<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 7, 1998
REGISTRATION NO. 333-57993
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1 TO
NOTE EXCHANGE ON
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
GLOBIX CORPORATION
(Exact name of registrant as specified in its charter)
------------------------------
<TABLE>
<S> <C> <C>
DELAWARE 7373 13-3781263
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
295 LAFAYETTE STREET
NEW YORK, NEW YORK 10012
(212) 334-8500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------------
MARC H. BELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GLOBIX CORPORATION
295 LAFAYETTE STREET
NEW YORK, NEW YORK 10012
(212) 334-8500
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
ARNOLD N. BRESSLER, ESQ.
MILBERG WEISS BERSHAD HYNES & LERACH LLP
ONE PENNSYLVANIA PLAZA
NEW YORK, NEW YORK 10119
(212) 594-5300
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF CLASS OF AMOUNT TO OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED BE REGISTERED PER UNIT(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
New 13% Senior Notes due 2005............... $160,000,000 100% $160,000,000 $55,172(2)
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
calculated pursuant to Rule 457(f) under the Securities Act of 1933 as the
market value of the securities to be canceled in the exchange.
(2) Previously paid.
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PROSPECTUS
$160,000,000
GLOBIX CORPORATION
OFFER TO EXCHANGE NEW 13% SENIOR NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT
FOR ALL OUTSTANDING
13% SENIOR NOTES DUE 2005
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M.,
NEW YORK CITY TIME ON SEPTEMBER 10, 1998, UNLESS EXTENDED.
---------------------
Globix Corporation, formerly known as Bell Technology Group Ltd., a Delaware
corporation (the "Company") hereby offers upon terms and subject to the
conditions set forth in this Prospectus (the "Prospectus") and the accompanying
Letter of Transmittal (the "Letter of Transmittal") (the offering pursuant to
the Prospectus together with the Letter of Transmittal herein the "Exchange
Offer") to exchange up to an aggregate principal amount of $160,000,000 of its
new 13% Senior Notes due 2005 (as defined in that certain indenture dated April
30, 1998 by and among the Company and Marine Midland Bank as Trustee (the
"Indenture")) (capitalized terms followed by the parenthetical remark "(as
defined)" and not otherwise defined herein shall have the meanings given to them
in the Indenture) (herein the "Exchange Notes") for up to an aggregate principal
amount of $160,000,000 of the Company's outstanding 13% Senior Notes due 2005
(herein the "Existing Notes"). The terms of the Exchange Notes are substantially
identical in all material respects to those of the Existing Notes, respectively,
except that the Exchange Notes (i) will have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and therefore will
not be subject to certain restrictions on transfer applicable to the Existing
Notes and (ii) will not be entitled to registration or other rights under the
Registration Rights Agreement (as defined) including the provision in the
Registration Rights Agreement for payment of Additional Interest (as defined)
upon failure by the Company to consummate the Exchange Offer or the occurrence
of certain other events. See "Description of Notes." The Exchange Notes will be
issued pursuant to, and the holders thereof (herein the "New Holders") will be
entitled to the benefit of, the Indenture governing the Existing Notes. In the
event that the Exchange Offer is consummated, any Existing Notes which remain
outstanding after consummation of the Exchange Offer and the Exchange Notes
issued in the Exchange Offer will vote together as a single class for purposes
of determining whether Holders of the requisite percentage in outstanding
principal amount of Notes (as defined below) have taken certain actions or
exercised certain rights under the Indenture. See "Description of Exchange
Notes", "The Exchange Offer." Holders of Existing Notes are referred to herein
as "Existing Holders", and Existing Holders together with New Holders are
referred to herein collectively as "Holders". The Exchange Notes together with
the Existing Notes are referred to herein collectively as the "Notes".
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED
TO EXISTING HOLDERS ON OR ABOUT AUGUST 12, 1998.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 11 FOR A DISCUSSION OF CERTAIN
FACTORS WHICH EXISTING HOLDERS SHOULD CONSIDER IN CONNECTION
WITH THE EXCHANGE OFFER.
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS OR THE LETTER OF TRANSMITTAL. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
August 12, 1998
<PAGE>
(continuation of cover page)
The Existing Notes were offered in connection with the issuance of 160,000
units (collectively, the "Units"), each consisting of $1,000 principal amount of
13% Senior Notes due 2005 of the Company and one warrant (a "Warrant"), to
purchase 3.52 Shares of common stock, par value $0.01 per share (the "Common
Stock"), of the Company (the "Existing Notes Offering"). See "Description of
Units."
The Exchange Notes will mature on May 1, 2005. Interest on the Exchange
Notes will be payable semi-annually in arrears on May 1 and November 1 of each
year, commencing November 1, 1998. Concurrently with the closing of the Existing
Notes Offering, the Company deposited with an escrow agent (the "Escrow Agent")
an amount ($57 million) of U.S. Government Securities (as defined) that,
together with the interest received thereon, will be sufficient to pay, when
due, the first six interest payments on the Notes. The Exchange Notes will be
collateralized by a first priority security interest in the Escrow Account (as
defined). See "Description of Notes--Escrow Account". The Exchange Notes will be
redeemable at the option of the Company, in whole or in part, at any time on or
after May 1, 2001, at the redemption prices set forth herein, plus accrued and
unpaid interest to the date of redemption. In addition, after the date of
issuance and prior to May 1, 2000, the Company may redeem up to 35% of the
original aggregate principal amount of the Exchange Notes at a redemption price
of 113% of the principal amount, together with accrued and unpaid interest to
the date of redemption, with the net cash proceeds of one or more Public Equity
Offerings (as defined) or the sale of Common Stock to a Strategic Investor (as
defined), provided that at least 65% of the original aggregate principal amount
of the Notes remains outstanding. In the event of a Change of Control, Holders
of the Exchange Notes will have the right to require the Company to purchase
their Exchange Notes, in whole or in part, at a price equal to 101% of the
aggregate principal amount thereof, plus accrued and unpaid interest thereon to
the date of purchase. See "Description of Notes--Optional Redemption" and
"--Change of Control". The Exchange Notes will be senior unsecured obligations
of the Company, will rank PARI PASSU in right of payment with all existing and
future unsecured and unsubordinated Indebtedness (as defined) of the Company,
and will rank senior in right of payment to any future subordinated Indebtedness
of the Company. Holders of secured Indebtedness of the Company will, however,
have claims prior to the claims of the Holders of the Notes with respect to the
assets securing such other Indebtedness. As of March 31, 1998, on a pro forma
basis after giving effect to the Existing Notes Offering, the Company would have
had approximately $163.3 million of Indebtedness outstanding, including trade
payables. Approximately $3 million of such indebtedness was secured. See
"Description of Notes--Ranking".
On April 30, 1998, the Company issued $160.0 million aggregate principal
amount of Existing Notes. The Existing Notes were issued pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. The Exchange Notes are
being offered hereunder in order to satisfy certain obligations of the Company
under the Registration Rights Agreement by and among the Company and ING Baring
(U.S.) Securities, Inc. as the initial purchaser (the "Initial Purchaser") of
the Existing Notes. The Exchange Offer is intended to satisfy the Company's
obligations under the Registration Rights Agreement. Once the Exchange Offer is
consummated, the Company generally will have no further obligations to register
any of the Existing Notes not tendered by Existing Holders for exchange. See
"Risk Factors--Consequences to Non-Tendering Holders of Existing Notes."
The Exchange Notes generally will be issued in the form of Global Notes (as
defined) which will be deposited with, or on behalf of, the Depositary (as
defined) and registered in its name or in the name of a nominee of the
Depositary. Beneficial interests in the Global Notes representing the Exchange
Notes will be shown on, and transfers thereof will be effected through, records
maintained by DTC and its participants. See "Book-Entry; Delivery and Form."
The Company will accept for exchange any and all Existing Notes which are
properly tendered in the Exchange Offer prior to 5:00 p.m., New York City time,
on September 10, 1998 (20 business days after
ii
<PAGE>
effectiveness of the registration statement on Form S-4 of which this Prospectus
is a part (the "Exchange Offer Registration Statement", which term shall
encompass all amendments, exhibits, annexes and schedules thereto)), unless
extended by the Company in its sole discretion (the "Expiration Date"). The
Expiration Date will not in any event be extended to a date later than September
24, 1998. Tenders of Existing Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date. In the event the Company
terminates the Exchange Offer and does not accept for exchange any Existing
Notes with respect to the Exchange Offer, the Company will promptly return the
Existing Notes to the Existing Holders. The Exchange Offer is not conditioned
upon any minimum principal amount of Existing Notes being tendered for exchange,
but is subject to certain events and conditions that may be waived by the
Company and to the terms and provisions of the Registration Rights Agreement.
The Existing Notes may be tendered in whole or in part solely in integral
multiples of $1,000.
The Company is making the Exchange Offer in reliance on the position of the
staff of the Division of Corporation Finance (the "Staff") of the Securities and
Exchange Commission (the "Commission") as set forth in the Staff's Exxon Capital
Holdings Corporation no-action letter (available May 13, 1988) (the "Exxon
Capital No-Action Letter"), Morgan Stanley & Co. Incorporated no-action letter
(available June 5, 1991) (the "Morgan Stanley No-Action Letter"), Shearman &
Sterling no-action letter (available July 2, 1993) (the "Shearman & Sterling
No-Action Letter"), and other interpretive letters addressed to third parties in
other transactions. However, the Company has not sought its own interpretive
letter addressing such matters and there can be no assurance that the Staff
would make a similar determination with respect to the Exchange Offer as it has
in such interpretive letters to third parties. Based on these interpretations by
the Staff, and subject to the two immediately following sentences, the Company
believes that Exchange Notes issued pursuant to this Exchange Offer in exchange
for Existing Notes may be offered for resale, resold and otherwise transferred
by such New Holder (other than a New Holder who is a broker-dealer) without
further compliance with the registration and prospectus delivery requirements of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such New Holder's business and that such New Holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. However, any Existing Holder who (i) is an "affiliate" of
the Company (within the meaning of Rule 405 under the Securities Act), (ii) does
not acquire such Exchange Notes in the ordinary course of its business, (iii)
intends to participate in the Exchange Offer for the purpose of distributing
Exchange Notes, or (iv) is a broker-dealer who purchased such Existing Notes
directly from the Company, (a) will not be able to rely on the interpretations
of the Staff set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Existing Notes in the Exchange Offer and
(c) must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any sale or other transfer of such
Existing Notes unless such sale is made pursuant to an exemption from such
requirements (e.g., Rule 144 or otherwise). In addition, as described below, if
any broker-dealer holds Existing Notes acquired for its own account as a result
of market-making or other trading activities and exchanges such Existing Notes
for Exchange Notes (a "Participating Broker-Dealer"), then such Participating
Broker-Dealer may be deemed a statutory "underwriter" within the meaning of the
Securities Act and must deliver a prospectus meeting the requirements of the
Securities Act in connection with any resales of such Exchange Notes. See "Plan
of Distribution".
Each Existing Holder who wishes to exchange Existing Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, and (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Existing Notes for its own account as a result
of market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering
iii
<PAGE>
a prospectus, a Participating Broker-Dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. Based on the
position taken by the Staff in the interpretive letters referred to above, the
Company believes that Participating Broker-Dealers may fulfill their prospectus
delivery requirements with respect to the Exchange Notes received upon exchange
of such Existing Notes with a prospectus meeting the requirements of the
Securities Act, which may be the prospectus prepared for an exchange offer so
long as it contains a description of the plan of distribution with respect to
the resale of such Exchange Notes. Accordingly, this Prospectus, as it may be
amended or supplemented from time to time, may be used by a Participating
Broker-Dealer during the period referred to below in connection with resales of
Exchange Notes received in exchange for Existing Notes where such Existing Notes
were acquired by such Participating Broker-Dealer for its own account as a
result of market-making or other trading activities. Subject to certain
provisions set forth in the Registration Rights Agreement, the Company shall use
its best efforts to keep the Exchange Offer Registration Statement continuously
effective, supplemented and amended to the extent necessary to ensure that it is
available for sales of Exchange Notes by Participating Broker-Dealers, and to
ensure that the Exchange Offer Registration Statement conforms with the
requirements of the Act and the policies, rules and regulations of the
Commission as announced from time to time, for a period expiring approximately
180 days from the date on which the Exchange Offer Registration Statement is
declared effective. See "Plan of Distribution." Any Participating Broker-Dealer
who is an affiliate of the Company may not rely on such interpretive letters and
must comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "The Exchange
Offer-Resales of Exchange Notes."
Each Participating Broker-Dealer who surrenders Existing Notes pursuant to
the Exchange Offer will be deemed to have agreed, by execution of the Letter of
Transmittal, that, upon receipt of notice from the Company of the occurrence of
any event or the discovery of any fact which makes any statement contained or
incorporated by reference in this Prospectus untrue in any material respect or
which causes this Prospectus to omit to state a material fact necessary in order
to make the statements contained or incorporated by reference herein, in light
of the circumstances under which they were made, not misleading or of the
occurrence of certain other events specified in the Registration Rights
Agreement, such Participating Broker-Dealer will suspend the sale of Exchange
Notes pursuant to this Prospectus until the Company has amended or supplemented
this Prospectus to correct such misstatement or omission and has furnished
copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the Exchange
Notes may be resumed, as the case may be.
The Exchange Notes will be a new issue of securities for which there
currently is no established trading market. Although the Initial Purchaser has
informed the Company that it currently intends to make a market in the Exchange
Notes, it is not obligated to do so, and any such market making may be
discontinued at any time without notice. As the Existing Notes were issued and
the Exchange Notes are being issued to a limited number of institutions who
typically hold similar securities for investment, the Company does not expect
that an active public market for the Exchange Notes will develop. Accordingly,
there can be no assurance as to the development, liquidity or maintenance of any
market for the Exchange Notes. The Existing Notes have been approved for trading
in the Private Offerings, Resale and Trading through Automatic Linkages (PORTAL)
market. The Company does not currently intend to apply for listing of the
Exchange Notes on any securities exchange or for quotation through the Nasdaq
Stock Market. See "Risk Factors--Restrictions on Resale; Absence of Public
Market for the Existing Notes."
Any Existing Notes not tendered and accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture (except
for those rights which terminate upon consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the Existing Holders will
continue to be subject to the existing restrictions upon transfer thereof and
the Company will have no further obligation to such Existing Holders (except for
limited instances involving Existing Holders that are not eligible to
participate in the Exchange Offer) to provide for registration under the
Securities Act of the Existing Notes held by
iv
<PAGE>
them. To the extent that Existing Notes are tendered and accepted in the
Exchange Notes Offering, an Existing Holder's ability to sell untendered
Existing Notes could be adversely affected. See "Summary-- Consequences of
Failure to Exchange" and "Risk Factors".
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF EXISTING NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER THEIR
EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER.
THE COMPANY HAS AGREED TO PAY ALL EXPENSES OF THE EXCHANGE OFFER. See "The
Exchange Offer--Fees and Expenses." Each Exchange Note will bear interest from
the most recent date to which interest has been paid or duly provided for on the
Existing Note surrendered in exchange for such Exchange Note or, if no such
interest has been paid or duly provided for on such Existing Note, from April
30, 1998. Holders of the Existing Notes whose Existing Notes are accepted for
exchange will not receive accrued interest on such Existing Notes for any period
from and after the last Interest Payment Date (as defined below) to which
interest has been paid or duly provided for on such Existing Notes prior to the
original issue date of the Exchange Notes or, if no such interest has been paid
or duly provided for, will not receive any accrued interest on such Existing
Notes, and will be deemed to have waived the right to receive any interest on
such Existing Notes accrued from and after such Interest Payment Date or, if no
such interest has been paid or duly provided for, from and after April 30, 1998.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No dealer-manager is being used in connection
with this Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITY
OTHER THAN THE EXCHANGE NOTES OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY OF THE EXCHANGE NOTES TO ANY
PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR
SOLICITATION TO SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
UNTIL NOVEMBER 10, 1998 (90 DAYS AFTER COMMENCEMENT OF THE EXCHANGE OFFER),
ALL DEALERS EFFECTING TRANSACTIONS IN THE EXCHANGE NOTES, WHETHER OR NOT
PARTICIPATING IN THE EXCHANGE OFFER, MAY BE REQUIRED TO DELIVER A PROSPECTUS IN
CONNECTION WITH SUCH TRANSACTION.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 pursuant to the Securities Act, and the rules and regulations promulgated
thereunder, covering the Exchange Notes offered hereby (the "Exchange Offer
Registration Statement"). This Prospectus does not contain all the information
set forth in the Exchange Offer Registration Statement. For further information
with respect to the Company and the Exchange Offer, reference is made to the
Exchange Offer Registration Statement. Statements made in this Prospectus as to
the contents of any contract, agreement or other document referred to are
necessarily incomplete. With respect to each such contract, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a
v
<PAGE>
more complete description of the document or matter involved, and each such
statement shall be deemed qualified in its entirety by such reference. The
Company is subject to the informational requirements of the Exchange Act and, in
accordance therewith, files reports, proxy and information statements and other
information with the Commission. Copies of such materials can be obtained by
mail from the Public Reference Section of the Commission, at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. In
addition, such reports, proxy and information statements and other information
can be inspected and copied at the public reference facility referenced above
and at the SEC's regional offices at Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511 and 7 World Trade Center, Suite 1300,
New York, New York 10048. The Commission maintains a web site (http:www.sec.gov)
that contains reports, proxy and information statements and other information
regarding Company, such as the Company, that file electronically with the
Commission. In addition, for so long as any of the Notes remain outstanding, the
Company has agreed to make available to any prospective purchaser of the Notes
or beneficial owners of the Notes, in connection with the sale thereof, the
information required by Rule 144A(d)(4) under the Securities Act. The Common
Stock of the Company is traded on the Nasdaq SmallCap Market. Reports of the
Company may also be inspected at the offices of the Nasdaq SmallCap Market,
Nasdaq Operations, 1735 K Street, N.W. Washington, D.C. 20006. Any such request
and requests for the agreements summarized herein should be directed to Paul
Asher, Secretary, at the Company's principal executive offices, 295 Lafayette
Street, New York, New York 10012, telephone number (212) 334-8500.
FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS CONTAINED IN THIS PROSPECTUS UNDER "PROSPECTUS SUMMARY,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS," IN ADDITION TO CERTAIN STATEMENTS CONTAINED
ELSEWHERE IN THIS PROSPECTUS, ARE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 AND ARE THUS
PROSPECTIVE. SUCH FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
FUTURE RESULTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. THE MOST
SIGNIFICANT OF SUCH RISKS, UNCERTAINTIES AND OTHER FACTORS ARE DISCUSSED UNDER
THE HEADING "RISK FACTORS," BEGINNING ON PAGE 11 OF THIS PROSPECTUS, AND
PROSPECTIVE INVESTORS ARE URGED TO CAREFULLY CONSIDER SUCH FACTORS.
vi
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES
THERETO) INCLUDED ELSEWHERE IN THIS PROSPECTUS, INCLUDING THE FACTORS SET FORTH
IN "RISK FACTORS." CERTAIN TERMS USED HEREIN ARE DEFINED IN THE GLOSSARY
ATTACHED HERETO AS ANNEX A.
THE COMPANY
Globix Corporation ("Globix" or the "Company") is an Internet service
provider ("ISP") engaged in the design, construction and provision of
sophisticated Internet-based solutions for large and medium size business
enterprises. The Company currently operates a "SuperPOP" facility in New York
City and is planning to construct and operate SuperPOPs in London and San
Francisco. A SuperPOP is a high-capacity Internet data center offering dedicated
Internet access, web hosting and co-location facilities to a large concentration
of customers in a focused geographic area. The Company considers itself a
primary source for "one-stop shopping" for innovative, cutting-edge Internet
technology for Fortune 1000 companies. The Company provides one-stop Internet
solutions to its customers which include: (i) high bandwidth dedicated Internet
access, web hosting and co-location facilities, (ii) value-added systems and
network integration, (iii) interactive development--digital web design, web
implementation, and 3-dimensional computer animation and (iv) instructor-led
corporate training. Globix currently provides Internet services to over 570
large and medium size business customers, including CNBC/Dow Jones Business
Video, General Media International Inc. (Penthouse Magazine) and Ogilvy &
Mather.
Globix enables its clients to take advantage of emerging Internet
technology. The emergence of the Internet and the widespread adoption of
Internet protocol ("IP") as a data transmission standard in the 1990's is
rapidly accelerating the standardization of networking protocols. This
standardization enables business enterprises to utilize Internet technologies
for customized data communications within an enterprise ("Intranet") and between
an enterprise and its partners, suppliers and customers. These customized data
communications become critical for larger enterprises that typically have a
variety of strategic partners and suppliers, large mobile workforces and mass
customer bases. Globix leverages its core competencies in leading-edge Internet
technologies to deliver innovative Internet solutions to these larger
enterprises that are scaleable, modular, interchangeable and inter-exchangeable
with other IP-based networks. The Company designs, integrates, installs and
maintains these solutions for its clients, including training its clients'
personnel to utilize these solutions in today's global marketplace.
Total ISP revenues in the United States are projected to grow from $3.3
billion in 1996 to over $18 billion in 2000, according to International Data
Corporation ("IDC"). Today, businesses represent the largest and fastest growing
segment of the Internet market. IDC predicts that U.S. corporate access revenues
will grow from approximately $1.9 billion in 1996 to over $6.6 billion in 2000.
In addition, IDC predicts that enhanced Internet services, such as web hosting,
security, e-commerce, virtual private networks and advanced Internet
applications, are expected to grow from approximately $126 million in 1996 to
over $7 billion in 2000. The rapidly growing need for Internet access and
technology has resulted in a highly fragmented industry with the proliferation
of over 4,000 ISPs operating within the United States. These ISPs are primarily
made up of a few large national providers focused on high bandwidth access and a
large number of small providers with limited resources focused on serving local
markets. The increasingly complex needs of larger enterprises for Internet
technology are rarely met by either the large national ISPs that focus on access
or the small local ISPs that have limited resources to provide innovative
Internet solutions. Globix's strategy is to bridge the gap with its high
capacity, reliable SuperPOP infrastructure and its IP networking expertise,
workstation, server and software integration, interactive media and training
capabilities to provide sophisticated commercial Internet solutions--"one-stop
solutions." This unique capacity to fulfill the specific needs of larger
enterprises is what makes Globix a "Total Business Solutions Provider" and has
enabled it to win major customers within the ranks of Fortune 1000 companies in
the intensely competitive ISP market, while maintaining a customer retention
rate of over 95%.
1
<PAGE>
Through its SuperPOP, the Company offers high capacity dedicated Internet
access, as well as web hosting and co-location facilities. The Company's
SuperPOP is directly linked to the Internet backbone via multiple high bandwidth
connections. In the event that one of these connections fails, re-routing to an
alternate is instantaneous and invisible to the customer. The Company provides
high-speed, collision-free service by maintaining bandwidth which significantly
exceeds the typical requirements of its entire customer base. This extensive
buffer assures smooth, rapid access even to sites with extraordinary, burstable
traffic. To support its large clients, the Company has invested heavily in its
Network Operations Center ("NOC"), which is monitored 24 hours a day, seven days
a week to assure all connections, servers and other systems are performing to
specifications. The Company's engineers, programmers and system administrators
continually review operations to ensure server, software and router integrity
within the SuperPOP.
Globix's expertise in leading innovative Internet technologies includes: (i)
the customization and integration of high-powered servers for Web and database
applications, (ii) design of switched and/or router-based networks, (iii) design
and maintenance of firewall and security protection for the Internet, intranets
and extranets, (iv) programming and customization of commercial
application-specific software, (v) web design, including Hyper-Text Markup
Language ("HTML") and Virtual Reality Markup Language ("VRML") and 3-dimensional
computer animation and (vi) customized application-specific training. In
providing complete Internet solutions, the Company maintains the status of a
Value Added Reseller ("VAR") of leading Internet hardware and software
technologies from manufacturers such as Sun Micro systems, Inc., Silicon
Graphics, Inc., Compaq Computers, Inc., Cisco Systems, Inc., Microsoft
Corporation, Netscape Corporation and Checkpoint Software Corp.
The Company's revenues grew to approximately $17,400,000 for the fiscal year
ended September 30, 1997, an increase of 68% over the prior year. Since
commencing ISP operations in December 1995, the number of Internet customers has
grown to over 570 large and medium size businesses as of May 31, 1998. The
Company sees attractive expansion opportunities in large business and financial
centers all over the world. Due to its large number of national and
multinational clients, Globix believes that by building SuperPOPs in London and
San Francisco it can immediately pick up additional Internet service revenue
from its current customer base. Furthermore, the Company believes each of these
cities, similar to New York, are dynamic marketplaces for large enterprise
clients and offer significant potential for expanding the Company's customer
base. Also, due to the highly fragmented nature of the ISP industry, the Company
believes there are significant acquisition opportunities in each of these
marketplaces. Serving the ever-increasing Internet needs of large and medium
size businesses is becoming a daunting challenge for hundreds of small, local
business ISPs. The Company believes that many of these operators may have little
choice but to affiliate or join with larger providers. Globix believes that
servicing its target markets through a SuperPOP infrastructure will enable it to
achieve significant cost efficiencies as compared to other ISPs in its target
markets. The Company believes that the resulting competitive pressure on other
ISPs will permit the Company to become a major consolidator in these
marketplaces.
In January 1996, the Company completed an initial public offering of
1,279,642 shares of its Common Stock and 661,250 redeemable Common Stock
purchase warrants (the "IPO Warrants") to purchase an additional 661,250 shares
of Common Stock, which raised net proceeds of approximately $7,000,000. In
September 1997, the Company completed a private placement of 400,000 shares of
Common Stock through Value Management and Research GmbH for a total
consideration of $2,200,000. Value Management and Research GmbH also received a
warrant to purchase 34,783 shares of Common Stock at an exercise price of $6.60
per share and such warrant was exercised in June 1998.
On April 16, 1998, the Company's stockholders approved an amendment to its
Certificate of Incorporation to (i) change the name of the Company to Globix
Corporation, or such other name as the directors shall determine and (ii)
increase the number of authorized shares to 20,000,000, par value $.01 per
share. The changes to the Certificate of Incorporation became effective on June
1, 1998.
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<PAGE>
On June 8, 1998, the Company called its outstanding IPO Warrants for
redemption. Holders of the IPO Warrants had until July 8, 1998 to exercise their
right to purchase one share of Company Common Stock for each IPO Warrant held at
an exercise price of $7.44. As of July 9, 1998, the exercise rights have expired
and the remaining IPO Warrants will, upon presentation and surrender, be
redeemed by the Company at $.10 each.
The Common Stock of the Company is quoted on Nasdaq under the trading symbol
"GBIX" and on the Boston Stock Exchange (the "BSE") under the trading symbol
"GXC".
The Company was originally incorporated in the State of New York in 1989 by
Marc H. Bell as NAFT International Ltd. ("NAFT"). In July 1994, PFM Technologies
Corporation acquired the assets and liabilities of NAFT and its affiliated
corporations in a tax-free exchange of common stock. In September 1995, the
Company was reincorporated by merger into Bell Technology Group Ltd., a Delaware
corporation. On June 1, 1998, the Company's name was changed to Globix
Corporation. The Company's executive offices are located at 295 Lafayette
Street, 3rd Floor, New York, New York 10012, and its telephone number is (212)
334-8500. The Company's address on the World Wide Web is www.globix.com.
3
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THE EXCHANGE OFFER
<TABLE>
<S> <C>
Securities Offered................ $160.0 million aggregate principal amount of new 13%
Senior Notes due 2005 (the "Exchange Notes").
The Exchange Offer................ $1,000 principal amount of the Exchange Notes in
exchange for each $1,000 principal amount of $160.0
million aggregate principal amount of 13% Senior Notes
due 2005 previously issued by the Company on April 30,
1998 (the "Existing Notes"). As of the date hereof,
$160.0 million aggregate principal amount of Existing
Notes are outstanding. The Company will issue the
Exchange Notes to New Holders on or promptly after the
Expiration Date.
Based on an interpretation by the Staff set forth in
no-action letters issued to third parties, the Company
believes that Exchange Notes issued pursuant to the
Exchange Offer in exchange for Existing Notes may be
offered for resale, resold and otherwise transferred by
such New Holder (other than any such New Holder which is
a affiliate of the Company or is a broker-dealer which
acquired such Existing Notes directly from the Company)
without compliance with the registration and prospectus
delivery provisions of the Securities Act, provided that
such Exchange Notes are acquired in the ordinary course
of such New Holder's business and that such New Holder
does not intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes. Each broker-dealer
that acquired such Existing Notes as a result of market
making or other trading activity and that receives
Exchange Notes for its own account pursuant to the
Exchange Offer (a "Participating Broker-Dealer") must
acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. See
"Plan of Distribution."
Any Existing Holder who (i) is an affiliate of the
Company, (ii) does not acquire such Exchange Notes in
the ordinary course of its business, (iii) tenders in
the Exchange Offer with the intention to participate, or
for the purpose of participating, in a distribution of
the Exchange Notes, or (iv) is a broker-dealer which
acquired such Existing Notes directly from the Company,
could not rely on the position of the Staff enunciated
in the Exxon Capital No-Action Letter, the Morgan
Stanley No-Action Letter or similar no-action letters
and, in the absence of an exemption therefrom, must
comply with the registration and prospectus delivery
requirements of the Securities Act in connection with
the resale of the Exchange Notes. Failure to comply with
such requirements in such instance may result in such
Holder incurring liability under the Securities Act for
which the Holder is not indemnified by the Company.
No federal or state regulatory requirements must be
complied with or approval obtained in connection with
the Exchange
</TABLE>
4
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<TABLE>
<S> <C>
Offer, other than registration requirements under the
Securities Act.
Expiration Date................... 5:00 p.m., New York City time, on September 10, 1998,
unless the Exchange Offer is extended by the Company in
its sole discretion, in which case the term "Expiration
Date" means the latest date and time to which the
Exchange Offer is extended.
Interest on the Exchange Notes and
the Existing Notes................ Each Exchange Note will bear interest from the most
recent date to which interest has been paid or duly
provided for on the Existing Note surrendered in
exchange for such Exchange Note or, if no such interest
has been paid or duly provided for on such Existing
Note, from April 30, 1998. Holders of the Existing Notes
whose Existing Notes are accepted for exchange will not
receive accrued interest on such Existing Notes for any
period from and after the last Interest Payment Date to
which interest has been paid or duly provided for on
such Existing Notes prior to the original issue date of
the Exchange Notes or, if no such interest has been paid
or duly provided for, will not receive any accrued
interest on such Existing Notes, and will be deemed to
have waived the right to receive any interest on such
Existing Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or
duly provided for, from and after April 30, 1998.
Conditions to the Exchange
Offer............................. The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company. See "The
Exchange Offer--Conditions."
Procedures for Tendering Existing
Notes............................. Each Existing Holder wishing to accept the Exchange
Offer must complete, sign and date the accompanying
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver the Letter of
Transmittal, or such facsimile, together with the
Existing Notes and any other required documentation to
the Exchange Agent (as defined) at the address set forth
in the Letter of Transmittal. Persons holding Existing
Notes through the Depositary (initially the Depository
Trust Company ("DTC")) and wishing to accept the
Exchange Offer must do so pursuant to DTC's Automated
Tender Offer Program ("ATOP"), by which each tendering
participant will agree to be bound by the Letter of
Transmittal. By executing or agreeing to be bound by the
Letter of Transmittal, each Existing Holder will
represent to the Company that, among other things, the
Existing Holder or the person receiving such Exchange
Notes, whether or not such person is the Existing
Holder, is acquiring the Exchange Notes in the ordinary
course of business and that neither the Existing Holder
nor any such other person has any arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes within the meaning
of the Securities Act.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Special Procedures for Beneficial
Owners............................ Any beneficial owner whose Existing Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender should
contact such registered Existing Holder promptly and
instruct such registered Existing Holder to tender on
such beneficial owner's behalf. If such beneficial owner
wishes to tender on such owner's own behalf, such owner
must, prior to completing and executing the Letter of
Transmittal and delivering its Existing Notes, either
make appropriate arrangements to register ownership of
the Existing Notes in such owner's name or obtain a
properly completed bond power from the registered
Existing Holder. The transfer of registered ownership
may take considerable time.
Guaranteed Delivery Procedures.... Existing Holders who wish to tender their Existing Notes
and whose Existing Notes are not immediately available
or who cannot deliver their Existing Notes, the Letter
of Transmittal or any other documents required by the
Letter of Transmittal to the Exchange Agent (or comply
with the procedures for book-entry transfer) prior to
the Expiration Date must tender their Existing Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer--Guaranteed Delivery
Procedures."
Withdrawal Rights................. Tenders may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date pursuant to
the procedures described under "The Exchange Offer--
Withdrawals of Tenders."
Acceptance of Existing Notes and
Delivery of Exchange Notes........ The Company will accept for exchange any and all
Existing Notes that are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City time,
on the Expiration Date. The Exchange Notes issued
pursuant to the Exchange Offer will be delivered
promptly following the Expiration Date. See "The
Exchange Offer--Terms of the Exchange Offer."
Certain Federal Income Tax
Consequences...................... The exchange of the Existing Notes for the Exchange
Notes pursuant to the Exchange Offer should not be
taxable to the Holders thereof for federal income tax
purposes. See "Certain Federal Income Tax Consequences."
Effect on Holders of Existing
Notes............................. As a result of the making of this Exchange Offer, the
Company will have fulfilled certain of its obligations
under the Registration Rights Agreement, and Existing
Holders who do not tender their Existing Notes, except
for limited instances involving the Existing Holders
that are not eligible to participate in the Exchange
Offer, will not have any further registration rights
under the Registration Rights Agreement or otherwise.
See "The Exchange Offer--Purposes and Effect of Exchange
Offer." Such Existing Holders will continue to hold the
untendered Existing Notes and will be entitled to all
the rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent such
rights or limitations, by
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
their terms, terminate or cease to have further
effectiveness as a result of the Exchange Offer. All
untendered Existing Notes will continue to be subject to
certain restrictions on transfer. Accordingly, if any
Existing Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Existing
Notes could be adversely affected. See "Risk Factors--
Consequences of Failure to Exchange."
Exchange Agent.................... Marine Midland Bank
</TABLE>
SUMMARY OF TERMS OF EXCHANGE NOTES
The form and terms of the Exchange Notes are the same as the form and terms
of the Existing Notes (which they replace) except that (i) the Exchange Notes
have been registered under the Securities Act and, therefore, will not bear
legends restricting the transfer thereof and (ii) the New Holders, except for
limited instances involving the Initial Purchaser and certain Existing Holders
that are not eligible to participate in the Exchange Offer, will not be entitled
to further registration rights under the Registration Rights Agreement, which
rights will be satisfied when the Exchange Offer is consummated, and will not be
entitled to any payments of Additional Interest (as defined) for failure to
satisfy such rights. The Exchange Notes will evidence the same debt as the
Existing Notes and will be entitled to the benefits of the Indenture. From time
to time in this Prospectus, the Exchange Notes and the Existing Notes are
collectively referred to as the "Notes". See "Description of Notes".
<TABLE>
<S> <C>
Notes Offered:.................... $160.0 million aggregate principal amount of New 13%
Senior Notes due 2005 (the "Exchange Notes").
Maturity:......................... May 1, 2005.
Escrow Proceeds:.................. $57 million of the net proceeds from the issuance of the
Existing Notes have been invested in U.S. Government
Securities (as defined) to be held in an Escrow Account
(as defined) for the benefit of the Holders of the Notes
to fund, when due, the first six scheduled interest
payments on the Notes, with any balance to be retained
by the Company. The Exchange Notes will be
collateralized by a first priority security interest in
the Escrow Account. See "Description of Notes--Escrow
Account."
Interest Payment Dates:........... The Exchange Notes will bear interest at the rate of 13%
per annum, payable semiannually in arrears on May 1 and
November 1 of each year, commencing November 1, 1998.
Ranking:.......................... The Exchange Notes will be senior unsecured obligations
of the Company, ranking PARI PASSU in right of payment
with all existing and future unsecured and
unsubordinated Indebtedness of the Company and will rank
senior in right of payment to any future subordinated
Indebtedness of the Company. Holders of secured
Indebtedness of the Company will, however, have claims
prior to the claims of the Holders of the Exchange Notes
with respect to the assets securing such other
Indebtedness. As of March 31, 1998, on a pro forma basis
after giving effect to the Existing Notes Offering, the
total amount of Indebtedness outstanding of the Company,
including trade payables, was approximately
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
$163.3 million. Approximately $3 million of such
Indebtedness was secured. See "Description of
Notes--Ranking".
Sinking Fund:..................... None
Optional Redemption:.............. The Notes are redeemable at the option of the Company,
in whole or in part, at any time on or after May 1,
2001, at a premium declining to par on May 1, 2004, plus
accrued and unpaid interest to the date of redemption.
In addition, on or prior to May 1, 2000, the Company may
redeem up to 35% of the original aggregate principal
amount of Notes at a redemption price of 113% of the
principal amount, together with accrued and unpaid
interest to the date of redemption with the net cash
proceeds of one or more Public Equity Offerings or the
sale of Common Stock to a Strategic Investor; provided
that at least 65% of the original aggregate principal
amount of Notes are outstanding following such
redemption. See "Description of Notes--Optional
Redemption."
Change of Control:................ Following the occurrence of a Change of Control (as
defined below), the Company will be required to make an
offer to purchase the Notes at a purchase price equal to
101% of the principal amount thereof plus accrued and
unpaid interest, if any, to the date of purchase. The
Company may not have available sufficient funds or the
financial resources necessary to satisfy its obligations
to repurchase the Notes and other debt that may become
repayable upon a Change of Control. See "Risk
Factors--Change of Control" and "Description of the
Notes--Change of Control."
Certain Covenants:................ The indenture under which the Existing Notes are and the
Exchange Notes will be governed (the "Indenture")
contains certain covenants, that among other things,
limit the ability of the Company to make certain
restricted payments, incur additional indebtedness and
issue preferred stock, pay dividends or make other
distributions, issue guarantees of debt, repurchase
equity interests or subordinated indebtedness, engage in
sale and leaseback transactions, create certain liens,
enter into certain transactions with affiliates, sell
assets of the Company, conduct certain lines of business
or enter into certain mergers and consolidations. These
covenants are subject to important exceptions and
qualifications. See "Description of Notes--Certain
Covenants."
Transfer Restrictions:............ For certain restrictions on transfer of the Exchange
Notes, see "The Exchange Offer--Resale of Exchange
Notes".
</TABLE>
8
<PAGE>
For a discussion of certain factors that should be considered in connection
with a decision to exchange Existing Notes for Exchange Notes, see "Risk
Factors."
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
NINE SIX SIX
YEAR YEAR MONTHS YEAR YEAR MONTHS MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, SEPT. 30, SEPT. 30, SEPT. 30 MAR. 31, MAR. 31,
1993 1994 1995(1) 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 3,254 $ 6,524 $ 8,738 $ 10,374 $ 17,400 $ 8,926 $ 9,091
Cost of revenues............................... 2,536 5,192 7,292 8,599 13,902 6,847 5,858
Total operating expenses....................... 659 1,432 1,315 3,463 6,508 3,178 3,985
Income (loss) from operations.................. 59 (100) 131 (1,688) (3,010) (1,100) (752)
Net income (loss).............................. $ 51 $ (144) $ 39 $ (1,893) $ (3,115) $ (1,074) $ (871)
Net income (loss) per share(6)................. 0.06 (0.11) 0.02 (0.72) (1.01) (0.35) (0.25)
Weighted average shares used in computing net
loss per share 863 1,294 1,725 2,633 3,075 3,042 3,448
OTHER FINANCIAL DATA:
EBITDA(2)...................................... $ 100 $ (41) $ 199 $ (1,606) $ (2,466) $ (804) $ (246)
Ratio of earnings to fixed charges(3).......... 2.35:1 -- 1.58:1 -- -- -- --
Deficiency of earnings to cover fixed
charges(3)................................... -- $ (130) -- $ (1,923) $ (3,115) $ (1,074) $ (871)
</TABLE>
<TABLE>
<CAPTION>
AS OF
MARCH 31, 1998
-----------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED(4)
---------- -----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Balance Sheet Data:
Cash, cash equivalent and restricted cash(5)............................................. $ 985 $ 154,385
Working Capital.......................................................................... (143) 96,257
Total Assets............................................................................. 9,928 169,928
Long term debt and capital lease obligations, net of current portion..................... 807 158,554
Total Stockholders' Equity............................................................... 4,066 6,319
</TABLE>
- ------------------------
(1) The Company changed its fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months.
9
<PAGE>
(2) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. However, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles,
should not be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or cash flow as a measure
of liquidity, and should be examined in conjunction with the Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
(3) Ratio of earnings to fixed charges is defined as pre-tax income divided by
fixed charges. Fixed charges consist of interest on debt and the interest
component of rent expense (deemed to be one-third of the total).
(4) The adjusted data gives effect to the sale by the Company of the Units as of
March 31, 1998, after deduction of estimated offering expenses and the
discount to the Initial Purchaser and the value of the Warrants. See "Use of
Proceeds" and "Capitalization".
(5) The as-adjusted data includes restricted cash of $57 million to be held in
the Escrow Account.
(6) Presented in accordance with the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings per share" and represents both basic
and diluted earnings (loss) per share amounts. See "Financial Statements".
10
<PAGE>
RISK FACTORS
HOLDERS OF EXISTING NOTES SHOULD CAREFULLY CONSIDER THE RISK FACTORS SET
FORTH BELOW, AS WELL AS THE OTHER INFORMATION APPEARING IN THIS PROSPECTUS,
BEFORE TENDERING ANY EXISTING NOTES IN EXCHANGE FOR EXCHANGE NOTES. CERTAIN
MATTERS SET FORTH BELOW ALSO APPLY TO THE EXISTING NOTES AND WILL CONTINUE TO
APPLY TO ANY EXISTING NOTES REMAINING OUTSTANDING AFTER THE EXCHANGE OFFER.
SUBSTANTIAL INDEBTEDNESS; ABILITY TO SERVICE DEBT. The Company is and will
continue to be highly leveraged, with significant debt service requirements. At
March 31, 1998, after giving pro forma effect to the sale of $160.0 million of
Existing Notes and the application of the net proceeds therefrom as described in
"Use of Proceeds," the Company's total debt would have been approximately $163.3
million in aggregate principal amount of indebtedness and other liabilities
(including trade payables) outstanding. The degree to which the Company is
leveraged could have important consequences to Holders of the Notes, including
the following: (i) a substantial portion of the Company's cash flow from
operations will be dedicated to payment of the principal and interest on its
indebtedness, thereby reducing funds available for other purposes; (ii) the
Company's significant degree of leverage could increase its vulnerability to
changes in general economic conditions or in the event of a downturn in its
business; (iii) the Company's flexibility in planning for or reacting to changes
in market conditions may be limited; (iv) the Company's ability to obtain
additional financing for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes could be impaired; and (v) the
Company may be more leveraged than certain of its competitors, which may be a
competitive disadvantage.
The ability of the Company to meet its debt service obligations, including
with respect to the Notes, will depend on the future operating performance and
financial results of the Company, which will be subject in part to factors
beyond the control of the Company. There can be no assurance that the Company
will generate sufficient cash flow over the term of the Notes to meet its debt
service requirements. If the Company is unable to generate cash flow in the
future sufficient to cover its fixed charges and is unable to borrow sufficient
funds from other sources, it may be required to refinance all or a portion of
its existing debt or to sell all or a portion of its assets. There can be no
assurance that a refinancing would be possible, nor can there be any assurance
as to the practicality or timing of any asset sales or the proceeds which the
Company could realize therefrom. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital Resources".
CONTINUING LOSSES; ACCUMULATED DEFICIT. The Company incurred net losses and
negative cash flows from operations for the fiscal year ended September 30, 1996
in the amounts of approximately $1,893,000 and $1,877,000, respectively, for the
fiscal year ended September 30, 1997 in the amounts of approximately $3,115,000
and $2,532,000, respectively, and incurred a net loss and generated positive
cash flow for the first six months of the current fiscal year in the amounts of
approximately $871,000 and $703,000, respectively. On March 31, 1998, the
Company had an accumulated deficit of approximately $6.0 million.
The Company believes that as a result of the expansion it planned to
undertake after the completion of the Existing Notes Offering, it will incur
further losses during the 1998 fiscal year due to the interest on the Notes and
the fact that certain expenses (e.g., marketing) are incurred and recognized
prior to the earning and recognition of the revenue to which such expenses would
relate. However, there can be no assurance that after incurring such expenses,
there will be an increase in revenues or that the Company will attain
profitability in future operating periods or that it will have sufficient cash
available to meet continuing losses, necessary capital expenditures and/or the
repayment of the Notes (including the payment of interest due on the Notes). See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations".
RISKS ASSOCIATED WITH MANAGEMENT OF POTENTIAL GROWTH AND EXPANSION. The
Company has experienced, and expects to continue to experience, rapid expansion
of its business. The Company's business strategy is dependent in part upon its
ability to aggressively expand its customer base, which may include
11
<PAGE>
the acquisition of other ISPs. In addition, the Company's strategy contemplates
the acquisition or construction of SuperPOP facilities in a number of geographic
locations, including, over the near term, in London and San Francisco. Expansion
and development of the Company's business and services and the development of
new markets require significant capital expenditures. The Company is funding its
near term capital requirements through funds raised in the Existing Notes
Offering. Expansion of the business over the longer term is expected to require
substantial additional capital, which, if not fundable entirely with internally
generated funds at such time, will require additional outside financing. In
addition, such growth will increase the operating complexity of the Company as
well as the level of responsibility for both existing and new management
personnel. There can be no assurance that the Company will be able to add
services at the rate or according to the schedule presently planned by the
Company. To manage its growth, the Company must, among other things (i) continue
to implement and improve its operational, financial and management information
systems, including its billing, accounts receivable and payable tracking, fixed
assets and other financial management systems, (ii) hire and train additional
qualified personnel, and (iii) continue to expand and upgrade its network
infrastructure. Demands on the Company's network infrastructure and technical
support resources have grown rapidly with the Company's expanding customer base,
and the Company may in the future experience difficulties meeting the demand for
its services. There can be no assurance that the Company's infrastructure,
technical support or other resources will be sufficient to facilitate the
Company's growth. As the Company strives to increase network utilization, there
will be additional demands on the Company's customer support, sales and
marketing resources. Competition for qualified employees is intense and salaries
are escalating very quickly. In addition, the process of locating such personnel
with the combination of skills and attributes required to carry out the
Company's strategy is often lengthy.
In certain markets where the Company intends to construct SuperPOP
facilities, it may initially lease facilities from other ISPs pending
construction of its own facility to enable the Company to offer its services in
such market at an earlier date. During the period prior to the opening of its
own facility in such market, the Company will be dependent upon the services of
the lessor of such facility to provide services at the level demanded by the
Company and its customers and will also be subject to the risks of the financial
viability of such lessor. See "Business--Business Strategy".
Any failure of the Company to manage its growth effectively could have a
material adverse effect on the Company's business, financial condition and
results of operations.
RISKS ASSOCIATED WITH EXPANSION THROUGH ACQUISITIONS. The Company may seek
to acquire assets or businesses complementary to its operations. Any such future
acquisitions would be accompanied by the risks commonly encountered in
acquisitions of companies. Such risks include, among other things, the
difficulty of assimilating the operations and personnel of the acquired
companies, the additional financial resources that may need to be applied to
fund the operations of the acquired entity, the potential disruption of the
Company's business, the inability of the Company's management to maximize the
financial and strategic position of the Company by the incorporation of acquired
technology or business into the Company's service offerings, the difficulty of
maintaining uniform standards, controls, procedures and policies, the potential
loss of key employees of acquired companies, and the impairment of relationships
with employees and customers as a result of changes in management. No assurance
can be given that any acquisition by the Company will or will not occur, that if
an acquisition does occur it will not materially and adversely affect the
Company or that any such acquisition will be successful in enhancing the
Company's business. If the Company proceeds with one or more significant
acquisitions in which the consideration consists of cash, a substantial portion
of the Company's available cash, including proceeds of the Existing Notes
Offering, could be used to consummate the acquisitions. If the Company were to
consummate one or more acquisitions in which the consideration consisted of
stock, stockholders of the Company could suffer significant dilution of their
interests in the Company. Many business acquisitions must be accounted for as a
purchase for financial reporting purposes. Most of the businesses that might
become attractive acquisition candidates for the Company are likely to have
significant value in excess of
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the book value of their tangible assets. Acquisition of these businesses, if
accounted for as a purchase, would typically result in substantial amortization
of goodwill charges to the Company.
BROAD DISCRETION IN APPLICATION OF PROCEEDS. $57 million of the net
proceeds received upon the sale of the Units will be invested in U.S. Government
Securities to be held in an escrow account for the benefit of Holders of the
Notes to fund, when due, the first six scheduled interest payments on the Notes.
Approximately $45 million of the balance will be used to expand the Company's
New York SuperPOP facility and to construct SuperPOPS in London and San
Francisco. In connection therewith, the Company plans to use net proceeds to
increase its sales, marketing, technical and administrative personnel. In
addition, the Company plans to use net proceeds to fund possible future
acquisitions of ISPs in its target markets. Any balance would be applied to
working capital and general corporate purposes. However, the foregoing uses of
proceeds are estimates only and there could be significant variations in the
actual use of proceeds. Accordingly, the Company will have broad discretion as
to the application of such proceeds without prior stockholder approval. As a
result of the foregoing, the success of the Company will be substantially
dependent upon the discretion and judgment of the management of the Company.
Pending such use, the Company has invested and intends to invest the net
proceeds of the Existing Notes Offering in short-term interest bearing
obligations. See "Use of Proceeds."
SHIFTING FOCUS OF BUSINESS. As a reseller of computer and peripheral
equipment to corporations and other organizations, the Company faces intense
competition and the use of mass marketing channels in which price-cutting is the
dominant form of competition. Over the past decade, technological improvements
in computer and peripheral products, and increased competition, have been
accompanied by a consistent decline in their prices. This decline in prices has
resulted in decreasing profit margins for computer resellers. In order to meet
this challenge, the Company has expanded (and is looking to further expand) its
operation into higher profit areas such as (i) high bandwidth dedicated Internet
access, web hosting and co-location facilities, (ii) value-added systems and
network integration, (iii) interactive development--digital web design, web
implementation and 3-dimensional computer animation and (iv) instructor-led
corporate training. There can be no assurance that the Company's strategy to
shift the focus of its business will be successful.
The Company has two segments for financial reporting purposes: the Computer
Product Sales and Services Division and the Internet and Media Development
Division. The Company's Computer Product Sales and Services Division has been in
operation for approximately seven years. However, the Company's Internet and
Media Development Division has been in operation only since early 1995.
Accordingly, the Company has a limited operating history upon which an
evaluation of the Company and its prospects can be based. In addition, the
Company anticipates that the percentage of revenues from its Computer Product
Sales and Services Division will decline in relation to the revenues generated
from its Internet and Media Development Division. The Company's prospects must
be considered in light of the risks, expenses and difficulties frequently
encountered by companies in new and rapidly expanding markets. There can be no
assurance that the Company will be successful in addressing such risks and the
failure to do so would have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE UPON NETWORK INFRASTRUCTURE. The Company's success will depend
upon its ability to develop a reputation for reliability over the long term and
the security of its current and future Internet connections. The Company must
continue to expand and adapt its network infrastructure as the number of users
and the amount of information they wish to transfer increases, and as the
requirements of its customers change. The expansion of the Company's Internet
network infrastructure will require substantial financial, operational and
management resources. There can be no assurance that the Company will be able to
expand or adapt its network infrastructure to meet additional demand or its
customers' changing requirements on a timely basis, at a commercially reasonable
cost, or at all. In addition, if demand for usage of the Company's network were
to increase faster than projected, the network could experience
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capacity constraints, which would adversely affect the performance of the
system. Any failure of the Company to expand its network infrastructure on a
timely basis or adapt it to either changing customer requirements or evolving
industry standards, or capacity constraints experienced by the Company's network
for any reason, could have a material adverse effect on the Company's business,
financial condition and results of operations.
RISKS OF SYSTEM FAILURE. The Company's Internet operations are dependent
upon its ability to protect its network infrastructure against damage from acts
of nature, power failures, telecommunications failures and similar events.
Physical protection of the Company's network infrastructure is the primary
responsibility of the Company. However, because it leases its lines from
long-distance telecommunications companies, the regional Bell operating
companies ("RBOCs") and competitive local exchange carriers ("CLECs"), the
Company is dependent upon these companies for physical repair and maintenance of
the leased lines. Despite precautions taken by the Company, the occurrence of a
natural disaster or other unanticipated problems at the Company's SuperPOP
facility in New York City, may cause interruptions in the services provided by
the Company. In addition, failure of the Company's telecommunications providers
to provide the data communications capacity required by the Company as a result
of a natural disaster, operational disruption or for any other reason could
cause interruptions in the services provided by the Company. Any damage or
failure that causes interruptions in the Company's operations could have a
material adverse effect on the Company's business, financial condition and
results of operations.
SYSTEM SECURITY RISKS. Despite the implementation of network security
measures, the core of the Company's network infrastructure is vulnerable to
computer viruses, break-ins and similar disruptive problems. The Company may in
the future experience interruptions in service as a result of the accidental or
intentional actions of Internet users, current and former employees or others.
Unauthorized use could also potentially jeopardize the security of confidential
information stored in the computer systems of the Company and its customers,
which may result in liability of the Company to its customers and deter
potential customers. Although the Company intends to continue to implement
industry-standard security measures, such measures have occasionally been
circumvented in the past, and there can be no assurance that measures
implemented by the Company will not be circumvented in the future. Eliminating
computer viruses and alleviating other security problems may cause
interruptions, delays or cessation of service to the Company's customers that
could have a material adverse effect on the Company's business, financial
condition and results of operations. The Company does not carry any insurance
against these risks due to the unavailability of such insurance at a reasonable
cost.
DEPENDENCE ON THE INTERNET. The Company's products and services are
targeted toward users of the Internet, which has experienced rapid growth. As is
typical in the case of a new and rapidly evolving industry characterized by
rapidly changing technology, evolving industry standards and frequent new
product and service introductions, demand and market acceptance for recently
introduced products and services are subject to a high level of uncertainty. In
addition, critical issues concerning the commercial use of the Internet remain
unresolved and may impact the growth of Internet use, especially in the business
market targeted by the Company. Despite growing interest in the many commercial
uses of the Internet, many businesses have been deterred from purchasing
Internet access services for a number of reasons, including, among others,
inconsistent quality of service, lack of availability of cost-effective,
high-speed options, a limited number of local access points for corporate users,
inability to integrate business applications on the Internet, the need to deal
with multiple and frequently incompatible vendors, inadequate protection of the
confidentiality of stored data and information moving across the Internet, and a
lack of tools to simplify Internet access and use. In particular, numerous
published reports have indicated that a perceived lack of security of commercial
data, such as credit card numbers, has significantly impeded commercial
exploitation of the Internet to date, and there can be no assurance that
encryption or other technologies will be developed that satisfactorily address
these security concerns. Published reports have also indicated that capacity
constraints caused by growth in the use of the Internet
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may, unless resolved, impede further development of the Internet to the extent
that users experience delays, transmission errors and other difficulties.
RISKS OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS. The markets
for the Company's services are generally characterized by rapidly changing
technology, evolving industry standards, emerging competition and frequent new
product and service introductions. The Company's success will depend, in part,
on its ability to effectively use leading technologies, to continue to develop
its technical expertise, to enhance its current networking services, to develop
new services that meet changing customer needs, to advertise and market its
services and to influence and respond to emerging industry standards and other
technological changes in a timely and on a cost-effective basis. There can be no
assurance that the Company will be successful in effectively using new
technologies, developing new services or enhancing its existing services on a
timely basis, or that such new technologies or enhancements will achieve market
acceptance. The Company's pursuit of necessary technological advances will
require substantial time and expense and there can be no assurance that the
Company will succeed in adapting its businesses to changing technology standards
and customer requirements. Failure of the Company, for technological or other
reasons, to develop and introduce new or enhanced services that are compatible
with industry standards and that satisfy customer requirements would have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company believes that its ability to compete successfully is also
dependent upon the continued compatibility and interoperability of its services
with products and architectures offered by various vendors. Although the Company
intends to support emerging standards in the market for Internet access, there
can be no assurance that industry standards will be established or, if they
become established, that the Company will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the market.
This risk is present in each of the Company's product lines, but particularly in
its Internet and Media Development business, which relies on the continued
widespread commercial use of Transmission Control Protocol/Internetwork Protocol
("TCP/IP"). Alternative open protocol and proprietary protocol standards have
been or are being developed. If any of these alternative protocols become widely
adopted, there may be a reduction in the use of TCP/IP. There can be no
assurance that the announcement or introduction of new products or services by
the Company or its competitors or any change in industry standards will not
cause customers to defer or cancel purchases of existing products or services,
which could have a material adverse effect on the Company's business, financial
condition and results of operations. The failure of the Company to anticipate
the prevailing standard, or the failure of a common standard to emerge could
have a material adverse effect on the Company's business and results of
operations. In addition, there can be no assurance that services or technologies
developed by others will not render the Company's services or technology
uncompetitive or obsolete.
DEPENDENCE UPON SUPPLIERS. In order to provide Internet access and other
on-line services to its customers, the Company leases long distance fiber optic
telecommunications lines from more than one national telecommunications services
provider. The Company is dependent upon these providers of data communications
facilities.
Certain of the Company's suppliers, including RBOCs and CLECs, currently are
subject to various price constraints, including tariff controls, which in the
future may change. In addition, regulatory proposals are pending that may affect
the prices charged by the RBOCs and CLECs to the Company. Such regulatory
changes could result in increased prices of products and services, which could
have a material adverse effect on the Company's business, financial condition
and results of operations.
The Company relies on other companies to supply certain components of its
computer inventory as well as its network infrastructure (including
telecommunications services and networking equipment) which, in the quantities
and quality required by the Company, is available only from sole or limited
sources. At the present time, Silicon Graphics, Sun Microsystems, Compaq and
Intergraph are the
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Company's largest suppliers of products for both its Computer Product Sales and
Services Division and its Internet and Media Development Division. The Company
has in the past, and may from time to time, experience delays in receiving
telecommunications services and shipments of merchandise purchased for resale.
There can be no assurance that the Company will be able to obtain such
telecommunication services and shipments of merchandise on the scale and at the
times required by the Company at an affordable cost or at all. There also can be
no assurance that the Company's suppliers, will not enter into exclusive
arrangements with the Company's competitors or stop selling their products or
components to the Company at commercially reasonable prices, or at all. Any
failure of the Company's sole or limited-source suppliers to provide products or
components that comply with its standards could have a material adverse effect
on the Company's business, financial condition and results of operations.
COMPETITION. The market for the Company's services is extremely competitive
and the Company expects that competition will intensify in the future. The
Company believes that its ability to compete successfully depends upon a number
of factors, including market presence, the capacity, reliability, low latency
and security of its network infrastructure, technical expertise and
functionality, performance and quality of services, customization, the pricing
policies of its competitors and suppliers, the variety of services, the timing
of introductions of new services by the Company and its competitors, customer
support, the Company's ability to support industry standards and industry and
general economic trends.
The Company's current and prospective competitors generally may be divided
into the following groups: (i) telecommunications companies, such as AT&T, MCI,
Sprint, Inc., WorldCom, the RBOCs and other CLECs and various cable companies,
(ii) value-added resellers of computer, network and peripheral equipment, (iii)
graphic design and consulting firms, and (iv) network consultants and other
ISPs, such as BBN Corporation ("BBN"), a subsidiary of GTE, ICON CMT, PSINet,
Inc. ("PSI"), Exodus Communications, Inc. and other national and regional
providers. Many of these competitors have greater market presence, engineering
and marketing capabilities, and financial, technological and personnel resources
than those available to the Company. As a result, they may be able to develop
and expand their communications and network infrastructures more quickly, adapt
more swiftly to new or emerging technologies and changes in customer
requirements, take advantage of acquisition and other opportunities more
readily, and devote greater resources to the marketing and sale of their
products and services than can the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications companies,
will enter the Company's market, resulting in even greater competition. As a
result of increased competition and vertical and horizontal integration in the
industry, the Company could encounter significant pricing pressure, which, in
turn, could result in significant reductions in the average selling price of the
Company's services. For example, certain of the Company's competitors that are
telecommunications companies may be able to provide customers with reduced
communications costs in connection with their Internet access services, reducing
the overall cost of their solutions and significantly increasing price pressures
on the Company. There can be no assurance that the Company will be able to
offset the effects of any such price reductions with an increase in the number
of its customers, higher revenue from enhanced services, cost reductions or
otherwise. In addition, the Company believes that the Internet access services
businesses are likely to encounter consolidation in the near future, which could
result in increased price and other competition. Such increased price or other
competition could result in an erosion of the Company's market share, a failure
to attain profitability and could have a material adverse effect on the
Company's business, financial condition and results of operations. There can be
no assurance that the Company will have the financial resources, technical
expertise or marketing and support capabilities to successfully meet its
competition. See "Business-- Competition".
GOVERNMENT REGULATION; POTENTIAL TAXES. The Federal Communications
Commission (the "FCC") currently does not regulate value-added network software
or computer equipment related services that transport data or voice messages
over telecommunication facilities. The Company provides value-added
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IP-based network services, in part, through data transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for wireline communications. Operators of these
types of value-added networks that provide access to regulated transmission
facilities only as part of a data services package currently are excluded from
regulations that apply to a "telecommunications carrier" and as such the Company
is not currently subject to direct regulation by the FCC or any other
governmental agency, other than regulations applicable to businesses generally.
However, in the future the Company could become subject to regulation by the FCC
or another regulatory agency as a provider of basic telecommunications services.
Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer processing
and interaction with customer-supplied information are insufficient to afford
the Company the benefits of the enhanced or information service classification,
and thereby may seek to regulate some segments of the Company's activities as
basic telecommunications services. While state public utility commissions
generally have declined to regulate enhanced or information services, some
states have continued to regulate particular aspects of enhanced services in
limited circumstances, such as where they are provided by CLECs. Moreover, the
public service commissions of certain states continue to review potential
regulation of such services. There can be no assurance that regulatory
authorities of states within which the Company makes its services available will
not seek to regulate aspects of these activities as telecommunications services.
Changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition from
the RBOCs or other telecommunications companies, could affect the prices at
which the Company may sell its services. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on its business
and there can be no assurance that such future regulation or regulatory changes
will not have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business--Government Regulation;
Potential Taxes".
In addition, a number of state and local government officials have asserted
the right or indicated a willingness to impose taxes on Internet-related
services and commerce, including sales, use and access taxes. Certain proposed
federal legislation is being considered that would, if enacted as currently
proposed, place a moratorium on the imposition by state and local governments of
new taxes on ISPs or other businesses involved in Internet-related commerce.
However, there can be no assurance that such legislation will be enacted or, if
enacted, that such legislation will embody the features referred to herein.
Furthermore, there can be no assurance that federal taxes will not be imposed
upon such services. The Company cannot predict whether the imposition of any
such additional taxes would have a material adverse effect on the Company's
business, financial condition or results of operations.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK. The law
relating to the liability of online service providers, private network operators
and ISPs for information carried on or disseminated through the facilities of
their networks is currently unsettled. Several lawsuits seeking a judgment of
such liability are pending. In one case brought against an Internet service
provider, Religious Technology Center v. Netcom On-Line Communication Services,
Inc., the United States District Court for the Northern District of California
ruled in a preliminary phase that under certain circumstances Internet service
providers could be held liable for copyright infringement. The case has not
reached final judgment. There can be no assurance that such claims will not be
asserted against the Company or, if asserted, will not be successful. The
Telecommunications Act of 1996 prohibits and imposes criminal penalties and
civil liability for using an interactive computer service for transmitting
certain types of information and content, such as obscene communications.
Numerous states have adopted or are currently considering similar types of
legislation. The imposition upon the Company, Internet service providers or Web
server hosts of potential liability for materials carried on or disseminated
through their systems could require the Company to
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implement measures to reduce its exposure to such liability, which may require
the expenditure of substantial resources or the discontinuation of certain
product or service offerings. Further, the costs incurred in defending against
any such claims and potential adverse outcomes of such claims could have a
material adverse effect on the Company's business, financial condition and
results of operations. The Company believes that it is currently unsettled
whether the Telecommunications Act of 1996 prohibits and imposes liability for
any services provided by the Company should the content of information
transmitted be subject to the statute.
SUBSTANTIAL CONTROL BY PRINCIPAL STOCKHOLDERS; CONFLICTS OF INTEREST. As of
May 31, 1998, Marc H. Bell and Harpoon Holdings, Ltd. (together, the "Principal
Stockholders") beneficially owned or controlled approximately 47% of the
outstanding shares of Common Stock. Harpoon has entered into an Irrevocable
Proxy Agreement with Marc H. Bell (the "Irrevocable Proxy") which expires on
October 1, 2005, pursuant to which Marc H. Bell has the power to vote all shares
owned by Harpoon (the "Harpoon Shares") in the election of the Company's
directors. Consequently, as a practical matter, Marc H. Bell will be able to
control the election of the Company's Board of Directors and, consequently, the
management policy of the Company and all fundamental corporate actions,
including mergers, substantial acquisitions and dispositions of assets.
Certain decisions concerning the operations or financial structure of the
Company may present conflicts of interest between the Company's stockholders and
the Holders of the Notes. For example, if the Company encounters financial
difficulties or is unable to pay its debts as they mature, the interests of the
Company's stockholders might conflict with those of the Holders of the Notes. In
addition, the Company's stockholders may have an interest in pursuing
acquisitions, divestitures, financings or other transactions that, in their
judgment could enhance stockholder value, even though such transactions may pose
some risk to the Holders of the Notes. Because significant stockholders of the
Company can control the management policy of the Company and all fundamental
corporate decisions, any such conflict of interest may be rendered in favor of
the Company's stockholders to the detriment of the Holders of the Notes. See
"Principal Stockholders".
POSSIBLE ADVERSE EFFECT OF ISSUANCE OF PREFERRED STOCK. The Company's
Certificate of Incorporation authorizes the issuance of 500,000 shares of "blank
check" Preferred Stock, with designations, rights and preferences that may be
determined from time to time by the Board of Directors. At this time, none of
the shares of Preferred Stock are issued or outstanding. However, the Board of
Directors is empowered, without further stockholder approval, to issue Preferred
Stock with dividend, liquidation, conversion, voting or other rights that could
adversely affect the voting power or other rights of the holders of the Common
Stock. In addition, such charter provisions could limit the price that certain
investors might be willing to pay in the future for shares of the Company's
Common Stock and may have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock also could decrease the
amount of earnings and assets available for distribution to the holders of
Common Stock. There can be no assurance that the Company will not issue
Preferred Stock at some time in the future.
SHARES AVAILABLE FOR FUTURE SALE. Future sales of shares of Common Stock by
the Principal Stockholders under Rule 144 of the Securities Act or the issuance
of shares of Common Stock upon the exercise of options or warrants could
materially and adversely affect the market price of the Common Stock and could
materially impair the Company's future ability to raise capital through an
offering of equity securities. No predictions can be made as to the effect, if
any, that market sales of such shares or the availability of such shares for
future sale will have on the market price of the Common Stock prevailing from
time to time.
ABSENCE OF DIVIDENDS. The Company has not paid any cash dividends on the
Common Stock and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future.
Possible Delisting and Risk of Low-Priced Securities. The Company's Common
Stock is listed on Nasdaq and on the BSE. There can be no assurance that the
Company will continue to be able to satisfy
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certain specified financial tests and market related criteria required for
continued listing on Nasdaq and the BSE. If the Company is unable to satisfy
such maintenance criteria in the future, the Common Stock may be delisted from
trading on Nasdaq or the BSE, as the case may be. If the Common Stock were to be
so delisted, trading, if any, would thereafter be conducted in the
over-the-counter market, so-called "pink sheets" or the "Electronic Bulletin
Board" of the National Association of Securities Dealers, Inc., and consequently
an investor could find it more difficult to dispose of, or to obtain accurate
quotations as to the price of, the Company's Common Stock.
LIMITED LIABILITY AND INDEMNIFICATION MATTERS. As permitted by the Delaware
Law, the Company has included in its Certificate of Incorporation a provision to
eliminate the personal liability of its directors for monetary damages for
breach or alleged breach of their fiduciary duties as directors, subject to
certain exceptions. In addition, the By-laws of the Company provide that the
Company is required to indemnify its officers and directors under certain
circumstances, including those circumstances in which indemnification would
otherwise be discretionary, and the Company is required to advance expenses to
its officers and directors as incurred in connection with proceedings against
them for which they may be indemnified. At present, the Company is not aware of
any pending or threatened litigation or proceeding involving a director,
officer, employee or agent of the Company in which indemnification would be
required or permitted.
FORWARD LOOKING STATEMENTS. The statements contained in this Prospectus
that are not historical facts are "forward-looking statements" (as such term is
defined in the Private Securities Litigation Reform Act of 1995), which can be
identified by the use of forward-looking terminology such as "estimates,"
"projects," "anticipates," "expects," "intends," "believes," or the negative
thereof or other variations thereon or comparable terminology, or by discussions
of strategy that involve risks and uncertainties. Management wishes to caution
the reader that these forward-looking statements (cautionary statements), such
as the Company's plans to expand its existing network or to commence service in
new areas, the market opportunity presented by the Company's target markets,
statements regarding development of the Company's businesses, the estimate of
market sizes and addressable markets for the Company's services and products,
the Company's anticipated capital expenditures, the effect of regulatory reform
and other statements contained in this Prospectus regarding matters that are not
historical facts, are only estimates or predictions. No assurance can be given
that future results will be achieved; actual events or results may differ
materially as a result of risks facing the Company or actual results differing
from the assumptions underlying such statements. Such risks and assumptions
include, but are not limited to, the Company's ability to successfully market
its services to current and new customers, generate customer demand for its
services in the particular markets where it plans to market services, as well as
regulatory, legislative and judicial developments that could cause actual
results to vary materially from the future results indicated, expressed or
implied in such forward-looking statements. All written and oral forward-looking
statements made in connection with this Exchange Offer which are attributable to
the Company or persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements.
CHANGE OF CONTROL. Upon the occurrence of a Change of Control, each Holder
of Notes will be entitled to require the Company to purchase any or all of the
Notes held by such Holder at the prices stated herein. However, the Company's
ability to repurchase the Notes upon a Change of Control may be limited by the
terms of then existing contractual obligations of the Company and its
subsidiaries. In addition, the Company may not have adequate financial resources
to effect such a purchase, and there can be no assurance that the Company would
be able to obtain such resources through a refinancing of the Notes to be
purchased or otherwise. If the Company fails to repurchase all of the Notes
tendered for purchase upon the occurrence of a Change of Control, such failure
will constitute an Event of Default under the Indenture.
With respect to the sale of assets referred to in the definition of Change
of Control, the phrase "all or substantially all" as used in such definition
varies according to the facts and circumstances of the subject
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transaction, has no clearly established meaning under the relevant law and is
subject to judicial interpretation. Accordingly, in certain circumstances there
may be a degree of uncertainty in ascertaining whether a particular transaction
would involve a disposition of "all or substantially all" of the assets of a
person and therefore it may be unclear whether a Change of Control has occurred
and whether the Notes are subject to an offer to purchase.
The Change of Control provision may not necessarily afford the Holders
protection in the event of a highly leveraged transaction, including a
reorganization, restructuring, merger or other similar transaction involving the
Company that may adversely affect the Holders, because such transactions may not
involve a shift in voting power or beneficial ownership or, even if they do, may
not involve a shift of the magnitude required under the definition of Change of
Control contained in the Indenture to trigger such provisions. Except as
described under "Description of the Notes--Change of Control," the Indenture
does not contain provisions that permit the Holders of the Notes to require the
Company to repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
BANKRUPTCY AND PERFECTION ISSUES RELATED TO ESCROW ACCOUNT. The right of
the Trustee (as defined) under the Indenture and the Escrow Agreement (as
defined) to foreclose upon and sell Escrow Collateral (as defined) upon the
occurrence of an Event of Default (as defined) on the Notes is likely to be
significantly impaired by applicable bankruptcy law if a bankruptcy or
reorganization case were to be commenced by or against the Company or one or
more of its subsidiaries. Under applicable bankruptcy law, creditors such as the
Holders of the Notes are prohibited from foreclosing upon or disposing of a
debtor's property without prior bankruptcy court approval. Under the Indenture,
the Company is required to grant to the Trustee a first priority perfected
security interest in the Escrow Account. The Company will covenant to maintain
the perfection and priority of the security interest in the Escrow Account under
the relevant provisions of the Uniform Commercial Code. However, the failure to
maintain such perfection and priority may allow other creditors of the Company,
if any, to obtain rights to the Escrow Account equal or superior to those of the
Trustee and the Holders. See "Description of Notes--Escrow Account".
EFFECTIVE SUBORDINATION OF THE NOTES. The Indenture will permit certain
Indebtedness of the Company to be secured. Holders of secured Indebtedness of
the Company will have claims that are prior to the claims of the Holders of the
Notes to the extent of the assets securing such other Indebtedness. In addition,
the Notes are effectively subordinated to any debt of the Company's
subsidiaries.
ABSENCE OF A PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON RESALE. The
Existing Notes are currently owned by a relatively small number of beneficial
owners. The Existing Notes have not been registered under the Securities Act or
any state securities laws and, unless so registered and to the extent not
exchanged for the Exchange Notes, may not be offered or sold except pursuant to
an exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and applicable state securities laws. Any
Existing Notes tendered and exchanged in the Exchange Offer will reduce the
aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A through The Portal Market
of the National Association of Securities Dealers, Inc. ("PORTAL"). Because the
Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes under the Securities Act, the Company anticipates that
the liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
The Exchange Notes will constitute a new issue of securities for which there
is currently no active trading market. If the Exchange Notes are traded after
their initial issuance, they may trade at a discount from their initial offering
price, depending upon prevailing interest rates, the market for similar
securities
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and other factors including general economic conditions and the current
financial condition, results of operations and business prospects of the
Company. Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by non-affiliates of the Company without compliance with
the registration and prospectus delivery requirements of the Securities Act, the
Company does not intend to apply for a listing or quotation of the Exchange
Notes on any securities exchange or stock market. No broker-dealer is obligated
to engage in market-making activities with respect to the Exchange Notes, and
any such market-making undertaken may be discontinued at any time without
notice. In addition, any market-making activity in the Notes will be subject to
the limits imposed under the Exchange Act. Accordingly, there can be no
assurance as to the development, liquidity or maintenance of any market for the
Exchange Notes, or, in the case of non-tendering Existing Holders, the trading
market for the Existing Notes following the Exchange Offer. If no trading market
develops or is maintained, New Holders may experience difficulty in reselling
Exchange Notes or may be unable to sell them.
The liquidity of, and trading market for, the Existing Notes or the Exchange
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
CONSEQUENCES OF FAILURE TO EXCHANGE. As a result of the making of this
Exchange Offer, the Company will have fulfilled certain of its obligations under
the Registration Rights Agreement, and Existing Holders who do not tender their
Existing Notes, except for certain instances involving the Existing Holders who
are not eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Additional Interest (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Existing
Notes for Exchange Notes will continue to hold the untendered Existing Notes and
will be entitled to all the rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness as
a result of the Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i)(a) to a person who the seller reasonably believes
is a qualified institutional buyer in a transaction meeting the requirements of
Rule 144A, (b) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (c) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act or (d)
in accordance with another exemption from the registration requirements of the
Securities Act (and in the case of (b), (c) or (d), based upon an opinion of
counsel and written certification if the Company so requests) (ii) to the
Company or (iii) pursuant to an effective registration statement and, in each
case, in accordance with any applicable securities laws of any state of the
United States or any other applicable jurisdiction.
USE OF PROCEEDS
The net proceeds to the Company from the Existing Notes Offering were
approximately $153,400,000, after deduction of the Initial Purchaser's discount
and the estimated offering expenses. $57 million of such net proceeds were
invested in U.S. Government Securities held in an Escrow Account for the benefit
of the Holders of the Notes to fund when due the first six scheduled interest
payments on the Notes.
The Company currently plans to use the net proceeds from the Existing Notes
Offering to build a new, state of the art, New York SuperPOP facility and to
construct and operate SuperPOPs in London and San Francisco, which together will
require the expenditure of approximately $45 million. In conjunction with the
expansion of the Company's SuperPOP infrastructure, on June 2, 1998, the Company
entered into an agreement to purchase a building located at 139 Centre Street,
New York, New York. The Company intends to locate its New York SuperPOP facility
in the building. The total cost of the building purchase,
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equipment purchases and relocation expenses to the Company is expected to be
approximately $27 million. The Company intends to place a mortgage on the
building. The building contains approximately 160,000 square feet of space and
the Company intends to use approximately 40,000 square feet to house its
SuperPOP facility. The Company intends to utilize the remaining space for its
operations and may make space available for rent to the Company's clients that
maintain servers on the premises. The building purchase closed on July 1, 1998
and the Company anticipates that it will begin occupying the building in
September 1998.
The Company also plans to use net proceeds from the Existing Notes Offering
to increase its sales, marketing, technical and administrative personnel
associated with its expansion strategy. In addition, the Company plans to use
net proceeds from the Existing Notes Offering to pursue its strategy of
acquiring other ISPs in its target markets. In connection with the Company's
acquisition strategy, on July 23, 1998, the Company entered into a Securities
Purchase Agreement with Cybernet Data Systems, Inc., a Delaware corporation
("Cybernet"), pursuant to which the Company purchased for $1,000,000, a 10%
Convertible Subordinated Debenture due 2001 (the "Cybernet Debenture") and a
Warrant to Purchase Common Stock (the "Cybernet Warrant"). The Cybernet
Debenture is non-interest bearing until July 23, 1999. Beginning on July 23,
1999, the Cybernet Debenture will bear interest at a rate of 10% per annum,
payable semi-annually in advance on July 23 and January 23, in each year until
July 23, 2001, when the Cybernet Debenture is to be redeemed by Cybernet. The
Cybernet Debenture is convertible into 670,000 shares of Cybernet common stock.
The Cybernet Warrant entitles the Company to purchase an additional 666,667
shares of Cybernet common stock at an exercise price of $1.50 per share until
the Cybernet Warrant's expiration date of July 23, 1999. The Company expects to
use the balance of the net proceeds of the Existing Notes Offering for other
working capital and general corporate purposes.
The foregoing uses of proceeds are estimates only and there could be
significant variations in the actual use of the proceeds due to changes in
business or economic circumstances. Accordingly, the Company reserves the right
to reallocate the foregoing uses of proceeds depending upon any such change of
circumstances.
Pending specific application of the proceeds of the Existing Notes Offering,
the net proceeds of the Existing Notes Offering will be invested in
interest-bearing savings accounts, certificates of deposit, money market
accounts, United States government obligations or other short-term
interest-bearing obligations.
The Company will not receive any cash proceeds from the Exchange Offer. In
consideration for issuing the Exchange Notes in exchange for Existing Notes as
described in this Prospectus, the Company will receive Existing Notes in like
principal amount. The Existing Notes surrendered in exchange for the Exchange
Notes will be retired and canceled.
DIVIDEND POLICY
The Company has not paid any cash dividends on the Common Stock since it
terminated its Subchapter S status in July 1994. The Company currently intends
to retain its future earnings, if any, to fund the development and growth of its
business and, therefore does not anticipate paying any cash dividends on the
Common Stock in the foreseeable future.
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THE EXCHANGE OFFER
The following discussion sets forth or summarizes the material terms of the
Exchange Offer, including those set forth in the Letter of Transmittal
distributed with this Prospectus. This summary is qualified in its entirety by
reference to the full text of the documents underlying the Exchange Offer
(including the Indenture and the Registration Rights Agreement), which have been
filed as exhibits to the Company's Current Report on Form 8-K filed with the
Securities Exchange Commission on May 11, 1998.
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Existing Notes were sold by the Company to the Initial Purchaser on
April 30, 1998, and were subsequently resold to qualified institutional buyers
("QIBs") pursuant to Rule 144A under the Securities Act. In connection with the
Existing Notes Offering, the Company entered into the Registration Rights
Agreement, which requires, among other things, that within 60 days following
April 30, 1998 (the "Issue Date") (i.e. on or before June 29, 1998) the Company
(i) file with the Commission a registration statement under the Securities Act
with respect to an issue of Exchange Notes of the Company identical in all
material respects (other than transfer restrictions, registration rights and the
requirement, under certain circumstances, to pay Additional Interest) to the
Existing Notes (which obligation has been satisfied by the filing of the
Exchange Offer Registration Statement), (ii) use their best efforts to cause
such registration statement to become effective under the Securities Act by the
date which is 105 days after the Issue Date (the "Target Effectiveness Date")
and (iii) to consummate the Exchange Offer within 30 days after the Target
Effectiveness Date, and offer to the Existing Holders the opportunity to
exchange their Existing Notes for a like principal amount of Exchange Notes,
which would be issued without a restrictive legend and may generally be
reoffered and resold by the New Holder without restrictions or limitations under
the Securities Act, subject to the terms and conditions of the Exxon Capital,
Morgan Stanley and Shearman & Sterling No-Action Letters. See Outside Front
Cover, "Prospectus Summary--The Exchange Offer", and "--Resale of Exchange
Notes."
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A through PORTAL. Because
the Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes under the Securities Act, the Company anticipates that
the liquidity of the market for any Existing Notes remaining after the
consummation of the Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender such Existing Notes, except for certain
instances involving the Initial Purchaser or Existing Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Additional Interest for failure to register. Accordingly, any
Existing Holder that does not exchange that Holder's Existing Notes for Exchange
Notes will continue to hold the untendered Existing Notes and will be entitled
to all the rights and subject to all the limitations applicable thereto under
the Indenture, except to the extent that such rights or limitations, by their
terms, terminate or cease to have further effectiveness as a result of the
Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i)(a) to a person who the seller reasonably believes
is a qualified institutional buyer in a transaction meeting the requirements of
Rule 144A, (b) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (c) outside
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the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act or (d) in accordance with another exemption
from the registration requirements of the Securities Act (and in the case of
(b), (c) or (d), based upon an opinion of counsel and written certification if
the Company so requests) (ii) to the Company or (iii) pursuant to an effective
registration statement and, in each case, in accordance with any applicable
securities laws of any state of the United States or any other applicable
jurisdiction.
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Existing
Notes validly tendered and not withdrawn prior to 5:00 p.m., New York City time
on the Expiration Date. The Company will issue $1,000 principal amount of
Exchange Notes in exchange for each $1,000 principal amount of outstanding
Existing Notes accepted in the Exchange Offer. Existing Holders may tender some
or all of their Existing Notes pursuant to the Exchange Offer. However, Existing
Notes may be tendered only in integral multiples of $1,000. The form and terms
of the Exchange Notes are the same as the form and terms of the Existing Notes
except that (i) the Exchange Notes have been registered under the Securities Act
and hence will not bear legends restricting the transfer thereof and (ii) New
Holders generally will not be entitled to certain rights under the Registration
Rights Agreement or Additional Interest, which rights generally will terminate
upon consummation of the Exchange Offer. The Exchange Notes will evidence the
same debt as the Existing Notes and will be entitled to the benefits of the
Indenture.
Existing Holders do not have any appraisal or dissenters' rights under the
Delaware General Corporation Law or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1.
The Company shall be deemed to have accepted validly tendered Existing Notes
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering Existing
Holders for the purpose of receiving the Exchange Notes from the Company.
If any tendered Existing Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Existing Notes will be
returned, without expense, to the tendering Existing Holder thereof as promptly
as practicable after the Expiration Date.
Existing Holders who tender Existing Notes in the Exchange Offer will not be
required to pay brokerage commissions or fees or, subject to the instructions in
the Letter of Transmittal, transfer taxes with respect to the exchange of
Existing Notes pursuant to the Exchange Offer. The Company will pay all charges
and expenses, other than transfer taxes in certain circumstances, in connection
with the Exchange Offer. See "--Fees and Expenses."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
September 10, 1998, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice, followed by a public announcement
thereof no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled expiration date. In no event will the Expiration
Date be extended to a date more than 30 business days after effectiveness of the
Exchange Offer Registration Statement.
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The Company reserves the right, in its reasonable judgment, (i) to delay
accepting any Existing Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "--Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by a public
announcement thereof.
INTEREST ON EXCHANGE NOTES
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Existing Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Existing Note, from April 30, 1998. Holders of the Existing
Notes whose Existing Notes are accepted for exchange will not receive accrued
interest on such Existing Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Existing Notes prior to the original issue date of the Exchange Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Existing Notes, and will be deemed to have waived the right to
receive any interest on such Existing Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after April 30, 1998. Interest on the Notes will be payable semi-annually in
arrears on each May 1 and November 1, commencing on November 1, 1998.
PROCEDURES FOR TENDERING
Only Existing Holders may tender such Existing Notes in the Exchange Offer.
To tender in the Exchange Offer, an Existing Holder must complete, sign and date
the Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Existing
Notes and any other required documents, to the Exchange Agent so as to be
received by the Exchange Agent at the address set forth below prior to 5:00
p.m., New York City time, on the Expiration Date. Delivery of the Existing Notes
may be made by book-entry transfer in accordance with the procedures described
below. Confirmation of such book-entry transfer must be received by the Exchange
Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Existing Holder will make to
the Company the representation set forth below in the second paragraph under the
heading "--Resale of Exchange Notes."
The tender by an Existing Holder and the acceptance thereof by the Company
will constitute an agreement between such Existing Holder and the Company in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
THE METHOD OF DELIVERY OF EXISTING NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Existing Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Existing Holder promptly and instruct
such registered Existing Holder to tender on such beneficial owner's behalf.
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Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Existing Notes tendered pursuant thereto (i) are signed by the
registered Existing Holder, unless such Existing Holder has completed the box
entitled "Special Exchange Instructions" or "Special Delivery Instructions" on
the Letter of Transmittal or (ii) are tendered for the account of an Eligible
Institution. In the event that signatures on a Letter of Transmittal or a notice
of withdrawal, as the case may be, are required to be guaranteed, such guarantee
must be by a member firm of a registered national securities exchange or of the
National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office or correspondent in the United States, or an "eligible
guarantor institution" within the meaning of Rule 17Ad-15 under the Exchange Act
(an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Existing Holder of any Existing Notes listed therein, such Existing Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered Existing Holder as such registered Existing Holder's name appears on
such Existing Notes, with the signature thereon guaranteed by an Eligible
Institution.
If the Letter of Transmittal or any Existing Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Existing Notes and withdrawal of tendered
Existing Notes will be determined by the Company in its sole discretion, which
determination will be final and binding. The Company reserves the absolute right
to reject any and all Existing Notes not properly tendered or any Existing Notes
the Company's acceptance of which would, in the opinion of counsel for the
Company, be unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Existing Notes. The
Company's interpretation of the terms and conditions of the Exchange Offer
(including the instructions in the Letter of Transmittal) will be final and
binding on all parties. Unless waived, any defects or irregularities in
connection with tenders of Existing Notes must be cured within such time as the
Company shall determine. Although the Company intends to notify Existing Holders
of defects or irregularities with respect to tenders of Existing Notes, none of
the Company, the Exchange Agent or any other person shall incur any liability
for failure to give such notification. Tenders of Existing Notes will not be
deemed to have been made until such defects or irregularities have been cured or
waived. Any Existing Notes received by the Exchange Agent that are not properly
tendered and as to which the defects or irregularities have not been cured or
waived will be returned by the Exchange Agent to the tendering Existing Holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
TENDER OF EXISTING NOTES HELD THROUGH DTC
The Exchange Agent and DTC have confirmed that the Exchange Offer is
eligible for ATOP, the DTC Automated Tender Offer Program. Accordingly, DTC
participants may, in lieu of physically completing and signing the applicable
Letter of Transmittal and delivering it to the Exchange Agent, electronically
transmit their acceptance of the Exchange Offer by causing DTC to transfer
Existing Notes to the Exchange Agent in accordance with DTC's ATOP procedures
for transfer. DTC will then send an Agent's Message to the Exchange Agent.
The term "Agent's Message" means a message transmitted by DTC, received by
the Exchange Agent and forming part of the Book-Entry Confirmation, which states
that DTC has received an expressed acknowledgment from a participant in DTC that
is tendering Existing Notes which are the subject of such Book-Entry
Confirmation, that such participant has received and agrees to be bound by the
terms of the applicable Letter of Transmittal (or, in the case of an Agent's
Message relating to guaranteed delivery, that
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such participant has received and agrees to be bound by the applicable Notice of
Guaranteed Delivery), and that the Company may enforce such agreement against
such participant.
BOOK-ENTRY DELIVERY PROCEDURES
Within two business days after the date hereof, the Exchange Agent will
establish accounts with respect to the Existing Notes at DTC (the "Book-Entry
Transfer Facility") for purposes of the Exchange Offer. Any financial
institution that is a participant in the Book-Entry Transfer Facility systems
may make book-entry delivery of the Existing Notes by causing DTC to transfer
such Existing Notes into the Exchange Agent's account at such Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for such transfer. Timely book-entry delivery of Existing Notes
pursuant to the Exchange Offer, however, requires receipt of a Book-Entry
Confirmation prior to the Expiration Date. In addition, although delivery of
Existing Notes may be effected through book-entry transfer into the Exchange
Agent's account at the Book-Entry Transfer Facility, the Letter of Transmittal
(or a manually signed facsimile thereof), together with any required signature
guarantees and any other required documents, or an Agent's Message in connection
with a book-entry transfer, must, in any case, be delivered or transmitted to
and received by the Exchange Agent at its address set forth on the back cover
page of this Prospectus prior to the Expiration Date to receive Exchange Notes
for tendered Existing Notes, or the guaranteed delivery procedure described
below must be complied with. Tender will not be deemed made until such documents
are received by the Exchange Agent. Delivery of documents to the Book-Entry
Transfer Facility does not constitute delivery to the Exchange Agent.
GUARANTEED DELIVERY PROCEDURES
Existing Holders who wish to tender their Existing Notes and (i) whose
Existing Notes are not immediately available, (ii) who cannot deliver their
Existing Notes, the Letter of Transmittal or any other required documents to the
Exchange Agent or (iii) who cannot complete the procedures for book-entry
transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Existing Holder, the certificate
number(s) of such Existing Notes and the principal amount of Existing Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the Expiration
Date, the Letter of Transmittal (or facsimile thereof), together with the
certificate(s) representing the Existing Notes (or a confirmation of
book-entry transfer of such Existing Notes into the Exchange Agent's account
at DTC) and any other documents required by the Letter of Transmittal, will
be deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered
Existing Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Existing Notes into the Exchange Agent's account at DTC)
and all other documents required by the Letter of Transmittal, are received
by the Exchange Agent within three New York Stock Exchange trading days
after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Existing Holders who wish to tender their Existing Notes according to
the guaranteed delivery procedures set forth above.
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WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Existing Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at the address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Existing Notes to be withdrawn (the
"Depositor"), (ii) identify the Existing Notes to be withdrawn (including the
certificate number(s) and principal amount of such Existing Notes, or, in the
case of Existing Notes transferred by book-entry transfer, the name and number
of the account at DTC to be credited), (iii) be signed by the Existing Holder in
the same manner as the original signature on the Letter of Transmittal by which
such Existing Notes were tendered (including any required signature guarantees)
or be accompanied by documents of transfer sufficient to have the Trustee
register the transfer of such Existing Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Existing
Notes are to be registered, if different from that of the Depositor. All
questions as to the validity, form and eligibility (including time or receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Existing Notes so withdrawn will be deemed
not to have been validly tendered for purposes of the Exchange Offer and no
Exchange Notes will be issued with respect thereto unless the Existing Notes so
withdrawn are validly retendered. Any Existing Notes which have been tendered
but which are not accepted for exchange will be returned to such Existing Holder
without cost to such Existing Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn
Existing Notes may be retendered by following one of the procedures described
above under "--Procedures for Tendering" at any time prior to the Expiration
Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to Exchange Notes for any Existing Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Existing Notes, if:
(a) in the opinion of counsel to the Company, the Exchange Offer or any part
thereof contemplated herein violates any applicable law or interpretation of the
Staff;
(b) any action or proceeding shall have been instituted or threatened in any
court or by any governmental agency which might materially impair the ability of
the Company to proceed with the Exchange Offer or any material adverse
development shall have occurred in any existing action or proceeding with
respect to the Company;
(c) any governmental approval has not been obtained, which approval the
Company shall deem necessary for the consummation of the Exchange Offer as
contemplated hereby;
(d) any cessation of trading on the Nasdaq Stock Market or any exchange, or
any banking moratorium, shall have occurred, as a result of which the Company is
unable to proceed with the Exchange Offer; or
(e) a stop order shall have been issued by the Commission or any state
securities authority suspending the effectiveness of the Exchange Offer
Registration Statement or proceedings shall have been initiated or, to the
knowledge of the Company, threatened for that purpose.
If the Company determines in its reasonable judgment that any of the
foregoing conditions are not satisfied, the Company may (i) refuse to accept any
Existing Notes and return all tendered Existing Notes to the tendering Existing
Holders, (ii) extend the Exchange Offer and retain all Existing Notes tendered
prior to the expiration of the Exchange Offer, subject, however, to the rights
of Existing Holders to
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withdraw such Existing Notes (see "--Withdrawals of Tenders") or (iii) waive
such unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Existing Notes which have not been withdrawn.
EXCHANGE AGENT
Marine Midland Bank will act as Exchange Agent for the Exchange Offer with
respect to the Existing Notes.
Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal for the Existing Notes and
requests for copies of the Notice of Guaranteed Delivery should be directed to
the Exchange Agent, addressed as follows:
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Attn: Corporate Trust Operations
By Facsimile:
(212) 658-6425
(For Eligible Institutions Only)
Confirm by Telephone: (212) 658-6433
FEES AND EXPENSES
The expenses of soliciting Existing Notes for exchange will be borne by the
Company. The principal solicitation is being made by mail by the Exchange Agent.
However, additional solicitation may be made by telephone, facsimile or in
person by officers and regular employees of the Company and its affiliates and
by persons so engaged by the Exchange Agent.
The Company will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith and pay other registration expenses, including fees and
expenses of the Trustee (as defined), filing fees, blue sky fees and printing
and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Existing Notes pursuant to the Exchange Offer. If, however, certificates
representing the Exchange Notes or the Existing Notes for principal amounts not
tendered or accepted for exchange are to be delivered to, or are to be issued in
the name of, any person other than the registered Holder of the Existing Notes
tendered, or if tendered Existing Notes are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the exchange of the Existing Notes pursuant to
the Exchange Offer, then the amount of any such transfer taxes (whether imposed
on the registered Existing Holder or any other person) will be payable by the
tendering Existing Holder.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Existing Notes, which is the aggregate principal amount of the Existing Notes,
as reflected in the Company's accounting records on the date of exchange.
Accordingly, no gain or loss for accounting purposes will be recognized in
connection with the Exchange Offer. The expenses of the Exchange Offer will be
amortized over the term of the Exchange Notes.
29
<PAGE>
RESALE OF EXCHANGE NOTES
The Company is making the Exchange Offer in reliance on the position of the
staff of the Staff of the Commission as set forth in the Staff's Exxon Capital
No-Action Letter, Morgan Stanley & Co. Incorporated No-Action Letter, Shearman &
Sterling No-Action Letter, and other interpretive letters addressed to third
parties in other transactions. However, the Company has not sought its own
interpretive letter addressing such matters and there can be no assurance that
the Staff would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the Staff, and subject to the two immediately following
sentences, the Company believes that Exchange Notes issued pursuant to this
Exchange Offer in exchange for Existing Notes may be offered for resale, resold
and otherwise transferred by a such New Holder (other than a New Holder who is a
broker-dealer) without further compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such Exchange Notes
are acquired in the ordinary course of such New Holder's business and that such
New Holder is not participating, and has no arrangement or understanding with
any person to participate, in a distribution (within the meaning of the
Securities Act) of such Exchange Notes. However, any Existing Holder who (i) is
an "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act), (ii) does not acquire such Exchange Notes in the ordinary
course of its business, (iii) intends to participate in the Exchange Offer for
the purpose of distributing Exchange Notes, or (iv) is a broker-dealer who
purchased such Existing Notes directly from the Company, (a) will not be able to
rely on the interpretations of the Staff set forth in the above-mentioned
interpretive letters, (b) will not be permitted or entitled to tender such
Existing Notes in the Exchange Offer and (c) must comply with the registration
and prospectus delivery requirements of the Securities Act in connection with
any sale or other transfer of such Existing Notes unless such sale is made
pursuant to an exemption from such requirements. In addition, as described
below, if any broker-dealer holds Existing Notes acquired for its own account
that it wishes to exchange for Exchange Notes (a "Participating Broker-Dealer"),
such Participating Broker-Dealer may be deemed a statutory "underwriter" within
the meaning of the Securities Act and must deliver a prospectus meeting the
requirements of the Securities Act in connection with any resales of such
Exchange Notes.
Each Existing Holder who wishes to exchange Existing Notes for Exchange
Notes in the Exchange Offer will be required to represent that (i) it is not an
affiliate of the Company, (ii) any Exchange Notes to be received by it are being
acquired in the ordinary course of its business, and (iii) it has no arrangement
or understanding with any person to participate in a distribution (within the
meaning of the Securities Act) of such Exchange Notes. Each broker-dealer that
receives Exchange Notes for its own account pursuant to the Exchange Offer must
acknowledge that it acquired the Existing Notes for its own account as a result
of market-making activities or other trading activities (and not directly from
the Company) and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, such a Participating Broker-Dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
Based on the position taken by the Staff in the interpretive letters referred to
above, the Company believes that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to the Exchange Notes received
upon exchange of such Existing Notes with a prospectus meeting the requirements
of the Securities Act, which may be the prospectus prepared for an exchange
offer so long as it contains a description of the plan of distribution with
respect to the resale of such Exchange Notes. Accordingly, this Prospectus, as
it may be amended or supplemented from time to time, may be used by a
Participating Broker-Dealer during the period referred to below in connection
with resales of Exchange Notes received in exchange for Existing Notes where
such Existing Notes were acquired by such Participating Broker-Dealer for its
own account as a result of market-making or other trading activities. Subject to
certain provisions set forth in the Registration Rights Agreement, the Company
shall use its best efforts to keep the Exchange Offer Registration Statement
continuously effective, supplemented and amended to the extent necessary to
ensure that it is available for sales of Exchange Notes by Participating
Broker-Dealers, and to ensure that the Exchange Offer Registration
30
<PAGE>
Statement conforms with the requirements of the Act and the policies, rules and
regulations of the Commission as announced from time to time, for a period
expiring approximately 180 days from the date on which the Exchange Offer
Registration Statement is declared effective. See "Plan of Distribution." Any
Participating Broker-Dealer who is an affiliate of the Company may not rely on
such interpretive letters and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. See "The Exchange Offer--Resales of Exchange Notes."
In that regard, each Participating Broker-Dealer who surrenders Existing
Notes pursuant to the Exchange Offer will be deemed to have agreed, by execution
of the Letter of Transmittal, that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in this Prospectus untrue in
any material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Rights Agreement, such Participating Broker-Dealer will suspend the
sale of Exchange Notes pursuant to this Prospectus until the Company has amended
or supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the Exchange
Notes may be resumed, as the case may be.
CONSEQUENCES OF FAILURE TO EXCHANGE
Any Existing Notes tendered and exchanged in the Exchange Offer will reduce
the aggregate principal amount of Existing Notes outstanding. Following the
consummation of the Exchange Offer, Existing Holders who did not tender their
Existing Notes generally will not have any further registration rights under the
Registration Rights Agreement, and such Existing Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Existing Notes could be adversely affected. The Existing Notes
are currently eligible for sale pursuant to Rule 144A through PORTAL. Because
the Company anticipates that most Existing Holders will elect to exchange such
Existing Notes for Exchange Notes due to the absence of restrictions on the
resale of Exchange Notes (except for applicable restrictions on any New Holder
who is an affiliate of the Company or is a broker-dealer which acquired the
Existing Notes directly from the Company) under the Securities Act, the Company
anticipates that the liquidity of the market for any Existing Notes remaining
after the consummation of the Exchange Offer may be substantially limited.
As a result of the making of this Exchange Offer, the Company will have
fulfilled certain of its obligations under the Registration Rights Agreement,
and Existing Holders who do not tender their Existing Notes, except for certain
instances involving the Initial Purchaser or Existing Holders who are not
eligible to participate in the Exchange Offer, will not have any further
registration rights under the Registration Rights Agreement or otherwise or
rights to receive Additional Interest (as defined) for failure to register.
Accordingly, any Existing Holder that does not exchange that Holder's Existing
Notes for Exchange Notes will continue to hold the untendered Existing Notes and
will be entitled to all the rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent that such rights or
limitations, by their terms, terminate or cease to have further effectiveness as
a result of the Exchange Offer.
The Existing Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Existing
Notes may be resold only (i)(a) to a person who the seller reasonably believes
is a qualified institutional buyer in a transaction meeting the requirements of
Rule 144A, (b) in a transaction meeting the requirements of Rule 144 under the
Securities Act, (c) outside the United States to a foreign person in a
transaction meeting the requirements of Rule 904 under the Securities Act or (d)
in accordance with another exemption from the registration requirements of the
Securities Act (and in the case of (b), (c) or (d), based upon an opinion of
counsel and written certification
31
<PAGE>
if the Company so requests) (ii) to the Company or (iii) pursuant to an
effective registration statement and, in each case, in accordance with any
applicable securities laws of any state of the United States or any other
applicable jurisdiction.
OTHER
Participation in the Exchange Offer is voluntary and Existing Holders should
carefully consider whether to accept. Existing Holders are urged to consult
their financial and tax advisors in making their own decision on what action to
take.
The Company may in the future seek to acquire untendered Existing Notes in
open market or privately negotiated transactions, through subsequent exchange
offers or otherwise. The Company has no present plans to acquire any Existing
Notes that are not tendered in the Exchange Offer or to file a registration
statement to permit resales of any untendered Existing Notes.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a summary of the material United States federal
income tax considerations relevant to the Exchange Offer and the ownership and
disposition of the Exchange Notes. The tax consequences of these transactions
are uncertain. The discussion set forth below is based upon the Internal Revenue
Code of 1986, as amended (the "Code"), and judicial decisions and administrative
interpretations thereunder, as of the date hereof, and such authorities may be
repealed, revoked, modified or otherwise interpreted or applied so as to result
in federal income tax consequences different from those discussed below. There
can be no assurance that the Internal Revenue Service (the "IRS") will not
challenge one or more of the tax positions described herein, and the Company has
not obtained, nor does it intend to obtain, a ruling from the IRS or an opinion
of counsel with respect to the U.S. federal income tax consequences of acquiring
or holding Exchange Notes. The discussion below pertains only to Holders that
are (i) citizens or residents (within the meaning of Section 7701(b) of the
Code) of the United States, (ii) corporations, partnerships or other entities
created in or under the laws of the United States or any political subdivision
thereof, (iii) estates, the income of which is subject to United States federal
income taxation regardless of its source, and (iv) trusts subject to the primary
supervision of a court within the United States and the control of one or more
United States persons as described in Section 7701(a)(30) of the Code.
This discussion does not purport to deal with all aspects of U.S. federal
income taxation that may be relevant to a particular Holder in light of the
Holder's circumstances (for example, persons subject to the alternative minimum
tax provisions of the Code). Also, it is not intended to be wholly applicable to
all categories of investors, some of which (such as dealers in securities,
banks, insurance companies, tax-exempt organizations, and persons holding
Exchange Notes as part of a hedging or conversion transaction or straddle or
persons deemed to sell Exchange Notes under the constructive sale provisions of
the Code) may be subject to special rules. The discussion below is premised upon
the assumption that the Exchange Notes and Existing Notes constitute
indebtedness for U.S. federal income tax purposes, and that the Existing Notes
and Exchange Notes are held (or would be held if acquired) as capital assets
within the meaning of Section 1221 of the Code. This summary does not discuss
the tax considerations applicable to subsequent purchasers. The discussion also
does not discuss any aspect of state, local or foreign law.
EACH PROSPECTIVE HOLDER AND, SUBSEQUENT TO THE EXCHANGE OFFER, EACH HOLDER
OF EXCHANGE NOTES IS STRONGLY URGED TO CONSULT ITS OWN TAX ADVISOR INCLUDING
WITH RESPECT TO ITS PARTICULAR TAX SITUATION THE TAX EFFECTS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAX LAWS AND POSSIBLE CHANGES IN THE TAX LAWS.
32
<PAGE>
EXCHANGE OF NOTES
The exchange of Existing Notes for Exchange Notes pursuant to the Exchange
Offer should not be a taxable exchange for U.S. federal income tax purposes.
Accordingly, a Holder should have the same adjusted issue price, adjusted basis
and holding period in the Exchange Notes as it had in the Existing Notes
immediately before the exchange.
INTEREST AND ORIGINAL ISSUE DISCOUNT
Holders of Exchange Notes will be required to include payments of "qualified
stated interest" received thereon in taxable income in accordance with their
respective methods of accounting for federal income tax purposes. Stated
interest on the Exchange Notes will be treated as qualified stated interest.
Based upon the Company's determination of the allocation of the issue price of
the Units to the Existing Notes, the Company does not believe that the Existing
Notes will be treated as having been issued with original issue discount
("OID"). If, however, it is determined that the Existing Notes were issued with
"original issue discount" for federal income tax purposes, a Holder generally
will be required to include OID in gross income as it accrues, regardless of the
Holder's method of accounting for federal income tax purposes. Accordingly, each
Holder may be required to include amounts in gross income without regard to when
the cash or other payments to which such income is attributable are received.
The amount of OID with respect to each Existing Note is an amount equal to
the excess of the "stated redemption price at maturity" of such Existing Note
over its issue price. The stated redemption price at maturity of each Existing
Note will include all cash payments other than "qualified stated interest"
payments including principal and interest, required to be made thereunder until
maturity. Stated interest on the Existing Notes will be treated as qualified
stated interest. The issue price of an Existing Note will be equal to that
portion of the issue price the Unit allocable to the Existing Note as described
below.
If each Holder of an Exchange Note will be required to include in gross
income for federal income tax purposes an amount equal to the sum of the "daily
portions" of the OID of the Exchange Note for all days during each taxable year
in which the Holder holds the Exchange Note. The daily portions of OID will be
determined on a constant interest rate basis by allocating to each day in an
accrual period a pro rata portion of the OID thereon that is attributable to the
accrual period in which such day is included. The amount of the OID attributable
to each full accrual period will be the product of the "adjusted issue price" of
the Exchange Note at the beginning of an accrual period and the "yield to
maturity" of the Exchange Note (adjusted to reflect the length of the accrual
period). The adjusted issue price of an Exchange Note at the beginning of an
accrual period is the original issue price of the Exchange Note plus the
aggregate amount of OID that has accrued in all prior accrual periods, less any
cash payments on the Exchange Note other than qualified stated interest on or
before the first day of such accrual period. The yield to maturity is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made on the Exchange Note, produces an amount equal
to the issue price. Under these rules, Holders will have to include increasingly
greater amounts of OID in each successive accrual period.
The Company is required to furnish certain information to the IRS, and will
furnish annually to record holders of an Exchange Note, information with respect
to OID accruing during the calendar year. That information will be based upon
the adjusted issue price of the Exchange Note as if the Holder were the original
holder of the Exchange Note.
There are several circumstances under which the Company could make a payment
on an Exchange Note which would affect the yield to maturity of a Note,
including (as described in the "Description of Exchange Notes"), the optional
redemption of Notes, or the repurchase of Notes. The Company intends to report
on the basis that the likelihood of a change in the interest rate on the Notes
is remote and will not affect the yield to maturity of the Notes. The Company
further intends to report on the basis that the exercise of the Company's
optional redemption right will not lower the yield of the Notes to the Company.
However, if, for example, the interest rate on a Note were actually changed, a
Holder may be required to
33
<PAGE>
redetermine the yield to maturity of the Note. Solely for the purposes of
determining the amount of the OID, such Note may be treated as reissued on any
date the interest rate were changed for an amount equal to its adjusted issue
price. The effect of the above rules is that any increased amount of interest
may be included in income over the remaining term of the Notes, possibly in
advance of the cash relating thereto.
TAX BASIS IN THE NOTES
A Holder's tax basis in an Existing Note generally will be equal to the
portion of the price paid for the Unit which is allocable to such Existing Note,
increased by the amount of OID or market discount, if any, includable in gross
income prior to the date of disposition, and decreased by the amount of any
payment on such Existing Note other than qualified stated interest prior to
disposition.
MARKET DISCOUNT, ACQUISITION PREMIUM ON THE EXCHANGE NOTES
A Holder who purchased an Existing Note for an amount less than the Note's
stated redemption price at maturity (or "revised issue price" if the Note
contains OID) at the time of acquisition, the amount of such difference will be
treated as "market discount" for U.S. federal income tax purposes, unless such
difference is less than a specified de minimus amount. To the extent a Holder
had market discount with respect to an Existing Note, the Holder generally will
have market discount with respect to an Exchange Note. Under the market discount
rules, a Holder will be required to treat any principal payment on, or any gain
on the sale, exchange, retirement, disposition of, an Exchange Note as ordinary
income to the extent of the market discount which has not previously been
included in income and is treated as having accrued on such Exchange Note at the
time of such payment or disposition. If a Holder makes a gift of an Exchange
Note, accrued market discount, if any, will be recognized as if such Holder had
sold such Exchange Note for a price equal to its fair market value. In addition,
the Holder may be required to defer until the maturity of the Exchange Note, or
in certain circumstances the earlier disposition of the Exchange Note in a
taxable transaction, the deduction of a portion of the interest expense on any
indebtedness incurred or continued to purchase or carry such Exchange Note.
Any market discount will be considered to accrue on a straight-line basis
during the period from the date of acquisition to the maturity date of the
Exchange Note, unless the Holder elects to accrue market discount on a constant
yield to maturity method. A Holder of an Exchange Note may elect to include
market discount in income currently as it accrues (on either a straight-line
basis or constant yield to maturity method), in which case the rules described
above regarding the deferral of interest deductions will not apply. This
election to include market discount in income currently, once made, is
irrevocable and applies to all market discount obligations acquired on or after
the first day of the first taxable year to which the election applies and may
not be revoked without the consent of the IRS.
A Holder who purchased an Existing Note for an amount that is greater than
the adjusted issue price of such Existing Note, but that is less than or equal
to the sum of the amounts payable on the Existing Note after the purchase date
(other than qualified stated interest), will be considered to have purchased
such Existing Note at an "acquisition premium." To the extent a Holder had
acquisition premium with respect to an Existing Note, the Holder generally will
have acquisition premium with respect to an Exchange Note. Under the acquisition
premium rules of the Code and the OID Treasury regulations, the amount of OID
which such Holder must include in its gross income with respect to such Exchange
Note for any taxable year will be reduced for each accrual period by an amount
equal to the product of (1) the amount of OID otherwise includable for the
period, and (2) a fraction, the numerator of which is the acquisition premium
and the denominator of which is the excess of the amounts payable on the
Exchange Note after the purchase date (other than qualified stated interest)
over the Exchange Note's adjusted issue price.
Holders are permitted to elect to include all interest on an Exchange Note
using the constant yield method. For this purpose, interest generally includes
stated interest, acquisition discount, OID, de minimus OID, market discount, de
minimus market discount, and unstated interest, as adjusted by any
34
<PAGE>
amortizable bond premium or acquisition premium. Special rules apply to
elections made with respect to Notes with market discount or amortizable bond
premium and Holders considering such an election should consult with their own
tax advisors. Once made, the election cannot be revoked without the consent of
the IRS.
SALE, RETIREMENT OR REDEMPTION OF A NOTE
In general, a Holder of an Exchange Note will recognize gain or loss upon
the sale, retirement, redemption or other taxable disposition of such Exchange
Note in an amount equal to the difference between (a) the amount of cash plus
the fair market value of other property received in exchange therefor (other
than amounts attributable to accrued but unpaid stated interest) and (b) the
Holder's adjusted tax basis in such Exchange Note.
Except with respect to accrued market discount, any gain or loss recognized
on the sale, retirement, redemption or other taxable disposition of an Exchange
note generally will be capital gain or loss. The maximum rate of tax on
long-term capital gains on most capital assets held by an individual for more
than 18 months is 20%, and gain on most capital assets held by an individual for
more than one year and up to 18 months is subject to tax at a maximum rate of
tax of 28%. Holders are urged to consult their tax advisors with respect to
these capital gains rates.
Any gain or loss recognized on the sale, retirement, redemption or other
taxable disposition of an Exchange Note generally will be capital gain or loss.
Such capital gain or loss generally will be long-term capital gain or loss if
the Note has been held by the Holder for more than one year and otherwise will
be a short term capital gain or loss.
BACKUP WITHHOLDING
Backup withholding and information requirements may apply to certain
payments of principal, premium, if any, and interest (including OID) on an
Exchange Note and to certain payments of proceeds of the sale or retirement of
an Exchange Note. The Company, its agent, a broker, the Trustee or any paying
agent, as the case may be, will be required to withhold at a rate of 31% from
any payment that is subject to backup withholding and is made to a Holder, if
the Holder fails to furnish such Holder's taxpayer identification number (social
security number or employer identification number), to certify that such Holder
is not subject to backup withholding, or to otherwise comply with the applicable
requirements of the backup withholding rules. Certain Holders (including, among
others, all corporations) are not subject to the backup withholding and
information reporting requirements.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSEQUENCES IS FOR
GENERAL INFORMATION ONLY AND IS NOT TAX ADVICE. ACCORDINGLY, EACH HOLDER OF THE
EXISTING NOTES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR WITH RESPECT TO THE
TAX CONSEQUENCES TO SUCH HOLDER OF THE ACQUISITION, OWNERSHIP AND DISPOSITION OF
THE EXCHANGE NOTES INCLUDING THE APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
APPLICABLE HIGH-YIELD DISCOUNT OBLIGATIONS
Since the yield of the Exchange Notes will be at least five percentage
points above the applicable federal rate, the Company will not be able to deduct
for tax purposes any OID accruing with respect thereto if the Exchange Notes are
considered to have "significant original issue discount". In addition, if the
yield of the Exchange Notes is more than six percentage points above the
applicable rate, then (i) a portion of such interest corresponding to the yield
in excess of six percentage points above the applicable federal rate will not be
deductible, and (ii) a corporate Holder may be entitled to treat the OID that is
not deductible as a dividend to the extent of the earnings and profits of the
Company, which may then qualify for the dividends received deduction. If the
disqualified portion exceeds the Company's current and accumulated earnings and
profits, the excess will continue to be taxed as ordinary OID income in
accordance with the rules described above. Corporate Holders should consult
their tax advisors concerning the availability of the dividends received
deduction.
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<PAGE>
CAPITALIZATION
The following table sets forth (i) the actual cash, cash equivalents,
restricted cash and capitalization of the Company derived from its financial
statements as of March 31, 1998, and (ii) such amounts reflect the sale by the
Company of $160 million in principal amount of the Existing Notes and related
Warrants after deducting estimated discount and offering expenses. The
capitalization information set forth in the table below is qualified by the more
detailed Consolidated Financial Statements and Notes thereto included elsewhere
in this Prospectus and should be read in conjunction with such Consolidated
Financial Statements and Notes.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
<S> <C> <C>
AS
ACTUAL ADJUSTED
---------- ----------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and restricted cash(1)............................................. $ 985 $ 154,385
---------- ----------
---------- ----------
Current portion of long-term debt
Current capital lease obligations....................................................... 373 $ 373
---------- ----------
---------- ----------
Long-term debt:
Current capital lease obligations, net of current portion(2)............................ 807 807
13% Senior Notes Due 2005(3) -- 157,747
---------- ----------
Total long-term debt, net of current portion 807.................................... 807 158,554
Stockholders' Equity:
Preferred Stock, $.01 par value, 500,000 shares authorized, no shares issued and
outstanding........................................................................... -- --
Common Stock, $.01 par value, 10,000,000 shares authorized, 3,448,450 shares issued and
outstanding(4)........................................................................ 34 34
Additional paid-in capital(5)........................................................... 9,992 12,245
Accumulated deficit..................................................................... (5,960) (5,960)
---------- ----------
Total stockholders' equity............................................................ 4,066 6,319
---------- ----------
Total Capitalization................................................................ $ 4,873 $ 164,873
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) The as adjusted data includes estimated restricted cash of $57 million to be
held in the Escrow Account.
(2) See Note 5 of Notes to the Financial Statements for the fiscal year ended
September 30, 1997. Other long-term liabilities are not included in the
Company's long-term debt as this represents an accrual for the difference
between what the Company actually pays in rent for its corporate
headquarters which escalates over the term of the lease versus calculating
the total rental paid over the term of the lease divided by the number of
months of the lease in accordance with Financial Accounting Standards Board
("FASB") No. 13.
(3) Represents the proceeds from the issuance of the Units, net of the value of
the Warrants issued in the Unit Offering.
(4) Does not include options and warrants to purchase approximately 1,622,000
shares of Common Stock of the Company outstanding at March 31, 1998.
(5) The increase in Additional paid-in capital reflects the value of the
Warrants issued in the Unit Offering.
36
<PAGE>
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes thereto and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" appearing
elsewhere herein. The selected financial data for the nine months ended
September 30, 1995 and the fiscal years ended September 30, 1996 and September
30, 1997 are derived from financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants and included
elsewhere herein. The selected financial data for the fiscal year ended December
31, 1994 are derived from financial statements of the Company, which have been
audited by Arthur Andersen LLP, independent public accountants and are not
presented separately herein. The selected financial data for the fiscal year
ended December 31, 1993 and the six-month periods ended March 31, 1997 and March
31, 1998 are derived from unaudited financial statements. The unaudited
financial statements include all adjustments, consisting of normal recurring
accruals, which the Company considers necessary for a fair presentation of the
financial position and results of operations for these periods. The operating
results for the six months ended March 31, 1998 are not necessarily indicative
of the results to be expected for any future period. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
<TABLE>
<CAPTION>
NINE SIX
YEAR YEAR MONTHS YEAR YEAR MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, SEPT. 30, SEPT. 30, SEPT. 30, MAR. 31,
1993 1994 1995(1) 1996 1997 1997
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 3,254 $ 6,524 $ 8,738 $ 10,374 $ 17,400 $ 8,926
Costs and expenses:
Cost of revenues................................. 2,536 5,192 7,292 8,599 13,902 6,847
Selling, general and administrative.............. 618 1,373 1,213 3,187 6,036 2,882
Depreciation and amortization.................... 41 59 68 219 472 296
Research and development......................... -- -- 34 57 -- --
----------- ----------- --------- --------- --------- ---------
Total costs and expenses......................... 3,195 6,624 8,607 12,062 20,410 10,026
----------- ----------- --------- --------- --------- ---------
Income (loss) from operations...................... 59 (100) 131 (1,688) (3,010) (1,100)
Interest income.................................. -- -- -- 121 72 43
Interest expense................................. 5 (30) (73) (99) (177) (17)
Write-off of debt issuance costs................. -- -- -- (257) -- --
----------- ----------- --------- --------- --------- ---------
Income (loss) before taxes......................... 54 (130) 58 (1,923) (3,115) (1,074)
(Benefit from) provision for taxes................. 3 14 19 -- -- --
----------- ----------- --------- --------- --------- ---------
Net income (loss).................................. $ 51 $ (144) $ 39 $ (1,893) $ (3,115) $ (1,074)
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Net earnings (loss) per share(4)................... $ .06 $ (0.11) $ 0.02 $ (0.72) $ (1.01) $ (0.35)
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
Weighted average shares outstanding................ 863 1,294 1,725 2,633 3,075 3,042
----------- ----------- --------- --------- --------- ---------
----------- ----------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
EBITDA(2).......................................... $ 100 $ (41) $ 199 $ (1,605) $ (2,465) $ (804)
Ratio of earnings to fixed charges(3).............. 2.35:1 -- 1.58:1 -- -- --
Deficiency of earnings to cover fixed charges(3)... -- $ (130) -- $ (1,923) $ (3,115) $ (1,074)$(871)
<CAPTION>
SIX
MONTHS
ENDED
MAR. 31,
1998
-----------
<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues........................................... $ 9,091
Costs and expenses:
Cost of revenues................................. 5,857
Selling, general and administrative.............. 3,479
Depreciation and amortization.................... 506
Research and development......................... --
-----------
Total costs and expenses......................... 9,844
-----------
Income (loss) from operations...................... (752)
Interest income.................................. 8
Interest expense................................. (126)
Write-off of debt issuance costs................. --
-----------
Income (loss) before taxes......................... (871)
(Benefit from) provision for taxes................. --
-----------
Net income (loss).................................. $ (871)
-----------
-----------
Net earnings (loss) per share(4)................... $ (0.25)
-----------
-----------
Weighted average shares outstanding................ 3,448
-----------
-----------
OTHER FINANCIAL DATA:
EBITDA(2).......................................... $ (246)
Ratio of earnings to fixed charges(3).............. --
Deficiency of earnings to cover fixed charges(3)...
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
NINE SIX
YEAR YEAR MONTHS YEAR YEAR MONTHS
ENDED ENDED ENDED ENDED ENDED ENDED
DEC. 31, DEC. 31, SEPT. 30, SEPT. 30, SEPT. 30, MAR. 31,
1993 1994 1995(1) 1996 1997 1997
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<CAPTION>
SEPTEMBER 30,
DEC. 31, SEPT. 30, ------------------------------- MAR. 31,
1993 1994 1995 1996 1997 1997
----------- ----------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 3 $ 68 $ 222 $ 2,342 $ 2,401
Working Capital................................................. 79 330 180 3,468 1,981
Other assets.................................................... 149 210 460 2,666 4,149
Total assets.................................................... 881 1,368 2,962 7,810 11,025
Current liabilities............................................. 654 828 2,322 1,675 4,896
Long-term liabilities........................................... 23 313 341 45 1,115
Stockholders' equity............................................ 204 227 299 6,090 5,014
<CAPTION>
SIX
MONTHS
ENDED
MAR. 31,
1998
-----------
<S> <C>
<S>
BALANCE SHEET DATA:
Cash and cash equivalents....................................... $ 985
Working Capital................................................. (143)
Other assets.................................................... 364
Total assets.................................................... 9,928
Current liabilities............................................. 4,788
Long-term liabilities........................................... 1074
Stockholders' equity............................................ 4,066
<CAPTION>
BALANCE SHEET DATA:
Cash and cash equivalents.......................................
Working Capital.................................................
Other assets....................................................
Total assets....................................................
Current liabilities.............................................
Long-term liabilities...........................................
Stockholders' equity............................................
</TABLE>
- ------------------------
(1) The Company changed its fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months.
(2) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. However, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles,
should not be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or cash flow as a measure
of liquidity, and should be examined in conjunction with the Financial
Statements and Notes thereto of the Company included elsewhere in this
Prospectus.
(3) Ratio of earnings to fixed charges is defined as pre-tax income divided by
fixed charges. Fixed charges consist of interest on debt and the interest
component of rent expense (deemed to be one-third of the total).
(4) Presented in accordance with the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings per share" and represents both basic
and diluted earnings (loss) per share amounts. See "Financial Statements".
38
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
Consolidated Financial Statements and Notes thereto appearing elsewhere in this
Prospectus.
OVERVIEW
The Company was founded in 1989 by Marc H. Bell as NAFT International Ltd.
("NAFT"). From 1989 to 1994 the Company acted as a Value-Added Reseller
primarily providing custom computer hardware and software solutions for desktop
publishing. The Company specialized in Atex to Mac conversions and worked with
most major publishing houses and advertising agencies including Time Warner and
Ogilvy & Mather. In July 1994, PFM Technologies Corp., a company organized by
Mr. Bell, acquired the assets and liabilities of NAFT and its affiliated
corporations in a tax-free exchange of common stock. By 1995 the Company's
management recognized information delivery to the desktop as an attractive
business opportunity and began to re-shape its business strategy for the future.
In September 1995, the Company was reincorporated by merger into Bell Technology
Group Ltd., a Delaware corporation, with a focus on entering Internet and
Internet-related businesses. The Company began to offer Internet access to
business customers in December 1995 and had grown its customer base to over 80
large and medium size business customers by the end of 1996. In 1997 the Company
began to capitalize on its expertise in cutting-edge Internet technologies to
provide one-stop Internet solutions for large enterprises and as of May 31, 1998
had grown its Internet services customer base of medium and large businesses to
over 570 clients. On June 1, 1998, the Company changed its name to Globix
Corporation.
Prior to 1996, the Company's revenues consisted almost exclusively of sales
of computer hardware and software and desktop publishing services. Since 1996,
the Company has reshaped its sales of computer hardware and software from
mass-marketed computer desktop solutions to higher-end workstation, web and
database servers and software for sophisticated commercial Internet solutions.
In addition, the Company has significantly grown several new components of
revenue including Internet access, interactive development and instructor-led
training. Commencing in the fiscal year ended September 30, 1996, the Company
began segment reporting of revenue. The Company divided its operations for
segment reporting purposes into two divisions: (i) the "Computer Products Sales
and Services Division," which provides value-added systems and network
integration and (ii) the "Internet and Media Development Division," which
provides high bandwidth dedicated Internet access, web hosting and co-location
facilities, interactive development--digital web design, web implementation and
3-dimensional computer animation, and instructor-led training. The Company
expects that the Internet and Media Development Division will continue to grow
as a percentage of revenues. At the same time, the Company intends to continue
to emphasize hardware and software sales of the higher-margin workstation, web
and database server and software components complementary to its sophisticated
Internet solutions.
The Company historically has experienced negative cash flow from operations
and incurred net losses. The Company's ability to generate positive cash flow
from operations and achieve profitability is dependent upon the Company's
ability to continue to grow its revenue base and achieve further operating
efficiencies. For the fiscal years ended September 30, 1996 and 1997, the
Company generated negative operating cash flows of approximately $1.9 million
and approximately $2.5 million, respectively, and incurred net losses of
approximately $1.9 million and approximately $3.1 million, respectively. For the
six-months ended March 31, 1998, the Company generated positive operating cash
flow of approximately $703,000 and incurred a net loss of approximately
$871,000. The Company believes its SuperPOP infrastructure will enable it to
achieve further economies of scale as it continues to expand its customer base.
However, there can be no assurance that the Company will be able to achieve or
sustain revenue growth, positive cash flow or profitability in the future. As of
March 31, 1998, the Company had generated an accumulated deficit of
approximately $6.0 million.
39
<PAGE>
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 1998 AND 1997
REVENUES. Consolidated Revenues for the six months ended March 31, 1998
increased approximately 2% from approximately $8,936,000 to approximately
$9,091,000. Revenues from the Computer Products Sales and Service segment for
the six months ended March 31, 1998 decreased approximately 21%, from
approximately $7,981,000 to approximately $6,308,000. As previously stated, the
Company is actively de-emphasizing sales of lower-end and the more popular
brands of hardware where price competition is intense and profit margins are
low, in favor of software and Internet related sales which tend to produce
better profit margins. This trend should continue. The Company intends to focus
its future operations primarily in the areas of Internet related activities such
as web hosting, co-location, sales of high-end computer products and systems,
specialized computer programs (such as Alias, Softimage, etc.), training,
interactive development and web site development. Sales from the Internet and
Media Development segment for the six months ended March 31, 1998 increased
approximately 190%, from approximately $955,000 to approximately $2,768,000.
COST OF REVENUES. Cost of Revenues for the six months ended March 31, 1998
were approximately $5,858,000 or 64% of Revenues as compared to approximately
$6,941,000, or approximately 78% of Revenues for the comparable period in fiscal
1997. Cost of Revenues from the Computer Products and Services segment for the
six months ended March 31, 1998 were approximately $5,122,000, or approximately
81% of Revenues for the comparable period in fiscal 1997. Cost of Revenues for
the Internet and Media Development segment for the six months ended March 31,
1998 were approximately $736,000, or approximately 27% of Revenues, as compared
to approximately $360,000, or approximately 38% of Revenues, for the comparable
period in fiscal 1997. The increase in gross profit margin was due to an
increased percentage of sales from sales of services (including Internet
services) and computer programs that generate higher profit margins, rather than
sales of products. In addition, sales of more sophisticated computer systems
that required greater pre-sales and after market customer assistance generated
higher gross profit margins.
SELLING, GENERAL AND ADMINISTRATIVE. For the six months ended March 31,
1998, Selling, General and Administrative expenses increased from approximately
$2,882,000, or approximately 32% of sales, to approximately $3,479,000, or 38%
of sales. The increase in 1998 is due to an increase in payroll, primarily for
corporate management personnel and Internet and computer program sales
personnel, and technicians and engineers in anticipation of the Company's future
expansion. In addition, in the second quarter of 1998, the Company recorded a
reserve of $150,000 for a possible additional New York State Sales and Use tax
liability. The Company is diligently working with New York State Taxation and
Finance to resolve the matter.
NET LOSS. For the six months ended March 31, 1998, the Company incurred a
net loss of approximately $871,000, or $.25 per share, as compared to a net loss
of approximately $1,074,000, or $.35 per share.
FISCAL YEAR ENDED SEPTEMBER 30, 1997 COMPARED TO FISCAL YEAR ENDED SEPTEMBER
30, 1996
SEGMENT RESULTS. The Company's activities presently fall into two main
segments. One segment consists of computer product sales, service, network
installation and maintenance. The second segment
40
<PAGE>
consists of all Internet related activities, including Internet access, web
hosting, co-location, web design and interactive CD ROM design and preparation.
The following table details segment information:
<TABLE>
<CAPTION>
COMPUTER
PRODUCTS INTERNET
AND AND MEDIA
SERVICE SALES DEVELOPMENT CONSOLIDATED
------------- ------------ --------------
<S> <C> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1997
Sales to unaffiliated customers..................................... $ 14,986,417 $ 2,413,538 $ 17,399,955
Operating loss...................................................... 378,647 84,632 3,010,234(1)
Identifiable assets................................................. 5,781,580 2,105,207 11,024,988(2)
FISCAL YEAR ENDED SEPTEMBER 30, 1996
Sales to unaffiliated customers..................................... $ 9,732,322 $ 641,342 $ 10,373,664
Operating loss...................................................... 267,482 359,751 1,688,721(1)
Identifiable assets................................................. 3,442,760 1,132,253 7,809,782(2)
</TABLE>
- ------------------------
(1) Includes $2,546,955 for the fiscal year ended September 30, 1997 and
$1,061,488 for fiscal year ended September 30, 1996 of unallocated corporate
overhead including executive salaries of $616,034 for fiscal year ended
September 30, 1997 and $389,000 for fiscal year ended September 30, 1996 and
overhead including rent, payroll charges for administrative staff including
accounting, human resources, MIS and other support personnel and
professional fees.
(2) Including corporate assets not allocable to a particular segment of
$3,138,201 and $3,234,769 for the fiscal years ended September 30, 1997 and
1996, respectively.
REVENUES. Consolidated revenues for the fiscal year ended September 30,
1997 increased 68% to approximately $17.4 million from approximately $10.4
million for the fiscal year ended September 30, 1996. This increase was
primarily driven by growth in both the Computer Product Sales and Services
Division and the Internet and Media Development Division. Revenue from the
Computer Products Sales and Service Division increased 54% to approximately
$15.0 million for the fiscal year ended September 30, 1997 from approximately
$9.7 million for the fiscal year ended September 30, 1996. The Internet and
Media Development Division increased sales by 277% to approximately $2.4 million
for the fiscal year ended September 30, 1997 from approximately $0.6 million for
the fiscal year ended September 30, 1996. The Company anticipates that the
growth, if any, in revenues from Computer Product Sales and Services Division
will be at a much lower rate in the coming fiscal year, and that revenues from
the Internet and Media Development Division will continue to increase as a
percentage of total revenues. The Company continues to emphasize products sales
of higher-end workstations, web and database servers and software associated
with its sophisticated commercial Internet solutions.
COST OF REVENUES. Cost of revenues were approximately $13.9 million or 80%
of revenues for the fiscal year ended September 30, 1997 as compared to
approximately $8.6 million or 83% of revenues for the fiscal year ended
September 30, 1996. Cost of revenues decreased as a percentage of revenues
primarily due to the increase in higher margin revenue from the Internet and
Media Development Division. In addition, revenue from the sales of higher-end
workstations, web and database servers and software also generated higher gross
profit margins. The Company expects this trend to continue as it continues to
focus on high margin hardware and software sales and its Internet and Media
Development Division.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased to approximately $6.0 million for the fiscal year ended
September 30, 1997 from approximately $3.2 million for the fiscal year ended
September 30, 1996. As a percentage of revenues, Selling, General and
Administrative expenses increased to 35% for the fiscal year ended September 30,
1997 from 31% for the fiscal year ended September 30, 1996. This increase as a
percentage of revenues is the result of increasing
41
<PAGE>
the sales, marketing, technical and administrative personnel associated with the
growth in revenues during the fiscal year. The Company expects this expense as a
percentage of total revenues to level off and even decrease slightly as revenues
for the Internet and Media Development Division continue to grow.
NET LOSS. For the fiscal year ended September 30, 1997, the Company
incurred a net loss of approximately $3.1 million, or $1.01 per share, as
compared to a net loss of approximately $1.9 million, or $0.72 per share, for
the fiscal year ended September 30, 1996. During the fourth quarter of fiscal
year 1997, the Company established an additional reserve of $360,000 for
Returned Merchandise Allowances to properly reflect the value of its receivables
from vendors of merchandise to the Company. The Company considers this event to
be non-recurring and any such future write-offs to be significantly lower. The
Company also increased its allowance for doubtful accounts by $50,000.
FISCAL YEAR ENDED SEPTEMBER 30, 1996 COMPARED TO THE FISCAL YEAR (NINE
MONTHS)
ENDED SEPTEMBER 30, 1995
The financial statements contain results of operations for the twelve month
period ended September 30, 1996 and the nine month period ended September 30,
1995. The Company completed its Initial Public Offering in January 1996. These
facts should be considered in reading the following discussion.
REVENUES. Consolidated revenues for the fiscal year ended September 30,
1996 increased to approximately $10.4 million from approximately $8.7 million
for the nine months ended September 30, 1995. While the Company's actual
revenues are not steady on a month-by-month basis, average monthly revenues (for
comparison purposes only) in fiscal year 1996 were approximately $864,000 as
compared to average monthly revenues of approximately $971,000 in fiscal year
1995. This decline in average monthly revenue is due to the substantial
reduction in the sales of Apple computer products. The Company replaced these
sales in part with sales of other computer products and sales of
Internet-related service and training.
COST OF REVENUES. Cost of revenues were approximately $8.6 million or 83%
of revenues for the fiscal year ended September 30, 1996 as compared to
approximately $7.3 million or 83% of revenues for the nine months ended
September 30, 1995. Cost of revenues remained constant as a percentage of
revenues as result of improvements in the Company's gross profit margin from
Internet-related sales being offset by expenses associated with the relocation
of the Company's operations in the fourth quarter of fiscal year 1996.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, General and Administrative
expenses increased to approximately $3.2 million for the fiscal year ended
September 30, 1996 from approximately $1.2 million for the nine months ended
September 30, 1995. Within this category, a substantial portion of such costs
were related to payroll. The monthly payroll increased from approximately
$100,000 for the month of October 1995 to approximately $307,000 for the month
of October 1996. The increase in payroll was due primarily for administrative
personnel, sales personnel, technicians and engineers in all areas of
operations.
NET LOSS. For the fiscal year ended September 30, 1996, the Company
incurred a net loss of approximately $1.9 million or $0.72 per share, as
compared to net income of approximately $39,000, or $0.02 per share, for the
nine months ended September 30, 1995.
LIQUIDITY AND CAPITAL RESOURCES.
The Company and its subsidiaries have entered into a Restated Security
Agreement with NationsCredit Distribution Finance, Inc. ("Nations") pursuant to
which Nations will make certain advances to the Company to be used to finance
its accounts receivable and inventory. The amount available under this
arrangement is based upon the balance of collateral available that is 80% of its
current qualifying accounts receivable and 50% of its inventory. As of March 31,
1998, the Company had a credit line available of $2.0
42
<PAGE>
million, of which $1.9 million was outstanding. Such obligation is secured by a
continuing security interest in the assets of the Company and its subsidiaries.
The borrowings bear interest at the prime rate plus 1.75%. On April 30, 1998,
the Company repaid approximately $1.9 million of the $2.0 million currently
outstanding with Nations with proceeds of its Existing Notes Offering.
In December 1997, the Company received a $1,000,000 credit line from Cisco
Systems Capital Corporation ("CSC") to lease Cisco Systems products and
associated peripherals. The credit line is available to the Company for a period
of 180 days, is to be repaid over a 36-month period and is subject to quarterly
financial review by CSC. The Company may not purchase more than $500,000 on the
credit line during any three-month period. As of March 31, 1998, the Company had
used approximately $65,000 of this credit line. At the end of the lease term,
the Company has the option of purchasing the equipment for $1.
The Company had a negative cash flow of approximately $1,419,000 for the six
months ended March 31, 1998. This resulted in part from cash provided by
operations of approximately $703,000 which represents the net loss of
approximately $871,000, the decrease in accounts receivable of approximately
$324,000 (offset by the increase in accounts payable of approximately $544,000
and the decrease of accrued expenses of $241,000). In addition, the Company
purchased property and equipment in the amount of approximately $1,551,000. The
significant increase in capital expenditures resulted from the Company's
continuing focus on the development of its Internet related activities which
included the purchase of servers, routers, cabinets, monitors and other
equipment necessary to create and expand the equipment used to host web sites.
The negative cash flow and purchases of property and equipment resulted in a
decrease in working capital from approximately $1,981,000 at September 30, 1997
to approximately ($143,000) at March 31, 1998 and a decrease in the current
ratio from 1.40 to 1 at September 30, 1997 to .97 to 1 at March 31, 1998. The
decrease in prepaid expenses and other current assets is mainly the result of
the inclusion of $600,000 of proceeds from the Company's private placement in
September 1997 as a receivable as of September 30, 1997. Such $600,000 was
received in October 1997.
RECENTLY ISSUED ACCOUNTING STANDARDS. In the first quarter of fiscal 1998,
the Company adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share", which requires the presentation of both basic and
diluted earnings per share on the face of the Consolidated Statements of
Operations. Options and warrants are not included in the calculation of diluted
earnings per share if the effect would be antidilutive. Accordingly, basic and
diluted net loss per share do not differ for any period presented.
Net loss per share under the provisions of SFAS No. 128 for periods prior to
the first quarter of fiscal 1998 did not differ from the net loss per share as
reported in those prior periods.
The following table summarizes securities that were outstanding as of March
31, 1998 and 1997, but not included in the calculation of diluted net loss per
share because such shares are antidilutive.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Options..................................................................................... 926,564 257,564
Warrants.................................................................................... 695,933 661,150
</TABLE>
43
<PAGE>
BUSINESS
OVERVIEW
Globix is an Internet service provider engaged in the design, construction
and provision of sophisticated Internet-based solutions for large and medium
size business enterprises. The Company currently operates a "SuperPOP" facility
in New York City and is planning to construct and operate SuperPOPs in London
and San Francisco. A SuperPOP is a high-capacity Internet data center offering
dedicated Internet access, web hosting and co-location facilities to a large
concentration of customers in a focused geographic area. The Company considers
itself a primary source for "one-stop shopping" for innovative, cutting-edge
Internet technology for Fortune 1000 companies. The Company provides one-stop
Internet solutions to its customers which include: (i) high bandwidth dedicated
Internet access, web hosting and co-location facilities, (ii) value-added
systems and network integration, (iii) interactive development--digital web
design, web implementation and 3-dimensional computer animation and (iv)
instructor-led corporate training. Globix currently serves over 570 large and
medium size Internet services business customers, including CNBC/Dow Jones
Business Video, General Media International Inc. (Penthouse Magazine) and Ogilvy
& Mather.
INDUSTRY BACKGROUND
The emergence of the Internet and the widespread adoption of IP as a data
transmission standard in the 1990's, combined with deregulation of the
telecommunications industry and advances in telecommunications technology, have
significantly increased the attractiveness of providing data communication
applications and services over public networks. At the same time, growth in
client/server computing, multimedia personal computers and on-line computing
services and the proliferation of networking technologies have resulted in a
large and growing group of people who are accustomed to using networked
computers for a variety of purposes, including e-mail, electronic file
transfers, on-line computing and electronic financial transactions.
Consequently, the availability of an expansive variety of compelling business
and consumer applications over the Internet has attracted a large number of
consumer and business users, making Internet access services one of the fastest
growing segments of the $218 billion telecommunications services market.
As a result of this growing Internet audience, businesses have discovered
that the Internet provides a valuable marketing forum and can enhance
communications with customers and geographically distributed offices and
business partners, as well as allowing them to quickly reduce operating costs,
access valuable information and reach new markets. Businesses, having grown
increasingly accustomed to utilizing the Internet for mission critical
applications, such as sales, customer service and project coordination, are
seeking a variety of enhanced solutions to take even greater advantage of the
Internet. The proliferation of Internet services offered and the growth in
mission-critical Internet applications are driving an increase in the complexity
of commercial Internet sites. In order to ensure the quality, reliability,
availability and redundancy of these Internet operations, corporate information
technology ("IT") departments must make substantial investments in developing
Internet expertise and infrastructure. As a result, corporate IT departments are
increasingly seeking collaborative outsourcing arrangements that can increase
performance, provide continuous operation of their Internet solutions and reduce
Internet operating expenses. This demand has resulted in the emergence of a
rapidly growing ISP industry, including regional ISPs, national ISPs, and larger
IT outsourcing firms, which offer products and services designed to address
enterprises' outsourcing needs.
Total ISP revenues in the United States are projected to grow from $3.3
billion in 1996 to over $18 billion in 2000, according to IDC. Today, businesses
represent the largest and fastest growing segment of the Internet market. IDC
predicts that U.S. corporate access revenues will grow from approximately $1.9
billion in 1996 to over $6.6 billion in 2000. In addition, IDC predicts that
enhanced Internet services, such
44
<PAGE>
as web hosting, security, e-commerce, virtual private networks and advanced
Internet applications, are expected to grow from approximately $126 million in
1996 to over $7 billion in 2000.
The rapidly growing need for Internet access and technology has resulted in
a highly fragmented industry with the proliferation of over 4,000 ISPs operating
within the United States. These ISPs are primarily made up of a few large
national providers focused on high bandwidth access and a large number of small
providers with limited resources focused on serving local markets. However, the
solutions offered by these companies fail to address certain elements required
to ensure that customers' mission-critical Internet operations are reliable,
scalable and high performing. For example, regional ISPs lack the
geographically-distributed data centers necessary to deliver content using
replication or caching technologies, which are becoming increasingly important
as Internet usage and bandwidth demands increase. National ISPs focus on
providing Internet access and generally have not developed sophisticated and
reliable server management capabilities. The increasingly complex needs of
larger service enterprises for Internet technology are rarely met by either
large national ISPs that focus on access or the small local ISPs that have
limited resources to provide innovative Internet solutions.
THE GLOBIX SOLUTION
The Company believes the increasingly complex needs of larger enterprises
for Internet technology are underserved by both the large national ISPs and the
smaller local ISPs. Globix believes it bridges this gap by providing end-to-end
Internet solutions--one-stop solutions for large enterprises--through the
combination of a high capacity, reliable SuperPOP infrastructure, expertise in
sophisticated Internet technologies and VAR status of leading-edge hardware and
software. This unique capacity to fulfill the specific needs of larger
enterprises is what makes Globix a "Total Business Solutions Provider" and has
enabled it to win major customers within the ranks of the Fortune 1000 in the
intensely competitive ISP market, while maintaining a customer retention rate of
over 95%.
Through its SuperPOP, the Company offers high capacity dedicated Internet
access, as well as web hosting and co-location facilities. The Company's
SuperPOP is directly linked to the Internet backbone via multiple high bandwidth
connections. In the event that one of these connection fails, re-routing to an
alternate connection is instantaneous and invisible to the customer. The Company
provides high-speed, collision free service by maintaining bandwidth which
significantly exceeds the typical requirements of its entire customer base. This
extensive buffer assures smooth, rapid access even to sites with extraordinary,
burstable traffic. To support its large clients, the Company has invested
heavily in its NOC, which is monitored 24 hours a day, 7 days a week to assure
all connections, servers and other systems are performing to specifications. The
Company's engineers, programmers and system administrators continually review
operations to ensure server, router and software integrity within the SuperPOP.
Globix's expertise in leading innovative Internet technologies includes: (i)
the customization and integration of high-powered servers for Web and database
applications, (ii) design of switched and/or router-based networks, (iii) design
and maintenance of firewall and security protection, (iv) programming and
customization of commercial application-specific software, (v) web design,
including HTML and VRML and 3-dimensional computer animation and (vi) customized
application-specific training. The Company has developed many proprietary
turn-key solutions for its clients including Internet commerce applications,
Internet security applications and 3-dimensional computer animation solutions.
In providing complete Internet solutions, the Company maintains the status of a
VAR of leading Internet hardware and software technologies from manufacturers
such as Sun Microsystems, Inc., Silicon Graphics, Inc., Compaq Computers, Inc.,
Cisco Systems, Inc., Microsoft Corporation, Netscape Corporation and Checkpoint
Software Corp.
45
<PAGE>
BUSINESS STRATEGY
The key elements of the Company's business strategy include:
PROVIDE SOPHISTICATED ONE-STOP INTERNET SOLUTIONS TO LARGE ENTERPRISES. The
Company considers itself a primary source for "one-stop shopping" for
innovative, cutting-edge Internet technology for Fortune 1000 companies. The
Company provides to its customers one-stop Internet solutions which include: (i)
high bandwidth dedicated Internet access, web hosting and co-location facilities
(ii) value-added systems and network integration, (iii) interactive
development--digital web design, web implementation and 3-dimensional computer
animation and (iv) instructor-led corporate training. The Company believes that
the combination of its SuperPOP infrastructure, expertise in sophisticated
Internet technologies and VAR status of leading-edge hardware and software will
enable it to continue to win the confidence and business of large
enterprise-scale clients.
TARGET LARGE BUSINESS ENTERPRISES TYPICALLY UNDERSERVED BY BOTH LARGE AND
SMALLER ISPS. The rapidly growing need for Internet access and technology has
resulted in a highly fragmented industry with the proliferation of over 4,000
ISPs operating within the United States. These ISPs are primarily made up of a
few large national providers focused on high bandwidth access and a large number
of small providers focused on serving local markets with very limited resources.
The Company believes that the increasingly complex needs of larger enterprises
for Internet technology are rarely met by either the large national ISPs who
primarily focus on access or the small local ISPs who have limited resources to
provide innovative Internet solutions. Globix's strategy is to bridge this gap
by providing total end-to-end Internet solutions-- one-stop solutions for large
enterprises--through the combination of a high capacity, reliable SuperPOP
infrastructure, expertise in sophisticated Internet technologies and VAR status
of leading-edge hardware and software. This unique capacity to fulfill the
specific needs of larger enterprises is what makes Globix a "Total Business
Solutions Provider" and has enabled Globix to win major customers in the ranks
of the intensely competitive ISP market, while maintaining a customer retention
rate of over 95%. Since initiating internet service in December 1995 the Company
has rapidly grown its customer base to over 570 customers.
LEVERAGE SUPERPOP INFRASTRUCTURE TO ACHIEVE HIGHER OPERATING
EFFICIENCIES. The Company believes that by locating its SuperPOP infrastructure
in large urban business centers, it can achieve significant operating
efficiencies. Through its SuperPOP in lower Manhattan, the Company was able to
generate positive operating cash flow for the six months ended March 31, 1998
with a customer base of over 490 medium to large Internet customers. Because of
the fixed cost nature of the high capacity SuperPOP infrastructure, the Company
expects to achieve higher operating efficiencies as it expands its customer
base. The Company believes that building a single, high capacity SuperPOP in a
target urban market will enable it to achieve greater operating efficiencies
than operators who must build or lease a vast network of POP facilities to
accommodate their customer bases. The Company believes that the resulting
competitive pressure on other ISPs will permit the Company to become a major
consolidator in these marketplaces.
EXPAND FROM NEW YORK CITY INTO OTHER GLOBAL BUSINESS AND FINANCIAL
CENTERS. The Company has grown revenues to approximately $17,400,000 for the
fiscal year ended September 30, 1997 and has over 570 large and medium size
enterprise Internet clients as of May 31, 1998. The Company sees extremely
attractive expansion opportunities in large business and financial centers all
over the world. Due to its large number of national and multi-national clients,
Globix believes that by building SuperPOPs in London and San Francisco it can
immediately pick-up additional Internet service revenue from its current
customer base. Furthermore, the Company believes each of these cities, similar
to New York, is a dynamic marketplace for large enterprise clients and offer
significant potential for expanding the Company's customer base.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES IN THE HIGHLY
FRAGMENTED ISP MARKET. Due to the highly fragmented nature of the ISP industry,
the Company believes there are significant acquisition opportunities in each of
the marketplaces in which Globix may rapidly grow its customer base. Serving the
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ever-increasing Internet needs of large and medium size businesses is becoming a
daunting challenge for hundreds of small, local business ISPs. The Company
believes that many of these operators may have little choice but to affiliate
with or join larger providers. The Company further believes that the resulting
competitive pressure on other ISPs will permit the Company to become a major
consolidator in these marketplaces. Globix plans to quickly integrate the
operations of any acquired ISPs into its SuperPOP in order to grow its revenue
base and spread its costs over a larger customer base.
SERVICES
The Company provides one-stop Internet solutions that include: (i) high
bandwidth dedicated Internet access, web hosting and co-location facilities,
(ii) value-added systems and network integration, (iii) interactive
development--digital web design, web implementation, 3-dimensional computer
animation, and (iv) instructor-led corporate training.
HIGH BANDWIDTH DEDICATED INTERNET ACCESS, WEB HOSTING AND CO-LOCATION FACILITIES
DEDICATED INTERNET ACCESS. The Company provides high bandwidth Internet
access to its clients. The Company's customers, typically with medium to
large-sized local area networks ("LAN") and wide area networks ("WAN"), require
bandwidth far greater than available through the use of conventional modems.
Dedicated Internet access allows for a faster and more reliable connection to
the Internet which results in more rapid data transfer rates. The Company offers
dedicated Internet access to commercial entities over a variety of connection
speeds, from 56Kbps to T-1 (1.54Mbps) to T-3 (45Mbps) connectivity.
Part of the consultation process with the Company's clients includes
evaluating and selecting the bandwidth for their Internet needs. Globix connects
its clients to its SuperPOP infrastructure through the provision of a dedicated
local loop arranged through one of the Company's preferred local exchange
carriers. At its SuperPOP, the Company provides its clients with Internet
connectivity through its multiple high bandwidth connections to the Internet
backbone. In the event that one of these backbone connections fails, re-routing
to an alternate is instantaneous and invisible to the customer.
The Company provides high-speed, collision-free service by maintaining
bandwidth which significantly exceeds the typical requirements of its entire
customer base. This extensive buffer assures smooth, rapid access even to sites
with extraordinary, burstable traffic. To support its large clients, the Company
has invested heavily in its NOC, which is monitored 24 hours a day, seven days a
week to assure all connections, servers and other systems are performing to
specifications. The Company's engineers, programmers and system administrators
continually review operations to ensure server, software and router integrity
within the SuperPOP.
Each of the Company's customers receives an Internet IP address, domain name
service ("DNS") and 24-hour unrestricted access to the Internet. The Company
derives dedicated Internet access revenues from initial connection charges and
recurring monthly service fees, both of which vary directly with the bandwidth
chosen and utilized. The Company periodically consults with its customers to
assess and evaluate their ongoing bandwidth requirement and increase or modify
it, if necessary.
WEB HOSTING AND CO-LOCATION. The primary need for Internet access of many
of the Company's clients is to distribute content as much as to gather content.
Such web distribution is usually done via a web site, from which a client can
serve HTML pages, images and "media-rich" content (such as audio and video). To
this end, the Company offers two distinct services, web hosting and co-location,
which are ideally suited for providing the widespread dissemination of
information over the Internet.
Web hosting can be defined as housing a client's content (i.e., web pages)
on the Company's servers and software. Web hosting is an ideal solution for
clients who want to "publish" web pages on the Internet without purchasing,
configuring, maintaining and administrating the sophisticated hardware and
software
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necessary. Due to economies of scale, Globix can generally offer web hosting
solutions far more sophisticated than clients can provide for themselves for
equivalent economies. With its staff of Internet engineers and system
administrators, the Company offers multiple platforms for web hosting and
development, including both Unix and NT operating systems. These hosting servers
are located within the Company's SuperPOP infrastructure and make use of the
SuperPOP's multiple high bandwidth connections to the Internet backbone. File
structure directories, DNS and security privileges are set-up for clients on the
Company's hosting servers, thus enabling clients to remotely "publish" their
content for distribution over the Internet. Network and systems administration
and maintenance, DLT tape back-ups and security are all provided by the Company.
The Company is continually developing new and unique approaches to web hosting
solutions for its clients. Web hosting generates recurring revenue through
monthly fees to clients based upon the amount of data transferred to and from
their web site. Data transfer amounts are associated with the size and
complexity of a client's web site, the popularity of and traffic to that site
and the functionality of a site.
Co-location services, unlike web hosting, allow a customer wishing to
"publish" web pages on the Internet to house its own dedicated hardware and
software within the Company's SuperPOP. Co-location customers typically are
larger enterprises employing more sophisticated Internet solutions within their
day-to-day operations. The Company provides its co-location customers with
physical facilities, including web racks for housing servers, and high bandwidth
dedicated Internet access through its SuperPOP infrastructure. Customers have
remote access to their servers to remotely "publish" their web site content for
distribution over the Internet. The Company's co-location clients have access to
the SuperPOP for the purpose of administrating their own equipment, or they may
engage the Company to provide administration and maintenance. The Company
derives recurring revenues from co-location through both monthly rental fees
charged for the use of physical facilities and monthly service fees for the
amount of data transferred to and from their web site.
VALUE ADDED SYSTEMS AND NETWORK INTEGRATION
The Company's philosophy is to offer hardware, software and network
components integrated into complete Internet solutions. These integrated
solutions are well suited to complement the Company's Internet access services.
They are designed to enable the Company's clients to communicate more
effectively, efficiently and securely within their own organizations (via
Intranets) as well as outside their organization (via Internet and Extranets).
The Company's primary integration activities include local and wide area network
(LAN & WAN) configuration, web and database server integration and application-
specific software solutions. To deliver these solutions the Company utilizes its
expertise and familiarity with networking hardware, high end web and database
servers and computer software. The result is a turn-key Internet solution which
empowers the Company's clients to fully exploit the Internet as a communications
medium.
The Company's integrated Internet solutions generally include networking
components, high end servers and leading application software. The Company uses
networking components, including routers and switches, from leading
manufacturers such as Cisco Systems and 3COM. The Company's staff of networking
consultants is able to consult with a client on the options available to achieve
the desired goal, sell and then execute the configuration of complex network
architecture. The Company's server solutions can vary in functionality from
delivering email to an individual within a corporate LAN to delivering a
sophisticated, media-rich web site on the Internet to thousands of viewers. With
authorizations to sell servers from manufacturers such as Sun Microsystems,
Compaq, Silicon Graphics and others, the Company is able to deliver the optimal
server solution for the client's application, including configuration,
maintenance and service of that server. The Company also provides
application-specific software solutions from a variety of leading manufacturers,
including Microsoft, Netscape and Oracle. The Company believes that its ability
to provide value-added system and network integration is a key element of
differentiating its complete Internet solutions in the increasingly competitive
ISP market.
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INTERACTIVE DEVELOPMENT. The Company's interactive capabilities focus on
the development of complex web sites, utilizing tools such as HTML, VRML,
3-dimensional computer animation, compositing, motion capture and rendering. The
Company works with content providers such as marketing firms, end users and
production companies to provide technical, design and execution services. A
dedicated team of expert production, design and management personnel handle
large scale multi-media projects.
WEB DEVELOPMENT. The Company's Internet model is structured around
development, as opposed to full-service interactive agency model. The focus is
on an execution of Internet and Intranet initiatives. The Company designs
internal communications products used by businesses for computer based in-house
training and Intranet development. Most recently, the Company has leveraged its
Internet knowledge and instructional design expertise to develop interactive
training applications with rich multi-media content for delivery over corporate
Intranets. The Company recently completed an Intranet based interactive training
program utilizing Macromedia Shockwave technology for an international
pharmaceutical company. Two important Web-based solutions the Company has
developed and popularized are commerce and video streaming.
COMMERCE SOLUTIONS. The Company offers commerce-enabling solutions for its
web-hosting and co-location customers. A "shopping cart" program is available
for those customers looking to sell products, where, as in a retail store, their
clients browse through several products and choose to put some in their
"shopping cart" for purchase. This database driven technology is very flexible,
allowing the Company's clients to change products and prices easily and
cost-effectively. The Company also offers credit card authorization and
processing solutions that enable its customers to accept payment directly over
the Internet. This is accomplished through a Cybercash Server maintained by the
Company. This server can interface with any of the Company's web hosting or
co-location clients, allowing them to offer their clients a Secured Socket Layer
("SSL") environment to type a credit card number in a browser for the purpose of
conducting a business transaction. Whether selling hard goods or membership
services, the Company has helped several of its clients to deploy successful
Internet commerce businesses.
VIDEO STREAMING SOLUTIONS. Since 1995, the Company has offered "media-rich"
solutions over the Internet. Defined primarily as streaming audio and/or video,
rich-media can also include virtual reality markup language ("VRML"),
Macromedia's shockwave and other bandwidth-heavy applications. Streaming is a
technology that allows the end-user to access a file, such as video or audio,
while it is still downloading. With a focus on audio and video, the Company has
successfully integrated rich-media solutions for clients such as CNBC/DowJones
Business Video, which streams live and on-demand video and audio twenty-four
hours a day. The Company is also working with a major international magazine
publisher to stream multiple channels of video, each carrying its own content,
over the Internet. In effect, this would enable the magazine publisher to
produce its own cable-like TV experience without regard to geographic
boundaries.
3-DIMENSIONAL COMPUTER ANIMATION. The Company's animation capability
extends to working in Alias and SoftImage (the two animation packages with the
greatest market share) and to render work on a state-of-the-art render farm from
Silicon Graphics. The Company's expert staff of animation trainers are on hand
for sales consultations to ensure that the solution provided will meet the
client's expectations. When the Company is not using it, the Silicon Graphics
render farm is made available to clients, such as national broadcast companies,
who rent the farm for its powerful processing capability to render their
animations. The Company's animation facilities permeate the Company's diverse
capabilities, as animation is a solution involving hardware, software, training
and the rental of render time.
CD ROM DEVELOPMENT. The Company's authorware developers are capable of
creating computer-based training and computer-based sales tools for
corporations. Often integrated with one of the Company's many server offerings,
WAN or Internet services and training, CD ROM development is a value-added
service many clients seek from a single vendor.
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CONSULTING SERVICES. The Company provides consulting and project management
services for companies making the transition from print to electronic to
Internet presentations and is currently doing a project for the largest and
oldest industrial directory of products and services in the world.
INSTRUCTOR-LED CORPORATE TRAINING. In September 1996, the Company began an
aggressive program to market its in-house training facilities. The Company
provides training services for the more sophisticated computer software programs
that it sells as well as other applications. Training is marketed to large
advertising and publishing firms, banks, financial institutions, manufacturers,
and the like, which send their personnel to the Company's facility to attend one
to five day programs. Most clients maintain an on-going relationship with the
Company's account managers and regularly schedule classes during the year. The
Company's modern seminar facility at its corporate headquarters can accommodate
groups of up to 150. Training rooms are equipped with modern hardware,
projectors, computer desks and other appropriate classroom equipment.
Applications are installed as required by the content of the class. The Company
offers training on multiple platforms, Windows 95, Windows NT, Mac and Unix,
presented by instructors who teach the use of such equipment and programs. Some
instructors are on staff and others are hired on a freelance basis, as needs
dictate. In addition, T-1 access is provided in each classroom for use in
teaching Internet usage and programs. Course materials and training methodology
are customized in order to fit each client's specific needs. The Company's
charges depend upon the size of the class, the complexity of the content and the
equipment required. The Company markets its training on a value-added basis,
rather than as a price-focused commodity product. The Company intends to expand
this operation into a significant source of revenue. The Company also provides
training sessions at its customers' sites. In such events, it provides trainers,
materials and any software or special hardware required. The Company believes
that it has a considerable sales advantage through the ability to offer training
in a state-of-the-art facility using the most qualified trainers.
APPLICATION BASED COURSES. The Company is a training center for high-end
Internet, office and animation applications. The Company offers training on a
wide range of platforms, including Windows 95, Windows NT, Unix and Macintosh,
to personnel of large corporations as well as open enrollment classes for
individuals. Training services focus on office applications (MS Office, Lotus
Notes, Word Perfect, Act, Corel, WP Suite, Lotus Smart Suite), 3-dimensional
computer animation (Alias, Discrete Logic, SoftImage), and Internet applications
(JAVA, JAVA Script, Web Site Server Management, and HTML). The Company also
offers customized classes specifically designed to meet the needs of the
customer.
In order to increase the revenue associated with the delivery of training
services, the training department has increased the variety of courses offered,
stepped up the sales effort and reduced the cost of delivering the classes. In
order to become more efficient, the department has reengineered the way it
sells, sets-up and delivers classes. New process, procedures and sales tools
make it possible to improve the quality of services while reducing the cost of
delivery. Relationship building continues to be the cornerstone of the sales
effort. Account managers develop and maintain their corporate contacts in the
ongoing effort to sell other Company services as well as increase training
sales. Ongoing sales training, goal setting and evaluation insures optimum
performance. Cross selling with other Company sales personnel allows for maximum
revenue from every client.
CUSTOMERS
The Company has established a diversified base of Internet customers in a
wide range of industries, including advertising, publishing, entertainment,
communications, technology and financial services. Since initiating Internet
services in December 1995, the Company has grown its customer base to over 570
large and medium size business enterprise customers, including large companies
such as CNBC/Dow Jones Business Video, General Media International Inc.
(PENTHOUSE MAGAZINE), Nomura Securities, Ogilvy & Mather and BPI Communications
Inc. (BILLBOARD MAGAZINE, ADWEEK).
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While clients may not always demand the exact same combination of the
Company's offerings, there are enough requirements common within an industry,
which allows the Company to offer industry-tailored solutions. Solutions such as
Virtual Private Networking (VPN), electronic commerce transactions, media-rich
streaming, firewall security and other technologies can be tailored according to
specific needs of different industries. This unique capacity to fulfill the
specific industry needs of larger enterprises is what makes Globix a "Total
Business Solutions Provider" and has enabled it to win major customers within
the ranks of the Fortune 1000 in the intensely competitive ISP business, while
maintaining a customer retention rate of over 95%.
GLOBIX NETWORK
SUPERPOP INFRASTRUCTURE. The Globix network is designed to provide
customers with maximum performance and high reliability. A SuperPOP is a
high-capacity Internet data center offering dedicated Internet access, web
hosting and co-location facilities to a large concentration of customers in a
focused geographic area. Globix's Internet services are focused on Fortune 1000
companies where it can provide a complete Internet solution to the customer. By
locating a SuperPOP in major business and financial centers, the Company is able
to deliver the high quality services that demanding corporations require. The
Company's network is densely configured with redundant paths to the Internet
backbone. The components of the Company's SuperPOP infrastructure work in
harmony so that packets of data to or originating from the Company's network
travel efficiently and maintain their integrity.
NETWORK OPERATIONS CENTER ("NOC"). All of the Company's Internet and wide
area network services terminate within the NOC. Isolated from the rest of the
Company's facility, physically secure and separately environmentally controlled,
the NOC is first and foremost a controlled environment suitable for the storage
and maintenance of high-end powerful computer equipment. By the time its
construction is complete (anticipated to be the second quarter of fiscal 1998),
the NOC will boast over 3,000 square feet of raised floor, over 40,000 tons of
humidity-controlled air conditioning, an FM-200 fire suppression system, a
back-up generator capable of powering the NOC during an extended power outage, a
console facility for 24-hour, seven day a week monitoring, and a two-door
pass-key enabled man trap to control access to and from the facility. The result
is a professional environment better suited for computer equipment than anything
all but the largest of the Company's clients could provide for themselves.
The NOC is functionally suited for use by both the Company's engineers and
its co-location clients. In addition to the facility details mentioned above,
the Company's NOC offers amenities designed to make co-location an easier and
more pleasant experience. Desktop workstations are available within the NOC
which provide Internet access and an ability to "test" from an external network.
Two crash carts outfitted with monitors, terminals, keyboards and mice are
available to hook up to a client's own servers for the purpose of
administration. Courtesy telephones are also available.
NETWORK TOPOLOGY. Globix has deployed an Internet connectivity strategy
that takes advantage of its status as a Tier II Internet Service Provider. Tier
II means Internet connectivity is "purchased" from at least one Tier I carrier.
A Tier I carrier is defined as a network provider which maintains its own
physical infrastructure (usually composed of fiber optic lines) and peering
arrangements with other Tier I networks. Examples of Tier I providers include
AT&T, MCI, UUnet and Sprint. The Company takes four diverse feeds from three
separate Tier I providers, each over a unique router. Running BGP and OSPF (two
routing protocols) a piece of data (for example a web page or an e-mail) will
usually enter the Company's network or leave its network over the Tier I
provider best able to deliver that data efficiently and speedily. Furthermore,
the Company's connectivity strategy allows its customers to enjoy unencumbered
Internet access even when one of the Tier I carriers suffers delays, congestion
or an outage. The client's traffic is simply and automatically routed over one
of the other backbones.
The Company connects to its customers with a similar redundant and efficient
strategy. Connected to Bell Atlantic via redundant OC-3 fiber optics terminated
on three diverse fiber Muxes, the Company
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provides leased line connectivity to clients via Bell Atlantic's OC-12 SONET
ring topology. The Company also maintains diverse ISDN circuits available to
clients as a back-up to their leased lines. As a result of the attention paid to
connectivity, the Company is poised to service the most demanding companies in
New York City.
SALES AND MARKETING
The Company's sales and marketing objective is to achieve broad market
penetration within a specific geographic area by targeting enterprises that use
the Internet in their businesses. The Company targets primarily large and medium
size businesses.
As of May 31, 1998, the Company had 38 employees engaged in sales and
marketing. The Company is in the process of expanding its sales and marketing
staff.
TRADE SHOWS. The Company makes broad use of trade shows to deliver a
targeted message to its potential customer base. Trade shows which the Company
attended in 1997 were Internet World, Seybold, Internet & Electronic Commerce,
IT Forum, and PC Expo. Due to the success of the trade shows in 1997 the Company
has expanded both the number of trade shows it will attend in 1998 and will also
have an increased presence at the shows which it attends.
SEMINARS. The Company makes broad use of its seminar facility at its
corporate headquarters. The facility holds approximately 150 people. The Company
holds products seminars during the day for its existing and potential customers.
At night the facility is used by over 20 different Internet related user and
special interest groups. This facility enables the Company to reach a large
audience with topics specific to their individual needs.
DIRECT MAIL. The Company uses direct mail integrated with its other
marketing programs. Direct mail is not only used to increase the number of new
sales leads but also to reinforce sales programs to new customer contacts. In
addition direct mail is used to maintain and expand the Company's relationship
with existing customers.
HARDWARE AND SOFTWARE MANUFACTURERS. The Company has extensive partnership
relationships with the top manufacturers of Internet related hardware and
software. The Company is continually engaged in joint marketing activities with
its partners such as trade shows, seminars, print advertising and direct mail.
PRINT ADVERTISING. The Company advertises in a number of regional business
publications such as The New York Times and Crain's New York Business.
CHANNEL PROGRAM. In order to expand the Company's sales presence in its
target market, the Company has developed a sales channel. The sales channel is
comprised of other sales organizations, primarily telecommunication resellers,
who are compensated for selling the Company's products and services to its
customers.
FIELD SALES. The Company believes it is important to develop a personal
relationship with the customer. To achieve such relationships, the Company has
built a field sales organization that meets with both prospective customers and
existing customers face-to-face on a regular basis. The Company believes this
approach provides an advantage over firms using exclusively telemarketing to
reach the target audience.
PUBLIC RELATIONS. The Company employs an outside public relations firm to
provide coverage in trade and local publications of its activities and events.
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COMPETITION
The market for the Company's services is extremely competitive and the
Company expects that competition will intensify in the future. The Company
believes that its ability to compete successfully depends upon a number of
factors, including market presence, the capacity, reliability, low latency and
security of its network infrastructure, technical expertise and functionality,
performance and quality of services, customization, the pricing policies of its
competitors and suppliers, the variety of services, the timing of introductions
of new services by the Company and its competitors, customer support, the
Company's ability to support industry standards and industry and general
economic trends.
The Company's current and prospective competitors generally may be divided
into the following groups: (i) telecommunications companies, such as AT&T, MCI,
Sprint, Inc., WorldCom, the RBOCs and other CLECs and various cable companies,
(ii) value-added resellers of computer, network and peripheral equipment, (iii)
graphic design and consulting firms, (iv) network consultants and ISPs, such as
BBN, a subsidiary of GTE, ICON CMT, PSI, Exodus Communications, Inc. and other
national and regional providers and (v) nonprofit or educational Internet
connectivity providers. Many of these competitors have greater market presence,
engineering and marketing capabilities, and financial, technological and
personnel resources than those available to the Company. As a result, they may
be able to develop and expand their communications and network infrastructures
more quickly, adapt more swiftly to new or emerging technologies and changes in
customer requirements, take advantage of acquisition and other opportunities
more readily, and devote greater resources to the marketing and sale of their
products and services than can the Company.
The Company believes that new competitors, including large computer
hardware, software, media and other technology and telecommunications companies,
will enter the Company's market, resulting in even greater competition. As a
result of increased competition and vertical and horizontal integration in the
industry, the Company could encounter significant pricing pressure, which, in
turn, could result in significant reductions in the average selling price of the
Company's services. For example, certain of the Company's competitors that are
telecommunications companies may be able to provide customers with reduced
communications costs in connection with their Internet access services, reducing
the overall cost of their solutions and significantly increasing price pressures
on the Company. There can be no assurance that the Company will be able to
offset the effects of any such price reductions with an increase in the number
of its customers, higher revenue from enhanced services, cost reductions or
otherwise. In addition, the Company believes that the Internet access services
businesses are likely to encounter consolidation in the near future, which could
result in increased price and other competition. Such increased price or other
competition could result in erosion of the Company's market share and could have
a material adverse effect on the Company's business, financial condition and
results of operations. There can be no assurance that the Company will have the
financial resources, technical expertise or marketing and support capabilities
to successfully meet its competition.
GOVERNMENT REGULATION; POTENTIAL TAXES
The FCC currently does not regulate value-added network software or computer
equipment related services that transport data or voice messages over
telecommunication facilities. The Company provides value-added IP-based network
services, in part, through data transmissions over public telephone lines. These
transmissions are governed by regulatory policies establishing charges and terms
for wireline communications. Operators of these types of value-added networks
that provide access to regulated transmission facilities only as part of a data
services package currently are excluded from regulations that apply to
"telecommunications carriers" and as such the Company is not currently subject
to direct regulation by the FCC or any other governmental agency, other than
regulations applicable to businesses generally. However, in the future the
Company could become subject to regulation by the FCC or another regulatory
agency as a provider of basic telecommunications services.
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Currently, the FCC is reviewing its regulatory positions and could seek to
impose common carrier regulation on the network transport and communications
facilities aspects of an enhanced or information service package. Further, the
FCC could conclude that the Company's protocol conversions, computer processing,
and interaction with customer-supplied information are insufficient to afford
the Company the benefits of the enhanced or information service classification,
and thereby may seek to regulate some segments of the Company's activities as
basic telecommunications services. While state public utility commissions
generally have declined to regulate enhanced or information services, some
states have continued to regulate particular aspects of enhanced services in
limited circumstances, such as where they are provided by CLECs. Moreover, the
public service commissions of certain states continue to review potential
regulation of such services. There can be no assurance that regulatory
authorities of states within which the Company makes its services available will
not seek to regulate aspects of these activities as telecommunications services.
Changes in the regulatory environment relating to the Internet connectivity
market, including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition from
the RBOCs or other telecommunications companies, could affect the prices at
which the Company may sell its services. The Company cannot predict the impact,
if any, that future regulation or regulatory changes may have on its business
and there can be no assurance that such future regulation or regulatory changes
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
In addition, a number of state and local government officials have asserted
the right or indicated a willingness to impose taxes on Internet-related
services and commerce, including sales, use and access taxes. Certain proposed
federal legislation is being considered that would, if enacted as currently
proposed, place a moratorium on the imposition by state and local governments of
new taxes on ISP's or other businesses involved in Internet-related commerce.
However, there can be no assurance that such legislation will be enacted or, if
enacted, that such legislation will embody the features referred to herein.
Furthermore, there can be no assurance that federal taxes will not be imposed
upon such services. The Company cannot predict whether the imposition of any
such additional taxes would have a material adverse effect on the Company's
business, financial condition or results of operations.
EMPLOYEES
As of May 31, 1998, the Company employed approximately 104 full-time
employees. Of these, approximately 15 are management or department heads, 14 are
in administration and support, 38 are in sales and marketing, and 37 are in
technical and customer service. In addition to its full-time employees, the
Company also employs part-time personnel from time to time in various
departments. None of the Company's employees are covered by a collective
bargaining agreement. From time to time, the Company also employs a number of
part-time employees in various departments. The Company believes that its
employee relations are satisfactory. See "Risk Factors--Risks Associated with
Management of Potential Growth and Expansion".
FACILITIES
The Company leases approximately 32,000 square feet of space in New York,
New York, which it uses as its principal executive offices, sales, service and
training center, shipping and receiving depot, at a current annual base rent of
$418,812, which escalates to $563,547 in the final year. Such lease expires in
2007.
On June 2, 1998, the Company entered into an agreement to purchase a
building located at 139 Centre Street, New York, New York. The Company intends
to relocate its offices and New York SuperPOP facility into such building. The
total cost of the building purchase, equipment purchases and relocation expenses
to the Company is expected to be approximately $27 million. The Company intends
to place a mortgage on the building. The building contains approximately 160,000
square feet of space and the Company intends to use approximately 40,000 square
feet to house its SuperPOP facility. The Company
54
<PAGE>
intends to utilize the remaining space for its operations and may make space
available for rent to the Company's clients that maintain servers on the
premises. The building purchase closed on July 1, 1998 and that Company
anticipates that it will begin occupying the building in September 1998. The
Company has the option of maintaining or vacating its present space.
The Company considers that, in general, its physical properties are well
maintained, in good operating condition and adequate for its purposes.
LEGAL PROCEEDINGS
In January 1997, an action was commenced in the Supreme Court of the State
of New York, County of New York against General Media International Inc., the
Company and two individuals. The Complaint alleges that the Company tortiously
interfered with the plaintiff's contractual and business relations with General
Media International Inc. On April 15, 1997, counsel for the plaintiffs advised
the Company that the litigation was put on hold. No further steps have been
taken by plaintiffs to pursue their claims against the Company. In the Company's
opinion, plaintiffs' claims against the Company are without merit.
As of the date hereof, there are no other legal proceedings pending against
the Company. However, the Company has been informed by counsel for Rickel &
Associates, Inc. that it believes it is entitled to a finder's fee of
approximately $200,000 in connection with the Company's private placement of
400,000 shares of Common Stock in September 1997. The Company believes that it
has substantial defenses and counterclaims in the event a litigation were
commenced against it on this basis.
Bell Atlantic had objected to the Company's use of the name Bell Technology
Group Ltd. At the 1998 Annual Meeting of Shareholders held on April 16, 1998,
the Company's stockholders approved an amendment to its Certificate of
Incorporation to change the name of the Company to Globix Corporation, or such
other name as the directors shall determine. The change to the Certificate of
Incorporation became effective on June 1, 1998, and on such date the Company's
name was changed to Globix Corporation.
55
<PAGE>
MANAGEMENT
As of May 31, 1998, the Company's directors, executive officers and key
employees were as follows:
<TABLE>
<CAPTION>
HELD
OFFICE
NAME AND AGE POSITION WITH THE COMPANY SINCE
- --------------------------------- ----------------------------------------------------------------------- -----------
<S> <C> <C>
Marc H. Bell, 30 (1) President, Chief Executive Officer and Director 1989
Robert B. Bell, 58 (2) Executive Vice President, Chief Financial Officer and Director 1994
Marc Jaffe, 31 Vice President, Internet Services 1995
William T. Jahnke, 44 Vice President, Solution Sales 1995
Alan Levy, 36 Treasurer and Chief Accounting Officer 1997
Scott Safran, 42 Vice President, Training and Interactive Development 1997
Jerrold Hoffman, 54 Director of Purchasing 1994
Richard Topolewski, Jr., 36 Director of Internet Sales 1997
Paul Asher, 28 Secretary and Manager of Special Projects 1994
Leslie Bell, 26 Assistant Secretary and Director of Corporate Training 1994
Tsuyoshi Shiraishi, 53 Director 1995
Martin Fox, 61 (1)(2) Director 1995
Dr. Richard Videbeck, 74 (2) Director 1995
Lord Anthony St. John, 40 Director 1997
Sid Paterson 57 (1) Director 1998
</TABLE>
- ------------------------
(1) Member of Stock Option Committee
(2) Member of Audit Committee
MARC H. BELL has been the President and Chief Executive Officer since he
founded the Company in 1989. Since re-focusing the Company on Internet-related
services, Mr. Bell has appeared on numerous television broadcasts and has been
frequently quoted in numerous national publications regarding Internet-related
topics. Mr. Bell has always been interested in computer technology. While in
high school, Mr. Bell served as a free-lance computer consultant including
instructing the faculty at Fordham University on teaching computers in the
classroom. In 1983, Mr. Bell wrote the second bulletin board system ("BBS")
program available for the Apple II series computer called Camelot BBS. In
addition, Mr. Bell has worked in a variety of fields, including advertising and
publishing, utilizing cutting-edge computer technology. Mr. Bell has a B.S.
degree in accounting from Babson College and an M.S. degree in Real Estate
Finance from New York University.
ROBERT B. BELL has served as Executive Vice President and Chief ]Financial
Officer of the Company and its corporate predecessor since 1994. Prior to
joining the Company, Mr. Bell was a practicing attorney in New York City at the
firm of Bell, Kalnick, Beckman, Klee and Green, which Mr. Bell founded in the
early 1970s. Prior to 1994, Mr. Bell was for many years also an Adjunct
Professor at New York University. He is primarily responsible for the
administration of the Company's financial affairs and day to day business
operations. Robert Bell is the father of Marc H. Bell. Mr. Bell has a B.S.
degree from New York University and a J.D. degree from the University of
California at Berkeley.
56
<PAGE>
MARC JAFFE, Vice President, Internet Services, joined the Company in early
1995 to lead the Company's Internet services business. Prior to joining the
Company, Mr. Jaffe has extensive experience in the use of computers and
telecommunications in the advertising and marketing industry. Mr. Jaffe recently
developed an Internet-focused marketing strategy that won the prestigious
CreaTech Award, presented by Advertising Age magazine, and has spoken at
numerous Internet conferences. Prior to joining the Company, Mr. Jaffe was a
department manager at Sid Paterson Advertising Inc. in New York City since 1989.
Mr. Jaffe graduated from Colgate University in 1989, where he received a
Bachelor of Arts Degree.
WILLIAM T. JAHNKE has been a Vice President of the Company since March 1997
and has been in charge of value-added system integration sales of the Company
since August 1995. Prior to joining the Company, Mr. Jahnke was president and
chief operating officer of Vernon Computer Rentals and Leasing from February
1989 to December 1994, where he pioneered and implemented a nationwide asset
management program for Apple which is used by several thousand U.S. sales
representatives. Mr. Jahnke received a B.S. Degree in Computer Science from
Seneca College in 1975.
ALAN LEVY joined the Company as Treasurer and Chief Accounting Officer in
February 1997. From March 1994 to February 1997, Mr. Levy was the Assistant to
the Vice President of Finance of Del Laboratories, Inc., a manufacturer and
wholesaler of cosmetics and over-the-counter pharmaceuticals. Prior to that, Mr.
Levy was a Technical Manager with the American Institute of Certified Public
Accountants from August 1990 to March 1994. Prior to August 1990, Mr. Levy was a
Manager for Ernst & Young. He is a Certified Public Accountant and received his
Bachelor's degree in Public Accounting from Long Island University, C.W. Post
Campus.
SCOTT SAFRAN has been Vice President, Training and Interactive Development
since June 1997 and the Director of Corporate Training since joining the Company
in March 1996. Prior to joining the Company he was a Senior Account Executive at
IBM Skill Dynamics Corporation from December 1994 to October 1995. From December
1989 to December 1994, Mr. Safran was in various sales positions with AT&T
Networking Systems. Mr. Safran has a Bachelor of Arts in English Literature and
Master of Business Administration degrees from St. John's University.
JERROLD HOFFMAN, the Company's Director of Purchasing since January 1994,
has extensive experience in purchasing, production, sales and budgeting. Prior
to joining the Company, Mr. Hoffman served for eight years as production manager
at A. Kamhi, Inc., an apparel manufacturer. He received his Bachelor's degree in
economics from Hunter College.
RICHARD TOPOLEWSKI, JR., has been the Company's Director of Internet Sales
since May 1997. Mr. Topolewski has 13 years' experience in the
telecommunications industry. Prior to joining the Company, Mr. Topolewski was
the Director of Northeast Agent Sales for MFS Communications from February 1993
through May 1997. Prior to that, he was with Metromedia Communications as
National Sales Manager from November 1990 through February 1993. He received a
Bachelor of Science degree from Johnson and Wales University in Business
Management.
PAUL ASHER currently serves as the corporate Secretary and Manager of
Special Projects. Mr. Asher joined the Company in July 1994. Prior to joining
the Company, Mr. Asher had his own equipment rental company. Mr. Asher has a
Bachelor of Arts degree from the University of Rochester.
LESLIE BELL currently serves as Assistant Secretary and Director of
Corporate Training. Ms. Bell joined the Company in March, 1994 after graduating
from New York University with a Bachelor of Fine Arts degree.
TSUYOSHI SHIRAISHI has been a director of the Company since July 1, 1994.
Mr. Shiraishi has been the Chairman of Century World PTE Ltd., an investment
consulting firm, and the Managing Director of Harpoon since 1992. Prior to that,
Mr. Shiraishi was the Director of Marketing & Investment for Kajima Overseas
Asia PTE Ltd., a subsidiary of Kajima Corporation, an international construction
company, since
57
<PAGE>
1990. In addition, since 1990, Mr. Shiraishi has been Vice Chairman of Century
International Hotels, which operates and manages 17 hotels in the Pacific Rim.
He is the sole shareholder of Harpoon, which acquired 50% of the capital stock
of the Company as of July 1, 1994. Mr. Shiraishi is a Japanese citizen and a
resident of Singapore.
MARTIN FOX has been, for more than five years, the President and a director
of Initio, Inc., a publicly owned mail order retailer of consumer products.
DR. RICHARD VIDEBECK has been an independent consultant in consumer risk
analysis, particularly for retailers and banks since 1983. From 1974 until 1986,
Dr. Videbeck was a Professor of Sociology at the University of Illinois at
Chicago. From 1974 until 1977, Dr. Videbeck was the Dean of the Doctor of Arts
Program of the Graduate College of the University of Illinois at Chicago.
ANTHONY ST. JOHN, LORD ST. JOHN OF BLETSO is a member of the House of Lords
of the Parliament of the United Kingdom. He also serves as a consultant to
Merrill Lynch and is a Registered Representative of the London Stock Exchange.
SID PATERSON has been President and Chief Executive Officer of Sid Paterson
Advertising Inc. for more than five years.
DIRECTOR COMPENSATION
The directors currently do not receive any cash compensation (other than
reimbursement of travel expenses) for their services. For the fiscal year ended
September 30, 1997, Dr. Videbeck received the sum of $2,000. For the fiscal year
ended September 30, 1997, Mr. Fox received the sum of $4,000 as compensation for
services rendered as a director and $9,516 for services as a financial advisor
to the Company. Lord St. John, upon becoming a director of the Company was
granted options to purchase 10,000 shares of common stock at a price of $7.25.
During the fiscal year ended September 30, 1997, Dr. Videbeck and Mr. Fox were
each granted options to purchase 3,000 shares of common stock at a price of
$6.125 per share. During the second quarter of fiscal 1998, Messrs. Fox and
Paterson and Dr. Videbeck were each granted options to purchase 10,000 shares of
Common Stock at a price of $6.50 per share.
STOCK OPTION COMMITTEE
The Company's Board of Directors currently has a Stock Option Committee that
administers the Company's 1995 Stock Option Plan and 1998 Stock Option Plan. The
Stock Option Committee currently consists of Messrs. Marc H. Bell, Fox and
Paterson.
AUDIT COMMITTEE
The Company's Board of Directors currently has an Audit Committee that
monitors the corporate financial reporting and the internal and external audits
of the Company, reviews and approves material accounting policy changes,
monitors internal accounting controls, recommends engagement of independent
auditors, reviews related-party transactions and performs other duties as
prescribed by the Board of Directors. The Audit Committee currently consists of
Messrs. Robert B. Bell and Fox and Dr. Videbeck.
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<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation paid to Marc H. Bell, the
Company's Chief Executive Officer and to Robert B. Bell, the only other
executive officer who earned in excess of $100,000 in any of the three fiscal
years ended September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
COMPENSATION
----------------------------------
LONG-TERM
AWARDS
ANNUAL COMPENSATION SECURITIES
UNDERLYING
--------------------- OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY SAR'S
- --------------------------------------------------------------------------------- --------- ---------- -----------
<S> <C> <C> <C>
Marc H. Bell..................................................................... 1997 $ 200,000 --
President and Chief Executive Officer 1996 $ 165,000 --
1995 $45,000 --
Robert B. Bell................................................................... 1997 $ 125,000 90,000(1)
Executive Vice President and Chief Financial Officer 1996 $ 100,504 --
1995 $18,000 --
</TABLE>
- ------------------------
(1) The Company did not grant any stock options to Marc H. Bell or Robert B.
Bell during the fiscal year ended September 30, 1997. However, the exercise
price for the 90,000 options owned by Robert B. Bell were reset at September
30, 1997 to $6.125, the market value of the underlying shares on such date.
The following table sets forth information concerning the repricing of stock
options made during fiscal 1997. As of September 30, 1997, the Company had not
granted any options to Marc H. Bell.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------
<S> <C> <C> <C> <C>
% OF TOTAL
NUMBER OF OPTIONS EXERCISE
OPTIONS GRANTED TO OR BASE
REPRICED/ EMPLOYEES IN PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($/SH)(1) DATE
- ---------------------------------------------------------------- ----------- --------------- ----------- -----------
Robert B. Bell.................................................. 90,000(2) 24.9% $ 6.125 10/16/05
</TABLE>
- ------------------------
(1) Based upon the fair market value of the Company's Common Stock on the date
the exercise price was reset.
(2) All such options are currently exercisable.
59
<PAGE>
Mr. Bell did not exercise any of his options to acquire shares during fiscal
1997. The following table sets forth information concerning the fiscal year end
value of unexercised options:
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE-MONEY
OPTIONS AT OPTIONS AT
NAME SEPT. 30, 1997(1) SEPT. 30, 1997(2)
- ---------------------------------------------------------------------- --------------------- -----------------------
<S> <C> <C>
Robert B. Bell........................................................ 90,000 $ 0
</TABLE>
- ------------------------
(1) All options are currently exercisable.
(2) Calculation based upon the closing price of the Company's Common Stock on
the Nasdaq SmallCap Market on September 30, 1997 of $6.125 per share.
EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS
In October 1995, the Company entered into an employment agreement with Marc
H. Bell for a period of five years. Pursuant to the terms of the agreement, Mr.
Bell received a base salary of $200,000 per year.
Pursuant to his current employment agreement, the Company loaned Mr. Bell a
total of $145,408 during fiscal 1997. The loan is due in 2002 and bears interest
at the rate of 8.75% per annum. In the second quarter of fiscal 1998, the
Company granted Mr. Bell options to purchase 142,000 shares of Common Stock at a
purchase price of $6.50 per share and 69,500 shares of Common Stock at a
purchase price of $7.15 per share. None of such stock options are currently
exercisable. The Company has also purchased a key person life insurance policy
on Mr. Bell in the amount of $1,000,000. The Company is the sole beneficiary of
such policy.
Effective June 1, 1998, the Company terminated Mr. Bell's former employment
agreement and entered into a new employment agreement, which will terminate on
June 30, 2005. The new employment agreement provides for a base salary of
$350,000 per year, increasing annually at the rate of 5% per year starting
October 1, 1999. In addition, Mr. Bell will receive an annual bonus equal to
10,000 times the increase, if any, of the fair market value per share of the
Company's Common Stock measured during the 12-month period ending on June 30 of
each year of the agreement, commencing with the year beginning July 1, 1998. Mr.
Bell will also be entitled to receive stock options to purchase that number of
shares as shall equal to 25% of the increase, if any, in the number of issued
and outstanding shares of Common Stock during the 12-month period ending on
September 30 of each year of the agreement, provided that such increase was
attributable to equity offerings or acquisitions. The new employment agreement
also provides that Mr. Bell may require the Company to lend him a total of
$155,000. Any loan taken thereunder will mature five years after the date made
and bear interest at the rate of 8% per annum. However, the interest accruing
during the first two years is not payable until the end of such two year period.
STOCK OPTION PLANS
1995 STOCK OPTION PLAN
The Company has adopted the 1995 Stock Option Plan (the "Stock Option
Plan"), pursuant to which options to acquire an aggregate of 360,000 shares of
Common Stock have been reserved for issuance to employees, officers or directors
of, or consultants to, the Company. The Stock Option Committee has discretionary
authority to determine the types of stock options to be granted, the persons
eligible to receive stock options, those to whom options may be granted, the
number of shares to be subject to such options, the exercise price of such
option and the terms of the stock option agreements. The exercise price may be
paid in cash, certified or bank check, or in stock of the Company valued at its
then fair market value. Options are non-transferable (including pursuant to a
final divorce decree or property division settlement
60
<PAGE>
or agreement) except by permission of the Board of Directors, will or by the
laws of descent and distribution. The Company has filed a registration statement
on Form S-8 with respect to the shares of Common Stock to be issued upon the
exercise of the options granted under the 1995 Stock Option Plan.
As of February 28, 1998, options to purchase approximately 338,000 shares of
Common Stock were outstanding under the 1995 Stock Option Plan, including
options to purchase approximately 172,500 shares granted to the Company's
executive officers and directors. The exercise prices of such options range from
$5.25 to $6.125 per share. The term of the options is ten years from the date of
grant.
1998 STOCK OPTION PLAN
On January 8, 1998, the Board of Directors of the Company adopted the 1998
Stock Option Plan (the "1998 Stock Option Plan"), pursuant to which options to
acquire an aggregate of 1,200,000 shares of Common Stock have been reserved for
issuance to employees, officers or directors of, or consultants to, the Company.
The Stock Option Committee has discretionary authority to determine the types of
stock options to be granted, the persons eligible to receive stock options,
those to whom options may be granted, the number of shares to be subject to such
options, the exercise price of such options and the terms of the stock option
agreements. The exercise price may be paid in cash, certified or bank check, or
in stock of the Company valued at its then fair market value. Options are
non-transferable (including pursuant to a final divorce decree or property
division settlement or agreement) except by permission of the Board of
Directors, will or by the laws of descent and distribution. The 1998 Stock
Option Plan was approved by the Company's stockholders at the 1998 Annual
Meeting of Stockholders held on April 16, 1998. The Company has filed a
registration statement on Form S-8 with respect to the shares of Common Stock to
be issued upon the exercise of the options granted under the 1998 Stock Option
Plan.
As of May 31, 1998, the Company had granted options to purchase
approximately 597,000 shares of Common Stock under the 1998 Stock Option Plan,
including options to purchase 361,500 shares granted to the Company's executive
officers and directors. The exercise price of such options range from $6.50 to
$13.25 per share. The term of the options is 10 years from the date of grant.
CERTAIN TRANSACTIONS
Mr. Marc H. Bell currently has a loan outstanding from the Company. As of
May 31, 1998, the outstanding principal balance of such loan was $145,408. The
loan is due in 2002, and bears interest at the rate of 8.75% per annum. See
"Management--Employment Contracts, Termination of Employment and Change of
Control Arrangements".
61
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of May 31, 1998 by each beneficial
owner of more than 5% of the outstanding shares thereof, and by each director,
each executive officer named in the Summary Compensation Table and all executive
officers and directors of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT
NAME AND ADDRESS OWNED(1) OF CLASS
- ------------------------------------------------------------------------------------- ----------------- -----------
<S> <C> <C>
Marc H. Bell (2)..................................................................... 1,682,142 47.4%
295 Lafayette Street
New York, New York 10012
Tsuyoshi Shiraishi (3)............................................................... 862,500 24.3%
Harpoon Holdings, Ltd.
2 Handy Road
#11-09 Cathay Building
Singapore 229233
Robert B. Bell (4)................................................................... 120,000 3.3%
295 Lafayette Street
New York, New York 10012
Martin Fox (4)....................................................................... 16,000 *
2001 Tonnelle Avenue
No. Bergen, New Jersey 07047
Dr. Richard Videbeck (4)............................................................. 16,000 *
3249 East Angler's Stream
Avon Park, Florida 33825
Lord Anthony St. John (5)............................................................ 15,000 *
97 Cadogan Gardens
London SW32 RE
Sidney Paterson......................................................................
99 Madison Avenue
New York, New York 10016 20,000 *
All executive officers and directors as a group (11 persons)(6)...................... 1,884,973 50.4%
</TABLE>
- ------------------------
* Less than 1%
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if such person has or shares
the power to vote or direct the voting of such security or the power to
dispose or direct the disposition of such security. A person is also deemed
to be a beneficial owner of any securities if that person has the right to
acquire beneficial ownership within 60 days. Accordingly, more than one
person may be deemed to be a beneficial owner of the same securities. Unless
otherwise indicated by footnote, the named entities or individuals have sole
voting and investment power with respect to the shares of Common Stock
beneficially owned.
(2) Includes 819,642 shares owned directly by Mr. Bell and the 862,500 Harpoon
Shares which are subject to the October 1995 Irrevocable Proxy entered into
between Harpoon and Marc H. Bell, pursuant to which Harpoon has granted Mr.
Bell the sole right to vote the Harpoon Shares with respect to the election
of the Company's directors. The Irrevocable Proxy terminates in October
2005.
(3) Mr. Shiraishi, a director of the Company, is the sole shareholder of
Harpoon. See "Management".
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<PAGE>
(4) The named individual has the right to acquire the number of shares shown
pursuant to a currently exercisable stock option.
(5) Includes the right to acquire 10,000 shares pursuant to a currently
exercisable stock option.
(6) Includes currently exercisable stock options to purchase 187,831 shares.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of the Company consists of 20,000,000 shares of
Common Stock, par value $.01 per share, and 500,000 shares of Preferred Stock,
par value $.01 per share. The Preferred Stock may be issued with such rights,
designations and privileges (including redemption and voting rights) as the
Board may, from time to time, determine. The Company's Board of Directors
approved, and the Company's stockholders at the 1998 Annual Meeting of
Stockholders held on April 16, 1998 adopted, an amendment to the Company's
Certificate of Incorporation to increase the number of authorized shares of
Common Stock from 10,000,000 to 20,000,000, par value $.01 per share. This
amendment to the Certificate of Incorporation became effective on June 1, 1998.
COMMON STOCK
As of May 31, 1998 there were 3,552,344 shares of Common Stock outstanding
which are held of record by approximately 35 stockholders, which does not
include individual participants in security position listings.
Holders of Common Stock are entitled to one vote per share on all matters to
be voted upon by the stockholders of the Company. The holders of the Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of funds legally available therefor. See "Dividend
Policy". In the event of a liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to share ratably in all assets
remaining after payment of liabilities, subject to the prior liquidation rights
of any outstanding Preferred Stock. The Common Stock has no preemptive,
redemption, conversion or other subscription rights. The outstanding shares of
Common Stock are fully paid and non-assessable. The rights, preferences and
privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock that the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval,
to issue up to 500,000 shares of "blank check" Preferred Stock in one or more
series and to fix the rights, preferences, privileges and restrictions granted
or imposed upon any unissued shares of Preferred Stock and to fix the number of
shares constituting any series and the designations of such series.
The issuance of Preferred Stock may have the effect of delaying or
preventing a change in control of the Company. The issuance of Preferred Stock
could decrease the amount of earnings and assets available for distribution to
the holders of Common Stock or could adversely affect the rights and powers,
including voting rights, of the holders of the Common Stock. In certain
circumstances, such issuance could have the effect of decreasing the market
price of the Common Stock. As of the closing of the Offering, no shares of
Preferred Stock will be outstanding, and the Company currently has no plans to
issue any shares of Preferred Stock.
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<PAGE>
IPO WARRANTS
As of June 8, 1998, the Company had outstanding 592,055 Warrants to purchase
shares of its Common Stock, which were issued in connection with its initial
public offering ("IPO Warrants"). The holders of the IPO Warrants were entitled
to purchase one share of Common Stock at a price of $7.44 per share at any time
until the earlier to occur of (i) the close of business the day immediately
preceding the date fixed by the Company for redemption of the IPO Warrants, and
(ii) the automatic expiration of the IPO Warrants on January 23, 2001. The IPO
Warrants were subject to redemption by the Company at a redemption price of $.10
per IPO Warrant upon 30 days' prior written notice to the holders of the IPO
Warrants. The redemption was conditioned upon the average closing bid quotation
of the Common Stock as reported on Nasdaq, if traded thereon, (or if not traded
thereon, the average closing price if listed on a national securities exchange
or other reporting system that provides last sale price), having been at least
150% of the then current exercise price of the IPO Warrants ($11.16 per share)
for a period of 20 consecutive trading days ending on the third day prior to the
date on which the Company gave notice of redemption. This condition had been
satisfied. On June 8, 1998, the Company announced that it had called its
outstanding IPO Warrants for redemption on July 9, 1998. The IPO Warrants were
exercisable until the close of business on July 8, 1998. 581,172 IPO Warrants
were exercised prior to the scheduled redemption date. As of July 9, 1998,
holders of the remaining IPO Warrants have no rights except to receive, upon
surrender of the IPO Warrants, the redemption price of $.10 per IPO Warrant.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, Section 203 of the Delaware Law prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the Board of Directors and the holders of at least 66 2/3% of the outstanding
shares of voting stock not owned by the interested stockholder. The existence of
this provision would be expected to have the effect of discouraging takeover
attempts, including attempts that might result in a premium over the market
price for the shares of Common Stock held by stockholders.
The Company's Certificate of Incorporation provides that any action required
or permitted to be taken by the stockholders of the Company may be taken only at
a duly called annual or special meeting of the stockholders. The Certificate of
Incorporation and By-laws leave to the directors the sole right to change the
size of the Board of Directors and to fill vacancies on the Board of Directors.
The By-laws also establish procedures, including advance notice procedures, with
regard to the nomination, other than by or at the direction of the Board of
Directors, of candidates for elections as directors or for stockholder proposals
to be submitted at stockholder meetings. In addition, Marc H. Bell has
beneficial ownership of approximately 49% of the Common Stock. Therefore, he has
effective control over the election of the Company's Board of Directors.
The Board of Directors of the Company has amended the By-Laws to provide
that one third of the issued and outstanding shares present at a meeting of the
shareholders of the Company shall constitute a quorum for the transaction of all
business which shall come before the meeting.
As permitted by the Delaware Law, the Company has included in its
Certificate of Incorporation a provision to eliminate the personal liability of
its directors for monetary damages for breach or alleged breach of their
fiduciary duties as directors, subject to certain exceptions. In addition, the
By-laws of the Company provide that the Company is required to indemnify its
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and the
Company is required to advance expenses to its officers and directors as
incurred in connection
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<PAGE>
with proceedings against them for which they may be indemnified. At present, the
Company is not aware of any pending or threatened litigation or proceeding
involving a director, officer, employee or agent of the Company in which
indemnification would be required or permitted. The Company believes that the
provisions discussed above are necessary to attract and retain qualified persons
as directors and officers.
The Company has been advised that it is the position of the Commission that
insofar as the foregoing provision may be invoked to disclaim liability for
damages arising under the Securities Act, such provision is against public
policy as expressed in the Securities Act and is therefore unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock and IPO
Warrants is Continental Stock Transfer & Trust Company.
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DESCRIPTION OF UNITS
Each Unit issued in the Existing Notes Offering consisted of $1,000
principal amount at maturity of the Existing Notes and one Warrant, each Warrant
representing the right to purchase 3.52 shares of Common Stock. The Existing
Notes and the Warrants will not be separable until the earliest to occur of (i)
180 days from the date of issuance, (ii) a Change in Control, (iii) the
occurrence of an Event of Default, (iv) the effective date of the Exchange Offer
Registration Statement, or (v) such earlier date as may be determined by the
Initial Purchaser (the "Separation Date"). The Warrants will not be subject to
the terms of the Exchange Offer and will remain restricted securities subject to
certain transfer restrictions until such time as they become unrestricted
pursuant to the Securities Act, see "Description of Warrants--Registration
Rights."
DESCRIPTION OF NOTES
The Existing Notes were issued and the Exchange Notes will be issued under
an Indenture dated as of April 30, 1998 (the "Indenture") between the Company
and Marine Midland Bank, as trustee (the "Trustee"), a copy of the form of which
will be made available to prospective purchasers of the Exchange Notes upon
request to the Company. References to "(Section)" herein mean the applicable
Section of the Indenture.
The following summaries of the material provisions of the Indenture, the
Escrow Agreement and the Registration Rights Agreement do not purport to be
complete, and where reference is made to particular provisions of the Indenture,
the Escrow Agreement, and the Registration Rights Agreement such provisions,
including the definitions of certain terms, are qualified in their entirety by
reference to all of the provisions of the Indenture and those terms made a part
of the Indenture, the Escrow Agreement and the Registration Rights Agreement by
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
Existing Notes have not been registered under the Securities Act and are subject
to certain transfer restrictions. For definitions of certain capitalized terms
used in the following summary, see "-- Certain Definitions" or "--Registration
Rights."
GENERAL
The Notes will mature on May 1, 2005, will be limited to $160.0 million
aggregate principal amount, and will be unsecured senior obligations of the
Company. Each Note will bear interest at the rate set forth on the cover page
hereof from the date of issuance or from the most recent interest payment date
to which interest has been paid, payable semiannually in arrears on May 1 and
November 1, in each year, commencing November 1, 1998, to the Person in whose
name the Note (or any predecessor Note) is registered at the close of business
on the April 15 or October 15 immediately preceding such interest payment date.
Interest will be computed on the basis of a 360-day year comprised of twelve
30-day months. (Sections 202, 301, 309 and 313)
Principal of, premium, if any, and interest (including Additional Interest)
on the Notes will be payable, and the Notes will be exchangeable and
transferable, at the office or agency of the Company in The City of New York
maintained for such purposes (which initially will be the corporate trust office
of the Trustee); PROVIDED, HOWEVER, that payment of interest may be made at the
option of the Company by check mailed to the Person entitled thereto as shown on
the security register. (Sections 301, 305 and 1002) The Notes will be issued
only in fully registered form without coupons, in denominations of $1,000 and
any integral multiple thereof. (Section 302) No service charge will be made for
any registration of transfer, exchange or redemption of Notes, except in certain
circumstances for any tax or other governmental charge that may be imposed in
connection therewith. (Section 305)
All payments of principal and interest will be made by the Company in same
day funds. The Notes will trade in the Same-Day Funds Settlement System of The
Depository Trust Company (the "Depositary" or
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"DTC") until maturity, and secondary market trading activity for the Notes will
therefore settle in same day funds.
When issued, the Exchange Notes will be a new issue of securities with no
established trading market. No assurance can be given as to the liquidity of the
trading market for the Notes. See "Risk Factors-- Absence of a Public Market for
the Units, Notes and Warrants; Restrictions on Resale."
ESCROW ACCOUNT
Concurrently with the consummation of the Existing Notes Offering, pursuant
to the Indenture, the Company placed $57 million of the net proceeds of the
Existing Notes Offering in an escrow account (the "Escrow Account") held by the
Trustee for the benefit of the Trustee and Holders in accordance with an escrow
and security agreement to be entered into between the Company and Marine Midland
Bank, as escrow agent (the "Escrow Agreement"). The Escrow Agreement provides,
among other things, that funds shall be disbursed from the Escrow Account for
interest payments the Company makes on the Notes. The escrow agent will be
instructed to cause all funds in the Escrow Account to be invested, pending
disbursement, in U.S. Government Securities.
Under the Escrow Agreement, the Company granted to the Trustee, for the
benefit of the Holders, a first priority and exclusive security interest in the
Escrow Account, the earnings thereon and the proceeds thereof (the "Escrow
Collateral"). The Escrow Agreement provides that the Trustee may foreclose on
the Escrow Collateral upon acceleration of the maturity of the Notes. Under the
terms of the Indenture, the proceeds of the Escrow Collateral will be applied,
first, to amounts owing to the Trustee in respect of fees and expenses of the
Trustee, and second, to the Indenture Obligations of the Company to the Holders
under the Notes and the Indenture. The ability of Holders to realize upon the
Escrow Collateral may be subject to certain bankruptcy law limitations in the
event of the bankruptcy of the Company. See also "Risk Factors--Bankruptcy and
Perfection Issues Related to Escrow Account."
Upon payment in full of the first six scheduled interest payments (including
any Additional Interest), if no Default or Event of Default has occurred and is
continuing, the Escrow Collateral will be released to the Company.
OPTIONAL REDEMPTION
The Notes are not redeemable at the Company's option prior to May 1, 2001.
Thereafter, the Notes will be subject to redemption at any time at the option of
the Company, in whole or in part, on not less than 30 nor more than 60 days'
prior notice in amounts of $1,000 or an integral multiple thereof at the
following redemption prices (expressed as percentages of the principal amount),
if redeemed during the 12-month period beginning on May 1 of each of the years
indicated below:
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- -------------------------------------------------------------------------------- ----------------
<S> <C>
2001 106.500%
2002 104.333%
2003 102.166%
</TABLE>
and thereafter at 100% of the principal amount, in each case, together with
accrued and unpaid interest (including Additional Interest) if any, to the
redemption date.
In addition, at any time prior to May 1, 2000, the Company may, at its
option, use the net proceeds of one or more Public Equity Offerings or the sale
of Common Stock (other than Disqualified Stock) of the Company to a Strategic
Investor in a single transaction or a series of related transactions, to redeem
up to an aggregate of 35% of the aggregate principal amount of Notes originally
issued under the Indenture at a redemption price equal to 113% of the aggregate
principal amount thereof, plus accrued and unpaid interest thereon (including
Additional Interest), if any, to the redemption date; provided that at least 65%
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of the initial aggregate principal amount of Notes remains outstanding
immediately after the occurrence of such redemption. In order to effect the
foregoing redemption, the Company must mail a notice of redemption no later than
45 days after the related Public Equity Offering or sale of Common Stock and
must consummate such redemption within 60 days of the closing of the Public
Equity Offering or sale of Common Stock.
If less than all of the Notes are to be redeemed, the Trustee shall select
the Notes or portions thereof to be redeemed pro rata, by lot or by any other
method the Trustee shall deem fair and reasonable. (Sections 203, 1101 and 1104)
SINKING FUND
The Notes will not be entitled to the benefit of any sinking fund.
CHANGE OF CONTROL
If a Change of Control shall occur at any time, then each Holder of Notes
shall have the right to require that the Company purchase such Holder's Notes in
whole or in part in integral multiples of $1,000, at a purchase price (the
"Change of Control Purchase Price") in cash, in an amount equal to 101% of the
principal amount of such Notes or portion thereof, plus accrued and unpaid
interest (including Additional Interest), if any, to the date of purchase (the
"Change of Control Purchase Date"), pursuant to the offer described below (the
"Change of Control Offer") and in accordance with the other procedures set forth
in the Indenture.
Within 30 days of any Change of Control, the Company shall notify the
Trustee thereof and give written notice of such Change of Control to each Holder
of Notes, by first-class mail, postage prepaid, at his address appearing in the
security register, stating that a Change of Control has occurred and the date of
such event, the circumstances and relevant facts regarding such Change of
Control; the purchase price and the purchase date which shall be fixed by the
Company on a business day no earlier than 30 days nor later than 60 days from
the date such notice is mailed, or such later date as may be necessary to comply
with any applicable requirements under the Exchange Act; that any Note not
tendered will continue to accrue interest; that, unless the Company defaults in
the payment of the Change of Control Purchase Price, any Notes accepted for
payment pursuant to the Change of Control Offer shall cease to accrue interest
after the Change of Control Purchase Date; and certain other procedures that a
Holder of Notes must follow to accept a Change of Control Offer or to withdraw
such acceptance. (Section 1014)
Due to the highly leveraged structure of the Company and the effective
subordination of the Notes to the Company's secured Indebtedness and any
Indebtedness of the Company's subsidiaries, if a Change of Control Offer is
made, there can be no assurance that the Company will have available funds
sufficient to pay the Change of Control Purchase Price for all of the Notes that
might be delivered by Holders of the Notes seeking to accept the Change of
Control Offer. See "Risk Factors--Change of Control." The failure of the Company
to make or consummate the Change of Control Offer or pay the Change of Control
Purchase Price when due will give the Trustee and the Holders of the Notes the
rights described under "Events of Default."
The definition of "Change of Control" includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or substantially
all" of the Company's assets. This phrase has not been interpreted under New
York law (which is the governing law of the Indenture) to represent a specific
quantitative test. As a consequence, in the event the Holders of the Notes
elected to exercise their rights under the Indenture and the Company elected to
contest such election, there could be no assurance as to how a court
interpreting New York law would interpret the phrase.
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The existence of a Holder's right to require the Company to repurchase such
Holder's Notes upon a Change of Control may deter a third party from acquiring
the Company in a transaction which constitutes a Change of Control.
The Company will comply with the applicable tender offer rules, including
Rule 14e-1 under the Exchange Act, and any other applicable securities laws or
regulations in connection with a Change of Control Offer.
RANKING
The Notes are unsecured senior obligations of the Company, and the
Indebtedness represented by the Notes and the payment of principal of, premium,
if any, and interest (including Additional Interest, if any) on the Notes ranks
pari passu in right of payment with all other existing and future senior
Indebtedness of the Company and senior in right of payment to all existing and
future Subordinated Indebtedness of the Company. The Notes are effectively
subordinated to secured Indebtedness of the Company as to the assets securing
such Indebtedness. As of March 31, 1998, on an as adjusted basis after giving
effect to the Existing Notes Offering, there would have been approximately
$163.3 million of Indebtedness of the Company outstanding of which approximately
$3 million would have been secured long-term Indebtedness to which Holders of
the Notes would have been effectively subordinated in right of payment.
The Notes are not entitled to any security, except as described under
"--Escrow Account" and are not entitled to the benefit of any guarantees except
under the circumstances described under "--Certain Covenants--Limitation on
Issuances of Guarantees by Restricted Subsidiaries."
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATION ON INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF REDEEMABLE CAPITAL
STOCK. (a) The Company shall not, and shall not cause or permit any Subsidiary
to, directly or indirectly, Incur any Indebtedness (including without limitation
Acquired Indebtedness and by definition Redeemable Capital Stock) (other than
the Notes); PROVIDED, HOWEVER, that the Company may Incur Indebtedness, and the
Company or any Subsidiary may Incur Acquired Indebtedness, if, at the time of
such Incurrence after giving effect to the Incurrence of such Indebtedness
(including the issuance of such Redeemable Capital Stock), the Debt to
Annualized Operating Cash Flow Ratio would be less than or equal to 5.5 to 1.0
on or prior to December 31, 2000, or less than or equal to 5.0 to 1.0 after
December 31, 2000, in each case determined on a PRO FORMA basis (including a PRO
FORMA application of the net proceeds therefrom) as if such additional
Indebtedness had been Incurred at the beginning of the applicable Measurement
Period.
(b) The foregoing limitations of paragraph (a) of this covenant will not
apply to any of the following, each of which shall be given independent effect:
(i) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness (other than Acquired Indebtedness) consisting of Capital Lease
Obligations, Purchase Money Obligations, mortgage financings or other
obligations Incurred for the purpose of financing all or any part of the
purchase price, cost of construction or improvement of property, plant or
equipment used in connection with an Internet Service Business or a credit
facility or a master lease arrangement entered into for the purpose of
providing such financing, provided that such Indebtedness does not exceed
the lesser of Fair Market Value or the purchase price of such property,
plant or equipment at the time of such Incurrence;
(ii) the Incurrence of Indebtedness of the Company or any of its
Subsidiaries, and any renewals, extensions, substitutions, refinancings or
replacements of such Indebtedness, so long as the aggregate principal amount
of such Indebtedness shall not exceed $35 million outstanding at any one
time in the aggregate;
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(iii) the Incurrence by the Company of Indebtedness (other than secured
Acquired Indebtedness) in an aggregate principal amount not to exceed 2.0
times the sum of the Net Cash Proceeds received by the Company after the
date of the Indenture (other than from the issuance of Disqualified Stock)
in connection with any Public Equity Offerings; PROVIDED that such
Indebtedness does not mature prior to the Stated Maturity of the Notes or
has an Average Life to Stated Maturity at least equal to the Notes;
(iv) Indebtedness of the Company or any Subsidiary Incurred in the
ordinary course of business (a) pursuant to Interest Rate Agreements
designed to protect the Company or any Subsidiary against fluctuations in
interest rates in respect of Indebtedness of the Company or any Subsidiary
as long as the notional principal amount of such Interest Rate Agreements do
not exceed the aggregate principal amount of such Indebtedness then
outstanding, (b) under any Currency Hedging Arrangements designed to protect
the Company or any Subsidiary against fluctuations in the value of any
currency or (c) under any Commodity Price Protection Agreements designed to
protect the Company or any Subsidiary against fluctuations in the price of
any commodity;
(v) the Incurrence by the Company or any of its Subsidiaries of
Indebtedness in respect of bid, performance or advance payment bonds and
appeal or surety bonds;
(vi) Indebtedness existing on the date of the Indenture;
(vii) the Incurrence of (a) Indebtedness of any Subsidiary owed to and
held by the Company or another Subsidiary and (b) Indebtedness of the
Company owed to and held by any Subsidiary; and
(viii) any renewals, extensions, substitutions, refundings, refinancings
or replacements (collectively, a "refinancing") of any Indebtedness
described in clauses (i), (ii), (iii), (vi) and (vii) of this paragraph (b)
of this covenant including any successive refinancings so long as the
borrower under such refinancing is the Company or, if not the Company, the
same as the borrower of the Indebtedness being refinanced and the aggregate
principal amount of Indebtedness represented thereby is not increased by
such refinancing plus the lesser of (I) the stated amount of any premium or
other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing and, in the case of any
refinancing of Indebtedness that is Subordinated Indebtedness, such new
Indebtedness is made subordinated to the Notes at least to the same extent
as the Indebtedness being refinanced if at all and such refinancing does not
reduce the Average Life to Stated Maturity or the Stated Maturity of such
Subordinated Indebtedness.
(c) For purposes of determining any particular amount of Indebtedness under
this covenant, Guarantees, Liens or obligations with respect to letters of
credit supporting Indebtedness otherwise included in the determination of such
particular amount shall not be included; provided, however, that the foregoing
shall not in any way be deemed to limit the provisions of "--Limitations on
Issuances of Guarantees of Indebtedness."
(d) For purposes of determining compliance with this covenant, in the event
that an item of Indebtedness may be Incurred pursuant to paragraph (a) of this
covenant or by meeting the criteria of one or more of the types of Indebtedness
described in paragraph (b) of this covenant (or the definitions of the terms
used therein), the Company, in its sole discretion, (i) may classify such item
of Indebtedness under and comply with either of such paragraphs (or any of such
definitions), as applicable, (ii) may classify and divide such item of
Indebtedness into more than one of such paragraphs (or definitions), as
applicable, and (iii) may elect to comply with such paragraphs (or definitions),
as applicable, in any order. (Section 1008)
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company will not, and will not
permit any Subsidiary to, directly or indirectly:
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(i) declare or pay any dividend on, or make any distribution (including
without limitation any liquidation preference) on any shares of the
Company's Capital Stock (other than dividends or distributions payable
solely in shares of its Qualified Capital Stock or in options, warrants or
other rights to acquire shares of such Qualified Capital Stock);
(ii) purchase, redeem, defease or otherwise acquire or retire for value,
directly or indirectly, its Capital Stock or any Capital Stock of any
Affiliate of the Company (other than any such Capital Stock owned by the
Company or a Wholly Owned Subsidiary of the Company) or options, warrants or
other rights to acquire such Capital Stock;
(iii) make any principal payment on, or repurchase, redeem, defease,
retire or otherwise acquire for value, prior to any scheduled principal
payment, sinking fund payment or maturity, any Subordinated Indebtedness;
(iv) declare or pay any dividend or distribution (including without
limitation any liquidation preference) on any Capital Stock of any
Subsidiary to any Person (other than (a) to the Company or any of its Wholly
Owned Subsidiaries or (b) to all holders of Capital Stock of such Subsidiary
on a pro rata basis); or
(v) make any Investment in any Person (other than any Permitted
Investments) (any of the foregoing actions described in clauses (i) through
(v), other than any such action that is a Permitted Payment (as defined
below), collectively, "Restricted Payments") (the amount of any such
Restricted Payment, if other than cash, as determined by the Board of
Directors of the Company, whose determination shall be conclusive and
evidenced by a board resolution), unless (1) immediately before and
immediately after giving effect to such proposed Restricted Payment on a pro
forma basis, no Default or Event of Default shall have occurred and be
continuing; (2) immediately before and immediately after giving effect to
such Restricted Payment on a pro forma basis, the Company could incur $1.00
of additional Indebtedness under the provisions described under
"--Limitation on Incurrence of Indebtedness and Issuance of Redeemable
Capital Stock;" and (3) after giving effect to the proposed Restricted
Payment, the aggregate amount of all such Restricted Payments declared or
made after the date of the Indenture, does not exceed the sum of the
following (the "Basket"):
(A) (i) the Cumulative Operating Cash Flow determined at the time of
such Restricted Payment less (ii) 150% of cumulative Consolidated Interest
Expense determined for the period (treated as one accounting period)
commencing on the date of the original issue of the Notes and ending on the
last day of the most recent fiscal quarter immediately preceding the date of
such Restricted Payment for which consolidated financial information of the
Company is required to be available;
(B) (i) capital contributions to the Company after the date of the
Indenture or (ii) the aggregate Net Cash Proceeds received after the date of
the Indenture by the Company from the issuance or sale (other than to any of
its Subsidiaries) of Qualified Capital Stock of the Company or any options,
warrants or rights to purchase such Qualified Capital Stock of the Company
(except, in each case, to the extent such proceeds are used to purchase,
redeem or otherwise retire Capital Stock or Subordinated Indebtedness as set
forth below in clause (ii) or (iii) of paragraph (b) below);
(C) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company (other than from any of its Subsidiaries) upon the
exercise of any options, warrants or rights to purchase Qualified Capital
Stock of the Company;
(D) the aggregate Net Cash Proceeds received after the date of the
Indenture by the Company from the conversion or exchange, if any, of debt
securities or Redeemable Capital Stock of the Company or its Subsidiaries
into or for Qualified Capital Stock of the Company plus, to the extent such
debt securities or Redeemable Capital Stock were issued after the date of
the Indenture, the aggregate of Net Cash Proceeds from their original
issuance; and
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(E) in the case of the disposition or repayment of any Investment
constituting a Restricted Payment, an amount equal to the return of capital
with respect to such Investment and the initial amount of such Investment.
(b) Notwithstanding the foregoing, and in the case of clauses (ii) through
(vii) below, so long as no Default or Event of Default shall have occurred and
is continuing, the foregoing provisions shall not prohibit the following actions
(each of clauses (i) through (vii) below being referred to as a "Permitted
Payment"):
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such date of declaration such payment was
permitted by the provisions of paragraph (a) of this Section and such
payment shall have been deemed to have been paid on such date of declaration
and shall not have been deemed a Permitted Payment for purposes of the
calculation required by paragraph (a) of this Section;
(ii) the repurchase, redemption, or other acquisition or retirement for
value of any shares of any class of Capital Stock of the Company in exchange
for (including any such exchange pursuant to the exercise of a conversion
right or privilege in connection with which cash is paid in lieu of the
issuance of fractional shares or scrip), or out of the Net Cash Proceeds of
a substantially concurrent issuance and sale for cash (other than to a
Subsidiary) of, other shares of Qualified Capital Stock of the Company;
provided that the Net Cash Proceeds from the issuance of such shares of
Qualified Capital Stock are excluded from clause (v)(3)(B) of paragraph (a)
of this Section;
(iii) the repurchase, redemption, defeasance, retirement or acquisition
for value or payment of principal of any Subordinated Indebtedness or
Redeemable Capital Stock in exchange for, or in an amount not in excess of
the Net Cash Proceeds of, a substantially concurrent issuance and sale for
cash (other than to any Subsidiary of the Company) of any Qualified Capital
Stock of the Company, provided that the Net Cash Proceeds from the issuance
of such shares of Qualified Capital Stock are excluded from clause (v)(3)(B)
of paragraph (a) of this Section;
(iv) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of principal of any Subordinated
Indebtedness (other than Redeemable Capital Stock) (a "refinancing") through
the substantially concurrent issuance of new Subordinated Indebtedness of
the Company, provided that any such new Subordinated Indebtedness (1) shall
be in a principal amount that does not exceed the principal amount so
refinanced (or, if such Subordinated Indebtedness provides for an amount
less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, then such lesser amount as of the date
of determination), plus the lesser of (I) the stated amount of any premium
or other payment required to be paid in connection with such a refinancing
pursuant to the terms of the Indebtedness being refinanced or (II) the
amount of premium or other payment actually paid at such time to refinance
the Indebtedness, plus, in either case, the amount of expenses of the
Company incurred in connection with such refinancing; (2) has an Average
Life to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; (3) has a Stated Maturity for its final scheduled
principal payment later than the Stated Maturity for the final scheduled
principal payment of the Notes; and (4) is expressly subordinated in right
of payment to the Notes at least to the same extent as the Subordinated
Indebtedness to be refinanced;
(v) the repurchase, redemption, defeasance, retirement, refinancing,
acquisition for value or payment of any Redeemable Capital Stock through the
substantially concurrent issuance of new Redeemable Capital Stock of the
Company, provided that any such new Redeemable Capital Stock (1) shall have
an aggregate liquidation preference that does not exceed the aggregate
liquidation preference of the amount so refinanced; (2) has an Average Life
to Stated Maturity greater than the remaining Average Life to Stated
Maturity of the Notes; and (3) has a Stated Maturity later than the Stated
Maturity for the final scheduled principal payment of the Notes;
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(vi) the repurchase of shares of, or options to purchase shares of,
common stock of the Company or any of its Subsidiaries from employees,
former employees, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former employees,
directors or former directors), pursuant to the terms of the agreements
(including employment agreements) or plans (or amendments thereto) approved
by the Board of Directors under which such individuals purchase or sell or
are granted the option to purchase or sell, shares of such common stock;
PROVIDED, HOWEVER, that the aggregate amount of such repurchases in any
calendar year shall not exceed $500,000 individually and $2.5 million in the
aggregate; and
(vii) the repurchase or redemption of IPO Warrants of the Company
outstanding prior to the issuance of the Notes in an amount which shall not
exceed $100,000 in the aggregate and the repurchase of Common Stock of the
Company, through open market purchases, in an aggregate amount not to exceed
$1,000,000. (Section 1009).
LIMITATION ON TRANSACTIONS WITH AFFILIATES. The Company will not, and will
not permit or cause any of its Subsidiaries to, directly or indirectly, enter
into any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with or for the benefit of any Affiliate of the Company unless such
transaction or series of related transactions is entered into in good faith and
in writing and (a) such transaction or series of related transactions is on
terms that are no less favorable to the Company or such Subsidiary, as the case
may be, than those that would be reasonably expected to be available in a
comparable transaction in arm's-length dealings with an unrelated third party,
(b) such transaction or series of related transactions has been approved by a
majority of the Disinterested Directors of the Company, or in the event there is
only one Disinterested Director, by such Disinterested Director, (c) with
respect to any such transaction or series of related transactions involving
aggregate value in excess of $1 million, the Company delivers an officers'
certificate to the Trustee certifying that such transaction or series of related
transactions complies with clauses (a) and (b) above, and (d) with respect to
any transaction or series of related transactions involving aggregate value in
excess of $2.5 million, such transaction or series of related transactions has
been approved by a majority of the Disinterested Directors of the Company, or in
the event there is only one Disinterested Director, by such Disinterested
Director, and the Company delivers to the Trustee a written opinion of an
investment banking firm of national standing or other recognized independent
expert with experience appraising the terms and conditions of the type of
transaction or series of related transactions for which an opinion is required
stating that the transaction or series of related transactions is fair to the
Company or such Subsidiary from a financial point of view; PROVIDED, HOWEVER,
that this provision shall not apply to: (a) compensation and employee benefit
arrangements with any officer, director or employee of the Company, including
under any stock option or stock incentive plans, in the ordinary course of
business; (b) any transaction solely between or among the Company and/or any
Subsidiaries, if such transaction is otherwise in compliance with the Indenture;
(c) any transaction otherwise permitted by the terms of the section of the
Indenture described under "Certain Covenants--Limitations on Restricted
Payments;" (d) the execution and delivery of or payments made under any tax
sharing agreement between or among any of the Company and any Subsidiary; (e)
licensing or sublicensing of use of any intellectual property by the Company or
any Subsidiary to any Subsidiary or the Company; provided that the licensor
shall continue to have access to such intellectual property to the extent
necessary for the conduct of its respective business; (f) arrangements between
the Company and any Subsidiary for the purpose of providing services or
employees to such Subsidiary; (g) any transaction entered into for the purpose
of granting or altering registration rights with respect to the Capital Stock of
the Company; and (h) any transaction or series of related transactions entered
into prior to the date of the Indenture. (Section 1010)
LIMITATION ON LIENS. The Company will not, and will not permit any
Subsidiary to, directly or indirectly, create, incur, affirm, assume or suffer
to exist any Lien of any kind against or upon any property or assets (including
any intercompany notes) of the Company or any Subsidiary (other than the Escrow
Account) owned on the date of the Indenture or acquired after the date of the
Indenture, or any income or
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profits or proceeds therefrom, unless the Notes are directly secured equally and
ratably with (or, in the case of Subordinated Indebtedness, prior or senior
thereto, with the same relative priority as the Notes shall have with respect to
such Subordinated Indebtedness) the obligation or liability secured by such Lien
except for any Permitted Liens. (Section 1011)
LIMITATION ON SALE OF ASSETS. (a) The Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, whether in a single
transaction or a series of related transactions, consummate an Asset Sale unless
(i) no Default or Event of Default has occurred or would occur as a result
thereof, (ii) at least 75% of the consideration from such Asset Sale is received
in cash or other comparable consideration (as described below), and (iii) the
Company or such Subsidiary receives consideration at the time of such Asset Sale
at least equal to the Fair Market Value of the shares or assets subject to such
Asset Sale (as determined by the Board of Directors of the Company and evidenced
in a board resolution delivered to the Trustee). The following types of
consideration shall be deemed "comparable consideration" for the purposes of
this covenant: (A) Cash Equivalents, (B) liabilities (contingent or otherwise)
of the Company or a Subsidiary assumed by the transferee (or its designee) such
that the Company or such Subsidiary has no further liability therefor, and (C)
any securities, notes or other obligations received by the Company or any such
Subsidiary from such transferee that are immediately converted by the Company or
such Subsidiary into cash.
(b) The Company or a Subsidiary may, within 365 days of the Asset Sale
invest the Net Cash Proceeds in properties and other assets that will be used
only in Internet Service Business or to permanently repay any Pari Passu
Indebtedness of the Company (including the repurchase of the Notes). The amount
of such Net Cash Proceeds not used or invested within 365 days of the Asset Sale
as set forth in this paragraph constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds $5
million, the Company will apply the Excess Proceeds to the repayment of the
Notes and any other Pari Passu Indebtedness of the Company outstanding with
similar provisions requiring the Company to make an offer to purchase such
Indebtedness with the proceeds from any Asset Sale as follows: (A) the Company
will make an offer to purchase (an "Offer") from all Holders of the Notes in
accordance with the procedures set forth in the Indenture in the maximum
principal amount (expressed as a multiple of $1,000) of Notes that may be
purchased out of an amount (the "Note Amount") equal to the product of such
Excess Proceeds multiplied by a fraction, the numerator of which is the
outstanding principal amount of the Notes, and the denominator of which is the
sum of the outstanding principal amount of the Notes and such Pari Passu
Indebtedness (subject to proration in the event such amount is less than the
aggregate Offered Price (as defined herein) of all Notes tendered) and (B) to
the extent required by such Pari Passu Indebtedness to permanently reduce the
principal amount of such Pari Passu Indebtedness, the Company will make an offer
to purchase or otherwise repurchase or redeem Pari Passu Indebtedness (a "Pari
Passu Offer") in an amount (the "Pari Passu Debt Amount") equal to the excess of
the Excess Proceeds over the Note Amount; provided that in no event will the
Company be required to make a Pari Passu Offer in a Pari Passu Debt Amount
exceeding the principal amount of such Pari Passu Indebtedness plus the amount
of any premium required to be paid to repurchase such Pari Passu Indebtedness.
The offer price for the Notes will be payable in cash in an amount equal to 100%
of the principal amount of the Notes plus accrued and unpaid interest, if any,
to the date (the "Offer Date") such Offer is consummated (the "Offered Price"),
in accordance with the procedures set forth in the Indenture. To the extent that
the aggregate Offered Price of the Notes tendered pursuant to the Offer is less
than the Note Amount relating thereto or the aggregate amount of Pari Passu
Indebtedness that is purchased in a Pari Passu Offer is less than the Pari Passu
Debt Amount, the Company will use any remaining Excess Proceeds for general
corporate purposes. If the aggregate principal amount of Notes and Pari Passu
Indebtedness surrendered by Holders thereof exceeds the amount of Excess
Proceeds, the Trustee shall select the Notes to be purchased on a pro rata
basis. Upon the completion of the purchase of all the Notes tendered pursuant to
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an Offer and the completion of a Pari Passu Offer, the amount of Excess
Proceeds, if any, shall be reset at zero.
(d) The Indenture provides that, if the Company becomes obligated to make an
Offer pursuant to clause (c) above, the Notes and the Pari Passu Indebtedness
shall be purchased by the Company, at the option of the Holders thereof, in
whole or in part in integral multiples of $1,000, on a date that is not earlier
than 30 days and not later than 60 days from the date the notice of the Offer is
given to Holders, or such later date as may be necessary for the Company to
comply with the requirements under the Exchange Act.
(e) The Indenture provides that the Company will comply with the applicable
tender offer rules, including Rule 14e-1 under the Exchange Act, and any other
applicable securities laws or regulations in connection with an Offer. (Section
1012)
LIMITATION ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS. (a) The Company will
not permit any Subsidiary, directly or indirectly, to guarantee, assume or in
any other manner become liable with respect to any Pari Passu Indebtedness or
Subordinated Indebtedness of the Company unless such Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Guarantee of the Notes on the same terms as the guarantee of such Indebtedness
except that (A) such guarantee need not be secured unless required pursuant to
"--Limitation on Liens" and (B) if such Indebtedness is by its terms expressly
subordinated to the Notes, any such assumption, guarantee or other liability of
such Subsidiary with respect to such Indebtedness shall be subordinated to such
Subsidiary's Guarantee of the Notes at least to the same extent as such
Indebtedness is subordinated to the Notes; provided that this paragraph shall
not apply to any guarantee or assumption of liability of Indebtedness permitted
under the Indenture and described in clauses (i), (ii), (iv), (v), (vii) and
(viii) of paragraph (b) of "Certain Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Redeemable Stock."
(b) Notwithstanding the foregoing, any Guarantee by a Subsidiary of the
Notes shall provide by its terms that it (and all Liens securing the same) shall
be automatically and unconditionally released and discharged upon any sale,
exchange or transfer, to any Person not an Affiliate of the Company, of all of
the Company's Capital Stock in, or all or substantially all the assets of, such
Subsidiary, which transaction is in compliance with the terms of the Indenture
and such Subsidiary is released from its guarantees of other Indebtedness of the
Company or any Subsidiaries. (Section 1013)
LIMITATION ON SALE AND LEASEBACK TRANSACTIONS. The Company will not, and
will not permit any Subsidiary of the Company to, directly or indirectly, enter
into, assume or otherwise become liable with respect to any Sale and Leaseback
Transaction with respect to any property or assets (whether now owned or
hereafter acquired) unless (i) the sale or transfer of such property or assets
to be leased is treated as an Asset Sale and complies with the "--Limitation on
Sale of Assets" covenant, (ii) the Company or such Subsidiary would be entitled
under the "Limitation on Incurrence of Indebtedness and Issuance of Redeemable
Capital Stock" and "Limitation on Liens" covenant to incur any Indebtedness
(with the lease obligations being treated as Indebtedness for purposes of
ascertaining compliance with this covenant unless such lease is properly
classified as an operating lease under GAAP) in respect of such Sale and
Leaseback transaction and (iii) the consideration received by the Company or
such Subsidiary from such transaction is at least equal to the Fair Market Value
of the property being transferred. (Section 1015)
LIMITATION ON SUBSIDIARY CAPITAL STOCK. The Company will not permit (a) any
Subsidiary of the Company to issue any Capital Stock, except for (i) Capital
Stock issued or sold to, held by or transferred to the Company or a Wholly Owned
Subsidiary, and (ii) Capital Stock issued by a Person prior to the time (A) such
Person becomes a Subsidiary, (B) such Person merges with or into a Subsidiary or
(C) a Subsidiary merges with or into such Person; provided that such Capital
Stock was not issued or incurred by such Person in anticipation of the type of
transaction contemplated by subclause (A), (B) or (C), or (b) any Person (other
than the Company or a Wholly Owned Subsidiary) to acquire Capital Stock of any
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Subsidiary from the Company or any Subsidiary, except, in the case of clauses
(a) and (b), (1) upon the acquisition of all the outstanding Capital Stock of
such Subsidiary in accordance with the terms of the Indenture, (2) if,
immediately after giving effect to such issuance or sale, such Subsidiary would
no longer constitute a Subsidiary, and any Investment in such Person remaining
after giving effect to such issuance or sale would have been permitted to be
made under the provisions of the Indenture described in "-- Limitations on
Restricted Payments" if made on the date of such issuance or sale, (3) issuances
of director's qualifying shares, or sales to foreign nationals of shares of
Capital Stock of foreign Subsidiaries, to the extent required by applicable law,
(4) issuances or sales of common stock of a Subsidiary, provided that the
Company or such Subsidiary applies the Net Cash Proceeds, if any, in accordance
with the provisions of the Indenture to the extent applicable, (5) issuances
after which the Company maintains its direct or indirect percentage of
beneficial and economic ownership of such Subsidiary, or (6) issuances in
connection with Acquisitions for the primary purpose of minimizing tax liability
to the Company, any of its Subsidiaries, the Acquired Person or any shareholders
of the Acquired Person. (Section 1016)
LIMITATION ON DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING
SUBSIDIARIES. The Company will not, and will not permit any of its Subsidiaries
to, directly or indirectly, create or otherwise enter into or cause to become
effective any consensual encumbrance or restriction on the ability of any
Subsidiary to (i) pay dividends or make any other distribution on its Capital
Stock or with respect to any other interest or participation in, or measured by,
its profits, (ii) pay any Indebtedness owed to the Company or any Subsidiary,
(iii) make any Investment in the Company or any Subsidiary or (iv) transfer any
of its properties or assets to the Company or any Subsidiary, except for: (a)
any encumbrance or restriction, with respect to a Subsidiary that is not a
Subsidiary of the Company on the date of the Indenture, in existence at the time
such Person becomes a Subsidiary of the Company and not incurred in connection
with, or in contemplation of, such Person becoming a Subsidiary; (b)
encumbrances or restrictions (I) by reason of applicable law, or (II) under the
Indenture; (c) customary non-assignment provisions of any contract or lease
entered into in the ordinary course of business; (d) encumbrances or
restrictions imposed pursuant to contracts entered into in connection with
Permitted Liens, but solely to the extent such encumbrances or restrictions
affect property or assets subject to such Permitted Lien; (e) any encumbrance or
restriction imposed pursuant to contracts for the sale of assets with respect to
the assets to be sold pursuant to such contract; and (f) any encumbrance or
restriction existing under any agreement that extends, renews, refinances or
replaces the agreements containing the encumbrances or restrictions in the
foregoing clauses (a) through (e), or in this clause (f), provided that the
terms and conditions of any such encumbrances or restrictions are no more
restrictive in any material respect than those under or pursuant to the
agreement evidencing the Indebtedness so extended, renewed, refinanced or
replaced. (Section 1017)
LIMITATIONS ON UNRESTRICTED SUBSIDIARIES. The Company will not make, and
will not permit its Subsidiaries to make, any Investment in, and will not
designate any Subsidiaries as, Unrestricted Subsidiaries if, at the time
thereof, (a) a Default or Event of Default shall have occurred and be continuing
or would occur after giving effect to such Investment or designation, (b) the
aggregate amount of such Investments would exceed the amount of Restricted
Payments then permitted to be made pursuant to the "-- Limitation on Restricted
Payments" covenant, (c) the Company or its Subsidiaries would be prohibited
under the Indenture from making such Investment or designation, or (d) after
giving effect to such Investment or designation, the Company would exceed the
pro forma amount of Indebtedness permitted under the "Limitations on Incurrence
of Indebtedness and Issuance of Redeemable Stock" covenant. Any Investments in
Unrestricted Subsidiaries permitted to be made pursuant to this covenant will be
treated as a Restricted Payment in calculating the amount of Restricted Payments
made by the Company. (Section 1018)
PROVISION OF FINANCIAL STATEMENTS. After the earlier to occur of the
consummation of the Exchange Offer or the effectiveness of a Registration
Statement relating to the Notes and the 120th calendar day following the date of
original issue of the Notes, whether or not the Company is subject to Section
13(a) or 15(d) of the Exchange Act, the Company will, to the extent permitted
under the Exchange Act, file with
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the Commission the annual reports, quarterly reports and other documents which
the Company would have been required to file with the Commission pursuant to
Sections 13(a) or 15(d) if the Company were so subject, such documents to be
filed with the Commission on or prior to the date (the "Required Filing Date")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company will also in any event (x) within 15 days
of each Required Filing Date (i) transmit by mail to all Holders, as their names
and addresses appear in the security register, without cost to such Holders and
(ii) file with the Trustee copies of all such reports and other documents and
(y) if filing such documents by the Company with the Commission is not permitted
under the Exchange Act, promptly upon written request and payment of the
reasonable cost of duplication and delivery, supply copies of such documents to
any prospective Holder at the Company's cost. If any Guarantor's financial
statements would be required to be included in the financial statements filed or
delivered pursuant to the Indenture, the Company shall include such Guarantor's
financial statements in any filing or delivery pursuant to the Indenture. The
Indenture also provides that, so long as any of the Notes remain outstanding, at
any time when the Company is not subject to Sections 13 or 15(d) of the Exchange
Act, upon written request of a Holder, the Company will promptly furnish or
cause to be furnished such information as is specified pursuant to Rule
144A(d)(4) under the Securities Act (or any successor provision thereto) to such
Holder or to a prospective purchaser of such Notes who such Holder informs the
Company is reasonably believed to be a "Qualified Institutional Investor" within
the meaning of Rule 144A under the Securities Act, as the case may be in order
to permit compliance by such Holder with Rule 144A under the Securities Act,
until such time as the Company has either exchanged the Notes for securities
identical in all material respects which have been registered under the
Securities Act or until such time as the Holders thereof have disposed of such
Notes pursuant to an effective registration statement under the Securities Act.
(Sections 203 and 1019)
LIMITATION ON BUSINESS. The Company will not, and will not permit any of
the Subsidiaries to, engage in a business which is not an Internet Service
Business. (Section 1022)
ADDITIONAL COVENANTS. The Indenture also contains covenants with respect to
the following matters: (i) payment of principal, premium and interest; (ii)
maintenance of an office or agency in The City of New York; (iii) arrangements
regarding the handling of money held in trust; (iv) maintenance of corporate
existence; (v) payment of taxes and other claims; (vi) maintenance of
properties; (vii) maintenance of insurance; and (viii) maintenance of a first
priority security interest in the Escrow Account in favor of the Trustee.
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CONSOLIDATION, MERGER, SALE OF ASSETS
The Company will not, in a single transaction or through a series of related
transactions, consolidate with or merge with or into any other Person or sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its properties and assets to any Person or group of affiliated Persons, or
permit any of its Subsidiaries to enter into any such transaction or series of
related transactions if such transaction or series of related transactions, in
the aggregate, would result in a sale, assignment, conveyance, transfer, lease
or disposition of all or substantially all of the properties and assets of the
Company and its Subsidiaries on a consolidated basis to any other Person or
group of affiliated Persons, unless at the time and after giving effect thereto
(i) either (a) the Company will be the continuing corporation in the case of a
consolidation or merger involving the Company or (b) the Person (if other than
the Company) formed by such consolidation or into which the Company is merged or
the Person which acquires by sale, assignment, conveyance, transfer, lease or
disposition of all or substantially all of the properties and assets of the
Company and its Subsidiaries on a consolidated basis (the "Surviving Entity")
will be a corporation duly organized and validly existing under the laws of the
United States of America, any state thereof or the District of Columbia and such
Person expressly assumes, by a supplemental indenture, in a form reasonably
satisfactory to the Trustee, all the obligations of the Company under the Notes,
the Indenture, the Escrow Agreement and the Registration Rights Agreement, as
the case may be, and the Notes, the Indenture, the Escrow Agreement and the
Registration Rights Agreement will remain in full force and effect as so
supplemented; (ii) immediately before and immediately after giving effect to
such transaction on a pro forma basis (and treating any Indebtedness not
previously an obligation of the Company or any of its Subsidiaries which becomes
the obligation of the Company or any of its Subsidiaries as a result of such
transaction as having been incurred at the time of such transaction), no Default
or Event of Default will have occurred and be continuing; (iii) immediately
before and immediately after giving effect to such transaction on a pro forma
basis, the Company (or the Surviving Entity if the Company is not the continuing
obligor under the Indenture) could incur $1.00 of Additional Indebtedness (other
than Permitted Indebtedness) under the provisions of "--Certain
Covenants--Limitations on Incurrence of Indebtedness and Issuance of Redeemable
Capital Stock;" (iv) at the time of the transaction, each Guarantor, if any,
unless it is the other party to the transactions described above, will have by
supplemental indenture confirmed that its Guarantee shall apply to such Person's
obligations under the Indenture and the Notes; (v) at the time of the
transaction if any of the property or assets of the Company or any of its
Subsidiaries would thereupon become subject to any Lien, the provisions of
"--Certain Covenants-- Limitation on Liens" are complied with; (vi) such
transaction would not result in the loss, material impairment or adverse
modification or amendment of any authorization or license of the Company or its
Subsidiaries that could have a material adverse effect on the Company's
business, financial condition or results of operations; and (vii) at the time of
the transaction the Company or the Surviving Entity will have delivered, or
caused to be delivered, to the Trustee, in form and substance reasonably
satisfactory to the Trustee, an officers' certificate and an opinion of counsel,
each to the effect that such consolidation, merger, transfer, sale, assignment,
conveyance, transfer, lease or other transaction and the supplemental indenture
in respect thereof comply with the Indenture. Notwithstanding the foregoing, the
Company (i) may merge or consolidate with any of its Subsidiaries, and (ii) the
Company may merge or consolidate into any Person in a transaction designed
solely for the purpose of effecting a change in the jurisdiction of
incorporation of the Company within the United States of America. (Section 801)
In the event of any transaction (other than a lease) described in and
complying with the conditions listed in the immediately preceding paragraph in
which the Company is not the surviving person, such surviving person shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company, and the Company shall be discharged from all obligations and
covenants under the Indenture, the Notes, the Escrow Agreement and the
Registration Rights Agreement. (Section 802)
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EVENTS OF DEFAULT
An Event of Default will occur under the Indenture if:
(i) there shall be a default in the payment of any interest (including
Additional Interest, if any) on any Note when it becomes due and payable,
and such default shall continue for a period of 30 days (provided that such
30 day grace period shall be inapplicable for the first six interest
payments due on the Notes);
(ii) there shall be a default in the payment of the principal of (or
premium, if any, on) any Note at its Maturity (upon acceleration, optional
or mandatory redemption, required repurchase or otherwise);
(iii) (a) there shall be a default in the performance, or breach, of any
covenant or agreement of the Company or any Guarantor under the Indenture,
the Escrow Agreement, the Registration Rights Agreement or any Guarantee
(other than a default in the performance, or breach, of a covenant or
agreement which is specifically dealt with in clause (i), (ii) or in
subparagraph (b), (c) or (d) of this clause (iii)) and such default or
breach shall continue for a period of 30 days after written notice has been
given, by certified mail, (x) to the Company by the Trustee or (y) to the
Company and the Trustee by the Holders of at least 25% in aggregate
principal amount of the outstanding Notes; (b) there shall be a default in
the performance or breach of the provisions described in "--Consolidation,
Merger, Sale of Assets;" (c) the Company shall have failed to make or
consummate an Offer in accordance with the provision described in "--Certain
Covenants--Limitation on Sale of Assets;" or (d) the Company shall have
failed to make or consummate a Change of Control Offer in accordance with
the provisions described in "Change of Control;"
(iv) (a) any default by the Company or any Subsidiary in the payment of
the principal, premium, if any, or interest has occurred under any
agreement, indenture or instrument evidencing Indebtedness when the same
shall become due and payable in full and such default shall have continued
after any applicable grace period and shall not have been cured or waived
and, if not already matured at its final maturity in accordance with its
terms, the holder of such Indebtedness shall have the right to accelerate
such Indebtedness or (b) any event of default as defined in any agreement,
indenture or instrument of the Company evidencing Indebtedness shall have
occurred and the Indebtedness thereunder, if not already matured at its
final maturity in accordance with its terms, shall have been accelerated,
and in the case of (a) and (b) above, the principal amount of such
Indebtedness aggregates in excess of $5 million;
(v) any Guarantee shall for any reason cease to be, or shall for any
reason be asserted in writing by any Guarantor or the Company not to be, in
full force and effect and enforceable in accordance with its terms, except
to the extent contemplated by the Indenture and any such Guarantee;
(vi) one or more judgments or orders for the payment of money in excess
of $10 million, either individually or in the aggregate, shall be rendered
against the Company or any Subsidiary or any of their respective properties
which are not paid or covered by financially sound third-party insurers, and
shall not be paid and discharged and there shall be any period of 60
consecutive days during which a stay of enforcement of such judgment or
order, by reason of an appeal or otherwise, shall not be in effect;
(vii) any holder or holders of at least $5 million in aggregate principal
amount of Indebtedness of the Company or any Subsidiary after a default
under such Indebtedness shall notify the Trustee of its commencement of
proceedings to foreclose on any assets of the Company or any Subsidiary that
have been pledged to or for the benefit of such holder or holders to secure
such Indebtedness or shall commence proceedings, or take any action
(including by way of set-off), to retain in satisfaction of such
Indebtedness or to collect on, seize, dispose of or apply in satisfaction of
Indebtedness, assets of
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the Company or any Subsidiary (including funds on deposit or held pursuant
to lock-box and other similar arrangements);
(viii) there shall have been the entry by a court of competent
jurisdiction of (a) a decree or order for relief in respect of the Company
or any Subsidiary in an involuntary case or proceeding under any applicable
Bankruptcy Law or (b) a decree or order adjudging the Company or any
Subsidiary bankrupt or insolvent, or seeking reorganization, arrangement,
adjustment or composition of or in respect of the Company or any Subsidiary
under any applicable federal or state law, or appointing a custodian,
receiver, liquidator, assignee, trustee, sequestrator (or other similar
official) of the Company or any Subsidiary or of any substantial part of
their respective properties, or ordering the winding up or liquidation of
their respective affairs, and any such decree or order for relief shall
continue to be in effect, or any such other decree or order shall be
unstayed and in effect, for a period of 60 consecutive days;
(ix) (a) the Company or any Subsidiary commences a voluntary case or
proceeding under any applicable Bankruptcy Law or any other case or
proceeding to be adjudicated bankrupt or insolvent, (b) the Company or any
Subsidiary consents to the entry of a decree or order for relief in respect
of the Company or such Subsidiary in an involuntary case or proceeding under
any applicable Bankruptcy Law or to the commencement of any bankruptcy or
insolvency case or proceeding against it, (c) the Company or any Subsidiary
files a petition or answer or consent seeking reorganization or relief under
any applicable federal or state law, (d) the Company or any Subsidiary (I)
consents to the filing of such petition or the appointment of, or taking
possession by, a custodian, receiver, liquidator, assignee, trustee,
sequestrator or similar official of the Company or such Subsidiary or of any
substantial part of the Company's consolidated properties, (II) makes an
assignment for the benefit of creditors or (III) admits in writing its
inability to pay its debts generally as they become due or (e) the Company
or any Subsidiary takes any corporate action in furtherance of any such
actions in this paragraph (ix); or
(x) the Company shall challenge the Lien on the Escrow Collateral under
the Escrow Agreement prior to such time the Escrow Collateral is to be
released to the Company or the Escrow Collateral shall become subject to any
Lien other than the Lien under the Escrow Agreement. (Section 501)
If an Event of Default (other than as specified in clauses (viii) and (ix)
of the prior paragraph) shall occur and be continuing with respect to the
Indenture, the Trustee or the Holders of not less than 25% in aggregate
principal amount of the Notes then outstanding may, and the Trustee at the
request of such Holders shall, declare all unpaid principal of, premium, if any,
and accrued interest on all Notes to be due and payable, by a notice in writing
to the Company (and to the Trustee if given by the Holders of the Notes) and
upon any such declaration, such principal, premium, if any, and interest shall
become due and payable immediately. If an Event of Default specified in clause
(viii) or (ix) of the prior paragraph occurs with respect to the Company and is
continuing, then all the Notes shall ipso facto become and be due and payable
immediately in an amount equal to the principal amount of the Notes, together
with accrued and unpaid interest, if any, to the date the Notes become due and
payable, without any declaration or other act on the part of the Trustee or any
Holder. Thereupon, the Trustee may, at its discretion, proceed to protect and
enforce the rights of the Holders of Notes by appropriate judicial proceedings.
After a declaration of acceleration, but before a judgment or decree for
payment of the money due has been obtained by the Trustee, the Holders of a
majority in aggregate principal amount of Notes outstanding by written notice to
the Company and the Trustee, may rescind and annul such declaration and its
consequences if (a) the Company has paid or deposited with the Trustee a sum
sufficient to pay (i) all sums paid or advanced by the Trustee under the
Indenture and the reasonable compensation, expenses, disbursements and advances
of the Trustee, its agents and counsel, (ii) all overdue interest on all Notes
then outstanding, (iii) the principal of and premium, if any, on any Notes then
outstanding which have
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become due otherwise than by such declaration of acceleration and interest
thereon at the rate borne by the Notes and (iv) to the extent that payment of
such interest is lawful, interest upon overdue interest at the rate borne by the
Notes; and (b) all Events of Default, other than the non-payment of principal of
the Notes which have become due solely by such declaration of acceleration, have
been cured or waived as provided in the Indenture. No such rescission shall
affect any subsequent default or impair any right consequent thereon. (Section
502)
The Holders of not less than a majority in aggregate principal amount of the
Notes outstanding may on behalf of the Holders of all outstanding Notes waive
any past default under the Indenture and its consequences, except a default in
the payment of the principal of, premium, if any, or interest on any Note or in
respect of a covenant or provision which under the Indenture cannot be modified
or amended without the consent of the Holder of each Note affected by such
modification or amendment. (Section 513)
The Indenture provides that the Trustee will, within 30 days after the
receipt of notice of the occurrence of any Default, give to the Holders of the
Notes notice of such Default known to it, unless such Default shall have been
cured or waived; provided that the Trustee shall be protected in withholding
such notice if it determines in good faith that the withholding of such notice
is in the interest of such Holders. (Section 602) The Company is required to
deliver to the Trustee, on or before a date not more than 60 days after the end
of each fiscal quarter and not more than 120 days after the end of each fiscal
year, a written statement as to compliance with the Indenture, including whether
or not any Default has occurred that is not cured. (Section 1020)
The Trust Indenture Act contains limitations on the rights of the Trustee,
should it become a creditor of the Company or any Guarantor, if any, to obtain
payment of claims in certain cases or to realize on certain property received by
it in respect of any such claims, as security or otherwise. The Trustee is
permitted to engage in other transactions, provided that if it acquires any
conflicting interest it must eliminate such conflict upon the occurrence of an
Event of Default or else resign.
DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, elect to have the
obligations of the Company discharged with respect to the outstanding Notes
("defeasance"). Such defeasance means that the Company shall be deemed to have
paid and discharged the entire Indebtedness represented by the outstanding
Notes, except for (i) the rights of Holders of such outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on such
Notes when such payments are due, (ii) the Company's obligations with respect to
the Notes concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes, and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights, powers,
trusts, duties and immunities of the Trustee and (iv) the defeasance provisions
of the Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company and any Guarantor released with
respect to certain covenants that are described in the Indenture ("covenant
defeasance") and thereafter any omission to comply with such obligations shall
not constitute a Default or an Event of Default with respect to the Notes. In
the event covenant defeasance occurs, certain events (not including non-payment,
bankruptcy and insolvency events) described under "Events of Default" will no
longer constitute an Event of Default with respect to the Notes. (Sections 401,
402 and 403)
In order to exercise either defeasance or covenant defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Notes, cash in United States dollars, non-callable U.S.
Government Obligations (as defined in the Indenture), or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally recognized
firm of independent public accountants or a nationally recognized investment
banking firm selected by the Company, to pay and discharge the principal of,
premium, if any, and interest (including Additional Interest, if any) on the
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outstanding Notes on the Stated Maturity (or on any date after May 1, 2003 (such
date being referred to as the "Defeasance Redemption Date"), if at or prior to
electing either defeasance or covenant defeasance, the Company has delivered to
the Trustee an irrevocable notice to redeem all of the outstanding Notes on the
Defeasance Redemption Date); (ii) in the case of defeasance, the Company shall
have delivered to the Trustee an opinion of independent counsel in the United
States stating that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of the
Indenture, there has been a change in the applicable federal income tax law, in
either case to the effect that, and based thereon such opinion of independent
counsel in the United States acceptable to the Trustee shall confirm that, the
Holders of the outstanding Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such defeasance and will be subject
to federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such defeasance had not occurred; (iii) in
the case of covenant defeasance, the Company shall have delivered to the Trustee
an opinion of independent counsel in the United States acceptable to the Trustee
to the effect that the Holders of the outstanding Notes will not recognize
income, gain or loss for federal income tax purposes as a result of such
covenant defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such covenant defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) or (ix) under the first paragraph under--'Events of Default" are
concerned, at any time during the period ending on the 91st day after the date
of deposit; (v) such defeasance or covenant defeasance shall not cause the
Trustee for the Notes to have a conflicting interest for purposes of the Trust
Indenture Act with respect to any securities of the Company; (vi) such
defeasance or covenant defeasance shall not result in a breach or violation of,
or constitute a Default under, the Indenture or any other material agreement or
instrument to which the Company, or any Subsidiary is a party or by which it is
bound; (vii) such defeasance or covenant defeasance shall not result in the
trust arising from such deposit constituting an investment company within the
meaning of the Investment Company Act of 1940, as amended, unless such trust
shall be registered under such Act or exempt from registration thereunder;
(viii) the Company will have delivered to the Trustee an opinion of independent
counsel in the United States acceptable to the Trustee to the effect that after
the 91st day following the deposit, the trust funds will not be subject to the
effect of any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally; (ix) the Company shall have delivered to
the Trustee an officers' certificate stating that the deposit was not made by
the Company with the intent of preferring the Holders of the Notes over the
other creditors of the Company with the intent of defeating, hindering, delaying
or defrauding creditors of the Company, or others; (x) no event or condition
shall exist that would prevent the Company from making payments of the principal
of, premium, if any, and interest (including Additional Interest) on the Notes
on the date of such deposit or at any time ending on the 91st day after the date
of such deposit; and (xi) the Company will have delivered to the Trustee an
officers' certificate and an opinion of independent counsel acceptable to the
Trustee, each stating that all conditions precedent provided for relating to
either the defeasance or the covenant defeasance, as the case may be, have been
complied with. (Section 404)
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes as expressly provided for in the Indenture) as to all outstanding Notes
under the Indenture when (a) either (i) all such Notes theretofore authenticated
and delivered (except lost, stolen or destroyed Notes which have been replaced
or paid or Notes whose payment has been deposited in trust or segregated and
held in trust by the Company and thereafter repaid to the Company or discharged
from such trust as provided for in the Indenture) have been delivered to the
Trustee for cancellation or (ii) all Notes not theretofore delivered to the
Trustee for cancellation (x) have become due and payable and the Company has
irrevocably deposited or caused to be deposited with the Trustee as trust funds
in trust an amount in United States dollars sufficient to pay and discharge the
entire
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indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, including principal of, premium, if any, and accrued interest
(including Additional Interest, if any) at such Maturity, Stated Maturity or
redemption date; (b) the Company has paid or caused to be paid all other sums
payable under the Indenture by the Company; and (c) the Company has delivered to
the Trustee an officers' certificate and an opinion of independent counsel
acceptable to the Trustee each stating that (i) all conditions precedent under
the Indenture relating to the satisfaction and discharge of such Indenture have
been complied with and (ii) such satisfaction and discharge will not result in a
breach or violation of, or constitute a default under, the Indenture or any
other material agreement or instrument to which the Company, or any Subsidiary
is a party or by which the Company, or any Subsidiary is bound. (Section 1301)
MODIFICATIONS AND AMENDMENTS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of at least a majority in aggregate
principal amount of the Notes then outstanding; provided, however, that no such
modification or amendment may, without the consent of the Holder of each
outstanding Note affected thereby: (i) change the Stated Maturity of the
principal of, or any installment of interest on, or change to an earlier date
any redemption date of, or waive a default in the payment of the principal or
interest on, any such Note or reduce the principal amount thereof or the rate of
interest thereon or any premium payable upon the redemption thereof, or change
the coin or currency in which the principal of any such Note or any premium or
the interest thereon is payable, or impair the right to institute suit for the
enforcement of any such payment after the Stated Maturity thereof (or, in the
case of redemption, on or after the redemption date); (ii) amend, change or
modify the obligation of the Company to make and consummate an Offer with
respect to any Asset Sale or Asset Sales in accordance with "Certain
Covenants--Limitation on Sale of Assets" or the obligation of the Company to
make and consummate a Change of Control Offer in the event of a Change of
Control in accordance with "Change of Control," including, in each case,
amending, changing or modifying any definitions relating thereto; (iii) reduce
the percentage in principal amount of such outstanding Notes, the consent of
whose Holders is required for any such supplemental indenture, or the consent of
whose Holders is required for any waiver or compliance with certain provisions
of the Indenture; (iv) modify any of the provisions relating to supplemental
indentures requiring the consent of Holders or relating to the waiver of past
defaults or relating to the waiver of certain covenants, except to increase the
percentage of such outstanding Notes required for such actions or to provide
that certain other provisions of the Indenture cannot be modified or waived
without the consent of the Holder of each such Note affected thereby; (v) except
as otherwise permitted under "Consolidation, Merger, Sale of Assets," consent to
the assignment or transfer by the Company of any of its rights and obligations
under the Indenture; (vi) amend or modify any of the provisions of the Indenture
in any manner which subordinates the Notes issued thereunder in right of payment
to any other Indebtedness of the Company; or (vii) modify the provisions of the
Escrow Agreement or the Indenture relating to the Escrow Collateral in any
manner adverse to the Holders or release any of the Escrow Collateral from the
Lien under the Escrow Agreement or permit any other obligation to be secured by
the Escrow Collateral. (Section 902)
Notwithstanding the foregoing, without the consent of any Holders of the
Notes, the Company, and the Trustee may modify or amend the Indenture: (a) to
evidence the succession of another Person to the Company, and the assumption by
any such successor of the covenants of the Company in the Indenture, the Notes,
the Registration Rights Agreement and the Escrow Agreement in accordance with
"-- Consolidation, Merger, Sale of Assets"; (b) to add to the covenants of the
Company, or any other obligor upon the Notes for the benefit of the Holders of
the Notes or to surrender any right or power conferred upon the Company or any
Guarantor or any other obligor upon the Notes, as applicable, in the Indenture
or in the Notes; (c) to cure any ambiguity, or to correct or supplement any
provision in the Indenture or the Notes which may be defective or inconsistent
with any other provision in the Indenture or the Notes or make any other
provisions with respect to matters or questions arising under the Indenture or
the Notes; provided that, in each case, such provisions shall not adversely
affect the interest of the Holders of the
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Notes; (d) to comply with the requirements of the Commission in order to effect
or maintain the qualification of the Indenture under the Trust Indenture Act;
(e) to add a Guarantor under the Indenture; (f) to evidence and provide the
acceptance of the appointment of a successor Trustee under the Indenture; or (g)
to mortgage, pledge, hypothecate or grant a security interest in favor of the
Trustee for the benefit of the Holders of the Notes as additional security for
the payment and performance of the Company's obligations under the Indenture, in
any property, or assets, including any of which are required to be mortgaged,
pledged or hypothecated, or in which a security interest is required to be
granted to the Trustee pursuant to the Indenture or otherwise. (Section 901)
The Holders of a majority in aggregate principal amount of the Notes
outstanding may waive compliance with certain restrictive covenants and
provisions of the Indenture. (Section 1021)
GOVERNING LAW
The Indenture and the Notes are governed by, and will be construed in
accordance with, the laws of the State of New York, without giving effect to the
conflicts of law principles thereof.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the Commission for permission to continue
as Trustee with such conflict or resign as Trustee. (Sections 608 and 610)
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. (Section 512) The Indenture provides that in case an Event
of Default occurs (which has not been cured), the Trustee will be required, in
the exercise of its power, to use the degree of skill and care of a prudent
person in the conduct of his own affairs. Subject to such provisions, the
Trustee will be under no obligation to exercise any of its rights or powers
under the Indenture or the Escrow Agreement at the request of any Holder of
Notes unless such holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense. (Sections
601 and 603)
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CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (i) existing at the
time such Person becomes a Subsidiary or (ii) assumed in connection with the
acquisition of assets from such Person, in each case, other than Indebtedness
incurred in connection with, or in contemplation of, such Person becoming a
Subsidiary or such acquisition, as the case may be, provided that Indebtedness
of such Person which is redeemed, defeased, retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Subsidiary or such Asset Acquisition shall not constitute
Acquired Indebtedness.
"Acquired Person" means, with respect to any specified Person, any other
Person which merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Subsidiary to any
other Person, or any acquisition or purchase of Capital Stock of any other
Person by the Company or any Subsidiary, in either case pursuant to which such
Person shall become a Subsidiary or shall be consolidated, merged with or into
the Company or any Subsidiary or (ii) any acquisition by the Company or any
Subsidiary of the assets of any Person which constitute substantially all of an
operating unit or line of business of such Person or which is otherwise outside
of the ordinary course of business of the Company or such Subsidiary.
"Additional Interest" has the meaning provided in Section 5 of the
Registration Rights Agreement.
"Affiliate" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or other
disposition (including, without limitation, by way of merger, consolidation or
sale and leaseback transaction) (collectively, a "transfer"), directly or
indirectly, in one or a series of related transactions, of: (i) any Capital
Stock of any Subsidiary; (ii) all or substantially all of the properties and
assets of any division or line of business of the Company or its Subsidiaries;
or (iii) any other properties or assets of the Company or any Subsidiary other
than in the ordinary course of business. For the purposes of this definition,
the term "Asset Sale" shall not include any transfer of properties and assets
(A) that is governed by the provisions described under "Consolidation, Merger,
Sale of Assets," (B) that is by the Company to any Subsidiary or by any
Subsidiary to the Company or any other Subsidiary in accordance with the terms
of the Indenture, (C) that is of obsolete equipment in the ordinary course of
business, (D) the Fair Market Value of which in the aggregate does not exceed
$200,000 in any transaction or series of related transactions, (E) that is made
in accordance with the provisions described under "Certain
Covenants--Limitations on Restricted Payments," (F) which constitutes the
granting of any Permitted Lien and (G) any transfer of assets that are
transferred in exchange for one or more like-kind assets; provided that if the
Fair Market Value of the assets to be transferred by the Company or such
Subsidiary under this clause (G), plus the Fair Market Value of any other
consideration paid or credited by the Company or such Subsidiary exceeds $1
million, such transaction shall require approval of the Board of Directors of
the Company.
"Average Life to Stated Maturity" means, as of the date of determination
with respect to any Indebtedness, the quotient obtained by dividing (i) the sum
of the products of (a) the number of years from the date of determination to the
date or dates of each successive scheduled principal payment of such
Indebtedness multiplied by (b) the amount of each such principal payment; by
(ii) the sum of all such principal payments.
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"Bankruptcy Law" means Title 11, United States Bankruptcy Code of 1978, as
amended, or any similar United States federal or state law relating to
bankruptcy, insolvency, receivership, winding up, liquidation, reorganization or
relief of debtors or any amendment to, succession to or change in any such law.
"Capital Lease Obligation" of any Person means any obligation of such Person
and its subsidiaries on a consolidated basis under any capital lease of real or
personal property which, in accordance with GAAP, has been recorded as a capital
lease obligation.
"Capital Stock" of (i) with respect to any Person that is a corporation, any
and all shares, interests, participations or other equivalents (however
designated and whether or not voting) of corporate stock, including each class
of common stock and preferred stock of such Person and (ii) with respect to any
Person that is not a corporation, any and all partnership, membership or other
equity interests of such Person.
"Cash Equivalents" means (i) any evidence of Indebtedness, maturing not more
than one year after the date of acquisition, issued by the United States of
America, or an instrumentality or agency thereof, and guaranteed fully as to
principal, premium, if any, and interest by the United States of America, (ii)
any certificate of deposit, maturing not more than one year after the date of
acquisition, issued by, or time deposit of, a commercial banking institution
that is a member of the Federal Reserve System and that has combined capital and
surplus and undivided profits of not less than $500 million, whose short term
debt has a rating, at the time as of which any investment therein is made, of
"P-1" (or higher) according to Moody's Investors Service, Inc. ("Moody's") or
any successor rating agency or "A-1" (or higher) according to Standard & Poor's
Corporation ("S&P") or any successor rating agency, (iii) commercial paper,
maturing not more than 270 days after the date of acquisition, issued by a
corporation (other than an Affiliate or Subsidiary of the Company) organized and
existing under the laws of the United States of America with a rating, at the
time as of which any investment therein is made, of "P-1" (or higher) according
to Moody's or "A-1" (or higher) according to S&P and (iv) any money market
deposit accounts issued or offered by a domestic commercial bank having capital
and surplus in excess of $500 million; provided that the short term debt of such
commercial bank has a rating, at the time of Investment, of "P-1" (or higher)
according to Moody's or "A-1" (or higher) according to S&P.
"Change of Control" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13 (d) and 14 (d) of
the Exchange Act) is or becomes the "beneficial owner" (as defined in Rules
13d-3 and 13d-5 under the Exchange Act, except that a Person shall be deemed to
have beneficial ownership of all shares that such Person has the right to
acquire, whether such right is exercisable immediately or only after the passage
of time), directly or indirectly, of more than 50% of the total outstanding
Voting Stock of the Company; (ii) during any period of two consecutive years,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election to such
board or whose nomination for election by the stockholders of the Company was
approved by a vote of a majority of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved), cease for any reason to constitute a
majority of such Board of Directors then in office; (iii) the Company
consolidates with or merges with or into any Person or conveys, transfers or
leases all or substantially all of its assets to any Person, or any corporation
consolidates with or merges into or with the Company, in any such event,
pursuant to a transaction in which the outstanding Voting Stock of the Company
is changed into or exchanged for cash, securities or other property, other than
any such transaction where the outstanding Voting Stock of the Company is not
changed or exchanged at all (except to the extent necessary to reflect a change
in the jurisdiction of incorporation of the Company or where no "person" or
"group" owns, immediately after such transaction, directly or indirectly, more
than 50% of the total outstanding Voting Stock of the surviving corporation); or
(iv) the Company is liquidated or dissolved or adopts a plan of liquidation or
dissolution other than in a transaction which complies with the provisions
described under "--Consolidation, Merger, Sale of Assets."
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"Commission" means the Securities and Exchange Commission, as from time to
time constituted, created under the Exchange Act, or if at any time after the
execution of the Indenture such Commission is not existing and performing the
duties now assigned to it under the Trust Indenture Act, then the body
performing such duties at such time.
"Commodity Price Protection Agreement" means any forward contract, commodity
swap, commodity option or other similar financial agreement or arrangement
relating to, or the value of which is dependent upon, fluctuations in commodity
prices.
"Company" means Globix Corporation, a corporation incorporated under the
laws of the State of Delaware, until a successor Person shall have become such
pursuant to the applicable provisions of the Indenture, and thereafter "Company"
shall mean such successor Person.
"consolidated" means, consolidated in accordance with GAAP.
"Consolidated Income Tax Expense" of any Person means, for any period, the
provision for federal, state, local and foreign income taxes of such Person and
its Consolidated subsidiaries for such period as determined in accordance with
GAAP.
"Consolidated Interest Expense" of any Person means, without duplication,
for any period, the sum of (a) the interest expense of such Person and its
subsidiaries for such period, on a consolidated basis, including, without
limitation, (i) amortization of debt discount, (ii) the net costs associated
with Interest Rate Agreements, Currency Hedging Agreements and Commodity Price
Protection Agreements (including amortization of discounts), (iii) the interest
portion of any deferred payment obligation, (iv) accrued interest and (v) all
commissions, discounts and other fees and charges owed with respect to letters
of credit and bankers' acceptable financing and similar transactions, plus
(b)(i) the interest component of the Capital Lease Obligations paid, accrued
and/or scheduled to be paid or accrued by such Person and its subsidiaries
during such period and (ii) all capitalized interest of such Person and its
subsidiaries, plus (c) the interest expense actually paid by such Person under
any Guaranteed Debt of such Person and any subsidiary to the extent not included
under clause (a)(iv) above, plus (d) the aggregate amount for such period of
cash or non-cash dividends on any Redeemable Capital Stock or Preferred Stock of
such Person and its subsidiaries, in each case as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and its Subsidiaries for such period determined on a consolidated
basis in accordance with GAAP, adjusted, to the extent included in calculating
such consolidated net income, by excluding, without duplication, (a) other than
for purposes of calculating the Basket, all extraordinary, unusual or
nonrecurring gains or losses for such period (net of fees and expenses relating
to the transaction giving rise thereto); (b) other than for purposes of
calculating the Basket, all gains or losses from the sales or other dispositions
of assets out of the ordinary course of business (net of taxes, fees and
expenses relating to the transaction giving rise thereto) for such period; (c)
that portion of such net income derived from or in respect of Investments in
Persons other than Subsidiaries, except to the extent actually received in cash
by the Company or any Subsidiary (subject, in the case of any Subsidiary, to the
provisions of clause (f) of this definition); (d) the portion of such net income
(or loss) allocable to minority interests in any Person (other than a
Subsidiary) for such period, except to the extent the Company's allocation
portion of such Person's net income for such period is actually received in cash
by the Company or any Subsidiary (subject, in the case of any Subsidiary, to the
provisions of clause (f) of this definition); (e) the net income (or loss) of
any other Person combined with the Company or any Subsidiary on a "pooling of
interests" basis attributable to any period prior to the date of combination;
(f) the net income of any Subsidiary to the extent that the declaration of
dividends or similar distributions by that Subsidiary of that income is not at
the time (regardless of any waiver) permitted, directly or indirectly, by
operation of the terms of its charter or any agreement, instrument, judgment,
decree, order, statute, rule or governmental regulations applicable to that
Subsidiary or its stockholders; and (g) any gain or loss, net of taxes realized
by such person upon the termination of any employee pension benefit plan.
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"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication), to the
extent deducted in calculating such Consolidated Net Income, by (a) Consolidated
Income Tax Expense for such period; (b) Consolidated Interest Expense for such
period; and (c) depreciation, amortization and any other non-cash items for such
period (other than any non-cash item which requires the accrual of, or a reserve
for, cash charges for any future period) of the Company and any Subsidiary,
including, without limitation, amortization of capitalized debt issuance costs
for such period, all of the foregoing determined on a consolidated basis in
accordance with GAAP minus non-cash items to the extent they increase
Consolidated Net Income (including the partial or entire reversal of reserves
taken in prior periods) for such period.
"Cumulative Operating Cash Flow" means, as at any date of determination, the
positive cumulative Consolidated Operating Cash Flow realized during the period
commencing on the original issue date of the Notes and ending on the last day of
the most recent fiscal quarter immediately preceding the date of determination
for which consolidated financial information of the Company is available or, if
such cumulative Consolidated Operating Cash Flow for such period is negative,
the negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"Currency Hedging Arrangements" means one or more of the following
agreements which shall be entered into by one or more financial institutions:
foreign exchange contracts, currency swap agreements or other similar agreements
or arrangements designed to protect against the fluctuations in currency values.
"Debt to Annualized Operating Cash Flow Ratio" means, as of any date of
determination, the ratio of (a) the Total Consolidated Indebtedness as of the
date of calculation (the "Determination Date") to (b) two times the Consolidated
Operating Cash Flow for the latest two fiscal quarters for which financial
information is available immediately preceding such Determination Date (the
"Measurement Period"). For purposes of calculating Consolidated Operating Cash
Flow for the Measurement Period immediately prior to the relevant Determination
Date, (i) any Person that is a Subsidiary on the Determination Date (or would
become a Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed to have been a Subsidiary at all times during such
Measurement Period, (ii) any Person that is not a Subsidiary on such
Determination Date (or would cease to be a Subsidiary on such Determination Date
in connection with the transaction that requires the determination of such
Consolidated Operating Cash Flow) will be deemed not to have been a Subsidiary
at any time during such Measurement Period, and (iii) if the Company or any
Subsidiary shall have in any manner (x) acquired (through an Acquisition or the
commencement of activities constituting such operating business) or (y) disposed
of (by of an Asset Sale or the termination or discontinuance of activities
constituting such operating business) any operating business during such
Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement of
activities constituting such operating business, all such transactions had been
consummated prior to the first day of such Measurement Period (it being
understood that in calculating Consolidated Operating Cash Flow the exclusions
set forth in clauses (a) through (g) of the definition of Consolidated Net
Income shall apply to an Acquired Person as if it were a Subsidiary).
"Default" means any event which is, or after notice or passage of any time
or both would be, an Event of Default.
"Disinterested Director" means, with respect to any transaction or series of
related transactions, a member of the Board of Directors of the Company who does
not have any material direct or indirect financial interest in or with respect
to such transaction or series of related transactions.
"Disqualified Stock" means, with respect to any person, any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or becomes mandatorily redeemable, pursuant to a sinking fund
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obligation or otherwise, or becomes exchangeable for Indebtedness at the option
of the holder thereof, or becomes redeemable at the option of the holder
thereof, in whole or in part, on or prior to the final maturity date of the
Notes; PROVIDED such Capital Stock shall only constitute Disqualified Stock to
the extent it so matures or becomes so redeemable or exchangeable on or prior to
the final maturity date of the Notes; PROVIDED, FURTHER, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the final maturity date of the Notes shall not constitute
Disqualified Stock if the "asset sale" or "change of control" provisions
applicable to such Capital Stock are no more favorable to the holders of such
Capital Stock than the provisions applicable to the Notes contained in
"Limitation on Sale of Assets" and "Change of Control" described above and such
Capital Stock specifically provides that such person will not repurchase or
redeem any such stock pursuant to such provision prior to the Company's
repurchase of such Notes as are required to be repurchased pursuant to the
"Limitation on Sale of Assets" and "Change of Control" provisions described
above.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.
"Exchange Notes" means Notes issued in exchange for Existing Notes pursuant
to the Registration Rights Agreement.
"Existing Notes" means the Notes issued in the Existing Notes Offering.
"Fair Market Value" means, with respect to any asset or property, the sale
value that would be reasonably expected to be obtained in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy. Unless otherwise
specified, Fair Market Value shall be determined by the Board of Directors of
the Company acting in good faith and shall be evidenced by a resolution of the
Board of Directors.
"Generally Accepted Accounting Principles" or "GAAP" means generally
accepted accounting principles in the United States, consistently applied, which
are in effect on the date of the Indenture.
"Guarantee" means the guarantee by any Guarantor of the Company's Indenture
Obligations.
"Guaranteed Debt" of any Person means, without duplication, all Indebtedness
of any other Person guaranteed directly or indirectly in any manner by such
Person, or in effect guaranteed directly or indirectly by such Person through an
agreement (i) to pay or purchase such Indebtedness or to advance or supply funds
for the payment or purchase of such Indebtedness, (ii) to purchase, sell or
lease (as lessee or lessor) property, or to purchase or sell services, primarily
for the purpose of enabling the debtor to make payment of such Indebtedness or
to assure the holder of such Indebtedness against loss, (iii) to supply funds
to, or in any other manner invest in, the debtor (including any agreement to pay
for property or services without requiring that such property be received or
such services be rendered), (iv) to maintain working capital or equity capital
of the debtor, or otherwise to maintain the net worth, solvency or other
financial condition of the debtor or (v) otherwise to assure a creditor against
loss; PROVIDED that the term "guarantee" shall not include endorsements for
collection or deposit, in either case, in the ordinary course of business.
"Guarantor" means any Subsidiary which is a guarantor of the Notes,
including any Person that is required after the date of the Indenture to execute
a guarantee of the Notes pursuant to the "Limitation on Issuance of Guarantees
of Indebtedness" covenant until a successor replaces such party pursuant to the
applicable provisions of the Indenture and, thereafter, shall mean such
successor.
"Holder" means a registered holder of the Notes as indicated in the register
maintained pursuant to the Indenture.
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"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee, or redeem or otherwise become liable in respect
of such Indebtedness or other obligation or the recording, as required pursuant
to GAAP or otherwise, of any such Indebtedness or other obligation on the
balance sheet of such Person (and "Incurrence," "Incurred" and "Incurring" shall
have meanings correlative to the foregoing). Indebtedness of a Person existing
at the time such Person becomes a Subsidiary or is merged or consolidated with
or into the Company or any Subsidiary shall be deemed to be Incurred at such
time.
"Indebtedness" means, with respect to any Person, without duplication, (i)
all indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade payables and other accrued
current liabilities arising in the ordinary course of business, (ii) all
obligations of such Person evidenced by bonds, notes, debentures or other
similar instruments, (iii) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to property
acquired by such Person (unless the rights and remedies of the seller or lender
under such agreement in the event of default are limited to repossession or sale
of such property), but excluding trade payables arising in the ordinary course
of business, (iv) all obligations under Interest Rate Agreements, Currency
Hedging Agreements or Commodity Price Protection Agreements of such Person, (v)
all Capital Lease Obligations of such Person, (vi) all Indebtedness referred to
in clauses (i) through (v) above of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien, upon or with respect to property (including, without limitation,
accounts and contract rights) owned by such Person, even though such Person has
not assumed or become liable for the payment of such Indebtedness, (vii) all
Redeemable Capital Stock issued by such Person valued at the greater of its
voluntary or involuntary maximum fixed repurchase price plus accrued and unpaid
dividends, and (viii) any amendment, supplement, modification, deferral,
renewal, extension, refunding or refinancing of any liability of the types
referred to in clauses (i) through (vii) above. For purposes hereof, the
"maximum fixed repurchase price" of any Redeemable Capital Stock which does not
have a fixed repurchase price shall be calculated in accordance with the terms
of such Redeemable Capital Stock as if such Redeemable Capital Stock were
purchased on any date on which Indebtedness shall be required to be determined
pursuant to the Indenture, and if such price is based upon, or measured by, the
Fair Market Value of such Disqualified Stock, such Fair Market Value to be
determined in good faith by the board of directors of the issuer of such
Disqualified Stock. In no event shall "Indebtedness" include any trade payable
or other current liabilities arising in the ordinary course of business
excluding the current maturity of any obligation which would otherwise
constitute Indebtedness. The amount of any item of Indebtedness shall be the
amount of such Indebtedness properly classified as a liability on a balance
sheet prepared in accordance with GAAP.
"Indenture Obligations" means the obligations of the Company and any other
obligor under the Indenture or under the Notes including any Guarantor, to pay
principal of, premium, if any, and interest (and Additional Interest) when due
and payable, and all other amounts due or to become due under or in connection
with the Indenture, the Notes and the performance of all other obligations to
the Trustee and the Holders under the Indenture and the Notes, according to the
respective terms thereof.
"interest" includes Additional Interest, if any.
"Interest Rate Agreements" means one or more of the following agreements
which shall be entered into by one or more financial institutions: interest rate
protection agreements (including, without limitation, interest rate swaps, caps,
floors, collars and similar agreements) and/or other types of interest rate
hedging agreements from time to time.
"Internet Service Business" means any business whose principal business is
operating an internet connectivity or internet enhancement service as it exists
from time to time, including, without limitation, dial up or dedicated internet
service, web hosting or co-location services, security solutions, the provision
and development of software in connection therewith, configuration services,
electronic commerce,
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intranet solutions, data backup and restoral, business content and
collaboration, communications tools or network equipment products or services
(including without limitation, any business conducted by the Company or any
Subsidiary on the issue date of the Notes), and any business reasonably related
to the foregoing. A good faith determination by a majority of the Board of
Directors as to whether a business meets the requirements of this definition
shall be conclusive, absent manifest error.
"Investment" means, with respect to any Person, directly or indirectly, any
advance, loan (including guarantees), or other extension of credit or capital
contribution to (by means of any transfer of cash or other property to others or
any payment for property or services for the account or use of others), or any
purchase, acquisition or ownership by such Person of any Capital Stock, bonds,
notes, debentures or other securities issued or owned by any other Person and
all other items that would be classified as investments on a balance sheet
prepared in accordance with GAAP.
"Lien" means any mortgage or deed of trust, pledge, lien (statutory or
otherwise), security interest, easement, hypothecation, or other encumbrance
upon or with respect to any property of any kind, real or personal, movable or
immovable, now owned or hereafter acquired. A Person shall be deemed to own
subject to a Lien any property which such Person has acquired or holds subject
to the interest of a vendor or lessor under any conditional sale agreement,
capital lease or other title retention agreement, other than any lease properly
classified as an operating lease under GAAP and intellectual property licensing
arrangements.
"Maturity" means, when used with respect to the Notes, the date on which the
principal of the Notes becomes due and payable as therein provided or as
provided in the Indenture, whether at Stated Maturity, the Offer Date or the
redemption date and whether by declaration of acceleration, Offer in respect of
Excess Proceeds, Change of Control Offer in respect of a Change of Control, call
for redemption or otherwise.
"Net Cash Proceeds" means (a) with respect to any Asset Sale by any Person,
the proceeds thereof (without duplication in respect of all Asset Sales) in the
form of cash or Cash Equivalents including payments in respect of deferred
payment obligations when received in the form of, or stock or other assets when
disposed of for, cash or Cash Equivalents (except to the extent that such
obligations are financed or sold with recourse to the Company or any Subsidiary)
net of (i) brokerage commissions and other reasonable fees and expenses
(including fees and expenses of counsel and investment bankers) related to such
Asset Sale, (ii) provisions for all taxes payable as a result of such Asset
Sale, (iii) payments made to retire Indebtedness where payment of such
Indebtedness is secured by the assets or properties that are the subject of such
Asset Sale, (iv) amounts required to be paid to any Person (other than the
Company or any Subsidiary) owning a beneficial interest in the assets subject to
the Asset Sale and (v) appropriate amounts to be provided by the Company or any
Subsidiary, as the case may be, as a reserve, in accordance with GAAP, against
any liabilities associated with such Asset Sale and retained by the Company or
any Subsidiary, as the case may be, after such Asset Sale, including, without
limitation, pension and other post-employment benefit liabilities, liabilities
related to environmental matters and liabilities under any indemnification
obligations associated with such Asset Sale, all as reflected in an officers'
certificate delivered to the Trustee and (b) with respect to any issuance or
sale of Capital Stock or options, warrants or rights to purchase Capital Stock,
or debt securities or Capital Stock that have been converted into or exchanged
for Capital Stock as referred to under "--Certain Covenants--Limitation on
Restricted Payments," the proceeds of such issuance or sale in the form of cash
or Cash Equivalents including payments in respect of deferred payment
obligations when received in the form of, or stock or other assets when disposed
of for, cash or Cash Equivalents (except to the extent that such obligations are
financed or sold with recourse to the Company or any Subsidiary), net of
attorney's fees, accountant's fees and brokerage, consultation, underwriting and
other fees and expenses actually incurred in connection with such issuance or
sale (or conversion in the case of debt securities or Capital Stock that have
been converted) and net of taxes paid or payable as a result thereof.
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"Notes" means the Notes issued from time to time under the Indenture.
"Pari Passu Indebtedness" means (a) any Indebtedness of the Company that is
PARI PASSU in right of payment to the Notes and (b) with respect to any
Guarantee, Indebtedness which ranks PARI PASSU in right of payment to such
Guarantee.
"Permitted Investment" means (i) Investments in any Wholly Owned Subsidiary
or any Person which, as a result of such Investment, (a) becomes a Wholly Owned
Subsidiary or (b) is merged or consolidated with or into, or transfers or
conveys all or substantially all of its assets to, or is liquidated into, the
Company or any Wholly Owned Subsidiary; (ii) Indebtedness of the Company or a
Subsidiary described under clauses (iv) and (vii) of paragraph (b) under
"--Certain Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Redeemable Capital Stock"; (iii) Investments in any of the Notes; (iv)
Investments in Cash Equivalents; (v) Investments acquired by the Company or any
Subsidiary in connection with an Asset Sale permitted under "--Certain
Covenants--Limitation on Sale of Assets" to the extent such Investments are
non-cash proceeds as permitted under such covenant; (vi) Investments in
existence on the date of the Indenture; (vii) guarantees of Indebtedness of a
Wholly Owned Subsidiary given by the Company or another Wholly Owned Subsidiary
and guarantees of Indebtedness of the Company given by any Subsidiary, in each
case, in accordance with the terms of the Indenture; (viii) any Investment in
the Company by any Subsidiary of the Company; PROVIDED, that any such Investment
in the form of Indebtedness shall be Subordinated Indebtedness; (ix) accounts
receivable created or acquired in the ordinary course of business of the Company
or any Subsidiary and Investments arising from transactions by the Company or
any Subsidiary with trade creditors or customers in the ordinary course of
business (including any such Investment received pursuant to any plan of
reorganization or similar arrangement pursuant to the bankruptcy or insolvency
of such trade creditors or customers or otherwise in settlement of a claim); (x)
Investments the consideration of which is Capital Stock of the Company; (xi)
stock obligations or securities received in satisfaction of judgments; (xii)
Investments in prepaid expenses, negotiable instruments held for collection, and
lease, utility and workers' compensation, performance and other similar
deposits; and (xiii) any other Investments in an Internet Service Business in an
aggregate amount not to exceed $20 million at any one time outstanding. In
connection with any assets or property contributed or transferred to any Person
as an Investment, such property and assets shall be equal to the Fair Market
Value (as determined by the Company's Board of Directors in good faith and
evidenced by a board resolution) at the time of such Investment.
"Permitted Lien" means:
(a) any Lien existing as of the date of the Indenture;
(b) any Lien arising by reason of (1) any judgment, decree or order of any
court, so long as such Lien is adequately bonded and any appropriate legal
proceedings which may have been duly initiated for the review of such judgment,
decree or order shall not have been finally terminated or the period within
which such proceedings may be initiated shall not have expired; (2) taxes not
yet delinquent or which are being contested in good faith; (3) security for
payment of workers' compensation or other insurance or arising under worker's
compensation laws or similar legislation; (4) good faith deposits in connection
with bids, tenders, leases or contracts (other than contracts evidencing
Indebtedness); (5) zoning restrictions, easements, licenses, reservations, title
defects, rights of others for rights of way, utilities, sewers, electric lines,
telephone or telegraph lines, and other similar purposes, provisions, covenants,
conditions, waivers, restrictions on the use of property or minor irregularities
of title (and with respect to leasehold interests, mortgages, obligations, liens
and other encumbrances incurred, created, assumed or permitted to exist and
arising by, through or under a landlord or owner of the leased property, with or
without consent of the lessee), none of which materially impairs the use of any
parcel of property material to the operation of the business of the Company or
any Subsidiary or the value of such property for the purpose of such business;
(6) deposits to secure public or statutory obligations, or in lieu of surety or
appeal bonds; or (7) operation
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of law in favor of landlords, carriers, warehousemen, bankers, mechanics,
materialmen, laborers, employees or suppliers, incurred in the ordinary course
of business for sums which are not yet delinquent or are being contested in good
faith by negotiations or by appropriate proceedings which suspend the collection
thereof;
(c) any Lien to secure the performance of bids, trade contracts, leases
(including, without limitation, statutory and common law landlord's liens),
statutory obligations, surety and appeal bonds, letters of credit and other
obligations of a like nature and incurred in the ordinary course of business of
the Company or any Subsidiary;
(d) any Lien securing obligations in connection with Indebtedness permitted
under that section of the Indenture described in clause (i) of paragraph (b) of
"Certain Covenants--Limitation on Incurrence of Indebtedness and Issuance of
Redeemable Securities" which are incurred or assumed in connection with the
acquisition, development or construction of real or personal, moveable or
immovable property within 180 days of such incurrence or assumption; provided
that such Liens only extend to such acquired, developed or constructed property
and any accessories, accessions, additions, replacements and proceeds thereof;
(e) any Lien arising from judgments, decrees or attachments in circumstances
not constituting an Event of Default;
(f) any Lien securing obligations in connection with Indebtedness permitted
under that section of the Indenture described in clauses (ii) or (iii) of
paragraph (b) of "Certain Covenants--Limitation on Incurrence of Indebtedness
and Issuance of Redeemable Capital Stock;"
(g) any Lien in favor of the Company or any Subsidiary;
(h) any Lien securing obligations in connection with Acquired Indebtedness;
provided that any such Lien does not extend to or cover any property or assets
of the Company or any of its Subsidiaries other than the property or assets of
the Acquired Person covered thereby or the property or assets so acquired;
(i) any Lien in favor of the Trustee for the benefit of the Holders or the
Trustee arising under the provisions in the Indenture or the Escrow Agreement;
(j) any Lien encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company or
any Subsidiary if and to the extent arising in the ordinary course of business,
including rights of offset and set-off;
(k) any Lien in favor of customs or revenue authorities to secure payment of
customs duties in connection with the importation of goods in the ordinary
course of business;
(l) leases or subleases granted to third Persons not interfering with the
ordinary course of business of the Company or its Subsidiaries; and
(m) any Lien securing any extension, renewal, refinancing or replacement, in
whole or in part, of any obligation or Indebtedness described in the foregoing
clauses (a) through (d) and (f) through (h) so long as no additional collateral
is granted as security thereby.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint-stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"Preferred Stock" means, with respect to any Person, any Capital Stock of
any class or classes (however designated) which is preferred as to the payment
of dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over the
Capital Stock of any other class of such Person.
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"Public Equity Offering" means an underwritten offering of common stock of
the Company with gross proceeds to the Company of at least $25 million pursuant
to a registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-8
or otherwise relating to equity securities issuable under any employee benefit
plan of the Company).
"Purchase Money Obligation" means any Indebtedness secured by a Lien on
assets related to the business of the Company and any additions and accessions
thereto, which are purchased by the Company at any time after the Notes are
issued; provided that (i) the security agreement or conditional sales or other
title retention contract pursuant to which the Lien on such assets is created
(collectively a "Purchase Money Security Agreement") shall be entered into
within 180 days after the purchase or substantial completion of the construction
of such assets and shall at all times be confined solely to the assets so
purchased or acquired, any additions and accessions thereto and any proceeds
therefrom, (ii) at no time shall the aggregate principal amount of the
outstanding Indebtedness secured thereby be increased, except in connection with
the purchase of additions and accessions thereto and except in respect of fees
and other obligations in respect of such Indebtedness and (iii) (A) the
aggregate outstanding principal amount of Indebtedness secured thereby
(determined on a per asset basis in the case of any additions and accessions)
shall not at the time such Purchase Money Security Agreement is entered into
exceed 100% of the purchase price to the Company of the assets subject thereto
or (B) the Indebtedness secured thereby shall be with recourse solely to the
assets so purchased or acquired, any additions and accessions thereto and any
proceeds therefrom.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any Capital Stock that, either by its terms
or by the terms of any security into which it is convertible or exchangeable or
otherwise, is or upon the happening of an event or passage of time would be,
required to be redeemed prior to the Stated Maturity of the principal of the
Notes or is redeemable at the option of the holder thereof at any time prior to
such Stated Maturity, or is convertible into or exchangeable for debt securities
at any time prior to such Stated Maturity at the option of the holder thereof.
"Sale and Leaseback Transaction" means with respect to any Person, any
direct or indirect arrangement pursuant to which any property (other than
Capital Stock) is sold by such Person or a subsidiary, or, in the case of the
Company, it or a Subsidiary, and is thereafter leased back from the purchaser or
transferee thereof by such Person or one of its subsidiaries or, in the case of
the Company, it or one of its Subsidiaries.
"Securities Act" means the Securities Act of 1933, as amended, or any
successor statute, and the rules and regulations promulgated thereunder.
"Stated Maturity" means, when used with respect to any Indebtedness or any
installment of interest thereon, the dates specified in such Indebtedness as the
fixed date on which the principal of such Indebtedness or such installment of
interest, as the case may be, is due and payable.
"Strategic Investor" means any Person which is (or a controlled Affiliate of
any Person which is or a controlled Affiliate of which is) engaged principally
in the Internet Service Business and which has a Total Market Capitalization of
at least $1.0 billion.
"Subordinated Indebtedness" means Indebtedness of the Company or a Guarantor
subordinated in right of payment to the Notes or the Guarantee of such
Guarantor, as the case may be.
"subsidiary" means, with respect to any Person, any corporation, association
or other business entity (i) of which outstanding Capital Stock having at least
the majority of the votes entitled to be cast in the election of directors is
owned, directly or indirectly, by such Person and/or any one or more
subsidiaries of
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such Person, or (ii) of which at least a majority of voting interest is owned,
directly or indirectly, by such Person and/or one or more subsidiaries of such
Person.
"Subsidiary" means any subsidiary of the Company other than an Unrestricted
Subsidiary.
"Total Consolidated Indebtedness" means, as at any date of determination, an
amount equal to the aggregate amount of all Indebtedness of the Company and any
Subsidiary, on a consolidated basis, outstanding as of such date of
determination, after giving effect to any Incurrence of Indebtedness and the
application of the proceeds therefrom giving rise to such determination.
"Total Market Capitalization" of any Person means, as of any day of
determination, the sum of (a) the consolidated Indebtedness of such Person and
any Subsidiaries on such day, plus (b) the product of (i) the aggregate number
of outstanding shares of common stock of such Person on such day (which shall
not include any options or warrants on, or securities convertible or
exchangeable into, shares of common stock of such Person) and (ii) the average
closing price of such common stock over the 10 consecutive Trading Days ending
not earlier than 10 Trading Days immediately prior to such date of
determination, plus (c) the liquidation value of any outstanding shares of
Preferred Stock of such Person on such day. If no such closing price exists with
respect to shares of any such class, the value of such shares for purposes of
clause (b) of the preceding sentence shall be determined by the board of
directors in good faith and evidenced by a resolution thereof filed with the
Trustee. Notwithstanding the foregoing, unless the Person's common stock is
listed on any national securities exchange or on the Nasdaq National Market, the
"Total Market Capitalization" of the Person shall mean, as of any day of
determination, the enterprise value (without duplication) of the Person and any
subsidiaries (including the fair market value of their debt and equity), as
determined by an independent banking firm of national standing with experience
in such valuations and evidenced by a written opinion in customary form filed
with the Trustee; provided that for purposes of any such determination, the
enterprise value of the Person shall be calculated as if the Person were a
publicly held corporation without a controlling stockholder. For purposes of any
such determination, such banking firm's written opinion may state that such fair
market value is no less than a specified amount and such opinion may be as of a
date no earlier than 90 days prior to the date of such determination.
"Trading Day" with respect to a securities exchange or automated quotation
system means a day on which such exchange or system is open for a full day of
trading.
"Trust Indenture Act" means the Trust Indenture Act of 1939, as amended, or
any successor statute, and the rules and regulations promulgated thereunder.
"Unrestricted Subsidiary" means (i) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any subsidiary of the Company (including any newly acquired or
newly formed Subsidiary) to be an Unrestricted Subsidiary if all of the
following conditions apply: (a) neither the Company nor any of its Subsidiaries
provides credit support for Indebtedness of such subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness); (b) such
subsidiary is not liable, directly or indirectly, with respect to any
Indebtedness other than Unrestricted Subsidiary Indebtedness; (c) any Investment
in such subsidiary made as a result of designating such subsidiary an
Unrestricted Subsidiary shall not violate the provisions of the "--Certain
Covenants--Limitation on Unrestricted Subsidiaries" covenant and such subsidiary
is not party to any agreement, contract, arrangement or understanding at such
time with the Company or any Subsidiary unless the terms of any such agreement,
contract, arrangement or understanding are no less favorable to the Company or
such Subsidiary than those that might be obtained at the time from Persons who
are not Affiliates of the Company; and (d) such subsidiary does not own any
Capital Stock in any Subsidiary of the Company which is not simultaneously being
designated an Unrestricted Subsidiary. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing with the
Trustee a board resolution giving effect to such designation and an officers'
certificate certifying that such designation complies with the foregoing
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conditions and shall be deemed a Restricted Payment on the date of designation
in an amount equal to the greater of (1) the net book value of such Investment
or (2) the fair market value of such Investment as determined in good faith by
the Company's Board of Directors. The Board of Directors of the Company may
designate any Unrestricted Subsidiary as a Subsidiary; provided that (i)
immediately after giving effect to such designation, the Company could incur
$1.00 of additional Indebtedness (other than Permitted Indebtedness) pursuant to
the restrictions under "--Certain Covenants--Limitation on Incurrence of
Indebtedness and Issuance of Redeemable Capital Stock" and (ii) all Indebtedness
of such Subsidiary shall be deemed to be incurred on the date such Subsidiary
becomes a Subsidiary.
"Unrestricted Subsidiary Indebtedness" of any Unrestricted Subsidiary means
Indebtedness of such Unrestricted Subsidiary (i) as to which neither the Company
nor any Subsidiary is directly or indirectly liable (by virtue of the Company or
any such Subsidiary being the primary obligor on, guarantor of, or otherwise
liable in any respect to, such Indebtedness), except Guaranteed Debt of the
Company or any Subsidiary to any Affiliate, in which case (unless the incurrence
of such Guaranteed Debt resulted in a Restricted Payment at the time of
incurrence) the Company shall be deemed to have made a Restricted Payment equal
to the principal amount of any such Indebtedness to the extent guaranteed at the
time such Affiliate is designated an Unrestricted Subsidiary and (ii) which,
upon the occurrence of a default with respect thereto, does not result in, or
permit any holder of any Indebtedness of the Company or any Subsidiary to
declare, a default on such Indebtedness of the Company or any Subsidiary or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity.
"U.S. Government Securities" means securities that are direct obligations of
the United States of America, the payment of which its full faith and credit is
pledged.
"Voting Stock" means Capital Stock of the class or classes pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
a corporation (irrespective of whether or not at the time Capital Stock of any
other class or classes shall have or might have voting power by reason of the
happening of any contingency).
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock of which
is owned by the Company or another Wholly Owned Subsidiary. For the purposes of
this definition, any director qualifying shares or investments by foreign
nationals mandated by applicable law shall be disregarded in determining the
ownership of a Subsidiary.
REGISTRATION RIGHTS
The Company and the Initial Purchaser entered into a Registration Rights
Agreement on the Closing Date of the Existing Notes Offering. Pursuant to the
Registration Rights Agreement, the Company agreed to file with the Commission an
Exchange Offer Registration Statement on the appropriate form under the
Securities Act with respect to Exchange Notes. Upon the effectiveness of the
Exchange Offer Registration Statement, the Company will offer to the holders of
Transfer Restricted Securities (as defined) pursuant to an Exchange Offer who
are able to make certain representations the opportunity to exchange their
Transfer Restricted Securities for Exchange Notes. If (i) the Company is not
required to file the Exchange Offer Registration Statement or permitted to
consummate the Exchange Offer because the Exchange Offer is not permitted by
applicable law or Commission policy or (ii) any Holder of Transfer Restricted
Securities notifies the Company prior to the 20th day following consummation of
the Exchange Offer that (A) it is prohibited by law or Commission policy from
participating in the Exchange Offer or (B) that it may not resell the Exchange
Notes acquired by it in the Exchange Offer to the public without delivering a
prospectus and the prospectus contained in the Exchange Offer Registration
Statement is not appropriate or available for such resales or (C) that it is a
broker-dealer and owns Notes acquired directly from the Company or an affiliate
of the Company, the Company will file with the Commission a shelf registration
statement (the "Shelf Registration Statement") to cover resales of the Notes by
the Holders thereof who satisfy certain conditions relating to the provision of
information in connection with the Shelf Registration
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<PAGE>
Statement. The Company will use its best efforts to cause the applicable
registration statement to be declared effective as promptly as possible by the
Commission. For purposes of the foregoing, "Transfer Restricted Securities"
means each Existing Note until (i) the date on which such Existing Note has been
exchanged by a person other than a broker-dealer for an Exchange Note in the
Exchange Offer, (ii) following the exchange by a broker-dealer in the Exchange
Offer of an Existing Note for an Exchange Note, the date on which such an
Exchange Note is sold to a purchaser who receives from such broker-dealer on or
prior to the date of such sale a copy of the prospectus contained in the
Exchange Offer Registration Statement, (iii) the date on which such Existing
Note has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iv) the date on which such
Existing Note is distributed to the public pursuant to Rule 144 under the
Securities Act.
The Registration Rights Agreement provides that (i) the Company will file an
Exchange Offer Registration Statement with the Commission on or prior to 60 days
after the Issue Date, (ii) the Company will use its best efforts to have the
Exchange Offer Registration Statement declared effective by the Commission on or
prior to 105 days after the Issue Date, (iii) unless the Exchange Offer would
not be permitted by applicable law or Commission policy, the Company will
commence the Exchange Offer and use its best efforts to issue on or prior to 30
days after the date on which the Exchange Offer Registration Statement was
declared effective by the Commission, Exchange Notes in exchange for all
Existing Notes tendered prior thereto in the Exchange Offer and (iv) if
obligated to file the Shelf Registration Statement, the Company will use its
best efforts to file the Shelf Registration Statement with the Commission on or
prior to 45 days after such filing obligation arises and to cause the Shelf
Registration Statement to be declared effective by the Commission on or prior to
105 days after such obligation arises. If (a) the Company fails to file any of
the Registration Statements required by the Registration Rights Agreement on or
before the date specified for such filing, (b) any of such Registration
Statements is not declared effective by the Commission on or prior to the date
specified for such effectiveness (the "Target Effectiveness Date"), or (c) the
Company fails to consummate the Exchange Offer within 30 days of the Target
Effectiveness Date with respect to the Exchange Offer Registration Statement, or
(d) the Shelf Registration Statement or the Exchange Offer Registration
Statement is declared effective but thereafter ceases to be effective or usable
in connection with resales of Transfer Restricted Securities during the periods
specified in the Registration Rights Agreement (each such event referred to in
clauses (a) through (d) above a "Registration Default"), the interest rate borne
by the Notes shall be increased by one-half of one percent per annum for the
90-day period following such Registration Default, which rate will increase by
one-half of one percent per annum with respect to each subsequent 90-day period
up to a maximum of one and one half percent (1.50%) per annum until cured
("Additional Interest"). Following the cure of all Registration Defaults, the
accrual of Additional Interest will cease and the interest rate will revert to
the original rate.
Holders will be required to make certain representations to the Company (as
described in the Registration Rights Agreement) in order to participate in the
Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement within the time periods set forth in the
Registration Rights Agreement in order to have their Notes included in the Shelf
Registration Statement and benefit from the additional interest provisions set
forth above.
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DESCRIPTION OF WARRANTS
The Warrants were issued pursuant to a warrant agreement (the "Warrant
Agreement") between the Company and Marine Midland Bank, as warrant agent (the
"Warrant Agent") in a private transaction that is not subject to the
registration requirements of the Securities Act. The following summary of
certain provisions of the Warrant Agreement does not purport to be complete and
is qualified by reference to the Warrant Agreement, including the definitions
therein of certain terms used below.
GENERAL
Each Warrant, when exercised, will entitle the holder thereof to receive
3.52 fully paid and non-assessable shares of Common Stock of the Company, par
value $0.01 per share ("Warrant Share"), at an exercise price of $14.03 per
share, subject to adjustment (the "Exercise Price"). The Exercise Price and the
number of Warrant Shares are both subject to adjustment in certain cases
referred to below. The Warrants will entitle the holders thereof to purchase in
the aggregate 563,200 Warrant Shares, or approximately 10% of the Common Stock
on a fully diluted basis as of the closing of the Existing Notes Offering.
The Warrants will become exercisable after the Separation Date. Unless
exercised, the Warrants will automatically expire on May 1, 2005 (the
"Expiration Date"). The Company will give notice of expiration not less than 90
and not more than 120 days prior to the Expiration Date to the registered
holders of the then outstanding Warrants. If the Company fails to give such
notice, the Warrants will not expire until 90 days after the Company gives such
notice. In no event will holders be entitled to any damages or other remedy for
the Company's failure to give such notice other than any such extension.
The Warrants may be exercised by surrendering to the Company the warrant
certificates evidencing the Warrants to be exercised with the accompanying form
of election to purchase properly completed and executed, together with payment
of the Exercise Price. Payment of the Exercise Price may be made (A) by
tendering Notes having an aggregate principal amount, plus accrued and unpaid
interest, if any, thereon, to the date of exercise equal to the Exercise Price,
(B) by tendering Warrants (or a portion of a Warrant or Warrants) that cover
shares of Common Stock having a fair market value (as determined in good faith
by the Company's Board of Directors) equal to the Exercise Price or (C) by a
combination of Notes and Warrants. Upon surrender of the warrant certificate and
payment of the Exercise Price, the Company will deliver or cause to be
delivered, to or upon the written order of such holder, stock certificates
representing the number of whole shares of Common Stock to which the holder is
entitled. If less than all of the Warrants evidenced by a warrant certificate
are to be exercised, a new warrant certificate will be issued for the remaining
number of Warrants.
No fractional shares of Common Stock will be issued upon exercise of the
Warrants. The Company will pay to the holder of the Warrant at the time of
exercise an amount in cash equal to the current market value of any such
fractional share of Common Stock less a corresponding fraction of the Exercise
Price.
Certificates for Warrants will be issued in registered form only, and no
service charge will be made for registration or transfer or exchange upon
surrender of any Warrant certificate at the office of the Warrant Agent
maintained for that purpose. The Company may require payment of a sum sufficient
to cover any tax or other governmental charge that may be imposed in connection
with any registration or transfer or exchange of Warrant certificates.
The holders of the Warrants will have no right to vote on matters submitted
to the stockholders of the Company and will have no right to receive dividends.
The holders of the Warrants will not be entitled to share in the assets of the
Company in the event of liquidation, dissolution or the winding up of the
Company. In the event a bankruptcy or reorganization is commenced by or against
the Company, a bankruptcy court may hold that unexercised Warrants are executory
contracts which may be subject to rejection by the Company with approval of the
bankruptcy court, and the holders of the Warrants may, even if sufficient funds
are available, receive nothing or a lesser amount as a result of any such
bankruptcy
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<PAGE>
case than they would be entitled to if they had exercised their Warrants prior
to the commencement of any such case.
ADJUSTMENTS
The number of Warrant Shares purchasable upon the exercise of the Warrants
and the Exercise Price both will be subject to adjustment in certain events
including (i) the payment by the Company of dividends (or other distributions)
on Common Stock of the Company payable in Common Stock of the Company or other
shares of the Company's capital stock, (ii) subdivisions, combinations and
reclassifications of Common Stock of the Company, (iii) the issuance to all
holders of Common Stock of the Company of rights, options or warrants entitling
them to subscribe for Common Stock of the Company, or for securities convertible
into or exchangeable for shares of Common Stock of the Company, in either case
for a consideration per share of Common Stock which is less than the current
market price per share (as defined in the Warrant Agreement) of Common Stock of
the Company, and (iv) the distribution to all holders of Common Stock of the
Company of any of the Company's assets, debt securities or any rights or
warrants to purchase securities (excluding those rights and warrants referred to
in clause (iii) above and excluding cash dividends or other cash distributions
from current or retained earnings).
No adjustment in the Exercise Price will be required unless such adjustment
would require an increase or decrease of at least one percent (1%) in the
Exercise Price, provided, however, that any adjustment which is not made will be
carried forward and taken into account in any subsequent adjustment.
In the case of certain consolidations or mergers of the Company, or the sale
of all or substantially all of the assets of the Company to another corporation,
each Warrant will thereafter be exercisable for the right to receive the kind
and amount of shares of stock or other securities or property to which such
holder would have been entitled as a result of such consolidation, merger or
sale had the Warrants been exercised immediately prior thereto.
RESERVATION OF SHARES
The Company has authorized and reserved for issuance and will at all times
reserve and keep available such number of shares of Common Stock as will be
issuable upon the exercise of all outstanding Warrants. Such shares of Common
Stock, when paid for and issued, will be duly and validly issued, fully paid and
non-assessable, free of preemptive rights and free from all taxes, liens,
charges and security interests with respect to the issuance thereof.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent of
the holders of the Warrants, may amend or supplement the Warrant Agreement for
certain purposes, including curing defects or inconsistencies or making any
change that does not materially adversely affect the rights of any holder. Any
amendment or supplement to the Warrant Agreement that has a material adverse
effect on the interests of the holders of the Warrants will require the written
consent of the holders of a majority of the then outstanding Warrants (excluding
Warrants held by the Company or any of its Affiliates). The consent of each
holder of the Warrants affected will be required for any amendment pursuant to
which the Exercise Price would be increased or the number of shares of Common
Stock purchasable upon exercise of Warrants would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
REPORTS
Whether or not required by the rules and regulation of the Commission, so
long as any of the Warrants remain outstanding, the Company shall cause copies
of the SEC Reports described under "Description of the Notes--Certain
Covenants--Provision of Financial Statements" to be filed with the
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Warrant Agent and mailed to the holders at their addresses appearing in the
register of Warrants maintained by the Warrant Agent.
REGISTRATION RIGHTS
The holders of the Warrants and the Warrant Shares will be entitled to
certain rights with respect to the registration of the Warrant Shares under the
Securities Act as discussed below.
DEMAND REGISTRATION RIGHTS. The holders of the Warrants and the Warrant
Shares may require the Company, after the first anniversary of the date of
issuance of the Warrants, on three occasions, at the Company's sole expense
(excluding underwriter discounts), to prepare and file a registration statement
under the Securities Act that provides for the public resale by the holders of
Warrants and/or Warrant Shares of all or any portion of their Warrant Shares in
an underwritten public offering or otherwise (the "Resale Registration"). The
Company will be required to use its best efforts to have each such registration
statement declared effective and to remain effective for a period of six months
(or such shorter period as will terminate when all Warrant Shares covered
thereby have been sold). Only holders of at least 25% in aggregate of the
Warrants and the Warrant Shares (singly or collectively) will be permitted to
initiate a demand registration. The Company shall be entitled to delay the
filing of a demand registration statement under certain circumstances for up to
90 days. In the event the holders of the Warrants and the Warrant Shares require
the Company to effect a Resale Registration, certain other security holders of
the Company will be entitled to include shares of Common Stock of the Company
held by them in such Resale Registration. All shares of Common Stock included in
such Resale Registration shall, under certain circumstances, be subject to pro
rata cut-back provisions.
PIGGYBACK REGISTRATION RIGHTS. If, after the first anniversary of the date
of issuance of the Warrants, the Company proposes to register any of its Common
Stock under the Securities Act for its own account or for the account of other
security holders, the holders of the Warrants and the Warrant Shares will be
entitled to notice of the registration and will be entitled to include, at the
Company's sole expense (excluding underwriter discounts), all or any portion of
their Warrant Shares therein, subject to pro rata cut-back provisions in the
event that the managing underwriter in any underwritten offering determines that
the inclusion of the Warrant Shares and any other securities entitled to
piggyback registration rights would adversely affect the offering being
registered.
PROVISIONS GENERALLY APPLICABLE TO ALL SECURITIES
BOOK-ENTRY, DELIVERY AND FORM
Units sold in reliance on Rule 144A were represented by one or more
permanent global Units in definitive, fully registered form without interest
coupons (each a "Restricted Global Unit") and were deposited with the Trustee as
custodian for, and registered in the name of, Cede & Co., as nominee of the
Depositary.
Each Global Unit is comprised of one or more global certificates for the
Existing Notes (the "Global Notes") and one or more global certificates for the
Warrants (the "Global Warrant Certificate"). Each Global Note and Global Warrant
Certificate are sometimes each referred to herein as a "Global Security." As
used in this section, the term "Securities" shall refer to any of the Existing
Notes, Exchange Notes or Warrants, in whatever form held. Except as set forth
below regarding "Certificated Securities", owners of beneficial interests in the
Global Securities will not be entitled to receive physical delivery of
Certificated Securities (as defined below).
The Depositary is a limited-purpose trust company organized under the New
York Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing corporation"
within the meaning of the New York Uniform Commercial Code, and a "clearing
agency" registered pursuant to the provisions of Section 17A of the Exchange
Act. The
100
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Depositary holds securities for its participating organizations (collectively,
the "Participants" or the "Depositary's Participants") and facilitates the
clearance and settlement of transactions in such securities between Participants
through electronic book-entry changes in accounts of its Participants, thereby
eliminating the need for physical movement of securities certificates. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchaser), banks and trust companies, clearing corporations and certain
other organizations. Access to the Depositary's system is also available to
other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Company expects that pursuant to procedures established by the
Depositary (i) upon deposit of any Global Security, the Depositary will credit
the accounts of Participants designated by the Initial Purchaser with portions
of the principal amount of Global Security and (ii) ownership of the Securities
evidenced by each Global Security will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants. Holders
are advised that the laws of some states require that certain persons take
physical delivery in definitive form of securities that they own. Consequently,
the ability to own, transfer or pledge Securities evidenced by any Global
Security will be limited to such extent.
So long as the Global Security Holder is the registered owner of any
Securities, the Global Security Holder will be considered the sole Holder under
the Indenture of any Securities evidenced by any Global Security. Beneficial
owners of Securities evidenced by any Global Security will not be considered the
owners or Holders thereof under the Indenture for any purpose, including with
respect to the giving of any directions, instructions or approvals to the
Trustee thereunder. Neither the Company nor the Trustee will have any
responsibility or liability for any aspect of the records of the Depositary or
for maintaining, supervising or reviewing any records of the Depositary relating
to the Securities.
Payments in respect of the principal of, premium, if any, interest on any
Notes registered in the name of the Global Security Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Security Holder in its capacity as the registered Holder under the Indenture.
Under the terms of the Indenture, the Company and the Trustee may treat the
person in whose names Notes, including any Global Security, are registered as
the owners thereof for the purpose of receiving such payments. Consequently,
neither the Company nor the Trustee has or will have any responsibility or
liability for the payment of such amounts to beneficial owners of Securities.
The Company believes, however, that it is currently the policy of the Depositary
to immediately credit the accounts of the relevant Participants with such
payments, in amounts proportionate to their respective holdings of beneficial
interests in the relevant security as shown on the records of the Depositary.
Payments by the Depositary's Participants and the Depositary's Indirect
Participants to the beneficial owners of Securities will be governed by standing
instructions and customary practice and will be the responsibility of the
Depositary's Participants or the Depositary's Indirect Participants.
CERTIFICATED SECURITIES
Transferees of Existing Notes who are not "qualified institutional buyers"
as defined in Rule 144A under the Securities Act may hold Existing Notes only in
the form of Certificated Securities. All such Certificated Securities would be
subject to the applicable legend requirements. In addition, if (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to appoint a qualified
successor within 90 days or (ii) the Company, at its option, notifies the
Trustee in writing that it elects to cause the issuance of Existing Notes in the
form of Certificated Securities under the Indenture then, upon surrender by the
Global Security Holder of any
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Global Security, Certificated Securities will be issued to each person that the
Global Security Holder and the Depositary identify as being the beneficial owner
of the related Securities.
Neither the Company nor the Trustee will be liable for any delay by the
Global Security Holder or the Depositary in identifying the beneficial owners of
Existing Notes and the Company and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Security Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture requires that payments in respect of the Notes represented by
a Global Note (including principal, premium, if any, interest and Additional
Interest, if any) be made by wire transfer of immediately available funds to the
accounts specified by the Global Security Holder. With respect to Certificated
Notes, the Company will make all payments of principal, premium, if any,
interest and Additional Interest, if any, by wire transfer of immediately
available funds to the accounts specified by the Holders thereof or, if no such
account is specified, by mailing a check to each such Holder's registered
address. Secondary trading in long-term notes and debentures of corporate
issuers is generally settled in clearing-house or next-day funds. In contrast,
the Existing Notes represented by the Global Note have been approved for trading
in the PORTAL market and to trade in the Depositary's Same-Day Funds Settlement
System, and any permitted secondary market trading activity in such Existing
Notes will, therefore, be required by the Depositary to be settled in
immediately available funds. The Company expects that secondary trading in the
Certificated Securities will also be settled in immediately available funds.
PLAN OF DISTRIBUTION
This Prospectus, as it may be amended or supplemented from time to time, may
be used by Participating Broker-Dealers in connection with resales of Exchange
Notes received in exchange for Existing Notes where such Existing Notes were
acquired as a result of market-making activities or other trading activities.
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Company has
agreed that under certain circumstances, the Company shall use its best efforts
to keep the Exchange Offer Registration Statement continuously effective,
supplemented and amended to the extent necessary to ensure that it is available
for sales of Exchange Notes by Participating Broker-Dealers, and to ensure that
the Exchange Offer Registration Statement conforms with the requirements of the
Act and the policies, rules and regulations of the Commission as announced from
time to time, for a period expiring approximately 180 days from the date on
which the Exchange Offer Registration Statement is declared effective.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions pursuant to an exemption from registration under the Securities Act
(e.g. Rule 144 or otherwise) in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such or other methods of resale, at market prices prevailing at
the time of resale, at prices related to such prevailing market prices or
negotiated prices. Any such resale may be made directly to purchasers or to or
through brokers or dealers who may receive compensation in the form of
commissions or concessions from any such broker-dealer or the purchasers of any
such Exchange Notes. Any Participating Broker-Dealer that acquired Existing
Notes as a result of market making activities or other trading activities and
who resells Exchange Notes that were received by it pursuant to the Exchange
Offer and any broker or dealer that participates in a distribution of such
Exchange Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of Exchange Notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a Participating
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Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
LEGAL MATTERS
Certain legal matters relating to the issuance of the Exchange Notes will be
passed upon for the Company by Milberg Weiss Bershad Hynes & Lerach LLP, One
Pennsylvania Plaza, New York, New York 10119.
EXPERTS
The financial statements included in this registration statement have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said report.
103
<PAGE>
GLOBIX CORPORATION
AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
Financial Statements of Globix Corporation and Subsidiaries
Report of Independent Public Accountants............................................................ F-2
Consolidated Balance Sheets--As of September 30, 1997 and September 30, 1996........................ F-3
Consolidated Statements of Operations--For the years ended September 30, 1997 and 1996 and the nine
months ended September 30, 1995................................................................... F-4
Consolidated Statements of Changes in Stockholders' Equity--For the years ended September 30, 1997
and 1996 and the nine months ended September 30, 1995............................................. F-5
Consolidated Statements of Cash Flows--For the years ended September 30, 1997 and 1996 and the nine
months ended September 30, 1995................................................................... F-6
Notes to Consolidated Financial Statements--For the Year Ended September 30, 1997................... F-7-F-16
Consolidated Balance Sheets as of March 31, 1998 (unaudited) and September 30, 1997................. F-17
Consolidated Statements of Operations for the Six Months Ended March 31, 1998 (unaudited) and
1997.............................................................................................. F-18
Consolidated Statements of Cash Flows for the Six Months Ended March 31, 1998 (unaudited) and
1997.............................................................................................. F-19
Notes to Consolidated Financial Statements for the Six Months Ended March 31, 1998.................. F-20-F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation, formerly known as Bell Technology Group Ltd. (a Delaware
corporation) and Subsidiaries as of September 30, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the years ended September 30, 1997 and 1996 and the nine months ended September
30, 1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Globix Corporation and
Subsidiaries as of September 30, 1997 and 1996 and the results of its operations
and its cash flows for the years ended September 30, 1997 and 1996 and the nine
months ended September 30, 1995, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
December 19, 1997
New York, New York
F-2
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30,
1997 1996
------------- -------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................................... $ 2,401,446 $ 2,342,011
Accounts receivable, net of allowance for doubtful accounts of $194,684 and
$64,842 as of September 30, 1997 and September 30, 1996, respectively........... 3,259,548 1,847,918
Inventories....................................................................... 487,542 758,353
Prepaid expenses and other current assets......................................... 727,765 195,113
------------- -------------
Total current assets.......................................................... 6,876,301 5,143,395
Property and equipment, net......................................................... 3,548,838 2,151,294
Long-term investment................................................................ 325,000 400,000
Other assets........................................................................ 274,849 115,093
------------- -------------
Total assets.................................................................. $ 11,024,988 $ 7,809,782
------------- -------------
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings............................................................. $ 2,001,157 $ --
Current portion of notes payable.................................................. 335,021 39,152
Accounts payable.................................................................. 2,010,507 1,274,197
Accrued expenses.................................................................. 425,852 194,947
Deferred revenues................................................................. 123,046 166,617
------------- -------------
Total current liabilities..................................................... 4,895,583 1,674,913
Long term note payable, net of current portion...................................... 923,217 --
Other long term liabilities......................................................... 191,928 45,169
------------- -------------
Total liabilities............................................................. 6,010,728 1,720,082
------------- -------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 500,000 shares authorized; no shares issued and
outstanding..................................................................... -- --
Common Stock, $.01 par value; 10,000,000 shares authorized; 3,448,450 and
3,083,210 shares issued and outstanding......................................... 34,485 30,832
Additional paid-in capital........................................................ 10,069,474 8,033,134
Accumulated deficit............................................................... (5,089,699) (1,974,266)
------------- -------------
Total stockholders' equity...................................................... 5,014,260 6,089,700
------------- -------------
Total liabilities and stockholders' equity.................................... $ 11,024,988 $ 7,809,782
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
------------- ------------- ------------
<S> <C> <C> <C>
Revenues............................................................. $ 17,399,955 $ 10,373,664 $8,738,410
Costs and expenses:
Cost of revenues................................................... 13,901,859 8,599,241 7,292,232
Selling, general and administrative................................ 6,036,032 3,186,718 1,212,829
Depreciation and amortization...................................... 472,298 219,176 68,510
Research and development........................................... -- 57,250 34,000
------------- ------------- ------------
Total costs and expenses....................................... 20,410,189 12,062,385 8,607,571
Income (loss) from operations........................................ (3,010,234) (1,688,721) 130,839
Interest income.................................................... 72,427 121,256 --
Interest expense................................................... (177,626) (98,520) (72,881)
Write-off of Debt Issuance Costs................................... -- (257,391) --
------------- ------------- ------------
Income (loss) before taxes........................................... (3,115,433) (1,923,376) 57,958
Provision for (benefit from) taxes................................... -- (29,896) 19,099
------------- ------------- ------------
Net income (loss).................................................... $ (3,115,433) $ (1,893,480) $ 38,859
------------- ------------- ------------
------------- ------------- ------------
Basic net earnings (loss) per share.................................. $ (1.01) $ (0.72) $ 0.02
Basic weighted average shares outstanding............................ 3,075,235 2,633,400 1,725,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
TOTAL
ADDITIONAL STOCK-
PAID-IN ACCUMULATED HOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
---------- --------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1994.................. 1,725,000 $ 10,625 $ 368,958 $ (119,645) $ 259,938
Adjustment related to the merger of PFMT
and the Company......................... -- 6,625 (6,625) -- --
Net Income................................ -- -- -- 38,859 38,859
---------- --------- ------------- ------------- -------------
Balance, September 30, 1995................. 1,725,000 17,250 362,333 (80,786) 298,797
Stock insurance in connection with bridge
financing............................... 35,710 357 249,643 -- 250,000
Proceeds from Initial Public
Offering, net of expenses of
$1,602,175............................ 1,322,500 13,225 7,421,158 -- 7,434,383
Net Loss.................................. -- -- -- (1,893,480) (1,893,480)
---------- --------- ------------- ------------- -------------
Balance, September 30, 1996................. 3,083,210 30,832 8,033,134 (1,974,266) 6,089,700
Proceeds from Private Placement, net of
expenses of $216,763.................... 400,000 4,000 1,979,241 -- 1,983,241
Proceeds from exercise of stock options... 7,998 80 55,906 -- 55,986
Proceeds from exercise of warrants........ 100 1 765 -- 766
Correction of outstanding shares.......... (42,858) (428) 428 --
Net Loss.................................. -- -- -- (3,115,433) (3,115,433)
---------- --------- ------------- ------------- -------------
Balance, September 30, 1997................. 3,448,450 $ 34,485 $ 10,069,474 $ (5,089,699) $ 5,014,260
---------- --------- ------------- ------------- -------------
---------- --------- ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income....................................................... $(3,115,433) $(1,893,480) $ 38,859
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization......................................... 686,250 219,176 68,510
Write-off and amortization of debt issuance........................... -- 250,000 --
Benefit for deferred taxes............................................ -- (29,896) (838)
Changes in operating assets and liabilities:
Increase in accounts receivables.................................... (1,411,630) (424,370) (111,434)
Decrease (increase) in inventories.................................. 270,811 85,551 (422,991)
Decrease (increase) in prepaid expenses and other current assets.... 31,348 (183,052) 4,354
Decrease (increase) in other assets................................. 36,708 (68,729) (31,890)
Increase (decrease) in accounts payables............................ 736,310 (45,337) 99,211
Increase in accrued expenses........................................ 277,664 121,702 6,347
(Decrease) in payable due to officers............................... -- -- (5,250)
(Decrease) increase in deferred revenues............................ (43,571) 91,057 48,762
----------- ----------- ------------
Net cash used in operations....................................... (2,531,543) (1,877,378) (306,360)
----------- ----------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of landlord reimbursement.... (1,542,431) (1,954,646) (149,917)
Purchase of long-term investment...................................... -- (400,000) --
----------- ----------- ------------
Net cash used in investing activities............................. (1,542,431) (2,354,646) (149,917)
----------- ----------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from (repayments of) short term borrowings............... 2,001,077 (711,952) 417,739
Shareholder loan...................................................... (145,408) -- --
Repayments of stockholder loan........................................ -- (287,000) (13,000)
Proceeds from notes payable for equipment refinancing................. 873,610 -- --
Repayments of notes payable........................................... (195,887) (83,763) (48,990)
Proceeds from private placement, net of offering costs of $216,763.... 1,544,031 -- --
Proceeds from initial public offering, net of offering costs of
$1,602,175.......................................................... -- 7,434,383 --
Proceeds from sale of options......................................... 55,986 -- --
----------- ----------- ------------
Net cash provided by financing activities............................... 4,133,409 6,351,668 355,749
----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents.................... 59,435 2,119,644 (100,528)
Cash and cash equivalents, beginning of period........................ 2,342,011 222,367 322,895
----------- ----------- ------------
Cash and cash equivalents, ending of period........................... $ 2,401,446 $ 2,342,011 $ 222,367
----------- ----------- ------------
----------- ----------- ------------
Supplemental disclosure of cash flow information:
Cash paid for interest.................................................. 165,540 53,887 60,157
Cash paid for income taxes.............................................. 27,881 12,736 --
Noncash investing and financing activities:
Equipment acquired under capital lease obligations.................... 539,764 -- 121,422
Proceeds receivable associated with private placement................. 600,000 -- --
Issuance of common stock in connection with private placement......... 100,000 -- --
Issuance of common stock in connection with bridge financing.......... -- 250,000 --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Globix Corporation and Subsidiaries (the "Company") was incorporated in the
State of Delaware in September 1995. Shortly thereafter, the Company succeeded
by merger to all the assets and liabilities of PFM Technologies Corporation
("PFMT"), a New York corporation. In July 1994, the sole stockholder of NAFT
International Ltd. ("NAFT") and Stellar Graphics Corp. ("Stellar Graphics")
exchanged 100% of the common stock of both companies for 100 shares (100%) of
PFMT, then a newly formed corporation, in a tax free exchange. Subsequent to
this transaction, an additional 100 shares of PFMT were issued to Harpoon
Holdings, Ltd. ("Harpoon") in consideration for $200,000. The Company also owns
100% of the equity of NAFT Computer Service Corp. ("NCS") a New York corporation
formed in September 1994, PFM Communications Inc. ("PFMC"), a New York
corporation formed in March 1995 and GameNet Corp. ("GameNet"), a New York
corporation formed in March 1995. Prior to the merger of PFMT into the Company,
these entities were wholly owned subsidiaries of PFMT. During 1996, the Company
changed the name of Stellar Graphics Corp. to Bluestreak Digital Inc.
("Bluestreak").
The consolidated financial statements herein include the accounts of the
Company, NAFT, PFMC, NCS, GameNet and Bluestreak. All material intercompany
accounts and transactions have been eliminated. In September 1995, the Company
changed its fiscal year end from December 31 to September 30.
OPERATIONS
The Company's activities presently fall into two main segments. One segment
consists of computer products sales, service network installation and
maintenance. The second segment consists of all Internet related activities
including Web hosting and interactive CD ROM design, preparation and 3-D
animation.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital, and open-end
equipment lease commitment from Cisco Systems, Inc. of $1,000,000 received in
December 1997. In addition, the Company has a $3,000,000 credit facility with
NationsCredit discussed in note 2 to the financial statements. Borrowings under
the NationsCredit credit facility and security interests are limited to
inventory held primarily for sale to customers and the availability of current
accounts receivable of the Company's hardware sales subsidiary. The Company is
presently discussing an increase in its credit facility with NationsCredit based
upon a pledge of inventory and receivables held by its other subsidiary
corporations. However, in order to continue with its expansion program, the
Company will be required to raise additional debt or equity capital of several
million dollars. The Company is seeking other financing alternatives to finance
its expansion. However, there is no assurance that the Company will be able to
raise such additional cash.
SEGMENT INFORMATION
The following is a summary of segment information for the fiscal years ended
September 30, 1997 and 1996. The Company started its Internet and Media
Development segment during the second half of the fiscal period ended September
30, 1995. For the fiscal period ended September 30, 1995, no operating segment
of the Company had sufficient Gross Revenues, Operating Income/Loss or
Identifiable Assets to require the reporting of results for that period on a
Segment basis.
F-7
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Fiscal year ended September 30, 1997
<TABLE>
<CAPTION>
COMPUTER INTERNET AND
PRODUCTS & MEDIA
SERVICE SALES DEVELOPMENT CONSOLIDATED
------------- ------------ ---------------
<S> <C> <C> <C>
Sales to unaffiliated customers.................................... $ 14,986,417 $ 2,413,538 $ 17,399,955
Operating Loss..................................................... 378,647 84,632 3,010,234*
Identifiable assets................................................ 5,781,580 2,105,207 11,024,988**
</TABLE>
Fiscal year ended September 30, 1996
<TABLE>
<CAPTION>
COMPUTER
PRODUCTS & INTERNET AND
SERVICE MEDIA
SALES DEVELOPMENT CONSOLIDATED
------------ ------------ -------------
<S> <C> <C> <C>
Sales to unaffiliated customers....................................... $9,732,322 $ 641,342 $ 10,373,664
Operating Loss........................................................ 267,482 359,751 1,688,721*
Identifiable assets................................................... 3,442,760 1,132,253 7,809,782**
</TABLE>
- ------------------------
* Includes $2,546,955 for the fiscal year ended September 30, 1997 and
$1,061,488 for fiscal year ended September 30, 1996 of unallocated corporate
overhead including executive salaries of $616,034 for fiscal year ended
September 30, 1997 and $389,000 for fiscal year ended September 30, 1996 and
overhead including rent, payroll charges for administrative staff including
accounting, human resources, MIS and other support personnel and
professional fees.
** Including corporate assets not allocable to a particular segment of
$3,138,201 and $3,234,769 for the fiscal years ended September 30, 1997 and
1996.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
CONCENTRATIONS OF CASH AND ACCOUNTS RECEIVABLE
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, cash equivalents and accounts
receivable. As of September 30, 1997, the Company had concentrations of cash in
a bank in the form of demand deposits, certificates of deposit and restricted
letter of credit accounts, totaling approximately $2,211,695. The Company
believes that concentrations of credit risk with respect to trade accounts
receivable are limited due to the large number of entities comprising the
Company's customer base. The Company primarily operates in the New York City
metropolitan area.
SIGNIFICANT VENDORS
One vendor comprises approximately $2,787,000 or 22% of the Company's
inventory purchases during the fiscal year ended September 30, 1997. If such
vendor ceases to supply the Company, management is confident it can procure
comparable services at similar costs elsewhere.
F-8
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
INVENTORIES
Inventory consists of computer hardware and software, parts and related
items. Inventories are carried at the lower of cost or market determined by the
first-in, first-out method.
PROPERTY AND EQUIPMENT
Furniture and equipment are recorded at cost and are depreciated on a
straight-line basis over their estimated useful lives, generally five years.
Leasehold improvements are recorded at cost and amortized over the term of the
lease or life of the asset, whichever is shorter. Property and equipment consist
of the following.
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
1997 1996
------------- -------------
<S> <C> <C>
Leasehold improvements.............................................................. $ 686,662 $ 510,057
Computer hardware and software and network equipment................................ 3,724,645 1,862,416
Furniture and delivery equipment.................................................... 238,014 193,054
Less: Accumulated depreciation...................................................... (1,100,483) (414,233)
------------- -------------
Property and equipment, net......................................................... $ 3,548,838 $ 2,151,294
------------- -------------
------------- -------------
</TABLE>
Included in property and equipment is $1,413,373 and $155,507 of assets held
under capital lease obligations at September 30, 1997 and 1996 respectively.
Also included in total property and equipment is $416,667 and $184,086
representing internally developed software costs as of September 30, 1997 and
1996 respectively. In addition, included in property and equipment is $153,014
related to the implementation of a new MIS system as of September 30, 1997.
Depreciation expense relating to cost of sales is $203,000 (relating to the
establishment of the Network Operations Center for the Internet and Media
Development segment), $0 and $0 for fiscal years ended September 30, 1997 and
1996 and the nine months ended September 30, 1995, respectively.
REVENUE RECOGNITION
Revenues consist primarily of computer hardware sales, maintenance
contracts, Internet access fees, network installation charges, and repair fees.
Generally, maintenance contracts are for an agreed upon number of hours and are
prepaid by customers. Repair fees and maintenance charges are recognized as the
service is provided. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation charges are recognized when installation is completed.
Monthly subscription service revenue related to Internet access is
recognized over the period services are provided. Subscription service and
equipment installation revenues, which require the use of Company-provided
installation of equipment at a subscriber's location, are recognized at
completion of installation and upon commencement of service. Revenues related to
the Web; interactive development and to 2-D and 3-D animation are recognized at
the completion of each project. Projects are generally completed within a three
month period.
F-9
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COST OF REVENUES
Cost of revenues in the Company's Internet and Media Development businesses
consists primarily of local access costs, leased network backbone circuit costs,
the cost of equipment and applications sold to customers and depreciation of
network-related equipment and labor. For the Computer Products and Service
Sales, the cost of revenues is the cost of the computer products it sells
including parts, internal and third-party labor costs, and training and
certification costs.
RESEARCH & DEVELOPMENT
Research and development costs are expensed as incurred.
STOCK-BASED COMPENSATION
The Company accounts for employee stock options in accordance with
Accounting Principles Board No. 25 ("APB No. 25"), "Accounting for Stock Issued
to Employees." Under APB No. 25, the Company applies the intrinsic value method
of accounting and therefore does not recognize compensation expense for options
granted, because options are only granted at a price equal to market value on
the day of grant.
During 1996, Statement of Financial Accounting Standards No. 123 ("SFAS No.
123"), "Accounting for Stock Based Compensation," became effective for the
Company. SFAS No. 123 prescribes the recognition of compensation expense based
on the fair value of options determined on the grant date. However, SFAS No. 123
allows companies currently applying APB No. 25 to continue using that method.
The Company has therefore elected to continue applying the intrinsic value
method under APB No. 25. For companies that choose to continue applying the
intrinsic value method, SFAS No. 123 mandates certain pro forma disclosures as
if the fair value method had been utilized. See Note 3 for additional
discussion.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECENT PRONOUNCEMENTS
In the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
requires the presentation of both basic and diluted earnings per share on the
face of the Consolidated Statements of Operations. Options and warrants are not
included in the calculation of diluted earnings per share if the effect would be
antidilutive. Accordingly, basic and diluted net loss per share do not differ
for any period presented.
Net loss per share under the provisions of SFAS 128 for periods prior to the
first quarter of fiscal 1998 did not differ from the net loss per share as
reported in those prior periods.
The following table summarizes securities that were outstanding as of
September 30, 1997 and 1996, but not included in the calculation of diluted net
loss per share because such shares are antidilutive. As
F-10
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
mentioned in Note 3, the Company made its initial public offering in January
1996, therefore no stock options or warrants were outstanding for the nine
months ended September 30, 1995.
<TABLE>
<CAPTION>
SEPTEMBER 30,
--------------------
<S> <C> <C>
1997 1996
--------- ---------
Options................................................................. 272,564 202,730
Warrants................................................................ 695,933 661,250
</TABLE>
2. SHORT TERM BORROWINGS
The Company (through its NAFT subsidiary) has a Revolving Credit Agreement
with NationsCredit ("Nations") which may be used to finance its accounts
receivable and inventory up to a maximum of $3 million. The availability of
credit is based upon the balance of collateral available which is 80% of its
current accounts receivable and 100% of its inventory. As of September 30, 1997,
the Company had an outstanding balance of approximately $2 million, which was
the maximum available under the formula. Such obligation is secured by a
continuing security interest in the accounts receivable and inventory of NAFT,
and guaranties and cross guaranties of the Company and its other subsidiaries.
The borrowings bear interest at the prime rate plus 1.75%. Pursuant to the terms
of these agreements, NAFT is required to maintain certain liquidity ratios which
it is currently maintaining: (a) tangible net worth plus indebtedness
subordinated to amounts owed to Nations, less prepaid expenses, officer/employee
receivables and other intangible assets of not less than $1.4 million at the end
of each fiscal quarter, and (b) a ratio of total liabilities to tangible net
worth of no greater than 2.5 to 1 at the end of each fiscal quarter. As of
September 30, 1997, NAFT had a tangible net worth of approximately $2.7 million
and a ratio of total liabilities to tangible net worth of 1.8 to 1, therefore
keeping the Company in compliance with all requirements. While the Credit
Agreement gives Nations the right to demand repayment if it deems itself
"insecure," Nations has given the Company no indication that it is considering
utilizing this provision. Furthermore, incurring losses as the Company builds
its new businesses was anticipated in setting its covenants with Nations in
October 1996. The Company deems its relationship with Nations to be normal.
3. STOCKHOLDERS' EQUITY AND STOCK OPTIONS
INITIAL PUBLIC OFFERING
In January 1996, the Company sold, in an initial public offering, 1,150,000
shares of Common Stock at an initial offering price of $7.00 per share, and
575,000 Redeemable Purchase Warrants for $.10 per warrant. Each warrant entitles
the holder to purchase one share of the Company's common stock for $7.70 per
share. The warrants are redeemable by the Company at $.10 per warrant at any
time after January 24, 1997 if certain conditions are met. The net proceeds
which the Company received from the public offering amounted to approximately
$6,600,000.
In March 1996, the underwriter of the initial public offering exercised its
over-allotment option to purchase 129,642 common shares from the Company for
$7.00 per share and 86,250 Redeemable Purchase Warrants for $.10 per Warrant.
The net proceeds amounted to approximately $800,000.
F-11
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
PRIVATE PLACEMENT
In September 1997, the Company sold 382,609 shares of its common stock in a
private transaction for a total consideration of $2,200,000. Form SB-2 was filed
with the Securities and Exchange Commission with respect to these shares on
November 6, 1997 and became effective on November 20, 1997. A fee with respect
to the sale of these shares of $100,000 in cash and 17,391 shares of common
stock was paid to the investors and were offset against the proceeds of the
issuance. Of the total consideration, $1,600,000 was received by the Company in
September, 1997. Included in prepaid expenses and other current assets as of
September 30, 1997 is an receivable of $600,000 which was received by the
Company in October, 1997.
BRIDGE FINANCING
In October 1995, the Company borrowed $250,000 in a Bridge Financing. The
Bridge Notes issued in connection with the Bridge Financing carried interest at
9% per annum. Such loans were repaid at the closing of the initial public
offering. In connection with the Bridge Financing, the Company issued 35,710
shares of Common Stock to the Bridge Lenders at no cost, which were registered
as part of the initial public offering. Debt issuance costs of $257,391 and
interest expense of $37,149 were incurred by the Company in fiscal 1996 as a
result of the bridge loan transaction.
STOCK OPTIONS
The Company, with the approval of its stockholders, adopted the 1995 Stock
Option Plan ("Option Plan") which reserved 360,000 shares of common stock for
issuance under the Option Plan. Under the Option Plan, the term of the options
issued are determined by the stock option committee and range from 5 to 10 years
from the date of the grant. Option issued to directors are immediately
exercisable and options issued to employees are exercisable ratably over a three
year period. Options issued before the Company's initial public offering were
issued at the fair value of the stock at the date of grant, in the opinion of
management. The exercise price of the options issued subsequent to the initial
public offering is equal to or greater than 100% of the fair market value of the
stock on the date of grant.
On September 30, 1997, 250,064 options previously issued to employees and
directors with a weighted average exercise price of $8.32 were canceled and
reissued at $6.125, the fair market value of the Company's common stock on the
date of reissuance. This revaluation did not alter or amend any other provision
of the optionee's original option agreement, including the vesting period and
option term.
The Company accounts for awards granted to employees and directors under APB
No. 25, under which no compensation cost has been recognized for stock options
granted. Had compensation cost for these stock options been determined
consistent with SFAS No. 123, the Company's net loss and loss per share would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C> <C>
Net loss......................................................... As reported $ (3,115,433) $ (1,893,480)
Pro forma (3,307,639) (2,315,808)
Loss per share................................................... As reported (1.01) (0.72)
Pro forma (1.08) (0.88)
</TABLE>
F-12
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. STOCKHOLDERS' EQUITY AND STOCK OPTIONS (CONTINUED)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts as additional awards in future years are
anticipated. As mentioned in Note 3, the Company made its initial public
offering in January 1996, therefore no stock options were outstanding for the
nine months ended September 30, 1995.
Option activity for the two years ended September 30, 1997 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER EXERCISE
OF SHARES PRICE
---------- -----------
<S> <C> <C>
Options outstanding, October 1, 1995....................................................... -- $ --
Granted.................................................................................. 202,730 $ 7.04
Canceled................................................................................. -- $ --
Exercised................................................................................ -- $ --
---------- -----
Options outstanding, September 30, 1996.................................................... 202,730 $ 7.04
Granted.................................................................................. 361,897 $ 7.41
Canceled................................................................................. (284,065) $ 8.39
Exercised................................................................................ (7,998) $ 7.00
---------- -----
Options outstanding, September 30, 1997.................................................... 272,564 $ 6.13
---------- -----
---------- -----
</TABLE>
There were 45,437 options available for future grant at September 30, 1997.
The weighted average fair value of options granted is $3.76 and $2.89 for
the years ended September 30, 1997 and 1996, respectively. The fair value of
each option grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following weighted-average assumptions used for
grants in 1997 and 1996, respectively: risk-free interest rate of 6.17% and
5.77%; expected life of 6.00 and 4.09 years; expected volatility of 42% and 42%
and expected dividend yield of 0%.
The following table summarized information with respect to stock options
outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------- ------------------------
<S> <C> <C> <C> <C> <C>
NUMBER OF NUMBER OF
OPTIONS WEIGHTED OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF EXERCISE SEPT. 30, CONTRACTUAL EXERCISE SEPT. 31, EXERCISE
PRICES 1997 LIFE PRICE 1997 PRICE
- ----------------------- ----------- --------------- ----------- ----------- -----------
6.125..$......... 272,564 7.8 $ 6.125 150,410 6.125
</TABLE>
DEPOSIT SHARES
In connection with the Company's initial public offering, Marc H. Bell and
Harpoon have each deposited 210,000 shares of the Common Stock owned by them
(the "Deposit Shares") with the Company. The Company will hold such shares
pursuant to a Share Deposit Agreement. The Deposit Shares will be returned to
their respective owners in January 2004.
F-13
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. COMMITMENTS AND CONTINGENCIES
CAPITAL AND OPERATING LEASES
The Company leases office equipment and office space under various
noncancellable operating leases accounted for on a straight line basis. Rent
expense for the years ended September 30, 1997 and 1996 and the nine months
ended September 30, 1995 was approximately $548,897, $253,402 and $81,280,
respectively.
In February 1996, the Company entered into a lease for its corporate
headquarters effective July 1996. The lease is for eleven years and six months
starting with an initial annual base rental of $309,250 escalating to $563,547
in the final year. Under the lease, the landlord reimbursed the Company $500,000
for leasehold improvements. The Company is required by the terms of the lease to
maintain a security deposit in the form of a letter of credit in the amount of
$400,000. In order to obtain a standby letter of credit, the Company maintains a
restricted certificate of deposit presently in the amount of $400,000. As of
March 1998, this amount is to be reduced to $325,000 if the Company is not in
default under the terms of the lease. Therefore $75,000 of this deposit is
classified as other current assets and $325,000 is included in "Long-term
Investment" of the Company's consolidated balance sheets as of September 30,
1997.
The Company has entered into leases for various items of its office
furniture and equipment as well as for its telephone system accounted for as
capital leases. The terms on these leases vary from 36 to 60 month terms.
The Company refinanced certain of its furniture and computer equipment in
April 1997 in the amount of approximately $874,000 from FINOVA Capital
Corporation. Such loan is for a term of three years, bears interest at 12.19%
per annum and is self-liquidating over its term. Future minimum lease and loan
payments under these agreements are as follows:
<TABLE>
<CAPTION>
YEAR ENDING SEPTEMBER 30, OPERATING CAPITAL
- -------------------------------------------------------------------------------------- ------------ ------------
<S> <C> <C>
1998.................................................................................. $ 332,664 $ 483,116
1999.................................................................................. 423,319 483,116
2000.................................................................................. 447,362 366,732
2001.................................................................................. 456,310 133,968
2002.................................................................................. 465,436 70,404
Thereafter............................................................................ 2,774,953 --
Less: Amount representing interest.............................................. -- (279,098)
------------ ------------
Present value of net minimum lease payments..................................... $ 4,900,044 $ 1,258,238
------------ ------------
------------ ------------
</TABLE>
5. INCOME TAXES
Income taxes are accounted for under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Under this method, deferred
tax assets and liabilities are determined based on differences between the
financial reporting and income tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
The Company is in an accumulated loss position for both financial reporting
and income tax purposes. The tax benefit recorded by the Company has been fully
reserved against due to the uncertainty of the
F-14
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Company's ability to realize benefits by generating taxable income in the
future. The Company has a tax loss carryforward of approximately $4.2 million at
September 30, 1997. This carryforward expires between 2001 and 2012. The benefit
from the provision for taxes of $29,896 for the fiscal year ended September 30,
1996 represents the reversal of deferred taxes provided in prior years.
Income tax benefit consists of the following:
<TABLE>
<CAPTION>
NINE
YEAR YEAR MONTHS
ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
----------- ---------- ---------
<S> <C> <C> <C>
Current:
Federal........................................................................ $ -- $ -- $ 8,410
State and local................................................................ -- -- 11,527
----- ---------- ---------
Total........................................................................ -- -- $ 19,937
----- ---------- ---------
Deferred:
Federal........................................................................ -- $ (19,759) (398)
State and local................................................................ -- (10,137) (440)
----- ---------- ---------
Total........................................................................ -- $ (29,896) $ (838)
----- ---------- ---------
Total...................................................................... $ -- $ (29,896) $ 19,099
----- ---------- ---------
----- ---------- ---------
</TABLE>
The provision for income taxes on a historical net income for the years
ended September 30, 1997 and 1996 and the nine months ended September 30, 1995
differs from the amount computed by applying the federal statutory rate due to
the following:
<TABLE>
<CAPTION>
NINE
YEAR YEAR MONTHS
ENDED ENDED ENDED
SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
------------- ------------- -----------
<S> <C> <C> <C>
Statutory federal income tax rate.................................................. (34)% (34)% 34%
Effect of federal graduating tax rate.............................................. -- -- (18)%
State and local taxes, net of federal benefit...................................... (11)% (11)% 14%
Other.............................................................................. (0)% (1)% 3%
Valuation allowance................................................................ 45% 44% --
-- --
---
Effective income tax rate.......................................................... (0)% (2)% 33%
-- --
-- --
---
---
</TABLE>
F-15
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
SEPT. 30, SEPT. 30, SEPT. 30,
1997 1996 1995
------------- ----------- -----------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Tax depreciation and amortization in excess of book depreciation and
amortization........................................................... $ (264,820) $ (12,920) $ (6,708)
Income not recognized due to the change from the cash to the accrual
method of accounting for income tax purposes........................... -- -- (25,828)
Net operating loss carryforward.......................................... 1,908,226 733,393 --
Allowance for doubtful accounts.......................................... 255,350 29,176 5,158
Deferred rent............................................................ 80,795 -- --
Valuation allowance...................................................... (1,979,551) (749,649) --
------------- ----------- -----------
Total net deferred tax liabilities....................................... $ -- $ -- $ (27,378)
------------- ----------- -----------
------------- ----------- -----------
</TABLE>
6. EMPLOYMENT AGREEMENT
In October 1995, the Company entered into an employment agreement with Marc
H. Bell which extends for a period of five years, terminating on September 30,
2000. Pursuant to the terms of the agreement, Mr. Bell receives a base salary of
$200,000 per year and a bonus equal to 5% of the annual pre-tax net income of
the Company in excess of $1 million (50% of the Bonus Pool) to the extent, if
any, that the Bonus Pool exceeds $100,000.
During the third quarter of fiscal 1997, the Company made loans to Mr. Bell
bearing interest at 8.75% per annum in the total amount of $145,408. These loans
are pursuant to his existing employment agreement. The loans mature in June
2002.
The Company has also entered into employment contracts with William Jahnke
and Alan Levy. Such agreements are all similar and contain certain restrictive
covenants if employment is terminated by the employee without cause, or by the
Company for cause.
7. FOURTH QUARTER ADJUSTMENTS
During the fourth quarter of 1997, the Company established an additional
reserve of $360,000 for Returned Merchandise Allowances to properly reflect the
value of its receivables from vendors of merchandise to the Company. The Company
considers this event to be non-recurring and future write-offs to be
significantly lower. The Company also increased its allowance for doubtful
accounts by $50,000.
8. SUBSEQUENT EVENT
NEW CREDIT AGREEMENT
In December 1997, the Company received a $1,000,000 credit line from Cisco
Systems Capital Corporation ("CSC") to lease Cisco Systems products and
associated peripherals. The credit line is available to the Company for a period
of 180 days, is to be repaid over a 36 month period and is subject to quarterly
financial review by CSC. The Company may not purchase more than $500,000 on the
credit line during any three month period. At the end of the lease term, the
Company has the option of purchasing the equipment for fair market value, renew
the lease of the equipment for the then fair rental value or return the
equipment.
F-16
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1998 1997
------------ -------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents.......................................................... $ 984,625 $ 2,401,446
Accounts receivable, net of allowance for doubtful accounts of $272,986 as of March
31, 1998 and $194,684 as of September 30, 1997, respectively..................... 2,857,387 3,259,548
Inventories........................................................................ 478,942 487,542
Prepaid expenses and other current assets.......................................... 324,199 727,765
------------ -------------
Total current assets........................................................... 4,645,153 6,876,301
Property and equipment, net.......................................................... 4,593,760 3,548,838
Long-term investment................................................................. 325,000 325,000
Loan to stockholder.................................................................. 145,408 145,408
Other assets......................................................................... 218,294 129,441
------------ -------------
Total assets................................................................... $ 9,927,615 $ 11,024,988
------------ -------------
------------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings.............................................................. $ 1,587,984 $ 2,001,157
Current portion of notes payable................................................... 373,297 335,021
Accounts payable................................................................... 2,554,362 2,010,507
Accrued expenses................................................................... 184,623 425,852
Deferred revenues.................................................................. 87,599 123,046
------------ -------------
Total current liabilities...................................................... 4,787,865 4,895,583
Notes payable, less current portion................................................ 807,407 923,217
Other long term liabilities........................................................ 266,397 191,928
------------ -------------
Total liabilities.............................................................. 5,861,669 6,010,728
------------ -------------
Commitments and contingencies
Stockholders' equity:
Preferred Stock, $.01 par value; 500,000 shares authorized; no shares issued and
outstanding...................................................................... -- --
Common Stock, $.01 par value; 10,000,000 shares authorized; 3,448,450 shares issued
and outstanding.................................................................. 34,485 34,485
Additional paid-in capital........................................................... 9,991,836 10,069,474
Accumulated deficit.................................................................. (5,960,375) (5,089,699)
------------ -------------
Total stockholders' equity......................................................... 4,065,946 5,014,260
------------ -------------
Total liabilities and stockholders' equity..................................... $ 9,927,615 $ 11,024,988
------------ -------------
------------ -------------
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-17
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------------
<S> <C> <C>
1998 1997
------------ --------------
Revenue............................................................................. $ 9,091,174 $ 8,925,851
Costs and expenses:
Cost of revenues (exclusive of depreciation expense shown below).................. 5,857,968 6,847,094
Selling, general and administrative............................................... 3,479,353 2,882,344
Depreciation and amortization..................................................... 506,219 296,090
------------ --------------
Total costs and expenses...................................................... 9,843,540 10,025,528
------------ --------------
Loss from operations................................................................ (752,366) (1,099,677)
Interest income (expense), net.................................................... (118,310) 25,669
------------ --------------
Net loss............................................................................ $ (870,676) $ (1,074,008)
------------ --------------
Basic net loss per common share..................................................... $ (0.25) $ (0.35)
------------ --------------
------------ --------------
Basic weighted average shares outstanding........................................... 3,448,450 3,042,248
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-18
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MARCH 31,
----------------------------
<S> <C> <C>
1998 1997
------------- -------------
Cash flows from operating activities:
Net loss.......................................................................... $ (870,676) $ (1,074,008)
Adjustments to reconcile net (loss) to net cash used in operating activities
Depreciation and amortization..................................................... 506,219 296,090
Provision for bad debts........................................................... 78,302 86,833
CHANGES IN OPERATING ASSETS AND LIABILITIES:
(Increase) in accounts receivable................................................. 323,859 (2,149,268)
(Increase)in inventories.......................................................... 8,600 (40,720)
Decrease in prepaid expenses and other current assets............................. 403,566 73,275
Decrease (increase) in other assets............................................... (88,853) 7,668
Increase in accounts payable...................................................... 543,855 1,002,598
(Decrease)increase in accrued expenses............................................ (241,229) (31,293)
(Decrease)increase in deferred revenues........................................... (35,447) 44,252
Increase in other long-term liabilities........................................... 74,469 --
------------- -------------
Net cash provided by (used in) operations........................................... 702,665 (1,784,573)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of landlord reimbursement................ (1,551,141) (1,221,666)
------------- -------------
Net cash used in investing activities............................................... (1,551,141) (1,221,666)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
(413,173)
Net proceeds from short term borrowings........................................... 062
Net repayments of notes payable................................................... (77,534) 321,711
Additional costs incurred with private placement from September 1997.............. (77,638) --
Proceeds from exercise of stock options........................................... -- 23,760
------------- -------------
Net cash provided by financing activities........................................... (568,345) 1,871,533
------------- -------------
Net (decrease)increase in cash and cash equivalents................................. (1,416,821) (1,134,706)
Cash and cash equivalents, beginning of period.................................... 2,401,446 2,342,011
------------- -------------
Cash and cash equivalents, end of period............................................ $ 984,625 $ 1,207,305
------------- -------------
------------- -------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-19
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheets as of March 31, 1998, statements of
operations for the six months ended March 31, 1998 and 1997 and the statements
of cash flows for the six months ended March 31, 1998 and 1997 have been
prepared by Globix Corporation (the "Company") without audit. All material
inter-company accounts and transactions have been eliminated. The consolidated
results should be read in conjunction with the audited financial statements and
notes thereto included in the Company's Form 10KSB on file with the Securities
and Exchange Commission. Results of operations for the six-month period are not
necessarily indicative of the operating results for the full year. Interim
statements are prepared on a basis consistent with year-end statements.
In the opinion of management, the unaudited interim financial statements
furnished herein include all adjustments necessary for a fair presentation of
the results of operations of the Company. All such adjustments are of a normal
recurring nature.
2. REVOLVING CREDIT AGREEMENT
The Company and its subsidiaries have entered into a Restated Security
Agreement with NationsCredit Distribution Finance, Inc. ("Nations") pursuant to
which Nations will make certain advances to the Company to be used to finance
its accounts receivable and inventory. The amount available under this
arrangement is based upon the balance of collateral available which is 80% of
its current qualifying accounts receivable and 50% of its inventory. As of March
31, 1998, the Company had available $2.0 million of which $1.9 million was
outstanding. Such obligation is secured by a continuing security interest in the
assets of the Company and its subsidiaries. The borrowings bear interest at the
prime rate plus 1.75%. On April 30, 1998 the Company repaid approximately $1.9
million of the $2.0 million currently outstanding with Nations with proceeds of
its Existing Notes Offering.
3. NOTES AND MORTGAGES PAYABLE
The Company has entered into leases for various items of its office
furniture and equipment as well as for its telephone system accounted for as
capital leases. The terms on these leases vary from 36 to 60 month terms.
The Company financed certain of its furniture and computer equipment in
April 1997 in the amount of approximately $874,000 with FINOVA Capital
Corporation. Such loan is for a term of three years, bears interest at 12.19%
per annum and is self-liquidating over its term.
4. COMMITMENTS AND CONTINGENCIES
In February 1996, the Company entered into a lease for its corporate
headquarters effective July 1996. The lease is for eleven years and six months
starting with an initial annual base rental of $309,250 escalating to $563,547
in the final year. Under the lease, the landlord reimbursed the Company $500,000
for leasehold improvements. The Company is required by the terms of the lease to
maintain a security deposit in the form of a letter of credit in the amount of
$400,000. In order to obtain a standby letter of credit, the Company maintains a
restricted certificate of deposit presently in the amount of $400,000. As of
March 1998, this amount is to be reduced to $325,000 if the Company is not in
default under the terms of the lease. Therefore $75,000 of this deposit is
classified as other current assets and $325,000 is included in "Long-term
Investment" of the Company's consolidated balance sheets as of March 31, 1998
and September 30, 1997, respectively. The Company received the $75,000 in April
1998.
F-20
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEPRECIATION AND AMORTIZATION
Depreciation expense relating to cost of revenues is $68,640 and $48,783 for
the three months ended March 31, 1998 and 1997, and $131,906 and $93,799 for the
six months ended March 31, 1998 and 1997, respectively.
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In the first quarter of fiscal 1998, the Company adopted Statement of
Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share," which
requires the presentation of both basic and diluted earnings per share on the
face of the Consolidated Statements of Operations. Options and warrants are not
included in the calculation of diluted earnings per share if the effect would be
antidilutive. Accordingly, basic and diluted net loss per share do not differ
for any period presented.
Net loss per share under the provisions of SFAS 128 for periods prior to the
first quarter of fiscal 1998 did not differ from the net loss per share as
reported in those prior periods.
The following table summarizes securities that were outstanding as of March
31, 1998 and 1997, but not included in the calculation of diluted net loss per
share because such shares are antidilutive.
<TABLE>
<CAPTION>
MARCH 31,
--------------------
<S> <C> <C>
1998 1997
--------- ---------
Options................................................................. 926,564 257,564
Warrants................................................................ 695,933 661,150
</TABLE>
F-21
<PAGE>
ANNEX A
GLOSSARY
<TABLE>
<S> <C>
56 Kbps Equivalent to a single high-speed telephone service line; capable of
transmitting one voice call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for entry level high-speed
data and very low-speed video applications.
Backbone A centralized high-speed network that interconnects smaller, independent
networks.
Bandwidth The number of bits of information which can move through a
communications medium in a given amount of time. The capacity of a
telecommunications circuit/ network to carry voice, data and video
information. Typically measured in Kbps and Mbps. Bandwidth is typically
available to business end-users in increments from 56 Kbps to T-3.
CSU/DSU A high-speed modem used with dedicated network connections, capable of
handling connection speeds of up to 45 Mbps or more.
Extranet A collaborative network that uses Internet technology to link businesses
with their suppliers, customers, or other businesses that share common
goals. An Extranet can be either a part of a company's Intranet that is
made accessible to other companies or as a collaborative Internet
connection with other companies. The parties to the Extranet determine
whether the shared information is to be accessible only to the
collaborating parties or may be publicly accessible.
Firewall A system placed between networks that filters data passing through it
and removes unauthorized traffic, thereby enhancing the security of the
network.
HTML Hyper-Text Markup Language. Used in writing pages for the World Wide
Web, it permits the text to include code that defines font, layout,
embedded graphics and hypertext links.
Internet A global collection of interconnected computer networks which uses
TCP/IP, a common communications protocol.
Intranet A private network within an enterprise. An intranet usually consists of
interlinked LAN's and/or WAN's. Typically, the purpose of an intranet is
to share information and computer resources among employees of the
enterprise. An intranet uses common protocols such as TCP/IP and
hypertext transfer protocol ("HTTP").
ISDN Integrated Services Digital Network. A communications protocol used by
telephone companies to permit copper telephone wires to carry voice,
data and other source materials at high speeds.
Kbps Kilobits per second. A transmission rate. One kilobit equals 1,024 bits
of information.
LAN Local Area Network. A data communications network designed to
interconnect personal computers, workstations, minicomputers, file
servers and other communications and computing devices within a
localized environment.
Mbps Megabits per second. A transmission rate. One megabit equals 1,024
kilobits.
</TABLE>
A-1
<PAGE>
<TABLE>
<S> <C>
Latency The time that elapses between the moment when a command is sent to the
time that a response is received. On a network, latency is due to delays
in routers or switches, congestion delays on a crowded backbone, and the
time required for electrons to travel a great distance between nodes on
a network.
POP's Points of presence. Geographic areas within which the Company provides
local access.
Render Farm The process of creating an image on a computer from a collection of
mathematical formulas is called rendering, a microprocessor intensive
activity. A render farm is a collection of multiple computers (and
therefrom micro-processors) linked together to act as a single unit.
Router A system placed between networks that relays data to those networks
based upon a destination address contained in the data packets being
routed.
SuperPOP A high capacity Internet data center offering dedicated access, web
hosting and co-location facilities.
Server Software that allows a computer to offer a service to another computer.
Other computers contact the server program by means of matching client
software. In addition, such term means the computer on which server
software runs.
TCP/IP Transmission Control Protocol/Internet Protocol. A suite of network
protocols that allow computers with different architectures and
operating system software to communicate with other computers on the
Internet.
T-1 A data communications circuit capable of transmitting data at 1.5 Mbps.
T-3 A data communications circuit capable of transmitting data at 45 Mbps.
VRML Virtual Reality Markup Language. A protocol to create 3-D applications
on the Internet.
WAN Wide Area Network. A data communications network designed to connect
personal computers, workstations, minicomputers, file servers and other
communications and computing devices over a geographically dispersed
area.
World Wide or Web A collection of computer systems supporting a communications protocol
that permits multi-media presentation or Web of information over the
Internet.
</TABLE>
A-2
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS. IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE INITIAL PURCHASER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF ANY
OFFER TO BUY THE UNITS IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT
IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THERE HAS NOT BEEN A CHANGE IN THE FACTS SET FORTH
IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
Prospectus Summary.............................. 1
Risk Factors.................................... 11
Use of Proceeds................................. 21
Dividend Policy................................. 22
Certain Federal Income Tax Consequences......... 32
Capitalization.................................. 36
Selected Financial Data......................... 37
Management's Discussion and Analysis of
Financial Condition and Results of Operations... 39
Business........................................ 44
Management...................................... 56
Certain Transactions............................ 61
Principal Stockholders.......................... 62
Description of the Capital Stock................ 63
Description of the Units........................ 66
Description of the Notes........................ 66
Description of the Warrants..................... 98
Provisions Generally Applicable to All
Securities.................................... 100
Plan of Distribution............................ 102
Legal Matters................................... 103
Independent Public Accountants.................. 103
Index to Financial Statements................... F-1
Glossary........................................ A-1
</TABLE>
$160,000,000
EXCHANGE OFFER
WITH RESPECT TO
13% SENIOR NOTES
DUE 2005
--------------
PROSPECTUS
AUGUST 12, 1998
--------------
EXCHANGE AGENT:
MARINE MIDLAND BANK
140 BROADWAY
NEW YORK, NEW YORK 10005-1180
ATTENTION: CORPORATE
TRUST DEPARTMENT
TEL: (212) 658-6433; FAX: (212) 658-6425
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation limits the liability of Directors
to the maximum extent permitted by Delaware General Corporation Law. Delaware
law provides that the directors of a corporation will not be personally liable
to such corporation or its stockholders for monetary damages for breach of their
fiduciary duties as directors, except for liability (i) for any breach of their
duty of loyalty to the corporation or its stockholders; (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law; (iii) for unlawful payments of dividends or unlawful stock
repurchases or redemptions as provided in Section 174 of the Delaware General
Corporation Law; or (iv) for any transaction from which the director derives an
improper personal benefit. The Company's By-laws provide that the Company shall
indemnify its directors and officers under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified.
The directors and officers of the Company are insured (subject to certain
exceptions and deductions) against liabilities that they may incur in their
capacity as such, including liabilities under the Act, other than liabilities
thereunder arising in connection with this Exchange Offer, under a liability
insurance policy carried by the Company. Such policy provides coverage in an
aggregate amount of $1,000,000 (subject to retentions ranging from $75,000 to
$150,000).
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
EXHIBITS
<TABLE>
<CAPTION>
NUMBER DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------------
<S> <C>
3(a) Certificate of Incorporation of the Company, as amended.(12)
3(b) By-laws of the Company, as amended.(*)
4(a) Indenture between the Company and Marine Midland Bank, as Trustee, dated April 30, 1998.(10)
4(b) Form of $160,000,000 13% Senior Note due 2005, Series A.(10)
4(c) Form of $160,000,000 13% Senior Notes due 2005, Series B.(12)
4(d) Form of Warrant to purchase Common Stock expiring May 1, 2005.(10)
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP.(*)
10(a) Purchase Agreement between the Company and ING Baring (U.S.) Securities, Inc. (the "Initial
Purchaser"), dated April 24, 1998.(10)
10(b) Warrant Agreement between the Company and Marine Midland Bank, as Warrant Agent, dated as of April 30,
1998.(10)
10(c) Registration Rights Agreement between the Company and the Initial Purchaser, dated as of April 30,
1998.(10)
10(d) Warrant Registration Rights Agreement between the Company and the Initial Purchaser, dated as of April
30, 1998.(10)
10(e) Escrow and Security Agreement between Marine Midland Bank, as Escrow Agent, Marine Midland Bank, as
Trustee, and the Company, dated as of April 30, 1998.(10)
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------------
<S> <C>
10(f) Sublease for Penthouse Suite 907D between Rhodes Associates, Rose Associates, Electric Curtain Inc.,
Graphics and Stellar Corp., dated as of July 1, 1997.(8)
10(g) Bell Technology Group Ltd. 1995 Stock Option Plan, adopted September 29, 1995.(1)
10(h) Bell Technology Group Ltd. 1998 Stock Option Plan, adopted April 16, 1998.(11)
10(i) Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and Marc H. Bell, dated as of October 1,
1995.(1)
10(j) Employment Agreement between Marc H. Bell and the Company, dated as of October 1, 1995.(1)
10(k) Share Deposit Agreement between Marc H. Bell, Harpoon Holdings Ltd., the Company, and Rickel &
Associates.(3)
10(l) Form of Consulting Agreement between the Company and Rickel & Associates.(1)
10(m) Agreement of Lease between Bell Technology Group Ltd. and Puck Associates, dated as of July 23,
1996.(4)
10(n) Security Agreement with NationsCredit Commercial Corporation of America and NAFT International Ltd.,
dated October 1996.(4)
10(o) Restated Security Agreement with NationsCredit Distribution Finance, Inc. and the Company, dated as of
February 11, 1998.(12)
10(p) Agreement for Wholesale Financing between NAFT Ltd. and NationsCredit, dated as of October 1996.(4)
10(q) Lockbox Service Agreement between NAFT, European American Bank and NationsCredit, dated as of October
1996.(4)
10(r) Loan and Security Agreement between Finova Capital Corporation ("Finova") and the Company, dated as of
May 1, 1997.(6)
10(s) Guaranty by NAFT in favor of Finova, dated as of May 1, 1997.(6)
10(t) Guaranty by NAFT Computer Service Corp. in favor of Finova, dated as of May 1, 1997.(6)
10(u) Guaranty by Bluestreak Digital, Inc., in favor of Finova, dated as of May 1, 1997.(6)
10(v) Guaranty by PFM Communications, Inc., in favor of Finova, dated as of May 1, 1997.(6)
10(w) Promissory Notes to Bell Technology Group Ltd., from Marc H. Bell, dated April 2, 1997 and June 30,
1997.(8)
10(x) Agreement by and between Bell Technology Group Ltd., and Value Management & Research GmbH for the sale
of an aggregate of 382,609 shares of Common Stock, dated as of September 24, 1997.(7)
10(y) Employment Agreement between William T. Jahnke and NAFT International Ltd., dated as of November 1,
1995.(2)
10(z) Employment Agreement between Alan Levy and Bell Technology Group Ltd., dated as of June 1, 1997.(9)
10(aa) Amendment to Employment Agreement between Marc H. Bell and the Company, dated as of January 1,
1996.(4)
10(bb) Agreement between Bell Technology Group Ltd., and Cisco Systems Capital Corporation granting credit
approval for $1,000,000 for leasing transactions, dated as of December 15, 1997.(9)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION NO.
- --------- ------------------------------------------------------------------------------------------------------
<S> <C>
10(cc) Purchase Agreement between Hanover Equities, Inc. and the Company dated as of June
2, 1998.(13)
10(dd) Purchase Agreement between Young Woo and the Company dated as of June 2, 1998.(13)
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.(*)
25 Statement of Eligibility on Form T-1 of Marine Midland Bank, as Trustee.(*)
99(a) Form of Letter of Transmittal.(*)
99(b) Form of Notice of Guaranteed Delivery.(*)
</TABLE>
- ------------------------
(*) Filed herewith.
(1) Incorporated by reference to Registration Statement on Form SB-2 (File No.
33-98978) (the "Registration Statement") filed November 3, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement,
filed December 20, 1995.
(3) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A
for the year ended September 30, 1996.
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed March 13, 1997 (File No. 333-23259)
(6) Incorporated by reference to the Company's Report on Form 8-K/A filed July
18, 1997.
(7) Incorporated by reference to the Company's Report on Form 8-K filed October
8, 1997.
(8) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333-23259) filed March 13, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
(10) Incorporated by reference to the Company's Report on Form 8-K filed May 11,
1998.
(11) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
filed on March 16, 1998.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-57993) filed June 29, 1998.
(13) Incorporated by reference to the Company's Report on Form 8-K filed July
16, 1998.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows:
(1) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-3
<PAGE>
(2) That every prospectus (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(b) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first call mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
II-4
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO REGISTRATION STATEMENT ON FORM S-4
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK, ON THE 7TH DAY OF AUGUST, 1998.
<TABLE>
<S> <C> <C>
GLOBIX CORPORATION
By: /s/ MARC H. BELL
-----------------------------------------
MARC H. BELL, PRESIDENT
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO REGISTRATION STATEMENT HAS BEEN SIGNED BELOW ON AUGUST 7, 1998, BY
THE FOLLOWING PERSONS IN THE CAPACITIES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------------ --------------------------------------- -----------------
<C> <S> <C>
/s/ MARC H. BELL
-------------------------------------- President, Chief Executive August 7, 1998
MARC H. BELL Officer & Director
/s/ ROBERT B. BELL
-------------------------------------- Executive Vice President, August 7, 1998
ROBERT B. BELL Chief Financial Officer & Director
-------------------------------------- Director , 1998
MARTIN FOX
/s/ TSUYOSHI SHIRAISHI
-------------------------------------- Director August 6, 1998
TSUYOSHI SHIRAISHI
/s/ SID PATERSON
-------------------------------------- Director August 5, 1998
SID PATERSON
-------------------------------------- Director , 1998
RICHARD VIDEBECK
-------------------------------------- Director , 1998
ANTHONY ST. JOHN
/s/ ALAN LEVY
-------------------------------------- Treasurer & Chief Accounting Officer August 7, 1998
ALAN LEVY
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION NO. PAGE
- --------- ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
3(a) Certificate of Incorporation of the Company, as amended.(12)
3(b) By-laws of the Company, as amended.(*)
4(a) Indenture between the Company and Marine Midland Bank, as Trustee, dated April 30, 1998.(10)
4(b) Form of $160,000,000 13% Senior Note due 2005, Series A.(10)
4(c) Form of $160,000,000 13% Senior Notes due 2005, Series B.(12)
4(d) Form of Warrant to purchase Common Stock expiring May 1, 2005.(10)
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP.(*)
10(a) Purchase Agreement between the Company and ING Baring (U.S.) Securities, Inc. (the "Initial
Purchaser"), dated April 24, 1998.(10)
10(b) Warrant Agreement between the Company and Marine Midland Bank, as Warrant Agent, dated as of
April 30, 1998.(10)
10(c) Registration Rights Agreement between the Company and the Initial Purchaser, dated as of April
30, 1998.(10)
10(d) Warrant Registration Rights Agreement between the Company and the Initial Purchaser, dated as
of April 30, 1998.(10)
10(e) Escrow and Security Agreement between Marine Midland Bank, as Escrow Agent, Marine Midland
Bank, as Trustee, and the Company, dated as of April 30, 1998.(10)
10(f) Sublease for Penthouse Suite 907D between Rhodes Associates, Rose Associates, Electric Curtain
Inc., Graphics and Stellar Corp., dated as of July 1, 1997.(8)
10(g) Bell Technology Group Ltd. 1995 Stock Option Plan, adopted September 29, 1995.(1)
10(h) Bell Technology Group Ltd. 1998 Stock Option Plan, adopted April 16, 1998.(11)
10(i) Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and Marc H. Bell, dated as of October
1, 1995.(1)
10(j) Employment Agreement between Marc H. Bell and the Company, dated as of October 1, 1995.(1)
10(k) Share Deposit Agreement between Marc H. Bell, Harpoon Holdings Ltd., the Company, and Rickel &
Associates.(3)
10(l) Form of Consulting Agreement between the Company and Rickel & Associates.(1)
10(m) Agreement of Lease between Bell Technology Group Ltd. and Puck Associates, dated as of July 23,
1996.(4)
10(n) Security Agreement with NationsCredit Commercial Corporation of America and NAFT International
Ltd., dated October 1996.(4)
10(o) Restated Security Agreement with NationsCredit Distribution Finance, Inc. and the Company,
dated as of February 11, 1998.(12)
10(p) Agreement for Wholesale Financing between NAFT Ltd. and NationsCredit, dated as of October
1996.(4)
10(q) Lockbox Service Agreement between NAFT, European American Bank and NationsCredit, dated as of
October 1996.(4)
10(r) Loan and Security Agreement between Finova Capital Corporation ("Finova") and the Company,
dated as of May 1, 1997.(6)
10(s) Guaranty by NAFT in favor of Finova, dated as of May 1, 1997.(6)
10(t) Guaranty by NAFT Computer Service Corp. in favor of Finova, dated as of May 1, 1997.(6)
10(u) Guaranty by Bluestreak Digital, Inc., in favor of Finova, dated as of May 1, 1997.(6)
10(v) Guaranty by PFM Communications, Inc., in favor of Finova, dated as of May 1, 1997.(6)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER DESCRIPTION NO. PAGE
- --------- ----------------------------------------------------------------------------------------------- -----------
<S> <C> <C>
10(w) Promissory Notes to Bell Technology Group Ltd., from Marc H. Bell, dated April 2, 1997 and June
30, 1997.(8)
10(x) Agreement by and between Bell Technology Group Ltd., and Value Management & Research GmbH for
the sale of an aggregate of 382,609 shares of Common Stock, dated as of September 24, 1997.(7)
10(y) Employment Agreement between William T. Jahnke and NAFT International Ltd., dated as of
November 1, 1995.(2)
10(z) Employment Agreement between Alan Levy and Bell Technology Group Ltd., dated as of June 1,
1997.(9)
10(aa) Amendment to Employment Agreement between Marc H. Bell and the Company, dated as of January 1,
1996.(4)
10(bb) Agreement between Bell Technology Group Ltd., and Cisco Systems Capital Corporation granting
credit approval for $1,000,000 for leasing transactions, dated as of December 15, 1997.(9)
10(cc) Purchase Agreement between Hanover Equities, Inc. and the Company dated as of June 2, 1998.(13)
10(dd) Purchase Agreement between Young Woo and the Company dated as of June 2, 1998.(13)
21 List of Subsidiaries.
23 Consent of Arthur Andersen LLP.(*)
25 Statement of Eligibility on Form T-1 of Marine Midland Bank, as Trustee.(*)
99(a) Form of Letter of Transmittal.(*)
99(b) Form of Notice of Guaranteed Delivery.(*)
</TABLE>
- ------------------------
(*) Filed herewith.
(1) Incorporated by reference to Registration Statement on Form SB-2 (File No.
33-98978) (the "Registration Statement") filed November 3, 1995.
(2) Incorporated by reference to Amendment No. 1 to the Registration Statement,
filed December 20, 1995.
(3) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
(4) Incorporated by reference to the Company's Annual Report on Form 10-KSB/A
for the year ended September 30, 1996.
(5) Incorporated by reference to the Company's Registration Statement on Form
SB-2 filed March 13, 1997 (File No. 333-23259)
(6) Incorporated by reference to the Company's Report on Form 8-K/A filed July
18, 1997.
(7) Incorporated by reference to the Company's Report on Form 8-K filed October
8, 1997.
(8) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333-23259) filed March 13, 1997.
(9) Incorporated by reference to the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
(10) Incorporated by reference to the Company's Report on Form 8-K filed May 11,
1998.
(11) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
filed on March 16, 1998.
(12) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-57993) filed June 29, 1998.
(13) Incorporated by reference to the Company's Report on Form 8-K filed July
16, 1998.
<PAGE>
Exhibit 3(b)
BY-LAWS
OF
GLOBIX CORPORATION
(FORMERLY BELL TECHNOLOGY GROUP LTD.)
ARTICLE I. General.
1.01 Interpretation; Governing Instruments. Terms used and not
defined in these By-Laws shall have the meanings set forth in, and shall be
interpreted in accordance with, the Delaware General Corporation Law ("DGCL")
and other applicable statutes and the Corporation's certificate of
incorporation (collectively, the "governing instruments") as from time to
time in effect. Whether or not so stated, these By-Laws are subject to such
governing instruments, and in the event of any conflict or inconsistency the
provisions of the governing instruments shall control.
1.02 Registered Office. The address of the Company's registered
office in the State of Delaware is c/o United Corporate Services, Inc., 15
East North Street, in the City of Dover, County of Kent, State of Delaware
19901 and the name of the registered agent at said address is United
Corporate Services, Inc.
1.03 Other Offices; Business Activities. The Corporation may have
such other offices and conduct its business activities at such other
locations within or without the State of Delaware, as the board of directors
(the "Board") determines.
ARTICLE II. Stockholders.
2.01 Annual Meeting. The annual stockholders meeting for the
election of directors and the transaction of other business shall be held
annually during the fifth full month following the end of the Corporation's
fiscal year on such date and time as the Board may fix.
2.02 Special Meeting. Special stockholders meetings may be called by
the Board or chief executive officer and shall be called by the chief
executive officer, the president, the executive vice president, any vice
president or the secretary upon written request, stating the purpose(s) of
the meeting, either by any director or by the holders of not less than a
majority of the outstanding shares entitled to vote. Only such business may
be transacted at a special meeting as relates to the purpose(s) set forth in
the notice of meeting.
2.03 Place of Meeting. Stockholders meetings shall be held at such
place, within or without the State of Delaware, as may be
<PAGE>
fixed by the Board or, if not so fixed, at the registered office of the
Corporation in the State of Delaware. Attendance at any meeting in person or
by proxy shall constitute a waiver of notice, except when the person or proxy
attends the meeting for the express purpose of objecting, at the beginning of
the meeting, to the transaction of any business because the meeting is not
lawfully called or convened.
2.04 Notice of Meetings; Waiver. Written notice of each stockholders
meeting shall be given, personally or by mail, not less than ten nor more
than sixty days before the meeting date to each stockholder entitled to vote
at the meeting at his address appearing on the record of stockholders or, if
he shall have filed with the secretary a written request that notices be
mailed to some other address, at such other address. Each notice shall state
the place, date and time of the meeting and, unless an annual meeting, shall
indicate that it is being issued by or at the direction of the person(s)
calling the meeting. Notice of a special meeting shall also state the
purpose(s) for which called. Notice of an adjourned meeting shall be
unnecessary unless otherwise required by the governing instruments.
2.05 Quorum. Subject to the governing instruments, the holders of
one-third of the shares entitled to vote shall constitute a quorum for the
transaction of any business. When a specified item of business must be voted
on by a class or series, voting as a class, however, the holders of a
majority of the shares of such class or series shall constitute a quorum.
Despite the absence of a quorum the stockholders present may by majority vote
adjourn a meeting without further notice unless otherwise required by the
governing instruments.
2.06 Voting; Proxies. Subject to the governing instruments:
(a) Stockholders of record shall be entitled to one vote for
each share held. Any corporate action other than the election of directors
(as to which see Section 3.01 of these By-Laws) shall be authorized by a
majority of the votes cast by holders entitled to vote.
(b) Any stockholder may vote in person or by proxy signed by
him or his attorney-in-fact. No proxy shall be valid after the expiration of
eleven months from its date unless it otherwise provides.
2.07 Action Without Meeting. Subject to the governing instruments,
any stockholder action may be taken without a meeting if a consent in
writing, setting forth the action so taken, shall be signed by the holders of
outstanding shares necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
<PAGE>
ARTICLE III. Directors.
3.01 Authority; Number; Election; Qualification; Term. Subject to the
governing instruments, the Corporation's business shall be managed under the
direction of the Board which shall consist of two (2) directors, or such other
number, not less than two directors, as may be fixed from time to time by a vote
of the shareholders or by a majority of the Board, provided that no decrease in
the number of directors shall decrease the term of any incumbent director.
Directors shall be elected at each annual stockholders meeting, shall be at
least eighteen (18) years old, but need not be stockholders, and shall hold
office until the next annual stockholders meeting and the election and
qualification of their respective successors. Election of directors need not be
by ballot.
3.02 Annual, Regular and Special Meetings; Place. The annual Board
meeting for the election of officers and the transaction of other business shall
be held without notice immediately following and at the same place as the annual
stockholders meeting or, if a quorum is not present or the Board otherwise
determines, as promptly as practicable thereafter. Regular Board meetings for
the transaction of all business may be held without notice at such times and
places as the Board determines. Special Board meetings may be called by the
chairman of the Board, the president or a majority of the directors. Except as
provided above, Board meetings shall be held at such place, within or without
the State of Delaware, as the Board determines or, if not so determined, at the
principal office of the Corporation.
3.03 Notice of Meetings; Waiver, Adjournment. Notice of the time and
place of each deferred annual and of each special Board meeting shall be
given the directors by mail not less than three, or personally or by
telephone, telegram or telegraph not less than one, day prior to the meeting.
Notice of any meeting need not specify its purpose(s). Notice need not be
given to any director who submits a signed waiver of notice before, at or
after the meeting or who attends the meeting without protesting, prior to or
at its commencement, lack of notice to him. Whether or not a quorum is
present, a majority of the directors present may adjourn any meeting without
notice to directors not present unless the meeting is adjourned for more than
48 hours.
3.04 Quorum; Actions by Board. Subject to the governing instruments:
(a) Except as otherwise provided in these By-Laws, a majority
of the entire Board shall constitute a quorum for the transaction of business
and the vote of a majority of the directors present at the taking of the
vote, if a quorum is then present, shall be the act of the Board. Directors
may neither be present nor vote by proxy.
(b) Any action by the Board or any committee may be taken
without a meeting if all directors or committee members
<PAGE>
consent in writing to the adoption of a resolution authorizing the action.
The resolution and consent shall be filed with the Board or committee minutes.
(c) Any one or more directors or committee members may
participate in a Board or committee meeting by means of a conference
telephone or similar communications equipment allowing all persons
participating to hear each other at the same time. Participation by such
means shall constitute presence in person at a meeting.
3.05 Resignation; Removal; Vacancies. Subject to the governing
instruments:
(a) A director may resign at any time. Any or all directors may
be removed at any time for or without cause by stockholder vote and for cause
by the Board.
(b) Board vacancies occurring for any reason, including
vacancies resulting from an increase in the number of directors, but
excluding vacancies resulting from the removal of directors without cause,
may be filled by Board vote or, if the number of directors then in office is
less than a quorum, by vote of a majority of the directors then in office.
Vacancies occurring for any reason may also be filled by stockholders.
3.06 Compensation. Directors shall receive such compensation as the
Board determines to be appropriate, and shall be reimbursed for reasonable
expenses incurred in the performance of, their services to the Corporation as
directors and in other capacities.
3.07 Committees. The Board, by resolution adopted by a majority of
the entire Board, may designate an executive committee and any other
committee it deems necessary or desirable to designate, each committee
consisting of at least one director. Any committee designated by the Board
shall serve solely at the discretion of the Board. The Board, but not any
committee, may fill committee vacancies and may designate alternative
committee members to replace absent members at any committee meetings. The
executive committee has the power and authority to act in place of the Board
in all matters except amendment to the Certificate of Incorporation and
except as restricted by the DGCL and the action of the Board. Other
committees shall have such authority as the Board determines. The provisions
of Sections 3.02, 3.03 and 3.04 of these By-Laws relating to the holding of
meetings, notice, waiver, adjournment, quorum and Board action shall apply to
committees unless the Board otherwise determines. The Board may adopt
additional rules of procedure for any committee not inconsistent with these
By-Laws or may delegate this authority to any committee.
3.08 Indemnification. The Company shall indemnify its officers and
directors under certain circumstances, including those circumstances in which
indemnification would otherwise be
<PAGE>
discretionary, and the Company is required to advance expenses to its
officers and directors as incurred in connection with proceedings against
them for which they may be indemnified.
ARTICLE IV. Officers.
4.01 Positions; Election; Term; Removal. The executive officers of
the Corporation may include any one or more of the following: the chairman of
the Board (if the Board so determines), the president, an executive vice
president, one or more vice presidents (with such designations and rankings
as the Board may fix), the secretary, one or more assistant secretaries and
the treasurer, each of whom shall be elected or appointed annually by the
Board. Officers other than the chairman need not be directors. Any two or
more offices may be held by the same person except the offices of president
and secretary provided that if the Corporation has only one stockholder, such
stockholder, or, if permitted by applicable law, such stockholder's designee,
may hold all or any combination of offices. Officers shall serve at the
Board's discretion until the next annual Board meeting and the election of
their respective successors. The Board may at any time remove any officer
with or without cause and may fill any vacancies among the officers however
occurring. The Board may also appoint, or may delegate to any executive
officer the appointment of, subordinate and assistant officers with such
titles and duties as the Board or such officer determines.
4.02 Chief Executive Officer, Additional Powers and Duties of
Other Officers.
(a) The Corporation's chief executive officer shall be the
president unless the Board designates the chairman to be such. Subject to the
Board's overall authority, the chief executive officer shall have general
control and supervision of the Corporation's business and affairs and such
other powers and duties consistent with these By-Laws as are customarily
possessed by corporate chief executive officers and as the Board assigns.
(b) Subject to the Board's overall authority, each other
officer shall have such powers and duties in addition to those specifically
provided in these By-Laws as are customarily possessed by like corporate
officers holding the same position and as the Board or chief executive
officer assigns.
4.03 Chairman of the Board. The chairman shall preside at all Board
and stockholder meetings, and, if so designated by the Board, shall be the
Corporation's chief executive officer.
4.04 President. The president shall be the Corporation's chief
executive officer and chief operating officer (unless the Board designates
the chairman or other individual to be such). Unless and until the Board
otherwise determines, in the event of the absence or inability to act of the
chairman, or if there be
<PAGE>
no chairman, the president shall have the powers and duties of the chairman.
4.05 Vice Presidents. Each vice president shall have such further
title and such powers and duties as the Board or the chief executive officer,
if so authorized by the Board, assigns. Unless and until the Board otherwise
determines, in the event of the absence or inability to act of the president,
or if there be no president, the ranking vice president shall have the powers
and duties of the president.
4.06 Secretary. The secretary shall give all meeting and other
required corporate notices except as otherwise provided in these By-Laws;
shall attend and keep minutes of all Board and stockholder proceedings; shall
have charge of and maintain the corporate stock books and records (unless the
Corporation has a transfer agent or registrar) and such other corporate
records as the Board directs; and shall keep the corporate seal and, when
duly authorized, shall affix such seal to all necessary corporate instruments.
4.07 Treasurer. The treasurer shall be the Corporation's chief
financial officer and, unless another officer or employee is so designated by
the Board, its chief accounting officer, shall have custody of its funds and
securities and shall maintain its financial books and records.
4.08 Compensation. The Board shall fix the compensation, if any, of
all officers who are directors and may fix, or delegate to the chief
executive officer authority to fix, the compensation of other officers.
ARTICLE V. Shares and Transfer.
5.01 Certificates. Shares of the Corporation shall be represented by
certificates in such form consistent with the governing instruments as the
Board approves, shall be signed by the chairman, president or any vice
president and the secretary or treasurer, or any assistant secretary or
assistant treasurer, and shall be sealed with the corporate seal or its
facsimile. Officers' signatures may be facsimiles if the certificate is
signed by a transfer agent or registered by a registrar other than the
Corporation or its employee. Certificates may be used although the officer
who has signed, or whose facsimile signature has been used, is no longer such
officer. If the Corporation is authorized to issue shares of more than one
class, certificates shall contain the statements required by statute.
5.02 Transfer Agents; Registrars. The Board may appoint one or more
transfer agents and/or registrars, the duties of which may be combined and
prescribe their duties.
5.03 Transfers; Lost Certificates. Subject to the governing
instruments and compliance with such additional requirements as the Board may
establish:
<PAGE>
(a) Shares shall be transferable only on the Corporation's
books by the holders or their duly authorized attorneys or legal
representatives upon surrender of certificates properly endorsed.
(b) Replacements for certificates alleged to have been lost or
destroyed may be issued upon delivery of such proof of loss and/or bond with
or without surety, or other security, sufficient to indemnify the Corporation
as the Board determines.
5.04 Record Date. The Board may fix in advance a record date for the
determination of stockholders entitled to notice of or to vote at any
stockholders meeting, or to express consent to or dissent from any proposal
without a meeting, or for the purpose of determining stockholders entitled to
receive any dividend, distribution or allotment of rights, or for the purpose
of any other action. The record date shall not be more than sixty nor less
than ten days prior to the meeting date nor more than sixty days prior to any
other action.
ARTICLE VI. Miscellaneous.
6.01 Seal. The corporate seal shall be in such form as the Board may
approve.
6.02 Fiscal Year. The Board may establish and change the
Corporation's fiscal year. Until the Board acts, the fiscal year shall end on
September 30 in each year.
6.03 Shares in Other Corporations. Shares in other corporations held
by the Corporation may be represented and voted by the chief executive
officer or any person designated by him unless the Board otherwise directs.
6.04 By-Law Amendments; Stockholder Agreements. Subject to the
governing instruments:
(a) By-Laws may be adopted, amended or repealed either by the
stockholders at the time entitled to vote in the election of directors or by
the Board (provided that any change by the Board in the number of directors
requires the vote of a majority of the entire Board). Any By-Law adopted by
the Board may be amended or repealed by the stockholders entitled to vote
thereon. If the Board adopts, amends or repeals any By-Law regulating an
impending election of directors, the notice of the next stockholders meeting
for the election of directors shall set forth such By-Law and a concise
statement of the changes made.
(b) Any written agreement among all of the stockholders of the
Corporation holding votes sufficient to modify, amend or repeal any By-Law,
whether expressly or by interpretation or implication and whether or not the
Corporation is a party thereto, shall be given full force and effect in
accordance with its terms as a stockholders amendment under subsection
6.04(a) above provided a copy of such written agreement is delivered to
<PAGE>
the Corporation and that prompt notice of any such modification, amendment or
repeal effected by any such written agreement to which fewer than all the
stockholders of the Corporation are party is given to those stockholders who
are not party thereto.
<PAGE>
Exhibit 5
August 7, 1998
Globix Corporation
295 Lafayette Street, 3rd Floor
New York, New York 10012
Re: Globix Corporation
Registration Statement on Form S-4
Ladies and Gentlemen:
We have acted as counsel for Globix Corporation, a Delaware
corporation (the "Company"), in connection with the preparation and filing by
the Company of a registration statement on Form S-4, File No. 333-57993, and
Amendment No. 1 to the registration statement on Form S-4 under the
Securities Act of 1933, as amended. (Such Registration Statement and
Amendment thereto are defined herein as the "Registration Statement"). The
Registration Statement relates to the exchange of up to an aggregate
principal amount of $160,000,000 of the Company's 13% Senior Notes Due 2005,
Series B (the "Exchange Notes") for up to an aggregate principal amount of
$160,000,000 of its outstanding 13% Senior Notes Due 2005, Series A.
Capitalized terms used but not defined herein shall have the meanings as set
forth in the Registration Statement.
We have examined the Certificate of Incorporation and the By-Laws of
the Company, the minutes of the various meetings and consents of the Board of
Directors of the Company, originals or copies of such records of the Company,
the Indenture for the Notes, the Form of Exchange Note, certificates of
public officials, certificates of officers and representatives of the Company
and others, and such other documents, certificates, records, authorizations,
proceedings, statutes and judicial decisions as we have deemed necessary to
form the basis of the opinion expressed below. In such examination, we have
assumed the genuiness of all signatures, the authenticity of all documents
submitted to us as originals and the conformity to originals of all documents
submitted to us as copies thereof.
<PAGE>
Globix Corporation
Page 2
As to various questions of fact material to this opinion, we have
relied upon statements and certificates of officers and representatives of
the Company and others.
Based on the foregoing, we are of the opinion that the Exchange
Notes covered by the Registration Statement, when executed in the manner set
forth in the Indenture and issued and delivered in the manner set forth in
the Registration Statement, will be legally issued, will be binding
obligations of, and will be enforceable against the Company.
We hereby consent to be named in the Registration Statement and the
Prospectus as attorneys who have passed upon legal matters in connection with
the offering of the securities offered thereby under the caption "Legal
Matters."
We further consent to your filing a copy of this opinion as an
Exhibit to the Registration Statement.
Very truly yours,
MILBERG WEISS BERSHAD
HYNES & LERACH LLP
By:
--------------------------
Arnold N. Bressler
A Member of the Firm
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated December 19, 1997 (and to all references to our Firm) included in
or made a part of this Amendment No. 1 to registration statement on Form S-4
registering $160,000,000 aggregate principal amount of 13% Senior Notes, Series
B due 2005.
ARTHUR ANDERSEN LLP
New York, New York
August 7, 1998
<PAGE>
Exhibit 25
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM T-1
STATEMENT OF ELIGIBILITY UNDER THE TRUST
INDENTURE ACT OF 1939 OF A CORPORATION
DESIGNATED TO ACT AS TRUSTEE
-----------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2)
-----------
Marine Midland Bank
(Exact name of trustee as specified in its charter)
New York 16-1057879
(Jurisdiction of incorporation (I.R.S. Employer
or organization if not a U.S. Identification No.)
national bank)
140 Broadway, New York, N.Y. 10005-1180
(212) 658-1000 (Zip Code)
(Address of principal executive offices)
Warren L. Tischler
Senior Vice President
Marine Midland Bank
140 Broadway
New York, New York 10005-1180
Tel: (212) 658-5167
(Name, address and telephone number of agent for service)
Globix Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3781263 10012
(State or other jurisdiction (I.R.S. Employer (Zip code)
of incorporation or organization) Identification No.)
295 Lafayette Street
New York, New York
(Address of registrant's principal executive offices)
13% Senior Notes due 2005
(Title of indenture securities)
<PAGE>
General
Item 1. General Information.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervisory authority to
which it is subject.
State of New York Banking Department.
Federal Deposit Insurance Corporation, Washington, D.C.
Board of Governors of the Federal Reserve System,
Washington, D.C.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
Item 2. Affiliations with Obligor.
If the obligor is an affiliate of the trustee, describe each
such affiliation.
None
<PAGE>
Item 16. List of Exhibits.
-----------------
<TABLE>
<CAPTION>
Exhibit
- --------
<S> <C> <C> <C>
T1A(i) * - Copy of the Organization
Certificate of Marine Midland
Bank.
T1A(ii) * - Certificate of the State of New
York Banking Department dated
December 31, 1993 as to the
authority of Marine Midland Bank
to commence business.
T1A(iii) - Not applicable.
T1A(iv) * - Copy of the existing By-Laws of
Marine Midland Bank as adopted on
January 20, 1994.
T1A(v) - Not applicable.
T1A(vi) * - Consent of Marine Midland Bank
required by Section 321(b) of the
Trust Indenture Act of 1939.
T1A(vii) - Copy of the latest report of
condition of the trustee (March
31, 1998), published pursuant to
law or the requirement of its
supervisory or examining
authority.
T1A(viii) - Not applicable.
T1A(ix) - Not applicable.
</TABLE>
* Exhibits previously filed with the Securities and Exchange Commission with
Registration No. 33-53693 and incorporated herein by reference thereto.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the Trustee,
Marine Midland Bank, a banking corporation and trust company organized under the
laws of the State of New York, has duly caused this statement of eligibility to
be signed on its behalf by the undersigned, thereunto duly authorized, all in
the City of New York and State of New York on the 15th day of July, 1998.
MARINE MIDLAND BANK
By: /s/ Anthony R. Bufinsky
---------------------------------
Anthony R. Bufinsky
Corporate Trust Officer
<PAGE>
Exhibit T1A (vii)
Board of Governors of
the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance
Corporation
OMB Number: 3064-0052
Office of the Comptroller
of the Currency
OMB Number: 1557-0081
Federal Financial Institutions Examination Council Expires March 31, 2000
- --------------------------------------------------------------------------------
1
Please refer to page i,
Table of Contents, for the
required disclosure of
estimated burden.
- --------------------------------------------------------------------------------
Consolidated Reports of Condition and Income for
A Bank With Domestic and Foreign Offices--FFIEC 031
Report at the close of business March 31, 1998
This report is required by law; 12 U.S.C. Section 324 (State member banks); 12
U.S.C. Section 1817 (State nonmember banks); and 12 U.S.C. ss.161 (National
banks).
NOTE: The Reports of Condition and Income must be signed by an authorized
officer and the Report of Condition must be attested to by not less than two
directors (trustees) for State nonmember banks and three directors for State
member and National Banks.
I, Gerald A. Ronning, Executive VP & Controller
-----------------------------------------------------------------------------
Name and Title of Officer Authorized to Sign Report
of the named bank do hereby declare that these Reports of Condition and Income
(including the supporting schedules) have been prepared in conformance with the
instructions issued by the appropriate Federal regulatory authority and are true
to the best of my knowledge and believe.
/s/ Gerald A. Ronning
- -------------------------------------------------------------------------------
Signature of Officer Authorized to Sign Report
4/27/98
- -------------------------------------------------------------------------------
Date of Signature
Submission of Reports
Each Bank must prepare its Reports of Condition and Income either:
(a) in automated form and then file the computer data file directly with the
banking agencies' collection agent, Electronic Data System Corporation
(EDS), by modem or computer diskette; or
(971231)
---------------
(RCRI 9999)
This report form is to be filed by banks with branches and consolidated
subsidiaries in U.S. territories and possessions, Edge or Agreement
subsidiaries, foreign branches, consolidated foreign subsidiaries, or
International Banking Facilities.
The Reports of Condition and Income are to be prepared in accordance with
Federal regulatory authority instructions.
We, the undersigned directors (trustees), attest to the correctness of this
Report of Condition (including the supporting schedules) and declare that it has
been examined by us and to the best of our knowledge and belief has been
prepared in conformance with the instructions issued by the appropriate Federal
regulatory authority and is true and correct.
/s/ Malcolm Burnett
- -------------------------------------
Director (Trustee)
/s/ Bernard J. Kennedy
- -------------------------------------
Director (Trustee)
/s/ Sal H. Alfiero
- -------------------------------------
Director (Trustee)
(b) in hard-copy (paper) form and arrange for another party to convert the
paper report to automated for. That party (if other than EDS) must transmit
the bank's computer data file to EDS
To fulfill the signature and attestation requirement for the Reports of
Condition and Income for this report date, attach this signature page to the
hard-copy f the completed report that the bank places in its files.
FDIC Certificate Number 0 0 5 8 9
--- --- --- --- ---
(RCRI 9030)
---- ---- ---- ---
<PAGE>
REPORT OF CONDITION
Consolidating domestic and foreign subsidiaries of the
Marine Midland Bank of Buffalo
Name of Bank City
in the state of New York, at the close of business
March 31, 1998
ASSETS
Thousands
of dollars
Cash and balances due from depository institutions:
<TABLE>
<S> <C>
Noninterest-bearing balances
currency and coin .......................................$ 1,256,485
Interest-bearing balances ............................... 2,022,831
Held-to-maturity securities ............................. 0
Available-for-sale securities ........................... 3,703,793
Federal funds sold and securities purchased
under agreements to resell .............................. 1,758,449
Loans and lease financing receivables:
Loans and leases net of unearned
income .................................................. 21,468,541
LESS: Allowance for loan and lease
losses .................................................. 404,696
LESS: Allocated transfer risk reserve ................... 0
Loans and lease, net of unearned
income, allowance, and reserve .......................... 21,063,845
Trading assets .......................................... 885,006
Premises and fixed assets (including
capitalized leases) ..................................... 215,178
Other real estate owned .................................... 13,130
Investments in unconsolidated
subsidiaries and associated companies ...................... 0
Customers' liability to this bank on
acceptances outstanding .................................... 28,219
Intangible assets .......................................... 471,296
Other assets ............................................... 501,251
Total assets ............................................... 31,919,483
</TABLE>
<PAGE>
<TABLE>
LIABILITIES
<S> <C>
Deposits:
In domestic offices ..................................... 20,966,355
Noninterest-bearing ..................................... 3,689,470
Interest-bearing ........................................ 17,276,885
In foreign offices, Edge, and Agreement
subsidiaries, and IBFs ..................................... 4,101,409
Noninterest-bearing ..................................... 0
Interest-bearing ........................................ 4,101,409
Federal funds purchased and securities sold
under agreements to repurchase .......................... 814,706
Demand notes issued to the U.S. Treasury ................... 309,243
Trading Liabilities ........................................ 143,683
Other borrowed money:
With a remaining maturity of one year
or less ................................................. 1,878,712
With a remaining maturity of more than
one year through three years ............................ 70,086
With a remaining maturity of more than
three years ............................................. 54,547
Bank's liability on acceptances
executed and outstanding ................................... 28,219
Subordinated notes and debentures .......................... 497,837
Other liabilities .......................................... 822,464
Total liabilities .......................................... 29,687,261
EQUITY CAPITAL
Perpetual preferred stock and related
surplus .................................................... 0
Common Stock ............................................... 205,000
Surplus .................................................... 1,984,728
Undivided profits and capital reserves ..................... 19,101
Net unrealized holding gains (losses)
on available-for-sale securities ........................... 23,393
Cumulative foreign currency translation
adjustments ................................................ 0
Total equity capital ....................................... 2,232,222
Total liabilities, limited-life
preferred stock, and equity capital ........................ 31,919,483
</TABLE>
<PAGE>
EXHIBIT 99(A)
LETTER OF TRANSMITTAL
GLOBIX CORPORATION
OFFER TO EXCHANGE ITS
NEW 13% SENIOR NOTES DUE 2005
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
FOR ANY AND ALL OF ITS OUTSTANDING
13% SENIOR NOTES DUE 2005
PURSUANT TO THE PROSPECTUS
DATED AUGUST 12, 1998
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK
CITY TIME ON SEPTEMBER 10, 1998 (UNLESS EXTENDED BY GLOBIX CORPORATION IN ITS
SOLE DISCRETION) (SUCH TIME AND SUCH DATE, AND AS SUCH TIME AND DATE MAY BE
EXTENDED, THE "EXPIRATION DATE").
If you desire to accept the Exchange Offer (as defined below), this Letter
of Transmittal should be completed, signed, and submitted to:
MARINE MIDLAND BANK
Exchange Agent
BY MAIL, OVERNIGHT DELIVERY OR HAND:
Marine Midland Bank
140 Broadway
New York, NY 10005-1180
Attn: Corporate Trust Department
(Globix Corporation, 13% Senior Notes due 2005)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 658-6433
FACSIMILE TRANSMISSIONS:
(212) 658-6425
(Originals of all documents sent by facsimile should be sent promptly by
hand, overnight courier or registered or certified mail.)
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A
NUMBER OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID
DELIVERY. THE INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY
BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
1
<PAGE>
This Letter of Transmittal is to be completed by holders of Existing Notes
(as defined below) either if Existing Notes are to be forwarded herewith or if
tenders of Existing Notes are to be made by book-entry transfer to an account
maintained by Marine Midland Bank (the "Exchange Agent") at The Depository Trust
Company ("DTC") pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes" in the Prospectus.
Holders of Existing Notes whose certificates (the "Certificates") for such
Existing Notes are not immediately available or who cannot deliver their
Certificates and all other required documents to the Exchange Agent on or prior
to the Expiration Date (as defined in the Prospectus) or who cannot complete the
procedures for book-entry transfer on a timely basis, must tender their Existing
Notes according to the guaranteed delivery procedures set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes" in the Prospectus. See
Instruction 1 hereto. DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY
TO THE EXCHANGE AGENT.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Globix Corporation, a Delaware corporation
(the "Company"), the aggregate principal amount of the Company's 13% Senior
Notes due 2005 (the "Existing Notes") described in Box 1 below, in exchange for
a like aggregate principal amount of the Company's new 13% Senior Notes due 2005
(the "Exchange Notes") which have been registered under the Securities Act of
1933, as amended (the "Securities Act"), upon the terms and subject to the
conditions set forth in the Prospectus dated August 12, 1998 (as the same may be
amended or supplemented from time to time, the "Prospectus"), receipt of which
is acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitutes the "Exchange Offer").
Subject to, and effective upon, the acceptance for exchange of all or any
portion of the Existing Notes tendered herewith in accordance with the terms and
conditions of the Exchange Offer (including, if the Exchange Offer is extended
or amended, the terms and conditions of any such extension or amendment), the
undersigned hereby sells, assigns and transfers to or upon the order of the
Company all right, title and interest in and to such Existing Notes as are being
tendered herewith. The undersigned hereby irrevocably constitutes and appoints
Marine Midland Bank as the Exchange Agent (the "Exchange Agent") as its agent
and attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer) with respect to
the tendered Existing Notes, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest),
subject only to the right of withdrawal described in the Prospectus, to (i)
deliver Certificates for Existing Notes to the Company together with all
accompanying evidences of transfer and authenticity to, or upon the order of,
the Company, upon receipt by the Exchange Agent, as the undersigned's agent, of
the Exchange Notes to be issued in exchange for such Existing Notes, (ii)
present Certificates for such Existing Notes for transfer, and to transfer the
Existing Notes on the books of the Company, and (iii) receive for the account of
the Company all benefits and otherwise exercise all rights of beneficial
ownership of such Existing Notes, all in accordance with the terms and
conditions of the Exchange Offer.
THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE EXISTING
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
EXISTING NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES.
THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL DOCUMENTS
DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR DESIRABLE TO
COMPLETE THE EXCHANGE, ASSIGNMENT AND TRANSFER OF THE EXISTING NOTES TENDERED
HEREBY, AND THE UNDERSIGNED WILL COMPLY WITH ITS OBLIGATIONS UNDER THE
REGISTRATION RIGHTS AGREEMENT. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF THE
TERMS OF THE EXCHANGE OFFER.
The name(s) and address(es) of the registered holder(s) of the Existing
Notes tendered hereby should be printed in Box 1 below, if they are not already
set forth below, as they appear on the Certificates representing such Existing
Notes. The Certificate number(s) and the Existing Notes that the undersigned
wishes to tender should be indicated in the appropriate box below.
If any tendered Existing Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Existing Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Existing Notes will be returned (or, in the case of Existing
Notes tendered by book-entry transfer, such Existing Notes will be credited to
an account maintained at DTC), without expense to the tendering holder, promptly
following the expiration or termination of the Exchange Offer.
3
<PAGE>
The undersigned understands that tenders of Existing Notes pursuant to any
one of the procedures described in "The Exchange Offer--Procedures for Tendering
Existing Notes" in the Prospectus and in the instructions hereto will, upon the
Company's acceptance for exchange of such tendered Existing Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Existing Notes tendered
hereby.
Unless otherwise indicated herein in the box entitled "Special Exchange
Instructions" below (Box 7), the undersigned hereby directs that the Exchange
Notes be issued in the name(s) of the undersigned or, in the case of a book-
entry transfer of Existing Notes, that such Exchange Notes be credited to the
account indicated below maintained at DTC. If applicable, substitute
Certificates representing Existing Notes not exchanged or not accepted for
exchange will be issued to the undersigned or, in the case of a book-entry
transfer of Existing Notes, will be credited to the account indicated below
maintained at DTC. Similarly, unless otherwise indicated under "Special Delivery
Instructions" (Box 8), please deliver Exchange Notes to the undersigned at the
address shown below the undersigned's signature.
BY TENDERING EXISTING NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY, (ii) ANY EXCHANGE NOTES TO BE RECEIVED BY THE
UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS BUSINESS, (iii) THE
UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH ANY PERSON TO PARTICIPATE
IN A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF EXCHANGE NOTES
TO BE RECEIVED IN THE EXCHANGE OFFER, AND (iv) IF THE UNDERSIGNED IS NOT A
BROKER-DEALER, THE UNDERSIGNED IS NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE
IN, A DISTRIBUTION (WITHIN THE MEANING OF THE SECURITIES ACT) OF SUCH EXCHANGE
NOTES. BY TENDERING EXISTING NOTES PURSUANT TO THE EXCHANGE OFFER AND EXECUTING
THIS LETTER OF TRANSMITTAL, A HOLDER OF EXISTING NOTES WHICH IS A BROKER-DEALER
REPRESENTS AND AGREES, CONSISTENT WITH CERTAIN INTERPRETIVE LETTERS ISSUED BY
THE STAFF OF THE DIVISION OF CORPORATION FINANCE OF THE SECURITIES AND EXCHANGE
COMMISSION TO THIRD PARTIES, THAT SUCH EXISTING NOTES WERE ACQUIRED BY SUCH
BROKER-DEALER FOR ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR
OTHER TRADING ACTIVITIES (SUCH A BROKER-DEALER WHICH IS TENDERING EXISTING NOTES
IS HEREIN REFERRED TO AS A "PARTICIPATING BROKER-DEALER") AND IT WILL DELIVER
THE PROSPECTUS (AS AMENDED OR SUPPLEMENTED FROM TIME TO TIME) MEETING THE
REQUIREMENTS OF THE SECURITIES ACT IN CONNECTION WITH ANY RESALE OF SUCH
EXCHANGE NOTES (PROVIDED THAT, BY SO ACKNOWLEDGING AND BY DELIVERING A
PROSPECTUS, SUCH PARTICIPATING BROKER-DEALER WILL NOT BE DEEMED TO ADMIT THAT IT
IS AN "UNDERWRITER" WITHIN THE MEANING OF THE SECURITIES ACT).
THE COMPANY HAS AGREED THAT, SUBJECT TO THE PROVISIONS OF THE REGISTRATION
RIGHTS AGREEMENT, THE PROSPECTUS, AS IT MAY BE AMENDED OR SUPPLEMENTED FROM TIME
TO TIME, MAY BE USED BY A PARTICIPATING BROKER-DEALER IN CONNECTION WITH RESALES
OF EXCHANGE NOTES RECEIVED IN EXCHANGE FOR EXISTING NOTES, WHERE SUCH EXISTING
NOTES WERE ACQUIRED BY SUCH PARTICIPATING BROKER-DEALER FOR ITS OWN ACCOUNT AS A
RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES, FOR A PERIOD
ENDING 180 DAYS AFTER THE EXPIRATION DATE OR, IF EARLIER, WHEN ALL SUCH EXCHANGE
NOTES HAVE BEEN DISPOSED OF BY SUCH PARTICIPATING BROKER-DEALER. IN THAT REGARD,
EACH
4
<PAGE>
PARTICIPATING BROKER-DEALER, BY TENDERING SUCH EXISTING NOTES AND EXECUTING THIS
LETTER OF TRANSMITTAL, AGREES THAT, UPON RECEIPT OF NOTICE FROM THE COMPANY OF
THE OCCURRENCE OF ANY EVENT OR THE DISCOVERY OF ANY FACT WHICH MAKES ANY
STATEMENT CONTAINED OR INCORPORATED BY REFERENCE IN THE PROSPECTUS UNTRUE IN ANY
MATERIAL RESPECT OR WHICH CAUSES THE PROSPECTUS TO OMIT TO STATE A MATERIAL FACT
NECESSARY IN ORDER TO MAKE THE STATEMENTS CONTAINED THEREIN, IN LIGHT OF THE
CIRCUMSTANCES UNDER WHICH THEY WERE MADE, NOT MISLEADING OR OF THE OCCURRENCE OF
CERTAIN OTHER EVENTS SPECIFIED IN THE REGISTRATION RIGHTS AGREEMENT, SUCH
PARTICIPATING BROKER-DEALER WILL SUSPEND THE SALE OF EXCHANGE NOTES PURSUANT TO
THE PROSPECTUS UNTIL THE COMPANY HAS AMENDED OR SUPPLEMENTED THE PROSPECTUS TO
CORRECT SUCH MISSTATEMENT OR OMISSION AND HAS FURNISHED COPIES OF THE AMENDED OR
SUPPLEMENTED PROSPECTUS TO THE PARTICIPATING BROKER-DEALER OR THE COMPANY HAS
GIVEN NOTICE THAT THE SALE OF THE EXCHANGE NOTES MAY BE RESUMED, AS THE CASE MAY
BE.
Each Exchange Note will bear interest from the most recent date to which
interest has been paid or duly provided for on the Existing Note surrendered in
exchange for such Exchange Note or, if no such interest has been paid or duly
provided for on such Existing Note, from April 30, 1998. Holders of the Existing
Notes whose Existing Notes are accepted for exchange will not receive accrued
interest on such Existing Notes for any period from and after the last Interest
Payment Date to which interest has been paid or duly provided for on such
Existing Notes prior to the original issue date of the Exchange Notes or, if no
such interest has been paid or duly provided for, will not receive any accrued
interest on such Existing Notes, and will be deemed to have waived the right to
receive any interest on such Existing Notes accrued from and after such Interest
Payment Date or, if no such interest has been paid or duly provided for, from
and after April 30, 1998.
All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except
pursuant to the withdrawal rights set forth in the Prospectus, this tender is
irrevocable.
PLEASE READ THIS ENTIRE LETTER OF TRANSMITTAL CAREFULLY BEFORE COMPLETING
THE BOXES BELOW AND FOLLOW THE INSTRUCTIONS BEGINNING ON PAGE 11 HEREOF.
5
<PAGE>
ALL TENDERING HOLDERS COMPLETE THIS BOX 1:
BOX 1
<TABLE>
<CAPTION>
<S> <C> <C> <C>
DESCRIPTION OF EXISTING NOTES TENDERED
(ATTACH ADDITIONAL SIGNED PAGES, IF NECESSARY)
<CAPTION>
PRINCIPAL
IF BLANK, CERTIFICATE PRINCIPAL AMOUNT
PLEASE PRINT NAME(S) AND ADDRESS(ES) OF NUMBER(S) OF AMOUNT OF EXISTING
REGISTERED HOLDER(S), EXACTLY AS NAME(S) EXISTING OF EXISTING NOTES
APPEAR(S) ON EXISTING NOTE CERTIFICATE(S): NOTES* NOTES TENDERED**
<S> <C> <C> <C>
<CAPTION>
<S> <C> <C> <C>
TOTAL TOTAL
PRINCIPAL PRINCIPAL
AMOUNT AMOUNT
TENDERED
$ $
<CAPTION>
* Need not be completed by book-entry holders.
** Existing Notes may be tendered in whole or in part in denominations of $1,000 and
integral multiples thereof. All Existing Notes held shall be deemed tendered unless a
lesser number is specified in this column. See Instruction 4.
</TABLE>
BOX 2
BOOK-ENTRY TRANSFER
(SEE INSTRUCTION 1 BELOW)
/ / CHECK HERE IF TENDERED EXISTING NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC
AND COMPLETE THE FOLLOWING:
Name of Tendering Institution __________________________________________________
DTC Account Number _____________________________________________________________
Transaction Code Number ________________________________________________________
6
<PAGE>
BOX 3
NOTICE OF GUARANTEED DELIVERY
(SEE INSTRUCTION 1 BELOW)
/ / CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
TENDERED EXISTING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
FOLLOWING:
Name of Registered Holders(s)___________________________________________________
Window Ticket Number (if any)___________________________________________________
Date of Execution of Notice of Guaranteed Delivery______________________________
Name of Institution which Guaranteed Delivery___________________________________
If Guaranteed Delivery is to be made By Book-Entry Transfer:____________________
Name of Tendering Institution___________________________________________________
DTC Account Number______________________________________________________________
Transaction Code Number_________________________________________________________
BOX 4
RETURN OF NON-EXCHANGED EXISTING NOTES TENDERED BY BOOK-ENTRY TRANSFER
(SEE INSTRUCTIONS 4 AND 6 BELOW)
/ / CHECK HERE IF TENDERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED EXISTING
NOTES ARE TO BE RETURNED BY CREDITING THE DTC ACCOUNT NUMBER SET FORTH
ABOVE.
BOX 5
PARTICIPATING BROKER-DEALER
/ / CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED THE EXISTING NOTES FOR
ITS OWN ACCOUNT AS A RESULT OF MARKET-MAKING OR OTHER TRADING ACTIVITIES (A
"PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE TEN ADDITIONAL COPIES OF
THE PROSPECTUS AND TEN COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name:___________________________________________________________________________
Address:________________________________________________________________________
7
<PAGE>
BOX 6
TENDERING HOLDER SIGNATURE
HOLDER(S) SIGN HERE_____________________________________________________________
(SEE INSTRUCTIONS 2, 5 AND 6 BELOW)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 IN BOX 9 BELOW)
(NOTE: SIGNATURE(S) MUST BE GUARANTEED IF REQUIRED BY INSTRUCTION 2)
Must be signed by registered holder(s) exactly as name(s) appear(s) on
Certificate(s) for the Existing Notes hereby tendered or on a security position
listing, or by a person(s) authorized to become the registered holder(s) by
endorsements and documents transmitted herewith (including such opinions of
counsel, certifications and other information as may be required by the Company
or the Trustee for the Existing Notes to comply with the restrictions on
transfer applicable to the Existing Notes). If signature is by an
attorney-in-fact, executor, administrator, trustee, guardian, officer of a
corporation or another acting in a fiduciary capacity or representative
capacity, please set forth the signer's full title. See Instruction 5 below.
------------------------------------------------------------------------------
(SIGNATURE(S) OF HOLDER(S))
Date ____________________, 1998
Name(s) ________________________________________________________________________
(PLEASE PRINT)
Address ________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number _________________________________________________
(Tax Identification or Social Security Number(s)) ______________________________
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1, 2 AND 5 BELOW)
------------------------------------------------------------------------------
AUTHORIZED SIGNATURE
Name ___________________________________________________________________________
(PLEASE PRINT)
Date ____________________, 1998
Capacity or Title_______________________________________________________________
Name of Firm____________________________________________________________________
Address_________________________________________________________________________
(INCLUDE ZIP CODE)
Area Code and Telephone Number__________________________________________________
8
<PAGE>
<TABLE>
<S> <C>
BOX 7 BOX 8
SPECIAL EXCHANGE INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5 AND 6 BELOW) (SEE INSTRUCTIONS 1, 5 AND 6 BELOW)
To be completed ONLY if the Exchange Notes To be completed ONLY if Exchange Notes are
are to be issued in the name of someone to be sent to someone other than the
other than the registered holder of the registered holder of the Existing Notes
Existing Notes whose name(s) appear(s) whose name(s) appear(s) above, or to such
above. registered holder(s) at an address other
than that shown above.
Issue Exchange Notes to: Mail Exchange Notes to:
Name Name
Address Address
(INCLUDE ZIP CODE) (INCLUDE ZIP CODE)
(TAX IDENTIFICATION OR SOCIAL (TAX IDENTIFICATION OR SOCIAL
SECURITY NUMBER) SECURITY NUMBER)
</TABLE>
9
<PAGE>
BOX 9
SUBSTITUTE FORM W-9
TO BE COMPLETED BY ALL TENDERING SECURITYHOLDERS
(SEE INSTRUCTION 9 BELOW)
SIGN THIS SUBSTITUTE FORM W-9 IN ADDITION TO THE SIGNATURE(S) REQUIRED IN BOX 6
PAYER'S NAME: MARINE MIDLAND BANK
<TABLE>
<S> <C> <C>
SUBSTITUTE PART I--PLEASE PROVIDE YOUR TIN TIN:
FORM W-9 (EITHER YOUR SOCIAL SECURITY NUMBER
OR EMPLOYER IDENTIFICATION NUMBER) -----------------------
IN THE BOX TO THE RIGHT AND CERTIFY
BY SIGNING AND DATING BELOW.
DEPARTMENT OF THE PART II--AWAITING TIN / /
TREASURY SIGN THIS FORM AND THE CERTIFICATION OF AWAITING TAXPAYER
INTERNAL REVENUE IDENTIFICATION NUMBER BELOW
SERVICE
PART III--EXEMPT / /
See enclosed Guidelines for additional information and SIGN
THIS FORM.
CERTIFICATION--UNDER PENALTIES OF PERJURY, I CERTIFY THAT:
PAYER'S REQUEST FOR (1) The number shown on this form is my correct taxpayer
TAXPAYER IDENTIFICATION identification number (or I am waiting for a number to be
issued to me); and
(2) I am not subject to backup withholding because (i) I am
exempt from backup
withholding, or (ii) I have not been notified by the
NUMBER (TIN) AND Internal Revenue Service (IRS) that I am subject to
CERTIFICATION
backup withholding as a result of a failure to report all
interest or dividends, or (iii) the IRS has notified me that
I am no longer subject to backup withholding.
(3) Any other information provided on this form is true and
correct.
CERTIFICATION INSTRUCTIONS--You must cross out item (iii) in
Part (2) above if you have been notified by the IRS that you
are subject to backup withholding because of underreporting
interest or dividends on your tax return and you are no
longer subject to backup withholding.
Signature: ------------------------------- Date:
</TABLE>
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE
IF YOU CHECKED THE BOX IN PART 2 OF THE SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number
has not been issued to me, and either (1) I have mailed or delivered an
application to receive a taxpayer identification number to the appropriate
Internal Revenue Service Center or Social Security Administration Office or
(2) I intend to mail or deliver an application in the near future. I
understand that if I do not provide a taxpayer identification number by the
time of payment, 31% of all payments made to me on account of the Exchange
Notes shall be retained until I provide a taxpayer identification number to
the Exchange Agent and that, if I do not provide my taxpayer identification
number within 60 days, such retained amounts shall be remitted to the Internal
Revenue Service as backup withholding and 31% of all reportable payments made
to me thereafter will be withheld and remitted to the Internal Revenue Service
until I provide a taxpayer identification number.
Signature
--------------------------------------------- Date
----------------------------, 199
NOTE: FAILURE TO COMPLETE AND RETURN THIS SUBSTITUTE FORM W-9 MAY RESULT IN
BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU. PLEASE REVIEW THE
ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
FOR ADDITIONAL INFORMATION.
10
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER
GENERAL
Please do not send Certificates for Existing Notes directly to the Company.
Your Existing Note Certificates, together with your signed and completed Letter
of Transmittal and any required supporting documents should be mailed in the
enclosed addressed envelope, or otherwise delivered, to the Exchange Agent, at
either of the addresses indicated on the first page hereof. THE METHOD OF
DELIVERY OF CERTIFICATES, THIS LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED
DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING HOLDER AND THE
DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE EXCHANGE AGENT.
IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY
INSURED, OR OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN ALL CASES, SUFFICIENT
TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES
This Letter of Transmittal is to be completed if either (a) Certificates are
to be forwarded herewith or (b) tenders are to be made pursuant to the
procedures for tender by book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Existing Notes" in the Prospectus. Certificates,
or timely confirmation of a book-entry transfer of such Existing Notes into the
Exchange Agent's account at DTC, as well as this Letter of Transmittal (or
facsimile thereof), properly completed and duly executed, with any required
signature guarantees, and any other documents required by this Letter of
Transmittal, must be received by the Exchange Agent at its address set forth
herein on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Existing Notes may be tendered in whole or in part in the principal amount of
$1,000 and integral multiples of $1,000.
Holders who wish to tender their Existing Notes and (i) whose Existing Notes
are not immediately available or (ii) who cannot deliver their Existing Notes,
this Letter of Transmittal and all other required documents to the Exchange
Agent on or prior to the Expiration Date or (iii) who cannot complete the
procedures for delivery by book-entry transfer on a timely basis, may tender
their Existing Notes by properly completing and duly executing a Notice of
Guaranteed Delivery pursuant to the guaranteed delivery procedures set forth in
"The Exchange Offer--Procedures for Tendering Existing Notes" in the Prospectus
and by completing Box 3 hereof. Pursuant to such procedures: (i) such tender
must be made by or through an Eligible Institution (as defined below); (ii) a
properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form made available by the Company, must be received by the
Exchange Agent on or prior to the Expiration Date; and (iii) the Certificates
(or a book-entry confirmation (as defined in the Prospectus)) representing all
tendered Existing Notes, in proper form for transfer, together with a Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent within three New
York Stock Exchange trading days after the date of execution of such Notice of
Guaranteed Delivery, all as provided in "The Exchange Offer--Procedures for
Tendering Existing Notes" in the Prospectus.
The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent, and must include a guarantee by an
Eligible Institution in the form set forth in such Notice. For Existing Notes to
be properly tendered pursuant to the guaranteed delivery procedure, the Exchange
Agent must receive a Notice of Guaranteed Delivery on or prior to the Expiration
Date. As used herein, "Eligible Institution" means a firm or other entity
identified in Rule 17Ad-15 under the Exchange
11
<PAGE>
Act as "an eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association or clearing
agency; or (v) a savings association, that is a participant in the Securities
Transfer Agents Medallion Program, the New York Stock Exchange Medallion
Signature Program or the Stock Exchanges Medallion Program.
The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance of
such tender.
2. GUARANTEE OF SIGNATURES
No signature guarantee on this Letter of Transmittal is required if:
(i) this Letter of Transmittal is signed by the registered holder (which term,
for purposes of this document, shall include any participant in DTC whose
name appears on a security position listing as the owner of the Existing
Notes) of Existing Notes tendered herewith, unless such holder(s) has
completed either the box entitled "Special Exchange Instructions" (Box 7) or
the box entitled "Special Delivery Instructions" (Box 8) above, or
(ii) such Existing Notes are tendered for the account of a firm that is an
Eligible Institution.
In all other cases, an Eligible Institution must guarantee the signature(s)
on this Letter of Transmittal (Box 6). See Instruction 5.
3. INADEQUATE SPACE
If the space provided in the box captioned "Description of Existing Notes"
is inadequate, the Certificate number(s) and/or the principal amount of Existing
Notes and any other required information should be listed on a separate signed
schedule which should be attached to this Letter of Transmittal.
4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS
Tenders of Existing Notes will be accepted only in the principal amount of
$1,000 and integral multiples thereof. If less than all the Existing Notes
evidenced by any Certificate submitted are to be tendered, fill in the principal
amount of Existing Notes which are to be tendered in Box 1 under the column
"Principal Amount of Existing Notes Tendered". In such case, new Certificate(s)
for the remainder of the Existing Notes that were evidenced by your Existing
Certificate(s) will only be sent to the holder of the Existing Notes, promptly
after the Expiration Date. All Existing Notes represented by Certificates
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
Except as otherwise provided herein, tenders of Existing Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective on or prior to that time, a written, telegraphic,
telex or facsimile transmission of such notice of withdrawal must be timely
received by the Exchange Agent at its address set forth above or in the
Prospectus on or prior to the Expiration Date. Any such notice of withdrawal
must specify the name of the person who tendered the Existing Notes to be
withdrawn, the aggregate principal amount of Existing Notes to be withdrawn, and
(if Certificates for such Existing Notes have been tendered) the name of the
registered holder of the Existing Notes as set forth on the Certificate for the
Existing Notes, if different from that of the person who tendered such Existing
Notes. If Certificates for the Existing Notes have been delivered or otherwise
identified to the Exchange Agent, then prior to the physical release of such
Certificates for the Existing Notes, the tendering holder must submit the serial
numbers shown on the particular Certificates for the Existing Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by an
Eligible Institution, except in the case of Existing Notes tendered for the
account of an Eligible Institution. If Existing Notes have been
12
<PAGE>
tendered pursuant to the procedures for book-entry transfer set forth in "The
Exchange Offer--Procedures for Tendering Existing Notes," the notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawal of Existing Notes, in which case a notice of withdrawal will
be effective if delivered to the Exchange Agent by written, telegraphic, telex
or facsimile transmission. Withdrawals of tenders of Existing Notes may not be
rescinded. Existing Notes properly withdrawn will not be deemed validly tendered
for purposes of the Exchange Offer, but may be retendered at any subsequent time
on or prior to the Expiration Date by following any of the procedures described
in the Prospectus under "The Exchange Offer--Procedures for Tendering Existing
Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give such notification. Any Existing Notes which have been tendered
but which are withdrawn will be returned to the holder thereof without cost to
such holder promptly after withdrawal.
5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS
If this Letter of Transmittal is signed by the registered holder(s) of the
Existing Notes tendered hereby, the signature(s) must correspond exactly with
the name(s) as written on the face of the Certificate(s) without alteration,
enlargement or any change whatsoever.
If any of the Existing Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
If any tendered Existing Notes are registered in different name(s) on
several Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are different
registrations of Certificates.
If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing and, unless waived by the Company, must
submit proper evidence satisfactory to the Company, in its sole discretion, of
such persons' authority to so act.
When this Letter of Transmittal is signed by the registered owner(s) of the
Existing Notes listed and transmitted hereby, no endorsement(s) of
Certificate(s) or separate bond power(s) are required unless Exchange Notes are
to be issued in the name of a person other than the registered holder(s).
However, if Exchange Notes are to be issued in the name of a person other than
the registered holder(s), signature(s) on such Certificate(s) or bond power(s)
must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered owner(s) of the Existing Notes listed, the certificates must be
endorsed or accompanied by appropriate bond powers, signed exactly as the name
or names of the registered owner(s) appear(s) on the Certificates, and also must
be accompanied by such opinions of counsel, certifications and other information
as the Company or the Trustee for the Existing Notes may require in accordance
with the restrictions on transfer applicable to the Existing Notes. Signatures
on such Certificates or bond powers must be guaranteed by an Eligible
Institution.
6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS
If Exchange Notes are to be issued in the name of a person other than the
signer of this Letter of Transmittal, or if Exchange Notes are to be sent to
someone other than the signer of this Letter of Transmittal or to an address
other than that shown above, the appropriate boxes on this Letter of
13
<PAGE>
Transmittal should be completed (Box 7 and 8). Certificates for Existing Notes
not exchanged will be returned by mail or, if tendered by book-entry transfer,
by crediting the account indicated above maintained at DTC. See Instruction 4.
7. DETERMINATION OF VALIDITY
The Company will determine, in its sole discretion, all questions as to the
form of documents, validity, eligibility (including time of receipt) and
acceptance for exchange of any tender of Existing Notes, which determination
shall be final and binding on all parties. The Company reserves the absolute
right to reject any and all tenders determined by it not to be in proper form or
the acceptance of which, or exchange for, may, in the view of counsel to the
Company, be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer set forth
in the Prospectus under "The Exchange Offer--Certain Conditions to the Exchange
Offer" or any conditions or irregularity in any tender of Existing Notes of any
particular holder whether or not similar conditions or irregularities are waived
in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange
Offer (including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Existing Notes will be deemed to have been
validly made until all irregularities with respect to such tender have been
cured or waived. Neither the Company, any affiliates or assigns of the Company,
the Exchange Agent, nor any other person shall be under any duty to give
notification of any irregularities in tenders or incur any liability for failure
to give such notification.
8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES
Questions and requests for assistance may be directed to the Exchange Agent
at its address and telephone number set forth on the front of this Letter of
Transmittal. Additional copies of the Prospectus, the Notice of Guaranteed
Delivery and the Letter of Transmittal may be obtained from the Exchange Agent.
9. 31% BACKUP WITHHOLDING; SUBSTITUTE FORM W-9
For U.S. Federal income tax purposes, holders are required, unless an
exemption applies, to provide the Exchange Agent with such holder's correct
taxpayer identification number ("TIN") on Substitute Form W-9 of this Letter of
Transmittal (Box 9) and certify, under penalties of perjury, that such number is
correct and he or she is not subject to backup withholding. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Existing Notes
exchanged pursuant to the Exchange Offer, or with respect to Exchange Notes
following the Exchange Offer, may be subject to 31% backup withholding.
The box in Part 2 of the Substitute Form W-9 (Box 9) may be checked if the
tendering holder has not been issued a TIN and has applied for a TIN or intends
to apply for a TIN in the near future. If the box in Part 2 is checked, the
holder or other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below Substitute Form W-9 in order to avoid backup
withholding. Notwithstanding that the box in Part 2 is checked and the
Certificate of Awaiting Taxpayer Identification Number is completed, the
Exchange Agent will withhold 31% of all payments made prior to the time a
properly certified TIN is provided to the Exchange Agent.
The holder is required to give the Exchange Agent the TIN (i.e., social
security number or employer identification number) of the registered owner of
the Existing Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Existing Notes. If the Existing Notes are registered in
more than one name or are not in the name of the actual owner, consult the
enclosed "Guidelines for
14
<PAGE>
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below and check the box in Part 3 of
Box 9 for "exempt", to avoid possible erroneous backup withholding. A foreign
person may qualify as an exempt recipient by submitting a properly completed IRS
Form W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the enclosed "Guidelines for Certification of Taxpayer
Identification Number on Substitute Form W-9" for additional guidance on which
holders are exempt from backup withholding.
Backup withholding is not an additional U.S. Federal income tax. Rather, the
U.S. Federal income tax liability of a person subject to backup withholding will
be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
10. LOST, DESTROYED OR STOLEN CERTIFICATES
If any Certificate(s) representing Existing Notes have been lost, destroyed
or stolen, the holder should promptly notify the Exchange Agent. The holder will
then be instructed as to the steps that must be taken in order to replace the
Certificate(s). This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing lost, destroyed or stolen
Certificate(s) have been followed.
11. SECURITY TRANSFER TAXES
Holders who tender their Existing Notes for exchange will not be obligated
to pay any transfer taxes in connection therewith. If, however, Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Existing Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Existing Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be payable
by the tendering holder. If satisfactory evidence of payment of such taxes or
exemption therefrom is not submitted with the Letter of Transmittal, the amount
of such transfer taxes will be billed directly to such tendering holder.
IMPORTANT: THIS LETTER OF TRANSMITTAL (OR FACSIMILE THEREOF) AND ALL OTHER
REQUIRED DOCUMENTS MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO THE
EXPIRATION DATE.
15
<PAGE>
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9
A. TIN--The Taxpayer Identification Number for most individuals is their
social security number. Refer to the following chart to determine the
appropriate number:
<TABLE>
<CAPTION>
- -----------------------------------------------------
GIVE THE SOCIAL
FOR THIS TYPE OF ACCOUNT: SECURITY
NUMBER OF--
- -----------------------------------------------------
<S> <C> <C>
1. individual The individual
2. Two or more The actual owner of
individuals (joint the account or, if
account) combined funds, the
first individual on
the account (1)
3. Custodian account of the Minor (2)
a minor (Uniform
Gift to Minors Act)
4. a. The usual The grantor--trustee
revocable savings (1)
trust (grantor is
also trustee)
b. So-called trust
account that is The actual owner (1)
not a legal or
valid trust under
State law
5. Sole proprietorship The owner (3)
- -----------------------------------------------------
<CAPTION>
GIVE THE EMPLOYER
FOR THIS TYPE OF ACCOUNT: IDENTIFICATION
NUMBER OF--
<S> <C> <C>
- -----------------------------------------------------
6. Sole proprietorship The owner (3)
7. A valid trust, Legal entity (4)
estate or pension
trust
8. Corporate The corporation
9. Association, club, The organization
religious,
charitable,
educational or other
tax-exempt
organization
10. Partnership The partnership
11. A broker or The broker or
registered nominee nominee
12. Account with the The public entity
Department of
Agriculture
</TABLE>
- ---------------------------------------------
- ---------------------------------------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's name and social security
number.
(3) Show the individual's name. You may also enter your business name or "doing
business as" name. You may use either your Social Security number or your
employer identification number.
(4) List first and circle the name of the legal trust, estate, or pension trust.
NOTE: If no name is circled when there is more than one name, the number will be
considered to be that of the first name listed.
16
<PAGE>
B. EXEMPT PAYEES --The following lists exempt payees. If you are exempt,
you must nonetheless complete the form and provide your TIN in order to
establish that you are exempt. Check the box in Part 3 of the form, sign and
date the form.
For this purpose, Exempt Payees include: (1) A corporation; (2) An
organization exempt from tax under section 501(a), or an individual retirement
plan (IRA) or a custodial account under section 403(b)(7); (3) The United States
or any of its agencies or instrumentalities; (4) A state, the District of
Columbia, a possession of the United States, or any of their political
subdivisions or instrumentalities; (5) A foreign government or any of its
political subdivisions, agencies or instrumentalities; (6) An international
organization or any of its agencies or instrumentalities; (7) A foreign central
bank of issue; (8) A dealer in securities or commodities required to register in
the U.S. or a possession of the U.S.; (9) A real estate investment trust; (10)
An entity or person registered at all times during the tax year under the
Investment Company Act of 1940; (11) A common trust fund operated by a bank
under section 584(a); (12) A financial institution.
C. OBTAINING A NUMBER
If you do not have a taxpayer identification number or you do not know your
number, obtain Form SS-5, application for a Social Security Number, or Form
SS-4, Application for Employer Identification Number, at the local office of the
Social Security Administration or the Internal Revenue Service and apply for a
number.
D. PRIVACY ACT NOTICE
Section 6109 requires most recipients of dividend, interest or other
payments to give taxpayer identification numbers to payers who must report the
payments to the IRS. The IRS uses the numbers for identification purposes.
Payers must be given the numbers whether or not payees are required to file tax
returns. Payers must generally withhold 31% of taxable interest, dividend, and
certain other payments to a payee who does not furnish a taxpayer identification
number. Certain penalties may also apply.
E. PENALTIES
(1) Penalty for Failure to Furnish Taxpayer Identification Number. If you
fail to furnish your taxpayer identification number to a payer, you are subject
to a penalty of $50 for each such failure unless your failure is due to
reasonable cause and not to willful neglect.
(2) Failure to Report Certain Dividend and Interest Payments. If you fail to
include any portion of an includible payment for interest, dividends, or
patronage dividends in gross income, such failure will be treated as being due
to negligence and will be subject to a penalty of 5% on any portion of an
under-payment attributable to that failure unless there is clear and convincing
evidence to the contrary.
(3) Civil Penalty for False Information with Respect to Withholding. If you
make a false statement with no reasonable basis which results in no imposition
of backup withholding, you are subject to a penalty of $500.
(4) Criminal Penalty for Falsifying Information. Falsifying certifications
or affirmations may subject you to criminal penalties including fines and/or
imprisonment.
FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL
REVENUE SERVICE.
17
<PAGE>
EXHIBIT 99(B)
NOTICE OF GUARANTEED DELIVERY
FOR TENDER OF
13% SENIOR NOTES DUE 2005
OF
GLOBIX CORPORATION
THIS NOTICE OF GUARANTEED DELIVERY, OR ONE SUBSTANTIALLY EQUIVALENT TO THIS
FORM, MUST BE USED TO ACCEPT THE EXCHANGE OFFER (AS DEFINED BELOW) IF
(I)CERTIFICATES FOR THE COMPANY'S (AS DEFINED BELOW) 13% SENIOR NOTES DUE 2005
(THE "EXISTING NOTES") ARE NOT IMMEDIATELY AVAILABLE, (II)THE EXISTING NOTES,
THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS CANNOT BE DELIVERED
TO MARINE MIDLAND BANK (THE "EXCHANGE AGENT") ON OR PRIOR TO THE EXPIRATION DATE
(AS DEFINED IN THE PROSPECTUS REFERRED TO BELOW) OR (III)THE PROCEDURES FOR
DELIVERY BY BOOK- ENTRY TRANSFER CANNOT BE COMPLETED ON A TIMELY BASIS. THIS
NOTICE OF GUARANTEED DELIVERY MAY BE DELIVERED BY HAND, OVERNIGHT COURIER OR
MAIL, OR TRANSMITTED BY FACSIMILE TRANSMISSION, TO THE EXCHANGE AGENT. SEE "THE
EXCHANGE OFFER PROCEDURES FOR TENDERING EXISTING NOTES" IN THE PROSPECTUS.
THE EXCHANGE AGENT FOR THE EXCHANGE OFFER IS:
MARINE MIDLAND BANK
BY MAIL, OVERNIGHT DELIVERY OR HAND:
MARINE MIDLAND BANK
140 BROADWAY
NEW YORK, NEW YORK 10005-1180
ATTN: CORPORATE TRUST DEPARTMENT
(GLOBIX CORPORATION, 13% SENIOR NOTES DUE 2005)
TO CONFIRM BY TELEPHONE OR FOR INFORMATION:
(212) 658-6433
FACSIMILE TRANSMISSIONS:
(212) 658-6425
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS
SET FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA
FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
THIS NOTICE OF GUARANTEED DELIVERY IS NOT TO BE USED TO GUARANTEE
SIGNATURES. IF A SIGNATURE ON A LETTER OF TRANSMITTAL IS REQUIRED TO BE
GUARANTEED BY AN "ELIGIBLE INSTITUTION" UNDER THE INSTRUCTIONS THERETO, SUCH
SIGNATURE GUARANTEE MUST APPEAR IN THE APPLICABLE SPACE PROVIDED IN THE
SIGNATURE BOX ON THE LETTER OF TRANSMITTAL.
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<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to Globix Corporation, a Delaware corporation
(the "Company"), upon the terms and subject to the conditions set forth in the
Prospectus dated { }, 1998 (as the same may be amended or supplemented
from time to time, the "Prospectus") and the related Letter of Transmittal
(which together constitute the "Exchange Offer"), receipt of which is hereby
acknowledged, the aggregate principal amount of Existing Notes set forth below
pursuant to the guaranteed delivery procedures set forth in the Prospectus under
the caption "The Exchange Offer--Procedures for Tendering Existing Notes."
DESCRIPTION OF EXISTING NOTES TENDERED
Name(s), Address(es) and Area Code(s) and Telephone Number(s) of Registered
Holder(s):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Certificate Number(s) (if available):
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
Aggregate Principal Amount Tendered: $
Signature(s):
________________________________________________________________________________
________________________________________________________________________________
If Existing Notes will be tendered by book-entry transfer, please provide the
following information:
Name of Tendering Institution:
DTC Account Number:
Date:
Transaction Code Number:
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<PAGE>
THE GUARANTEE BELOW MUST BE COMPLETED
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a firm or other entity identified in Rule 17Ad-15 under the
Securities Exchange Act of 1934, as amended, as an "eligible guarantor
institution," including (as such terms are defined therein) (i)a bank; (ii)a
broker, dealer, municipal securities broker or dealer or government securities
broker or dealer; (iii)a credit union; (iv)a national securities exchange,
registered securities association or clearing agency; or (v)a savings
association, that is a participant in the Securities Transfer Agents Medallion
Program, the New York Stock Exchange Medallion Signature Program or the Stock
Exchanges Medallion Program (each of the foregoing being referred to as an
"Eligible Institution"), hereby guarantees to deliver to the Exchange Agent, at
its address set forth above, either the Existing Notes tendered hereby in proper
form for transfer, or confirmation of the book-entry transfer of such Existing
Notes to the Exchange Agent's account at The Depository Trust Company ("DTC"),
pursuant to the procedures for book-entry transfer set forth in the Prospectus,
in either case together with one or more properly completed and duly executed
Letter(s) of Transmittal (or facsimile thereof) and any other required documents
within three New York Stock Exchange trading days after the date of execution of
this Notice of Guaranteed Delivery.
The undersigned acknowledges that it must deliver the Letter(s) of
Transmittal and the Existing Notes tendered hereby to the Exchange Agent within
the time period set forth above and that failure to do so could result in a
financial loss to the undersigned.
<TABLE>
<S> <C>
Name of Firm: Authorized
Signature:
Address: Name (Please Print):
Capacity or Title:
Area Code and Date:
Telephone Number:
</TABLE>
NOTE: DO NOT SEND EXISTING NOTES WITH THIS NOTICE OF GUARANTEED DELIVERY.
ACTUAL SURRENDER OF EXISTING NOTES MUST BE MADE PURSUANT TO, AND BE ACCOMPANIED
BY, A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER
REQUIRED DOCUMENTS.
No person has been authorized to give any information or to make any
representations in connection with this Exchange Offer other than those
contained in the Prospectus, and, if given or made, such other information or
representations must not be relied upon as having been authorized by the
Company. Neither the delivery of this Prospectus nor any exchange of Existing
Notes for Exchange Notes made hereunder shall, under any circumstances, create
any implication that there has been no change in the affairs of the Company
since the date hereof or that the information contained herein is correct as of
any time subsequent to its date. This Prospectus does not constitute an offer to
sell or a solicitation of an offer to buy any securities other than the
securities to which it relates. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy such securities in any circumstances
in which such offer or solicitation is unlawful.
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