. Needham & Company reviewed and analyzed the pro forma contribution of each of Globix and NEON to pro forma combined August 31, 2004 balance sheet information, and pro forma projected calendar 2004 through calendar 2007 combined operating results. In calculating the pro forma projected combined operating results, Needham & Company used financial forecasts prepared by Globix and NEON management and assumed no cost savings or other synergies. Needham & Company reviewed, among other things, the pro forma contributions to revenue, gross profit, earnings before interest and taxes, or EBIT, earnings before interest, taxes, depreciation and amortization, or EBITDA, cash and equivalents, total assets, stockholders' equity, working capital and enterprise value. This analysis indicated that NEON would have contributed: o 42.9% of pro forma combined cash and cash equivalents; o 54.4% of pro forma combined total assets; o 86.3% of pro forma combined stockholder's equity; o 25.3% of pro forma combined net working capital; and o 39.6% of pro forma combined enterprise value. This analysis also indicated that NEON would contribute the percentages shown in the following table of o last twelve months, or LTM, and projected calendar 2004 through projected calendar 2007 pro forma combined revenue; o LTM and projected calendar 2004 through projected calendar 2007 pro forma combined gross profit; o LTM and projected calendar 2004 through projected calendar 2007 pro forma combined EBIT; and o LTM and projected calendar 2004 through projected calendar 2007 pro forma combined EBITDA. [Download Table] LTM CY 2004E CY 2005E CY 2006E CY 2007E --- -------- -------- -------- -------- Revenue 43.5% 43.5% 47.8% 49.4% 50.5% Gross profit 33.7% 34.9% 43.0% 45.9% 48.3% EBIT N/M N/M N/M N/M 43.1% EBITDA N/M N/M 74.3% 60.0% 56.7% The results of the contribution analysis are not necessarily indicative of the contributions that the respective businesses may have in the future. 57
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Based on the exchange ratio, after taking into account the transactions contemplated by the merger agreement, including the Globix's debt-for-equity exchange, and using the treasury stock method to calculate the number of shares of Globix common stock outstanding, NEON common stockholders would beneficially own approximately 56.7% of the outstanding shares of common stock of the combined company (ignoring current cross ownership between the holders of Globix and NEON common stock, as further described in the section entitled "The Merger - Interests of Certain Persons in the Merger" beginning on page 71 of this joint proxy statement/prospectus). The foregoing ownership percentage does not include the shares of NEON convertible preferred stock that are beneficially owned by certain common stockholders of NEON and that will be exchanged for Globix convertible preferred stock in the merger or currently exercisable options or warrants (other than the Class A warrants) held by NEON or Globix common stockholders. ACCRETION/DILUTION ANALYSIS. Needham & Company reviewed various pro forma financial impacts of the merger on the holders of Globix and NEON common stock based on the Globix closing stock price of $2.85 on July 16, 2004, the last trading day prior to announcement of the merger, and the common stock exchange ratio of 1.2748 and estimated financial results of Globix and NEON for calendar years 2004, 2005 and 2006, and assuming cost savings and other synergies resulting from the merger. The estimated financial results and cost savings and other synergies were based upon Globix management estimates. Based upon these projections and assumptions, Needham & Company noted that the merger would result in accretion to the projected earnings per share of Globix for each of calendar years 2004, 2005 and 2006. The actual operating or financial results achieved by the combined entity may vary from projected results, and these variations may be material. SELECTED COMPANY ANALYSIS. Using information provided by NEON management, Needham & Company compared selected historical and projected financial and market data ratios for NEON to the corresponding publicly available data and ratios of certain publicly traded companies that Needham & Company deemed relevant because their lines of businesses are similar to NEON's line of business. These companies, referred to as the selected companies, consisted of the following: Level 3 Communications, Inc.; Corvis Corporation; Cogent Communications Group, Inc.; FiberNet Telecom Group, Inc.; XO Communications, Inc.; and VersaTel Telecom International N.V. The table below sets forth information concerning the following multiples for the selected companies and for NEON: o Enterprise value as a multiple of LTM revenues; o Enterprise value as a multiple of projected calendar 2004 revenues; o Enterprise value as a multiple of projected calendar 2005 revenues; and o Enterprise value as a multiple of LTM EBITDA. Needham & Company also compared, for the selected companies, o Enterprise value as a multiple of LTM EBIT; o Price as a multiple of LTM earnings per share; o Price as a multiple of projected calendar 2004 earnings per share; and o Price as a multiple of projected calendar 2005 earnings per share; but determined these comparisons were not meaningful because of NEON's losses. 58
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Needham & Company calculated multiples for the selected companies based on the closing stock prices of those companies on August 31, 2004 and for NEON based on the Globix closing stock price of $2.85 on July 16, 2004 and the exchange ratio of 1.2748 shares of Globix common stock for each share of NEON common stock. [Enlarge/Download Table] SELECTED COMPANIES ------------------------------------------------------------------- HIGH LOW MEAN MEDIAN NEON ---- --- ---- ------ ---- Enterprise value to LTM revenues 3.7x 0.4x 1.5x 1.3x 1.6x Enterprise value to projected 1.6x 0.3x 0.9x 0.9x 1.5x calendar 2004 revenues Enterprise value to projected 1.7x 0.3x 0.9x 0.7x 1.1x calendar 2005 revenues Enterprise value to LTM EBITDA 13.4x 6.5x 10.3x 10.9x 19.0x No company, transaction or business used in the preceding "Selected Company Analysis," or the following "Selected Transaction Analysis" as a comparison is identical to Globix, NEON or the merger. Accordingly, an evaluation of the results of these analyses is not entirely mathematical; rather, it involves complex considerations and judgments concerning differences in the financial and operating characteristics and other factors that could affect the acquisition, public trading or other values of the selected companies or selected transactions or the business segment, company or transaction to which they are being compared. SELECTED TRANSACTION ANALYSIS. Needham & Company analyzed publicly available financial information for the following selected telecommunications industry merger and acquisition transactions, which represent transactions since January 1, 2002 involving targets with an equity value of between $30 million and $200 million: ACQUIRER TARGET -------- ------ ITC DeltaCom, Inc. BTI Telecom Corp. CenturyTel, Inc. Digital Teleport, Inc. Level 3 Communications, Inc. Genuity Inc. Xspedius Management Corp. LLC e.spire Communications, Inc. In examining the selected transactions, Needham & Company analyzed, for the selected transactions and for NEON, the enterprise value as a multiple of revenue for the last 12 months. Of the transactions analyzed, Needham & Company believed that the acquisition by CenturyTel of Digital Teleport was the most relevant for purposes of the selected transaction analysis because of the similarity of the target's line of business and size to those of NEON, and noted this transaction had a multiple of enterprise value to LTM revenues of 1.8x. Needham & Company calculated multiples for NEON based on the Globix closing stock price of $2.85 on July 16, 2004, the exchange ratio of 1.2748 shares of Globix common stock for each share of NEON common stock. The following table sets forth information concerning the multiples of enterprise value to LTM revenues for the selected transactions. 59
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[Enlarge/Download Table] SELECTED TRANSACTIONS ------------------------------------------------------------- HIGH LOW MEAN MEDIAN GLOBIX / NEON MERGER ---- --- ---- ------ -------------------- Enterprise value to LTM revenue 3.1x 0.4x 1.6x 1.4x 1.6x OTHER ANALYSES. In rendering its opinion, Needham & Company considered various other analyses, including a discounted cash flow sensitivity analysis and a history of trading prices and volumes for Globix common stock. The summary set forth above does not purport to be a complete description of the analyses performed by Needham & Company in connection with the rendering of its opinion. The preparation of a fairness opinion involves various determinations as to the most appropriate and relevant quantitative and qualitative methods of financial analyses and the application of those methods to the particular circumstances and, therefore, such an opinion is not readily susceptible to summary description. Accordingly, Needham & Company believes that its analyses must be considered as a whole and that selecting portions of its analyses or the factors it considered, without considering all analyses and factors, could create a misleading or incomplete view of the process underlying its opinion. In its analyses, Needham & Company made numerous assumptions with respect to industry performance, general business and economic and other matters, many of which are beyond the control of Globix and NEON. Any estimates contained in these analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable. Additionally, analyses relating to the values of businesses or assets do not purport to be appraisals or necessarily reflect the prices at which businesses or assets may actually be sold. Accordingly, these analyses and estimates are inherently subject to substantial uncertainty. Needham & Company's opinion and its related analyses were only one of many factors considered by the special committee of Globix's board of directors in its evaluation of the proposed merger and should not be viewed as determinative of the views of the special committee of Globix's board of directors or management with respect to the common stock exchange ratio or the merger. Under the terms of its engagement letter with Needham & Company, Globix has paid or agreed to pay Needham & Company fees for rendering the Needham & Company opinion that Globix and Needham & Company believe are customary in transactions of this nature. None of Needham & Company's fees are contingent on consummation of the merger. Whether or not the merger is consummated, Globix has agreed to reimburse Needham & Company for certain of its out-of-pocket expenses and to indemnify it against specified liabilities relating to or arising out of services performed by Needham & Company in rendering its opinion. Needham & Company is a nationally recognized investment banking firm. As part of its investment banking services, Needham & Company is regularly engaged in the evaluation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, secondary distributions of securities, private placements and other purposes. Needham & Company was retained by the special committee of the Globix board of directors to render an opinion in connection with the merger based on Needham & Company's experience as a financial advisor in mergers and acquisitions as well as Needham & Company's familiarity with technology companies. Needham & Company has had no other investment banking relationship with Globix, and has had no investment banking relationship with NEON, during the past two years. Needham & Company may in the future provide investment banking and financial advisory services to Globix and NEON unrelated to the proposed merger, for which services Needham & Company expects to receive compensation. In the normal course of its business, Needham & Company may actively trade the equity securities of Globix for its own account or for the account of its customers and, therefore, may at any time hold a long or short position in these securities. 60
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THE NEON SPECIAL COMMITTEE'S AND NEON'S REASONS FOR THE MERGER THE NEON SPECIAL COMMITTEE'S REASONS FOR THE MERGER In reaching its determination, the NEON special committee considered: o the NEON special committee's conclusion that entering into the merger agreement at this time would provide greater value to NEON's stockholders than they would receive if NEON remained a stand-alone entity due to, among other factors, the greater diversification of products and services that could be offered by the combined entity; o the NEON special committee's conclusion that the economic terms contained in the merger agreement represented the best economic terms that could be obtained from Globix; o the NEON special committee's conclusion that the expenditure of approximately $5 million of available cash by the combined company to eliminate a portion of the NEON convertible preferred stock was a prudent financial decision based upon: o the combined company's liquidity position post-merger, o the high dividend rate on the convertible preferred stock, and o the combined company's new right to redeem the convertible preferred stock a year earlier; o the business, financial condition, results of operations, prospects, current business strategy and competitive position of each of NEON, Globix and the new combined company, as well as general economic and stock market conditions; o the information from, analysis by and the substance of discussions with NEON management in support of the merger; o the NEON special committee's conclusion that, since the merger consideration to be received by NEON common stockholders would be in the form of publicly tradable Globix securities, the exchange of NEON securities in the merger would provide: o increased liquidity for the common stockholders, and o improved access to the capital markets for the combined company; o the NEON special committee's belief that the merger would allow Globix and NEON to realize cost savings as a result of certain business synergies; o the fact that the receipt of Globix capital stock by the holders of NEON capital stock in the merger is expected to be tax-free to such holders, as well as to Globix and NEON; and o the opinion of Adams Harkness to the effect that, based upon and subject to the assumptions, qualifications and limitations stated in its opinion, as of the date of its opinion, the exchange ratio of 1.2748 shares of Globix common stock for each outstanding share of NEON common stock to be paid to the holders thereof in the merger was fair, from a financial point of view, to the holders of NEON common stock (as stockholders of NEON), and the reports and analyses presented to the NEON special committee by Adams Harkness in connection with the opinion. See "--Opinion of NEON's Financial Advisor" beginning on page 63 of this joint proxy statement/prospectus. 61
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The NEON special committee also considered a number of negative factors in its deliberations concerning the merger, including: o the fact that the merger agreement does not provide the holders of NEON capital stock with any protection against fluctuations in the market price of Globix common stock during the period from the signing of the merger agreement to the completion of the merger; o the reduction in the combined company's liquidity as a result of the combined company's expenditure of approximately $5 million of available cash to eliminate a portion of the NEON convertible preferred stock; o the combined company's liquidity position post-merger; o the loss of control over the future operations of NEON following the merger; o the fact that the merger agreement provides that Globix has the right not to proceed with the transaction under certain circumstances, including in the event that greater than fifteen percent (15%) of NEON's common stockholders or convertible preferred stockholders elect to exercise their appraisal rights; o the ability of Globix to reduce its pre-merger debt; and o the other factors discussed in this joint proxy statement/ prospectus under the section entitled "Risk Factors," beginning on page 21 of this joint proxy statement/prospectus. The NEON special committee believed that these negative factors were substantially outweighed by the benefits anticipated from the merger. The preceding discussion of the information and factors considered by the NEON board of directors is not intended to be exhaustive, but is believed to include all material factors considered by the NEON board of directors. Mr. Lampe, a director on the NEON and Globix boards of directors, abstained from voting on the merger. In evaluating the merger, the members of the NEON special committee considered their knowledge of the business, financial condition and prospects of NEON, and the advice of its advisors. In light of the number and variety of factors that the NEON special committee considered in connection with their evaluation of the merger, the NEON special committee did not find it practicable to assign relative weights to the foregoing factors. Rather, the NEON special committee made its determination based upon the total mix of information available to it. NEON'S REASONS FOR THE MERGER In determining the fairness of the terms of the merger and approving the merger agreement and the transactions contemplated by the merger agreement, the NEON board of directors considered the factors described above under "--The NEON Special Committee's Reasons for the Merger" beginning on page 61 of this joint proxy statement/prospectus. In approving the merger agreement and the transactions contemplated by the merger agreement, the NEON board of directors concurred with and adopted the analysis of the NEON special committee with respect to the financial evaluation of NEON and of the exchange ratio. In evaluating the merger, the members of the NEON board of directors considered their knowledge of the business, financial condition and prospects of NEON, and the advice of its advisors. In light of the number and variety of factors that NEON's board of directors considered in connection with their evaluation of the merger, NEON's board of directors did not find it practicable to assign relative weights to the foregoing factors. Rather, NEON's board of directors made its determination based upon the total mix of information available to it. 62
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RECOMMENDATIONS OF NEON'S BOARD OF DIRECTORS The NEON board of directors (with one director, Mr. Lampe, abstaining, and as to the first amendment, with two directors, Messrs. Lampe and Grubin, abstaining) has approved the merger, the merger agreement and the transactions contemplated by the merger agreement, and on the basis of the recommendation of the NEON special committee, determined that the terms of the merger are advisable and in the best interests of NEON and its stockholders. Accordingly, the NEON board of directors (with one director, Mr. Lampe, abstaining) recommends that NEON's stockholders vote "FOR" the merger, the merger agreement and the transactions contemplated by the merger agreement, "FOR" the amendment to NEON's certificate of incorporation, "FOR" the amendment to the certificate of designation for the NEON convertible preferred stock and "FOR" the proposal to grant discretionary authority to adjourn or postpone the NEON special meeting to solicit additional votes to approve the matters considered at the NEON special meeting, if necessary. OPINION OF NEON'S FINANCIAL ADVISOR Adams Harkness, Inc. (f/k/a Adams, Harkness & Hill, Inc.) provided a fairness opinion to the NEON special committee on July 16, 2004 that, as of the date of such fairness opinion, the exchange ratio payable pursuant to the merger agreement was fair, from a financial point of view, to the holders of NEON common stock (as stockholders of NEON). The full text of the July 16, 2004 fairness opinion, which sets forth assumptions made, matters considered and limitations on the review undertaken in connection with the fairness opinion, is attached as Appendix E to this joint proxy statement/prospectus and is incorporated herein by reference (the "Adams Harkness fairness opinion"). The Adams Harkness fairness opinion, referred to herein, does not constitute a recommendation as to how any NEON stockholder should vote with respect to the merger. NEON stockholders are urged to, and should, read the fairness opinion in its entirety. The NEON special committee retained Adams Harkness to assist it in its evaluation of the proposed merger. Pursuant to the terms of Adams Harkness' engagement letter, Adams Harkness was retained by the NEON special committee to render an opinion as to the fairness, from a financial point of view, to the stockholders of NEON of the consideration to be received, or the exchange ratio to be employed, as the case may be, by such stockholders in connection with the merger. Adams Harkness is a nationally recognized investment banking firm and is regularly engaged in the valuation of businesses and their securities in connection with mergers and acquisitions, negotiated underwritings, private placements and valuations for corporate and other purposes. At the meeting of the NEON special committee on July 16, 2004, Adams Harkness rendered its fairness opinion, in writing, that, as of that date, based upon and subject to the various considerations set forth in such fairness opinion, the exchange ratio of 1.2748 set forth in the draft merger agreement dated as of July 16, 2004 is fair, from a financial point of view, to the holders of NEON common stock (as stockholders of NEON). The Adams Harkness fairness opinion is directed to the NEON special committee and addresses only the fairness, from a financial point of view, of the exchange ratio of 1.2748 set forth in the merger agreement. The description of the Adams Harkness fairness opinion set forth in this joint proxy statement/prospectus is only a summary and NEON stockholders should refer to the full text of the Adams Harkness fairness opinion. The following is a summary of the various sources of information and valuation methodologies used by Adams Harkness in arriving at its fairness opinion. To assess the fairness of the transaction, Adams Harkness employed analyses based on the following: o relative valuations for each of NEON and Globix based on a discounted cash flow valuation analysis for each company on a stand-alone basis; o each company's implied pro forma revenue and EBITDA contribution to the combined entity; o valuation metrics derived from selected comparable companies; and o valuation metrics derived from selected precedent transactions. 63
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In conducting its investigation and analysis and in arriving at its opinion, Adams Harkness reviewed the information and took into account the investment, financial and economic factors it deemed relevant and material under the circumstances. The material actions undertaken by Adams Harkness in connection with the preparation and rendering of its fairness opinion were as follows: o reviewed the terms of the merger agreement furnished to Adams Harkness by legal counsel to the NEON special committee which, for the purposes of the Adams Harkness fairness opinion, Adams Harkness assumed, with the permission of the NEON special committee, to be identical in all material respects to the merger agreement to be executed; o analyzed and discussed with management of NEON and Globix certain historical and projected financial statements and other financial and operating data concerning each company, including with respect to Globix, forecasts characterized by Globix management as a downside scenario; o reviewed and analyzed the historical common stock trading history of Globix; o conducted due diligence discussions with members of senior management of NEON and Globix concerning the financial performance, operations, business strategy and prospects for such company, respectively; o reviewed and analyzed the potential pro forma financial effects of the merger on the projected financial results of the consolidated entity; o compared the results of operations of Globix with those of certain companies Adams Harkness deemed to be relevant and comparable; o compared the terms and conditions of the merger with certain mergers and acquisitions Adams Harkness deemed to be relevant and comparable; o reviewed and analyzed the current capitalization of each of NEON and Globix, as well as the projected pro forma capitalization of Globix after giving effect to the merger; and o performed such other financial studies, investigations and analyses and took into account such other matters as it deemed necessary, including Adams Harkness' assessment of general economic, market and monetary conditions as of the date of the Adams Harkness fairness opinion. In rendering its fairness opinion, Adams Harkness assumed and relied upon the accuracy and completeness of all of the financial and other information that was publicly available or provided to Adams Harkness by, or on behalf of, NEON and Globix, and did not independently verify such information. Adams Harkness also relied on the assurances of NEON's management that they were not aware of any facts that would make such information misleading. Adams Harkness assumed, with the NEON special committee's consent, that: o with respect to forecasts reviewed relating to the prospects of NEON or Globix, that such forecasts were reasonably prepared on bases reflecting the best currently available estimates and judgments of the management of NEON and Globix, respectively, as to the future financial performance of such company; o all material assets and liabilities (contingent or otherwise, known or unknown) of each of NEON and Globix are as set forth in the historic and projected financial statements of each such company as provided to Adams Harkness; o obtaining any regulatory and other approvals and third party consents required for consummation of the merger would not have a material effect on the anticipated benefits of the merger; and 64
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o the merger would be consummated in accordance with the terms set forth in the merger agreement. In conducting its review, Adams Harkness did not obtain an independent evaluation or appraisal of any of the assets or liabilities (contingent or otherwise) of NEON or Globix. Adams Harkness' fairness opinion did not predict or take into account any possible economic, monetary or other changes which may occur, or information which may come available, after the date of its written fairness opinion. For purposes of its analyses, Adams Harkness assumed, among other things, that there would be 25,156,262 pro forma fully diluted shares of NEON common stock outstanding, and 22,326,902 fully diluted shares of Globix common stock outstanding, immediately prior to the effective time of the merger. DISCOUNTED CASH FLOW ANALYSIS Adams Harkness analyzed certain historical and projected financial statements of NEON and Globix, provided by management of NEON and Globix, respectively, in performing a discounted cash flow analysis for each company. Adams Harkness relied on such information and assumed such information to be complete and accurate in all material respects. Through these analyses, Adams Harkness assessed the stand-alone value for each company based on the valuation implied by the present value of the company's future cash flows using selected discount rates. Implied equity values were then calculated using most recent (March 31, 2004) balance sheet information (assuming, based on discussions with management of NEON and Globix, the conversion of $12.5 million of Globix debt into equity). Terminal values were calculated by tax affecting out-year free cash flows at 40% and capitalizing this amount using a sensitized range of long-term growth rates (reflective of historical and projected performance) and weighted average costs of capital ("WACC"). The present value of tax shields relating to an out-year residual net operating loss balance was added to the valuation of both companies. Adams, Harkness also paid close attention to the fact that NEON is a private company. In arriving at an appropriate valuation, Adams Harkness applied a discount to the value of NEON's securities based on its view that valuations of private securities are subject to a discount relative to the market price of comparable public securities, reflecting the inability to freely trade such private securities in the public marketplace. For purposes of its analysis, Adams Harkness applied a 26% valuation discount (reflecting a 30% base discount, reduced to adjust for NEON's size). In arriving at the appropriate discount rates to apply to each company, Adams Harkness performed WACC calculations, based on the respective balance sheet information of each company as of March 31, 2004 (adjusted, in the case of Globix, to reflect the anticipated conversion of $12.5 million of Globix debt into equity prior to closing). For purposes of this calculation, Adams Harkness: o calculated beta, in the case of Globix, using comparable publicly traded companies, and in the case of NEON, using Ibbotson SIC code small company composite data because of the limited number of comparable, publicly traded companies; o assumed a risk free rate of 4.5% (based on the 10 year Treasury Note yield as of July 15, 2004), and a market risk premium of 7%; o applied a 7% size premium adjustment to the base WACC calculated for each company; and o applied a 26% premium to NEON's cost of equity capital to reflect the impact of the lack of a liquid, public market for NEON's securities. Based on these assumptions, Adams Harkness performed three-year and five-year discounted cash flow analyses for each company, sensitized in each case to account for a range of long-term revenue growth rates and WACCs. For NEON, Adams Harkness utilized long-term revenue growth rates between 5.5% and 6.5%, and WACCs ranging from 25.0% to 26.0%. Based on the above assumptions and sensitivities, Adams Harkness' three-year discounted cash flow analysis resulted in a range of implied equity values for NEON between $51.8 million and $53.5 million, and the five-year discounted cash flow analysis resulted in a range of implied equity values for NEON between $66.3 million and $70.9 million. 65
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For Globix, Adams Harkness utilized long-term revenue growth rates between 4.5% and 5.5%, and WACCs ranging from 14.0% to 15.0%. Based on the above assumptions and sensitivities, Adams Harkness' three-year discounted cash flow analysis resulted in a range of implied equity values for Globix between $31.7 million and $47.3 million, and the five-year discounted cash flow analysis resulted in a range of implied equity values for Globix between $37.5 million and $52.4 million. Using the ranges of equity values listed above, Adams Harkness calculated ranges of implied NEON pro forma ownership in the consolidated entity. Based on each company's three-year discounted cash flow analysis, Adams Harkness derived a range of implied NEON pro forma equity ownership in the consolidated entity of between 53% and 62%. Based on each company's five-year discounted cash flow analysis, Adams Harkness derived a range of implied NEON pro forma equity ownership in the consolidated entity of between 58% and 64%. CONTRIBUTION ANALYSIS Based on management projections, Adams Harkness analyzed each company's implied pro forma ownership in the consolidated entity based on the percentage of projected revenues and EBITDA each company will contribute to the consolidated entity. Because of each company's limited operating history following emergence from bankruptcy, Adams Harkness primarily focused on each company's projected revenue and EBITDA contribution for the calendar years 2004 - 2006. The following table reflects the projected revenue contribution of each of NEON and Globix to the consolidated entity based on each company's respective revenue projections: [Enlarge/Download Table] ------------------------------------------------------------------- Revenue Contribution to Consolidated Entity ------------------------------------------- Year NEON Globix ---- ---- ------ --------------------- ----------------------------- --------------- CY 2004E 43.4% 56.6% --------------------- ----------------------------- --------------- CY 2005E 46.6% 53.4% --------------------- ----------------------------- --------------- CY 2006E 51.6% 48.4% --------------------- ----------------------------- --------------- CY 2007E 55.9% 44.1% --------------------- ----------------------------- --------------- CY 2008E 59.5% 40.5% --------------------- ----------------------------- --------------- The following table reflects the projected EBITDA contribution of each of NEON and Globix to the consolidated entity based on each company's respective EBITDA projections: ------------------------------------------------------------------- EBITDA Contribution to Consolidated Entity ------------------------------------------ Year NEON Globix ---- ---- ------ --------------------- ----------------------------- --------------- CY 2004E 57.2% 42.8% --------------------- ----------------------------- --------------- CY 2005E 59.6% 40.4% --------------------- ----------------------------- --------------- CY 2006E 69.2% 30.8% --------------------- ----------------------------- --------------- CY 2007E 73.5% 26.5% --------------------- ----------------------------- --------------- CY 2008E 75.8% 24.2% --------------------- ----------------------------- --------------- 66
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PUBLIC COMPANY PEER ANALYSIS Adams Harkness established a group of publicly traded companies that it deemed comparable to each of NEON and Globix based on similarity of services offered, markets served and financial performance (collectively, for purposes of this section, the "Peer Group Companies"), and analyzed certain operating performance characteristics and public market valuation metrics of such Peer Group Companies. Such information included: o last twelve months revenue and projected 2004 and 2005 revenue; o last twelve months earnings before interest and taxes depreciation and amortization, referred to as EBITDA, and projected 2004 and 2005 projected EBITDA; and o ratio of enterprise value to last twelve months revenue, and 2004 and 2005 projected revenue. NEON is a privately held regional service provider of advanced optical networking solutions and services in the Northeast and mid-Atlantic markets. Adams Harkness established the following group of four publicly traded companies in the communications and information services industry that it deemed comparable to NEON (in alphabetical order): [Enlarge/Download Table] -------------------------------- ---------------- ----------------- ---------------- ----------------- Last Twelve Last Twelve Market Enterprise Months Months Company Value Value (1) Revenue (2) EBITDA (2) ------- ----- --------- ----------- ---------- -------------------------------- ---------------- ----------------- ---------------- ----------------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) -------------------------------- ---------------- ----------------- ---------------- ----------------- Corvis Corp $600.4 $317.4 $459.6 NMF -------------------------------- ---------------- ----------------- ---------------- ----------------- Fiber Net Telecom Group $48.5 $57.0 $30.5 NA -------------------------------- ---------------- ----------------- ---------------- ----------------- Global Crossing $277.9 $172.9 $2,932.0 NA -------------------------------- ---------------- ----------------- ---------------- ----------------- Level 3 Communications $2,071.2 $6,242.2 $1,619.0 $412.0 -------------------------------- ---------------- ----------------- ---------------- ----------------- (1) Market value is derived from share prices as of the close of trading on July 15, 2004 and the financial data information and the number of fully diluted shares outstanding are taken from each company's most recent SEC filings. To determine enterprise value, market value is adjusted for a company's debt and cash positions by adding the debt balance and subtracting the cash balance. (2) Last twelve months revenue and last twelve months EBITDA data are obtained from each Peer Group Company's most recent SEC filings. 67
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Globix is a publicly traded (OTC Bulletin Board) provider of hosting, network and applications solutions for businesses in the US and UK, based in New York, NY and employing approximately 250 employees. Globix offers web hosting, dedicated internet access and networking services, streaming media, content delivery, network security solutions, virtual private networks, and managed network services. Adams Harkness established the following group of eight publicly traded companies in the hosting and network applications industry that it deemed comparable to Globix (in alphabetical order): [Enlarge/Download Table] -------------------------------- ---------------- ----------------- ---------------- ----------------- Last Twelve Last Twelve Market Enterprise Months Months Company Value Value (1) Revenue (2) EBITDA (2) ------- ----- --------- ----------- ---------- -------------------------------- ---------------- ----------------- ---------------- ----------------- (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) (IN MILLIONS) -------------------------------- ---------------- ----------------- ---------------- ----------------- Corio Inc $116.3 $83.3 $67.4 $1.6 ------------------------------- ----------------- ----------------- ---------------- ----------------- Equant $1,561.1 $1,232.0 $2,948.9 $208.5 ------------------------------- ----------------- ----------------- ---------------- ----------------- Equinix Inc $532.4 $560.2 $128.8 $5.7 ------------------------------- ----------------- ----------------- ---------------- ----------------- Interland Inc $47.3 $17.2 $106.0 NMF ------------------------------- ----------------- ----------------- ---------------- ----------------- InterNAP Network Services $347.7 $270.0 $140.7 $10.6 ------------------------------- ----------------- ----------------- ---------------- ----------------- NaviSite Inc $90.5 $95.0 $73.9 NMF ------------------------------- ----------------- ----------------- ---------------- ----------------- Raindance Communications $109.6 $71.6 $74.8 $12.9 ------------------------------- ----------------- ----------------- ---------------- ----------------- Savvis Communications $142.3 $173.6 $305.8 NMF ------------------------------- ----------------- ----------------- ---------------- ----------------- (1) Market value is derived from share prices as of the close of trading on July 15, 2004 and the financial data information and the number of fully diluted shares outstanding are taken from each company's most recent SEC filings. To determine enterprise value, market value is adjusted for a company's debt and cash positions by adding the debt balance and subtracting the cash balance. (2) Last twelve months revenue and last twelve months EBITDA data are obtained from each Peer Group Company's most recent SEC filings. Based on its expertise in the valuation of publicly-traded companies and, in particular, its research into the performance variables considered by investors when assessing relative value among the Peer Group Companies, Adams Harkness concluded that, because of the limited set of comparable companies, most without valuation metrics applicable to NEON or Globix, the valuations implied for both NEON and Globix through peer group analyses were rendered less meaningful than those derived from certain other analyses. PRECEDENT TRANSACTION ANALYSIS Adams Harkness assessed the transaction premiums and relative valuations associated with selected precedent publicly disclosed acquisitions it deemed relevant. Adams Harkness reviewed five precedent transactions related specifically to communications and information services companies. Each of the five precedent transactions were announced after July 23, 2003. Adams Harkness analyzed the transaction value to last twelve months revenue multiple and the transaction value to EBITDA multiple paid in each transaction. Premiums paid in precedent public company change of control transactions typically imply the range of consideration acquirors are willing to pay above a seller's stock price prior to or at the time of the announcement of the relevant transaction. However, since market conditions change over time, valuation metrics derived from precedent transactions may or may not be accurate proxies for value at a given point in time. 68
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Adams Harkness identified two precedent transactions with available and applicable valuation metrics it deemed relevant to NEON. In chronological order, the selected transactions were: [Enlarge/Download Table] -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Value of Enterprise Target Net Target LTM Ent Date Transaction Value Sales LTM EBITDA Val/ Ent Val/ Target Name Acquiror Name Announced ($ mil) ($ mil) ($ mil) ($ mil) Sales EBITDA -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Reliance Gateway FLAG Telecom Group Ltd Net Pvt Ltd 10/16/2003 194.8 176.0 148.5 (39.7) 1.2x NMF -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Focal Communications Corvis Corporation 3/8/2004 210.0 297.0 306.9 15.7 1.0x 18.9x -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Adams Harkness identified three precedent transactions with available and applicable valuation metrics it deemed relevant to Globix. In chronological order, the selected transactions were: -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Value of Enterprise Target Net Target LTM Ent Date Transaction Value Sales LTM EBITDA Val/ Ent Val/ Target Name Acquiror Name Announced ($ mil) ($ mil) ($ mil) ($ mil) Sales EBITDA -------------------------- --------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Digex Inc. WorldCom Inc 7/24/2003 25.5 242.4 154.4 12.2 1.6x 19.8x --------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Axcelerant Inc GRIC Communications Inc 8/12/2003 51.9 46.6 16.1 (2.8) 2.9x NMF --------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- Host Europe PLC PIPEX Communications PLC 4/2/2004 55.0 46.5 30.4 6.2 1.5x 7.5x --------------------- -------------------------- ----------- ------------ ---------- ----------- ------------ ------- ---------- As part of its analysis of the above transactions, Adams Harkness analyzed the ratio of enterprise value to last twelve months revenue of the target companies, as well as analyzing the enterprise value to EBITDA of the target companies. Based on this analysis, Adams Harkness applied a range of ratios of transaction value to last twelve months revenue and EBITDA multiples. The results of the analysis offered a mean enterprise value to last twelve months revenue of 1.6x, and a mean enterprise value to EBITDA of 15.4x. However, because of the limited number of precedent transactions with available and applicable valuation metrics, Adams Harkness concluded that the valuations implied for each of NEON and Globix through precedent transaction analyses were less meaningful than those derived from certain other analyses. 69
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SUMMARY OF FINANCIAL AND COMPARATIVE ANALYSES The foregoing summary does not purport to be a complete description of the analyses performed by Adams Harkness. The preparation of a fairness opinion is a complex process. Adams Harkness believes that its analyses must be considered as a whole, and that selecting portions of such analysis without considering all analyses and factors would create an incomplete view of the processes underlying its fairness opinion. Any estimates contained in Adams Harkness' analyses are not necessarily indicative of actual values, which may be significantly more or less favorable than as set forth therein. Estimates of values of companies do not purport to be appraisals or necessarily to reflect the prices at which companies may actually be sold. Such estimates are inherently subject to uncertainty. Adams Harkness advised the NEON special committee that the financial and comparative analyses conducted by it in rendering its fairness opinion (specifically, the discounted cash flow analysis, the pro forma ownership analysis, the peer group analysis and the selected precedent transactions analysis) constituted a "going concern" analysis of NEON. Taken together, the information and analyses employed by Adams Harkness lead to Adams Harkness' overall opinion that the exchange ratio of 1.2748 set forth in the merger agreement is fair, from a financial point of view, to holders of NEON common stock (as stockholders of NEON). AFFIRMATION OF FAIRNESS OPINION On October 8, 2004 Adams, Harkness provided to the NEON special committee, in writing, an affirmation of its fairness opinion that, as of such date, based upon and subject to the various considerations and assumptions set forth in the affirmation of the fairness opinion, the exchange ratio is fair, from a financial point of view, to holders of NEON common stock (as stockholders of NEON). The full text of the affirmation of the fairness opinion dated October 8, 2004, which sets forth, among other things, the assumptions made, procedures followed, matters considered, and limitations on the scope of the review undertaken by Adams, Harkness in rendering its affirmation of its opinion, is attached as Appendix F to this joint proxy statement/prospectus and is incorporated herein by reference. The Adams, Harkness affirmation of its fairness opinion is directed to the NEON special committee and addresses only the fairness, from a financial point of view, of the Exchange Ratio pursuant to the merger agreement as of October 8, 2004, and does not address any other aspect of the merger or constitute a recommendation to any holder of common stock as to how to vote at the special meeting. In connection with Adams, Harkness' affirmation of its fairness opinion review and arriving at the fairness opinion and this affirmation thereof, Adams, Harkness has not independently verified any information received from NEON or Globix, have relied on such information, and have assumed that all such information is complete and accurate in all material respects. Adams, Harkness has also relied on the assurances of management of NEON that they are not aware of any facts that would make such information misleading. With respect to any forecasts reviewed, relating to the prospects of NEON or Globix, Adams, Harkness has assumed, and received written confirmation thereof, that they have been reasonably prepared on bases reflecting the best currently available estimates and judgments of management of NEON and Globix, respectively, as to the future financial performance of such company. In particular, with permission of the NEON special committee, in connection with the Adams, Harkness affirmation of the fairness opinion, Adams, Harkness has relied on the financial projections prepared by Globix management and utilized in the analysis supporting the fairness opinion of July 16, 2004, and not any subsequently shared financial modeling scenarios. 70
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MATERIAL CONTRACTS BETWEEN GLOBIX AND NEON Other than contracts relating to the merger agreement and the merger, which are described in the section entitled "Terms of the Merger Agreement and Related Transactions" beginning on page 83 of this joint proxy statement/prospectus, there are no material contracts between Globix and NEON. INTERESTS OF CERTAIN PERSONS IN THE MERGER INTERESTS OF GLOBIX'S AND NEON'S DIRECTORS AND OFFICERS IN THE MERGER When NEON's stockholders are considering the recommendation of NEON's board of directors that they vote in favor of the adoption of the merger, the merger agreement and the transactions contemplated by the merger agreement and the other proposals set forth in this joint proxy statement/prospectus, NEON stockholders should be aware that some of the directors and officers of NEON have interests in the merger and participate in arrangements that are different from, or are in addition to, those of NEON stockholders generally. The NEON board of directors and its special committee were aware of these interests and considered them, among other matters, when they adopted and approved the merger, the merger agreement and the transactions contemplated by the merger agreement (with Mr. Lampe abstaining from the voting, and as to the first amendment, with Messrs. Lampe and Grubin, abstaining from voting). Similarly, when Globix's stockholders are considering the recommendation of Globix's board of directors that they vote in favor of the issuance of Globix common stock in connection with the merger, Globix stockholders should be aware that some of the directors and officers of Globix have interests in the merger and participate in arrangements that are different from, or are in addition to, those of Globix stockholders generally. The Globix board of directors and its special committee were aware of these interests and considered them, among other matters, when they adopted and approved the merger, the merger agreement and the transactions contemplated by the merger agreement (with Mr. Lampe abstaining from the voting). These special interests on behalf of Globix and NEON directors and officers include the following: SIGNIFICANT HOLDERS OF GLOBIX AND NEON SECURITIES ARE AFFILIATED WITH NEON AND GLOBIX DIRECTORS Certain NEON stockholders who beneficially own a significant percentage of NEON securities also beneficially own a significant percentage of the Globix common stock. Beneficial ownership of the equity securities of Globix and NEON by significant stockholders is disclosed under "Share Ownership of Certain Beneficial Owners and Management of Globix," "Security Ownership of Directors, Executive Officers and More Than Five Percent Stockholders of NEON" and "Securities Ownership of Certain Beneficial Owners and Management of Globix Following the Merger" on pages 123, 153 and 169 of this joint proxy statement/prospectus. These persons may have interests in the merger that are different from, or are in addition to, those of NEON stockholders generally. Steven Lampe, a director of both Globix and NEON, is affiliated with LC Capital Master Fund Ltd., which holds approximately 7.4% of the outstanding common stock of Globix and 10.4% and 15.6%, respectively, of the outstanding common stock and convertible preferred stock of NEON, as of December 1, 2004. Mr. Singer, the non-executive chairman of the board of directors of Globix, is a trustee of certain trusts for the benefit of his brother's children. These and other trusts for the benefit of his brother's children (collectively, the "Singer Trusts") hold approximately 6.9% of the outstanding common stock of Globix and 3.2% and 27.5%, respectively, of the outstanding common stock and convertible preferred stock of NEON, as of December 1, 2004. Robert Grubin, a director of NEON, is a partner at Loeb Partners Corp., which holds approximately 2.5% of the outstanding common stock of Globix and 13.8% and 4.0%, respectively, of the outstanding common stock and convertible preferred stock of NEON, as of December 1, 2004. 71
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DEBT-FOR-EQUITY EXCHANGE It is a condition to the closing of the merger that some of Globix's 11% senior note holders exchange $12.5 million in principal and accrued interest of Globix's 11% senior notes for approximately 4,545,455 shares of Globix common stock at a price per share of $2.75, the approximate trading price of the Globix common stock at the time the parties reached an agreement on the overall amount of the exchange. LC Capital Master Fund Ltd. and the Singer Children's Management Trust, one of the Singer Trusts, have agreed to participate in the debt-for-equity exchange which is described in more detail in the section entitled "Terms of the Merger Agreement and Related Transactions - Debt-for-Equity Exchange" beginning on page 94 of this joint proxy statement/prospectus. ACCELERATED VESTING OF OPTIONS All officers and directors of NEON, including Mr. Courter and Mr. Marshall, have stock option agreements (and employment agreements in the case of Mr. Courter and Mr. Marshall) that provide that, upon a change of control of NEON, including a transaction such as the merger, their unvested options will accelerate and become fully vested and exercisable. Options to purchase approximately 1,349,677 shares of NEON common stock held by NEON's officers and directors at a weighted exercise price of $5.24 per share will be fully vested and exercisable immediately prior to the completion of the merger. INDEMNIFICATION AND DIRECTORS AND OFFICERS INSURANCE The merger agreement requires Globix and NEON, as the surviving corporation, to indemnify and hold harmless each present and former director and officer of NEON and other persons entitled to indemnification under the certificate of incorporation and bylaws or similar organizational documents of NEON or any of its subsidiaries as in effect on the date of the merger agreement against any costs or expenses reasonably incurred in connection with any threatened, pending or completed claim, action, suit, proceeding or investigation brought against such indemnified person and arising out of or pertaining to matters existing or occurring with respect to NEON or any of its subsidiaries at or prior to the effective time of the merger to the fullest extent permitted under NEON's organizational documents and applicable law. Each indemnified person will be entitled to advancement of expenses incurred in the defense of any claim, action, suit, proceeding or investigation from Globix and NEON to the fullest extent permitted by the Delaware General Corporation Law and the Sarbanes-Oxley Act of 2002. However, any person to whom expenses are advanced must provide an undertaking to repay such advances if it is ultimately determined that such person is not entitled to indemnification. Additionally, the merger agreement requires that NEON maintain for a period of at least five years policies of directors' and officers' liability insurance and fiduciary liability insurance for the benefit of the indemnified persons with respect to claims arising from facts or events that occurred on or before the effective time of the merger, including in respect of the transactions contemplated by the merger agreement. BUSINESS ADVISORS OF NEON AND GLOBIX CTA provides consulting and business development services to NEON. Under a letter agreement between NEON and CTA, CTA agreed to present merger and acquisition advice and opportunities to NEON for a success fee. CTA has agreed to waive this fee in relation to the merger. NEON has issued to certain current and former affiliates of CTA and certain of such affiliates' designees warrants exercisable for 300,000 shares of NEON common stock at $6.06 per share through October 23, 2008 and warrants exercisable for 350,000 shares of NEON common stock at $5.30 per share through December 3, 2007, as payment for such services. CTA purchased the warrants exercisable for 350,000 shares of NEON common stock for $25,000. One of CTA's employees, Wayne Barr, Jr., serves on NEON's board of directors and Mr. Barr will serve on the board of directors of Globix following the merger. A current director of NEON, Mr. Aquino, was affiliated with CTA at the time NEON's board of directors approved the merger. 72
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CTA provides similar consulting and business development services to Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a success fee if Globix consummates a sale, merger or similar transaction with CTA's assistance. CTA has agreed to waive this fee in relation to the merger. Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for 500,000 shares of Globix common stock at $3.00 per share through March 13, 2013, which were purchased for $25,000. See "Description of Globix Capital Stock - Description of Globix Warrants" beginning on page 130 of this joint proxy statement/prospectus. OPERATION OF GLOBIX AND NEON AFTER THE MERGER Following the merger, the stockholders of NEON will become stockholders of Globix, and their rights as stockholders will be governed by Globix's certificate of incorporation and bylaws, each as amended to date and currently in effect, and the laws of the State of Delaware. See "Comparison of Stockholder Rights," beginning on page 179 of this joint proxy statement/prospectus. After the merger, NEON, as the surviving entity following the merger, will continue to operate as a wholly owned subsidiary of Globix. Upon the completion of the merger, Mr. Courter, the chairman of the board, president and chief executive officer of NEON, will be the chairman of the board, president and chief executive officer and a director of the wholly owned subsidiary NEON and will be a director of Globix, and all other executive officers and directors of NEON before the merger will serve in such capacities after the merger, subject to the authority of the board of directors of Globix after the merger. After the merger, the board of directors of Globix will be comprised of nine members, including four persons who are currently directors of Globix (Messrs. Herzig, Singer, Steele and Stevenson), four persons who are currently directors of NEON (Messrs. Barr, Cecin, Courter and Forsgren) and one person who is currently a director of both companies (Mr. Lampe). The management of Globix after the transaction will remain unchanged, except that Mr. Courter may be deemed an executive officer of Globix for purposes of the Securities Exchange Act of 1934, by virtue of his position with a principal business unit of Globix. For further information, see "Management of Globix After the Merger," beginning on page 157 of this joint proxy statement/prospectus. ACCOUNTING TREATMENT Globix intends to account for the merger as a purchase in accordance with generally accepted accounting principles in the United States. Globix has been identified as the acquirer for accounting purposes as a result of the following: Globix will pay part of the consideration to acquire NEON in cash, part through the issuance of Globix common stock and convertible preferred stock and part through the assumption of NEON warrants and options; the merged company's management and operations are expected to be controlled by Globix's board of directors which will consist of four individuals who are currently members of the board of directors of Globix, four individuals who are currently members of the board of directors of NEON and one individual who is currently a member of the board of directors of both NEON and Globix; and the current holders of Globix common stock are expected to continue to hold the majority of the common stock of the combined company following the merger, factoring in cross ownership between the two companies. The purchase price will be allocated to NEON's assets and liabilities based on their estimated fair values at the time of completion of the merger. The excess of the fair value of the identifiable net assets acquired over the purchase price (i.e. negative goodwill) which is expected to be approximately $25.7 million, will be reduced to zero by assigning it on a pro rata basis to the estimated fair value of all identified noncurrent acquired assets. Following the completion of the merger, the results of operations of NEON will be included in the consolidated financial statements of Globix from the date of the acquisition. GOVERNMENTAL AND REGULATORY APPROVALS The Hart-Scott-Rodino Antitrust Improvements Act of 1976 as amended (the "HSR Act") and its related rules and regulations prohibit Globix and NEON from completing the merger until Globix and NEON each file notifications with the Antitrust Division of the Department of Justice and the Federal Trade Commission, and the HSR Act waiting period requirements have been satisfied. Even after the HSR Act waiting period expires or is terminated, and even after the merger is completed, the Antitrust Division or the Federal Trade Commission could challenge the merger on antitrust grounds. In addition, before or after the merger is completed, states and private litigants could also challenge the merger on antitrust grounds. Globix and NEON each filed HSR Act notifications with the Federal Trade Commission and the Antitrust Division on August 13, 2004, and the waiting period was terminated on August 20, 2004. 73
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NEON's subsidiary, NEON Connect, Inc., has competitive local exchange carrier, or CLEC, authorization in several states in the Northeast and mid-Atlantic regions. Of these several states, Vermont, New Jersey and Delaware require that approval must be granted in order for NEON Connect, Inc.'s parent company, NEON, to merge with and into a wholly owned subsidiary of Globix. Similarly, NEON's subsidiary NorthEast Optic Network of New York, Inc. also has authorization to be a CLEC in the State of New York. The State of New York also requires that approval be granted by the state in order for NEON, as the parent of NorthEast Optic Network of New York, Inc., to consummate the merger. Each of these states requires the approval as a means of ensuring that after the merger has taken place, the new organization will maintain the obligations that each state requires in order to be a CLEC. NEON and Globix have submitted applications to the state agencies that oversee public utilities in each of the four states identified above. NEON has received approval from each of the state agencies of Vermont, Delaware and New York. Approval from the state of New Jersey is pending subject to customary authorization process. NEON Connect, Inc. also possesses CLEC authorizations in Maine, Maryland, Massachusetts, New Hampshire, Rhode Island and Washington, D.C. In each of these jurisdictions, the agency that oversees public utilities requires that it be notified of the merger, as part of regulating CLECs. The State of New Hampshire requires the notification before the merger closes and the remaining jurisdictions require notification after the merger is completed. NorthEast Optic Network of Connecticut, Inc., a subsidiary of NEON, also possesses authorization to be a CLEC in the State of Connecticut. Connecticut, as part of regulating competitive local exchange carriers, also requires that its agency which oversees public utilities receive a notice of the merger after the merger is completed. NEON Optica is a party to a franchise agreement with the City of New York and a fiber optic cable license agreement with the City of White Plains, New York. Both of these agreements require the respective cities to give their prior written consent in the event of a change of control of NEON Optica or any person holding control of NEON Optica. NEON has solicited from the cities the required consents and is working with each of the cities to obtain those consents. Other than the SEC declaring Globix's registration statement on Form S-4 relating to this transaction effective, approval under the HSR Act and approval from certain state agencies with regard to CLEC authorization, Globix and NEON do not believe that any additional material governmental filings are required in connection with the merger. MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES This discussion is based on the Internal Revenue Code of 1986, as amended (referred to in this discussion as the "Code"), and on Treasury regulations, administrative rulings and court decisions in effect as of the date of this joint proxy statement/prospectus, all of which may change at any time, possibly with retroactive effect. A. TO THE HOLDERS OF NEON SECURITIES The following discussion summarizes the material United States federal income tax consequences of the merger that are generally applicable to holders of NEON common stock, NEON convertible preferred stock, NEON Class A warrants, NEON redeemable preferred stock warrants, and NEON CTA warrants (collectively, "NEON Securities"). This discussion assumes that holders of NEON Securities hold their securities as capital assets within the meaning of Section 1221 of the Code. This discussion does not address all aspects of United States federal income taxation that may be important to a holder of NEON Securities in light of his, her or its particular circumstances or particular tax status, including, without limitation, the following: o holders of securities who are not citizens or residents of the United States; o financial institutions; o tax exempt organizations; 74
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o mutual funds; o pension funds; o insurance companies; o dealers in securities or foreign currency; o holders of securities who acquired their shares in connection with stock option grants or in other compensatory transactions; and o holders of securities who hold their securities as part of a hedge, straddle or conversion transaction. In addition, the following discussion does not address the tax consequences of other transactions effectuated prior to or after the merger, whether or not such transactions are in connection with the merger. Furthermore, neither estate and gift nor foreign, state or local tax considerations are addressed. No ruling has been obtained from the Internal Revenue Service regarding the tax consequences of the merger, and the following discussion is not binding on the Internal Revenue Service. WE URGE HOLDERS OF NEON SECURITIES TO CONSULT THEIR OWN TAX ADVISOR(S) AS TO THE SPECIFIC FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES TO THEM OF THE MERGER AND THEIR RELATED REPORTING OBLIGATIONS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. The merger will constitute a "reorganization" within the meaning of Section 368(a) of the Code, by virtue of Section 368(a)(2)(E) of the Code, with each of Globix, NEON the transitory merger subsidiary of Globix formed for purposes of this transaction ("Merger Corp."), qualifying as a "party to a reorganization" under Section 368(b) of the Code. Qualifying as a "reorganization" within the meaning of Section 368(a) of the Code would result in the following federal income tax consequences, subject to the limitations and qualifications referred to above: Recognition of Gain or Loss --------------------------- o No gain or loss will be recognized by holders of NEON common stock solely with respect to their receipt of Globix common stock in the merger. o The Internal Revenue Service (the "IRS") has ruled that amounts received in a reorganization with respect to accrued dividends, where there has been no declaration to pay the dividends, are treated as part of the reorganization consideration and not as a payment of the accrued dividend (though the reorganization consideration, in whole or in part, may be treated as a dividend under the rules discussed below). Provided that amounts distributed to holders of NEON convertible preferred stock in respect of the accrued dividends that have not been declared are treated as part of the reorganization consideration, no gain or loss will be recognized by holders of NEON convertible preferred stock with respect to their receipt of Globix convertible preferred stock in the merger. However, gain, if any, but not loss, will be recognized with respect to cash received by a holder of NEON convertible preferred stock in the merger, but only to the extent of the lesser of the cash received or the excess of the sum of the cash received and the fair market value of the Globix convertible preferred stock received over the holder's basis in the shares of NEON convertible preferred stock exchanged therefor. 75
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o Gain recognized by a holder of NEON convertible preferred stock, if any, will be capital gain (taxed to individuals at a maximum tax rate of 15% if the shares of NEON convertible preferred stock have been held for more than one year and otherwise at ordinary income tax rates and taxed to corporations at a maximum tax rate of 35%) unless the cash received for NEON convertible preferred stock has the effect of a dividend under the provisions of Sections 356 and 302 of the Code, in which case the gain will be treated as dividend income (taxed to individuals at a maximum rate of 15% in the case of qualifying dividends and to corporations at a maximum tax rate of 35%, though the amount of the dividend to corporate holders may be reduced by a dividends received deduction, as discussed below) to the extent of the holder's ratable share of any earnings and profits, as calculated for federal income tax purposes, and any excess will be capital gain. The receipt of cash generally will not have the effect of a dividend if it is not essentially equivalent to a dividend under Section 302(b)(1) of the Code, which generally requires that there be a meaningful reduction of the interest such holder otherwise would have had in Globix immediately following the merger had part of its convertible preferred stock not been exchanged for cash. The IRS has indicated that any reduction in the interest of a minority shareholder that owns a very small percentage of the shares of a public and widely held corporation will be a meaningful reduction and therefore will not be essentially equivalent to a dividend where the holder exercises no control over corporate affairs. For purposes of determining whether a holder of NEON convertible preferred stock has had a meaningful reduction of its interest as a result of the merger, the constructive ownership rules of Section 318 of the Code apply in comparing such holder's percentage interest in Globix immediately after the merger with the percentage of Globix such holder would have owned if it had received Globix convertible preferred stock in lieu of cash in the merger. Generally, the constructive ownership rules under Section 318 treat a holder as owning (i) shares of stock owned by certain relatives, related corporations, partnership, estates or trusts, and (ii) shares of stock the holder has an option to acquire. As discussed above, a holder's receipt of cash that is treated as essentially equivalent to a dividend up to the amount of the lesser of the cash received or the excess of the sum of the cash received and the fair market value of the Globix convertible preferred stock received over the holder's basis in the shares of NEON convertible preferred stock exchanged therefor, will be taxed as dividend income only to the extent of the holder's ratable share of earnings and profits, calculated under federal income tax rules. It is not clear whether the relevant earnings and profits are only those of NEON or also include the earnings and profits of Globix. NEON and Globix have each tentatively determined that they do not anticipate having earnings and profits. If this proves to be the case, the amount that would otherwise have been treated as dividend income will be capital gain. Until such time as NEON and Globix make such a final determination, there can be no assurance as to whether either or both of them has earnings and profits. A corporate holder of NEON convertible preferred stock may be eligible for a dividends received deduction on any amount treated as a dividend, as discussed above. However, the benefit of the dividends received deduction may be reduced or eliminated by many exceptions to and restrictions on dividends received deductions, including restrictions relating to the holding period of stock, debt-financed portfolio stock, taxpayers that pay the alternative minimum tax and so-called "extraordinary dividends" within the meaning of Section 1059 of the Code. If Section 1059 applies to a corporate holder of NEON convertible preferred stock, the IRS probably would take the position that the basis of the Globix convertible preferred stock received by such holder must be reduced under Section 1059 by the amount of dividend income excluded by such corporate holder as a result of the dividends received deduction, and if the amount of such exclusion exceeds such basis, the excess will be treated as capital gain. 76
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o No gain or loss will be recognized by a holder of NEON Class A warrants with respect to its receipt solely of Globix common stock in the merger. o Capital loss will be recognized by a holder of redeemable preferred stock warrants of NEON upon expiration of such warrants in an amount equal to the holder's cost or other basis for such warrants. Under current law, capital losses are deductible only to the extent of capital gains plus, in the case of a non-corporate taxpayer, ordinary income of up to $3,000 in any year. o No gain or loss will be recognized by a holder of NEON CTA warrants with respect to its receipt solely of Globix CTA warrants in the merger. Basis of Globix Stock Received in the Merger -------------------------------------------- o Except as described above with regard to certain corporate holders of NEON convertible preferred stock, the aggregate tax basis of (i) the Globix common stock received in the merger by a holder of NEON common stock or NEON Class A warrants; (ii) the Globix convertible preferred stock received in the merger by a holder of NEON convertible preferred stock; or (iii) the Globix warrants received in the merger by a holder of NEON CTA warrants will in each case be the same as each such holder's aggregate tax basis in the NEON common stock, Class A warrants, convertible preferred stock or CTA warrants surrendered in exchange therefor, decreased by the amount of cash received and increased by the amount of gain recognized on the exchange (including any portion of such gain that was treated as a dividend). Holding Period -------------- o The holding period for the Globix common stock received in the merger by a holder of NEON common stock or Class A warrants will include the period during which the holder held the NEON common stock or Class A warrants surrendered in exchange therefor. o The holding period for the Globix convertible preferred stock received in the merger by a holder of NEON convertible preferred stock will include the period during which the holder held the NEON convertible preferred stock surrendered in exchange therefor. o The holding period for the Globix CTA warrants received in the merger by a holder of NEON CTA warrants will include the period during which the holder held the NEON CTA warrants surrendered in exchange therefor. Globix Convertible Preferred Stock Redemption Premium ----------------------------------------------------- Under certain circumstances, Section 305 of the Code requires that any excess of the redemption price of preferred stock over its issue price be treated, prior to its receipt, as a constructive distribution. A constructive distribution would be taken into account by the holders of the preferred stock on an economic accrual basis over the period that stock is outstanding and generally would be treated as a taxable dividend to the extent of the issuer's current and accumulated earnings and profits. Although constructive distributions on the Globix convertible preferred stock could be argued to result from the redemption and change of control rights applicable to the stock or from cumulative dividends on the stock that are not paid, and although this issue is not free from doubt, a holder of Globix convertible preferred stock probably would not be treated as receiving constructive distributions under Section 305 with respect to the Globix convertible preferred stock. 77
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Dissenters' Rights ------------------ A dissenting stockholder who perfects dissenters' rights under Delaware law generally will recognize gain or loss with respect to his, her or its shares of NEON Securities equal to the difference between the amount of cash received and the basis in such shares. Such gain or loss generally will be long-term capital gain or loss, provided the shares were held for more than one year prior to disposition. Interest, if any, awarded by a court in an appraisal proceeding would be included in such stockholder's income as ordinary income. Withholding ----------- Under the Code, payment to a holder of NEON Securities may, under certain circumstances, be subject to backup withholding at a 28% rate with respect to the amount of cash, if any, received pursuant to the merger. Any amount withheld under the backup withholding rules is not an additional tax and may be refunded or credited against the holder's federal income tax liability, provided the required information is furnished to the IRS. Successful Challenge by the IRS to the Tax-Free Reorganization Status --------------------------------------------------------------------- of Merger --------- The above summary of certain tax consequences of the merger to holders of NEON Securities is not binding on the IRS and the parties are not requesting a ruling from the IRS in connection with the merger. A successful IRS challenge to the "tax-free reorganization" status of the merger would result in a holder of NEON Securities recognizing gain or loss with respect to the NEON Securities surrendered equal to the difference between the holder's basis in the NEON Securities surrendered and the fair market value, as of the effective time of the merger, of the consideration (including Globix common stock, Globix convertible preferred stock, Globix warrants, and cash) received in exchange for such NEON Securities. In such event, the holder's aggregate basis in the Globix common stock, Globix convertible preferred stock or Globix warrants so received would equal their fair market value and their holding period would begin the day after the merger. B. TO GLOBIX AND NEON Recognition of Gain or Loss --------------------------- Neither Globix, Merger Corp. nor NEON will recognize gain or loss as a result of the merger. Limitation on NEON and Globix Tax Attributes -------------------------------------------- Under Section 382 of the Code, following an "ownership change," special limitations apply to the use by a "loss corporation" of its (i) net operating loss ("NOL") carryforwards arising before the ownership change and (ii) net unrealized built-in losses ("NUBILs") (if such losses existed immediately before the ownership change and exceed a statutory threshold amount) recognized during the five years following the ownership change ((i) and (ii) are referred to collectively as the "Applicable Tax Attributes"). After an ownership change, the amount of the loss corporation's taxable income for each post-change taxable year that may be offset by the Applicable Tax Attributes is limited to the product of the "long-term tax-exempt rate" (published by the IRS for the month of the ownership change) multiplied by the value of the loss corporation's stock (the "Section 382 Limitation"). To the extent that the loss corporation's Section 382 Limitation in a given taxable year exceeds its taxable income for the year, that excess increases the Section 382 Limitation in future taxable years. NEON had NOL carryforwards of approximately $79 million at December 31, 2003. These NOL carryforwards expire through 2023 and are subject to review and possible adjustment by the IRS. As a result of its bankruptcy reorganization in 2002, NEON experienced an ownership change, subjecting approximately $65 million of its NOL carryforwards to a Section 382 Limitation of approximately $6 million per year. 78
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Globix had NOL carryforwards of approximately $173.2 million at September 30, 2004. These NOL carryforwards expire through 2024 and are subject to review and possible adjustment by the IRS. As a result of its bankruptcy reorganization in 2002, Globix experienced an ownership change, subjecting approximately $45 million of its NOL carryforwards and NUBILs (assuming Globix is found to have had NUBILs that exceeded the threshold at the time of its 2002 bankruptcy reorganization) to a Section 382 Limitation. Globix has not yet determined the amount of the Section 382 Limitation or whether its NUBILs exceeded the threshold amount. As a result of the merger, NEON or Globix, or both, may experience another ownership change. Under Section 382, the determination of whether an ownership change has occurred is based on ownership shifts involving persons or groups that are or are deemed to be "5% shareholders." Although NEON and Globix will each be tested for an ownership change, cross-ownership in NEON and Globix may be taken into account in determining whether a change in ownership has occurred as a result of the merger. If the merger results in an ownership change for either NEON or Globix, or both, another Section 382 Limitation will apply to the Applicable Tax Attributes of NEON and/or Globix, as the case may be, including both those that existed at the time of the bankruptcy ownership change and Applicable Tax Attributes that arose thereafter. Only the Section 382 Limitation resulting from the merger, if any, would apply to Applicable Tax Attributes that arose subsequent to NEON's or Globix's bankruptcy reorganization, as the case may be. NEON and Globix have not yet determined whether the merger will result in another ownership change of either of them. Further, whether or not the merger causes an ownership change, NEON or Globix may each experience an ownership change after the merger as a result of future changes in the ownership of their stock that could result in additional Section 382 Limitations. Under regulations governing consolidated returns of affiliated groups, NOL carryforwards of an acquired company or group can be used only to offset the acquired company or group's taxable income, not to offset the taxable income of other members of the acquiring corporation's consolidated group. If, however, the shareholders of the acquired corporation in a merger receive more than 50 percent of the fair market value of the stock of the acquiring corporation (as a result of owning stock in the acquired corporation), the acquired company or group is treated as remaining in existence for purposes of the consolidated return rules (with the acquiring company as the new parent). In that case, the NOL limitation applies to the acquiring corporation, rather than to the acquired corporation. As a result of this rule, NEON's consolidated group will be treated as remaining in existence with Globix as the new parent and Globix's consolidated group will be treated as terminated. The use of Globix's NOL carryforwards will be limited under the above rule, unless Globix experiences a Section 382 ownership change as a result of the merger, in which case Globix's NOL carryforwards will be subject to a Section 382 Limitation but will not be subject to the consolidated group taxable income limitation. APPRAISAL RIGHTS OF DISSENTING STOCKHOLDERS Under Delaware law, the holders of NEON outstanding common stock and convertible preferred stock who comply with the governing statutory provisions are entitled to appraisal rights to receive a judicially determined fair value for their shares instead of the merger consideration. The stockholders of Globix are not entitled to appraisal rights in connection with the merger. If the merger is consummated, a holder of record of NEON stock on the date of making a demand for appraisal, as described below, will be entitled to have those shares appraised by the Delaware Court of Chancery under Section 262 of the Delaware General Corporation Law, or DGCL, and to receive payment for the "fair value" of those shares instead of the consideration provided for in the merger agreement. In order to be eligible to receive this payment, however, a NEON stockholder must (1) continue to hold its shares through the time of the merger, and, as a result, a stockholder who is the record holder of shares of NEON common stock and convertible preferred stock on the date the written demand for appraisal is made, but who thereafter transfers those shares before the effective time of the merger, will lose any right to appraisal in respect of those shares; (2) strictly comply with the procedures discussed under Section 262; and (3) not vote in favor of the merger or consent thereto in writing, and, as a result, a stockholder who submits a proxy and wishes to exercise appraisal rights must vote against the merger agreement or abstain from voting on the merger agreement because a proxy which does not contain voting instructions will, unless revoked, be voted in favor of the merger agreement. This joint proxy statement/prospectus is being sent to all holders of record of NEON common stock and convertible preferred stock on the record date for the NEON special meeting and constitutes 79
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notice of the appraisal rights available to those holders under Section 262. The written demand for appraisal must be in addition to and separate from any proxy or vote. Neither voting (in person or by proxy) against, abstaining from voting or failing to vote on the proposed merger agreement will constitute a written demand for appraisal within the meaning of Section 262. THE STATUTORY RIGHT OF APPRAISAL GRANTED BY SECTION 262 REQUIRES STRICT COMPLIANCE WITH THE PROCEDURES IN SECTION 262. FAILURE TO FOLLOW ANY OF THESE PROCEDURES MAY RESULT IN A TERMINATION OR WAIVER OF DISSENTERS' RIGHTS UNDER SECTION 262. THE FOLLOWING IS A SUMMARY OF THE PRINCIPAL PROVISIONS OF SECTION 262. The following summary is not a complete statement of Section 262 of the DGCL, and is qualified in its entirety by reference to Section 262, which is incorporated herein by reference, together with any amendments to the laws that may be adopted after the date of this joint proxy statement/prospectus. A copy of Section 262 is attached as Appendix C to this joint proxy statement/prospectus. A holder of NEON stock who elects to exercise appraisal rights under Section 262 must deliver a written demand for appraisal of its shares of NEON prior to the vote on the merger. The written demand must reasonably inform NEON of the identity of the holder and that the holder intends to demand the appraisal of the holder's shares. All demands should be delivered to NEON, 2200 West Park Drive, Westborough, Massachusetts, 01581, Attention: Christopher E. Dalton, Esq. Only a holder of shares of NEON stock on the date of making a written demand for appraisal who continuously holds those shares through the time of the merger is entitled to seek appraisal. Simply voting against the approval and adoption of the merger agreement does not constitute a demand for appraisal rights and does not constitute a waiver of appraisal rights. Demand for appraisal must be executed by or for the holder of record, fully and correctly, as that holder's name appears on the holder's stock certificates representing shares of NEON stock, should specify the holder's name and mailing address, the number of shares of NEON common stock and convertible preferred stock owned and that the holder intends to demand appraisal of the holder's shares. If NEON stock is owned of record in a fiduciary capacity by a trustee, guardian or custodian, the demand should be made in that capacity. If NEON stock is owned of record by more than one person, as in a joint tenancy or tenancy in common, the demand should be made by or for all owners of record. An authorized agent, including one or more joint owners, may execute the demand for appraisal for a holder of record; that agent, however, must identify the record owner or owners and expressly disclose in the demand that the agent is acting as agent for the record owner or owners of the shares. A record holder such as a broker who holds shares of NEON stock as a nominee for beneficial owners, some of whom desire to demand appraisal, must exercise appraisal rights on behalf of those beneficial owners with respect to the shares of NEON stock held for those beneficial owners. In that case, the written demand for appraisal should state the number of shares of NEON stock covered by it. Unless a demand for appraisal specifies a number of shares, the demand will be presumed to cover all shares of NEON stock held in the name of the record owner. BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY WITH THE STATUTORY REQUIREMENTS WITH RESPECT TO THE EXERCISE OF APPRAISAL RIGHTS BEFORE THE DATE OF THE NEON SPECIAL MEETING. Within 10 days after the merger, the surviving or resulting corporation is required to send notice of the effectiveness of the merger to each stockholder who prior to the time of the merger complies with the requirements of Section 262 and has delivered notice of intent to demand appraisal. 80
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Within 120 days after the merger, the surviving corporation or any stockholder who has complied with the requirement of Section 262 may file a petition in the Delaware Court of Chancery demanding a determination of the fair value of the shares of NEON stock held by all stockholders seeking appraisal. If no petition is filed by either the surviving corporation or any dissenting stockholder within the 120-day period, the rights of all dissenting stockholders to appraisal will cease. Stockholders seeking to exercise appraisal rights should not assume that the surviving corporation will file a petition with respect to the appraisal of the fair value of their shares or that the surviving corporation will initiate any negotiations with respect to the fair value of those shares. The surviving corporation is under no obligation to and has no present intention to take any action in this regard. Accordingly, stockholders who wish to seek appraisal of their shares should initiate all necessary action with respect to the perfection of their appraisal rights within the time periods and in the manner prescribed in Section 262. FAILURE TO FILE THE PETITION ON A TIMELY BASIS WILL CAUSE THE STOCKHOLDER'S RIGHT TO AN APPRAISAL TO CEASE. A stockholder timely filing a petition for appraisal with the Delaware Court of Chancery must deliver a copy to the surviving corporation, which will then be obligated within 20 days to provide the Register in Chancery with a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving corporation. After notice to those stockholders, the Delaware Court of Chancery may conduct a hearing on the petition to determine which stockholders have become entitled to appraisal rights. The Court of Chancery may require stockholders who have demanded an appraisal of their shares and who hold stock represented by certificates to submit their certificates to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings. If any stockholder fails to comply with such requirement, the Delaware Court of Chancery may dismiss the proceedings as to that stockholder. Within 120 days after the time of the merger, any stockholder who has complied with subsections (a) and (d) of Section 262 is entitled, upon written request, to receive from the surviving corporation a statement setting forth the total number of shares of NEON stock not voted in favor of the merger with respect to which demands for appraisal have been received by NEON and the number of holders of those shares. The statement must be mailed within 10 days after NEON has received the written request or within 10 days after the time for delivery of demands for appraisal under subsection (d) of Section 262 has expired, whichever is later. If a petition for an appraisal is filed in a timely manner, at the hearing on the petition, the Delaware Court of Chancery will determine which stockholders are entitled to appraisal rights and will appraise the shares of NEON stock owned by those stockholders. The court will determine the fair value of those shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, together with a fair rate of interest, to be paid, if any, upon the fair value. Stockholders who consider seeking appraisal should consider that the fair value of their shares under Section 262 could be more than, the same as, or less than, the value of the consideration provided for in the merger agreement without the exercise of appraisal rights. The Court of Chancery may determine the cost of the appraisal proceeding and assess it against the parties as the Court deems equitable. Upon application of a dissenting stockholder, the Court may order that all or a portion of the expenses incurred by any dissenting stockholder in connection with the appraisal proceeding (including, without limitation, reasonable attorney's fees and the fees and expenses of experts) be charged pro rata against the value of all shares of NEON stock entitled to appraisal. In the absence of a court determination or assessment, each party bears its own expenses. Final decisions by the Court of Chancery in appraisal proceedings are subject to appeal to the Delaware Supreme Court. Any stockholder who has demanded appraisal in compliance with Section 262 will not, after the merger, be entitled to vote such stock for any purpose or receive payment of dividends or other distributions, if any, on the NEON stock, except for dividends or distributions, if any, payable to stockholders of record at a date prior to the merger. 81
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A stockholder may withdraw a demand for appraisal and accept the Globix common stock and/or preferred stock and cash, as applicable, at any time within 60 days after the merger by delivering to NEON a written withdrawal of the stockholder's demand for appraisal. If an appraisal proceeding is properly instituted, it may not be dismissed as to any stockholder without the approval of the Delaware Court of Chancery, and any such approval may be conditioned on the Court of Chancery's deeming the terms to be just. If, after the merger, a holder of NEON stock who had demanded appraisal for its shares fails to perfect or loses its right to appraisal, those shares will be treated under the merger agreement as if they were converted into Globix common stock and/or preferred stock at the time of the merger. IN VIEW OF THE COMPLEXITY OF THESE PROVISIONS OF THE DELAWARE CORPORATE LAW, ANY NEON STOCKHOLDER WHO IS CONSIDERING EXERCISING APPRAISAL RIGHTS SHOULD CONSULT A LEGAL ADVISOR. 82
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TERMS OF THE MERGER AGREEMENT AND RELATED TRANSACTIONS THE MERGER AGREEMENT THE FOLLOWING IS A BRIEF SUMMARY OF THE MATERIAL PROVISIONS OF THE MERGER AGREEMENT AS AMENDED BY THE FIRST AMENDMENT TO THE MERGER AGREEMENT, COPIES OF WHICH ARE ATTACHED AS APPENDICES A-1 AND A-2, RESPECTIVELY, TO THIS JOINT PROXY STATEMENT/PROSPECTUS AND INCORPORATED HEREIN BY REFERENCE. STOCKHOLDERS OF NEON AND GLOBIX ARE URGED TO READ THE MERGER AGREEMENT IN ITS ENTIRETY FOR A MORE COMPLETE DESCRIPTION OF THE MERGER. IN THE EVENT OF ANY DISCREPANCY BETWEEN THE TERMS OF THE MERGER AGREEMENT AND THE FOLLOWING SUMMARY, THE MERGER AGREEMENT WILL CONTROL. THE MERGER Following the approval of the merger and adoption of the merger agreement by the stockholders of NEON and the approval of the issuance of Globix common stock in connection of the merger by the stockholders of Globix and the satisfaction or waiver of the other conditions to the merger set forth in the merger agreement, Cornerstone Merger Corp., a wholly owned subsidiary of Globix, will merge with and into NEON, with NEON continuing as the surviving corporation under the name "NEON Communications, Inc." and as a wholly owned subsidiary of Globix. THE EFFECTIVE TIME At the closing of the merger, the parties will cause the merger to become effective by filing a certificate of merger with the Delaware Secretary of State. The parties anticipate that the closing of the merger will occur in the first quarter of calendar 2005 but cannot assure you as to the exact timing. DIRECTORS AND OFFICERS OF NEON AFTER THE MERGER At the effective time of the merger, the directors of NEON before the merger will remain the directors of NEON, and the officers of NEON before the merger will remain officers of NEON. CONVERSION OF SHARES IN THE MERGER Upon completion of the merger: o each outstanding share of NEON common stock, other than shares held in treasury, will be converted into, and will have the right to receive, 1.2748 shares of Globix common stock (the "exchange ratio"); o all accrued and unpaid dividends on the NEON convertible preferred stock through the closing date of the merger shall be treated as if paid in shares of NEON convertible preferred stock based on the liquidation preference of $11.25 per share of NEON convertible preferred stock and each outstanding share of NEON convertible preferred stock, other than shares held in treasury or held by Globix but including the shares treated as issued with respect to accrued but unpaid dividends, will be converted into, and will have the right to receive, $3.75 in cash and 2.08333 shares of Globix convertible preferred stock with the terms described in the section entitled "Description of Globix Capital Stock - Description of Preferred Stock," beginning on page 128 of this joint proxy statement/prospectus. A copy of the certificate of designation for the Globix convertible preferred stock is included as an exhibit to the first amendment to the merger agreement which is attached as Appendix A-2 to this joint proxy statement/prospectus; o each outstanding Class A warrant of NEON issued under the Class A warrant agreement dated as of December 23, 2002 between NEON and American Stock Transfer & Trust Company, as warrant agent, will be exercised immediately prior to the merger or will be converted into, and will have the right to receive, 1.2748 shares of Globix common stock; 83
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o each outstanding redeemable preferred stock warrant of NEON issued under the redeemable preferred stock warrant agreement dated as of December 23, 2002 between NEON and American Stock Transfer & Trust Company, as warrant agent, will expire at the effective time of the merger and the holders of the expired warrants will not have any rights to receive payments with respect to those warrants; and o each outstanding NEON CTA warrant will be converted into, and will have the right to receive, a Globix warrant with substantially the terms described in the section entitled "Description of Globix Capital Stock - Description of Globix Warrants," beginning on page 124 of this joint proxy statement/prospectus, representing the right to acquire a number of shares of Globix common stock that equals the number of shares of NEON common stock for which such warrant was exercisable multiplied by the exchange ratio, at a purchase price equal to the purchase price per share of NEON common stock subject to such warrant divided by the exchange ratio. For a description of the differences between the rights of the holders of Globix capital stock and holders of NEON capital stock, see "Comparison of Stockholders Rights" beginning on page 179 of this joint proxy statement/prospectus. TREATMENT OF NEON OPTIONS At the effective time of the merger, each option to acquire NEON common stock that was granted under NEON's stock plans or otherwise granted by NEON and that is outstanding and unexercised immediately prior to the effective time of the merger will be modified and become an option to purchase Globix common stock. In each case, the number of shares of Globix common stock subject to the modified stock option will be equal to the number of shares of NEON common stock subject to the NEON stock option, assuming full vesting, multiplied by the exchange ratio (and rounding any fractional share to the nearest whole share) and the exercise price per share of Globix common stock will be equal to the exercise price per share of NEON common stock subject to the NEON stock option divided by the exchange ratio. The duration and other terms of each such modified NEON stock option, including the vesting schedule, will be the same as the prior NEON stock option. It is the intention of Globix and NEON that each NEON stock option that qualifies before the merger as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended, will, to the extent permitted by applicable law, continue to qualify as an incentive stock option. See "The Merger -- Interests of NEON's Directors, Officers and Significant Stockholders in the Merger" beginning on page 71 of this joint proxy statement/prospectus for a discussion of the treatment of the acceleration of vesting schedules of executive officers pursuant to the merger. TAX TREATMENT OF NEON OPTION HOLDERS Neither the merger nor the modification of NEON options and the NEON option plan will be taxable to holders of NEON options. It is anticipated that NEON will amend the NEON option plan to provide for the issuance of Globix common stock upon exercise of outstanding options granted under the NEON option plan. Provided that all the requirements of Treasury Regulations section 1.424-1 are met, it is the intention of Globix and NEON that each NEON option that qualified before the merger as an "incentive stock option" under Section 422 of the Internal Revenue Code of 1986, as amended, will continue to qualify as an incentive stock option after the merger and after the amendment of the NEON option plan to provide for the issuance of Globix common stock upon exercise of options previously granted under the NEON option plan. If Globix, as the sole shareholder of NEON, timely approves the amendment of the NEON option plan in accordance with Treasury Regulations section 1.424-1, additional incentive stock options for the issuance of Globix stock may be issued under the NEON option plan. The accelerated vesting of options held by certain NEON employees as a result of the merger will not be an excess parachute payment to such employees and will not result in the recognition of income by, or imposition of an excise tax on, such employees or the disallowance of a deduction by NEON. 84
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THE EXCHANGE AGENT Globix will authorize a bank, trust company or such other person that is reasonably acceptable to Globix and NEON to act as exchange agent in the merger. Promptly after the merger, Globix will deposit with the exchange agent shares of Globix common stock, Globix convertible preferred stock and cash (the "merger consideration") to be paid in exchange for the NEON common stock, NEON convertible preferred stock and NEON Class A warrants. PROCEDURES FOR EXCHANGING STOCK AND WARRANT CERTIFICATES Within five days after the effective time of the merger, the exchange agent will mail to the holders of record of NEON capital stock and NEON Class A warrants a letter of transmittal and instructions on how to surrender their NEON stock certificates or warrant certificates, as the case may be, in exchange for the merger consideration. HOLDERS OF NEON CAPITAL STOCK AND CLASS A WARRANTS SHOULD NOT SURRENDER THEIR NEON STOCK CERTIFICATES OR WARRANT CERTIFICATES UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FROM THE EXCHANGE AGENT. Upon surrendering their NEON stock certificates or warrant certificates, the letter of transmittal and any other documents required by the exchange agent, the holders of NEON stock certificates or warrant certificates will be entitled to a certificate representing that number of shares of Globix common stock, or Globix convertible preferred stock and cash, as the case may be, to which the holder is entitled. Until surrendered to the exchange agent, outstanding NEON stock certificates and Class A warrant certificates will be deemed from and after the effective time of the merger to evidence only the ownership of the number of full shares of Globix common stock, or Globix convertible preferred stock and cash, into which their NEON securities were converted at the effective time and any dividends and other distributions, as applicable. DIVIDENDS WITH RESPECT TO UNEXCHANGED SHARES Until each NEON stockholder surrenders his or her NEON stock certificate or warrant certificate in exchange for a Globix stock certificate, that stockholder will not receive any dividends or other distributions declared or made by Globix after the effective time of the merger, if any. However, once that stockholder surrenders his or her NEON stock certificate or warrant certificate to the exchange agent, he or she will receive (i) a Globix stock certificate, (ii) cash with respect to NEON convertible preferred stock exchanged and (iii) at the appropriate payment date with respect to such dividends, the amount of any dividends or other distributions with a record date after the effective time of the merger, if any. NO FRACTIONAL SHARES No fractional shares of Globix common stock or Globix convertible preferred stock will be issued in connection with the merger. Instead, the aggregate of all converted shares issued to each NEON stockholder will be rounded up to the nearest whole share. RETURN OF EXCHANGE FUND Any shares of Globix capital stock and cash that the exchange agent has not distributed six months after the effective time of the merger will be delivered to Globix upon demand. Certificates representing NEON capital stock and Class A warrants must thereafter be surrendered for exchange to Globix. None of Globix, NEON or the exchange agent will be liable for any shares of Globix capital stock, dividends or distributions with respect thereto, or cash delivered to a public official pursuant to any abandoned property, escheat or similar laws. LOST, STOLEN OR DESTROYED STOCK CERTIFICATES If a certificate representing NEON capital stock or warrants is lost, stolen or destroyed, the exchange agent will issue the applicable merger consideration in exchange for the certificate only upon the making of an affidavit of such loss, theft or destruction by the claimant, and, if required by Globix or the exchange agent, the posting of a bond as indemnity against any claim that may be made against Globix or the exchange agent with respect to such certificate. 85
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REPRESENTATIONS AND WARRANTIES In the merger agreement, each of NEON and Globix has made a number of representations and warranties to the other with respect to it and its subsidiaries, where applicable, that relate to a number of matters, including: o its incorporation, good standing and qualification to do business; o its power and authority to own, lease and operate its properties and to carry on its business; o its certificate of incorporation and bylaws; o its capitalization; o its authority to enter into the merger agreement; o the effect of the merger, or entering into the merger agreement, on its outstanding obligations; o required consents, waivers and approvals; o regulatory approvals required to complete the merger; o with respect to Globix, its filings and reports with the SEC; o its financial statements and liabilities; o changes in its business since the date of its more recent audited balance sheet (September 30, 2003 for Globix and December 31, 2003 for NEON); o the completeness and accuracy of information being supplied for inclusion in this joint proxy statement/prospectus and the related registration statement; o vote required with respect to the merger; o title to and operation of the assets and properties it owns and leases; o the receipt of an opinion from its financial advisor that the exchange ratio is fair, from a financial point of view, to its common stockholders; o identification of transactions with certain related parties; o litigation with respect to the corporation or its subsidiaries; o its intellectual property, the other intellectual property that it uses and infringement of other intellectual property; o its compliance with applicable laws; o permits required to conduct its business and compliance with those permits; o accounts receivable and warranties; o customers and suppliers; o unlawful business practices; o its taxes; o its employee benefit plans; o its hazardous material activities and environmental liabilities; o its agreements, contracts and commitments; o brokers' and finders' fees in connection with the merger; and o its insurance. 86
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The representations and warranties in the merger agreement are complicated and are not easily summarized. Globix and NEON urge you to read carefully the articles in the merger agreement entitled "Representations and Warranties of NEON" and "Representations and Warranties of Globix." CONDUCT OF BUSINESS OF NEON AND GLOBIX PENDING THE MERGER Each of NEON and Globix has agreed that until the closing of the merger (or the merger agreement terminates), or unless the other party to the merger agreement consents in writing or as required by law, it and its subsidiaries will conduct their respective businesses in the usual, regular and ordinary course in all material respects, in substantially the same manner in which it was conducted prior to July 19, 2004, and not enter into any new material line of business. Each of NEON and Globix further agrees to discharge or satisfy claims, liabilities or obligations only in the usual, regular and ordinary course of business. Each of NEON and Globix has also agreed to use all commercially reasonable efforts to: o carry on and preserve its present lines of business; o maintain their rights and franchises; and o maintain its relationships with customers, suppliers and others with which it has business dealings. In addition, until the closing of the merger (or the merger agreement terminates), or unless the other party to the merger agreement consents in writing, each of NEON and Globix has agreed not to: o declare or pay dividends or make other distributions in respect to any of its capital stock, except for dividends by subsidiaries of NEON or Globix, as the case may be, to such corporation or other subsidiaries thereof and except for accruals of dividends on the NEON convertible preferred stock; o effect any stock splits, combinations or recapitalizations with respect to its capital stock; o repurchase or redeem shares of its capital stock, except repurchases of shares in connection with its stock option plans consistent with past practices; o issue or authorize the issuance of any securities convertible into or exercisable for its capital stock (including indebtedness with voting rights), other than issuances of capital stock upon exercise of outstanding options or warrants; issuances by a wholly owned subsidiary of capital stock to NEON or Globix, as the case may be, or to another wholly owned subsidiary of such company; the issuance of 341,936 shares of NEON common stock to Mode 1 Communications, Inc. or any exchange of outstanding 11% senior notes of Globix for shares of Globix common stock in one or more private transactions, after NEON and Globix shall have negotiated in good faith any modifications to the merger agreement required by such exchange; o amend its charter or bylaws or the charter or bylaws of any of its subsidiaries; o acquire or agree to acquire, by merging or consolidating with, acquiring a substantial portion of the assets of or making a substantial equity investment in, other entities; o sell, lease, encumber or otherwise dispose of property or assets (including capital stock of its subsidiaries) that are material to its business, other than internal reorganizations or consolidations involving existing subsidiaries; sales or encumbrances in the ordinary course of business, liens for current property taxes and other governmental changes not yet due or delinquent and being contested in good faith and with adequate reserves; statutory liens of landlord or mechanics in the ordinary course; equipment leases and purchase money security interests; 87
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o make any loans to or investments in any other person other than loans to subsidiaries or financing transactions in the ordinary course of business; o incur or guarantee indebtedness, issue or sell any debt securities or rights to such debt securities, or engage in any asset securitization transaction, except in each case in the ordinary course of business consistent with past practice or under existing credit facilities or intercompany indebtedness; o materially change its method of accounting, except as required by generally accepted accounting principles in the United States; change its fiscal year; make or revoke any election relating to taxes; settle or compromise any material tax liability; or change any material aspects of its method of accounting for tax purposes; o adopt, amend or terminate any employee benefit plan, consulting agreement or any other employee benefit fund, award or arrangement for the benefit of any director, officer or employee of such corporation or any of its subsidiaries, other than in the ordinary course of business consistent with past practice or to the extent not material; o increase compensation, benefits (including severance) or bonuses to any employee, officer, director or consultant, other than annual increases in salary to current non-officer employees granted in the ordinary course of business consistent with past practice; o enter into, amend or terminate any change of control, retention or severance agreement for the benefit of any director, officer or employee of the corporation or its subsidiaries; o adopt a plan of liquidation, dissolution or other reorganization (other than the merger) or alter the corporate structure or ownership of any of its subsidiaries; o enter into, renew or modify any contract with respect to which the aggregate annual payments to it or from it to a third party are expected to exceed $500,000, except in the ordinary course of business consistent with past practice; or o enter into any agreement, commitment or arrangement to take any of the prohibited actions listed above. The agreements related to the conduct of each of NEON's and Globix's business in the merger agreement are complicated and not easily summarized. We urge you to read the section in the merger agreement entitled "Covenants Relating to Conduct of Business" carefully. Notwithstanding the covenants described above, the merger agreement provides that each party to the agreement shall exercise complete control and supervision over its and its subsidiaries' operations pending the merger, consistent with the terms of the merger agreement. The parties have formed a transition committee comprised of senior personnel of both parties to develop transition plans for the post-closing period. Each party has also agreed to use commercially reasonable efforts to manage its business so that, assuming a September 30, 2004 merger, NEON would have approximately $7 million of unrestricted cash on a consolidated basis (including cash, if any, used to redeem NEON convertible preferred stock) and Globix would have approximately $18 million of unrestricted cash on a consolidated basis, in each case immediately prior to the merger. ADDITIONAL AGREEMENTS OF GLOBIX AND NEON Pursuant to the merger agreement, Globix and NEON have also agreed to use commercially reasonable efforts to take all necessary, proper or appropriate actions to consummate the transactions contemplated by the merger agreement. In particular, Globix and NEON agreed to file a pre-merger notification and report form under the HSR Act, which was filed on August 13, 2004 and the HSR Act waiting period was terminated on August 20, 2004. 88
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Each of Globix and NEON has agreed to use its reasonable best efforts to have the S-4 registration statement of which this joint proxy statement/prospectus forms a part declared effective by the SEC. In accordance with its certificate of incorporation and bylaws, NEON will take all action necessary to convene a meeting or meetings of the holders of NEON stock, to be held as promptly as practicable after the S-4 registration statement is declared effective. Subject to the fiduciary duty exception described below, the NEON board of directors: o will recommend approval of the merger, the amendment to the certificate of incorporation and the amendment to the certificate of designation by its stockholders; o will not withdraw or modify its recommendation; and o will take all lawful action to solicit stockholder approval as promptly as possible. In accordance with its certificate of incorporation and bylaws, Globix will take all action necessary to convene a meeting or meetings of the holders of Globix common stock, to be held as promptly as practicable after the S-4 registration statement is declared effective. Subject to the fiduciary duty exception described below, the Globix board of directors: o will recommend approval of the issuance of Globix's common stock in the merger; o will not withdraw or modify its recommendation; and o will take all lawful action to solicit stockholder approval as promptly as possible. The merger agreement does not preclude either NEON or Globix from, prior to the receipt of the requisite stockholder approval, providing information to or entering into negotiations with, a third party with respect to an alternative acquisition proposal if the board of directors of NEON or Globix, as applicable, concludes in good faith that it is required to do so under applicable law. Further, if the board of directors of NEON or Globix, as applicable, concludes in good faith that it is required to do so under applicable law and has either entered into, or resolved to enter into, an agreement (or agreement in principle) to effect a competing acquisition or other business combination proposal, it may withdraw, modify or change its recommendations to its stockholders in order to comply with its fiduciary duties. Unless the merger agreement is terminated, each of the NEON board of directors and the Globix board of directors is obligated to convene its respective stockholder meeting whether or not it continues to recommend the merger or the common stock issuance in the merger, as applicable. DIRECTORS' AND OFFICERS' INDEMNIFICATION Globix has agreed and shall cause NEON as the surviving subsidiary in the merger to agree, to fulfill and honor in all respects the indemnification obligations of NEON to its present and former officers and directors pursuant to the indemnification provisions of NEON's and its subsidiaries' certificate of incorporation, bylaws and other charter documents arising out of or pertaining to matters existing or occurring with respect to NEON or any of its subsidiaries prior to or at the effective time of the merger. The merger agreement provides that Globix shall cause NEON to maintain directors' and officers' liability insurance and fiduciary liability insurance with respect to claims arising from facts or events occurring on or before the effective date of the merger for a period of at least five years from the date of the completion of the merger. 89
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FINANCIAL DUE DILIGENCE Before mailing of this joint proxy statement/prospectus, the accountants for Globix and NEON completed a limited financial due diligence review of the other party to the merger agreement and prepared a report to be presented for review by the board of directors and special committee of each of Globix and NEON. Each party was obligated to notify the other party by September 15, 2004 of any issues arising as a result of such financial due diligence. No such notifications were provided. CONDITIONS PRECEDENT TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER The following conditions must be satisfied before the merger can become effective: o holders of NEON capital stock must have approved the merger, the merger agreement and the transactions contemplated by the merger agreement, and the amendment to the NEON certificate of incorporation and to the certificate of designation; o no court or governmental entity shall have enacted, issued, promulgated, enforced or entered, or instituted a proceeding to do so, any law, statute, ordinance, rule, regulation, judgment, decree, injunction or other order that is in effect and that restrains, enjoins or otherwise prohibits consummation of the merger; o holders of Globix capital stock must have approved the issuance of Globix common stock in connection with the merger; o all applicable waiting periods under the HSR Act have expired or been terminated; o Globix and NEON have obtained all authorizations, consents, orders, declarations or approvals of, or filings with, any governmental authority required in connection with the merger, which the failure to obtain, make or occur would have the effect of restraining or prohibiting the merger or any of the transactions contemplated or would have a material adverse effect on Globix, assuming the merger had taken place; o the S-4 registration statement of which this joint proxy statement/prospectus forms a part must have become effective under the Securities Act of 1933, all necessary blue sky or state securities or other authorizations shall have been received, and there must be no stop order or threat of proceedings by the SEC to suspend the effectiveness of the S-4 registration statement; and o the number of shares of NEON common stock that are dissenting shares shall be no greater than 15% of the outstanding NEON common stock and the number of shares of NEON convertible preferred stock that are dissenting shares shall be no greater than 15% of the outstanding NEON convertible preferred stock. CONDITIONS PRECEDENT TO GLOBIX'S OBLIGATIONS Globix's obligations to effect the merger are subject to the fulfillment or satisfaction, prior to or on the closing date of the merger, of each of the following conditions: o each of NEON's representations and warranties contained in the merger agreement must be true and correct in all material respects as of the closing, other than representations and warranties that expressly relate to an earlier date (in which case such representations and warranties must be true as of such earlier date); o NEON shall have performed and complied in all material respects with all agreements to be performed prior to or on the closing date; 90
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o Globix shall have received a favorable legal opinion dated as of the closing date from its counsel that the merger constitutes a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; o there shall not have been any changes, circumstances or effects which, individually or in the aggregate, have had or could reasonably be expected to have a material adverse effect on NEON and its subsidiaries taken as a whole; o there shall not be any litigation pending or threatened which could reasonably be expected to prohibit the merger, impose limitations on Globix's ownership or operations of NEON after the merger or compel Globix or any of its affiliates to dispose of or hold separate any portion of the business of NEON or any of NEON's subsidiaries; o NEON and each subsidiary shall have entered into a subsidiary guaranty and security agreement with respect to the indenture dated as of April 23, 2002 among Globix, certain of its subsidiaries and HSBC Bank USA, as trustee; o Globix shall have received a Foreign Investment Real Property Tax Act certificate that neither NEON nor any office or subsidiary is a US real property holding corporation; o NEON or the applicable subsidiary shall have received all consents or waivers in order to avoid the occurrence, as a result of the merger, of loss or substantial diminution in value of any material contract to which NEON or a subsidiary is a party or any permit applicable to NEON or a subsidiary; and o the holders of 90% or more of the NEON Class A warrants shall have exercised their Class A warrants and the Class A warrant agreement shall have been amended to provide for the conversion of NEON Class A warrants into shares of Globix common stock. CONDITIONS PRECEDENT TO NEON'S OBLIGATIONS NEON's obligations to effect the merger are subject to the satisfaction of the following conditions prior to the closing date of the merger: o each of Globix's representations and warranties contained in the merger agreement must be true and correct in all material respects as of the closing, other than representations and warranties that expressly relate to an earlier date (in which case such representations and warranties must be true as of such earlier date); o Globix shall have performed and complied in all material respects with all agreements to be performed prior to or on the closing date; o NEON shall have received a favorable legal opinion dated as of the closing date from its counsel that the merger constitutes a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended; o there shall not have been any changes, circumstances or effects which, individually or in the aggregate, have had or could reasonably be expected to have a material adverse effect on Globix and its subsidiaries taken as a whole; o there shall not be any litigation pending or threatened which could reasonably be expected to prohibit the merger, impose limitations on Globix's ownership or operations of NEON after the merger or compel Globix or any of its affiliates to dispose of or hold separate any portion of the business of NEON or any of NEON's subsidiaries; 91
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o Globix or the applicable subsidiary shall have received all consents or waivers in order to avoid the occurrence, as a result of the merger, of loss or substantial diminution in value of any material contract to which Globix or a subsidiary is a party or any permit applicable to Globix or a subsidiary; and o Globix shall have acquired 11% senior notes in an amount equal to $12,500,000, including principal and accrued interest, in exchange for shares of Globix common stock valued at $2.75 per share. TERMINATION OF THE MERGER AGREEMENT The merger agreement may be terminated, and the merger may be abandoned at any time prior to the closing date, whether before or after stockholder approval: o by the mutual written agreement of Globix and NEON; o by Globix or NEON if: * the closing date has not occurred within 150 days after the expiration or termination of the waiting period applicable to the merger under the HSR Act, except that the right to terminate the merger agreement is not available to any party who has caused the delay in the closing date by failing to fulfill its obligations under the merger agreement; * any court or other governmental authority of competent jurisdiction issues an order or takes any other final and non-appealable action restraining, enjoining or otherwise prohibiting the merger, except that the right to terminate the merger agreement is not available to any party whose failure to fulfill its obligations under the merger agreement has been the cause of the issuance of such order; * the other party shall have failed to comply in any material respect with any of its covenants or agreements contained in the merger agreement required to be complied with prior to the date of such termination, which failure to comply has not been cured within five business days following receipt by such other party of written notice of such failure to comply; * the holders of NEON common stock and NEON convertible preferred stock do not approve the merger, the amendment to the NEON certificate of incorporation or the amendment to the NEON certificate of designation; * the holders of Globix common stock do not approve the issuance of Globix common stock in the merger; or * shares of NEON common stock representing greater than 15% of the outstanding NEON common stock or shares of NEON convertible preferred stock representing greater than 15% of the outstanding NEON convertible preferred stock, each as of the record date, dissent from the merger. o by NEON if: * the board of directors of Globix shall not have recommended or shall have resolved not to recommend, or shall have qualified, changed, modified or withdrawn its recommendation of the issuance of Globix common stock in the merger to its stockholders, or shall have resolved to do so; * the board of directors of Globix shall have recommended to the stockholders of Globix any transaction involving the acquisition of all or substantially all of Globix's business other than the merger or shall have resolved to do so; * there has been a breach of a representation or warranty of Globix that gives rise to a failure of the fulfillment of a condition of NEON's obligations to effect the merger, which breach has not been cured within five business days following receipt by Globix of written notice of the breach; 92
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* there shall have been any changes, circumstances or effects which, individually or in the aggregate, have had or could reasonably be expected to have a material adverse effect on Globix and its subsidiaries, taken as a whole; * on or prior to September 15, 2004, NEON shall have notified Globix in writing that the results of the review by NEON of the financial due diligence report by the auditors of NEON provided to the board of directors of NEON are not satisfactory and reflect a material adverse effect with respect to Globix and its subsidiaries, taken as a whole, as determined in good faith by the special committee of the board of directors of NEON, after a full discussion with Globix of all issues raised in such review; or * the board of directors of NEON has approved a merger, acquisition or other agreement (including an agreement in principle) to effect a competing acquisition or business combination proposal. o by Globix if: * the board of directors of NEON shall not have recommended, or shall have resolved not to recommend, or shall have qualified, changed, modified or withdrawn its recommendation of the merger to its stockholders, or shall have resolved to do so; * the board of directors of NEON shall have recommended to the stockholders of NEON any transaction involving the acquisition of all or substantially all of NEON's business other than the merger, or shall have resolved to do so; * there has been a breach of a representation or warranty of NEON that gives rise to a failure of the fulfillment of a condition of Globix's obligations to effect the merger, which breach has not cured within five business days following receipt by NEON of written notice of the breach; * there shall have been any changes, circumstances or effects which, individually or in the aggregate, have had or could reasonably be expected to have a material adverse effect with respect to NEON and its subsidiaries, taken as a whole; * on or prior to September 15, 2004, Globix shall have notified NEON in writing that the results of the review by Globix of the financial due diligence report by the auditors of Globix provided to the board of directors of Globix are not satisfactory and reflect a material adverse effect with respect to NEON and its subsidiaries, taken as a whole, as determined in good faith by the special committee of the board of directors of Globix, after a full discussion with NEON of all the issues raised in the review; or * the board of directors of Globix has approved a merger, acquisition or other agreement (including an agreement in principle) to effect a competing acquisition or other business combination proposal. EFFECTS OF TERMINATION; PAYMENT OF EXPENSES If the merger agreement is terminated for any of the reasons specified above, all provisions of the merger agreement shall terminate, except that each party shall continue to be bound by confidentiality obligations set forth in the merger agreement, shall be bound to cover its expenses of the merger described below and shall be liable for any fraud or willful breach of a covenant contained in the merger agreement. If the merger agreement is not consummated, all associated costs and expenses, including fees and disbursements of counsel, financial advisors and accountants, shall be paid by the party incurring the costs, except that printing expenses and filing fees under the Securities Act of 1933, the Securities Exchange Act of 1934, applicable Blue Sky regulations and the HSR Act will be shared equally by Globix and NEON. 93
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If the merger is consummated, Globix and the surviving subsidiary will pay all costs and expenses incurred in connection with the merger and the transactions contemplated by the merger. WAIVER AND AMENDMENT OF THE MERGER AGREEMENT At any time prior to the effective time of the merger, Globix and NEON may agree in writing to: o extend the time for the performance of any obligation or other act required to be performed under the merger agreement; o waive any inaccuracies in the representations and warranties contained in the merger agreement or in any document delivered pursuant to the merger agreement; o waive compliance with any of the agreements or conditions contained in the merger agreement; or o amend the merger agreement. RESTRICTIONS ON RESALES BY AFFILIATES The shares of Globix common stock and convertible preferred stock to be issued to NEON stockholders in the merger have been registered under the Securities Act of 1933. These shares may be traded freely and without restriction by those stockholders not deemed to be "affiliates" of NEON as that term is defined under the Securities Act of 1933. An affiliate of a corporation, as defined by the rules promulgated under the Securities Act of 1933, is a person who directly or indirectly, through one or more intermediaries, controls, is controlled by, or is under common control with, that corporation. Any transfer by an affiliate of NEON must be one permitted by the resale provisions of Rule 145 promulgated under the Securities Act of 1933. If a NEON affiliate becomes an affiliate of Globix, any transfer must be permitted by the resale provisions of Rule 144 promulgated under the Securities Act of 1933 or otherwise permitted under the Securities Act of 1933. SOLICITATION OF CLASS A WARRANTHOLDERS As one of the conditions to Globix's obligation to consummate the merger, and as required by the merger agreement, NEON must solicit the consent of the holders of at least ninety percent (90%) of the Class A warrants to exercise their respective Class A warrants prior to or as of the effective time of the merger. Additionally, NEON is required to solicit the consent of at least a majority of the holders of the Class A warrants to amend the warrant agreement pursuant to which the Class A warrants are issued to provide that upon a merger of NEON the Class A warrant holders may receive the same type of consideration as the holders of NEON common stock immediately prior to such merger. Messrs. Lampe and Grubin, currently directors of NEON, collectively, indirectly beneficially own approximately 20% of the issued and outstanding Class A warrants. Each of Messrs. Lampe and Grubin has provided notice to NEON that their respective affiliates intend to exercise their respective Class A warrants prior to or as of the effective date of the merger. DEBT-FOR-EQUITY EXCHANGE NEON's obligations to effect the merger are conditioned in part upon Globix completing a number of private debt-for-equity exchange transactions with some existing debt holders in which Globix will exchange certain of its 11% senior notes in an aggregate amount of $12,500,000 in principal and accrued interest in return for issuing approximately 4,545,455 shares of Globix common stock at a price per share of $2.75, the approximate trading price of the Globix common stock at the time the parties reached an agreement on the overall amount of the exchange. Globix has entered into securities exchange agreements with York Capital Management (an affiliate of JGD Management Corp.), MacKay Shields LLC, LC Capital Master Fund Ltd., Goldman Sachs & Co., the Singer Children's Management Trust, one of the Singer Trusts, an individual investor and Cypress Management Partnership in order to effect the debt-for-equity exchange. Each of the exchanging debt holders, except for Cypress Management Partnership and the individual investor, is itself or is affiliated with a holder of 5% or more of the Globix common stock. Each of the exchanging holders, other than Goldman Sachs & Co., Lloyd Miller and Cypress Management Partnership has a significant interest in NEON or is affiliated with a holder of a significant interest in NEON. Mr. Singer, who is the non-executive chairman of the board of directors of Globix, is a trustee of the Singer Children's Management Trust. Mr. Lampe, who is a director of both Globix and NEON, is an affiliate of LC Capital Master Fund Ltd. 94
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Under the terms of the securities exchange agreements, each of the debt-for-equity exchange transactions is to be effected at the time of the merger or at an earlier time mutually agreed upon. Globix has agreed to file a registration statement with the Securities and Exchange Commission as promptly as possible, but not later than 90 days after the closing of the merger, in order to register the shares of common stock issued in exchange for its 11% senior notes. With respect to registration of the shares of common stock issued in the debt-for-equity exchange, Globix has granted the exchanging holders the right to purchase additional shares of Globix common stock equal to (1) up to 5% of the shares acquired by them at a purchase price of $2.75 per share if the registration statement is not effective within 90 days after the closing of the merger, and (2) an additional 5% of the shares acquired by them at a purchase price of $2.75 per share if the registration statement is not effective for more than 90 days during the first twelve months commencing on the 90th day following the closing of the merger. The merger agreement provides that in the event Globix wishes to exchange additional 11% senior notes in excess of $12,500,000 for additional shares of its common stock, Globix and NEON will negotiate in good faith all of the modifications to the merger agreement that would be necessary or appropriate to reflect any additional exchange. APPROVAL OF AMENDMENT OF NEON'S CERTIFICATE OF INCORPORATION Approval of a majority of the outstanding shares of NEON common stock and NEON convertible preferred stock entitled to vote, voting as a single class, and a majority of the outstanding shares of NEON common stock entitled to vote, voting as a separate class, is required to authorize the amendment to NEON's certificate of incorporation. The amendment would except the merger from the definition of liquidation event in NEON's certificate of incorporation. The certificate of incorporation currently provides that upon the occurrence of a liquidation event, subject to any preferential rights of preferred stock, all remaining NEON assets will be distributed ratably to the holders of NEON common stock. A liquidation event is currently defined to include, among other things, any consolidation, merger or share exchange of NEON in which the holders of NEON's voting stock outstanding immediately prior to such consolidation, merger or share exchange do not in the aggregate hold a majority of the voting stock of the surviving or resulting entity. The full text of the liquidation provisions of the certificate of incorporation relating to the definition of liquidation event as such provisions will be amended if the merger agreement and the merger are approved, is set forth in Appendix B-1 hereto. You should carefully read the liquidation event provision and consult with legal counsel regarding the impact of the amendment to the certificate of incorporation to amend the liquidation provision. NEON's board of directors (with one director, Mr. Lampe, abstaining) has approved the amendment to the certificate of incorporation and recommends that you vote "FOR" approval and adoption of the amendment of NEON's certificate of incorporation. APPROVAL OF AMENDMENT OF CERTIFICATE OF DESIGNATION FOR NEON CONVERTIBLE PREFERRED STOCK Approval of a majority of the outstanding shares of NEON common stock and NEON convertible preferred stock entitled to vote, voting as a single class, and two-thirds of the outstanding shares of NEON convertible preferred stock entitled to vote, voting as a separate class, is required to authorize the amendment to the certificate of designation with respect to the NEON convertible preferred stock. The amendment would except the merger from the definition of change of control as set forth in the certificate of designation. 95
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The full text of the provisions of the certificate of designation of the NEON convertible preferred stock relating to the definition of change of control, as such provisions will be amended if the merger agreement and the merger are approved, is set forth as Appendix B-2 hereto. NEON's board of directors (with one director, Mr. Lampe, abstaining) has approved the amendment to the certificate of designation and recommends that you vote "FOR" approval and adoption of the amendment of the certificate of designation for the NEON convertible preferred stock. INFORMATION ABOUT GLOBIX OUR COMPANY We are a provider of Internet services to businesses. Our services include: o Hosting and co-location in our secure and fault-tolerant Internet data centers; o Network services and connectivity to the Internet through our domestic and international Internet Protocol (IP) fiber based network; o Internet based managed services focusing on application management and operating system management, security services and storage services; and o Media services including: streaming media, webcasting and digital asset management solutions. Our target market for our services is small to large size businesses in a broad range of industries, including media, publishing, financial services, retail, healthcare, governmental agencies, manufacturing, technology and non-profit organizations. No single customer comprised more than 10% of our revenues in the fiscal years ended September 30, 2004 or 2003. We sell our services to businesses primarily through our direct sales force. Our customers use our services to operate and maintain computer equipment in a secure, fault-tolerant environment with connectivity to a high-speed, high-capacity, direct link to the Internet, through our own network, and to support Internet applications. Our employees are located in New York, New York; Atlanta, Georgia; Santa Clara, California; Fairfield, New Jersey; and London, England. Our principal executive offices are located at 139 Centre Street, New York, New York 10013, and our telephone number at that location is (212) 334-8500. Although we maintain a website at www.globix.com, we do not intend that the information available through our website be incorporated into this joint proxy statement/prospectus. Our SEC filings are available on our website. Globix was founded in 1989 and in 1998 undertook a major expansion plan in order to pursue opportunities resulting from the growth of the Internet. On March 1, 2002, Globix filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code, together with a prepackaged plan of reorganization, with the United States Bankruptcy Court for the District of Delaware. We continued to operate in Chapter 11 in the ordinary course of business and received permission from the bankruptcy court to pay our employees, trade, and certain other creditors in full and on time, regardless of whether these claims arose prior to or after the Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed the plan of reorganization. On April 25, 2002, all conditions necessary for the plan of reorganization to become effective were satisfied or waived and we emerged from Chapter 11 bankruptcy protection. For additional information, see "Our Chapter 11 Bankruptcy Reorganization" beginning on page 100 of this joint proxy statement/prospectus, for a discussion of our reorganization pursuant to Chapter 11 of the United States Bankruptcy Code. 96
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WHAT WE OFFER OUR CUSTOMERS We provide our customers with a range of Internet-based services, including network infrastructure and expertise to build, maintain, operate and support Internet-based operations. Our primary services include: INTERNET HOSTING AND CO-LOCATION We currently operate Internet data centers in New York, New York; Atlanta, Georgia; Santa Clara, California; and London, England. Our Internet data centers include electrical infrastructure, precision environmental control systems, fire suppression systems and comprehensive security systems. We offer co-location solutions for customers who choose to own and maintain their own servers, but require the physically secure, climate-controlled environment provided by our Internet data centers and connectivity to our network. We offer hosting services in a dedicated server environment. This service includes providing hardware usage, bandwidth and managed services to meet customer-specific needs. MANAGED SERVICES We provide managed system and network services to our hosting and co-location customers. Such services include a wide variety of maintenance, administration and problem resolution services for many popular operating systems, Internet network devices, software security solutions and web based applications. In addition we also offer media service, such as streaming media for business communication. Streaming media is a process by which audio, video or other multimedia is delivered in a streaming or continuous fashion over the Internet or over a company's intranet. On October 31, 2003, we acquired the business and substantially all of the assets of Aptegrity, Inc., a provider of web application and operations management services. The acquisition of Aptegrity has enabled us to provide remote management of a wider range of custom and off-the-shelf Web-based applications. By managing e-commerce, database, content management and customer relationship management software for our clients, we help them to protect Internet revenue streams, reduce technology operating costs and operating risk, and improve user satisfaction. With the purchase of Aptegrity we gained new clients and the ability to offer higher-revenue managed services to our existing customer base. In addition we provide hosting and co-location services to some of Aptegrity's pre-acquisition customers. Since the acquisition of Aptegrity our customers have increased their spending with us on average. We attribute this to the greater utilization of our bundled services as a result of the broader range of services we are able to provide to our customers. NETWORK SERVICES AND INTERNET ACCESS We provide access to our network to our hosting and co-location customers in our Internet data centers as well as Internet access services which provide businesses with high-speed continuous access to the Internet from their own premises. In addition, we provide other services, such as domain name registration, local loop provisioning, Internet address assignment, router configuration, e-mail configuration and management and technical consulting services. Our network infrastructure is designed for high availability and low latency, and utilizes a single autonomous system number. As a result, traffic is carried on a network controlled by Globix to the greatest extent possible and therefore does not suffer from the congestion or high latency of public networks. The domestic Globix backbone is a Packet over Synchronous Optical Network ("SONET"), which provides a mechanism for using the speed and efficient management capabilities of SONET for data transport. Essentially, it provides a method for carrying data packets in SONET frames that will operate at speeds up to OC-48 (2.4Gbs). The OC-48 Globix domestic backbone connects to our data centers and to our backbone points of presence in Boston, Chicago, Los Angeles, Seattle and Washington, D.C. 97
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Our European backbone is a Packet over SONET currently connecting London, Amsterdam, Frankfurt and Paris. The domestic and European networks are connected by two OC-3 (155Mbps) transatlantic crossings. Our United States and European network sections interconnect to numerous network access points, commercial Internet exchanges and other Internet, application and network service providers. Our network operations are directed from our 139 Centre Street data center in New York, New York, which is staffed 24 hours a day, seven days a week. Network administrators located in our operations center monitor our network infrastructure. Our network administrators are able to identify and correct network problems either themselves or by dispatching system engineers located at our customer support centers. CUSTOMER SUPPORT CENTERS Our customer support call centers are operated 24 hours a day, seven days a week, and are equipped with telecommunications systems capable of automatic call distribution, automatic number identification, quality assurance recording and archiving, and intelligent call routing. A trouble ticketing and knowledge database of customer information and history supports our customer service operations. GOVERNMENT REGULATION In the United States, our Internet services are currently classified by the Federal Communications Commission as information services, which are not subject to significant regulation, rather than as telecommunications or common carrier services, which are subject to a comprehensive regulatory framework. Similarly, our Internet services are not significantly regulated in certain foreign jurisdictions in which we conduct business. In certain other foreign jurisdictions in which we operate, however, our provision of certain Internet services may be subject to the jurisdictions' laws and regulations governing telecommunications services and/or common carriers. In jurisdictions where these laws and regulations currently apply to certain types of our Internet solutions, we endeavor to take all reasonable steps necessary to ensure that we comply with these laws and regulations. This may require us to, among other things, obtain regulatory authorizations and pay fees each year to regulatory authorities. The laws and regulations applicable to Internet-related services are evolving in the United States and many other jurisdictions. As these laws and regulations evolve, it is possible that we could be regulated in additional jurisdictions as a telecommunications services provider and/or as a common carrier. As a result, we may become subject to, among other things, additional licensing requirements, fee payment obligations, common carrier obligations, network access changes and/or universal service obligations. In addition to the telecommunications and/or common carrier laws and regulations that currently govern certain of our services in some jurisdictions and that may, in the future, govern our Internet services in the United States and other jurisdictions, new laws and regulations related to the provision of Internet services may be adopted, implemented and/or challenged at the federal, state and/or local levels in the United States and at corresponding levels in foreign jurisdictions. These laws and regulations may address, among other things, issues of user privacy, obscenity, pricing, consumer protection, taxation, advertising, intellectual property rights, information security, liability for certain types of content and the convergence of traditional telecommunications services with Internet communications. A number of laws and regulations related to these issues are currently being considered by United States and foreign regulators. It is impossible to predict the nature of any new laws or regulations that will be applicable to our services, whether currently existing laws and regulations will be newly-applied to our services or the manner in which currently existing laws and regulations applicable to us will be interpreted and enforced. The adoption of new laws or regulations or the application of existing laws or regulations in a manner that is adverse to our company might decrease demand for our Internet solutions, impose taxes, fees or other charges or other costly technical requirements on our company or otherwise increase our cost of doing business. Any of these developments could harm our business, financial position, results of operations and cash flows. 98
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The Digital Millennium Copyright Act ("DMCA") includes a limitation on liability of on-line service providers for copyright infringement for transmitting, routing or providing connections, transient storage, caching or storage at the direction of a user. This limitation on liability applies if the service provider had no actual knowledge or awareness of the copyright infringement and if certain other conditions are met. It is not yet clear how the DMCA will be applied to limit liability that we may face in the future for any possible copyright infringement or copyright-related issues relating to the activities of our customers. The DMCA also requires Internet service providers to follow certain "notice and take-down" procedures in order to be able to take advantage of the limitation on liability provided for in the DMCA. We have implemented the procedures required by the DMCA and require our users to agree to an "acceptable use" policy which prohibits the use of our facilities for illegal purposes. There can be no assurance, however, that our procedures and acceptable use policy will shield us from liability. Despite enactment of the DMCA, the law relating to the liability of companies that provide Internet-related services for information carried on or disseminated through their networks remains largely unsettled. Claims could be made against us under currently existing or future laws in the United States or other jurisdictions for defamation, obscenity, negligence, copyright, trademark infringement or other legal theories based on the nature and content of the materials disseminated through our networks. EMPLOYEES AND EMPLOYEE RELATIONS As of September 30, 2004, we had approximately 240 full-time employees: approximately 188 in the United States and 52 outside the United States. In addition to our full-time employees, we also employ part-time personnel from time to time in various departments to meet fluctuations in work levels. None of our employees are covered by a collective bargaining agreement. COMPETITION Our competitors include other Internet service providers with a significant national or global presence and a focus on business customers. Among these competitors are IBM, Digex, Savvis, Akamai, NaviSite, EDS, Speedera, Data Return, Rackspace and Equinix. Our competitors also include telecommunications companies, such as AT&T, British Telecom, Level 3, MCI and Sprint. We believe that competition is based upon a number of factors, including price, quality of service and financial stability. Of the competitors mentioned, some compete only in hosting and infrastructure services, and some compete only in media services. Very few provide services that compete across our entire services portfolio. We believe our competitive differentiation from those that do is our flexibility, speed and ability to customize a bundled solution across all of our service capabilities. Competitive pressure impacts Globix's business in two primary ways: customer churn and pricing pressure. For these purposes, churn means contractual revenue loss due to customer cancellations and downgrades, net of upgrades and additions to service. Churn due to customer cancellations comes from three major sources: customers no longer needing our services due to bankruptcy or exiting of a product line, customers taking our services in-house and customers replacing our services with services from a competitor. Customer churn due to downgrades is caused mainly by customers not needing all the services we offered them in the past (as a result of exiting a product line, taking services in-house or using a competitor's services), or customers renewing their contracts for identical services but at a lower price, which is mainly as a result of competitive pricing pressure. Due to difficulty in determining the root cause of contract cancellations and downgrades, it is impossible to determine precisely the percentage of churn that is due to competitive pressure is inexact. However, we believe that competitive pressure is a significant cause of contract cancellations and downgrades. Conversely, obtaining contracts formerly provided by our competitors is also a major source of new contract adds. Our primary strategy for dealing with contract cancellations related to competitive pressure is first to sell valued added services to clients who have contracted only commodity services. We expect these value added services to offer product differentiation and increase exit costs, thereby decreasing cancellation rates. Second, we expect to continue to offset customer cancellations with new contract adds obtained through direct marketing efforts focused at prospective clients who potentially contract services with our competitors. Pricing pressure from competition specifically affects our commodity products and services such as bandwidth and co-location. We believe that pricing pressure for our managed services is considerably less significant. 99
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Our primary strategy for dealing with price pressure is to bundle higher value-added services with our core infrastructure services to provide increased product differentiation. TRADEMARKS AND PATENTS We currently have eight trademark applications and one patent application pending in the United States Patent and Trademark Office. Registration of the same trademarks has been applied for or granted in certain foreign countries. Additionally, Globix acquired the U.S. and European Union registered trademarks of Aptegrity(R) and Minding your E-Business(R) in the acquisition of Aptegrity, Inc. OUR CHAPTER 11 BANKRUPTCY REORGANIZATION On April 8, 2002, the United States Bankruptcy Court for the District of Delaware confirmed our plan of reorganization, which became effective on April 25, 2002. As of the effective date of the plan, all of our existing securities were cancelled and: o each holder of the 12.5% senior notes became entitled to receive, in exchange for its claims in respect of the 12.5% senior notes, its pro rata share of: o $120 million in aggregate principal amount of the 11% enior notes, and o 13,991,000 shares of our common stock, representing 85% of the shares of our common stock issued and outstanding following the effective date of the plan; and o each holder of shares of our preferred stock outstanding immediately prior to the effective date of the plan became entitled to receive, in exchange for its claims in respect of these shares of preferred stock, its pro rata share of 2,304,400 shares of our common stock, representing 14% of the shares of our common stock issued and outstanding following the effective date of the plan; and o each holder of shares of our common stock outstanding immediately prior to the effective date of the plan became entitled to receive, in exchange for its claims in respect of these shares of common stock, its pro rata share of 164,600 shares of our common stock, representing 1% of the shares of our common stock issued and outstanding following the effective date of the plan. The plan provides that all of the shares of our common stock are subject to dilution by the exercise of management incentive stock options, representing up to 10% of the shares of our issued and outstanding common stock on a fully-diluted basis following the effective date of the plan. As of September 30, 2004, the number of outstanding options representing the right to acquire 956,565 shares of common stock had been granted to members of our management. A total of 16,460,000 shares of our common stock and $120 million in aggregate principal amount of the 11% senior notes were deemed to be issued and outstanding on the effective date of the plan. As of September 30, 2002, however, no shares of our common stock or 11% senior notes had been distributed. In October 2002, we distributed a total of 16,295,400 shares of common stock and $120 million in aggregate principal amount of 11% senior notes. Pursuant to the terms of a Stipulation and Order that we entered into with the lead plaintiffs in the class action lawsuit described in " - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus, 229,452 of these shares of common stock and $1,968,000 in aggregate principal amount of the 11% senior notes were placed in reserve in escrow pending the outcome of the class action lawsuit. In the event that any judgment or settlement entered into in connection with the class action lawsuit requires us to pay an amount in excess of our liability insurance, then we will be required to issue to the class action litigants and their attorneys all (in the event that this excess is $10 million or greater) or a portion of (in the event that this excess is less than $10 million) the shares of common stock and 11% senior notes held in escrow. Based on an August 12, 2004 court approval of a settlement agreement pursuant to which Globix would not be required to pay an amount in excess of our liability 100
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insurance, described under "- Legal Proceedings," beginning on page 102 of this joint proxy statement/prospectus, Globix does not believe that the shares of common stock and 11% senior notes held in escrow are likely to be distributed to the class action litigants and their attorneys, and such shares and notes will accordingly be available for distribution to Globix security holders under the plan. Distribution of the remaining 164,600 shares of common stock deemed to have been issued on the effective date of the plan, which are allocable under the terms of the plan to the holders of our common stock outstanding immediately prior to the effective date of the plan, will occur following the resolution of the stockholder derivative suit against our company and certain of our former officers and directors described in " - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus. Through September 30, 2004, we had acquired in the open market approximately $26.1 million in aggregate principal amount of our 11% senior notes and related accrued interest of approximately $1.9 million for an aggregate purchase price of approximately $20.2 million, and had issued approximately an additional $18.5 million in 11% senior notes in payment of accrued interest on the 11% senior notes. The indenture governing the 11% senior notes requires interest to be paid in kind through 2004, and permits interest to be paid in kind for two years thereafter at the discretion of our board of directors. In addition, on March 3, 2004, we purchased $40.3 million in principal amount of the 11% senior notes pursuant to an offer to purchase as described in " - Properties" below. Our indebtedness at September 30, 2004 consisted of approximately $72.2 million in aggregate principal amount of our 11% senior notes, approximately $3.3 million in related accrued interest, approximately $370 thousand of capital lease obligations and approximately $20 million of mortgage debt on our New York City headquarters and data center. PROPERTIES In July 1998, we purchased the land and the approximately 155,000 gross square foot building located at 139 Centre Street, New York, New York. Construction at this facility was completed in July 1999 and the building houses an Internet data center and offices for our executive, technical, sales and administrative personnel. In December 2002 we retained the services of a real estate broker to lease office space equivalent to approximately one third of our 139 Centre Street facility. As of September 30, 2004, we had leased office space in approximately 25% of this facility to third parties for periods ranging between two to six years. The estimated average annualized rental income is approximately $0.9 million. In July 1998, we signed a lease commencing January 15, 1999 for approximately 60,000 gross square feet of space in Santa Clara, California. The facility contains an Internet data center and offices for technical, sales and administrative personnel. In October 1998, we signed a lease for the rental of approximately 38,000 gross square feet of space at Prospect House, 80 New Oxford Street, London, England. Construction at both of these facilities was completed in July 1999. Prospect House contains an Internet data center and some technical staff while the balance of technical personnel, as well as sales and administrative personnel, are located in our other London facility at 1 Oliver's Yard. In July 2000, we entered into a lease for the Oliver's Yard facility, which consists of approximately 210,000 gross square feet of space. Construction and fit-out of one floor of Internet data center space has been completed and the facility became operational in June 2001. In April 2002 we renegotiated our lease for this Internet data center, resulting in our retaining a total of 60,000 gross square feet of space. We sublease access office space in our London offices to third parties for periods ranging between 3 to 10 years. The estimated average annualized income is approximately $800 thousand. In August 2000, in connection with our acquisition of Comstar.net, Incorporated, we acquired our existing leases for an Internet data center in Atlanta, Georgia containing approximately 5,000 gross square feet of space. In September 2000 we purchased the land and approximately 187,000 gross square foot building located at 415 Greenwich Street, New York, New York. During October 2003 we reached an agreement to sell the property for total cash consideration of approximately $60 million. The agreement was subject to various closing conditions which were not satisfied until January 2004. The sale of the property was completed on January 22, 2004 for approximately $48.7 million in net proceeds. On March 3, 2004, we used approximately $44 million of the net proceeds to repurchase approximately $40.3 million in principal amount of our outstanding 11% senior notes at par value plus accrued interest in the amount of approximately $3.7. 101
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In November 2003, our company assumed Aptegrity, Inc.'s lease of approximately 5,600 square feet in Fairfield, New Jersey for approximately $11,000 a month ending December 2006. We believe that the facilities that we plan to continue to occupy are adequate for our current and foreseeable needs and that additional space will be available, either through leasing or purchasing, when needed. LEGAL PROCEEDINGS On January 28, 2002, a derivative suit was filed in the United States District Court for the Southern District of New York against our company, as nominal defendant, and certain of our current and former directors and officers. The action is entitled Susan Boney, Individually and Derivatively on behalf of Nominal Defendant Globix Corp, Plaintiff v. the named former Board of Directors (pre-Bankruptcy), Defendants and Globix Corp, a Delaware Corporation, Nominal Defendant. Plaintiffs brought the action against the former board and certain executives seeking damages and expenses for breach of fiduciary duty for violations of federal and state securities laws alleging misrepresentations of Globix's financial performance from 2000 through 2001. We believe that the allegations in this lawsuit are without merit and we intend to vigorously defend against them. In addition, the plaintiff has not pursued her claims since the filing of the lawsuit. Although there can be no assurance as to the outcome or effect of this lawsuit, we do not believe, based on currently available information, that the ultimate liabilities, if any, resulting from this lawsuit will have a material adverse impact on our business, financial condition, results of operations or cash flows. On August 12, 2004, the United States District Court for the Southern District of New York approved the settlement of a class action lawsuit entitled In re Globix Corp Securities Litigation, No. 02-CV-00082. This lawsuit named as defendants Globix and our former officers Marc Bell, Peter Herzig (who remains a director of Globix) and Brian Reach, and asserted claims under sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder on behalf of all persons or entities who purchased our securities between November 16, 2000 and December 27, 2001. The lawsuit alleged that the defendants had failed to disclose the true state of the company's financial condition during this period. Under the settlement, which remains subject to appeal, the company has agreed to pay $3,500,000 (all of which would be covered by insurance) to settle all claims against it. A motion for reconsideration of the fee award has been filed by those plaintiffs' law firms whose fees were not included in the settlement. Although there can be no assurance as to the outcome of the motion, Globix does not believe that the ultimate liabilities, if any, resulting from this appeal will have a material adverse impact on our business, financial condition, results of operations or cash flows. On June 25, 2002, we entered into a Stipulation and Order with the lead plaintiffs in the class action lawsuit. The Stipulation and Order provides that 229,452 shares of our common stock and $1,968,000 in aggregate principal amount of the 11% senior notes will be held in escrow pending the outcome of the class action lawsuit. In the event that any judgment or settlement entered into in connection with the class action lawsuit requires us to pay an amount in excess of our liability insurance, we will be required to issue to the class action litigants and their attorneys all (in the event that this excess is $10 million or greater) or a portion of (in the event that this excess is less than $10 million) the shares of our common stock and the 11% senior notes being held in escrow. Based on the court approval of the settlement agreement, Globix does not believe that the shares of common stock and 11% senior notes that are being held in escrow are likely to be distributed to the class action litigants and their attorneys. On November 12, 2003, we were served with a complaint filed in the United States Court for Southern District of New York, entitled Alfred G. Binford v. Globix Corporation, alleging breach of contract claims related to the failure to make payments under an employment letter, as amended, seeking damages in the amount of $2,113,000. Although there can be no assurance as to the outcome or effect of this lawsuit, we do not believe, based on currently available information, that the ultimate liabilities, if any, resulting from this lawsuit will have a material adverse impact on our business, financial condition, results of operations or cash flows. Globix has accrued its estimated liability. 102
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We are from time to time involved in other legal proceedings in the ordinary course of our business operations. Although there can be no assurance as to the outcome or effect of any legal proceedings to which we are a party, we do not believe, based on currently available information, that the ultimate liabilities, if any, arising from any such legal proceedings would have a material adverse impact on our business, financial condition, results of operations or cash flows. SELECTED CONSOLIDATED FINANCIAL DATA OF GLOBIX The following selected historical consolidated financial data as of and for the years ended September 30, 2004 and September 30, 2003 (Successor Company), five months ended September 30, 2002 (Successor Company), the seven months ended April 30, 2002 (Predecessor Company), and as of and for the fiscal years ended September 30, 2001 and 2000 (Predecessor Company) have been derived from our audited consolidated financial statements and related notes. This information should be read together with, and is qualified in its entirety by reference to, our consolidated financial statements included elsewhere in this joint proxy statement/prospectus, and the notes thereto and the information set forth in "Globix Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 106 of this joint proxy statement/prospectus. As a result of the application of fresh start accounting under SOP No. 90-7 as of May 1, 2002 our financial results for the fiscal year ended September 30, 2002 include two different bases of accounting and, accordingly, the operating results and cash flows of the Successor Company and the Predecessor Company have been separately disclosed. For the purposes of this joint proxy statement/prospectus and the financial statements and related notes contained in this joint proxy statement/prospectus, references to the "Predecessor Company" are references to our company for periods prior to April 30, 2002 (the last day of the calendar month in which we emerged from bankruptcy) and references to the "Successor Company" are references to our company for periods subsequent to April 30, 2002. The Successor Company's financial statements are not comparable to the Predecessor Company's financial statements. 103
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[Enlarge/Download Table] (IN THOUSANDS OF UNITED STATES DOLLARS, EXCEPT SHARE AND PER SHARE DATA) SUCCESSOR COMPANY PREDECESSOR COMPANY --------------------------------------------- --------------------------------------------- FIVE MONTHS SEVEN MONTHS YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- ------------- ------------- Consolidated Statement of Operations Data: Revenue $ 61,190 $ 60,177 $ 30,723 $ 51,273 $ 104,210 $ 81,287 Operating costs and expenses: Cost of revenues (excluding depreciation, amortization, certain payroll and occupancy shown below) 19,747 19,990 10,458 22,123 40,609 42,513 Selling, general and administrative 43,518 44,430 29,313 57,206 124,821 98,113 Loss (gain) on impairment of assets 17,972 -- -- 2,578 3,500 -- Restructuring and other charges (credits) -- (1,020) -- 24,834 56,109 -- Depreciation and amortization 13,828 15,523 6,060 28,115 36,657 18,228 ------------- ------------- ------------- ------------- ------------- ------------- Total operating costs and expenses 95,065 78,923 45,831 134,856 261,696 158,854 Other operating income -- 345 -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------- Loss from operations (33,875) (18,401) (15,108) (83,583) (157,486) (77,567) Interest and financing expense, net (10,925) (13,962) (5,866) (32,487) (51,846) (33,082) Other income (expense) 1,667 1,232 (157) (509) (1,379) 1,779 Gain (loss) on debt discharge 1,747 6,023 -- 427,066 -- (17,577) Reorganization items -- -- -- (7,762) -- -- Fresh start accounting adjustments -- -- -- (148,569) -- -- Minority interest in subsidiary -- -- -- 5,778 -- -- ------------- ------------- ------------- ------------- ------------- ------------- Income (loss) before income taxes and cumulative effect of a change in accounting principle (41,386) (25,108) (21,131) 159,934 (210,711) (126,447) Income tax expense -- 167 -- -- -- -- ------------- ------------- ------------- ------------- ------------- ------------- Income (loss) before cumulative effect of a change in accounting principle (41,386) (25,275) (21,131) 159,934 (210,711) (126,447) Cumulative effect of a change in accounting principle -- -- -- -- (2,332) -- ------------- ------------- ------------- ------------- ------------- ------------- 104
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(CONTINUED) SUCCESSOR COMPANY PREDECESSOR COMPANY --------------------------------------------- --------------------------------------------- FIVE MONTHS SEVEN MONTHS YEAR ENDED YEAR ENDED ENDED ENDED YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, SEPTEMBER 30, SEPTEMBER 30, 2004 2003 2002 2002 2001 2000 ------------- ------------- ------------- ------------- ------------- ------------- Net income (loss) (41,386) (25,275) (21,131 159,934 (213,043) (126,447) Dividends and accretion on preferred stock -- -- -- (3,178) (7,104) (5,768) ------------- ------------- ------------- ------------- ------------- ------------- Net income (loss) attributable to common stockholders $ (41,386) $ (25,275) $ (21,131 $ 156,756 $ (220,147) $ (132,215) ============= ============= ============= ============= ============= ============= Earnings (loss) per common share: Basic: Before cumulative effect of a change in accounting principle $ (2.51) $ (1.54) $ (1.28) $ 3.96 $ (5.66) $ (3.73) Cumulative effect of a change in accounting principle -- -- -- (0.06) -- ------------- ------------- ------------- ------------- ------------- ------------- Basic earnings (loss) per share attributable to common stockholders $ (2.51) $ (1.54) $ (1.28) $ 3.96 $ (5.72) $ (3.73) ============= ============= ============= ============= ============= ============= Weighted average common shares outstanding - basic 16,460,000 16,460,000 16,460,000 39,618,856 38,476,909 35,484,040 ============= ============= ============= ============= ============= ============= Diluted: Before cumulative effect of a change in accounting principle $ (2.51) $ (1.54) $ (1.28) $ 3.30 $ (5.66) $ (3.73) Cumulative effect of a change in accounting principle -- -- -- -- (0.06) -- ------------- ------------- ------------- ------------- ------------- ------------- Diluted earnings (loss) per share attributable to common stockholders $ (2.51) $ (1.54) $ (1.28) $ 3.30 $ (5.72) $ (3.73) ============= ============= ============= ============= ============= ============= Weighted average common shares outstanding - diluted 16,460,000 16,460,000 16,460,000 48,507,456 38,476,909 35,484,040 ============= ============= ============= ============= ============= ============= Other Consolidated Financial Data: Net cash provided by (used in) operating activities $ (1,568) $ (12,188 $ 3,679 $ (59,684) $ (140,543) $ (94,318) Net cash provided by (used in) investing activities $ 42,177 $ (858) $ (6,461) $ 5,842 $ (113,271) $ (149,939) Net cash provided by (used in) financing activities $ (53,423) $ (10,539) $ (2,279) $ (4,946) $ 387 $ 509,395 Consolidated Balance Sheet Data: Cash, cash equivalent, short-term investments and marketable securities $ 20,158 $ 33,260 $ 54,281 $ 113,112 $ 378,510 Restricted cash and investments $ 4,737 $ 6,928 $ 9,097 $ 33,870 $ 43,178 Working capital $ 15,466 $ 28,449 $ 42,421 $ 78,340 $ 366,139 Total assets $ 138,542 $ 222,282 $ 262,720 $ 552,988 $ 729,591 Current portion of long-term debt $ 555 $ 1,510 $ 1,520 $ 6,687 $ 2,173 Long-term debt, less current portion $ 95,278 $ 140,389 $ 151,274 $ 630,750 $ 621,809 Mandatory redeemable convertible preferred stock $ -- $ -- $ -- $ 83,230 $ 76,042 Stockholders' equity (deficit) $ 16,875 $ 53,351 $ 72,547 $ (237,325) $ (18,030)
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GLOBIX MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and the accompanying notes and "Selected Consolidated Financial Data of Globix" beginning on page 103 of this joint proxy statement/prospectus. The following discussion contains forward-looking statements. These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our company and our industry. Our results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks and uncertainties discussed in "Risk Factors" beginning on page 21 of this joint proxy statement/prospectus and elsewhere in this joint proxy statement/prospectus. The results shown herein are not necessarily indicative of the results to be expected in any future periods. As is more fully discussed in Note 1 ("Basis of Presentation") to the consolidated financial statements, we reported under fresh start accounting pursuant to SOP 90-7 as of May 1, 2002 resulting in a change in the basis of accounting in the underlying assets and liabilities of our company at the effective date of our plan of reorganization. Accordingly, the financial statements of the Successor Company and the Predecessor Company are not comparable. Where appropriate, we have combined the actual results of operations for the Successor Company for the five months ended September 30, 2002 and the Predecessor Company for the seven months ended April 30, 2002 as pro forma combined 2002 operating results in order to present a more meaningful comparative analysis to the operating results of the prior fiscal year. Successor Company and Predecessor Company financial data are derived from the consolidated financial statements that appear elsewhere in this joint proxy statement/prospectus. In addition to the basis in accounting differences noted above, our operating results for fiscal 2002 were significantly impacted by: o items associated with the Predecessor Company's bankruptcy, including debt discharge, restructuring activities and other charges related to certain bankruptcy activities and certain changes in accounting estimates recorded in the third quarter fiscal 2002; and o the Successor Company recognizing the effects of reduced depreciation, additional amortization and reduced interest expense arising from the revaluation of our assets and liabilities and the reduced amount of the Successor Company's outstanding debt following the effective date of the plan. OVERVIEW Globix is a provider of Internet services for small to large size businesses in a broad range of industries. Our company was founded in 1989 and in 1998 undertook a major expansion plan in order to pursue opportunities resulting from the growth of the Internet. On March 1, 2002, Globix filed a voluntary petition under Chapter 11 of the United States Bankruptcy Code, together with a prepackaged plan of reorganization, with the United States Bankruptcy Court for the District of Delaware. We continued to operate in Chapter 11 in the ordinary course of business and received permission from the bankruptcy court to pay our employees, trade, and certain other creditors in full and on time, regardless of whether these claims arose prior to or after the Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed the plan of reorganization. Effective April 25, 2002, all conditions necessary for the plan of reorganization to become effective were satisfied or waived and we emerged from Chapter 11 bankruptcy protection. For additional information about our reorganization, see "Our Chapter 11 Bankruptcy Reorganization" beginning on page 100 of this joint proxy statement/prospectus. Since Globix emerged from bankruptcy reorganization in April 2002, its management has actively reviewed various strategies for increasing stockholder value. A key objective has been to redress the imbalance between revenues and costs that has historically been a feature of Globix' business, by increasing the revenue base and by cutting costs. A second objective has been to reduce leverage by buying back or paying off higher cost indebtedness. 106
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Globix has attempted to address customer churn, industry-wide price competition and price decreases in its traditional offerings of hosting and network services by broadening the range of services it offers through the addition of value added services as part of its managed services business. By focusing on providing value added services Globix believes it will be able to increase its monthly recurring revenue per customer or average revenue per unit (ARPU). We calculate ARPU by dividing our average contracted monthly recurring revenue for the period by our average number of contracted customers during the period. During the fiscal year ended September 30, 2004 there was a 6% decrease in our total number of customers, while our ARPU increased to approximately $3.4 thousand as of September 30, 2004 compared to approximately $2.7 thousand as of September 30, 2003. In addition, during the fiscal year ended September 2004 we saw an improvement in our monthly average churn rate in comparison to 2003. In 2004 our monthly positive change in contract rate (negative churn) averaged 0.3% during the fiscal year ended September 30, 2004 compared to a monthly average churn rate of 1.7% in the fiscal year ended September 30, 2003. We define churn as contractual revenue losses as a percentage of total contractual revenue due to customer cancellations and downgrades, net of upgrades, and additions of new services. In addition, Globix has cut the costs of its operations by combining offices, eliminating redundancy within its operations and selling or leasing excess office space. This process of cost cutting was largely completed with the sale of the property at 415 Greenwich Street in New York, New York. Growth through acquisition offers the possibility of revenue growth and the expansion of service offerings, to enable Globix to offer a broader range of services to compete more effectively, while providing a larger revenue base to support Globix's existing indebtedness. The ability to achieve operating efficiencies by combining administrative or other functions has also been a consideration in reviewing possible acquisitions. In addition, market conditions have made it possible to acquire related businesses at what are perceived to be relatively low prices. In pursuing its acquisition strategy, Globix has reviewed potential transactions involving smaller companies, like Aptegrity, Inc., whose acquisition gradually expands the range of services that Globix provides, as well as larger companies, such as NEON, that could significantly increase the size of Globix' business and enhance its ability to compete against much larger competitors. In order to increase its operating flexibility and address concerns about its long term financial viability, Globix has also attempted to decrease its indebtedness through the repurchase of its 11% senior notes and the repurchase or early payment of other financial obligations. Although Globix operates in one operating segment, there are four major service lines as follows: INTERNET HOSTING AND CO-LOCATION We offer co-location solutions for customers who choose to own and maintain their own servers, but require the physically secure, climate-controlled environment provided by our Internet data centers and connectivity to our network. We offer hosting services in a dedicated server environment. This service includes providing hardware usage, bandwidth and managed services to meet customer-specific needs. MANAGED SERVICES We provide managed application, system, network and media services to our hosting and co-location customers. Such services include a wide variety of maintenance, administration and problem resolution services for many popular operating systems, Internet network devices, software security solutions, web-based applications, as well as streaming media delivered in a streaming or continuous fashion over the Internet or over a company's intranet. 107
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NETWORK SERVICES AND INTERNET ACCESS We provide access to our network for our hosting and co-location customers located inside of our Internet data centers as well as Internet access services which provide businesses with high-speed continuous access to the internet from their own premises. In addition, we provide other services, such as domain name registration, local loop provisioning, Internet address assignment, router configuration, e-mail configuration and management and technical consulting services. OTHER Our other services, which we categorize as "other," are comprised of hardware and software sales and other non-recurring revenue. For the fiscal year ended September 30, 2003, "other" also includes revenue from DSL customer accounts which were sold during the second quarter of fiscal year 2003. For a more detailed description of these service lines see the "Information About Globix" section beginning on page 96 of this joint proxy statement/prospectus. CRITICAL ACCOUNTING POLICIES AND ESTIMATES Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of our financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. We base our accounting estimates on historical experience and other factors that are believed to be reasonable under the circumstances. However, actual results may vary from these estimates under different assumptions or conditions. The following is a summary of our critical accounting policies and estimates: REVENUE RECOGNITION Revenue consists primarily of Internet hosting, co-location, managed services, network services and Internet access. We recognize revenue in accordance with the Securities and Exchange Commission's Staff Accounting Bulletin ("SAB"), No. 104 "Revenue Recognition" which revises and rescinds certain sections of SAB No. 101, "Revenue Recognition". The changes noted in SAB 104 did not have a material effect on Globix's consolidated financial statements. Globix recognizes revenue when delivery has occurred, persuasive evidence of an agreement exists, the fee is fixed or determinable and collectability is probable. SAB No. 104 expresses the view of the Securities and Exchange Commission's staff in applying accounting principles generally accepted in the United States of America to certain revenue recognition issues. Under the provisions of SAB No. 104, set up and installation revenue are deferred and recognized over the estimated length of the customer relationship, which in the case of our business is approximately 36 months. Prior to April 30, 2002, the estimated length of the customer relationship was 12-18 months. Monthly service revenue under recurring agreements related to Internet hosting, co-location, network services, Internet access and managed services is recognized over the period that service is provided. Revenue derived from project or event type managed service engagements is recognized over the life of the engagement. Payments received in advance of providing services are deferred until the period that these services are provided. 108
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COST OF REVENUE Cost of revenue consists primarily of telecommunications costs for Internet access and managed hosting and includes the cost of hardware and software purchased for resale to customers and payroll cost which relates to certain managed services. Cost of revenue excludes certain payroll, occupancy, depreciation and amortization. Telecommunications costs include the cost of providing local loop for connecting dedicated access customers to Globix's network, leased line and associated costs related to connecting with Globix's peering partners and costs associated with leased lines connecting Globix's facilities to its backbone and aggregation points of presence. INTANGIBLE ASSETS We adopted SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" when we emerged from bankruptcy in April 2002. SFAS 141 requires all business combinations to be accounted for using the purchase method of accounting and that certain intangible assets acquired in a business combination must be recognized as assets separate from goodwill. SFAS No. 142 addresses the recognition and measurement of goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 also addresses the initial recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. SFAS No. 142 provides that intangible assets with indefinite lives and goodwill will not be amortized but, will be tested at least annually for impairment. If an impairment is indicated then the asset will be written down to its fair value typically based upon its future expected discounted cash flows. Our intangible assets following bankruptcy are as follows: o trademarks and trade name; o network build-out/know-how; and o customer contracts. We amortize intangible assets by the straight-line method over their estimated useful lives. Trademarks and trade name are amortized over a period of 7-15 years, network build-out/know-how is amortized over 8 years and the customer contracts are amortized over 2-3 years. ESTIMATES The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of assets and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Use of estimates and assumptions include, but are not limited to, allowance for doubtful accounts, credit reserve and deferred tax valuation allowance. ALLOWANCE FOR DOUBTFUL ACCOUNTS AND CREDIT RESERVE At each reporting period we evaluate on a specific basis the economic condition of our customers and their ability and intent to pay their debt. If such evaluation shows that it is probable that a customer will not settle his full obligation, a reserve against accounts receivable in general and administrative expense is recorded for the non-recoverable amount. We also maintain a general bad debt reserve, which is based on the aging of our customers receivables and historical trends. In addition during each reporting period we must make estimates of potential future credits, which will be issued in respect of current revenues. We analyze historical credits and changes in customer demands regarding our current billings when evaluating credit reserves. If such analysis shows that it is probable that a credit will be issued, we reserve the estimated credit amount against revenues in the current period. As of September 30, 2004 and September 30, 2003 the balance of bad debt reserve amounted to approximately $2.2 million and $2.6 million, respectively. 109
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ACCOUNTING FOR INCOME TAXES As part of the process of preparing our consolidated financial statements we are required to estimate our income tax expense in each of the jurisdictions in which we operate. This process involves us estimating our actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as accruals and reserves, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income and to the extent we believe that recovery is not likely, we must establish a valuation allowance. Management currently estimates that it is more likely than not that these assets will not be realized in the foreseeable future and accordingly a 100% valuation allowance is recorded against the deferred tax assets. FISCAL YEAR ENDED SEPTEMBER 30, 2004 COMPARED TO THE FISCAL YEAR ENDED SEPTEMBER 30, 2003 REVENUE. Revenue for the year ended September 30, 2004 increased 1.7% or approximately $1.0 million to $61.2 million from $60.1 million for the year ended September 30, 2003. On a fourth quarter comparison, revenue increased $2.2 million or 14% to $16 million for the quarter ended September 30, 2004 compared to $13.8 million for the quarter ended September 30, 2003. In addition on a quarter over quarter basis revenue increased by $0.3 million or 2% for the quarter ended September 30, 2004 compared to the quarter ended June 30, 2004 continuing the trend of increased revenue on a quarter over quarter basis for the fourth straight quarter. During the year ended September 30, 2004 our monthly positive change in contract rate (negative churn) averaged 0.3% compared to a monthly average churn rate of 1.7% for the fiscal year ended September 30, 2003. During the year ended September 30, 2004, new contracts averaged 2.0% per month and contract upgrades averaged 1.6% per month, offset by a 1.7% monthly average in contract downgrades and a 1.6% average in contract cancellations per month. We define churn as contractual revenue losses as a percentage of total contractual revenue due to customer cancellations and downgrades, net of upgrades, and additions of new services. Cancellations refer to customers that have either stopped using our services completely or remained a customer but terminated a particular service. Downgrades are a result of customers taking less of a particular service or renewing their contract for identical services at a lower price. During the fiscal year ended September 30, 2004, our monthly recurring revenue per customer (ARPU) averaged approximately $3.3 thousand compared to an average ARPU of approximately $2.7 thousand in the fiscal year ended September 30, 2003, despite a decrease of approximately 88 customers or 6% from 1,457 customers in September 30, 2003 to 1,369 at September 20, 2004. This is due mainly to our focus on higher-revenue managed services customers as a result of the acquisition of Aptegrity. We calculate ARPU by dividing our average contracted monthly recurring revenue for the period by our average number of contracted customers during the period. Revenue breakdown for our four major service lines of Internet Hosting and Co-Location, Managed Services, Network Services and Internet Access, and Hardware and Software Sales, DSL and Other is as follows. Revenue from Internet Hosting and Co-Location decreased by $2.3 million or 9% to $23.8 million in fiscal year 2004 compared to 26.0 million in fiscal year 2003. Revenue from Network Services and Internet Access revenue decreased by $1.6 million or 8% to $17.5 million in fiscal year 2004 compared to $19.0 million in fiscal year 2003. The decreases in these two major services lines are mainly due to lower revenue under recurring contracts or churn. Revenue from Hardware and Software Sales, DSL and Other decreased by $0.8 million or 46% to $1.0 million in fiscal year 2004 compared to $1.8 million in fiscal year 2003. This decrease was primarily due to $0.7 million reduction in DSL revenue as a result of the sale of our DSL customer accounts during fiscal year 2003 and a decrease of $0.5 million in lower margin Hardware and Software sales. Revenue from Managed Services increased by $5.7 million or 42% to $19.0 million in the year ended September 30, 2004 compared to $13.3 million in the year ended September 30, 2003. This increase is the direct result of the acquisition of Aptegrity and our continued focus on adding value-added services through our Managed Services line of business. The above analysis includes the positive effect of foreign exchange rates between the U.S. dollar and the British Pound in the amount of approximately $2.8 million on our revenue year over year. 110
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COST OF REVENUE. Cost of revenue for the year ended September 30, 2004, decreased $243 thousand to $19.7 million from $20.0 million for the same period in 2003. This was mainly due to $2.9 million decrease in our network cost resulting from our continued focus on deriving efficiencies and cost savings from our network. Additional decrease of approximately $134 thousand resulted from lower hardware costs as a result of our shift away from lower margin hardware sales. These decreases were offset in part by additional labor costs of $2.8 million associated with the business acquired from Aptegrity and our continued focus on Managed Services. The aforementioned analysis includes the adverse effect of foreign exchange rates between the U.S. dollar and the British Pound in the amount of approximately $392 thousand on cost of revenue year over year. As a result of the variances described above gross margins increased to 67.7% for the year ended September 30, 2004 compared to 66.8% for the same period ended September 30, 2003. SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative expenses decreased by approximately $900 thousand to $43.5 million as compared to $44.4 million for the year ended September 30, 2003. The decrease in selling, general and administrative expenses was mainly due to a one time non-cash charge of $1.1 million in the second quarter of fiscal 2003 related to warrants granted to one of Globix's consultants. Bad debt expenses decreased $1.2 million to approximately $0.7 million for year ended September 30, 2004, compared to $1.9 million in the same period last year, as a result of improvement in collections and a reduction in the number of high-risk customer account receivable balances. Other cost savings amounting to approximately $1.0 million resulted from our efforts to reduce our operating cost. These were offset mainly by a $1.7 million credit recorded during the year ended September 30, 2003 as a result of the settlement of the Rabbi Trust litigation. In addition, our marketing expenses were up by approximately $0.7 million to $1.2 million in the year ended September 30, 2004 as a result of our increased efforts to enhance long-term growth and improve our public relations. The aforementioned analysis includes the adverse effect of foreign exchange rate in the amount of approximately $1.5 million on selling, general and administrative period over period. LOSS ON IMPAIRMENT OF ASSETS. Impairment charges for the year ended September 30, 2004 amounted to approximately $18 million as a result of the write-down of the cost basis of Globix's property located at 415 Greenwich Street in New York, NY to its market value less cost to sell of approximately $11.5 million. The sale of the 415 Greenwich Street property was consummated on January 22, 2004 for total cash consideration of $60 million. DEPRECIATION AND AMORTIZATION. Depreciation and amortization decreased $1.7 million to $13.8 million for the year ended September 30, 2004, as compared to $15.5 million in the year ended September 30, 2003. The decrease resulted from $1.7 million of depreciation expenses recorded in the year ended September 30, 2003 related to the 415 Greenwich Street property which was not depreciated during the same period in 2004 and from lower capital spending, offset by amortization of intangible assets resulting from the acquisition of Aptegrity in the amount of $292 thousand. INTEREST AND FINANCING EXPENSES. Interest and financing expense for the year ended September 30, 2004 was $11.5 million, compared to $15.1 million for the same period in 2003. The decrease was attributable to the lower average balance of the 11% senior notes outstanding in fiscal 2004 compared to fiscal 2003, which resulted from the repurchases we made throughout fiscal 2004 of approximately $47.3 million of our 11% senior notes offset by an increase in the balance of the 11% senior notes of approximately $7.2 million from the required payment in kind of the related accrued interest in May, 2004. INTEREST INCOME. Interest income for the year ended September 30, 2004 was $540 thousand, compared to $1.2 million, for the same period in 2003. The decrease was primarily due to a decrease in our cash and investments. OTHER INCOME, NET. Other income for the year ended September 30, 2004 was $1.7 million, compared to $1.2 million, for the same period in 2003. The increase was due primarily to the receipt of $450 thousand for an insurance claim filed in connection with the September 11, 2001 terrorist attack, and $850 thousand from leasing office space in our 139 Centre Street facility, offset by other non-operational expenses. 111
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors described above, we reported net loss of $41.4 million, or $2.51 basic and diluted loss per share for the year ended September 30, 2004, as compared to a net loss of $25.3 million, or $1.54 basic and diluted loss per share for the year ended September 30, 2003. FISCAL YEAR ENDED SEPTEMBER 30, 2003 COMPARED TO FISCAL YEAR ENDED SEPTEMBER 30, 2002 REVENUE. Revenue for the fiscal year ended September 30, 2003 decreased 26.6% to $60.1 million from $82.0 million for the fiscal year ended September 30, 2002. This decrease in revenues was mainly attributable to customer churn which accounted for $19.8 million, or approximately 90.4% of our revenue decrease. During fiscal 2003 our monthly churn averaged approximately 1.7%. Of this average monthly churn, 1.8% was related to downgrades, 3.2% was related to cancellations, partially offset by decreases in churn of 1.7% and 1.6% related to new and upgraded contracts, respectively. Revenues also declined due to a decrease in lower margin hardware and software sales. Hardware and software sales decreased $2.1 million, or 77.3%, as a result of our shift away from lower margin hardware and software sales. This decrease accounted for 9.6% of our total revenue decline. COST OF REVENUE AND GROSS MARGIN. Cost of revenue for the fiscal year ended September 30, 2003 decreased to $20.0 million from $32.6 million for the fiscal year ended September 30, 2002. A decrease of $10.8 million or 85.7% of our cost of revenue decrease, realized within non-hardware related costs reflects our continued focus on network reconfiguration. A decrease of $1.8 million, or 14.3% of our cost of revenue decrease, in hardware costs reflects our shift away from lower margin hardware sales. Gross margin increased to 66.8% for the fiscal year ended September 30, 2003 from 60.0% for the fiscal year ended September 30, 2002. The increase in gross margin is primarily attributable to the movement away from lower margin products and the reduction of network cost as a result of our focus on network reconfiguration. During fiscal year 2003, Globix sold its DSL services in the second quarter and shifted away from hardware sales, both low margin products. In addition, Globix reduced certain network costs through contract renegotiations with certain major vendors. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses were $44.4 million, or 73.8% of revenue, for the year ended September 30, 2003, compared to $29.3 million, or 95.0% of revenue, for the five months ended September 30, 2002. For the seven-month period ended April 30, 2002, selling, general and administrative expenses were $57.2 million, or 111.6% of revenue. For the fiscal year ended September 30, 2002 selling, general and administrative expenses totaled $86.5 million, or 106% of revenue. The decrease in selling, general and administrative expenses as a percentage of revenue for the fiscal year ended September 30, 2003 from both the five-month period ended September 30, 2002 and the seven month period ended April 30, 2002, was in part due to a decrease in salaries and benefits in connection with our restructuring efforts, which focused on significant reductions in facilities and personnel. During the year ended September 30, 2003, salaries and benefits were $21.3 million, or 35.5% of revenue, as compared to $12.4 million, or 40.0% of revenue, in the five month period ended September 30, 2002. For the seven month period ended April 30, 2002, salaries and benefits were $33.7 million, or 66.0% of revenue. For the fiscal year ended September 30, 2002, salaries and benefits totaled $46.1 million, or 56.0% of revenue. The number of our employees decreased from approximately 262 as of September 30, 2002 to approximately 209 as of September 30, 2003. For the year ended September 30, 2003, bad debt expense was $1.9 million, representing 3.1% of revenue, compared to $1.9 million, or 6.0% of revenue, for the five-month period ended September 30, 2002. For the seven-month period ended September 30, 2002, bad debt expense was $4.3 million, or 8.0% of revenue. For the fiscal year ended September 30, 2002, bad debt expense was $6.2 million, or 8.0% of revenue. The decrease in bad debt expense for the fiscal year ended September 30, 2003 was partially attributable to improvements in collections as well as a proactive reduction in the number of high risk customer account receivable balances. 112
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RESTRUCTURING AND OTHER EXPENSES. We recorded a reversal in the fiscal year 2003 of approximately $1.0 million to our previously recorded restructuring charges. Reversals related to contract settlement charges in the amount of $0.8 million and facility closings charges of $0.2 million were primarily for settling certain facility contracts and purchase commitments for amounts lower than originally planned. DEPRECIATION AND AMORTIZATION. Depreciation and amortization in the year ended September 30, 2003 was $15.5 million or 25.8% of revenue, as compared to $6.1 million, or 20% of revenue, in the five-month period ended September 30, 2002. Depreciation and amortization in the seven month period ended April 30, 2002 was $28.1 million or 55.0% of revenue. For the fiscal year ended September 30, 2002, depreciation and amortization was $34.2 million, or 41.7% of revenue. The decrease in depreciation and amortization expenses for the fiscal year 2003 compared to the fiscal year 2002 was attributable to a decrease in our capital spending in connection with our restructuring plan as well as the impact of fresh start accounting, in particular the revaluation of our tangible and intangible assets as of April 30, 2002. OTHER OPERATING INCOME. Other operating income resulted from the sale of DSL customer accounts in the amount of $345 thousand during the fiscal year ended September 30, 2003. INTEREST AND FINANCING EXPENSE AND INTEREST INCOME. Interest and financing expense for the year ended September 30, 2003 was $15.1 million, or 25.2% of revenue, compared to $6.7 million, or 22.0% of revenue, in the five months ended September 30, 2002. Interest and financing expense in the seven-month period ended April 30, 2002 was $34.5 million, or 67.0% of revenue. For the fiscal year ended September 30, 2002, interest and financing expense totaled $41.2 million, or 50.0% of revenue. The decrease in interest and financing expense was primarily attributable to the reduction in our outstanding indebtedness pursuant to the plan of reorganization and to the repurchase of approximately $19 million in principal value of the 11% senior notes during the fiscal year 2003. Interest income in the year ended September 30, 2003 was $1.2 million, or 2.0% of revenue, compared to $0.8 million, or 3.0% of revenue, in the five-month period ended September 30, 2002. Interest income in the seven-month period ended April 30, 2002 was $2.0 million, or 4.0% of revenue. For the fiscal year ended September 30, 2002, interest income was $2.8 million, or 3.0% of revenue. This decreasing trend was primarily attributable to the reduced amount of our cash investments and the impact of declining interest rates as compared to the prior fiscal year. OTHER INCOME (EXPENSE). Other income in the year ended September 30, 2003 was $1.2 million compared to an expense of $0.6 million in the fiscal year ended September 30, 2002. This increase is due primarily to write-offs of strategic investments in the amount of $490 thousand in the prior period and insurance receipts in the amount of $88 thousand associated with the September 11, 2001 terrorist attack received in the current year. GAIN ON DISCHARGE OF DEBT. Gain on discharge of debt was $6.0 million for the fiscal year ended September 30, 2003. The gain is a direct result of the repurchase of approximately $19 million in principal value of the 11% senior notes. We did not recognize any gain on discharge of debt during the five-month period ended September 30, 2002. The gain on the discharge of approximately $427.1 million recorded in the seven-month period ended April 30, 2002 resulted from the exchange of the 12.5% senior notes for the 11% senior notes under the plan of reorganization. INCOME TAX EXPENSE. Income tax expense for the fiscal year ended September 30, 2003, in the amount of $167 thousand, represents our estimated income taxes due in the United Kingdom. We did not record any income tax expenses during the fiscal year ended September 30, 2002. NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCKHOLDERS. As a result of the factors described above, we reported net loss of $25.3 million and net loss attributable to common stockholders of $25.3 million, or $1.54 basic and diluted loss per share for the fiscal year ended September 30, 2003, as compared to a net income of $138.8 million and net income attributable to common stockholders of $135.6 million, or $2.67 basic earnings per share and $2.01 diluted earnings per share, respectively, for the fiscal year ended September 30, 2002. 113
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LIQUIDITY AND CAPITAL RESOURCES Historically our cost structure exceeded our revenue base mainly due to high labor costs resulting from higher than necessary head count, significant level of overhead due to numerous locations and overlapping within our network. This has led us historically to experience negative cash flows from operations and incur net losses. Our management believes that steps taken as part of our restructuring efforts to reduce facilities and personnel, combined with our ongoing efforts to derive efficiencies from our network have reduced our cash outflows to a level that meets our current revenue rate. Our ability to generate positive cash flows from operations and achieve profitability is dependent upon our ability to grow our revenue while maintaining our current cost structure and network efficiencies. Management believes that by maintaining a monthly positive change in contract rate (negative churn), by continuing to focus on providing managed services solutions and by keeping close control over costs and expenditures it will be able to meet its revenue and profitability targets. Additionally, since emerging from bankruptcy our management has taken several significant steps to reduce our level of outstanding indebtedness and is committed to further reduce our financial obligations by settling them in cash, converting into equity instruments, refinancing or any other manner, which may be beneficial to us. The indenture governing our 11% senior notes permits interest to be paid in kind in 2005 and 2006 at the discretion of our board of directors. Although there can be no assurance, Globix management believes that its board will elect payment of interest in kind in 2005. As of September 30, 2004 our cash and cash equivalent, short-term and long-term investments amounted to approximately $21.7 million. In addition during fiscal year 2004 we used approximately $1.6 million in operating activities, which we believe represents our recurring cash-flow activities following the complete consummation of our plan of reorganization and under our current cost structure. We further believe that this cash and investment balance is sufficient to meet our 2005 anticipated day to day operating expenses, commitments, working capital, capital expenditures and interest payment of approximately $8.0 million under our 11% senior notes if our board does not elect payment of interest in kind. However, in the longer term there can be no assurance that we will be successful in achieving sufficient profitability, attracting new customers, maintaining our existing churn levels or reducing our outstanding indebtedness. In addition, in the future, we may make acquisitions or repurchase indebtedness of our company, which, in turn, may adversely affect our liquidity. In such cases management will have to take drastic steps to reduce its operating expenses to meet its then revenue base and liquidity needs. Such steps may include further reduction of our headcount, consolidation or elimination of facilities, termination of low margin customers and negotiating with our creditors to restructure our indebtedness, mainly but not limited to our 11% senior notes. On March 1, 2002, our company and two of our wholly owned domestic subsidiaries, Comstar.net, Inc. and ATC Merger Corp., filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code, together with the plan of reorganization, with the United States Bankruptcy Court for the District of Delaware. We continued to operate in Chapter 11 in the ordinary course of business and received permission from the bankruptcy court to pay our employees, trade, and certain other creditors in full and on time, regardless of whether these claims arose prior to or after the Chapter 11 filing. On April 8, 2002, the bankruptcy court confirmed the plan. Effective April 25, 2002, all conditions necessary for the plan to become effective were satisfied or waived and we emerged from Chapter 11 bankruptcy protection. As of the effective date of the plan, all of our existing securities were cancelled and: o each holder of our 12.5% senior notes due 2010 became entitled to receive, in exchange for its claims in respect of the 12.5% senior notes, its pro rata share of: o $120 million in aggregate principal amount of our 11% senior notes, and o 13,991,000 shares of our common stock, representing 85% of the shares of our common stock issued and outstanding following the effective date of the plan; and 114
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o each holder of shares of our preferred stock outstanding immediately prior to the effective date of the plan became entitled to receive, in exchange for its claims in respect of these shares of preferred stock, its pro rata share of 2,304,400 shares of our common stock, representing 14% of the shares of our common stock issued and outstanding following the effective date of the plan; and o each holder of shares of our common stock outstanding immediately prior to the effective date of the plan became entitled to receive, in exchange for its claims in respect of its shares of common stock, its pro rata share of 164,600 shares of our common stock, representing 1% of the shares of our common stock issued and outstanding following the effective date of the plan. All of the shares of our common stock issued pursuant to the plan are subject to dilution by the exercise of management incentive stock options, representing up to 10% of the shares of our issued and outstanding common stock on a fully-diluted basis following the effective date of the plan. A total of 16,460,000 shares of our common stock and $120 million in aggregate principal amount of the 11% senior notes were deemed to be issued and outstanding on the effective date of the plan pursuant to the terms of the plan. As of September 30, 2002, however, no shares of our common stock or 11% senior notes had been distributed. In October 2002, we distributed a total of 16,295,400 shares of common stock and $120 million in aggregate principal amount of 11% senior notes. Pursuant to the terms of a Stipulation and Order that we entered into with the lead plaintiffs in the class action lawsuit described in "Item 3 - Legal Proceedings," 229,452 of these shares of common stock and $1,968,000 in aggregate principal amount of these 11% senior notes were placed in reserve in escrow pending the outcome of the class action lawsuit. In the event that any judgment or settlement entered into in connection with the class action lawsuit requires us to pay an amount in excess of our liability insurance, then we will be required to issue to the class action litigants and their attorneys all (in the event that this excess is $10 million or greater) or a portion of (in the event that this excess is less than $10 million) the shares of common stock and 11% senior notes held in escrow. Based on an August 12, 2004 court approval of a settlement agreement pursuant to which Globix would not be required to pay an amount in excess of our liability insurance described under "Item 3 -Legal Proceedings," Globix believes that the shares of common stock and 11% senior notes held in escrow are not likely to be distributed to the class action litigants and their attorneys, and such shares and notes will accordingly be available for distribution to Globix security holders under the plan. Distribution of the remaining 164,600 shares of common stock deemed to have been issued on the effective date of the plan, which are allocable under the terms of the plan to the holders of our common stock outstanding immediately prior to the effective date of the plan, will occur following the resolution of the stockholder derivative suit against our company and certain of our former officers and directors described in "Item 3 - Legal Proceedings". The indenture governing the 11% senior notes contains a number of covenants that impose significant operating and financial restrictions on us and our subsidiaries. These restrictions significantly limit, and in some cases prohibit, among other things, the ability of our company and certain of our subsidiaries to incur additional indebtedness, create liens on assets, enter into business combinations or engage in certain activities with our subsidiaries. FISCAL YEAR ENDED SEPTEMBER 30, 2004 As of September 30, 2004, we had cash and cash equivalents, short-term and long-term investments totaling to approximately $21.7 million compared to approximately $32.4 million on September 30, 2003. This decrease of $10.7 million included a $12.4 million decrease in cash and cash equivalents to $12.1 million at September 30, 2004 from $24.5 million at September 30, 2003. This was mainly attributable to operating activities, investing activities and financing activities as described below. During the year ended September 30, 2004, we completed the sale of the 415 Greenwich Street property for approximately $48.7 million in net proceeds, of which approximately $44 million was used to purchase a portion of our 11% senior notes at par plus accrued interest as required pursuant to the indenture and the remainder was used for working capital. 115
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OPERATING ACTIVITIES. Net cash used in operating activities during the year ended September 30, 2004 was approximately $1.6 million in comparison to $12.2 million, which was used in operating activities during the year ended September 30, 2003. The improvement in our cash burn is due to the pay-down of the remaining pre-bankruptcy obligations to our vendors and others during fiscal 2003, our continuing improvement in collections, the reduction in the number of high-risk customer account receivable balances and our ongoing focus on cost control by adjusting our expenditure rate to our revenues. We believe that the change in our accounts receivable, accounts payable and accrued liabilities during fiscal 2004 represents our recurring cash-flow activities following the complete consummation of our plan of reorganization. Our $1.6 million use of cash in operating activities was attributed mainly to our net loss of $41.4 million, which included non-cash depreciation and amortization expenses of $13.8 million and a non-cash impairment charge of $18.0 million resulting from a write-down of the 415 Greenwich Street property to its fair market value less cost for sale, offset by a non-cash gain on debt discharge of $1.7 million resulting from the repurchase of a portion of our 11% senior notes. Changes in assets and liabilities resulted in an increase to operating cash flow of approximately $9.5 million, which was mainly attributed to a $9.4 million increase in accrued interest on the 11% senior notes, which we expect will be paid in kind during May 2005. INVESTING ACTIVITIES. Net cash provided by investing activities during the year ended September 30, 2004 was $42.2 million. Approximately $48.7 million resulted from the sale of the 415 Greenwich Street property and approximately $1.0 million, net resulted from the sale of our investment in Globecomm Systems, Inc. and other investments. This was offset by the use of $2.3 million for the acquisition of Aptegrity, $4.7 million for capital expenditures and $1.5 million of deferred acquisition cost that we incurred as part of the proposed merger with NEON. FINANCING ACTIVITIES. Net cash used in financing activities during the year ended September 30, 2004 was $53.4 million. Approximately $49.6 million of the cash used in financing activities was attributed to the repurchase of a portion of our 11% senior notes and related accrued interest in the open market and as part of an offer to the holders of the 11% senior notes in connection with the sale of the 415 Greenwich Street property. $2.7 million was used to prepay a long-term note payable and the remaining $1.1 million was used for payment and settlement of certain contractual obligations. FISCAL YEAR ENDED SEPTEMBER 30, 2003 As of September 30, 2003, we had cash and cash equivalents of approximately $24.5 million compared to approximately $47.6 million on September 30, 2002. OPERATING ACTIVITIES. For the fiscal year ended September 30, 2003 net cash used in operating activities was approximately $12.2 million attributable mainly to a net loss of $25.3 and non-cash gains of approximately $6.0 million and $1.0 million for discharges resulting from our repurchase of the 11% senior notes and reversal of restructuring accruals recorded in prior years, respectively, offset by depreciation and amortization expenses of approximately $15.5 million, an increase in our provision of doubtful accounts of approximately $1.9 million and a non-cash charge of approximately $1.0 million recorded in respect of warrants issued to a consultant. Changes in assets and liabilities resulted in an increase to operating cash-flow of approximately $2.0 million. INVESTING ACTIVITIES. Cash used for investing activities for the year ended September 30, 2003 amounted to approximately $0.9 million, which attributed mainly to capital expenditures in the amount of approximately $1.2 million. 116
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In September 2000 we purchased the land and approximately 187,000 gross square foot building located at 415 Greenwich Street, New York, New York. During October 2003 we reached an agreement to sell the property for total cash consideration of approximately $60 million. The agreement was subject to various closing conditions which were not satisfied until January 2004. The sale of the property was completed on January 22, 2004 and resulted in approximately $48.7 million in net proceeds. On March 3, 2004, we used approximately $44 million of the net proceeds to repurchase approximately $40.3 million in principal amount of our outstanding 11% senior notes at par value plus accrued interest in the amount of approximately $3.7. We intend to use the remaining balance of the net proceeds from the sale for working capital purposes. Consummation of the sale also eliminated certain obligations that we incurred in connection with the purchase and rehabilitation of the property. On October 31, 2003, Globix paid approximately $2.0 million (subject to final settlement) for the acquisition of the business, substantially all of the assets and the assumption of certain liabilities of Aptegrity, Inc., a provider of web application and operations management services. FINANCING ACTIVITIES. Cash used in financing activities for the year ended September 30, 2003 amounted to approximately $10.5 million. Approximately $14.6 million were used to repurchase a portion of our 11% senior notes, approximately $0.9 million were used to buy-out certain of our capital leased equipments and approximately $1.1 million were used to amortize scheduled payments under our mortgage and capital lease agreements, offset by a contribution of approximately $6 million from the minority interest investor mentioned above. On October 3, 2003, we repurchased in the open market for approximately $5.6 million additional portion of our outstanding 11% senior notes. 117
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SEGMENT INFORMATION Our activities fall within one operating segment. The following table sets forth geographic segment information for the year ended September 30, 2004 and 2003 (Successor Company), five months ended September 30, 2002 (Successor Company), and for the seven months ended April 30, 2002 (Predecessor Company): [Enlarge/Download Table] PREDECESSOR SUCCESSOR COMPANY COMPANY ---------------------------------------------------- -------------- FIVE MONTHS SEVEN MONTHS YEAR ENDED YEAR ENDED ENDED ENDED SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, APRIL 30, 2004 2003 2002 2002 -------------- -------------- -------------- -------------- Revenues: United States ................................. $ 35,537 $ 36,833 $ 20,410 $ 37,747 Europe (mainly the United Kingdom) ........... 25,653 23,344 10,313 13,526 -------------- -------------- -------------- -------------- Consolidated ................................. $ 61,190 $ 60,177 $ 30,723 $ 51,273 ============== ============== ============== ============== Operating income (loss): United States.................................. $ (37,755) $ (22,631) $ (15,069) $ (54,433) Europe (mainly the United Kingdom) ........... 3,880 4,230 (39) (29,150) -------------- -------------- -------------- -------------- Consolidated ................................. $ (33,875) $ (18,401) $ (15,108) $ (83,583) ============== ============== ============== ============== Long-lived assets: United States ................................. $ 64,978 $ 137,279 $ 148,559 United Kingdom ............................... 25,844 25,351 26,151 -------------- -------------- -------------- Consolidated ................................. $ 90,822 $ 162,630 $ 174,710 ============== ============== ============== Although our company operates in one operating segment, there are 4 major service lines as detailed in the table below. Data for fiscal year 2002 have not been provided due to impracticability. [Enlarge/Download Table] SUCCESSOR COMPANY ---------------------------------- YEAR ENDED YEAR ENDED SEPTEMBER 30, SEPTEMBER 30, 2004 2003 -------------- -------------- Internet Hosting and Co-Location..................... $ 23,760 $ 26,048 Managed Services..................................... 18,996 13,342 Network Services and Internet Access................. 17,483 19,034 Hardware and Software Sales, DSL and Other .......... 951 1,753 -------------- -------------- Revenue, net $ 61,190 $ 60,177 ============== ============== 118
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INCOME TAXES Globix is in an accumulated loss position for both financial and income tax reporting purposes. Globix has United States Federal income tax loss carryforwards of approximately $173.2 million at September 30, 2004. These income tax loss carryforwards expire at various times through 2024. The United States Federal income tax loss carryforwards were reduced upon emergence from bankruptcy due to the Internal Revenue Code's rules and regulations related to the cancellation of indebtedness income that is excluded from taxable income. Since the bankruptcy plan provided for substantial changes in our ownership, our use of net operating loss carryforwards from the period prior to bankruptcy may be limited. Globix has not yet determined the impact, if any, that changes in ownership have had on net operating loss carryforwards. As of September 30, 2004, Globix also had net operating loss carryforwards of approximately $24.3 million from its United Kingdom subsidiaries, which do not expire under United Kingdom tax rules. For financial reporting purposes, income tax benefits through September 30, 2004 related to both United States Federal and foreign income tax losses are fully offset by a valuation allowance due to the uncertainty of our ability to realize income tax benefits by generating taxable income in the future. Our emergence from bankruptcy in fiscal 2002 did not create a new tax reporting entity. Accordingly, the adjustments required to adopt fresh start accounting are not applicable for our tax reporting and, therefore, deferred tax items were recognized concurrently with the recognition of the respective fresh start accounting adjustments. In addition, pursuant to SOP 90-7, reversals of the valuation allowance recorded against deferred tax assets that existed as of the emergence date will first reduce intangibles, until exhausted, and thereafter will be reported as additional paid in capital as opposed to income tax expense. The balance of the valuation allowance for which this treatment is required was approximately $80 million at September 30, 2004 and 2003. INDEBTEDNESS Our indebtedness at September 30, 2004 consisted of approximately $72.2 million in aggregate principal amount of our 11% senior notes, approximately $3.3 million in related accrued interest, approximately $370 thousand of capital lease obligations and approximately $19.9 million in mortgage debt. Total borrowings at September 30, 2004 were approximately $95.9 million, which included $0.6 million in current obligations and $95.3 million of the 11% senior notes, related accrued interest, long-term mortgage and capital lease obligations. The indenture governing the 11% senior notes requires interest to be paid in kind through 2004, and permits interest to be paid in kind for two years thereafter at the discretion of our board of directors. In September 2000 we purchased the land and approximately 187,000 gross square foot building located at 415 Greenwich Street, New York, New York. During October 2003 we reached an agreement to sell the property for total cash consideration of approximately $60 million. The agreement was subject to various closing conditions which were not satisfied until January 2004. The sale of the property was completed on January 22, 2004 and resulted in approximately $48.7 million in net proceeds. On March 3, 2004, we used approximately $44 million of the net proceeds to repurchase approximately $40.3 million in principal amount of our outstanding 11% senior notes at par value plus accrued interest in the amount of approximately $3.7. Consummation of the sale also eliminated certain obligations that we incurred in connection with the purchase and rehabilitation of the property. In addition, through September 30, 2004 we acquired in the open market approximately $26.1 million in aggregate principal amount of our 11% senior notes and approximately $1.9 million of related accrued interest for an aggregate purchase price of approximately $20.2 million in open market purchases and issued an additional $18.5 million in 11% senior notes as payment of accrued interest on the 11% senior notes. COMMITMENTS As of September 30, 2004, we had commitments to certain telecommunications carriers totaling $25.6 million payable in various years through 2009. Additionally, we have various agreements to lease facilities and equipment and are obligated to make future minimum lease payments of approximately $76 million on operating leases expiring in various years through 2017. 119
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As of September 30, 2004 we had contractual obligations due in future periods as follows: [Enlarge/Download Table] Less than 1 After 5 Contractual Obligations Total year 2-3 years 4-5 years years ------------- ------------- ------------- ------------- ------------- 11% senior notes $ 72,202 $ -- $ -- $ 72,202 $ -- 11% senior notes - Accrued Interest 3,349 -- -- 3,349 -- Mortgage Payable 33,979 2,142 4,284 4,284 23,269 Capital Lease Obligations 370 249 121 -- -- Operating Leases 76,029 6,777 13,673 13,701 41,878 Telecommunications Commitments 25,564 9,738 11,909 3,917 -- ------------- ------------- ------------- ------------- ------------- Total Contractual Cash Obligations $ 211,493 $ 18,906 $ 29,987 $ 97,453 $ 65,147 ============= ============= ============= ============= ============= RECENT TECHNICAL ACCOUNTING PRONOUNCEMENTS In April 2003, the Financial Accounting Standards Board issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." SFAS No. 149 clarifies under what circumstances a contract with an initial net investment meets the characteristics of a derivative as discussed in Statement No. 133. It also specifies when a derivative contains a financing component that warrants special reporting in the Consolidated Statement of Cash Flows. SFAS No. 149 amends certain other existing pronouncements in order to improve consistency in reporting these types of transactions. The new guidance is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The adoption of this standard did not have a material impact on our consolidated financial statements. In May 2003, the Financial Accounting Standards Board issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." SFAS No. 150 specifies that instruments within its scope embody obligations of the issuer and that, therefore, the issuer must classify them as liabilities. SFAS No. 150 requires issuers to classify as liabilities the following three types of free standing financial instruments: (1) mandatorily redeemable financial instruments; (2) obligations to repurchase the issuer's equity shares by transferring assets and (3) certain obligations to issue a variable number of shares. SFAS No. 150 defines a "freestanding financial instrument" as a financial instrument that (1) is entered into separately and apart from any of the entity's other financial instruments or equity transactions or (2) is entered into in conjunction with some other transaction and can be legally detached and exercised on a separate basis. For all financial instruments entered into or modified after May 31, 2003, SFAS No. 150 is effective immediately. For all other instruments of public companies, SFAS No. 150 goes into effect at the beginning of the first interim period beginning after June 15, 2003. For contracts that were created or modified before May 31, 2003 and still exist at the beginning of the first interim period beginning after June 15, 2003, entities should record the transition to SFAS No. 150 by reporting the cumulative effect of a change in an accounting principle. SFAS No. 150 prohibits entities from restating financial statements for earlier years presented. The adoption of this standard did not have a material impact on our consolidated financial statements. In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (ARB) No. 51", which relates to the identification of, and financial reporting for, variable-interest entities (VIEs). FIN No. 46 requires that if an entity is the primary beneficiary of a variable interest entity, the assets, liabilities and results of operations of the variable interest entity should be included in the consolidated financial statements of the entity. The provisions of FIN No. 46 are effective immediately for all arrangements entered into after January 31, 2003. For those arrangements entered into prior to February 1, 2003, the provision of FIN No. 46 are required to be adopted at the beginning of the first interim or annual period beginning after June 15, 2003. In October 2003, FASB Staff Position deferred the effective date for existing VIE arrangements created before February 1, 2003 to the first interim or annual reporting period that ends after December 15, 2003. The adoption of this standard did not have a material impact on the company's consolidated financial statements. 120
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 2004, investments consisted of an investment in a limited partnership that invests in fixed income securities and investments in fixed rate investment grade and government securities denominated in U.S. dollars. At September 30, 2004, the majority of our investments were due to mature within twelve months and the carrying value of these investments approximated fair value. As of September 30, 2004 marketable securities included our investment in EDGAR Online Inc., which is recorded at fair market value. We do not hedge our exposure to fluctuations in the value of our investments in equity securities. At September 30, 2004, $4.7 million of our cash and investments were restricted in accordance with the terms of certain collateral obligations. We are also subject to market risk associated with foreign currency exchange rates. Approximately 42% of our revenues and approximately 28% of our operating costs and expenses for the year ended September 30, 2004 were denominated in British Pounds. To date, we have not utilized financial instruments to minimize our exposure to foreign currency fluctuations. We will continue to analyze risk management strategies to minimize foreign currency exchange risk in the future. The company believes that an immediate increase or decrease of 5% of the U.S. Dollar in comparison to the British Pound would not have a material impact on its operating results or cash flows. We believe that we have limited exposure to financial market risks, including changes in interest rates. The fair value of our investment portfolio or related income would not be significantly impacted by changes in interest rates due mainly to the short-term nature of the majority of our investment portfolio. An increase or decrease in interest rates would not significantly increase or decrease interest expense on debt obligations, due to the fixed nature of the substantial majority of our debt obligations. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE On July 31, 2002, we engaged PricewaterhouseCoopers LLP ("PWC") as our independent accountants and dismissed Arthur Andersen LLP, which had previously served as our independent accountants. The board of directors and audit committee participated in and approved the decision to change independent accountants. The audit reports of Arthur Andersen on the consolidated financial statements of Globix and its subsidiaries as of and for the fiscal years ended September 30, 2000 and 2001 did not contain an adverse opinion or disclaimer of opinion, nor were they modified as to uncertainty, audit scope or accounting principles. The audit report for the year ended September 30, 2001 contained a going concern modification. During the fiscal years ended September 30, 2000 and 2001, there were no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of Arthur Andersen LLP, would have caused it to make reference to the subject matter of the disagreement in connection with its report. PWC served as our independent accountants from July 31, 2002 through September 12, 2003. At a meeting held on September 12, 2003, our audit committee recommended and approved a change in our independent accountants. Accordingly, we dismissed PWC as our independent accountants on September 12, 2003. 121
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PWC's reports on our financial statements for the seven-month period ended April 30, 2002 and as of and for the five month period ended September 30, 2002 contained no adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principle. From the date of PWC's engagement on July 31, 2002 through September 12, 2003, there have been no disagreements with PWC on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of PWC, would have caused PWC to make reference thereto in its report on the financial statements for such periods. From the date of PWC's engagement on July 31, 2002 through September 12, 2003, there have been no "reportable events" as that term is defined in Item 304(a)(1)(v) of Regulation S-K, except that on August 13, 2003 PWC provided us with a management letter reporting to us the matter described in the following paragraphs: Since our emergence from bankruptcy in April 2002, we have had to face many challenging and complex accounting and financial reporting issues, including fresh start accounting, restructuring and the restatement of amounts in our financial statements for the quarter ended March 31, 2002. In addition, we have experienced significant turnover in our financial reporting staff, as well as limited management resources. We fell behind in our periodic reporting to the Securities and Exchange Commission for the year ended September 30, 2002, and experienced difficulty in catching up with our filing obligations for the year ended September 30, 2002 while fulfilling our responsibilities for the year ended September 30, 2003. PWC reported that the combined effect of these challenges had stressed the capabilities of our accounting staff and created material weaknesses within our accounting and reporting controls. The management letter indicated that the shortage of qualified accounting personnel had required PWC to perform significantly more work in connection with the audit of our financial statements for the seven-month period ended April 30, 2002 and the five-month period ended September 30, 2002. The management letter recommended hiring at least two additional senior financial staff members, one of whom would be required to be the controller. We agreed with these findings and recommendations and as such, the management letter noted that we had hired a controller who began work on July 15, 2003. In addition, in order to resolve the problems described above, we hired a new senior accountant in May 2003, a new manager of external reporting in October 2003 and a new senior accountant in November 2003. In addition, we returned to a normal recurring closing timetable that includes formal management reviews and a monthly financial reporting package in January 2004. Finally, by completing our fiscal 2002 reporting, we have significantly reduced the burden on our internal accounting staff. At its meeting on September 12, 2003, our audit committee recommended and approved the engagement of Amper, Politziner & Mattia PC, which firm we refer to as "Amper," as our independent auditors. Accordingly, we engaged Amper as our independent auditors, effective September 12, 2003. During the two most recent fiscal years and through September 12, 2003, we had not consulted with Amper regarding any matter that would require reporting under Item 304(a)(2) of Regulation S-K. 122
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SHARE OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBIX PRINCIPAL HOLDERS OF COMMON STOCK The following table and the accompanying notes set forth certain information, as of December 1, 2004 (except as set forth below), concerning the beneficial ownership of our common stock by: (1) each person who is known by us to beneficially own more than five percent of our common stock, (2) each current director of Globix, (3) each officer of Globix named in the Summary Compensation Table and (4) all current directors and executive officers as a group. [Download Table] NAME AND ADDRESS NUMBER OF PERCENT OF OF BENEFICIAL OWNER SHARES(1),(2) CLASS ------------------- ------------- ----- Goldman, Sachs & Co. 1,405,513(3) 8.54% 85 Broad Street New York, NY 10004 HM Parties(4) 2,304,400(5) 14.00% c/o Hicks, Muse, Tate & Furst Incorporated 200 Crescent Court, Suite 1600 Dallas, Texas 75201 MacKay Shields LLC 2,482,491(6) 15.08% c/o MacKay Shields Financial Corp. 9 West 57th Street New York, NY 10019 JGD Management Corp. 1,027,733(7) 6.24% 350 Park Avenue New York, New York 10022 Kingdon Capital Management, LLC 1,397,076(8) 8.49% 152 West 57th Street, 50th Floor New York, NY 10019 Peter S. Brodsky --(9) * Peter L. Herzig -- * Steven Lampe 1,219,817(10) 7.41% Steven G. Singer 1,138,007(11) 6.91% Raymond L. Steele -- * Peter K. Stevenson 548,667(12) 3.23% Steven Van Dyke 168,609(13) 1.02% Robert M. Dennerlein 55,833(14) * H. Jameson Holcombe 65,221(15) * 123
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NAME AND ADDRESS NUMBER OF PERCENT OF OF BENEFICIAL OWNER SHARES(1),(2) CLASS ------------------- ------------- ----- John D. McCarthy 97,546(16) * Philip J. Cheek 15,000(17) * All directors and executive officers as a group (12 persons) 3,317,034(18) 19.23%
* Less than 1%. (1) The information regarding beneficial ownership of our common stock has been presented in accordance with the rules of the Securities and Exchange Commission. Under these rules, a person may be deemed to beneficially own any shares as to which such person, directly or indirectly, has or shares voting power or investment power and also any shares of our common stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire from Globix within 60 days. For purposes of calculating the beneficial ownership percentages set forth above, the total number of shares of our common stock deemed to be outstanding as of December 1, 2004 was 16,460,000. As used in this joint proxy statement/prospectus, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. Except as noted, each stockholder listed has sole voting and investment power with respect to the shares shown as being beneficially owned by such stockholder. (2) On June 25, 2002, we entered into a Stipulation and Order with the lead plaintiffs in the class action lawsuit described in the section of this joint proxy statement/prospectus entitled "Information About Globix --Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus. The Stipulation and Order provides that 229,452 shares of our common stock and $1.968 million in aggregate principal amount of our 11% senior notes will be held in reserve in escrow pending the outcome of the class action lawsuit. In the event that any judgment or settlement entered into in connection with the class action lawsuit requires us to pay an amount in excess of our liability insurance, we will be required to issue to the class action litigants and their attorneys all (in the event that this excess is $10 million or greater) or a portion of (in the event that this excess is less than $10 million) the shares of our common stock and the notes being held in escrow. On August 12, 2004, the United States District Court for the Southern District of New York approved the settlement of the class action lawsuit in an amount which would be covered by liability insurance. Although the settlement remains subject to appeal, Globix believes that its liability insurance is sufficient to cover any judgment or settlement in the class action lawsuit and that the shares of Globix common stock and the notes being held in escrow will be distributed in accordance with the plan or reorganization rather than to the class action litigants and their attorneys. Accordingly, MacKay Shields LLC and Goldman Sachs & Co. (and each other former holder of our 12.5% notes on the effective date of the plan of reorganization) will be entitled to receive a portion of these 229,452 shares of common stock based on its percentage ownership of the 12.5% notes on the effective date of the plan of reorganization. 124
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(3) This information is as of August 31, 2004 and based on information provided to us by Goldman Sachs & Co. (4) "HM Parties" refers collectively to HM4 Globix Qualified Fund, LLC, HM4 Globix Private Fund, LLC, HM PG-IV Globix, LLC, HM 4-EQ Globix Coinvestors, LLC and HM 4-SBS Globix Coinvestors, LLC. Of the 2,304,400 shares held by the HM Parties: (i) 2,092,487 of these shares are owned of record by HM4 Globix Qualified Fund, LLC; (ii) 14,831 of these shares are owned of record by HM4 Globix Private Fund, LLC; (iii) 111,430 of these shares are owned of record by HM PG-IV Globix, LLC; (iv) 34,177 of these shares are owned of record by HM4 EQ Globix Coinvestors, LLC; and (v) 51,475 of these shares are owned of record by HM4 SBS Globix Coinvestors, LLC. (5) Thomas O. Hicks is the President and Chief Executive Officer of each of the HM Parties and is the sole member of the ultimate general partner of the controlling member of each of the HM Parties and has the ultimate legal authority over all investment decisions made with respect to the shares of our common stock owned of record by the HM Parties. Accordingly, Mr. Hicks may be deemed to beneficially own all or a portion of the shares of our common stock owned of record by the HM Parties. Peter S. Brodsky, a director of Globix, Dan H. Blanks, Joe Colonnetta, Jack D. Furst, a director of Globix from December 1999 through April 2002, Lyndon Lea, John R. Muse, Rick Neuman and Andrew Rosen are partners of Hicks, Muse, Tate & Furst Incorporated, which is an affiliate of Mr. Hicks and of the HM Parties, and serve as officers of each of the HM Parties. In addition, Messrs. Hicks, Muse, Lea and Furst are members of the management committee of Hicks, Muse Tate & Furst Incorporated. Consequently, these individuals may be deemed to beneficially own all or a portion of the shares of our common stock owned of record by the HM Parties. Each of Messrs. Hicks, Brodsky, Blanks, Colonnetta, Furst, Lea, Muse, Neuman and Rosen disclaims the existence of a group and disclaims beneficial ownership of the shares of our common stock of which he is not the record owner. (6) This information is as of November 19, 2004 and based on information provided to us by MacKay Shields LLC, the pecuniary interests in these shares are held by a number of clients for whom MacKay Shields LLC is the discretionary investment advisor or subadvisor. MacKay Shields LLC has voting and investment control over these shares and, accordingly, is deemed to beneficially own these shares. (7) According to information provided to us by JGD Management Corp. these shares are held by certain managed accounts and investment funds for whom JGD Management Corp. is the discretionary investment advisor. (8) According to information provided to us by Kingdon Capital Management, LLC, these shares are directly beneficially owned by Kingdon Capital Management, LLC and held of record by Kingdon Associates, Kingdon Partners, Kingdon Family Partnership LP and M. Kingdon Offshore N.V. (9) Mr. Brodsky is a partner of Hicks, Muse, Tate & Furst Incorporated, which is an affiliate of Mr. Hicks and each of the HM Parties, and serves as an officer of each of the HM Parties. Consequently, Mr. Brodsky may be deemed to beneficially own all or a portion of the shares of our common stock owned of record by each of the HM Parties. Mr. Brodsky disclaims the existence of a group and disclaims beneficial ownership of shares of our common stock of which he is not the record owner. (10) Mr. Lampe is affiliated with LC Capital Master Fund Ltd., which owns these shares. Mr. Lampe has voting and investment control over these shares and, consequently, is deemed to beneficially own these shares. (11) Mr. Singer is co-trustee of two trusts for the benefit of his brother's children and as trustee has voting and investment control over the 517,979 shares of our common stock held in the trusts. Mr. Singer and his sister-in-law, Karen Singer, filed a Schedule 13G to report the beneficial ownership of these shares and an additional 589,109 shares held in a trust for the benefit of Mr. Singer's brother's children, for which Karen Singer serves as sole trustee. Mr. Singer and his sister-in-law disclaim membership in a group, as such term is defined in Section 13(d)(3) of the Securities Exchange Act of 1934, and disclaim any other interest in the common stock held in the Singer Trusts. 125
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(12) Pursuant to the terms of Mr. Stevenson's employment agreement described in "Executive Compensation - Employment Agreements - Peter K. Stevenson", on March 14, 2003, we granted to Mr. Stevenson options to acquire 548,667 shares of our common stock pursuant to our 2003 Stock Option Plan. As of December 31, 2003, all of these stock options were vested. (13) Mr. Van Dyke is the founder and co-managing principal of Bay Harbour Management L.C. Bay Harbour Management serves as investment advisor for Bay Harbour 90-1, Ltd., Bay Harbour Partners, Ltd., Zurich Institutional Benchmarks Master Fund Ltd. and HFR DS Strategic Master Trust, which collectively owned (as of August 1, 2003) 168,609 shares of our common stock, or approximately 1.02 percent of the shares of our outstanding common stock. Bay Harbour Management has voting and investment control over these shares and, accordingly, may be deemed to beneficially own these shares. Mr. Van Dyke is the natural person with voting and investment control over these shares. (14) Includes options to purchase 55,833 shares that are exercisable within 60 days of December 1, 2004, including 16,667 options which vested on September 30, 2004 assuming determination by Globix's compensation committee of its board of directors that certain performance targets have been achieved. (15) Includes options to purchase 65,221 shares that are exercisable within 60 days of December 1, 2004, including 17,764 options which vested on September 30, 2004 assuming determination by Globix's compensation committee of its board of directors that certain performance targets have been achieved. (16) Includes options to purchase 97,544 shares that are exercisable within 60 days of December 1, 2004, including 24,386 options which vested on September 30, 2004 assuming determination by Globix's compensation committee of its board of directors that certain performance targets have been achieved. (17) Includes options to purchase 15,000 shares that are exercisable within 60 days of December 1, 2004, including 5,000 options which vested on September 30, 2004 assuming determination by Globix's compensation committee of its board of directors that certain performance targets have been achieved. (18) Includes options to purchase an aggregate of 790,599 shares that are exercisable within 60 days of December 1, 2004, including 67,984 options which vested on September 30, 2004 assuming determination by Globix's compensation committee of its board of directors that certain performance targets have been achieved. Unless otherwise indicated, the address for the individuals listed above is c/o Globix Corporation, 139 Centre St., New York, NY 10013. 126
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DESCRIPTION OF GLOBIX CAPITAL STOCK DESCRIPTION OF COMMON STOCK The following summary is a description of the material terms of our common stock, does not purport to be complete and is subject in all respects to the applicable provisions of Delaware law and of our constituent documents and of the constituent documents of our subsidiaries. GENERAL Our company is authorized to issue 500,000,000 shares of common stock with a par value of $0.01 per share. We are also authorized to issue 5,000,000 shares of preferred stock with a par value of $0.01 per share. As of December 1, 2004, 16,460,000 shares of common stock were issued and outstanding (including 229,452 shares held in reserve pending the outcome of a class action lawsuit and 164,600 shares held in reserve pending resolution of a shareholder derivative suit, each as described in detail in the section entitled "Information About Globix - Legal Proceedings" beginning on page 102 of this joint proxy statement/prospectus) and no shares of our preferred stock were authorized or outstanding. Our board of directors is authorized, subject to any limitations prescribed by law and limitations set forth in the indenture, dated as of April 23, 2002, among Globix, the subsidiary guarantors listed therein and HSBC Bank USA, as trustee, to provide for the issuance of preferred stock in one or more series and to fix or alter the dividend rate, voting rights, redemption price, liquidation preference and any other rights, powers and preferences as our board of directors may determine from time to time. The indenture limits, among other things, our ability to pay dividends and to issue stock with a mandatory redemption date prior to the maturity date of the notes. All shares of our common stock are identical and entitle the holders thereof to the same rights and privileges. The issued and outstanding shares of our common stock are validly issued, fully paid and non-assessable. The holders of outstanding shares of our common stock are entitled to receive dividends out of assets legally available therefore at such times and in such amounts as our board of directors may from time to time determine in its discretion. The holders of our common stock have no preemptive rights to purchase any of our securities. Upon liquidation, dissolution or winding up of our company, the holders of our common stock are entitled to receive pro rata our assets which are legally available for distribution, after payment of all debts and other liabilities and subject to the prior rights of any holders of any preferred stock then outstanding. Each outstanding share of our common stock is entitled to one vote on all matters submitted to a vote of stockholders. DELAWARE ANTI-TAKEOVER LAW We are subject to Section 203 of the Delaware General Corporation Law which, subject to certain exceptions, prohibits a Delaware corporation from engaging in any business combination with any interested stockholder for a period of three years following the date that the stockholder became an interested stockholder, unless: o prior to that date, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; o upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors 127
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and also officers and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or o on or subsequent to that date, the business combination is approved by the board of directors of the corporation and is authorized at an annual or special meeting of stockholders, and not by written consent, by the affirmative vote of holders of at least 66 2/3% of the outstanding shares of voting stock which are not owned by the interested stockholder. TRANSFER AGENT AND REGISTRAR The transfer agent and registrar for our common stock is Mellon Investor Services LLC. DESCRIPTION OF PREFERRED STOCK In connection with the merger, Globix will designate 4,500,000 of the 5,000,000 shares of its authorized but undesignated preferred stock with a par value of $0.01 per share as a new series of 6% Series A Cumulative Convertible Preferred Stock ("Globix convertible preferred stock"). Existing shares of NEON convertible preferred stock will be converted into cash and shares of the Globix convertible preferred stock in the merger as described in the section entitled "Terms of the Merger Agreement and Related Transactions - Conversion of Shares in the Merger" beginning on page 83 of this joint proxy statement/prospectus The designation and issuance of this new series of Globix convertible preferred stock is permitted under the terms of Globix's indenture, dated April 23, 2002, among Globix, the subsidiary guarantors listed therein and HSBC Bank USA, as trustee. A copy of the certificate of designation for the Globix convertible preferred stock is included as an exhibit to the first amendment to the merger agreement which is attached as Appendix A-2 to this joint proxy statement/prospectus. All shares of Globix convertible preferred stock will be identical and entitle the holders thereof to the same rights and privileges. Shares of Globix convertible preferred stock will rank senior to shares of its common stock with respect to dividend rights and upon the liquidation, dissolution or winding-up of Globix. So long as there are 200,000 shares of Globix convertible preferred stock outstanding, Globix will not be permitted to authorize or issue shares of capital stock, or securities convertible into shares of capital stock, that rank senior to or equal to the Globix convertible preferred stock without first obtaining the affirmative vote or consent of the holders of 66 2/3% of the outstanding Globix convertible preferred stock. The holders of Globix convertible preferred stock will be entitled to cumulative preferential dividends when declared accruing at the rate of $0.216 per share per year or $0.108 per share semi-annually, payable semi-annually in arrears on June 15 or December 15 of each year, commencing on December 15, 2004. Dividends may be paid in cash or in additional shares of Globix convertible preferred stock at Globix's option. Accumulated unpaid dividends will accrue and cumulate dividends at a rate of 6% per annum. The liquidation preference of the Globix convertible preferred stock will be $3.60 per share, plus an amount equal to all accrued and unpaid dividends. The Globix convertible preferred stock liquidation preference will be payable upon any voluntary or involuntary liquidation, dissolution or winding-up of Globix, but only after payment in full of Globix's outstanding debt obligations and any securities of Globix that rank senior to the Globix convertible preferred stock. Generally, a voluntary sale, conveyance, exchange or transfer of all or substantially all of Globix's assets, or the merger or consolidation of Globix, will not be deemed a voluntary or involuntary liquidation, dissolution or winding-up of Globix. 128
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The Globix convertible preferred stock will be convertible into shares of Globix common stock at the option of a holder at any time with an initial conversion rate of one share of Globix common stock issued for each share of Globix convertible preferred stock converted. The conversion rate will be subject to adjustment for certain dilutive events, including, but not limited to, stock splits, Globix's issuance of convertible securities at a price per share less than the current market price for shares of Globix common stock, and certain distributions by Globix of cash, securities, indebtedness or other non-cash assets to the holders of its common stock. No adjustments to the conversion rate will be required unless and until an adjustment would effect at least a 1% increase or decrease in such rate. Any adjustments below the 1% threshold will be aggregated until together they would effect an increase or decrease in the conversion rate of at least a 1%. The Globix convertible preferred stock is subject to automatic conversion upon the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of Globix convertible preferred stock or the day immediately following the date on which the closing price of Globix common stock has equaled or exceeded $10.80 for a period of 45 consecutive trading days. The Globix convertible preferred stock will be entitled to one vote for each share of common stock into which such share of Globix convertible preferred stock is convertible and will vote with the holders of Globix common stock as a single class with respect to any question or matter on which holders of Globix common stock have a right to vote. Globix may elect to redeem the Globix convertible preferred stock, in whole or in part, for $3.816 per share in 2005 and 2006, $3.708 per share in 2007 and $3.60 per share in 2008, plus, in each case, all accrued and unpaid dividends. In the event of a partial redemption, Globix must effect the redemption with respect to holders of the Globix convertible preferred stock on a pro rata basis, except that Globix may elect to redeem all of the shares of holders with fewer than 100 shares. In the event of a change in control of Globix, each holder of Globix convertible preferred stock will have the option to require Globix to redeem its shares at a price equal to $3.636 per share plus all accrued and unpaid dividends up to the date that such shares are redeemed. Globix will not be required to redeem any shares upon a change in control prior to repurchasing any securities ranking senior to the Globix convertible preferred stock, including the Globix 11% senior notes pursuant to the terms of the indenture. A "change in control" for purposes of the Globix convertible preferred stock generally means: o a person or group, other than certain permitted holders, becomes the direct or indirect beneficial owner of more than 50% of the outstanding voting securities of Globix; o during any consecutive two-year period, individuals who at the beginning of the period constituted the board of directors of Globix cease for any reason to constitute a majority of the directors then in office; o a merger or consolidation of Globix, or Globix conveys, transfers or leases all or substantially all of its assets (other than a transaction in which no person or group, other than certain permitted holders, owns 50% of the surviving corporation); and o Globix is liquidated or dissolved, or adopts a plan of liquidation or dissolution. The "permitted holders" for purposes of the Globix convertible preferred stock include certain major stockholders of both NEON and Globix prior to the merger. 129
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Shares of Globix convertible preferred stock that are redeemed for, or converted into, shares of common stock, or that are otherwise reacquired by Globix may not be reissued as shares of Globix convertible preferred stock, and will instead be returned to the status of authorized, unissued shares of undesignated preferred stock. Holders of outstanding shares of Globix convertible preferred stock are entitled to receive certain annual and quarterly financial reports of Globix. However, if Globix has filed copies of such reports with the SEC, it is not obligated to provide them to holders of outstanding shares of Globix convertible preferred stock unless and until such holders request copies from Globix. Globix may amend the terms of the Globix convertible preferred stock or waive certain of its provisions with the affirmative vote or consent of a majority of the holders of the Globix convertible preferred stock, provided that the consent of each holder will generally be required with respect to any amendment or waiver that would adversely affect a fundamental right of such holder and that the provisions governing a change in control may be amended, modified or waived only with the consent of the holders of 66 2/3% of the Globix convertible preferred stock then outstanding. DESCRIPTION OF GLOBIX WARRANTS Communication Technology Advisors LLC ("CTA") provides consulting and business development services to NEON for which certain of its current and former affiliates and certain of such affiliates' designees have received warrants exercisable for 300,000 shares of NEON common stock at $6.06 per share through October 23, 2008 and warrants exercisable for 350,000 shares of NEON common stock at $5.30 per share through December 31, 2007 as payment for such services. CTA purchased the warrants exercisable for 350,000 shares of NEON common stock for $25,000. CTA provides similar consulting and business development services to Globix and certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for 500,000 shares of Globix common stock at $3.00 per share through March 13, 2013, which were purchased for $25,000. In connection with the merger, each outstanding NEON warrant issued to CTA will be converted into, and will have the right to receive, a Globix warrant with substantially the terms described below, representing the right to acquire a number of shares of Globix common stock determined by multiplying the number of shares of NEON common stock subject to such NEON CTA warrant immediately prior to the merger by 1.2748, at a purchase price per share equal to the purchase price per share of NEON common stock subject to such NEON CTA warrant divided by 1.2748. Each of the current Globix warrants issued to affiliates of CTA and the Globix warrants to be issued in exchange for the NEON CTA warrants in connection with the merger have substantially similar terms. Each Globix warrant issued in exchange for a NEON CTA warrant in connection with the merger will grant the holder of such warrant the right to subscribe for and purchase shares of Globix common stock at a specified exercise price for a specified time period as set forth in the warrant. The exercise price will be payable in cash or alternatively will permit cashless exercise by the holder. The standard exercise period for the Globix warrants issued in exchange for the NEON CTA warrants will be five years and the minimum number of shares of common stock for which a Globix warrant or any portion thereof may be exercisable at any one time is 10,000. If Globix at any time subdivides (by any stock split, stock dividend, recapitalization or otherwise) its outstanding shares of common stock into a greater number of shares, then as of the record date for effecting such subdivision the number of shares issuable upon exercise of any Globix warrant will be proportionately increased and the exercise price in effect immediately prior to such subdivision shall be proportionately decreased. If Globix at any time combines (by reverse stock split, recapitalization or otherwise) its outstanding shares of common stock into a smaller number of shares, then as of the record date for effecting such combination the number of shares issuable upon exercise of any Globix warrant will be proportionately decreased and the exercise price in effect immediately prior to such combination shall be proportionately increased. 130
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In the event of any consolidation or merger of Globix with or into any other corporation, entity or person, or (a) any other corporate reorganization, in which Globix shall not be the continuing or surviving entity of such consolidation, merger or reorganization or in connection with which the common stock (or other securities issuable upon exercise of a Globix warrant) shall be changed into or exchanged for stock of any other entity or cash or other property, (b) any transaction in which in excess of 50% of Globix's voting power is transferred to a person not a stockholder immediately prior to the consummation of such transaction, (c) any sale of all or substantially all of the assets of Globix or (d) a similar capital reorganization or reclassification of Globix common stock, then, in each case, the holder of the Globix warrant, on exercise at any time after the consummation or effective date of such event or transaction, will be entitled to receive the stock, other securities, cash or other property to which such holder would have been entitled upon the date of such event or transaction if such holder had exercised the Globix warrant immediately prior to such event or transaction. Until a Globix warrant has been exercised in accordance with its terms, the holder of such warrant will not have any voting rights or other rights or obligations as a stockholder of Globix with respect to the shares of Globix common stock issuable upon exercise of such warrant. The terms and provisions of the Globix Warrants will provide that they may not be amended or waived without the prior written consent of Globix and the holder. 131
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INFORMATION ABOUT NEON OUR COMPANY We are a leading facilities-based communications provider, supplying telecommunication services to communications companies and non-carrier customers in the twelve-state Northeast and mid-Atlantic market. NEON is an independent provider of SONET and DWDM services to a wide range of communications carriers including local, long distance and wireless telephone companies and Internet service providers. We also provide services to non-carrier customers such as financial institutions and colleges and universities. We own and operate a high bandwidth fiber optic network, consisting of approximately 4,600 route miles and over 218,000 fiber miles. Our network extends from Portland, Maine to Washington, D.C. and includes metro and intercity coverage as well as co-location space in a number of large, mid-size and small markets in the Northeast and mid-Atlantic, including Boston, New York, Philadelphia, Newark, Baltimore, Washington, DC, Portland, Portsmouth, Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack, Reston, Vienna, and smaller communities along our network routes. We have deployed a portion of our network using utility rights of way, which we believe provide a competitive advantage compared to alternative rights of way in our territory, such as railbeds and highways. Our utilization of utility rights of way allows us to provide alternative routes to our customers which, when combined with their existing routes over more conventional rights of way, provide reliable redundant routes that do not share common points of failure with the other conventional routes. These utility rights of way also enable us to provide more direct connections to our customers. Our principal executive offices are located at 2200 West Park Drive, Westborough, Massachusetts, 01581, and our telephone number at that location is (508) 616-7800. Although we maintain a website at www.neoninc.com, we do not intend that the information available through our website be incorporated into this joint proxy statement/prospectus. NEON SERVICES We connect our customers to our network's backbone through carrier hotels, NEON points of presence ("POPs"), central offices or by building connections to our customers' facilities. We offer our customers the following services: o SONET Private Line - Physically diverse looped SONET services at bandwidth levels including DS-3, OC-3, OC-12 and OC-48. o Wavelength (DWDM) - Flexible and scalable high capacity transport at 2.5 Gbps and 10 Gbps, configured as either protected or unprotected wavelengths. o Central Office Access - Connections to major carrier networks throughout the NEON footprint over NEON's fully protected SONET network. o Co-location - Secure, carrier class conditioned, and power ready space, racks and cabinets strategically located to facilitate high bandwidth connectivity to other POPs, carrier hotels, local switch offices and numerous service providers. 132
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o Network Control Center services - Includes monitoring of circuit and node status, alarming when performance falls outside established thresholds and producing management reports. o Dark Fiber - Fiber strands contained within a fiber optic cable which has been laid but does not include optical transmission equipment. OUR FIBER OPTIC NETWORK Our network is primarily optical and incorporates mid- to late-1990s fiber optic technology. Our network consists of fiber optic communication paths, which allow for high-speed, high-quality transmission of voice, data and video communications. Fiber optic systems use laser generated light waves to transmit voice, data and video in digital formats through ultra-thin strands of glass. Fiber optic systems are generally characterized by large circuit capacity, are resistant to external signal interference and connect directly to digital switching equipment or digital microwave systems. We offer end-to-end fiber optic capacity utilizing bi-directional SONET ring architecture, which has the ability to route customer traffic in two directions around a ring design thereby minimizing service interruptions due to fiber cuts. Our network is continuously monitored on a 24-hour, 7 day a week basis from our Network Control Center at our headquarters in Westborough, Massachusetts to maintain quality control and to alert us of any degradation of signal or loss of fiber capacity, and to pinpoint the location of such difficulty and enable us to repair or replace impaired fiber quickly. RIGHT-OF-WAY AGREEMENTS We use rights-of-way and licenses from utilities for major portions of our network in the Northeast and mid-Atlantic regions. These utility rights-of-way and licenses provide urban and intercity coverage at lower cost and have a simpler approval process than the lengthy and expensive approval process for alternative rights-of-way. Furthermore, installing cable in utility rights-of-way or via license arrangements is typically easier and faster than alternative rights-of-way, such as easement agreements. The lower cost, simpler approval process and easier and faster installation process are the result of placing our cables in existing underground conduits and ducts or on existing towers and poles. Other forms of rights-of-way, such as those along highways and railroad tracks, require burying cables in trenches. In addition, our utility rights-of-way and licenses provide the potential to establish communications connections to nearly every building, business park and industrial complex in our service territory. In 2003, NEON acquired all of the equity interests in Columbia Transmission Communications Corporation ("Columbia Transmission"). Columbia Transmission became a wholly owned subsidiary of NEON and was renamed NEON Transcom, Inc. NEON Transcom utilizes traditional rights-of-way, in the form of easement agreements, that were established with individual land owners by Columbia Transmission before it was acquired by NEON. NEON Transcom and NEON now only manage the individual rights-of-way that are presently in place. This part of NEON's network runs from New York City to the greater Washington, D.C. area and represents a relatively small portion of NEON's entire network. This part of the network is a redundant section of network that parallels NEON's original network from New York City to the Washington, D.C. areas. OUR CUSTOMERS We are carrier neutral and provide services to a variety of companies providing voice and data communications services. We also provide services to non-carrier customers that require bandwidth services such as financial institutions, colleges and universities. Our network enables these companies to link geographically separated central offices and points of presence with primary or redundant connections in their networks. Our facilities also enable our carrier customers to connect their networks directly into the premises of their end-users. 133
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To date, we have entered into contracts with approximately 100 customers, including several Fortune 500 companies. Our customers include common carriers, internet infrastructure companies, wireless service providers, international communication providers and a number of non-carrier customers. Our revenue is derived principally from lit fiber services under contracts ranging from one to five years that provide for monthly payments. Dark fiber service contracts have terms of approximately 20 years and generally provide for monthly payments. In addition, the contracts typically provide for outage related credits, a predetermined reduction or offset against the customer's lease rate when a customer's leased facility is non-operational or does not meet the customer's operating parameters, and also typically require us to maintain adequate insurance coverage, including product liability coverage. Our customer base includes the following: INCUMBENT LOCAL EXCHANGE CARRIERS AND INDEPENDENT TELCOS. Incumbent local exchange carriers typically require some interstate paths for internal communications, signal control and operator services. Incumbent local exchange carriers also require intrastate capacity to connect central offices to one another and to connect central offices to points of presence and customer premises. FACILITIES BASED INTEREXCHANGE CARRIERS. Interexchange carriers typically require (a) regional short haul connectivity from their national backbone facilities to originate and terminate traffic deeper into the customer base; (b) redundant routing to ensure reliability in their networks; and (c) additional capacity for their customers as minutes of use and IP bandwidth requirements increase. COMPETITIVE LOCAL EXCHANGE CARRIERS. Competitive local exchange carriers typically require interconnection between their local networks and extensions further into the community. INTERNET SERVICE PROVIDERS. Internet Service Providers ("ISP") typically require distribution channels to interexchange carriers and local exchange carrier switches as well as interconnection to other ISP switches to provide access to the Internet to consumers and commercial customers via local networks. WIRELESS COMMUNICATION COMPANIES. Wireless companies typically require land based back hauling of traffic from towers to their switches and also capacity between their switches with interexchange carriers, POPs, and incumbent local exchange carriers' central offices. Microwave carriers typically require fiber optic capacity to replace microwave service as their primary source of communications capacity. CABLE TELEVISION COMPANIES. Cable companies typically require fiber optic capacity to upgrade their systems to higher speed bandwidths, which allow them to increase the number of channels available, add interactive programming and Internet and data transfer capabilities and to consolidate head end facilities. We also provide services to several international communications providers and a number of non-carrier customers. SALES AND MARKETING We employ a direct sales and marketing strategy which allows us to take a consultative approach in selling services to our customers. Our sales force is trained to focus on product differentiation and superior customer service. We also offer our customers a competitive price. We incentivize our sales force to focus on selling long-term contracts. Our sales force consists of 21 employees, including 4 management, marketing and administrative support personnel. 134
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SUPPLY RELATIONSHIPS We have entered into agreements and arrangements for the supply of equipment and services relating to the construction and maintenance of our network. In choosing our suppliers, we use such criteria as the quality and performance of the product for the intended purpose, pricing, and the ability of the supplier to meet our delivery schedule and technical support requirements. We purchase optronic network equipment and network services generally from Nortel Networks, Cisco Systems, Lucent Technologies and ECI Telecom. We believe that there are alternative suppliers or alternative components for all of the components contained in our network. However, any delay or extended interruption in the supply of any of the key components, changes in the pricing arrangements with our suppliers and manufacturers or delay in transitioning a replacement supplier's product into our network could disrupt our operations and, if such disruption continued for an extended period of time, it could have a material adverse effect on our business, financial condition and results of operations. COMPETITION The telecommunications industry is highly competitive, and we face substantial competition. Many of our existing and potential competitors have financial, management and other resources that are substantially greater than ours, as well as other competitive advantages, including established reputations in the communications market. Our current and projected competitors generally fall into five segments: INCUMBENT LOCAL EXCHANGE CARRIERS AND INTEREXCHANGE CARRIERS. Incumbent local exchange carriers include Regional Bell Operating Companies, such as Verizon and SBC/SNET. Interexchange carriers include such companies as AT&T, MCI and Sprint. These communications carriers currently own or lease fiber optic networks in our current and proposed service areas. Incumbent local exchange carriers and interexchange carriers dominate their respective local markets in the cities connected by our network. NATIONAL LONG-HAUL FIBER CARRIERS. Carriers such as Qwest Communications, Wiltel, Global Crossing and Level 3 Communications own or lease fiber optic networks in our current and proposed service areas and employ advanced technology comparable to that of our network. REGIONAL CARRIERS. Regional carriers include Cavalier/Elantic, PPL Telecom and Progress Telecom. DARK FIBER PROVIDERS. Providers of dark fiber include AboveNet, NEESCom (National Grid), NSTAR, FiberTech and Sunesys. METRO CARRIERS. Metro carriers include Consolidated Edison Communications, LGN and FiberNet. Most communications carriers already own fiber optic cables as part of their communications networks, and each of these carriers could, and some do, compete directly with us in the market for leasing fiber capacity. We also face potential competition from the utilities in certain portions of our network. GOVERNMENTAL REGULATION NEON's core business is that of a carrier's carrier and therefore, our core business is not directly subject to common carrier regulation. Several of NEON's subsidiaries however, have been certified to provide common carrier services through their authorizations as competitive local exchange carriers, or CLECs. These authorizations for CLEC's are granted by state governments, but subject these subsidiaries to the Telecommunications Act of 1996 as well as 135
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state laws. NEON's core business as a carrier's carrier is, however, part of an industry that is highly regulated by federal, state and local governments whose regulatory actions are often subject to judicial modification. In light of the changes that are occurring in the regulation of telecommunications, we cannot forecast whether or not we will be subject to additional regulation in the future. FEDERAL REGULATION Federal regulation has the greatest impact on the telecommunications industry and has undergone major changes in the last eight years as the result of the adoption by Congress of the Telecommunications Act of 1996 on February 8, 1996. The Telecommunications Act is the most comprehensive reform of the nation's telecommunications laws since the Communications Act of 1934, as amended, was enacted. The Telecommunications Act imposes a number of access and interconnection requirements on telecommunications carriers and on all local exchange providers, including competitive local exchange carriers, with additional requirements imposed on incumbent local exchange carriers. The Telecommunications Act provides a detailed list of items which are subject to these interconnection requirements, as well as a detailed set of duties for all affected carriers. All telecommunications carriers must interconnect with the facilities of other carriers and not install features that will interfere with the interoperability of networks. After lengthy legal proceedings, the Federal Communications Commission ("FCC") adopted revised guidelines implementing the interconnection and local competition provisions of the Telecommunications Act. In order to foster competition in the local exchange market, the FCC required incumbent local exchange carriers to offer unbundled access to their telecommunications networks to competitive local exchange carriers at cost-based rates, including access to dark fiber. This could decrease the demand for fiber provided by the company. The degree of access the incumbent local exchange carriers are required to provide to their unbundled network elements is currently under review by the FCC. However, the long and short term effects of the FCC's guidelines have yet to be ascertained. Aside from the impact of the Telecommunications Act, we believe that federal regulation does not affect our core business directly because we are not currently regulated as a common carrier under federal law. Federal law imposes certain legal requirements on common carriers who engage in interstate or foreign communication by wire or radio. These legal requirements apply to telecommunications carriers to the extent they engage in the provision of telecommunications services. Telecommunications carriers that provide telecommunications services and common carriers are essentially the same. Each provides communications services directly to the public or to some group of potential users on a nondiscriminatory basis subject to standardized rates, terms and conditions. We do not believe our core business offers our fiber capacity in this manner, because we enter into individual agreements on a selective basis with prospective customers who use our services and facilities to support their own functions such as carrier's carrier or common carriers services. We therefore do not believe that our core business' provision of dark or lit fiber capacity constitutes telecommunications service or common carriage as defined by the FCC or under the common carrier provisions of the Communications Act of 1934. Our core business' lit and dark fiber is provided on a private basis as a carrier's carrier. There are no assurances, however, that the leasing of lit or dark fiber will not be subject to further regulation under the Communications Act of 1934. Accordingly, it is conceivable that the FCC would subject our provision of fiber capacity to common carrier regulation. In 1994, the U.S. Court of Appeals for the District of Columbia Circuit remanded to the FCC the question of the FCC's authority to regulate dark fiber. In addition, the FCC has been petitioned by certain railroad, power and telecommunications associations, none of which are affiliated with us, to clarify the regulatory status of fiber capacity providers. To date, the FCC has not indicated an intention to rule on this remand. 136
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If, and to the extent that, we were deemed to be a common carrier we would be required to comply with several regulatory requirements, including, but not limited to, the duty to: o provide such services indiscriminately upon any reasonable request; o charge rates and adopt practices, classifications and regulations that are just and reasonable; o avoid unreasonable discrimination in charges, practices, regulations, facilities and services; o pay into federal funds for Telecommunications Relay Services, the North American Numbering Administration and Local Number Portability; o limit our use of Customer Proprietary Network Information to provisioning of the services in connection with which the Customer Proprietary Network was obtained; and o comply with various reporting, regulatory fee payment and publication of rates. We might also be required to file tariffs setting forth the rates for our services or to make our rates otherwise publicly available. These regulatory requirements could impose substantial burdens on us. Notably, however, similarly situated competitors would be subject to comparable regulatory obligations. As a provider of interstate telecommunications in our provision of leased fiber capacity, our revenues from such leases to end users are subject to contributions to the FCC's Universal Service Fund, a fund that was established to ensure the availability of affordable basic telecommunications services. As a general matter, revenues received from other telecommunications carriers for fiber capacity we provide are not subject to contribution to the Universal Service Fund. However, our revenues from the provision of fiber capacity to telecommunications carriers who themselves are exempt from contributing to the Universal Service Fund because their contribution would be less than $10,000 would be subject to such contribution if the carrier notifies us that it is not contributing directly, in which case the carrier is considered to be an end user. In addition, if a carrier purchasing our capacity uses it for its own purposes, then we would be subject to such contribution for the revenue generated from that carrier because it too would be considered an end user. Because certain internet service providers are deemed end users, our revenues received pursuant to fiber capacity leases to such entities would be subject to contributions to the Universal Service Fund. If such contribution would be less than $10,000, we would qualify for a de minimus exemption from contribution to the Universal Service Fund. The assessment rate is calculated quarterly and is currently set at 8.9% of gross end-user revenues. The assessment rate may be higher in subsequent years. However, the majority of our current revenue does not qualify as "end-user" revenue. Our required contributions to the Universal Service Fund for the year ended December 31, 2003 and the nine-months ended September 30, 2004 were approximately $168,000 and $140,000, respectively. The FCC is currently reviewing its rules for recovery of Universal Service Fund contributions and evaluating who is required to contribute to the Universal Service Fund. The outcome of these proceedings could affect the amount we are required to contribute to the Universal Service Fund in the future. Federal telecommunications law may also affect our business by virtue of the inter relationships that exist among us and incumbent local exchange carriers and interexchange carriers. For example, the FCC is currently reviewing existing obligations of the incumbent local exchange carriers to make available certain unbundled network elements to their competitors at cost-based rates. While it is not possible to predict the precise effect any changes in the current unbundling rules will have on our business or financial condition, the elimination or relaxing of these obligations on the incumbent local exchange carriers could eliminate one of the principal disincentives for use of incumbent local exchange carrier facilities by interexchange carriers, which could have a material adverse effect on the use of our fiber optic networks by interexchange carriers. 137
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STATE REGULATION The Telecommunications Act prohibits state and local governments from enforcing any law, rule or legal requirement that prohibits or has the effect of prohibiting any person from providing any interstate or intrastate telecommunications service. In addition, under current FCC policies, any dedicated transmission service or facility that is used more than 10% of the time for the purpose of interstate or foreign communication is subject to FCC jurisdiction to the exclusion of any state regulation. Notwithstanding these prohibitions and limitations, states regulate telecommunications services, including through certification of providers of intrastate services (or competitive local exchange carriers), regulation of intrastate rates and service offerings, and other regulations and retain jurisdiction under the Telecommunications Act to adopt, on a competitively neutral basis, regulations necessary to preserve and advance universal service, protect the public safety and welfare, ensure the continued quality of telecommunications services and safeguard the rights of consumers. Accordingly, the degree of state involvement in local telecommunications services may be substantial. The state regulatory environment varies substantially from state to state. At present, we do not anticipate that the regulatory requirements to which we will be subject in the Northeast and Mid-Atlantic markets will have any material adverse effect on our operations. An exception to this statement, however, is obtaining approvals from the states of Vermont, Delaware, New York and New Jersey for NEON to merge with Globix. Under current regulations, each of these four states require that when a company has been granted authorization to be a competitive local exchange carrier and its parent company will be sold or merged with another company, the subsidiary must receive the approval of the state before the sale or merger of the parent company. In any state that does not grant the approval, a material adverse effect may result to NEON's business. In some jurisdictions, our pricing flexibility for intrastate services may be limited because of regulation, although our direct competitors will be subject to similar restrictions. However, there can be no assurance that future regulatory, judicial, or legislative action will not have a material adverse effect on us. LOCAL GOVERNMENT REGULATION In addition to federal and state laws, local governments exercise legal authority that may impact our business. For example, local governments, such as the City of Boston and the City of New York, typically retain the ability to license public rights-of-way, subject to the limitation that local governments may not prohibit persons from providing telecommunications services. Local authorities affect the timing and costs associated with our use of public rights-of-way. These regulations may have an adverse effect on our business. EMPLOYEES At September 30, 2004, we employed 133 people. Our employees are not represented by any labor union and we consider our relationship with employees to be satisfactory. In the normal course of business, we have contracted with third parties to perform a portion of the engineering, routine maintenance and construction supervision and construction activities associated with the construction of our fiber optic network. 138
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PROPERTIES The NEON network and its component assets are the principal properties currently owned by us or with respect to which we have indefeasible rights of use and leases. We own substantially all of the communications equipment currently utilized in our business and hold certain ownership interests in the cable comprising the NEON network. Our installed fiber optic cable is laid along the various rights-of-way held by us. Other fixed assets are located at various leased locations in geographic areas we serve. Substantially all of our assets are held by NEON Optica, Inc. and its subsidiaries. The principal asset of NEON Communications, Inc. is all of the outstanding capital stock of NEON Optica, Inc. Our executive, administrative and sales offices are located at our principal office in Westborough, Massachusetts. We lease this space (approximately 25,000 square feet) pursuant to a 3-year lease that commenced in November 2002. LEGAL PROCEEDINGS On November 9, 2004 NEON Transcom, Inc., a wholly-owned subsidiary of NEON, filed against Washington Metropolitan Area Transit Authority ("WMATA") in United States District Court for the District of Columbia a declaratory judgment that rights-of-way fees provided for under a license agreement violate the Telecommunications Act of 1996, as amended, and further seeking an injunction preventing WMATA from requiring payment of the fees and holding NEON Transcom, Inc. in default under the License Agreement, dated October 5, 1999 between WMATA and NEON. The matter is styled NEON Transcom, Inc. vs. Washington Metropolitan Area Transit Authority. On November 22, 2004, NEON received correspondence from WMATA's counsel notifying NEON that WMATA intends to file a claim against NEON. WMATA is seeking payment of approximately $847,000 owed to WMATA under the License Agreement. Although there can be no assurance as to the outcome or effect of WMATA's threatened lawsuit, we do not believe, based on currently available information, that the ultimate liabilities, if any, resulting from this lawsuit will have a material adverse impact on our business, financial condition, results of operations or cash flows. 139
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SELECTED CONSOLIDATED FINANCIAL DATA OF NEON The following tables set forth our selected consolidated financial data as of and for the periods indicated. The selected consolidated financial data as of December 31, 2002 and 2003 and for the years ended December 31, 2001, 2002 and 2003 have been derived from the audited Consolidated Financial Statements and Notes to Consolidated Financial Statements of NEON included elsewhere in this joint proxy statement/prospectus. The Consolidated Financial Statements as of and for the years ended December 31, 2003 and 2002 were audited by BDO Seidman, LLP, an independent registered public accounting firm, while the Consolidated Financial Statements for the year ended December 31, 2001 were audited by Arthur Andersen, LLP. The selected consolidated financial data as of December 31, 1999, 2000 and 2001 and for the years ended December 31, 1999 and 2000 were derived from audited Consolidated Financial Statements and Notes to Consolidated Financial Statements of the Company not included herein which were audited by Arthur Andersen LLP. The selected consolidated financial data as of September 30, 2004 and for the nine months ended September 30, 2003 and 2004 have been derived from the unaudited Consolidated Financial Statements of the Company included elsewhere in this registration statement and include, in the opinion of management, all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial position and results of operations as of and for such periods. NEON's results of operations for the nine months ended September 30, 2004 may not be representative of its results of operations for the full year. The following financial information is qualified by reference to and should be read in conjunction with "NEON Management's Discussion and Analysis of Financial Condition and Results of Operations" beginning on page 143 of this joint proxy statement/prospectus and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this registration statement. As a result of the application of fresh start accounting under SOP No. 90-7 as of December 31, 2002, our financial results for the fiscal year ended December 31, 2002, include two different bases of accounting and, accordingly, the operating results and cash flows of the Successor Company and the Predecessor Company have been separately disclosed. For the purposes of the joint proxy statement/prospectus, references to the "Predecessor Company" are references to NEON for periods prior to December 31, 2002 (the last of the calendar month in which we emerged from bankruptcy) and references to the "Successor Company" are references to NEON for periods as of and subsequent to December 31, 2002. The Successor Company's financial statements are not comparable to the Predecessor Company's financial statements. [Enlarge/Download Table] SUCCESSOR COMPANY YEAR SUCCESSOR COMPANY PREDECESSOR COMPANY ENDED NINE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------------------------------------- -------------- ----------------------------- 1999 2000 2001 2002 2003 2003 2004 ------------- ------------- -------------- ------------- ------------- ------------- ------------- STATEMENT OF OPERATIONS DATA(1): Revenues .................. $ 5,665,276 $ 13,182,953 $ 26,550,645 $ 33,674,213 $ 41,588,308 $ 30,836,345 $ 35,798,784 Operating expenses(2) ..... 19,895,829 38,908,620 121,120,199 58,757,599 46,409,366 33,906,437 40,316,132 ------------- ------------- -------------- ------------- ------------- ------------- ------------- Loss from operations ...... (14,230,553) (25,725,667) (94,569,554) (25,083,386) (4,821,058) (3,070,092) (4,517,348) Other income (expense), net ..................... (13,299,215) (16,085,834) (22,111,846) (16,661,551) 554,390 423,020 264,669 ------------- ------------- -------------- ------------- ------------- ------------- ------------- Loss before benefit from income taxes, extraordinary item and cumulative effect of change in accounting principle .... (27,529,768) (41,811,501) (116,681,400) (41,744,937) (4,266,668) (2,647,072) (4,252,679) Benefit from income taxes(3) ................ -- -- -- -- 1,287,322 1,287,322 -- Extraordinary items(3) .... -- -- -- 26,513,191 1,930,984 1,930,984 -- Cumulative effect of change in accounting principle(4) and (5) .... -- (1,724,007) -- (72,311,911) -- -- -- ------------- ------------- -------------- ------------- ------------- ------------- ------------- Net income (loss) ......... $(27,529,768) $(43,535,508) $(116,681,400) $(87,543,657) $ (1,048,362) $ 571,234 $ (4,252,679) ============= ============= ============== ============= ============= ============= ============= 140
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SUCCESSOR COMPANY YEAR SUCCESSOR COMPANY PREDECESSOR COMPANY ENDED NINE MONTHS YEAR ENDED DECEMBER 31, DECEMBER 31, ENDED SEPTEMBER 30, ----------------------------------------------------------- -------------- ----------------------------- 1999 2000 2001 2002 2003 2003 2004 ------------- ------------- -------------- ------------- ------------- ------------- ------------- OTHER FINANCIAL DATA(1): Cash (used in) provided by operating activities.. $(17,970,325) $ (9,760,691) $ (10,488,858) $ (8,590,553) $ 6,107,478 $ 3,157,315 $ 5,258,247 Cash used in investing activities .............. (68,323,061) (16,660,455) (40,927,865) (6,512,860) (4,539,606) (1,582,770) (9,461,520) Cash (used in) provided by financing activities.. 33,323,983 42,302,915 43,360,680 21,564,285 (5,688,757) (4,448,916) 589,032 Net increase (decrease) in cash and cash equivalents ............. (52,969,403) 15,881,769 (8,056,043) 6,460,872 (4,120,885) (2,874,371) (3,614,241) ------------- ------------- -------------- ------------- ------------- ------------- ------------- Capital expenditures ...... 48,583,642 76,716,670 41,916,091 8,494,813 8,292,941 5,705,991 8,785,920 ------------- ------------- -------------- ------------- ------------- ------------- ------------- Deficiency to fixed charges(6) .............. 30,454,069 45,297,677 122,057,701 N/A N/A N/A N/A PREDECESSOR COMPANY SUCCESSOR COMPANY SUCCESSOR COMPANY AS OF DECEMBER 31, AS OF DECEMBER 31, AS OF SEPTEMBER 30, --------------------------------------------- ---------------------------- ------------------- 1999 2000 2001 2002 2003 2004 ------------- ------------- -------------- ------------- ------------- ------------------- BALANCE SHEET DATA(1): Working capital (deficiency)(7) ......... $ 67,969,107 $ (132,478) $ (38,773,810) $ 9,725,480 $ 12,351,063 $ 5,684,247 Total assets .............. 280,633,376 281,936,691 352,268,141 165,123,095 167,008,415 165,642,143 Long-term debt ............ 180,000,000 180,000,000 205,417,760 -- -- -- Total liabilities(8) ...... 213,166,586 246,014,818 292,295,716 30,876,349 31,487,912 34,373,191 Cumulative convertible preferred stock ......... -- -- -- 12,441,028 13,978,739 15,261,986 Stockholders' equity ...... 67,466,790 35,921,873 59,972,425 121,805,718 121,541,764 116,006,966
(1) As discussed more fully in the Overview section of NEON Management's Discussion and Analysis of Financial Condition and Results of Operations and note 3 to the Consolidated Financial Statements, during 2002, we completed a restructuring whereby we eliminated all of our long-term debt and related accrued interest. In connection with our restructuring, we adopted fresh start reporting effective December 31, 2002. Therefore, the financial information for periods ending after December 31, 2002 and balance sheet data as of December 31, 2002 and thereafter is generally not comparable to the financial information for prior periods. (2) Operating expenses for 2001 include a one time, non-cash charge of $60,000,000 related to the write-down of subscription receivable, as discussed more fully in note 5 of our notes to the Consolidated Financial Statements. (3) The benefit from income taxes in 2003 represents the income tax benefit related to current operating losses used to offset the gain on acquisition discussed in note 2 to the Consolidated Financial Statements. The extraordinary item in 2002 represents the net impact of the reorganization discussed in note 1 above. The extraordinary item in 2003 represents a gain, net of taxes, on an acquisition discussed more fully in note 2 to the Consolidated Financial Statements. 141
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(4) In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition, which we adopted in the fourth quarter of 2000. Under the guidance of SAB No. 101, we recognize revenues from nonrecurring installation charges and design, engineering and construction services ratably over the multi-year network services terms to which the nonrecurring charges ultimately relate. Prior to the issuance of SAB No. 101, revenues for these nonrecurring services were generally recognized as services were performed since we had no further obligations. We were required to adopt this new accounting guidance as of January 1, 2000 and we reported a cumulative effect of change in accounting principle of approximately $1,724,000 related to nonrecurring revenues recognized prior to January 1, 2000. (5) In January 2002, we adopted Statement of Financial Accounting Standards No. 142 "Goodwill and Other Intangible Assets." In connection with the transition to the new accounting method, we determined that the carrying value of our assets was impaired and we recorded a one-time, non-cash charge of approximately $72,312,000 as the cumulative effect of a change in accounting principle to write-off all of our goodwill and other identifiable intangible assets. (6) For purposes of calculating the deficiency to fixed charges: earnings consist of loss before income tax benefit, plus fixed charges, excluding capitalized interest, and fixed charges consist of interest expenses and capitalized interest, plus amortization of deferred financing costs. (7) Working capital for the year ended December 31, 2001 reflects the entire balance of NEON Optica's 15% equipment note as a result of our default on the note following our election not to make the December 31, 2001 payment under this note. (8) Total liabilities includes deferred revenue for all periods presented. For December 31, 2003 and June 30, 2004, total liabilities also includes an asset retirement obligation related to the acquisition of Columbia Transmission as discussed more fully in notes 2 and 4 to the Consolidated Financial Statements. 142
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NEON MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the "Selected Consolidated Financial Data of NEON" and the Consolidated Financial Statements and Notes to Consolidated Financial Statements included elsewhere in this joint proxy statement/prospectus. Certain information contained in the discussion and analysis set forth below and elsewhere in this joint proxy statement/prospectus, including information with respect to our plans and strategy for our business, includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on our current expectations and assumptions about our company and our industry and involve risks and uncertainties. In evaluating such statements, you should specifically consider the various factors identified in this joint proxy statement/prospectus that could cause results to differ materially from those expressed in such forward-looking statements, including matters set forth in the section entitled "Risk Factors" beginning on page 21 of this joint proxy statement/prospectus. The results shown herein are not necessarily indicative of the results to be expected in any future periods. As discussed below, we adopted fresh-start reporting effective December 31, 2002. Therefore, financial information for the Successor Company is generally not comparable to such information for the Predecessor Company. OVERVIEW We are a leading facilities-based communications provider, supplying telecommunication services to communications companies and non carrier customers in the twelve-state Northeast and mid-Atlantic market. NEON is an independent provider of SONET and DWDM services to a wide range of communications carriers including local, long distance and wireless telephone companies and Internet service providers. We also provide services to non-carrier customers such as financial institutions and colleges and universities. Our network is a high bandwidth fiber optic network with proximity to vital markets. We provide bandwidth to cities and towns beyond the "first tier" markets of Boston, New York, Philadelphia, Newark, Baltimore and Washington, DC. Our "second tier" and "third tier" markets include Portland, Portsmouth, Springfield, Worcester, Albany, White Plains, Providence, Hartford, Hackensack, Reston, Vienna and smaller communities along our network routes. We intend to further expand our network in the Northeast and mid-Atlantic market on a success basis to serve customer needs. Our principal services include: o SONET Private Line - Physically diverse looped SONET services at bandwidth levels including DS-3, OC-3, OC-12 and OC-48. o Wavelength (DWDM) - Flexible and scalable high capacity transport at 2.5 Gbps and 10 Gbps, configured as either protected or unprotected wavelengths. o Central Office Access - Connections to major carrier networks throughout the NEON footprint over NEON's fully protected SONET network. o Co-location - Secure, carrier class conditioned, and power ready space, racks and cabinets strategically located to facilitate high bandwidth connectivity to other POPs, carrier hotels, local switch offices and numerous service providers. 143
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o Network Control Center services - Includes monitoring of circuit and node status, alarming when performance falls outside established thresholds and producing management reports. o Dark fiber - Fiber strands contained within a fiber optic cable which has been laid but does not include optical transmission equipment. Our network service revenues include short-term leases of lit fiber and longer-term leases of dark fiber at fixed-cost pricing over multi-year terms. Other services revenues include co-location services at our facilities as well as nonrecurring design, engineering, and construction services. We generally receive fixed monthly payments from our customers for the leasing of capacity on our network and the use of co-location facilities and recognize revenues ratably over the term of the applicable customer agreement. Design, engineering, and construction services revenues are non-refundable and are generally recognized ratably over the term of the related network services arrangement (generally ranging from one to twenty years). Our costs consist primarily of cost of revenues; selling, general and administrative expenses; depreciation and amortization; and, through mid-2002, interest expense. Cost of revenues relates to lease payments for fiber optic facilities, operations and maintenance costs, type II circuits, right of way fees and property taxes. Selling, general and administrative expenses relate to expenses in connection with sales, marketing, operations and administration, including personnel, office facilities advertising and promotion, and management and information technology. Depreciation and amortization expense is associated with our network. Since our inception, we have expanded our network and increased our annual revenue every year. We funded a substantial portion of our network expansion and growth through 2002 with proceeds from our public offering of debt and equity in 1998 and convertible debt issuances and vendor financing in 2001. Such funding amounted to approximately $300 million. However, as the result of a prolonged downturn in the telecommunications market, we continued to experience net losses and negative cash flow from operating activities through 2002. During 2002, we entered into discussions with a group of note holders representing approximately two-thirds of our senior notes and holders of our 15% and 18% notes regarding the restructuring of their debt. Such restructuring was ultimately pursued in bankruptcy in order to bind all creditors to the terms of the plan of reorganization. Accordingly, on June 25, 2002, we filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). Our Plan of Reorganization was confirmed by the Bankruptcy Court on November 13, 2002 and became effective on December 20, 2002. We recorded this transaction as of December 31, 2002, which we refer to as the "effective date." Under the plan of reorganization, on the effective date our senior notes and 15% equipment note were exchanged for common stock in the Successor Company. Our 18% subordinated convertible notes, and all of our outstanding shares of common stock were cancelled. Former creditors collectively purchased approximately $12.4 million of new Series A 12% Cumulative Convertible Preferred Stock. In our restructuring, we eliminated all of our debt and accrued interest amounting to approximately $250 million. As discussed more fully in note 3 to the Consolidated Financial Statements, in connection with the restructuring, we adopted fresh start reporting effective on December 31, 2002. Therefore, the financial information presented after December 31, 2002 and the balance sheet information as of December 31, 2002 and thereafter, is generally not comparable to the financial information for prior periods. The presentation of financial information of the "Predecessor Company" represents the Company's financial information for the specific periods prior to the Company's adoption of fresh start reporting. On September 12, 2003, we acquired Columbia Transmission Communications Corporation ("Columbia Transmission") from Columbia Energy Group, a wholly owned subsidiary of NiSource, Inc. Columbia Transmission became a wholly owned subsidiary of NEON and was renamed NEON Transcom, Inc. NEON Transcom owns and operates a diverse dark fiber network that runs from New York City to Washington, D.C. As discussed more fully in note 2 to the Consolidated Financial Statements, we accounted for the acquisition as a purchase under Statement of Financial Accounting Standards No. 141 and included the operating results of Columbia Transmission in our Consolidated Statements of Operations since the acquisition date. 144
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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES Our discussion and analysis of financial condition and results of operations are based upon our Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, the allowance for doubtful accounts and the value of long-lived tangible and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. REVENUE RECOGNITION The services we provide include short term leases of lit fiber (fixed amounts of capacity on fiber optic transmission lines that use optronics equipment installed by us) and longer term leases of dark fiber (fiber optic transmission lines leased without optronics equipment installed by us) at fixed cost pricing over multi year terms. Revenues from telecommunications network services are recognized ratably over the term of the applicable lease agreements with customers, which range from one to 20 years, provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivables is reasonably assured. Amounts billed in advance of the service provided are recorded as deferred revenue. We also lease space to customers at our co-location facilities. Other service revenues include these co-location service revenues as well as revenues from nonrecurring installation charges and design, engineering and construction services. We recognize revenues from nonrecurring installation charges and design, engineering and construction services ratably over the multi-year network services terms to which the nonrecurring charges relate provided there exists persuasive evidence of an arrangement, the fee is fixed or determinable and collectability of the related receivables is reasonably assured. We have contracts with customers that provide service-level commitments, which may obligate us to provide credits against billings if service is interrupted or does not meet the customer's operating parameters. These amounts are accounted for as reductions of revenue. To date, credits granted under these arrangements have not been material. ALLOWANCE FOR DOUBTFUL ACCOUNTS We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We specifically analyze accounts receivable and historical bad debts, customer concentrations and current economic trends when evaluating the adequacy of the allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. 145
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LONG-LIVED TANGIBLE AND INTANGIBLE ASSETS We review our long-lived assets, including our property and equipment and other intangibles, for impairment whenever events or changes in circumstances indicate that the carrying value of the assets may not be recoverable in accordance with Statement of Financial Accounting Standards ("SFAS") No. 144, ACCOUNTING FOR THE IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS. SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired. We believe that the carrying values of our long-lived assets are realizable as of September 30, 2004. CONCENTRATION OF CREDIT RISK AND SIGNIFICANT CUSTOMERS Financial instruments that subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable. Our cash and cash equivalents are invested in financial instruments with high credit ratings. We do not require collateral or other securities to support customer receivables; however, we perform regular credit evaluations of our customers' financial condition and maintain allowances for potential credit losses. Concentration of credit risk with respect to accounts receivable is limited to customers to whom we make significant sales. For the years ended December 31, 2001 and 2003, one customer accounted for 10% of net revenues. For the year ended December 31, 2002 and the nine months ended September 30, 2004, no customer accounted for more than 10% of net revenues. As of December 31, 2002 and 2003, no customers had balances in excess of 10% of accounts receivable. As of September 30, 2004, one customer represented approximately 30% of accounts receivable. This amount was subsequently collected in full from the customer. We have no significant off-balance-sheet or other concentration of credit risks at December 31, 2002 or 2003 or September 30, 2004. RESULTS OF OPERATIONS NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2003 Revenues increased by $5.0 million, or 16.1%, to $35.8 million for the nine months ended September 30, 2004 compared to $30.8 million for the nine months ended September 30, 2003. Revenues in 2004 were generated by recurring lease services of $31.9 million and other service revenues of $3.9 million which consist of co-location revenues and amortization of nonrecurring charges for design, engineering, construction and related services. The increase in revenues for 2004 related primarily to growth in booking and provisioning customer orders for network services. For the nine months ended September 30, 2004, revenues consisted of lit services (77%), dark services (12%) and other services (11%) compared to 77%, 13% and 10%, respectively, for the nine months ended September 30, 2003. Cost of revenues was $19.6 million for the nine months ended September 30, 2004, an increase of 35.6% as compared to $14.5 million for the nine months ended September 30, 2003. The increase in cost of revenues is due to operating costs for Columbia Transmission which was acquired in September 2003 to expand our network in the mid-Atlantic market as well as the overall growth in our business volume during 2004. As a percentage of revenues, cost of revenues increased to 54.7% for the nine months ended September 30, 2004, compared to 46.9% for the nine months ended September 30, 2003. The increase in cost of revenues as a percentage of revenues reflects the Columbia Transmission acquisition offset to some extent by revenue growth and improving network utilization in the Northeast. 146
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Selling, general and administrative expenses ("SG&A") of $12.8 million for the nine months ended September 30, 2004, was comparable to $12.8 million for the nine months ended September 30, 2003. This reflects our focus on overall cost management. As a percentage of revenues, SG&A expenses decreased to 35.8% for the nine months ended September 30, 2004, compared to 41.5% for the nine months ended September 30, 2003. The improvement in SG&A expenses as a percentage of revenues reflects the growth in our revenues and our focus on operating efficiencies and overall cost management. Depreciation and amortization expense increased 19.0% to $7.9 million for the nine months ended September 30, 2004, compared to $6.6 million for the nine months ended September 30, 2003. This increase reflects the expansion of our communications network in our Northeast and mid-Atlantic service areas. Other income decreased to $0.3 million for the nine months ended September 30, 2004 compared to $0.4 million for the nine months ended September 30, 2003. This decrease was due primarily to lower interest rates and lower cash balances during 2004 compared to 2003. For the nine months ended September 30, 2004, we recorded a net loss of $4.3 million compared to net income of $0.6 million for the comparable period in 2003. The increase in our net loss for 2004 is due primarily to costs related to the operation of Columbia Transmission which was expected to be dilutive to our results for approximately 24 months. Results for 2003 also reflect a gain from the acquisition of Columbia Transmission totaling $3.2 million. The acquisition is discussed more fully in the Overview section above and in Note 2 to the Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 2003 COMPARED TO THE YEAR ENDED DECEMBER 31, 2002 Revenues increased by $7.9 million, or 23.5%, to $41.6 million for the year ended December 31, 2003 compared to $33.7 million for the year ended December 31, 2002. Revenues in 2003 were generated by recurring lease services of $37.5 million and other service revenues of $4.1 million. The primary reason for the increase in revenues was the growth in booking and provisioning of customer orders for additional network services. For 2003, revenues consisted of lit services (78%), dark services (13%) and other services (9%) compared to 72%, 19% and 9%, respectively for 2002. Cost of revenues totaled $20.9 million for the year ended December 31, 2003, an increase of 18.1% as compared to the $17.7 million for the year ended December 31, 2002. The increase in cost of revenues reflects the overall growth in our business volume during 2003 and costs related to the operation of Columbia Transmission. As a percentage of revenues, cost of revenues decreased to 50.2% for the year ended December 31, 2003, compared to 52.5% for 2002. The improvement in cost of revenues as a percentage of revenues reflects our revenue growth and improving network utilization offset to some extent by costs related to Columbia Transmission. Selling, general and administrative expenses decreased 6.9% to $16.5 million for the year ended December 31, 2003 compared to $17.8 million for the year ended December 31, 2002. The decrease in SG&A expenses reflects the impact of headcount reductions in 2002 and January 2003, cost reduction activities undertaken during our restructuring in 2002 and overall cost management during the year. As a percentage of revenues, SG&A expenses decreased to 39.7% for the year ended December 31, 2003, compared to 52.7% for 2002. The improvement in SG&A expenses as a percentage of revenues reflects the factors discussed above. Depreciation and amortization expense decreased 61.4% to $9.0 million for the year ended December 31, 2003, compared to $23.3 million for the year ended December 31, 2002. This decrease reflects the adoption of fresh start reporting as of December 31, 2002 in connection with our restructuring discussed above and the related revaluation of our assets to fair value on such date. 147
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Interest and other income increased 27.6% to $0.6 million for the year ended December 31, 2003 compared to $0.5 million for the year ended December 31, 2002. This increase was due primarily to higher cash balances during 2003 compared to 2002. This increase was offset to some extent by the decline in interest rates during 2003. Interest and other expense was reduced to $15,000 for the year ended December 31, 2003 compared to $17.1 million for the year ended December 31, 2002 as the result of our restructuring in 2002 and the related elimination of debt. During 2002, interest expense related to NEON Optica's $180 million 12 3/4% senior notes Due 2008, 18% subordinated convertible notes and 15% equipment note payable. For the year ended December 31, 2003 we recorded a net loss of $1.0 million compared to a net loss of $87.5 million in 2002. This improvement reflects the improved operating results discussed above, the restructuring and related elimination of debt accomplished in 2002 and a gain on the acquisition of Columbia Transmission. Our restructuring and acquisition are discussed more fully in the Overview section above and in notes 3 and 2, respectively, to the Consolidated Financial Statements. YEAR ENDED DECEMBER 31, 2002 COMPARED TO THE YEAR ENDED DECEMBER 31, 2001 Revenues increased by $7.1 million, or 26.8%, to $33.7 million for the year ended December 31, 2002 compared to $26.6 million for the year ended December 31, 2001. Revenues in 2002 were generated by recurring lease services of $30.5 million and other service revenues of $3.2 million. The primary reason for the increase in revenues was the growth in demand for our lit services during 2002. For 2002 revenues consisted of lit services (72%), dark services (19%) and other services (9%) compared to 69%, 18% and 13%, respectively for 2001. Cost of revenues for the year ended December 31, 2002 was $17.7 million, an increase of 3.4% as compared to the $17.1 million for the year ended December 31, 2001. The increase in cost of revenues reflects the overall growth in our business volume during 2002. As a percentage of revenues, cost of revenues improved to 52.5% from 64.4% in 2001 due primarily to improved network utilization. Selling, general and administrative expenses decreased 29.1% to $17.8 million for the year ended December 31, 2002 compared to $25.0 million for the year ended December 31, 2001, reflecting headcount reductions during 2001 and 2002 and savings related to our restructuring efforts during 2002. As a percentage of revenues, SG&A expenses decreased to 52.7% of revenues in 2002 compared to 94.3% in 2001. This improvement reflects the growth in our revenues as well as our cost reduction activities during 2001 and 2002. Depreciation and amortization expense increased 22.8% to $23.3 million for the year ended December 31, 2002, compared to $19.0 million for the year ended December 31, 2001. This increase resulted primarily from increased capital expenditures related to the expansion of our communications network in our Northeast and mid-Atlantic service areas. Interest and other income decreased 86.6% to $0.5 million for the year ended December 31, 2002 compared to $3.3 million for the year ended December 31, 2001. This decrease was due primarily to lower cash and investment balances for 2002 compared to 2001. Interest and other expense decreased in 2002 as the result of our restructuring activities whereby we stopped accruing interest expense beginning July 2002. 148
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For the year ended December 31, 2002, we recorded a net loss of $87.5 million compared to a net loss of $116.7 million for the year ended December 31, 2001. The decrease in net loss is primarily attributable to the gain from our restructuring as discussed more fully in note 3 to the Consolidated Financial Statements, and the improved results from operations discussed above. LIQUIDITY AND CAPITAL RESOURCES Through 2001, the design, construction and development of our network and the purchase of telecommunications equipment required substantial capital investment. We funded a substantial portion of these expenditures through our public offerings of equity and debt completed on August 5, 1998, which resulted in net proceeds to us of approximately $218 million (after deducting expenses), of which $72 million was placed in escrow to cover the first seven semi annual interest payments on our 12 3/4% senior notes due 2008, as well as additional convertible debt issuances totaling $26.5 million in 2001 and vendor financing of approximately $46.5 million. As discussed in the Overview section above and in note 3 to the Consolidated Financial Statements, during 2002, we completed a restructuring pursuant to Chapter 11 of the Bankruptcy Code which eliminated all of our debt and related accrued interest. In connection with our restructuring, we received approximately $12.4 million from the issuance of Series A 12% Cumulative Convertible Preferred Stock to fund future growth. Since 2002 we have focused our capital spending primarily on the purchase of telecommunications equipment and deployment of network facilities to support customer demands. We have funded our activities from available cash and cash from operations. We expect to continue to experience negative cash flow after investing activities for the foreseeable future. Accordingly, our ability to continue to grow our network and to support related customer demands will be limited by our current capital resources and cash provided from operations until sufficient cash flow after investing activities is generated. Cash provided by operating activities was $5.3 million for the nine months ended September 30, 2004 compared to $3.2 million for the same period in 2003. Cash provided by operating activities for the year ended December 31, 2003 was $6.1 million compared to cash used in operating activities of $8.6 million for the year 2002. The improvement in cash provided by operating activities reflects our improved operating results and our focus on working capital management. Net cash provided by operating activities was used primarily to fund investing activities in 2003 and 2004. Net cash used in investing activities was $9.5 million for the nine months ended September 30, 2004 and $4.5 million and $6.5 million for the years ended December 31, 2003 and 2002, respectively. Cash used in investing activities consisted primarily of capital expenditures for the purchase of telecommunications equipment and network development to expand our communications network in the Northeast and mid Atlantic regions to support customer demands. Net cash provided by (used in) financing activities was approximately $0.6 million for the nine months ended September 30, 2004. For the years ended December 31, 2003 and 2002 financing activities used $5.7 million and provided $21.6 million, respectively. In 2003 cash was used primarily to increase short-term restricted investments. In 2002 cash was provided primarily from the issuance of preferred stock and a decrease in restricted investments. At September 30, 2004, we had unrestricted cash and cash equivalents of $11.3 million compared to $14.9 million at December 31, 2003. Our ability to generate cash from operations and achieve profitability is dependent upon our ability to grow our revenue and to continue to control operating costs and capital expenditures. We are dependent upon our cash on hand and cash generated from operations to support our capital requirements and, as discussed above, we expect to experience negative cash flow after investing activities for the foreseeable future. We believe that our existing cash and cash equivalents in addition to our cash from operations will be sufficient to fund our operations and capital expenditures for at least the next 12 months. However, there can be no assurance that we will be successful in implementing our business plan or that changes in assumptions or conditions will not adversely affect our financial condition or liquidity position. 149
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NEON is currently involved in a dispute over rights of way fees, in which WMATA is claiming fees of $847,000 under a 1999 license agreement. NEON has filed suit seeking declaratory judgment that such fees violate the Telecommunications Act of 1996. If we elect to pursue a material strategic acquisition or expansion opportunities, our cash needs may be increased substantially, both to finance any such acquisitions and to finance development efforts in new markets. COMMITMENTS As of December 31, 2003, we had contractual cash obligations as follows ($ in 000's): [Enlarge/Download Table] PAYMENTS DUE BY PERIOD FISCAL 2006 AFTER CONTRACTUAL OBLIGATIONS TOTAL FISCAL 2004 FISCAL 2005 THROUGH 2008 FISCAL 2008 ----------------------------------- ------------- ------------- ------------- ------------- ------------- Operating leases $ 26,547 $ 2,676 $ 2,497 $ 6,084 $ 15,290 Fiber leases 181,533 7,917 8,825 26,523 138,268 ------------- ------------- ------------- ------------- ------------- Total contractual cash obligations $ 208,080 $ 10,593 $ 11,322 $ 32,607 $ 153,558 ============= ============= ============= ============= ============= Other than changes in the normal course of business, there were no material changes in contractual cash obligations through September 30, 2004. As discussed more fully in note 2 to the Consolidated Financial Statements, we have recorded an other long-term liability of approximately $1.8 million for the asset retirement obligation related to the acquisition of Columbia Transmission. We do not maintain any off-balance sheet financing arrangements. We have employment agreements with two officers. These agreements provide for employment and related compensation and restrict the individuals from competing, as defined, with us during the terms of their agreements. These agreements also provide for stock options under the 2002 Plan and for severance payments upon termination under circumstances defined in these agreements. INCOME TAXES We are in an accumulated loss position for both financial and income tax reporting purposes. We have income tax loss carry forwards to offset future taxable income, if any, of approximately $79 million at December 31, 2003. These income tax loss carry forwards expire through 2023 and are subject to review and possible adjustment by the Internal Revenue Service. As the result of our bankruptcy restructuring in 2002 we believe the use of approximately $65 million of our tax loss carry forwards is limited to approximately $6 million per year. In addition, the occurrence of certain events, including significant changes in ownership interests, may limit the amount of net operating loss carry forwards available for use in any given year. A full valuation allowance has been recorded in the Consolidated Financial Statements to offset these carry forwards because their future realizability is uncertain. 150
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TRANSACTIONS WITH RELATED PARTIES We have agreements with Northeast Utilities which were initially entered into in 1994 and 1995 and cover the provision of rights-of-way along electric utility towers and inside urban electric utility ducts. Pursuant to these agreements, we acquired indefeasible rights-of-use in fiber optic filaments along Northeast Utilities' rights-of-way and we pay Northeast Utilities mileage-based annual fees and a percentage of the gross revenues that we generate on the portion of our network located on Northeast Utilities' rights-of-way, as such gross revenues exceed predefined limits specified in the agreements with Northeast Utilities. To date, none of the limits has been exceeded. Northeast Utilities has waived a portion of our right-of-way fees on certain route segments through September 2004. Under the agreements, 12 fibers on designated route segments of our network in Northeast Utilities service territory are owned by and have been set aside for Northeast Utilities use. After June 30, 2005, Northeast Utilities may lease the 12 fibers to third parties and is free to use these fibers to compete with us. At December 31, 2003 and 2002, approximately $1.4 million and $1.8 million associated with the construction of the 12 fibers are included in prepaid rights-of-way fees in the consolidated balance sheet, respectively. In accordance with the adoption of fresh start reporting, we revalued the prepaid right-of-way fees at December 31, 2002 based upon an independent appraisal. Such fees are being recognized as a cost of revenues ratably over 5 years, the estimated remaining useful life. In connection with our restructuring, Mode 1, an affiliate of Northeast Utilities, agreed to purchase up to $3.5 million of common stock, at the market price on the date of purchase, to cover the payment of future amounts due to Northeast Utilities through December 31, 2004. During 2003, Mode 1 purchased approximately 236,000 shares of the Company's common stock for approximately $1.4 million and purchased approximately 342,000 shares of the Company's common stock in 2004 for approximately $2.1 million. In accordance with our agreement, we used the proceeds from such sales to pay certain 2003 and 2004 operating costs due to Northeast Utilities. We paid Northeast Utilities approximately $428,000, $26,000 and $1.4 million (proceeds from stock sale) in 2001, 2002 and 2003, respectively, and approximately $1.4 million was included in other long-term liabilities at December 31, 2002 and accrued expenses at December 31, 2003. We paid approximately $0.2 million to Central Maine Power, a related party prior to the effective date of our restructuring, for right-of-way fees for the year ended December 31, 2001. We also paid Central Maine Power and/or Union Water and Power, an affiliate of Central Maine Power, approximately $1.0 million for materials, labor and other contractor charges for the year ended December 31, 2001. We believe that the fees payable under the agreements with related parties are reasonable and are comparable to those which would have been negotiated on an arm's-length basis with an unaffiliated third party. We have employment agreements with two officers. These agreements provide for employment and related compensation and restrict the individuals from competing, as defined, with the company during the terms of their agreements. These agreements also provide for stock options under our 2002 Stock Option Plan and for severance payments upon termination under circumstances defined in these agreements. 151
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RECENT ACCOUNTING PRONOUNCEMENTS In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity and requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances), because that instrument represents an obligation. Many of those instruments were previously classified as equity. The statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of nonpublic entities, which are subject to the provisions for the first fiscal period beginning after December 15, 2003. The adoption of SFAS No. 150 did not have a material effect on our financial position, results of operations or cash flows. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires that the criteria for consolidation be based upon analysis of risks and rewards, not control, and represents a significant and complex modification of previous accounting principles. FIN 46 is effective for consolidated financial statements issued after June 30, 2003. We do not believe the adoption of FIN 46 will have a material effect on our consolidated results of operations, financial position or cash flows. In December 2003, the Securities and Exchange Commission published Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition." SAB No. 104 was effective upon issuance and supersedes SAB No. 101, "Revenue Recognition in Financial Statements," and rescinds the accounting guidance contained in SAB No. 101 related to multiple-element revenue arrangements that was superseded by EITF Issue No. 00-21. The adoption of SAB No. 104 did not have a material effect on our financial position, results of operations, or cash flows. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK At September 30, 2004, cash equivalents and short-term restricted investments consist of investments in money market accounts. We do not have operations subject to risks of foreign currency fluctuations, nor do we currently use derivative financial instruments in our operations or investment portfolio. We also do not have any indebtedness. 152
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SECURITY OWNERSHIP OF DIRECTORS, EXECUTIVE OFFICERS AND MORE THAN FIVE PERCENT STOCKHOLDERS OF NEON The following table and the accompanying notes set forth certain information, as of December 1, 2004 (except as set forth below), concerning the beneficial ownership of NEON common stock and NEON convertible preferred stock by: (1) each person who is known by NEON to beneficially own more than five percent of NEON common stock and NEON convertible preferred stock, (2) each director of NEON, (3) each executive officer of NEON and (4) all directors and executive officers as a group. [Enlarge/Download Table] ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ SHARES OF NEON PERCENT OF CLASS SHARES OF NEON PERCENT OF CLASS CONVERTIBLE OF CONVERTIBLE NAME AND ADDRESS OF BENEFICIAL OWNER COMMON STOCK (1) OF COMMON STOCK PREFERRED STOCK (1) PREFERRED STOCK ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Citadel Investment Group LLC 2,000,000 12.4% - - 131 South Dearborn St., 36th Floor Chicago, IL 60603 (2) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ LC Capital Master Fund Ltd. 2,538,686 14.9% 171,476 15.6% Lampe Conway & Co. LLC 730 Fifth Avenue, Ste. 1002 New York, NY 10019 (3) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Loeb Partners Corp. 2,456,326 15.0% 44,444 4.0% 61 Broadway New York, NY 10006 (4) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Greywolf Capital Management LP 857,955 5.3% - - 411 West Putnam Avenue Greenwich, CT 06830 (5) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ MacKay Shields LLC 7,524,804 40.0% 538,220 48.8% 9 W 57th Street, 73rd FL New York, NY 10019 (6) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Mode 1 Communications, Inc. 2,136,550 13.2% - - c/o Northeast Utilities Service Co. 107 Selden Street Berlin, CT 06037 (7) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ The Singer Trusts 2,038,998 11.6% 303,044 27.5% 560 Sylvan Avenue Englewood Cliffs, NJ 07632 (8) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ JGD Management Corp. 904,333 5.6% - - 390 Park Ave., 15th Floor New York, New York 10022 (9) ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Stephen E. Courter (10) 450,000 2.7% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ William A. Marshall (11) 325,000 2.0% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Jeffrey C. MacHaffie (12) 185,000 1.1% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Kurt J. Van Wagenen (13) 275,000 1.7% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Peter D. Aquino(14) 169,954 1.0% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Wayne Barr, Jr. (15) 169,954 1.0% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Jose A. Cecin, Jr. (16) 2,407 * - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ John H. Forsgren (17) 2,138,167 13.3% - - ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Robert M. Grubin (18) 2,456,326 15.0% 44,444 4.0% ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ Steven G. Lampe (19) 2,538,686 14.9% 171,476 15.6% ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ NEON directors and executive officers as a group 8,710,494 46.3% 215,920 19.6% ------------------------------------------------- --------------------- ------------------- --------------------- ------------------ (*) Less than 1%. 153
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(1) The information regarding beneficial ownership of NEON common stock and NEON convertible preferred stock has been presented in accordance with the rules of the Securities and Exchange Commission. Under these rules, a person may be deemed to beneficially own any shares as to which such person, directly or indirectly, has or shares voting power or investment power and also any shares of our common stock as to which such person has the right to acquire voting or investment power within 60 days through the exercise of any stock option or other right. The percentage of beneficial ownership as to any person as of a particular date is calculated by dividing (a) (i) the number of shares beneficially owned by such person plus (ii) the number of shares as to which such person has the right to acquire voting or investment power within 60 days by (b) the total number of shares outstanding as of such date, plus any shares that such person has the right to acquire from NEON within 60 days. For purposes of calculating the beneficial ownership percentages set forth above, the total number of shares of our common stock deemed to be outstanding as of December 1, 2004 was 16,117,799. As used in this joint proxy statement/prospectus, "voting power" is the power to vote or direct the voting of shares and "investment power" is the power to dispose or direct the disposition of shares. Except as noted, each stockholder listed has sole voting and investment power with respect to the shares shown as being beneficially owned by such stockholder. (2) According to information provided to NEON, Citadel Limited Partnership is the portfolio manager for each of Citadel Equity Fund Ltd. and Citadel Credit Trading Ltd. Citadel Equity Fund Ltd. owns 1,400,000 shares of NEON common stock and Citadel Credit Trading Ltd. owns 600,000 shares of NEON common stock. Citadel Investment Group, L.L.C. acts as the general partner of Citadel Limited Partnership. (3) LC Capital Master Fund Ltd. directly beneficially owns 1,673,543 shares of NEON common stock and 857,689 Class A warrants and 171,476 shares of NEON convertible preferred stock. LC Capital also indirectly beneficially owns 7,454 shares of NEON common stock pursuant to stock options granted to Mr. Lampe, an affiliate of LC Capital, that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (4) Loeb Partners Corp. directly beneficially owns 2,226,570 shares of NEON common stock and 222,302 Class A warrants and 44,444 shares of NEON convertible preferred stock. Loeb Partners also indirectly beneficially owns 7,454 shares of NEON common stock pursuant to stock options granted to Mr. Grubin, an affiliate of Loeb Partners Corp., that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (5) Greywolf Capital Management LP indirectly beneficially owns 857,955 shares of NEON common stock through Greywolf Capital Partners II LP and Greywolf Capital Overseas Fund. (6) This information is as of November 19, 2004 and based on information provided to NEON by MacKay Shields LLC, the pecuniary interests in these shares are held by a number of clients for whom MacKay Shields LLC is the discretionary investment advisor or subadvisor. MacKay Shields LLC has voting and investment control over these shares and, accordingly, is deemed to beneficially own these shares. These beneficially owned securities include 4,832,750 shares of NEON common stock, 2,692,054 Class A warrants and 538,220 shares of NEON convertible preferred stock. (7) Mode 1 Communications, Inc. directly, and NU Enterprises, Inc. and Northeast Utilities, Inc. indirectly, beneficially own 2,129,096 shares of NEON common stock. Mode 1 also indirectly beneficially owns 7,454 shares of NEON common stock pursuant to stock options granted to Mr. Forsgren, and subsequently assigned to Northeast Utilities, the parent of Mode 1 Communications, that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. 154
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(8) The Singer Trusts indirectly beneficially own 523,230 shares of NEON common stock through the Singer Children's Management Trust as record holder, 1,296,560 Class A warrants through the Singer Children's Management Trust as record holder, 219,208 Class A warrants through the Second Gary & Karen Singer Children's Trust as record holder, 259,218 shares of NEON convertible preferred stock through the Singer Children's Management Trust as record holder and 43,826 shares of NEON convertible preferred stock through the Second Gary & Karen Singer Children's Trust as record holder. (9) According to information provided to NEON, JGD Management Corp. indirectly owns 820,333 shares of NEON common stock through York Credit Opportunities Fund, L.P. and 84,000 shares of NEON common stock through York Global Value Partners, L.P. (10) Mr. Courter, an officer and director of NEON, directly beneficially owns these shares pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (11) Mr. Marshall, an officer of NEON, directly beneficially owns these shares pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (12) Mr. MacHaffie, an officer of NEON, directly beneficially owns these shares pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (13) Mr. Van Wagenen, an officer of NEON, directly beneficially owns these shares pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (14) Mr. Aquino, a director of NEON, directly beneficially owns 7,454 shares of NEON common stock pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. Additionally, as of December 31, 2004 he indirectly beneficially owns 162,500 CTA warrants that are directly beneficially owned by PDA Group, LLC, of which Mr. Aquino is an executive officer. (15) Mr. Barr, a director of NEON, directly beneficially owns 7,454 shares of NEON common stock pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. Additionally, he indirectly beneficially owns 162,500 CTA warrants that are directly beneficially owned by Rita Barr, Mr. Barr's spouse. (16) Mr. Cecin, a director of NEON, directly beneficially owns these shares pursuant to stock options that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (17) Mr. Forsgren, a director of NEON, is affiliated with Mode 1 Communications, which directly beneficially owns 2,136,550 shares of NEON common stock (including 341,936 shares that NEON intends to issue to Mode 1 prior to consummation of the merger and 7,454 shares of NEON common stock pursuant to stock options granted to Mr. Forsgren and subsequently assigned to Northeast Utilities, the parent of Mode 1). Mr. Forsgren directly beneficially owns 1,617 shares of NEON stock. According to information provided to NEON, Mr. Forsgren has disclaimed beneficial ownership of all shares of NEON common stock except for 1,617 shares. 155
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(18) Mr. Grubin is affiliated with Loeb Partners, which directly beneficially owns 2,226,570 shares of NEON common stock, 222,302 Class A warrants, and 44,444 shares of NEON convertible preferred stock. Mr. Grubin directly beneficially owns 7,454 options for NEON common stock that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. Mr. Grubin has voting and investment control over these shares and, consequently, is deemed to beneficially own these shares. (19) Mr. Lampe is affiliated with LC Capital Master Fund Ltd., which directly beneficially owns 1,673,543 shares of NEON common stock, 857,689 Class A warrants and 171,476 shares of NEON convertible preferred stock. Mr. Lampe directly beneficially owns 7,454 options for NEON common stock that will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. Mr. Lampe has voting and investment control over these shares and, consequently, is deemed to beneficially own these shares. 156
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MANAGEMENT OF GLOBIX AFTER MERGER Set forth below is the name, age as of September 30, 2004, and a brief account of the business experience of each person who will be a director of Globix after the merger. [Download Table] Name Age Position ---- --- -------- Peter K. Stevenson 44 President, Chief Executive Officer and Director Peter L. Herzig 41 Vice Chairman of the Board of Directors Steven Lampe 45 Director Steven G. Singer 43 Chairman of the Board of Directors Raymond L. Steele 69 Director Wayne Barr, Jr. (1) 40 Director Jose A. Cecin, Jr. (1) 41 Director Stephen E. Courter (1) 49 President and Chief Executive Officer of NEON, and Director John Forsgren (1) 58 Director (1) Such person is currently an officer or director of NEON and will assume the stated position with Globix upon the effectiveness of the merger. OUR BOARD OF DIRECTORS Effective upon the merger, the number of directors on our board of directors will be nine. Our directors are elected at each annual stockholders' meeting, and serve until the next annual stockholders' meeting or the election and qualification of their respective successors. Four of the current members of our board of directors (Messrs. Stevenson, Herzig, Singer and Lampe) were selected in accordance with the terms of the plan of reorganization under Chapter 11 of the U.S. Bankruptcy Code approved April 8, 2002 to serve as the directors of Globix following the effective date of the plan. Mr. Steele was appointed to our board of directors in June 2003. Messrs. Barr, Cecin, Courter and Forsgren are being appointed to our board of directors in accordance with the terms of the merger agreement. Peter S. Brodsky and Steven Van Dyke, who are currently members of our board of directors, are expected to resign in connection with the closing of the merger. Peter K. Stevenson joined Globix as president and chief executive officer in April 2002 and also serves as a member of our board of directors. Mr. Stevenson has over 20 years of experience in the communications industry. Prior to joining Globix, Mr. Stevenson was a senior consultant to Communication Technology Advisors LLC, from January 2002 through April 2002, a restructuring boutique focusing on distressed telecommunications companies through the provision of strategic planning advice, restructuring assistance and overall business advice. CTA currently provides Globix with a wide array of business advisory services. Mr. Stevenson is a founder of Net One Group, Inc., a northern Virginia based telecom investment and management company focused on developing and operating next generation broadband services networks. From January 2001 to January 2002, Mr. Stevenson served as a strategic advisor to the board of directors of Net Uno, one of the largest cable television, CLEC and ISP carriers in Venezuela. From January 1998 to December 2000, Mr. Stevenson was a corporate officer of Net Uno and president and chief operating officer of Net Uno's Data and Telephone Group. From February 1996 to June 1998, Mr. Stevenson was partner in, and vice president for, Wave International, an international telecommunications investment and management firm focused on developing companies in international markets. Mr. Stevenson graduated with a Bachelor of Science degree from Saint Francis University in Loretto, Pennsylvania. 157
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Peter L. Herzig has served as vice chairman of our board of directors since May 2002. From August 2001 through April 2002, Mr. Herzig served as our chief executive officer. Mr. Herzig joined Globix in October 2000, served as chief operating officer from March 2001 through August 2001 and served as senior vice president and chief operating officer-Application Services Group from October 2000 through March 2001. Prior to joining Globix, Mr. Herzig served as executive vice president and chief financial officer at iWon.com from March 2000 to October 2000, where his responsibilities included managing iWon's relationship with Globix. Prior to joining iWon.com, Mr. Herzig was a senior managing director and head of global capital markets services for Bear, Stearns & Co. Inc. from February 1998 through March 2000, where he provided strategic capital-structure advisory services to a broad spectrum of domestic and international clients, including many new media technology companies experiencing growth with the expansion of the Internet. Prior to Bear Stearns, Mr. Herzig worked at Goldman Sachs & Co. from July 1989 through February 1998. Mr. Herzig has a Bachelor of Arts degree from Dartmouth College and a Masters in Business Administration degree from Columbia University. Steven Lampe has been a director of Globix since April 2002. Mr. Lampe is a managing member of Lampe, Conway & Co. LLC, an investment management company which he co-founded in June 1999. Prior to his work at Lampe, Conway, Mr. Lampe managed Lone Star Securities Fund, a distressed investment fund, from June 1997 through June 1999. Prior to his employment with Lone Star, Mr. Lampe worked at Smith Management, a private investment company, from February 1988 through June 1997. Mr. Lampe has a Bachelor of Arts degree from Middlebury College and a Masters in Business Administration degree from Harvard University. Steven G. Singer has been a director of Globix since April 2002. Effective December 15, 2002, Mr. Singer became chairman of our board of directors. Mr. Singer is the chairman and chief executive officer of American Banknote Corporation, a publicly-traded corporation and 200 year-old global security printer of documents of inherent value, including currency, passports, credit cards, stock and bond certificates, and related products and services. He also serves as the non-executive chairman of the board of Motient Corporation, a publicly traded corporation, and as the Chapter 7 Trustee of American Pad & Paper Company. From 1993 through November 2000, Mr. Singer was the executive vice president and chief operating officer of Romulus Holdings, Inc., a family-owned investment vehicle, and, from 1994 through the present, has served as the chairman of Pure 1 Systems, a manufacturer and distributor of water treatment products. Mr. Singer has a Bachelor of Arts degree, summa cum laude, from the University of Pennsylvania and a Juris Doctor degree from the Harvard Law School. Raymond L. Steele has been a director of Globix since June 2003. Mr. Steele is a retired businessman. In addition to our company, Mr. Steele is a member of the board of directors of Dualstar Technologies Corporation and American Banknote Corporation. From August 1997 until October 2000, Mr. Steele served as a board member of Video Services Corp. Prior to his retirement, Mr. Steele held various senior positions such as executive vice president of Pacholder Associates, Inc. (from August 1990 until September 1993), executive advisor at the Nickert Group (from 1989 through 1990), and vice president, trust officer and chief investment officer of the Provident Bank (from 1984 through 1988). Stephen E. Courter, NEON's chairman of the board of directors, president and chief executive officer, joined NEON in December 2000 in his current position. Mr. Courter held his current position with NEON when the company filed for bankruptcy in June, 2002. Prior to joining NEON, Mr. Courter was managing director and chief executive officer of Energis N.V., a facilities-based network service provider in Holland from June 1998 to December 2000. From December, 1995 to June, 1998, Mr. Courter was vice president of finance and assistant general manager of GlobalOne, a joint venture between Sprint, Deutsche Telecom and France Telecom. Prior to joining GlobalOne, from August, 1987 to November, 1995, he served in various positions of increasing responsibility at Sprint International. Earlier in his career, Mr. Courter worked for IBM Corporation and KPMG Peat Marwick LLP. 158
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John H. Forsgren has served as one of NEON's directors since May 1998 and as NEON's interim chief executive officer from August 2000 to December 2000. Mr. Forsgren has served as vice chairman, executive vice president and chief financial officer of Northeast Utilities and various subsidiaries since 1996. >From December 1994 to July 1996, he served as a managing director of Chase Manhattan Bank. Wayne Barr, Jr. is a founding member and Senior Managing Director of Capital & Technology Advisors LLC and Communication Technology Advisors LLC, financial and operational restructuring firms with offices in Albany, New York and Reston, Virginia. Mr. Barr is also a founding member of TechOne Capital Group LLC, a private investment firm based in Albany, New York. Prior to starting these firms, Mr. Barr was the Associate General Counsel of CAI Wireless Systems, Inc., a wireless spectrum company located in Albany, New York, which was sold to MCI WorldCom in 1999. Mr. Barr began his career as an attorney in private practice in New York City and in Albany. He received his J.D., degree from Albany Law School of Union University and is a member of the New York State Bar. Mr. Barr has served as a member of the board of directors of NEON since December 2002 and is a member of the board of directors of Evident Technologies, Inc. and a member of the Board of Trustees of the New York Racing Association, Inc. Jose A. Cecin, Jr. is a Managing Director of the Windsor Group, a leading middle-market investment bank, and directs the firm's telecommunications practice. He is also active in the firm's defense and aerospace practice. Mr. Cecin has over eighteen years of management experience and has had a strong focus on telecommunications, financing and corporate development over the last thirteen years. Prior to joining the Windsor Group, Mr. Cecin was one of two founders of Cambrian Communications, a telecommunications service provider, where he served as chief operating officer and a director. Prior to founding Cambrian in 1999, Mr. Cecin was on the founding team of Wave International, a telecommunications management company focused on infrastructure opportunities in developing markets. Prior to Wave International, Mr. Cecin served as Managing Director of Corporate Development at Bell Atlantic Corporation (now Verizon). Mr. Cecin has served on the board of directors and board of advisors of several private companies. Mr. Cecin earned a BS degree in Electrical Engineering from the United States Military Academy at West Point and an MBA from Stanford University. GLOBIX DIRECTORS' COMPENSATION Under our compensation program for directors, our directors are entitled to receive: o $2,000 per month for directors and $4,000 per month for the Chairman; o an additional $250 per month for service on the Compensation Committee of our board of directors (or $500 per month for the Chairman of the Compensation Committee); o an additional $500 per month for service on the Audit Committee of our board of directors (or $1,000 per month for the Chairman of the Audit Committee); and o an additional $1,000 for each board of directors or committee meeting in excess of four per year. NEON DIRECTORS' COMPENSATION Of the current NEON directors, Messrs. Barr, Cecin, Courter and Forsgren are expected to become directors of Globix upon the effective date of the merger. Under the NEON directors' compensation program, NEON's nonemployee directors are compensated $20,000 per year, which payments are payable at the option of NEON in cash or with options to purchase NEON common stock. NEON's only employee director, Mr. Courter, is not compensated for such director services. 159
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OTHER EXECUTIVE OFFICERS [Download Table] Name Age Position ---- --- -------- Robert M. Dennerlein 45 Vice President and Chief Financial Officer H. Jameson Holcombe 41 Senior Vice President, Operations, Chief Technology Officer and Secretary John D. McCarthy 40 Senior Vice President, Business Development and U.S. Sales and Marketing Philip J. Cheek 39 Managing and Finance Director of Globix U.K. Ltd. James C. Schroeder 57 Vice President and General Counsel Robert M. Dennerlein joined Globix in January 2003 as vice president and corporate controller and became our chief financial officer on May 12, 2003. Prior to joining Globix, from August 2001 until January 2003, Mr. Dennerlein served as vice president and controller for OpNext, a global optical components joint venture created by a spinoff from Hitachi and a venture capital investment by Clarity Partners. From July 1999 until August 2001, Mr. Dennerlein served as the director of accounting and external reporting for Agere Systems (formerly the Microelectronics division of Lucent Technologies). From June 1992 until July 1999, Mr. Dennerlein held various management positions at International Specialty Products, a global specialty chemicals manufacturer. He served as senior director, ISP Financial Services from July 1997 until July 1999 and prior to that controller, ISP International Operations from May 1995 until July 1997. Mr. Dennerlein is a Certified Public Accountant and received a Masters in International Business degree from Seton Hall University. He also holds a Bachelor of Science in Accounting from Seton Hall University. H. Jameson Holcombe joined Globix in July 2002 as senior vice president of operations, a position he continues to hold. In April, 2003 he became our corporate secretary and on August 11, 2003 he became our chief technology officer. Prior to joining Globix, Mr. Holcombe served as chief information officer of Cambrian Communications from February 2000 through July 2002. From August 1997 to January 2000, Mr. Holcombe served as a senior principal consultant at C-Change, Inc. in San Rafael CA, leading project teams to deliver e-commerce initiatives for entertainment, telecommunications and financial services clients. Mr. Holcombe received a Masters degree in Computer Science from George Washington University in Washington, D.C. and a Masters in Business Administration degree from Chaminade University in Honolulu. Mr. Holcombe received his undergraduate degree from the United States Military Academy at West Point. John D. McCarthy has served as senior vice president, business development since September 2002 and as senior vice president of US sales and marketing since October 2003. Prior to that, he served as acting chief financial officer from March 2002 through September 2002. Mr. McCarthy also resumed the duties of acting chief financial officer from November 2002 to May 2003. Mr. McCarthy served as vice president of financial planning and analysis from August 2001 through March 2002 and as managing director for the Application Services Group from the time he joined Globix in March 2001 through August 2001. Prior to joining Globix, Mr. McCarthy served as vice president, finance for LC39 Venture Group LLC, a New York based technology incubator and venture capital fund, from April 2000 to March 2001. From November 1998 through April 2000, he held management positions with an e-commerce startup and acted as a consultant to several entrepreneurial ventures. From 1996 to 1998, Mr. McCarthy was vice president, director of business affairs with divisions of Young & Rubicam. Mr. McCarthy received a Masters in Business Administration degree from The Wharton School of Business of the University of Pennsylvania and a Masters degree in International Studies from Wharton's Lauder Institute. Mr. McCarthy received his undergraduate degree from Connecticut College. 160
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Philip J. Cheek joined our United Kingdom subsidiary, Globix Ltd., in July 2000 as European finance director. Mr. Cheek was subsequently appointed to the additional position of managing director of Globix Ltd. on July 12, 2001. He currently serves on the Globix Ltd. United Kingdom board of directors. Prior to his joining Globix Ltd., Mr. Cheek served in various financial positions with Fritz Companies, an international freight company (now part of UPS) from April 1996 through July 2000. Mr. Cheek graduated as a qualified ACCA in 1992 with a professional training practice Maxwells Chartered Accountants. James C. Schroeder joined Globix in February 2000 as Deputy General Counsel. In December 2003 he was promoted to General Counsel and is responsible for overseeing all of Globix's legal activities including real estate and sales contracts. Prior to joining Globix, Mr. Schroeder was in private practice. Earlier in his career Mr. Schroeder served as in-house counsel for Philips Electronics NA and McKesson, Inc. Mr. Schroeder holds a BA from the University of Southern California. He received his JD from Pepperdine University and his LLM from New York University. 161
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GLOBIX AND NEON EXECUTIVE COMPENSATION GLOBIX SUMMARY COMPENSATION TABLE The following summary compensation table sets forth the total compensation for the fiscal years ended September 30, 2004, September 30, 2003 and September 30, 2002 for Globix's Chief Executive Officer, Globix's four other most highly compensated executive officers during the fiscal year ended September 30, 2004 who held office as of September 30, 2004. [Enlarge/Download Table] ANNUAL COMPENSATION ------------------- SECURITIES OTHER ANNUAL UNDERLYING SALARY BONUS COMPENSATION OPTIONS/ ALL OTHER NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARS (#) COMPENSATION ----------------------------- ------- ----------- ----------- ------------- ------------ ------------ Peter K. Stevenson(1) 2004 308,000 168,750(2) --- --- --- PRESIDENT AND CHIEF 2003 284,684 150,000 79,105(4) 548,667(3) EXECUTIVE OFFICER 2002 127,333 75,000 50,000(5) --- 1,459(6) Robert M. Dennerlein(7) 2004 176,250 13,000(2) --- --- --- CHIEF FINANCIAL OFFICER 2003 108,077 42,916 --- 100,000 --- H. Jameson Holcombe(8) 2004 185,000 13,000(2) --- --- --- SENIOR VICE PRESIDENT 2003 170,000 53,125 79,623(9) 106,582 --- OF OPERATIONS, CORPORATE 2002 34,375 --- 27,621(10) --- --- SECRETARY AND CHIEF TECHNOLOGY OFFICER John D. McCarthy(11) 2004 190,000 18,000(2) --- --- --- SENIOR VICE PRESIDENT, 2003 190,000 62,938 --- 146,316 --- CORPORATE DEVELOPMENT 2002 190,000 27,000 --- 100,000(12) --- Philip J. Cheek(13) 2004 197,134 --- 3,584(14) --- 19,893(15) MANAGING AND FINANCE 2003 178,333 41,625 3,213(16) 30,000 17,833(15) DIRECTOR, GLOBIX U.K. LTD. 2002 119,662 18,097 2,955(17) --- 11,966(15) (1) Mr. Stevenson became our President and Chief Executive Officer on April 15, 2002. (2) Amounts shown represent a special one-time bonus paid in March 2004 occasioned by the successful completion of the sale of the property at 415 Greenwich Street in New York, New York. Year end bonuses have not yet been determined, but will be included in the summary compensation table in Globix's proxy statement relating to its annual meeting to be held in 2005. (3) Pursuant to Mr. Stevenson's employment agreement dated as of April 15, 2002, we agreed to grant to Mr. Stevenson options to acquire 548,667 shares of our common stock, which options were granted to Mr. Stevenson on March 14, 2003 pursuant to our 2003 Stock Option Plan. (4) Represents the amount that we reimbursed Mr. Stevenson for his housing and travel costs in the fiscal year ended September 30, 2003, including amounts reimbursed for taxes associated with these payments, as his permanent residence is located outside of the New York area. 162
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(5) Represents the amount that we reimbursed Mr. Stevenson for his housing and travel costs in the fiscal year ended September 30, 2002, as his permanent residence is located outside of the New York area. (6) Represents the amount of premiums for life insurance benefits for Mr. Stevenson paid by Globix in the five month period ended September 30, 2002. (7) Mr. Dennerlein became our Chief Financial Officer on May 12, 2003. He joined Globix in January 2003. (8) Mr. Holcombe joined Globix in July 2002 as Senior Vice President of Operations. He became our Corporate Secretary in April 2003 and our Chief Technology Officer on August 11, 2003. (9) Represents the amount that we reimbursed Mr. Holcombe for his housing and travel costs in the fiscal year ended September 30, 2003, including amounts reimbursed for taxes associated with these payments, as his permanent residence is located outside of the New York area. (10) Represents the amount that we reimbursed Mr. Holcombe for his housing and travel costs in the fiscal year ended September 30, 2002, as his permanent residence is located outside of the New York area. (11) Mr. McCarthy has served as our Senior Vice President, Corporate Development since September 2002. He joined Globix on March 5, 2001. (12) These options were granted prior to the effective date of our plan of reorganization and were cancelled on the effective date of the plan of reorganization. (13) Mr. Cheek joined our U.K. subsidiary, Globix Ltd., in July 2000. He was appointed Managing and Finance Director of Globix Ltd. on July 12, 2001. (14) Represents the amount that we reimbursed Mr. Cheek for his travel costs in the fiscal year ended September 30, 2004, as his permanent residence is located outside of the London area. (15) Represents the amount contributed by Globix Ltd. to its profit sharing plan. (16) Represents the amount that we reimbursed Mr. Cheek for his travel costs in the fiscal year ended September 30, 2003, as his permanent residence is located outside of the London area. (17) Represents the amount that we reimbursed Mr. Cheek for his travel costs in the fiscal year ended September 30, 2002, as his permanent residence is located outside of the London area. 163
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NEON SUMMARY COMPENSATION TABLE The following table sets forth compensation information for Stephen E. Courter, the chief executive officer of NEON who is expected to be an executive officer of Globix, for the fiscal years ended December 31, 2001, 2002 and 2003. [Enlarge/Download Table] ANNUAL COMPENSATION ------------------- ------------------------------------------------------------------------------------------------------- SECURITIES OTHER ANNUAL UNDERLYING SALARY BONUS COMPENSATION OPTIONS/ ALL OTHER NAME AND PRINCIPAL POSITION YEAR ($) ($) ($) SARS (#) COMPENSATION ----------------------------- ------- ------------- ---------- ------------ ------------ ------------ Stephen E. Courter (1) 2003 268,750(2) 137,500 5,645 450,000(5) -- PRESIDENT, CHIEF 2002 244,712(3) -- 7,719 -- -- EXECUTIVE OFFICER AND 2001 239,423 89,500(4) 5,228 -- -- CHAIRMAN OF THE BOARD ----------------------------- ------- ------------- ---------- ------------ ------------ ------------ -------------------------------------------------------------------------------- (1) Mr. Courter became NEON's President, Chief Executive Officer and Chairman of the Board in December 2000. (2) Mr. Courter's employment agreement dated February 13, 2003 provides that his base compensation would be $275,000 for fiscal year 2003 but Mr. Courter earned and was paid $268,750. (3) Mr. Courter's base salary was $250,000 for fiscal years 2001 and 2002. However, Mr. Courter voluntarily reduced his base salary from the middle of 2001 through the beginning of 2002 by 10% due to NEON's financial condition at the time. (4) This bonus was earned as part of NEON's management incentive plan, but has not been paid. Pursuant to NEON's reorganization plan, the management incentive bonus will be paid in a lump sum on the earlier of (i) the date NEON achieves positive cash flow from operations (after giving effect to the payment(s) of such bonus), (ii) the date of Mr. Courter's employment termination, or (iii) the date NEON entirely ceases operations. (5) Pursuant to Mr. Courter's employment agreement dated February 13, 2003, NEON agreed to grant to Mr. Courter options to acquire 450,000 shares of NEON common stock, which options were granted to Mr. Courter on March 7, 2003. 164
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NEON OPTION/SAR GRANTS IN LAST FISCAL YEAR The following table provides information on grants of NEON common stock options in fiscal 2003 to the NEON officer listed in the Summary Compensation Table. [Enlarge/Download Table] NUMBER OF POTENTIAL REALIZABLE VALUE AT SECURITIES PERCENT OF TOTAL ASSUMED ANNUAL RATE OF STOCK UNDERLYING OPTIONS/SARs PRICE APPRECIATION FOR OPTION OPTIONS/ GRANTED TO EXERCISE OR TERM SARs EMPLOYEES IN BASE PRICE EXPIRATION ----------------------------- NAME GRANTED(#) FISCAL YEAR ($/SHARE) DATE 5% ($) 10%($) ---------------------- -------------- ---------------- ----------- ----------------- --------------- ------------- Stephen E. Courter 450,000(1) 24% $5.30 3/7/13 1,498,500(*) 3,802,500(*) -------------------------------------------------------------------------------- (*) Based on the fair market value of $5.30 per share of NEON common stock on the date of grant of March 7, 2003. (1) All of Mr. Courter's stock options will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. GLOBIX AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL AND FISCAL YEAR-END OPTION VALUES The following table presents information concerning options granted to the officers included in the Summary Compensation Table during the fiscal year ended September 30, 2004. [Enlarge/Download Table] VALUE NUMBER OF REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT ACQUIRED AT EXERCISE OPTIONS AT FISCAL YEAR END FISCAL YEAR END(1) ON LESS EXERCISE EXERCISE PRICE ---------------------------- ---------------------------- NAME EXERCISE PRICE) ($/SHARE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---------------------- --------- ------------- -------------- ------------ ------------- ------------ ------------- Peter K. Stevenson --- --- 3.04 548,667 --- $115,220 $ --- Robert M. Dennerlein --- --- 3.04 50,000 50,000 10,500 10,500 H. Jameson Holcombe --- --- 3.04 53,291 53,291 11,191 11,191 John D. McCarthy --- --- 3.04 73,158 73,158 15,363 15,363 Philip J. Cheek --- --- 3.04 15,000 15,000 3,150 3,150 (1) Based on a sales price of $3.25 per share of our common stock on the OTC Bulletin Board on September 30, 2004. 165
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NEON AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table presents information concerning options granted to Mr. Courter during the fiscal year ended December 31, 2003. [Enlarge/Download Table] VALUE NUMBER OF REALIZED NUMBER OF SECURITIES VALUE OF UNEXERCISED SHARES (MARKET PRICE UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS/SARs AT ACQUIRED AT EXERCISE OPTIONS AT FISCAL YEAR END(1) FISCAL YEAR END(2) ON LESS EXERCISE ----------------------------- ---------------------------- NAME EXERCISE PRICE) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---------------------- --------- ------------- ------------ -------------- ------------ ------------- Stephen E. Courter --- --- 150,000 300,000 $114,000 $228,000 -------------------------------------------------------------------------------- (1) All of Mr. Courter's stock options will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. (2) Based on the fair market value of $6.06 per share of NEON common stock as of January 30, 2004, the closest date on which the fair market value of the NEON common stock was determined. All of Mr. Courter's stock options will accelerate, become fully vested and exercisable immediately prior to a change of control of NEON, including a transaction such as the merger. EMPLOYMENT AGREEMENTS PETER K. STEVENSON. Effective April 15, 2002, we entered into an employment agreement with Peter K. Stevenson for his services as our President and Chief Executive Officer. The original term of the agreement extended until July 31, 2003. As of August 1, 2003, the agreement was amended to extend the term until July 31, 2004, subject to extension for successive six month periods with the mutual consent of Globix and Mr. Stevenson, and to make certain other changes in Mr. Stevenson's compensation and severance arrangements. Under the amended agreement, Mr. Stevenson's base salary is $308,000 per year. Mr. Stevenson is also eligible for an annual bonus in an amount up to 50 percent of his base salary, payable at the discretion of the Compensation Committee, if he achieves the targets (objective and subjective) established by the Compensation Committee. In addition, under the terms of Mr. Stevenson's employment agreement we agreed to grant to Mr. Stevenson options to acquire 548,667 shares of our common stock, or 3 percent of the outstanding shares of our common stock on a fully diluted basis. One hundred percent of these options have vested. Mr. Stevenson's employment agreement provides that in the event that we terminate his employment with Globix for any reason other than cause, or if Mr. Stevenson terminates his employment with our Company for good reason, then Mr. Stevenson is entitled to twelve months' salary. H. JAMESON HOLCOMBE. On July 15, 2002, we entered into an agreement with H. Jameson Holcombe outlining the terms of Mr. Holcombe's employment as our Vice President, Operations. Mr. Holcombe's base salary is $165,000 per year, which will be increased no less frequently than once per year in accordance with our policies. Mr. Holcombe is also eligible to receive a bonus of 30 percent of his base salary, which is contingent upon our Company meeting certain performance targets mutually agreed upon by Globix and Mr. Holcombe. Further, we are required to reimburse Mr. Holcombe for his travel each week to New York and his reasonable living expenses while in New York. Our agreement with Mr. Holcombe also provides that he is eligible to receive stock options under our 2003 Stock Option Plan. We are entitled to terminate Mr. Holcombe's employment at any time. 166
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STEPHEN E. COURTER. Effective February 13, 2003, NEON entered into an employment agreement with Stephen E. Courter for his services as NEON's President, Chief Executive Officer and Chairman of the board of directors. The original term of the employment agreement was extended until December 31, 2003 and provided for the agreement to be automatically extended for successive twelve-month periods, subject to early termination. Under the agreement, Mr. Courter's initial base salary is $275,000 per year and will be reviewed and determined annually by NEON's compensation committee of the board of directors. Mr. Courter is also eligible for an annual bonus initially at 50 percent of his base salary, payable in accordance with NEON's compensation program established and administered by NEON's board of directors. In addition, under the terms of Mr. Courter's employment agreement NEON agreed to grant to Mr. Courter options to acquire 450,000 shares of NEON common stock. Mr. Courter's employment agreement provides that in the event that NEON terminates his employment with NEON for any reason (other than for cause, as defined in the employment agreement), then Mr. Courter is entitled to twelve months' salary and incentive compensation at the then current compensation rate and twelve months' benefit continuation at the then current level. Additionally, all unvested stock options to purchase NEON common stock will accelerate, become fully vested and exercisable. Upon a change of control of NEON, including a transaction such as the merger, all unvested stock options will become fully vested and exercisable immediately prior to the change of control event. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Mr. Singer, the Chairman of Globix's board of directors and a member of the compensation committee of the board of directors, was paid a success fee by Globix in the amount of $169,000 in connection with sale by Globix of the property located at 415 Greenwich Street, New York, New York in January 2004. 167
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GLOBIX CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In September 2002, Globix paid Peter L. Herzig a lump sum of $250,000 in connection with his resignation as Chief Executive Officer of Globix. In January 2004, Globix paid Steven Singer, the Chairman of Globix's board of directors and a member of the compensation committee of the board of directors, a success fee in the amount of $169,000 in connection with sale by Globix of the property located at 415 Greenwich Street, New York, New York. Mr. Stevenson, Globix's president and chief executive officer, was also paid a success fee in the amount of $169,000 by Globix in connection with the sale of the property. Globix paid similar success fees in lesser amounts to certain other executive officers in connection with the sale of the property. CTA provides consulting and business development services to NEON. Additionally, CTA agreed to present merger and acquisition advice and opportunities to NEON for a success fee which CTA has agreed to waive in relation to the merger. NEON has issued to certain current and former affiliates of CTA and certain of such affiliates' designees warrants exercisable for 300,000 shares of NEON common stock at $6.06 per share through October 23, 2008 and warrants exercisable for 350,000 shares of NEON common stock at $5.30 per share through December 3, 2007, as payment for its consulting and business development services. CTA purchased the warrants exercisable for 350,000 shares of NEON common stock for $25,000. One of CTA's employees, Wayne Barr, Jr., serves on NEON's board of directors. Mr. Barr will also serve on Globix's board of directors after consummation of the merger. A current director of NEON, Mr. Aquino, was affiliated with CTA at the time NEON's board of directors approved the merger. CTA provides similar consulting and business development services to Globix. Under a letter agreement between Globix and CTA, CTA is entitled to a success fee if Globix consummates a sale, merger or a similar transaction with CTA's assistance. CTA has agreed to waive this fee in relation to the merger. Certain affiliates of CTA, including Mr. Barr, hold warrants exercisable for 500,000 shares of Globix common stock at $3.00 per share through March 13, 2013, which were purchased for $25,000. 168
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SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF GLOBIX FOLLOWING THE MERGER The following table sets forth certain information, assuming the consummation of the merger on December 31, regarding the beneficial ownership of Globix common stock and Globix convertible preferred stock by: (i) each person who is known by Globix to own beneficially more than 5% of the outstanding shares of Globix common stock or Globix convertible preferred stock following the merger; (ii) each director of Globix following the merger; (iii) each officer of Globix named in the Summary Compensation Table; and (iv) all of the directors and executive officers of Globix as a group following the merger. Except as noted below, the address of each person listed on the table is c/o Globix Corporation, 139 Centre Street, New York, New York 10013. [Enlarge/Download Table] ----------------------------------------- ---------------------------------- ------------------------------- --------------- NAME AND ADDRESS COMMON STOCK PREFERRED STOCK OF BENEFICIAL OWNER BENEFICIALLY OWNED BENEFICIALLY OWNED ----------------------------------------- ---------------------------------- ------------------------------- PERCENTAGE OF VOTING SECURITIES BENEFICIALLY NUMBER PERCENTAGE(1) NUMBER PERCENTAGE(2) OWNED(3) ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- MacKay Shields LLC(4)(5) 13,456,930 27.70% 1,420,721 48.85% 28.90% c/o MacKay Shields Financial Corp. 9 West 57th Street New York, NY 10019 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- Citadel Investment Group LLC(6) 2,549,600 5.25 - - 4.95 131 Dearborn St., 36th Floor Chicago, IL 60604 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- LC Capital Master Fund Ltd.(7) (8) 4,910,679 10.11 452,639 15.56 10.41 Lampe Conway & Co. LLC 730 Fifth Avenue, Ste. 1002 New York, NY 10019 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- Loeb Partners Corp. (9) 3,547,995 7.30 117,317 4.03 7.12 61 Broadway New York, NY 10006 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- Mode 1 Communications, Inc.(10) 2,723,674 5.61 - - 5.29 c/o Northeast Utilities Service Co. 107 Selden Street Berlin, CT 06037 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- JGD Management Corp. (11) 2,980,577 6.14 - - 5.79 350 Park Avenue New York, NY 10022 ----------------------------------------- ------------------ --------------- -------------- ---------------- --------------- 169
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