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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 4, 1999
REGISTRATION NO. 333-70375
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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DELAWARE 7373 13-3781263
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
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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)
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
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ARNOLD N. BRESSLER, ESQ. ELLEN B. CORENSWET, ESQ.
MILBERG WEISS BERSHAD HYNES & LERACH LLP BABAK YAGHMAIE, ESQ.
ONE PENNSYLVANIA PLAZA BROBECK, PHLEGER & HARRISON LLP
NEW YORK, NEW YORK 10119-0165 1633 BROADWAY
(212) 594-5300 NEW YORK, NEW YORK 10019
(212)581-1600
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this registration statement becomes effective.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, please check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE(3)
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Common Stock, $.01 par value per share...................... $134,733,800 $37,456.00
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(1) Includes shares of common stock to be sold by selling stockholders and
shares of common stock which the Underwriters have the option to purchase to
cover overallotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(c) of the Securities Act of 1933, as amended, based
upon the closing price of $25 7/16 per share of common stock on February 26,
1999.
(3) $17,663.43 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.
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<PAGE> 2
SUBJECT TO COMPLETION -- MARCH 4, 1999
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PROSPECTUS
MARCH , 1999
GLOBIX LOGO
4,605,790 SHARES OF COMMON STOCK
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GLOBIX CORPORATION:
- - We are a leading provider of Internet
access and sophisticated Internet-based
products and services to large and medium size businesses.
- - Globix Corporation
295 Lafayette Street
New York, New York 10012
(212) 334-8500
- - Nasdaq SmallCap Market symbol (and
proposed Nasdaq National Market symbol): GBIX
THE OFFERING:
- - Globix is offering 4,000,000 of the shares and existing stockholders are
offering 605,790 of the shares.
- - The underwriters have an option to purchase an additional 690,869 shares from
Globix to cover any overallotments.
- - There is an existing trading market for these shares. The reported last sale
price on February 26, 1999 was $25.44 per share.
- - We plan to use the proceeds from this offering to fund the completion of our
network and for general corporate purposes. We will not receive any proceeds
from the shares sold by the selling stockholders.
- - Closing: , 1999.
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Per Share Total
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Public offering price: $ $
Underwriting fees:
Proceeds to Globix:
Proceeds to selling stockholders:
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THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
THE UNDERSIGNED ARE FACILITATING INTERNET DISTRIBUTION.
DLJDIRECT INC. WIT CAPITAL CORPORATION
AS E-MANAGER
WE WILL AMEND AND COMPLETE THE INFORMATION IN THIS PROSPECTUS. ALTHOUGH WE ARE
PERMITTED BY US FEDERAL SECURITIES LAWS TO OFFER THESE SECURITIES USING THIS
PROSPECTUS, WE MAY NOT SELL THEM OR ACCEPT YOUR OFFER TO BUY THEM UNTIL THE
DOCUMENTATION FILED WITH THE SEC RELATING TO THESE SECURITIES HAS BEEN DECLARED
EFFECTIVE BY THE SEC. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES
OR OUR SOLICITATION OF YOUR OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION
WHERE THAT WOULD NOT BE PERMITTED OR LEGAL.
<PAGE> 3
GLOBIX NETWORK MAP
TABLE OF CONTENTS
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Page
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Prospectus Summary............. 3
Risk Factors................... 8
Use of Proceeds................ 17
Price Range of Common Stock and
Dividend Policy.............. 18
Capitalization................. 19
Dilution....................... 20
Selected Consolidated Financial
Data......................... 21
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 22
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Page
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Business....................... 34
Management..................... 49
Certain Transactions........... 58
Principal and Selling
Shareholders................. 59
Description of Capital Stock... 61
Shares Eligible for Future
Sale......................... 64
Underwriting................... 66
Legal Matters.................. 70
Experts........................ 70
Available Information.......... 71
Index to the Company's
Financial Statements......... F-1
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<PAGE> 4
PROSPECTUS SUMMARY
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Globix and our
industry. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of various factors, including all
the risks and uncertainties discussed in "Risk Factors" and elsewhere in this
prospectus. We do not undertake to update publicly any forward-looking
statements for any reason, even if new information becomes available or other
events occur in the future. We believe that our forward-looking statements are
within the meaning of the safe harbor provided by the Securities Exchange Act of
1934, as amended. This summary highlights some information from this prospectus.
You should also read the more detailed information and consolidated financial
statements and the notes to those statements appearing in other parts of this
prospectus.
GLOBIX CORPORATION
OUR BUSINESS
We are a leading provider of Internet access and sophisticated Internet
products and services to large and medium size businesses. Our comprehensive
range of high performance products and services enables our customers to utilize
the Internet in implementing their business strategies. Our Internet products
and services include:
- Internet access using telecommunication lines dedicated to particular
customers
- facilities for hosting customer web sites on our servers, known as web
hosting, and housing customer-owned web servers and related equipment,
known as co-location
- sale and integration of Internet-related hardware and software
- management of sophisticated computer systems and networks
- value-added services such as electronic commerce, dissemination of audio
and video content over the Internet, network security and web site
development
- instructor-led corporate training
Our customers primarily use our products and services to maintain a high speed,
high capacity, direct link to the Internet and to establish and support complex
web sites. We currently offer our products and services from our facility in New
York City, where most of our customers have substantial operations. Our team of
sales consultants, technical personnel and customer support professionals is
located near our customers. Due to this strong local market presence, we are
able to evaluate the needs of our customers and quickly respond with tailored
solutions. We also provide our customers the ability to outsource the design and
maintenance of their corporate web sites. Our products are flexible and
scaleable, allowing us to modify the size and breadth of the services we provide
as needed.
OUR CUSTOMERS
As of December 31, 1998, we had approximately 850 business customer
accounts for Internet products and services. Our customers are in a variety of
industries such as advertising, financial services, media, publishing and
retail. Our Internet customers include Acclaim Entertainment, American Red
Cross, Bloomingdale's, BPI Communications (Billboard and Adweek), Dow Jones,
General Media International (Penthouse), Microsoft,
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<PAGE> 5
National Hockey League, Nomura Securities, Ogilvy & Mather, RealNetworks,
Standard & Poors and Tishman Speyer Properties.
OUR FACILITIES AND NETWORK EXPANSION
We are in the process of building new state-of-the-art "SuperPOP"
facilities in New York City, London and the San Francisco Bay area. Each new
SuperPOP will feature:
- a high performance Internet data center with multiple, redundant,
high-capacity fiber connections, uninterruptable power supplies with
back-up generators, a dry fire suppression system, raised floor and
environmental controls
- a network operations center, which provides 24 hour a day, 7 day a week
monitoring of our network and our customers' web sites
- on-site customer support, sales and marketing, and administration of
Internet software and hardware, including servers and routers
The new SuperPOP facilities will increase our total Internet data center
capacity from 2,000 square feet to 63,000 square feet, significantly increasing
the space we have available to house servers and routers for hosting web sites.
All three new SuperPOP facilities are expected to be completed and operational
by June 30, 1999.
We are also currently establishing a high performance network
infrastructure, which will serve many of the major business centers in the
United States, as well as London, England. Our network will significantly
increase data transmission speed and capacity, improve reliability and reduce
data transmission costs. To implement this project, in October 1998, we entered
into an agreement with Qwest Communications giving us the exclusive right for a
20 year period to use portions of Qwest's global fiber network, which is
currently under construction. In April 1998, we completed a $160.0 million debt
financing to fund our new SuperPOP facilities and network.
OUR MARKET OPPORTUNITY
We believe we are well positioned to take advantage of the significant
market opportunity that exists to provide Internet products and services to
businesses. For example, International Data Corporation estimates that:
- U.S. corporate Internet access revenues will increase from $2.9 billion
in 1998 to $10.1 billion in 2002.
- U.S. value-added Internet service revenues, such as hosting customers'
web sites, electronic commerce and security services, will increase from
$3.0 billion in 1998 to $9.0 billion in 2002.
- European corporate Internet access revenues will increase from $1.7
billion in 1998 to $4.2 billion in 2001.
- European value-added Internet service revenues will increase from $223.0
million in 1998 to $679.0 million in 2001.
Our target customers are large and medium size businesses located near our
SuperPOP facilities. We believe that our target market is underserved by both
large national and global Internet service providers and by smaller local and
regional Internet service providers. Large ISPs focus primarily on Internet
access products, and generally do not maintain a significant local presence or
offer a full range of Internet services. Smaller ISPs typically lack the
resources to provide and support a full range of value-added
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<PAGE> 6
Internet products and services. We believe that our strong local presence, high
performance facilities and comprehensive range of Internet products and services
enable us to effectively compete against both large and small ISPs.
OUR GROWTH STRATEGY
Our objective is to become the leading provider of Internet access and
sophisticated Internet products and services to businesses in key global
business markets. To achieve this objective, we intend to:
- continue to invest extensively in our infrastructure
- expand our product and service offerings
- sell additional products and services to existing customers
- enhance the Globix brand name in our target markets
- make investments in, or acquire, complementary businesses
OUR HISTORY
We were originally incorporated in New York in 1989 as NAFT International
Ltd. In July 1994, PFM Technologies Corporation, a newly formed affiliate of
NAFT, acquired NAFT and its affiliated corporations in a tax-free exchange of
common stock. We reincorporated in Delaware in 1995 under the name Bell
Technology Group Ltd. We changed our name to Globix Corporation on June 1, 1998.
Our principal executive offices are located at 295 Lafayette Street, New York,
New York 10012. Our telephone number is (212) 334-8500.
------------------------
The name "Globix" and the Globix logo are trademarks of Globix. Each
trademark, trade name or service mark of any other company appearing in this
prospectus belongs to its holder.
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THE OFFERING
Common stock offered:
By Globix................................... 4,000,000 shares
By the selling stockholders ................ 605,790 shares
--------------
Total............................... 4,605,790 shares
Common stock to be outstanding after
the offering................................ 8,234,186 shares
Use of proceeds............................... To fund the completion of our
network and for general
corporate purposes. We may
also use a portion of the net
proceeds to make investments
in, or acquire, complementary
businesses.
Nasdaq SmallCap Market symbol (and proposed
Nasdaq National Market symbol)................ GBIX
The 8,234,186 shares of common stock to be outstanding after this offering
is based on the 4,153,396 shares outstanding as of February 26, 1999 and
includes the 4,000,000 shares of common stock being sold by us in this offering
and the 80,790 shares of common stock to be issued upon the exercise of warrants
immediately prior to the offering by some of the selling stockholders. The
shares of common stock to be outstanding after this offering excludes (1) any
shares of common stock to be issued pursuant to the overallotment option, (2)
664,685 shares of common stock issuable upon the exercise of warrants at an
effective weighted average exercise price of $13.58 per share to be outstanding
immediately after the closing of this offering, and (3) 1,355,032 shares of
common stock issuable upon the exercise of options outstanding under our stock
option plans at a weighted average exercise price of $8.01 per share as of
February 26, 1999. It further excludes 177,374 additional shares of common stock
reserved for issuance under our existing stock option plans as of February 26,
1999 and approximately 2,500,000 shares of common stock, approved by our board
of directors on March 2, 1999, to be used for the grant of stock options. The
2,500,000 shares include an immediately exercisable option to be granted
concurrently with the closing of this offering to Marc H. Bell, our President
and Chief Executive Officer, for a number of shares of common stock equal to 25%
of the difference between the number of shares outstanding immediately after the
closing of this offering and the number outstanding as of October 1, 1998. The
exercise price of Mr. Bell's option will be the same as the price to the public
in this offering.
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SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Set forth below is our financial data for the year ended December 31, 1994,
the nine months ended September 30, 1995 and the years ended September 30, 1996,
1997 and 1998, which are derived from our audited consolidated financial
statements. We changed our fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months. Also set
forth below is the consolidated financial data as of December 31,1998 and for
the three months ended December 31, 1997 and 1998 which are derived from our
unaudited interim financial statements. In our opinion, these unaudited
statements have been prepared on the same basis as our audited financial
statements and reflect all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of our results of operations and
financial position for these periods.
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NINE
YEAR MONTHS THREE MONTHS ENDED
ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ---------------------------- ---------------------
1994 1995 1996 1997 1998 1997 1998
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CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues.............................. $6,524 $8,738 $10,374 $17,400 $ 20,595 $4,740 $ 5,929
Cost of revenues...................... 5,192 7,292 8,599 13,699 13,322 3,114 3,702
Total operating expenses.............. 1,432 1,315 3,463 6,711 12,006 1,852 6,073
Income (loss) from operations......... (100) 131 (1,688) (3,010) (4,733) (226) (3,846)
Net income (loss)..................... (144) 39 (1,893) (3,115) (11,156) (282) (7,819)
Basic and diluted net income (loss)
per share(1)........................ $(0.11) $ 0.02 $ (0.72) $ (1.01) $ (3.08) $(0.08) $ (1.89)
Weighted average common shares
outstanding......................... 1,294 1,725 2,633 3,075 3,626 3,448 4,140
OTHER FINANCIAL DATA:
EBITDA(2)............................. $ (41) $ 199 $(1,469) $(2,335) $ (3,423) $ 16 $(3,339)
Capital expenditures.................. 103 150 1,955 1,542 23,270 829 22,320
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AS OF DECEMBER 31, 1998
--------------------------
ACTUAL AS ADJUSTED(3)
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CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $ 57,320 $151,866
Restricted cash and investments........................... 50,473 50,473
Working capital........................................... 43,855 138,401
Total assets.............................................. 184,901 279,447
Long-term debt and notes payable.......................... 162,615 162,615
Stockholders' equity...................................... (4,752) 89,794
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THREE MONTHS ENDED
----------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1997 1997 1998 1998 1998 1998
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QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Internet............................. $ 569 $1,328 $1,441 $ 1,637 $ 2,042 $ 2,281
Server sales and integration......... 2,963 3,412 2,911 4,059 3,765 3,648
------- ------ ------ ------- ------- -------
Total revenues................... 3,532 4,740 4,352 5,696 5,807 5,929
Cost of revenues:
Internet............................. 509 335 401 399 397 565
Server sales and integration......... 2,575 2,779 2,343 3,401 3,267 3,137
------- ------ ------ ------- ------- -------
Total cost of revenues........... 3,084 3,114 2,744 3,800 3,664 3,702
Total operating expenses............... 1,955 1,852 2,134 3,406 4,615 6,073
Loss from operations................... (1,507) (226) (526) (1,510) (2,472) (3,846)
Net loss............................... (1,584) (282) (588) (4,070) (6,217) (7,819)
</TABLE>
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(1) 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 Note 1 of Notes to
Consolidated Financial Statements.
(2) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included 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. In
addition, EBITDA should not be considered as a substitute for net income or
net loss as an indicator of our operating performance or cash flow or as a
measure of liquidity. This data should be examined in conjunction with our
consolidated financial statements and notes to the financial statements
included elsewhere in this prospectus.
(3) The as adjusted data gives effect to the application of the net proceeds
from the sale of the 4,000,000 shares of common stock, after deducting the
underwriting discount and estimated offering expenses, and includes the
proceeds from the exercise by some selling stockholders of warrants for
80,790 shares of common stock.
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RISK FACTORS
WE HAVE LARGE DEBT OBLIGATIONS, WHICH ARE A SUBSTANTIAL BURDEN ON OUR CASH FLOW.
As a result of our large outstanding debt obligations, we have significant
ongoing debt service requirements. As of December 31, 1998, we owed
approximately $162.6 million in long-term debt and notes payable. Our high level
of indebtedness could have several adverse effects on our future operations,
including the following:
- A substantial portion of our revenues must be used to pay interest on our
indebtedness and, therefore, will not be available for other business
purposes.
- The terms and conditions of our indebtedness may restrict our flexibility
in planning for and reacting to changes in our business.
- Our ability to obtain additional financing in the future for working
capital, capital expenditures, and other purposes may be substantially
impaired.
Our ability to meet our debt service obligations and to reduce our total
indebtedness depends on our future operating performance. Our future operating
performance will depend on our ability to expand our business operations by
building our new facilities, establishing our enhanced network and expanding our
product and service offerings. We cannot assure you that we will succeed in
expanding our business operations. In addition, our future operating performance
will depend on economic, competitive, regulatory and other factors affecting our
business. Many of these factors are beyond our control.
Based on our current level of operations, we believe that we will have
sufficient cash flow to meet our needs at least through the year ending
September 30, 2000. After that time, we may not generate sufficient cash flow
from operations or be able to raise capital in sufficient amounts to enable us
to service our debt and operate our business. If we are unable to do so, our
business, financial condition and results of operations will be materially and
adversely affected.
WE HAVE A HISTORY OF OPERATING LOSSES AND WE EXPECT THESE LOSSES TO CONTINUE AND
INCREASE, AT LEAST FOR THE NEAR FUTURE.
We have experienced significant losses since we began operations. We expect
to continue to incur significant losses for the foreseeable future. We incurred
net losses of approximately $3.1 million for the year ended September 30, 1997
and $11.2 million for the year ended September 30, 1998. Our loss for the
quarter ended December 31, 1998 was approximately $7.8 million. As of December
31, 1998, our accumulated deficit was approximately $24.1 million. We expect our
expenses to increase as we expand our business. We cannot assure you that our
revenues will increase as a result of our increased spending. If revenues grow
more slowly than we anticipate, or if operating expenses exceed our
expectations, we may not become profitable. Even if we become profitable, we may
be unable to sustain our profitability.
WE MAY NOT BE ABLE TO RETAIN THE KEY PERSONNEL WE NEED TO SUCCEED.
Our growth is placing a significant strain on our management systems and
resources. If we do not successfully manage our expansion, our business will
suffer.
As we continue to increase the scope of our operations, our workforce has
grown. As of December 31, 1998, we had 217 full-time employees in comparison to
50 full-time employees as of September 30, 1995. Despite this growth, we still
need to attract, train
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and retain more employees for management, technical, sales and marketing, and
customer support positions. Competition for qualified employees is intense.
Consequently, we may not be successful in attracting, training and retaining the
people we need.
WE MAY HAVE DIFFICULTY ESTABLISHING AND MANAGING OUR EXPANDING OPERATIONS.
A key element of our business strategy is the expansion of our facilities
and our network, which has required a great deal of management time and the
expenditure of large amounts of money. Recently, our growth has been limited by
a shortage of space in our current facility in New York City to house computer
equipment for Internet access and hosting of customers' web sites. We are
building new state-of-the-art facilities in New York City, London and the San
Francisco Bay area. We are also establishing a network connecting these new
facilities. Our success will depend on our ability to complete, integrate,
operate and further expand and upgrade our new network and facilities. Any delay
in the opening of our new facilities, particularly the New York facility, or in
the completion of our new network, would materially and adversely affect our
business plans. In addition, if we do not institute adequate financial and
managerial controls and reporting systems and procedures to operate from
multiple facilities in geographically dispersed locations, our operations will
be materially and adversely affected.
WE ONLY BEGAN OUR INTERNET DIVISION IN 1995, SO YOUR BASIS FOR EVALUATING US IS
LIMITED.
Our Internet Division has only been in operation since 1995 and many of our
Internet-related services have only been offered since 1997. Previously, our
business principally involved the sales of computer and peripheral equipment for
desktop publishing applications. Accordingly, we have a limited operating
history in the Internet area upon which you may evaluate us. You should consider
the risks and difficulties frequently encountered by early stage companies in
new and rapidly evolving markets. If we fail to adequately address these risks,
our business, financial condition and results of operations will be materially
and adversely affected.
OUR OPERATIONS DEPEND ON THE CAPABILITIES OF OUR NETWORK.
Our success depends upon the performance of our network and our ability to
expand our network as our customer base gets larger and the needs of our
customers for Internet access become more demanding. If we are unsuccessful in
providing a network with the necessary capabilities, our business, financial
condition and results of operations will be materially and adversely affected.
Our existing network relies entirely on third party data communications and
telecommunications providers. These include Internet service providers, such as
Sprint, Cable & Wireless and UUNET, and long distance and local carriers,
including the regional Bell operating companies. These carriers are subject to
price constraints, including tariff controls, that in the future may be relaxed
or lifted. This could have a material and adverse effect on the costs of
maintaining our network. Many of our agreements with network and Internet
service providers allow the supplier to terminate the agreement on relatively
short notice. Accordingly, we cannot assure you that these suppliers will
continue to service us or that we can replace them on comparable terms.
Other risks and difficulties that we may encounter in connection with our
expanding network include our ability to adapt our network infrastructure to
changing customer requirements and changing industry standards.
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ANY DELAYS BY QWEST IN COMPLETING OUR NEW DEDICATED NETWORK WILL MATERIALLY AND
ADVERSELY AFFECT OUR BUSINESS.
In October 1998, we entered into an agreement with Qwest which gives us the
exclusive right to use portions of Qwest's global fiber network as our network
for a 20 year period. Our future success is highly dependent on Qwest's
performance of its obligations under this agreement. Qwest, however, has not
completed building its coast-to-coast network or its international network and
has already experienced significant delays. Any further delays in completing the
Qwest network would delay our network expansion. This would, in turn, delay our
ability to utilize our new facilities and our ability to effectively utilize the
personnel hired to work in these facilities. This delay might also require us to
seek network capacity from third parties, on a short term or longer term basis,
at a significantly higher cost than our cost structure with Qwest. Any of these
events would have a material and adverse effect on our business, financial
condition and results of operations.
OUR SUCCESS DEPENDS ON FORMING RELATIONSHIPS WITH OTHER INTERNET SERVICE
PROVIDERS.
The Internet includes a number of Internet service providers that operate
their own networks and connect with each other at various points under
arrangements known as "peering" arrangements. It is more costly and less
efficient to operate a network without peering arrangements. Consequently, we
must establish and maintain peering relationships to maintain high network
performance levels without having to pay excessive amounts for the transmission
of data. These arrangements are not subject to regulation and the terms,
conditions and costs can be changed by the provider over time. Internet service
providers may not agree to maintain peering relationships with us, at reasonable
costs or at all. Currently, we have two private peering arrangements. If we fail
to establish and maintain more peering relationships on a cost-effective basis,
the costs of establishing and operating our network will be significantly
greater and our business, financial condition and results of operations will be
materially and adversely affected.
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS MAY NEGATIVELY IMPACT OUR STOCK
PRICE.
Our revenues and operating results vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. You
should not rely on quarter-to-quarter comparisons of our results of operations
as an indication of future performance. It is possible that in some future
periods our results of operations may be below the expectations of public market
analysts and investors. In this event, the price of our common stock may fall.
Factors which could cause quarterly results to fluctuate include:
- customer demand for our products and services
- the timing of the expansion of our operations
- seasonality in sales, principally during the summer and year-end holidays
- the mix of our products and services revenues from our two operating
divisions
- the timing of significant sales of Internet-related hardware
- changes in the growth rate of Internet usage
- the mix of revenues from our various Internet products and services
- changes in pricing by us or our competitors
- the introduction of new products or services by us or our competitors
10
<PAGE> 12
- the mix of domestic and international sales, once our London facility
becomes operational
- costs related to acquisitions of technology or businesses
Our revenues are difficult to forecast. We plan to significantly increase
our operating expenses to bring our new facilities and network online and to
market and support our products and services. We may not be able to adjust our
spending quickly enough to offset any unexpected revenue shortfall. If we have
an unexpected shortfall in revenues in relation to our expenses, then our
business, financial condition and results of operations will be materially and
adversely affected.
WE ARE JUST BEGINNING TO EXPAND INTO INTERNATIONAL MARKETS AND MAY NOT BE
SUCCESSFUL IN THESE EFFORTS.
To date, we have operated only in the New York City area. We expect to
begin operations in London by June 30, 1999. We may also further expand
international operations in the future. Because we have limited experience
operating in markets other than the New York market and no experience operating
internationally, we may have difficulty adapting our products and services to
different market needs. We may also be unsuccessful in our efforts to market and
sell these products and services to customers abroad. In addition, we may find
it more difficult and expensive to hire and train employees and to manage
international operations together with our U.S. operations.
International operations are subject to other inherent risks, including:
- differences in regulatory requirements in various countries
- potentially adverse tax consequences
- political and economic instability
- technology export and import restrictions or prohibitions
- fluctuations in currency exchange rates
- imposition of exchange controls
- language and cultural barriers
- uncertainty regarding protection of intellectual property rights
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
If we fail to successfully address these risks, our business, financial
condition and results of operations may be materially and adversely affected.
WE ARE DEPENDENT ON OUR HARDWARE AND SOFTWARE SUPPLIERS TO PROVIDE US WITH THE
PRODUCTS AND SERVICES WE NEED TO SERVE OUR CUSTOMERS.
We rely on outside vendors to supply us with computer hardware, software
and networking equipment. These products are available from only a few sources.
We primarily buy these products from Silicon Graphics, Sun Microsystems, Compaq,
Intergraph and Cisco. We also rely on Cisco for network design and computer
installation services. We cannot assure you that we will be able to obtain the
products and services that we need on a timely basis and at affordable prices.
11
<PAGE> 13
We have in the past experienced delays in receiving shipments of equipment
purchased for resale. We may not be able to obtain computer equipment on the
scale and at the times required by us at an affordable cost. Our suppliers may
enter into exclusive arrangements with our competitors or stop selling their
products or services to us at commercially reasonable prices. If our sole or
limited source suppliers do not provide us with products or services, our
business, financial condition and results of operations may be materially and
adversely affected.
WE MAY MAKE INVESTMENTS OR ACQUISITIONS THAT ARE NOT SUCCESSFUL.
We may make investments in or acquire complementary businesses, products,
services or technologies, but we have very limited experience in these
activities. The terms and conditions of our $160.0 million debt financing limit
our ability to make investments in businesses unless we acquire the entire
business. If we seek to make investments or acquisitions, we will be subject to
the following risks:
- We may not be able to identify suitable investment or acquisition
candidates.
- If the purchase price for an acquisition consists of cash, we may need to
use all or a portion of our available cash, including proceeds from this
offering.
- If we do identify suitable candidates, we may not be able to make
investments or acquisitions on commercially acceptable terms.
- Acquisitions may cause a disruption in our ongoing business, distract our
management and other resources and make it difficult to maintain our
standards, controls and procedures.
- We may not be able to successfully integrate the services, products and
personnel of any acquired business into our operations.
- We may not be able to retain key employees of the acquired companies or
maintain good relations with its customers or suppliers.
- We may be required to incur additional debt.
- We may be required to issue equity securities, which may be dilutive to
existing shareholders, to pay for acquisitions.
- We may have to incur significant accounting charges, such as for goodwill
or for acquired in-process research and development, which may adversely
affect our results of operations.
BECAUSE WE ARE DEPENDENT ON COMPUTER SYSTEMS, A SYSTEMS FAILURE WOULD CAUSE A
SIGNIFICANT DISRUPTION TO OUR BUSINESS.
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain most of our computer systems in our facility in New York. While we have
taken precautions against systems failure, interruptions could result from
natural disasters as well as power loss, telecommunications failure and similar
events. We also lease telecommunications lines from local and regional carriers,
whose service may be interrupted. Our business, financial condition and results
of operations could be materially and adversely affected by any damage or
failure that interrupts or delays our operations.
12
<PAGE> 14
IF OUR SECURITY MEASURES ARE INADEQUATE, OUR BUSINESS WILL BE ADVERSELY
AFFECTED.
We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Nonetheless, our infrastructure is
potentially vulnerable to physical or electronic break-ins, viruses or similar
problems. If a person circumvents our security measures, he or she could
jeopardize the security of confidential information stored on our systems,
misappropriate proprietary information or cause interruptions in our operations.
We may be required to make significant additional investments and efforts to
protect against or remedy security breaches. Security breaches that result in
access to confidential information could damage our reputation and expose us to
a risk of loss or liability.
The security services that we offer in connection with our customers'
networks cannot assure complete protection from computer viruses, break-ins and
other disruptive problems. Although we attempt to limit contractually our
liability in such instances, the occurrence of these problems may result in
claims against us or liability on our part. These claims, regardless of their
ultimate outcome, could result in costly litigation and could have a material
adverse effect on our business and reputation and on our ability to attract and
retain customers for our products and services.
OUR BUSINESS IS DEPENDENT ON THE CONTINUED GROWTH IN USE AND IMPROVEMENT OF THE
INTERNET.
Our products and services are targeted toward businesses, which use the
Internet. The Internet is subject to a high level of uncertainty and is
characterized by rapidly changing technology, evolving industry standards, and
frequent new product and service introductions. If Internet usage does not grow
at the rates which we presently anticipate, our business, financial condition
and results of operations will be materially and adversely affected.
Critical issues concerning the commercial use of the Internet remain
unresolved and may impact the growth of Internet use, especially in the market
that we target. Despite growing interest in the many commercial uses of the
Internet, many businesses have been deterred from purchasing Internet products
and services for a number of reasons, including:
- inadequate protection of the confidentiality of stored data and
information moving across the Internet
- inconsistent quality of service
- inability to integrate business applications on the Internet
- the need to deal with multiple vendors, whose products are frequently
incompatible
- lack of availability of cost-effective, high-speed products and services
OUR SUCCESS DEPENDS ON KEEPING UP WITH RAPID TECHNOLOGICAL CHANGES IN OUR
MARKETS.
The market for Internet products and services has only recently begun to
develop and is rapidly evolving. Significant technological changes could render
our existing products and services obsolete. To be successful, we must adapt to
our rapidly changing market by continually improving the responsiveness,
functionality and features of our products and services to meet our customer's
needs. If we are unable to respond to technological advances and conform to
emerging industry standards in a cost-effective and timely basis, our business,
financial condition and results of operations will be materially and adversely
affected.
13
<PAGE> 15
WE HAVE MANY COMPETITORS AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST
THEM.
Competition for the Internet products and services that we provide is
intense and we expect that competition will continue to intensify. We may not
have the financial resources, technical expertise, sales and marketing or
support capabilities to successfully meet our competition. If we are unable to
compete successfully against our competitors, our business, financial condition
and results of operations will be adversely affected.
Our competitors include other Internet service providers, such as:
- national and global Internet service providers, including Concentric
Network, PSINet and UUNET
- national and regional Internet service providers with a presence in the
New York metropolitan area, including AboveNet, DIGEX, Exodus, Frontier
GlobalCenter, GTE Genuity and Verio
Our competitors also include telecommunications companies, such as:
- AT&T, Cable & Wireless, MCI WorldCom and Sprint
- regional Bell operating companies which offer Internet access, such as
Bell Atlantic
Following the completion of our new facilities, we will encounter
additional competition from international Internet service providers, including
BT Internet and Demon Internet (recently acquired by Scottish Telecom), as well
as Internet service providers and telecommunication companies operating in the
San Francisco Bay area.
Because we offer a broad range of goods and services, we encounter
competition from numerous other businesses which provide one or more similar
goods or services, including numerous resellers of Internet-related hardware and
software and web site development companies.
Many of our existing competitors, as well as a number of potential new
competitors, have:
- longer operating histories
- greater name recognition
- larger customer bases
- larger networks
- more and larger facilities
- significantly greater financial, technical and marketing resources
Our competitors may respond more quickly than we can to new or emerging
technologies and changes in customer requirements. They may also devote greater
resources than we can to the development, promotion and sale of their products
and services. They may develop Internet products and services that are superior
to or have greater market acceptance than ours. Our competitors may also engage
in more extensive research and development, undertake more extensive marketing
campaigns, adopt more aggressive pricing policies and make more attractive
offers to our existing and potential employees and strategic partners. In
addition, current and potential competitors have established or may establish
cooperative relationships among themselves or with third parties.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market and
rapidly acquire significant market share. As a result of increased competition
and vertical and horizontal integration in the industry, we could encounter
significant pricing pressures. These pricing pressures could result in
significantly lower average selling prices for our products and
14
<PAGE> 16
services. For example, telecommunications companies may be able to provide
customers with reduced communications costs in connection with their Internet
access services, significantly increasing pricing pressures on us. We may not be
able to offset the effects of any price reductions with an increase in the
number of our customers, higher revenue from value-added services, cost
reductions or otherwise. In addition, Internet access service businesses are
likely to encounter consolidation in the near future, which could result in
increased price and other competition.
YEAR 2000 PROBLEMS MAY DISRUPT OUR BUSINESS.
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. In other words,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in system failures or miscalculations
causing disruptions of normal business activities. If our present efforts to
address the Year 2000 compliance issues are not successful, or if suppliers and
other third parties do not successfully address such issues, our business,
financial condition and results of operations could be materially and adversely
affected.
We plan to perform a Year 2000 simulation on our software by June 30, 1999
to test system readiness. Based on the results of our Year 2000 simulation test,
we intend to revise the code of our software and systems as necessary to improve
the Year 2000 compliance of our software. We have been informed by our material
hardware and software vendors that the products used by us are currently Year
2000 compliant. We are currently assessing the materiality of our
non-information technology systems and will seek assurances of Year 2000
compliance from providers of material non-information technology systems. Until
this testing is complete and these vendors and providers are contacted, we will
not be able to completely evaluate whether our information technology and other
systems will need to be revised or replaced. These revisions and replacements
may not be completed on schedule or within estimated costs and may not
successfully address our Year 2000 compliance issues.
We cannot assure you that governmental agencies, utility companies,
telecommunication companies, other Internet service providers, third party
service providers, hardware and software manufacturers and others outside our
control will be Year 2000 compliant.
CHANGES IN GOVERNMENT REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
There is an increasing number of laws and regulations pertaining to the
Internet. These laws or regulations relate to liability for information received
from or transmitted over the Internet, online content regulation, user privacy,
taxation and quality of products and services. The government may also seek to
regulate some segments of our activities as basic telecommunications services.
Moreover, the applicability to the Internet of existing laws governing
intellectual property ownership and infringement, copyright, trademark, trade
secret, obscenity, libel, employment, personal privacy and other issues is
uncertain and developing. We cannot predict the impact, if any, that future
regulation or regulatory changes may have on our business.
WE MAY BE LIABLE FOR THE MATERIAL OUR CUSTOMERS DISTRIBUTE OVER THE INTERNET.
The law relating to the liability of online service providers, private
network operators and Internet service providers for information carried on or
disseminated through their networks is currently unsettled. We may become
subject to legal claims relating to the content in the web sites we host. For
example, lawsuits may be brought against us claiming that material inappropriate
for viewing by young children can be accessed from
15
<PAGE> 17
the web sites we host. Claims could also involve matters such as defamation,
invasion of privacy and copyright infringement. Providers of Internet products
and services have been sued in the past, sometimes successfully, based on the
content of material. If we have to take costly measures to reduce our exposure
to these risks, or are required to defend ourselves against such claims, our
business, financial condition and results of operations may be materially and
adversely affected.
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING STOCKHOLDERS COULD HAVE ADVERSE
EFFECTS.
The market price of our common stock could decline as a result of sales by
our existing stockholders of a large number of shares of common stock in the
market after this offering, or the perception that these sales may occur. These
sales also might make it more difficult for us to sell equity securities in the
future at a time and at a price that we deem appropriate.
On March 2, 1999 our board of directors approved approximately 2,500,000
shares of our common stock to be used for the grant of stock options. This
number includes an immediately exercisable option to be granted concurrently
with the closing of this offering to Marc H. Bell, our President and Chief
Executive Officer, for a number of shares of common stock equal to 25% of the
difference between the number of shares outstanding immediately after the
closing of this offering and the number outstanding as of October 1, 1998. The
exercise price of Mr. Bell's option will be the same as the price to the public
in this offering. These 2,500,000 shares are in addition to the approximately
2,000,000 shares issuable upon the exercise of outstanding options and warrants.
If the holders of these options and warrants were to exercise their rights and
sell the shares issued to them, it could have an adverse effect on the market
price of our common stock.
OUR COMMON STOCK MAY BE SUBJECT TO GREAT PRICE VOLATILITY.
The market price of our common stock has fluctuated in the past and is
likely to continue to be highly volatile and could be subject to wide
fluctuations. In addition, the stock market has experienced extreme price and
volume fluctuations. The market prices of the securities of Internet-related
companies have been especially volatile. Investors may be unable to resell their
shares of our common stock at or above the offering price.
OUR MANAGEMENT HAS BROAD DISCRETION IN THE APPLICATION OF PROCEEDS, WHICH MAY
INCREASE THE RISK THAT THE PROCEEDS WILL NOT BE APPLIED EFFECTIVELY.
Our management will have broad discretion in determining how to spend the
proceeds of this offering. Accordingly, we can spend the proceeds from this
offering in ways with which the stockholders may not agree.
WE ARE SUBJECT TO ANTI-TAKEOVER PROVISIONS.
Provisions of our certificate of incorporation, our by-laws and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders.
THE BOOK VALUE OF THE SHARES PURCHASED IN THIS OFFERING WILL IMMEDIATELY BE
SUBSTANTIALLY DILUTED.
Investors purchasing shares in this offering will incur immediate and
substantial dilution in net tangible book value per share.
16
<PAGE> 18
USE OF PROCEEDS
The net proceeds to Globix from the sale of the 4,000,000 shares of common
stock offered by Globix are estimated to be approximately $93.6 million ($110.0
million if the underwriters' overallotment option is exercised in full), at an
assumed public offering price of $25.44 per share and after deducting the
estimated underwriting discount and offering expenses payable by Globix.
Globix intends to use the net proceeds from this offering to fund the
completion of its new network and for general corporate purposes. In addition,
Globix may use a portion of the net proceeds to make investments in, or acquire,
complementary businesses. Globix, however, currently has no agreements with
respect to any such transaction. As of the date of this prospectus, Globix
cannot specify with certainty the particular uses for the net proceeds to be
received upon completion of this offering. Accordingly, Globix's management will
have broad discretion in the application of the net proceeds.
Pending the uses described above, the net proceeds will be invested in
short-term, investment grade instruments, certificates of deposit or direct or
guaranteed obligations of the United States.
17
<PAGE> 19
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Globix has applied for listing on the Nasdaq National Market. Globix's
common stock has been quoted on the Nasdaq SmallCap Market since its initial
public offering in January 1996. The following table sets forth, for the periods
indicated, the high and low closing sale prices per share of the common stock as
reported on the Nasdaq SmallCap Market.
<TABLE>
<CAPTION>
PRICE RANGE OF
COMMON STOCK
---------------
HIGH LOW
<S> <C> <C>
YEAR ENDED SEPTEMBER 30, 1997:
First Quarter.......................................... $10 1/4 $ 8 1/2
Second Quarter......................................... 13 3/4 9 5/8
Third Quarter.......................................... 13 7/8 9 7/8
Fourth Quarter......................................... 11 3/8 5 9/16
YEAR ENDED SEPTEMBER 30, 1998:
First Quarter.......................................... $ 9 3/16 $ 4
Second Quarter......................................... 12 4 3/8
Third Quarter.......................................... 15 15/16 9 1/16
Fourth Quarter......................................... 14 5/16 5 3/16
YEAR ENDING SEPTEMBER 30, 1999:
First Quarter.......................................... $13 15/16 $ 4
Second Quarter (through February 26, 1999)............. 34 10 7/8
</TABLE>
On February 26, 1999, the reported last sale price of the common stock on
the Nasdaq SmallCap Market was $25 7/16. As of February 26, 1999, there were 41
holders of record of the common stock, which does not include individual
participants in security position listings.
Globix has not paid any cash dividends on its capital stock since it
terminated its Subchapter S status in July 1994. Under the terms of Globix's
$160.0 million debt financing, its ability to pay dividends is contractually
limited. Globix currently intends to retain future earnings, if any, to finance
the expansion of its business and does not expect to pay any cash dividends for
the foreseeable future.
18
<PAGE> 20
CAPITALIZATION
The following table sets forth the capitalization of Globix as of December
31, 1998, based on common stock outstanding on that date of 4,140,116 shares, on
an actual basis and as adjusted to reflect (1) the sale by Globix of the
4,000,000 shares of common stock offered hereby at an estimated offering price
of $25.44 per share, and (2) the issuance of 80,790 shares of common stock upon
the exercise of warrants immediately prior to the offering by some of the
selling stockholders. The as adjusted data is calculated after deducting the
estimated underwriting discounts and commissions and offering expenses payable
by Globix. The capitalization information set forth in the table below is
qualified by and should be read in conjunction with the more detailed
consolidated financial statements and notes thereto included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities........... $ 57,320 $151,866
======== ========
Restricted cash and investments............................ $ 50,473 $ 50,473
======== ========
Current portion of notes payable........................... $ 2,790 $ 2,790
-------- --------
Long-term debt:
Long-term note payable, less current portion............. 1,848 1,848
Long-term debt, net of discount.......................... 157,977 157,977
-------- --------
Total long-term debt, net of current portion.......... 159,825 159,825
Stockholders' equity:
Preferred stock, $.01 par value, 500,000 shares
authorized, no shares issued and outstanding.......... -- --
Common stock, $.01 par value, 20,000,000 shares
authorized, 4,140,116 shares issued and outstanding
actual; 8,220,906 as adjusted......................... 41 82
Additional paid-in capital................................. 17,247 111,752
Accumulated other comprehensive income..................... 2,024 2,024
Accumulated deficit........................................ (24,064) (24,064)
-------- --------
Total stockholders' equity............................ (4,752) 89,794
-------- --------
Total capitalization................................ $155,073 $249,619
======== ========
</TABLE>
The 8,220,906 shares as adjusted for this offering excludes (1) any shares
of common stock to be issued pursuant to the overallotment option, (2) 664,685
shares of common stock issuable upon the exercise of warrants at an effective
weighted average exercise price of $13.58 per share to be outstanding
immediately after the closing of this offering, (3) 1,355,032 shares of common
stock issuable upon the exercise of options outstanding under our stock option
plans at a weighted average exercise price of $8.01 per share as of February 26,
1999, and (4) 13,280 shares issued upon the exercise of options between January
1, 1998 and February 26, 1999. It further excludes 177,374 additional shares of
common stock reserved for issuance under our existing stock option plans as of
February 26, 1999 and approximately 2,500,000 shares of common stock, approved
by our board of directors on March 2, 1999, to be used for the grant of stock
options. The 2,500,000 shares of common stock include an immediately exercisable
option to be granted concurrently with the closing of this offering to Marc H.
Bell, our President and Chief Executive Officer, for a number of shares of
common stock equal to 25% of the difference between the number of shares
outstanding immediately after the closing of this offering and the number
outstanding as of October 1, 1998. The exercise price of Mr. Bell's option will
be the same as the price to the public in this offering.
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<PAGE> 21
DILUTION
The net tangible book value of Globix as of December 31, 1998 was $(10.7)
million, or $(2.59) per share of common stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities, divided
by the number of shares of common stock outstanding. After giving effect to the
sale by Globix of the 4,000,000 shares of common stock offered hereby at an
estimated offering price of $25.44 per share and the 80,790 shares to be issued
upon the exercise of warrants immediately prior to this offering by some of the
selling stockholders, the net tangible book value of Globix as of December 31,
1998 would have been approximately $83.8 million, or $10.20 per share of common
stock. This represents an immediate increase in the net tangible book value of
$12.79 per share to existing stockholders and an immediate dilution in the net
tangible book value of $15.24 per share to new investors of common stock in this
offering. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.......... $25.44
Net tangible book value per share as of
December 31, 1998........................... $(2.59)
Increase per share attributable to new
investors................................... 12.79
Net tangible book value per share after the
offering....................................... $10.20
------
Dilution per share to new investors.............. $15.24
======
</TABLE>
The foregoing discussion excludes (1) any shares to be issued pursuant to the
overallotment option, (2) 664,685 shares of common stock issuable upon the
exercise of warrants at an effective weighted average exercise price of $13.58
per share to be outstanding immediately after the closing of this offering, (3)
1,355,032 shares of common stock issuable upon the exercise of options
outstanding under our stock option plans at a weighted average exercise price of
$8.01 per share as of February 26, 1999, and (4) 13,280 shares of common stock
issued upon the exercise of options between January 1, 1999 and February 26,
1999. It further excludes 177,374 additional shares of common stock reserved for
issuance under our existing stock option plans as of February 26, 1999 and
approximately 2,500,000 shares of common stock, approved by our board of
directors on March 2, 1999, to be used for the grant of stock options. The
2,500,000 shares include an immediately exercisable option to be granted
concurrently with the closing of this offering to Marc H. Bell, our President
and Chief Executive Officer, for a number of shares of common stock equal to 25%
of the difference between the number of shares outstanding immediately after the
closing of this offering and the number outstanding as of October 1, 1998. The
exercise price of Mr. Bell's option will be the same as the price to the public
in this offering.
20
<PAGE> 22
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data for the years ended September 30,
1996, 1997 and 1998 are derived from our financial statements which have been
audited by Arthur Andersen LLP, independent public accountants, and included
elsewhere in this prospectus. The selected consolidated financial data for the
year ended December 31, 1994 and the nine months ended September 30, 1995 are
derived from our financial statements which have been audited by Arthur Andersen
LLP, and are not presented separately in this prospectus. We changed our fiscal
year end from December 31 to September 30 in 1995. Consequently, the 1995 fiscal
year consisted of nine months. The selected consolidated statement of operations
data for the three months ended December 31, 1997 and 1998 and the selected
consolidated balance sheet data as of December 31, 1998 are derived from our
unaudited consolidated financial statements which, in the opinion of management,
have been prepared on the same basis as the audited consolidated financial
statements and contain all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the results of operations and
financial position. Interim periods are not necessarily indicative of results
for any future period. The following selected consolidated financial data should
be read in conjunction with the consolidated financial statements and notes to
these statements and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere in this prospectus.
<TABLE>
<CAPTION>
NINE THREE MONTHS
YEAR MONTHS ENDED
ENDED ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31,
DECEMBER 31, SEPTEMBER 30, ---------------------------- ----------------
1994 1995 1996 1997 1998 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues....................................... $6,524 $8,738 $10,374 $17,400 $ 20,595 $4,740 $ 5,929
Costs and expenses:
Cost of revenues............................. 5,192 7,292 8,599 13,699 13,322 3,114 3,702
Selling, general and administrative.......... 1,373 1,213 3,187 6,036 10,696 1,610 5,566
Depreciation and amortization................ 59 68 219 675 1,310 242 507
Research and development..................... -- 34 57 -- -- -- --
------ ------ ------- ------- -------- ------ -------
Total costs and expenses................... 6,624 8,607 12,062 20,410 25,328 4,966 9,775
------ ------ ------- ------- -------- ------ -------
Income (loss) from operations.................. (100) 131 (1,688) (3,010) (4,733) (226) (3,846)
Interest income.............................. -- -- 121 72 1,953 7 944
Interest and financing expenses.............. (30) (73) (99) (177) (8,376) (63) (4,917)
Write-off of debt issuance costs............. -- -- (257) -- -- -- --
------ ------ ------- ------- -------- ------ -------
Income (loss) before taxes..................... (130) 58 (1,923) (3,115) (11,156) (282) (7,819)
Provision for (benefit from) taxes............. 14 19 (30) -- -- -- --
------ ------ ------- ------- -------- ------ -------
Net income (loss).............................. $ (144) $ 39 $(1,893) $(3,115) $(11,156) $ (282) $(7,819)
====== ====== ======= ======= ======== ====== =======
Basic and diluted net income (loss) per
share(1)..................................... $(0.11) $ 0.02 $ (0.72) $ (1.01) $ (3.08) $(0.08) $ (1.89)
====== ====== ======= ======= ======== ====== =======
Weighted average common shares outstanding..... 1,294 1,725 2,633 3,075 3,626 3,448 4,140
OTHER FINANCIAL DATA:
EBITDA(2)...................................... $ (41) $ 199 $(1,469) $(2,335) $ (3,423) $ 16 $(3,339)
Capital expenditures........................... 103 150 1,955 1,542 23,270 829 22,320
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF SEPTEMBER 30, AS OF
DECEMBER 31, ---------------------------------------------- DECEMBER 31,
1994 1995 1996 1997 1998 1998
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities................................. $ 322 $ 222 $ 2,342 $ 2,401 $ 76,111 $ 57,320
Restricted cash and investments.............. -- -- 400 325 60,480 50,473
Working capital.............................. 401 180 3,468 1,980 75,859 43,855
Total assets................................. 2,308 2,962 7,810 11,025 182,266 184,901
Long-term debt and notes payable............. 350 123 39 1,258 161,489 162,615
Stockholders' equity......................... 259 299 6,090 5,014 2,719 (4,752)
</TABLE>
- -------------------------
(1) Presented in accordance with the guidelines of Statement of Financial
Accounting Standards No. 128, "Earnings per share" and represents both basic
and diluted income (loss) per share amounts. See Note 1 of Notes to
Consolidated Financial Statements.
(2) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included 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. In
addition, EBITDA should not be considered as a substitute for net income or
net loss as an indicator of our operating performance or cash flow or as a
measure of liquidity. This data should be examined in conjunction with our
consolidated financial statements and notes to the financial statements
included elsewhere in this prospectus.
21
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read together with the
consolidated financial statements and notes to these statements appearing
elsewhere in this prospectus. The following discussion contains forward-looking
statements based on Globix's current expectations, assumptions, estimates and
projections about Globix and its industry. Globix's results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risks and uncertainties discussed in
"Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Globix was founded in 1989 as a value-added reseller, primarily focused on
providing custom computer hardware and software products and services for
desktop publishing. By 1995, Globix recognized the growing demand by businesses
for electronic information delivery and began to change its corporate strategy
to focus on offering Internet products and services. In early 1996, Globix
raised net proceeds of approximately $7.4 million through a public offering of
its common stock and, subsequently, began to offer Internet access services to
business customers. By the end of 1996, the number of Globix's Internet
customers had grown to over 80 business accounts. In 1997, Globix expanded its
product and service offerings beyond Internet access and began to offer a range
of end-to-end Internet products and services designed to enable its customers to
more effectively capitalize on the Internet as a business tool. As of December
31, 1998, the number of Globix's customers for Internet products and services
had grown to approximately 850 customer accounts, consisting primarily of large
and medium size businesses.
In 1998, Globix undertook a major expansion plan. In April 1998, it
completed a $160.0 million debt financing to fund the expansion of its physical
facilities and the acquisition and completion of its new network. Globix is
currently constructing new state-of-the-art SuperPOP facilities in New York
City, London and the San Francisco Bay area. The new SuperPOPs will increase
Globix's total Internet data center capacity to approximately 63,000 square
feet. These facilities are expected to be operational by June 30, 1999. In
October 1998, Globix entered into an agreement with Qwest which gives it
exclusive rights to use portions of Qwest's global network for a 20 year period.
The completion of the new network is expected to significantly increase Globix's
network capacity and enable it to offer a wider variety of higher-speed Internet
access and Internet-related products and services to a larger number of
customers. Globix is also placing, or co-locating, Internet-related computer
equipment in the facilities of major telecommunications providers in Washington
D.C. and Chicago, which will provide entry points to its network. Globix is
planning to establish additional entry points in other major business centers in
the United States and Europe.
Commencing with 1996, Globix began segment reporting of its results of
operations into two divisions:
- - the Internet Division
- - the Server Sales and Integration Division
The Internet Division provides dedicated Internet access service; web hosting
and co-location services; value-added solutions, such as electronic commerce,
streaming media, network security and web site development; and instructor-led
corporate training. The Server Sales and Integration Division sells
Internet-related hardware and software and
22
<PAGE> 24
provides systems and network integration services. Over the last three years,
revenues from the Internet Division have grown significantly as a percentage of
total revenue from 9.6% for the three months ended December 31, 1996 to 38.5%
for the three months ended December 31, 1998. Globix expects that the Internet
Division revenues will continue to grow as a percentage of total revenues.
Globix continues to derive a majority of its total revenues from sales of
third-party hardware and software, including workstation web and database
servers, network equipment, and server and application software. Globix intends
to continue to offer higher-margin workstation, server and software components
as a complement to its Internet products and services. Globix maintains a
limited inventory of hardware and software and typically purchases these
products from third-party vendors only after receipt of a customer order. The
second largest component of Globix's total revenues is derived from providing
dedicated Internet access services to business customers. Globix's Internet
access customers typically sign one or two-year contracts that provide for
fixed, monthly-recurring service fees and a one time installation fee. Globix
also derives revenues from web site hosting and co-location services based upon
its customers' bandwidth requirements, including charges for fixed amounts of
bandwidth availability and incremental fees for additional bandwidth use. In
addition to fees based on bandwidth, Globix charges its co-location customers
monthly fees for the use of its physical facilities. Globix's web hosting and
co-location contracts typically range from one to two years. Value-added
Internet solutions are charged on a fixed price or time and materials basis.
Corporate training services are charged based on the length and size of the
class and the complexity of the content and class materials required.
Cost of revenues for the Server Sales and Integration Division consist
primarily of acquisition costs of third-party hardware and software. Cost of
revenues for the Internet Division consist primarily of telecommunications costs
for Internet access, web hosting and co-location customers and direct labor
costs for web site development, value-added solutions and corporate training.
Telecommunications costs include the cost of providing local telephone lines
into Globix's SuperPOP, costs related to the use of third-party networks, and
costs associated with leased lines. Globix anticipates that, in the near term,
its data transmission costs will substantially increase because of higher
network operating and maintenance and depreciation charges associated with the
expansion of its network and the acquisition of the right to use the Qwest
bandwidth. As utilization of this network increases in future years, Globix
expects to realize a substantial reduction in per unit data transmission costs
due to the network's scaleability and fixed cost structure. Cost of revenues for
web site development and value-added solutions consists of labor and overhead
costs for the personnel performing the services, including the cost of project
management, quality control and project review. Cost of revenues for corporate
training consist of labor and overhead costs for the training courses, including
in-house and contract instructors and the cost to develop and produce course
materials.
Selling, general and administrative expenses consist primarily of sales and
marketing personnel and related occupancy costs; advertising costs; salaries and
occupancy costs for executives, financial and administrative personnel; and
personnel and related operating expenses associated with network operations,
customer support and field services. Globix has recently hired a number of
members of its senior management. Globix is in the process of hiring a
significant number of additional personnel to staff its three new SuperPOP
facilities and to expand its sales and marketing, network operations, customer
support and field services personnel. Accordingly, Globix expects selling,
general and administrative expenses to continue to significantly increase for
the foreseeable future.
23
<PAGE> 25
Depreciation and amortization expenses are expected to increase
significantly beginning in fiscal 1999. Globix depreciates its capital assets on
a straight line basis over the useful life of the assets, ranging from five to
40 years. In addition, Globix is amortizing debt issuance costs of $6.6 million
relating to its $160.0 million debt financing over seven years. Globix has not
recognized any depreciation expense for the year ended September 30, 1998 or the
quarter ended December 31, 1998 for its new SuperPOPs in New York, London and
the San Francisco Bay area. The facilities are currently under construction and
Globix will begin recognizing depreciation expense for them upon completion,
which is expected by June 30, 1999.
Globix historically has experienced negative cash flow from operations and
has incurred net losses. Globix's ability to generate positive cash flow from
operations and achieve profitability is dependent upon its ability to continue
to grow its revenue base and achieve further operating efficiencies. For the
years ended September 30, 1996, 1997 and 1998 and the three months ended
December 31, 1998, Globix's operating cash flows were approximately $(1.9)
million, $(2.5) million, $115,000 and $(7.9) million. For the years ended
September 30, 1996, 1997 and 1998 and the three months ended December 31, 1998,
we incurred net losses of approximately $1.9 million, $3.1 million, $11.2
million and $7.8 million. Globix expects to experience negative cash flow from
operations and to incur net losses as a result of its significant investment in
the expansion of its physical facilities, the establishment of its network, the
hiring of additional personnel and the interest expense in connection with the
$160.0 million debt financing. Globix believes that its new SuperPOPs and
network 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 Globix will be able to realize sufficient future revenues to offset its
present investment in its physical facilities, network infrastructure and the
hiring of additional personnel, or that Globix will be able to achieve or
sustain revenue growth, positive cash flow or profitability in the future. As of
December 31, 1998, Globix had generated an accumulated deficit of approximately
$24.1 million.
24
<PAGE> 26
SEGMENT INFORMATION
Globix's activities fall within two reporting segments: the Internet
Division and the Server Sales and Integration Division. The following table sets
forth segment information for the years ended September 30, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Internet.................................. $ 641 $ 2,414 $ 6,448
Server sales and integration.............. 9,733 14,986 14,147
------- ------- --------
Consolidated........................... $10,374 $17,400 $ 20,595
======= ======= ========
Operating income (loss):
Internet.................................. $ (360) $ (84) $ 1,146
Server sales and integration.............. (268) (379) 721
------- ------- --------
Consolidated(1)........................ $(1,688) $(3,010) $ (4,733)
======= ======= ========
Identifiable assets:
Internet.................................. $ 1,132 $ 2,105 $ 7,808
Server sales and integration.............. 3,443 5,782 3,732
------- ------- --------
Consolidated(2)........................ $ 7,810 $11,025 $182,266
======= ======= ========
</TABLE>
- -------------------------
(1) Includes unallocated corporate overhead of $1,060, $2,547 and $6,600 for the
years ended September 30, 1996, 1997 and 1998. Such amounts include
executive salaries of $389, $616 and $824 for the years ended September 30,
1996, 1997 and 1998, as well as rent, payroll charges for administrative
staff and professional fees.
(2) Includes corporate assets not allocable to a particular segment of $3,235,
$3,138 and $170,726 for the years ended September 30, 1996, 1997 and 1998.
25
<PAGE> 27
RESULTS OF OPERATIONS
The following table sets forth certain consolidated statement of operations
data for the years ended September 30, 1996, 1997 and 1998 and the three months
ended December 31, 1997 and 1998 as a percentage of total revenues. This
information should be read in conjunction with the consolidated financial
statements and notes thereto found elsewhere in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30, DECEMBER 31,
------------------------- ----------------
1996 1997 1998 1997 1998
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
Revenues:
Internet................... 6.2% 13.9% 31.3% 28.0% 39.0%
Server sales and
integration............. 93.8 86.1 68.7 72.0 61.0
----- ----- ----- ----- ------
Total revenues.......... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ------
Cost and expenses:
Cost of revenues........... 82.9 78.7 64.7 65.7 62.4
Selling, general and
administrative.......... 30.7 34.7 51.9 33.9 93.9
Depreciation and
amortization............ 2.1 3.9 6.4 5.1 8.6
Research and development... 0.6 -- -- -- --
----- ----- ----- ----- ------
Total costs and
expenses.............. 116.3 117.3 123.0 104.7 164.9
Loss from operations......... (16.3) (17.3) (23.0) (4.7) (64.9)
Interest and financing
(expenses) income, net..... 0.2 (0.6) (31.2) (1.2) (67.0)
Write-off of debt issuance
costs...................... (2.5) -- -- -- --
----- ----- ----- ----- ------
Loss before taxes............ (18.6) (17.9) (54.2) (5.9) (131.9)
Income tax benefit........... 0.3 -- -- -- --
----- ----- ----- ----- ------
Net loss..................... (18.3)% (17.9)% (54.2)% (5.9)% (131.9)%
===== ===== ===== ===== ======
</TABLE>
THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO THE THREE MONTHS ENDED
DECEMBER 31, 1997
Revenues. Total revenues for the three months ended December 31, 1998
increased 25.1% to $5.9 million from $4.7 million for the three months ended
December 31, 1997. Revenues from the Server Sales and Integration Division for
the three months ended December 31, 1998 increased 6.9% to $3.6 million from
$3.4 million for the three months ended December 31, 1997. Revenues from the
Internet Division increased 71.8% to $2.3 million for the three months ended
December 31, 1998 from $1.3 million for the three months ended December 31,
1997. This increase was primarily attributable to an increase in the number of
customers to which we provided Internet access services. The increase in
percentage of Internet Division revenues as a percentage of total revenues
reflected our shift in product mix toward Internet related sales.
Cost of Revenues. Cost of revenues for the three months ended December 31,
1998 was $3.7 million or 62.4% of revenues as compared to $3.1 million or 65.7%
of total revenues for the three months ended December 31, 1997. The decrease in
cost of revenues as a percentage of total revenues was primarily a result of an
increase in higher margin Internet revenues as a percentage of total revenues.
Selling, General and Administrative. Selling, general and administrative
expenses for the three months ended December 31, 1998 were $5.6 million or 93.9%
of total revenues as compared to $1.6 million or 34.0% of total revenues for the
three months ended December 31, 1997. This increase in absolute dollars and as a
percentage of total revenues was primarily attributable to an increase in sales
and marketing, engineering and training
26
<PAGE> 28
and administration personnel necessitated by the growth in operations. The
number of full time employees increased from 84 as of December 31, 1997 to 217
as of December 31, 1998 and payroll costs increased from $935,000 for the three
months ended December 31, 1997 to $3.1 million for the three months ended
December 31, 1998. In addition, we increased expenditures in advertising from
$132,000 for the three months ended December 31, 1997 to $1.1 million for the
three months ended December 31, 1998.
Interest and Financing Expense and Interest Income. The increase in
interest expense to $4.9 million for the three months ended December 31, 1998 is
a result of the $160.0 million debt financing completed in April 1998. The
increase in interest income to $944,000 for the three months ended December 31,
1998 reflects the increased cash position derived from the net proceeds of the
debt financing. We are amortizing debt issuance costs of $6.6 million relating
to the $160.0 million debt financing over seven years.
Depreciation and Amortization. Depreciation and amortization increased to
$507,000 for the three months ended December 31, 1998 as compared to $242,000
for the three months ended December 31, 1997. The increase was primarily related
to depreciation of equipment purchased for use in the Internet Division.
Net Loss and Loss Per Share. As a result of the above, we reported a net
loss of $7.8 million or $1.89 per share for the three months ended December 31,
1998 as compared to a net loss of $282,000 or $0.08 per share for the three
months ended December 31, 1997.
YEAR ENDED SEPTEMBER 30, 1998 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1997
Revenues. Total revenues for the year ended September 30, 1998 increased
18.4% to $20.6 million from $17.4 million for the year ended September 30, 1997.
Revenues from the Server Sales and Integration Division for the year ended
September 30, 1998 decreased 5.6% to $14.1 million from $15.0 million for the
year ended September 30, 1997. This decrease was primarily attributable to lower
unit sales partially offset by a planned shift in product mix toward higher
priced and higher margin products. Revenues from the Internet Division increased
167.1% to $6.4 million for the year ended September 30, 1998 from $2.4 million
for the year ended September 30, 1997. This increase was primarily attributable
to an increase in the number of customers to which we provided Internet access
services. The increase in percentage of Internet Division revenues as a
percentage of total revenues reflected our shift in product mix toward Internet
related sales.
Cost of Revenues. Cost of revenues for the year ended September 30, 1998
was $13.3 million or 64.7% of total revenues as compared to $13.7 million or
78.7% of total revenues for the year ended September 30, 1997. The decrease in
cost of revenues in absolute dollars and as a percentage of total revenues was
primarily a result of an increase in higher margin Internet revenues as a
percentage of total revenues.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended September 30, 1998 were $10.7 million or 51.9% of
total revenues as compared to $6.0 million or 34.7% of total revenues for the
year ended September 30, 1997. This increase in absolute dollars and as a
percentage of total revenues was primarily attributable to an increase in sales
and marketing, engineering, training and administration personnel necessitated
by the growth in Internet-related operations. The number of employees increased
from 90 as of September 30, 1997 to approximately 170 as of September 30, 1998.
We increased expenditures in advertising from $325,000 for the year ended
September 30, 1997 to $1.3 million for the year ended September 30, 1998.
Interest and Financing Expense and Interest Income. The increase in
interest expense is a result of the $160.0 million debt financing completed in
April 1998. The
27
<PAGE> 29
increase in interest income reflects the increased cash position derived from
the net proceeds of the debt financing. We are amortizing debt issuance costs of
$6.6 million relating to the $160.0 million debt financing over seven years.
Depreciation and Amortization. Depreciation and amortization increased to
$1.3 million for the year ended September 30, 1998 as compared to $675,000 for
the year ended September 30, 1997. The increase was primarily related to
equipment purchased for use in the Internet Division during the year ended
September 30, 1998.
Net Loss and Loss per Share. As a result of the above, we reported a net
loss of $11.2 million or $3.08 per share for fiscal 1998 as compared to a net
loss of $3.1 million or $1.01 per share for the year ended September 30, 1997.
YEAR ENDED SEPTEMBER 30, 1997 AS COMPARED TO THE YEAR ENDED SEPTEMBER 30, 1996
Revenues. Total revenues for the year ended September 30, 1997 increased
67.7% to $17.4 million from $10.4 million for the year ended September 30, 1996.
Revenues from the Server Sales and Integration Division increased 54.0% to $15.0
million from $9.7 million for the year ended September 30, 1996. Revenues from
the Internet Division increased 276.3% to $2.4 million for the year ended
September 30, 1997 from $641,000 for the year ended September 30, 1996. The
increase in revenues reflects the growth in both the Server Sales and
Integration Division and the Internet Division.
Cost of Revenues. Cost of revenues for the year ended September 30, 1997
was $13.7 million or 78.7% of total revenues as compared to $8.6 million or
82.9% of total revenues for the year ended September 30, 1996. The decrease in
cost of revenues as a percentage of total revenues was primarily due to the
increase in higher margin revenue from the Internet Division. In addition,
revenue from the sales of higher-end workstations, web and database servers and
software contributed to higher gross profit margins.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended September 30, 1997 were $6.0 million or 34.7% of
total revenues as compared to $3.2 million or 30.7% of total revenues for the
year ended September 30, 1996. This increase in absolute dollars and as a
percentage of total revenues was primarily the result of increases in the sales,
marketing, technical and administrative personnel associated with the growth in
revenues during the year.
Net Loss and Loss per Share. As a result of the above, we reported a net
loss of $3.1 million or $1.01 per share for the year ended September 30, 1997
compared to a net loss of $1.9 million or $0.72 per share for the year ended
September 30, 1996. During the fourth quarter of fiscal year 1997, we
established an additional reserve of $360,000 for Returned Merchandise
Allowances to properly reflect the value of our receivables from our vendors of
hardware and software. We consider this event to be non-recurring.
QUARTERLY RESULTS OF OPERATION
The following table sets forth quarterly consolidated statement of
operations data for the periods indicated. The quarterly consolidated statement
of operations data is derived from our unaudited financial statements, which in
management's opinion has been prepared on substantially the same basis as our
audited financial statements and includes all adjustments, consisting only of
normal recurring adjustments necessary for a fair presentation of the financial
position and results of operations for these periods. This information should be
read in conjunction with the financial statements and notes thereto included
elsewhere in this prospectus. Our quarterly results of operations are not
necessarily indicative of our results of operations for any future period.
28
<PAGE> 30
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenues:
Internet.................................. $ 723 $ 768 $ 569 $1,328 $1,441
Server sales and integration.............. 4,506 4,175 2,963 3,412 2,911
------ ------ ------- ------ ------
Total revenues...................... 5,229 4,943 3,532 4,740 4,352
------ ------ ------- ------ ------
Cost of revenues:
Internet.................................. 351 209 509 335 401
Server sales and integration.............. 3,751 3,515 2,575 2,779 2,343
------ ------ ------- ------ ------
Total cost of revenues.............. 4,102 3,724 3,084 3,114 2,744
------ ------ ------- ------ ------
Gross profit.............................. 1,127 1,219 448 1,626 1,608
Selling, general and administrative....... 1,392 1,461 1,738 1,610 1,870
Depreciation and amortization............. 139 161 217 242 264
------ ------ ------- ------ ------
Total operating expenses............ 1,531 1,622 1,955 1,852 2,134
------ ------ ------- ------ ------
Loss from operations........................ (404) (403) (1,507) (226) (526)
Interest and financing income (expense),
net..................................... 11 (54) (77) (56) (62)
------ ------ ------- ------ ------
Net loss.................................... $ (393) $ (457) $(1,584) $ (282) $ (588)
====== ====== ======= ====== ======
Basic and diluted net loss per share........ $(0.13) $(0.15) $ (0.51) $(0.08) $(0.17)
====== ====== ======= ====== ======
Weighted average common shares
outstanding............................... 3,043 3,046 3,075 3,448 3,448
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenues:
Internet.................................. $ 1,637 $ 2,042 $ 2,281
Server sales and integration.............. 4,059 3,765 3,648
------- ------- -------
Total revenues...................... 5,696 5,807 5,929
------- ------- -------
Cost of revenues:
Internet.................................. 399 397 565
Server sales and integration.............. 3,401 3,267 3,137
------- ------- -------
Total cost of revenues.............. 3,800 3,664 3,702
------- ------- -------
Gross profit.............................. 1,896 2,143 2,227
Selling, general and administrative....... 3,010 4,207 5,566
Depreciation and amortization............. 396 408 507
------- ------- -------
Total operating expenses............ 3,406 4,615 6,073
------- ------- -------
Loss from operations........................ (1,510) (2,472) (3,846)
Interest and financing income (expense),
net..................................... (2,560) (3,745) (3,973)
------- ------- -------
Net loss.................................... $(4,070) $(6,217) $(7,819)
======= ======= =======
Basic and diluted net loss per share........ $ (1.16) $ (1.52) $ (1.89)
======= ======= =======
Weighted average common shares
outstanding............................... 3,510 4,091 4,140
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1997 1997 1997 1997 1998
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenues:
Internet.................................. 13.8% 15.5% 16.1% 28.0% 33.1%
Server sales and integration.............. 86.2 84.5 83.9 72.0 66.9
------ ------ ------- ------ ------
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------- ------ ------
Cost of revenues:
Internet(1)............................... 48.5 27.2 89.5 25.2 27.8
Server sales and integration(2)........... 83.2 84.2 86.9 81.4 80.5
------ ------ ------- ------ ------
Total cost of revenues.............. 78.4 75.3 87.3 65.7 63.1
------ ------ ------- ------ ------
Gross profit.............................. 21.6 24.7 12.7 34.3 36.9
Selling, general and administrative....... 26.6 29.6 49.2 33.9 43.0
Depreciation and amortization............. 2.7 3.3 6.1 5.1 6.0
------ ------ ------- ------ ------
Total operating expenses............ 29.3 32.9 55.3 39.0 49.0
------ ------ ------- ------ ------
Loss from operations........................ (7.7) (8.2) (42.6) (4.7) (12.1)
Interest and financing income (expense),
net..................................... 0.2 (1.1) (2.2) (1.2) (1.4)
------ ------ ------- ------ ------
Net loss.................................. (7.5)% (9.3)% (44.8)% (5.9)% (13.5)%
====== ====== ======= ====== ======
<CAPTION>
THREE MONTHS ENDED
---------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31,
1998 1998 1998
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF
OPERATIONS DATA:
Revenues:
Internet.................................. 28.7% 35.2% 39.0%
Server sales and integration.............. 71.3 64.8 61.0
------- ------- ------
Total revenues...................... 100.0 100.0 100.0
------- ------- ------
Cost of revenues:
Internet(1)............................... 24.4 19.4 15.3
Server sales and integration(2)........... 83.8 86.7 84.7
------- ------- ------
Total cost of revenues.............. 66.7 63.1 62.4
------- ------- ------
Gross profit.............................. 33.3 36.9 37.6
Selling, general and administrative....... 52.8 72.4 93.9
Depreciation and amortization............. 7.0 7.0 8.6
------- ------- ------
Total operating expenses............ 59.8 79.4 102.5
------- ------- ------
Loss from operations........................ (26.5) (42.5) (64.9)
Interest and financing income (expense),
net..................................... (44.9) (64.5) (67.0)
------- ------- ------
Net loss.................................. (71.4)% (107.0)% (131.9)%
======= ======= ======
</TABLE>
- -------------------------
(1) As a percentage of total Internet Division revenue
(2) As a percentage of total Server Sales and Integration Division revenue
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Our quarterly operating results vary significantly depending upon factors
such as customer demand for our products and services, seasonal fluctuations in
revenue, principally during the summer and year-end holidays, significant sales
of Internet-related hardware and software in any particular quarter, changes in
the growth rate of Internet usage, the mix of revenues from our two segments,
the mix of revenues from our various Internet products and services, the timing
of the expansion of our operations, changes in our pricing policies or those of
our competitors, the introduction of new products and services by us or our
competitors, the mix of domestic and international sales once our London
SuperPOP becomes operational, costs related to acquisitions of technology or
businesses, and general economic and market conditions.
As indicated in the quarterly data, the Internet Division revenues
decreased during the quarter ended September 30, 1997, while costs of revenues
increased substantially during that period. The decrease in revenues was
primarily a result of a shortage of funds to support our operations and the
reclassification of certain revenues between the two divisions. The increase in
cost of revenues during this period was primarily a result of Internet Division
expenditures which were committed in prior periods and higher costs associated
with inefficiencies caused by inadequate financing. The Internet Division
subsequently experienced a substantial increase in revenues and a decrease in
cost of revenues for the quarter ending December 31, 1997. We believe that our
recent revenue growth has been limited by the shortage of space at our current
Internet data center. Partly to address this shortage, we are currently building
three new SuperPOP facilities.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have satisfied our cash requirements through a
combination of public and private sales of equity, borrowings from institutional
and private lenders, and cash flow from operations. In January 1996, we
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. The net proceeds of the public
offering were approximately $7.4 million. In September 1997, we completed a
private placement of 400,000 shares of common stock with net proceeds to us of
$2.0 million. On April 30, 1998, we issued 160,000 Units for aggregate gross
proceeds of $160.0 million. Each Unit included a note in the principal amount of
$1,000 and one warrant entitling the holder thereof to purchase 3.52 shares of
common stock at an exercise price of $14.03 per share. The maturity date of the
notes is May 1, 2005. Interest on the notes accrues at the rate of 13.0% per
annum and is payable semi-annually on May 1 and November 1 of each year. Upon
issuance of the notes, we deposited with an escrow agent an amount of cash and
U.S. government securities (approximately $57.0 million), that, together with
the proceeds from the investment thereof, were estimated to be sufficient to pay
when due the first six interest payments on the notes, with any balance to be
returned to us. The notes are collateralized by a first priority security
interest in such escrow account. In July 1998, we called the outstanding IPO
Warrants for redemption. Substantially all of the IPO Warrants were exercised
prior to redemption and the net proceeds to us were approximately $4.3 million.
Cash and cash equivalents and marketable securities decreased from $76.1
million as of September 30, 1998 to $57.3 million as of December 31, 1998. This
decrease of approximately $18.8 million was primarily the result of the
construction of SuperPOP facilities in New York, London and the San Francisco
Bay area.
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At December 31, 1998, we had working capital of approximately $43.9
million, as compared to working capital of approximately $75.9 million at
September 30, 1998. Working capital decreased primarily because of the $21.4
million incurred with respect to the construction of SuperPOP facilities in New
York, London and the San Francisco Bay area and the $9.2 million used to acquire
the long-term exclusive right to use portions of Qwest's network. This decrease
was partially offset by increases in accounts receivable of $506,000 and prepaid
expenses and other current assets of $934,000.
As of December 31, 1998, we had spent approximately $21.5 million to
construct and equip our three new SuperPOP facilities. We estimate that we will
spend an additional $29.5 million to complete the SuperPOP facilities and $8.3
million to complete our new network. In addition, we have an option from Qwest
to maintain the initial bandwidth capacity of the domestic portion of our
network for the balance of the 20 year term of our agreement for an additional
payment of $15.0 million. We can exercise this option at any time prior to
December 31, 1999. If we were to choose not to exercise this option, our
domestic network would be reduced to a lesser capacity. We expect our new
SuperPOP facilities and network to become operational by June 30, 1999.
We maintain a $1.0 million credit line from Cisco Systems Capital
Corporation (CSC) to lease products and associated peripherals from CSC. The
terms of this line, which was entered into in December 1997, provided for 180
days of borrowing and a maximum borrowing limit of $1.0 million. However, CSC
has informally permitted us to continue to borrow under this line and to exceed
the stated $1.0 million limit. Amounts borrowed under the line are to be repaid
over a 36 month period and we have the option to purchase the equipment for a
nominal amount at the end of the lease term. As of December 31, 1998,
approximately $1.6 million was outstanding under this credit line.
In the opinion of management, we will be able to finance our business as
currently conducted and as currently planned from its current working capital
and the net proceeds of this offering at least through fiscal 2000.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with Year 2000 requirements or risk system failure
or miscalculations causing disruptions of normal business activities.
State of Readiness. Globix has made a preliminary assessment of the Year
2000 readiness of its information technology systems, including the hardware and
software that enable Globix to provide and deliver its products and services,
and its non-information technology systems. Globix's plan consists of:
- quality assurance testing of its internally developed proprietary
software and systems
- contacting third-party vendors and licensors of material hardware,
software and services that are both directly and indirectly related to
the delivery of Globix's products and services to its customers
- contacting vendors of material non-information technology systems;
- assessment of repair or replacement requirements
- repair or replacement
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- implementation
- creation of contingency plans in the event of Year 2000 failures
Globix plans to perform a Year 2000 simulation on its software by June 30, 1999
to test system readiness. Based on the results of its Year 2000 simulation test,
Globix intends to revise the code of its software and systems as necessary to
improve the Year 2000 compliance of its software. Globix has been informed by
its vendors of material hardware and software components of its information
technology systems that the products used by Globix are currently Year 2000
compliant. Globix is currently assessing the materiality of its non-information
technology systems and will seek assurances of Year 2000 compliance from
providers of material non-information technology systems. Until such testing is
complete and such vendors and providers are contacted, Globix will not be able
to completely evaluate whether its information technology systems or
non-information technology systems will need to be revised or replaced. Globix
plans to complete its Year 2000 evaluation during the first half of 1999.
Costs. To date, Globix has not incurred any material expenditures in
connection with identifying or evaluating Year 2000 compliance issues. Most of
its expenses have related to, and are expected to continue to relate to, the
operating costs associated with time spent by employees in the evaluation
process and Year 2000 compliance matters generally. At this time, Globix does
not possess the information necessary to estimate the potential costs of
revisions to its software and systems should such revisions be required or the
replacement of third party software, hardware or services that are determined
not to be Year 2000 compliant. Although Globix does not anticipate that such
expenses will be material, such expenses, if higher than anticipated, could have
a material adverse effect on Globix's business, financial condition and results
of operations.
Risks. Globix is not currently aware of any Year 2000 compliance problems
relating to its information technology or non-information technology systems
that would have a material adverse effect on Globix's business, results of
operations and financial condition. However, Globix may discover Year 2000
compliance problems in its software and systems that will require substantial
revisions. In addition, there is no assurance that third party software,
hardware or services incorporated into Globix's material information technology
and non-information technology systems will not need to be revised or replaced,
all of which could be time consuming and expensive. The failure of Globix to fix
or replace its software, hardware or services on a timely basis could result in
lost revenues, increased operating costs and the loss of customers and other
business interruptions, any of which could have a material adverse effect on
Globix's business, results of operations and financial condition. Moreover, the
failure to adequately address Year 2000 compliance issues in its information
technology and non-information technology systems could result in claims of
mismanagement, misrepresentation or breach of contract and related litigation,
which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, telecommunication companies, other Internet service providers, third
party service providers, hardware and software manufacturers and others outside
Globix's control will be Year 2000 compliant. The failure by such entities to be
Year 2000 compliant could result in a systemic failure beyond the control of
Globix, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent Globix from delivering its services to its customers,
decrease the use of the Internet or prevent users from
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accessing the web sites of its customers. Any of these occurrences could have a
material adverse effect on Globix's business, financial condition and results of
operations.
Contingency Plan. As discussed above, Globix is engaged in an ongoing Year
2000 assessment and has not yet developed any contingency plans. The results of
Globix's Year 2000 simulation testing and the responses received from
third-party vendors and service providers will be taken into account in
determining the nature and extent of any contingency plans.
INTRODUCTION OF THE EURO
On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and a new currency called the "Euro." These countries agreed to adopt
the Euro as their common legal currency on that date. The Euro trades on
currency exchanges and is available for non-cash transactions. Until January 1,
2002, the existing sovereign currencies will remain legal tender in these
countries. On January 1, 2002, the Euro is scheduled to replace the sovereign
legal currencies of these countries.
Globix's initial international expansion will be in the United Kingdom,
which has not adopted the Euro. Globix will evaluate the impact the
implementation of the Euro will have on its business operations and no
assurances can be given that the implementation of the Euro will not have
material adverse affect on Globix's business, financial condition and results of
operations. However, Globix does not expect the Euro to have a material effect
on its competitive position. In addition, Globix cannot accurately predict the
impact the Euro will have on currency exchange rates or Globix's currency
exchange risk.
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BUSINESS
We are a leading provider of Internet access and sophisticated Internet
products and services to large and medium size businesses. Our comprehensive
range of high performance products and services enables our customers to utilize
the Internet in implementing their business strategies. Our Internet products
and services include:
- Internet access using telecommunications lines dedicated to particular
customers
- Internet data center facilities for hosting customer web sites on our
servers, known as web hosting, and housing customer-owned web servers and
related equipment, known as co-location
- sales and integration of Internet-related hardware and software
- management of sophisticated computer systems and networks
- value-added services such as electronic commerce, streaming media,
network security and web site development
- instructor-led corporate training
Our customers primarily use our products and services to maintain a high speed,
high capacity, direct link to the Internet and to establish and support complex
web sites. We currently offer our products and services from our facility in New
York City, where most of our customers have substantial operations. Our team of
sales consultants, computer systems and network engineers and customer support
professionals is located near our customers. Due to this strong local market
presence, we are able to evaluate the needs of our customers and quickly respond
with tailored solutions as needed. We also provide our customers the ability to
outsource the design and maintenance of their corporate web sites. Our products
are flexible and scaleable, allowing us to modify the size and breadth of the
services we provide. We believe that our ability to offer a broad range of
Internet products and services, combined with our local sales and support
professionals and high performance Internet data center facilities,
differentiates us from our competitors.
INDUSTRY OVERVIEW
The Internet has experienced rapid growth in the 1990's and has emerged as
a global medium for communications and commerce. Internet access and value-added
Internet services represent two of the fastest growing segments of the
telecommunications services market. The Internet's growth is driven by a number
of factors, including the large and increasing number of personal computers in
the office and in the home linked to the Internet, advances in network designs,
increased availability of Internet-based software and applications, the
emergence of useful content and electronic commerce technologies, and
convenient, fast and inexpensive Internet access. According to International
Data Corporation, the total number of Internet users worldwide reached 69
million in 1997 and is forecast to increase to approximately 320 million by
2002. According to IDC, total Internet service provider revenues, including both
corporate and residential access, in the United States are projected to grow
from $10.7 billion in 1998 to $29.7 billion in 2002.
Businesses initially established corporate Internet sites as a means to
improve internal and external corporate communications. Today, businesses are
increasingly utilizing the Internet for functions critical to their core
business strategies, such as sales and marketing, customer service and project
coordination. The Internet presents a compelling profit opportunity for
businesses as it enables them to reduce operating costs, access valuable
information and reach new markets. To maintain a significant presence on the
Internet,
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businesses typically purchase Internet access services and establish a web site.
Internet access provides a company with its basic gateway to the Internet,
allowing it to transfer e-mail, access information, and connect with employees,
customers and suppliers. IDC predicts that U.S. corporate Internet access
revenues will grow 37% annually from $2.9 billion in 1998 to $10.1 billion in
2002. A web site provides a company with a tangible identity and interactive
presence on the Internet, allowing it to post company information and automate
business processes such as sales, order entry and customer service. According to
IDC, revenues in the United States from value-added Internet services, such as
web hosting, electronic commerce and security services, will grow 32% annually
from $3.0 billion in 1998 to $9.0 billion in 2002. IDC also predicts Europe will
experience similar strong growth, with corporate Internet access revenue
increasing 35% annually from $1.7 billion in 1998 to $4.2 billion in 2001 and
revenue from value-added services increasing 45% annually from $223.0 million in
1998 to $679.0 million in 2001.
In order to ensure the quality, reliability and availability of these
Internet operations, corporate information technology departments make
substantial investments in developing Internet expertise and infrastructure.
These information technology groups are challenged by the need to implement
their organization's Internet business strategy, adopt new and rapidly changing
technologies and continuously update content. The implementation, establishment
and maintenance of these solutions require significant technical expertise in a
number of areas, such as electronic commerce systems, security and privacy
technologies, application and database programming, mainframe and legacy
integration technologies and advanced user interface and multimedia production.
As a result, corporate information technology departments are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation and reduce Internet operating expenses.
The rapidly growing need for Internet access and other Internet products
and services has resulted in a highly fragmented industry with the proliferation
of over 6,400 Internet service providers operating worldwide and approximately
4,000 ISPs operating within the United States. These ISPs primarily consist of
large national and global ISPs and smaller local and regional ISPs. The large
national and global ISPs are generally more focused on Internet access and rely
on indirect sales, telemarketing and remote network operation centers to serve
their customers. In addition, large national and global ISPs typically do not
offer a full range of value-added services. Smaller local or regional ISPs
typically focus on serving their local market and lack the resources to provide
and support a full range of Internet products and services. Accordingly, Globix
believes that the needs of large and medium size businesses for comprehensive
Internet products and services are underserved by both large national and global
ISPs and smaller local and regional ISPs.
THE GLOBIX SOLUTION
Globix provides its customers with a comprehensive range of high
performance Internet products and services. Many of Globix's customers do not
have the network infrastructure or Internet expertise to build, maintain and
support critical Internet solutions. Globix's comprehensive range of products
and services enable its customers to more cost-effectively address their needs
without having to assemble products and services from different value added
resellers, Internet service providers and information technology
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firms, thereby significantly increasing the customer's ability to take advantage
of the Internet on a timely basis. Key advantages of the Globix solution are:
Strategically Located Near Customers. Globix's close proximity to its
customers, combined with its broad range of services under one roof, makes it
convenient for customers to maintain or co-locate their equipment at Globix's
facilities, meet with sales consultants, technicians, engineers, designers and
customer support staff and attend instructor-led training classes. Globix's new
SuperPOPs in New York City, London and the San Francisco Bay area will also be
strategically located near its targeted customer base. Globix believes that
maintaining a strategic local presence near its customers provides it with a
competitive advantage over many large Internet service providers which target
and support their customers from remote centralized telecenters and network
operations centers. Globix also believes it will have a significant competitive
advantage in the London market by being one of the first full-service providers
of Internet products and services to operate its own high-performance Internet
data center in that market.
High Performance and Reliable Infrastructure. Globix's infrastructure is
designed to provide the performance that its customers require for critical
operations. Globix's current network and facilities feature fault tolerant
direct links to the Internet and high-speed network architecture. Globix
provides high-speed, low packet-loss service by maintaining bandwidth which
significantly exceeds the typical requirements of its entire customer base.
Globix's network engineers continually monitor customer equipment and network
traffic flow and congestion points to consistently deliver high quality service
and network performance. Globix believes that its monitoring systems, combined
with its trained support staff, provide customers with a highly effective means
of monitoring, responding to and resolving problems. Globix's three new SuperPOP
facilities will feature a high performance Internet data center with multiple,
redundant, high-capacity fiber feeds, uninterruptable power supplies with
back-up generators, a dry fire suppression system, raised floor and fault
tolerant environmental controls. Globix is also establishing a fully redundant,
dedicated, high-speed network which will significantly increase network
capacity, improve reliability and reduce unit data transmission costs.
Scaleability and Flexibility. Globix's solutions are designed to be
flexible and scaleable, ensuring customers a consistently high level of
performance as their Internet operations expand. Globix monitors its customers'
bandwidth usage and can quickly increase the amount of bandwidth, power, hosting
space or managed services that a customer receives, as well as facilitate the
acquisition of additional hardware. Globix charges its customers based on the
amount of facility space and bandwidth it provides, offering customers a
flexible and cost-effective method to increase their Internet operations.
Innovative and Sophisticated Products and Services. Globix offers and
supports a variety of Internet products and services which allow its customers
to take advantage of cutting-edge Internet technology. Globix maintains
relationships with leading Internet hardware and software manufacturers such as
Sun Microsystems, Silicon Graphics, Compaq, Intergraph, Cisco, Microsoft,
Netscape and Check Point Software. These relationships provide Globix with
advance knowledge of innovative and sophisticated technologies and enhance its
ability to recommend and integrate such technologies into its product and
services offerings. Globix is committed to maintaining its expertise in leading
Internet technologies.
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GROWTH STRATEGY
Globix's objective is to become the leading provider of Internet access and
sophisticated Internet products and services to businesses in key global
markets. To achieve this objective, Globix intends to:
Continue to Invest Extensively in Infrastructure. Globix intends to
capitalize on the trend by corporate information technology departments to
outsource critical Internet operations by continuing to make significant
investments to improve and expand its infrastructure. Globix's geographically
diverse SuperPOP facilities under construction will increase Globix's total
Internet data center capacity from approximately 2,000 square feet to
approximately 63,000 square feet. In addition, Globix is developing points of
presence, or POPs, in Washington D.C. and Chicago by co-locating
Internet-related computer equipment in the facilities of major
telecommunications providers. Through these POPs, Globix intends to establish a
market presence in these cities to better serve its current and future
multi-regional business customers. In addition, these SuperPOPs and the planned
POPs will be connected by a fully redundant, dedicated, high speed network,
which is also currently under construction. This infrastructure expansion will
position Globix to aggressively pursue new dedicated access, web hosting and
co-location opportunities. Globix also believes it can achieve significant
economies of scale by leveraging the fixed costs associated with its network
infrastructure and Internet data center facilities. Globix is evaluating new
markets and may in the future establish additional POPs or SuperPOP facilities
in additional global business markets.
Expand Product and Service Offerings. Globix seeks to continually expand
the breadth of its product and service offerings using new technologies to
enable its customers to better utilize the Internet. For example, in 1998 Globix
built a team focused exclusively on the use of streaming media technology. With
this capability, Globix has produced and/or hosted over 70 events in a variety
of industries, including a live Rod Stewart concert from London. Globix intends
to introduce a number of other new products and services in the near future
including Internet video conferencing and xDSL access services.
Cross-sell Additional Products and Services. Globix seeks to attract and
retain new customers, as well as leverage its customer base by cross-selling
additional products and services to existing customers. Globix consults on a
regular basis with its customers in order to better understand their growing
need for Internet products and services and actively seeks to cross-sell
additional products and services to address these needs. For example, Globix
originally established a relationship with BPI Communications, the publisher of
BillBoard and Adweek, as its computer hardware supplier. This relationship has
evolved over time to include multiple dedicated access products,
Internet-related equipment sales and consulting services. The new SuperPOP
facilities will significantly increase Globix's capacity and enable it to more
effectively sell web hosting and co-location services and value-added Internet
products across its customers' geographically disparate locations. Globix
believes that this strategy will expand the number of customers for its products
and services and enable it to become a more integral component of its customers'
information technology infrastructure.
Enhance the Globix Brand Name in Target Markets. Globix seeks to expand
market share, increase customer loyalty and develop brand recognition in key
business markets by combining targeted branding initiatives with its strong
local presence. Globix began a print advertising campaign in June 1998 to
establish brand recognition for Globix in the New York metropolitan area. Globix
advertised in major business publications including Crains New York, The New
York Times and The Wall Street Journal. In addition, Globix has
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increased its presence at industry trade shows. Globix plans to continue to
aggressively build brand recognition by marketing its full range of services
through an advertising campaign using traditional media, online campaigns and
joint-promotions with key hardware and software vendors.
Make Strategic Investments and Acquisitions. Globix may make strategic
investments in smaller Internet service and design companies in exchange for
long-term exclusive supply contracts, such as dedicated Internet access, and web
hosting and co-location services. For example, in July 1998, Globix made a $1.0
million investment in Cybernet Data Systems, the publisher of the web site
"Edgar-Online.com." Under that agreement, Globix has the exclusive right for a
five-year period to provide Cybernet its web hosting services. Globix may also
make acquisitions to deepen and broaden its market presence, expand its
strengths in Internet connectivity and web hosting and co-location, and add to
or enhance its line of Internet products and services.
PRODUCTS AND SERVICES
Globix provides its customers with a comprehensive range of high
performance, flexible and scaleable products and services, as described below.
DEDICATED INTERNET ACCESS
Globix provides a variety of dedicated Internet access solutions, which
provide businesses high-speed continuous access to the Internet. Globix's
dedicated Internet access services are provided to customers at speeds ranging
from 56Kbps to 45Mbps. However, the majority of Globix's Internet access
customers purchase 1.5Mbps or higher levels of service. In addition, Globix
provides configuration services, including domain name registration, local loop
provisioning, Internet address assignment, router configuration, e-mail
configuration, security planning and management technical consulting services.
All of Globix's Internet access customers receive 24 hour a day, 7 day a week
technical support. Globix is currently participating in trials of new access
technologies, such as xDSL through a strategic relationship with Covad
Communications, and expects to deploy additional connectivity-related enhanced
services, such as Internet conference calling, by June 30, 1999.
WEB HOSTING
Globix provides web hosting services using either servers shared with other
customers or servers dedicated to one customer. Globix provides all of its web
hosting customers with 24 hour a day, 7 day a week monitoring, network and
systems administration and maintenance, tape back-ups and security monitoring.
Shared Server Web Hosting. Globix offers a variety of shared server web
hosting services that enable its customers to efficiently, reliably and
cost-effectively establish a sophisticated web presence and distribute
information over the Internet without purchasing, configuring, maintaining and
administering the necessary Internet hardware and software. Globix's basic web
hosting option includes 100 Mbps of data transfer per month and 20 Mbps of
storage. This basic service meets the bandwidth requirements of many businesses
and allows them to store sufficient standard graphics, HTML, sound and video
files to meet their ongoing needs. Storage and transfer limits can be increased
and customized to meet the requirements of the customer. Globix supplements this
basic service with a variety of web-based options such as e-mail, Microsoft
Frontpage extensions and Netshow streaming, RealNetworks offerings, and other
web development, security,
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electronic commerce and database products. Globix's shared hosting plans also
offer tools that enable customers to control and update their sites remotely,
monitor site performance, track the number of site visits, check account billing
information and evaluate the overall effectiveness of their web sites. In
addition, all shared servers have regular back-up procedures to protect customer
files.
Dedicated Server Web Hosting. Globix also offers dedicated server web
hosting solutions for larger customers that require substantially more server
and network capacity than is provided under the shared hosting plans. The
dedicated web hosting solutions provide the customer with an NT or UNIX-based
dedicated server that is owned and maintained by Globix within its Internet data
center. This service enables customers to host complex web sites and
applications without the need to incur significant infrastructure and overhead
costs. Globix offers dedicated server service at various price levels, depending
on customers' hardware data transfer and service requirements. For example,
Globix offers Bronze, Silver and Gold level dedicated web hosting services which
include either a Sun Microsystems or Compaq server, 64 Mbps to 256 Mbps of
memory and 1,000 Mbps to 3,000 Mbps of data transfer per month.
CO-LOCATION
Globix offers co-location services for customers who prefer to own and have
physical access to their servers, but require the high performance, reliability
and security of Globix's Internet data center. Co-location customers are
typically larger enterprises employing more sophisticated Internet hardware and
software, and have the expertise to maintain their web sites and related
equipment. Globix's co-location services include fault-tolerant physical
facilities and reliable, high bandwidth Internet access tailored to meet the
outsourcing needs of our customers' critical Internet operations. Globix
supports most leading Internet hardware and software platforms, including those
from Ascend, Cisco, Compaq, Check Point Software, Intergraph, Microsoft,
Netscape, Silicon Graphics, Storage Technologies and Sun Microsystems. This
multi-vendor flexibility enables Globix to offer the customer a broad range of
technology best suited for its needs. Customers have 24 hour a day, 7 day a week
physical and remote access to the Internet data center to administer, upgrade
and maintain their own equipment, or they may engage Globix to provide systems
administration and maintenance.
Globix believes its ability to sell additional hosting and co-location
services has been limited in the recent past because its present Internet data
center, with capacity totaling approximately 2,000 square feet, is fully
utilized. Partly to address this difficulty, Globix is currently building new
state-of-the-art SuperPOP facilities in New York City, London and the San
Francisco Bay area.
INTERNET-RELATED HARDWARE AND SOFTWARE SALES
Product resales are an integral part of providing end-to-end solutions to
Globix's customers. Globix assists its customers in identifying appropriate
hardware and software components tailored for their Internet needs. Generally,
Globix sells the hardware and software to its customers under reseller
agreements with major vendors. Globix is authorized to sell a full range of
equipment and hardware required to connect to the Internet, including servers
from manufacturers such as Sun Microsystems, Compaq, Silicon Graphics and
networking components, including routers and switches, from leading
manufacturers such as Cisco. Globix also provides application-specific software
products including browsers, electronic mail and other solutions from a variety
of leading
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manufacturers, including Microsoft, Netscape and Oracle which allow its
customers to navigate and utilize the Internet.
SYSTEMS AND NETWORK INTEGRATION
Globix provides integration services including local and wide area network
configuration, web and database server integration and application-specific
software solutions. When requested by the customer, Globix will configure all
equipment it sells by loading customer programs, connecting equipment to the
network, and servicing the customer's hardware and software. Globix's staff of
experienced network consultants work closely with customers to design, assemble
and configure a network architecture which meets their goals. Globix utilizes
its expertise across multiple platforms and familiarity with leading networking
hardware, high-end web and database servers and computer software to more
effectively address its customers' diverse systems and network integration
needs.
SYSTEMS ADMINISTRATION AND WEB SITE MANAGEMENT
Globix supports its customers' Internet operations by providing system
administration and web site management. Globix provides its customers with
detailed monitoring, reporting and management systems to control their
Internet-related hardware, software and network applications. Globix's products
and services can vary in functionality from delivering e-mail to an individual
within a corporate local area network to delivering a sophisticated, media-rich
web site on the Internet. Implementation of these solutions are often phased to
allow customers to outsource an increasing amount of their Internet operations.
Globix's systems and web management systems enable Globix and its customers to
jointly manage Internet operations housed at Globix's Internet data center and
at its customers' in-house facilities. Globix's comprehensive system
administration and web site management solutions enable it to identify and begin
to resolve hardware, software, network and application problems almost
immediately. As a result of its proactive service focus, Globix can usually
identify and resolve a potential problem before it ever affects an Internet
site's availability or performance.
VALUE-ADDED INTERNET SERVICES
Web Development. Globix provides advanced web site development and
implementation services. Its customers' web sites range from basic informational
sites to complex interactive sites featuring sophisticated graphics, animation,
sound and other multimedia content. Globix has completed web site development
projects for customers including Bank of New York and Cigar Aficionado. Globix's
interactive development capabilities utilize tools such as Hypertext Markup
Language (HTML), Virtual Reality Markup Language (VRML), computer animation,
compositing and motion capture. Globix works with content providers such as
marketing firms, end users and production companies to provide technical, design
and production services. Globix focuses on the design, development and
establishment of web sites and is not typically involved in creating the content
of its customers' web sites. Globix maintains a dedicated team of production,
design and management personnel who are available for large-scale web
development projects.
Electronic Commerce Solutions. Globix 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 Globix's customers to change products and prices easily and
cost-effectively. Globix also offers credit card authorization and
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processing solutions that enable its customers to accept payment directly over
the Internet. This is accomplished through a Cybercash server maintained by
Globix. This server can interface with any of Globix's web hosting or
co-location customers, allowing them to offer their clients a secure environment
to type a credit card number in a browser for the purpose of conducting a
business transaction. Globix also provides fully integrated turnkey electronic
commerce solutions that simplify and facilitate online commerce.
Security Solutions. Protection from unauthorized access is critical to
businesses using the Internet. The Globix security team works closely with
customers to design and integrate a customized security solution which ensures
network integrity while enabling users to perform business tasks in a secure,
yet unhindered, environment. Globix's firewall solutions provide users with
secure access to the Internet as well as segregate a customer's public servers
from its internal network. Globix's firewalls can also restrict access between
departments as well as track communications to ensure that these communications
follow a customer's established security procedures. Globix works with a variety
of vendors, including Check Point Software and WatchGuard Technologies. In
addition to firewalls, Globix offers enhanced security services including virus
scanning, active X and Java screening, content filtering and Uniform Resource
Locator, known as URLs, blocking. Globix also offers a virtual private network
product which provides security while greatly reducing the cost of leased line
access to remote offices, remote users and business partners.
Streaming Media Products. The development of streaming media products from
companies, such as RealNetworks and Microsoft, enables the simultaneous
transmission and playback of continuous streams of audio and video content over
the Internet. Globix seeks to become one of the leading providers of streaming
media services, offering completely integrated, in-house services. These
services include the three main components of streaming media technology:
production, encoding and hosting of live or pre-recorded events. Production
involves creating a video and/or audio recording of an event, such as a music
performance, sports competition or business meeting. Encoding is converting the
recording into a form that can be sent over the Internet. Hosting is placing the
encoded file on a server that can be accessed by Internet users. Globix has
produced and hosted streaming media events for customers from a number of
industries. Globix has produced and/or hosted over 70 events, including a live
Rod Stewart concert from London, New York State Governor George Pataki's
State-of-the State address, and the keynote address of John Chambers, the
President and Chief Executive Officer of Cisco, at the Consumer Electronics
Show. Globix encodes data for applications from several software providers,
including RealNetworks, Microsoft, a2b, Apple, Liquid Audio and Macromedia.
Globix believes that it is one of the few providers which offers expertise in
all three components of streaming media technology, combined with an established
customer base for Internet products and services and access to low cost,
scalable, bandwidth.
CORPORATE TRAINING
Globix provides corporate training services, often in conjunction with a
sale of Internet access, hardware and software products or other Internet
products and services. Globix offers instructor-led training on:
- multiple network platforms, including Windows 98, Windows NT, Mac and
Unix
- Internet applications, including Java, HTML, Macromedia and VRML
- office applications, including MS Office, Lotus Notes and Lotus Smart
Suite
- 3-dimensional computer animation programs, including Alias, Discrete
Logic and Soft Image
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Training is marketed to large advertising, financial services, media, publishing
and retail companies which send their personnel to Globix's facility to attend
one to five day programs. Most customers maintain an on-going relationship with
Globix's account managers and regularly schedule classes during the year.
Globix maintains training rooms at its New York facilities, which are
equipped with state-of-the-art modern hardware, projectors, computer desks and
other appropriate classroom equipment, including multiple T-1 access to
demonstrate Internet-related software. Course materials and training methodology
can be customized for the customer's specific needs. Globix's fees depend upon
the size of the class, the complexity of the content and the equipment required.
CUSTOMERS
Globix has established a diversified base of Internet customers in a
variety of data-intensive industries, such as advertising, financing services,
media, publishing and retail. Since initiating Internet services in December
1995, Globix's customer base has grown to approximately 850 large and medium
size business customer accounts, including Acclaim Entertainment, American Red
Cross, Bloomingdale's, BPI Communications (Billboard and Adweek), Dow Jones,
General Media International (Penthouse), Microsoft, National Hockey League,
Nomura Securities, Ogilvy & Mather, RealNetworks, Standard & Poors and Tishman
Speyer Properties. Globix believes it has benefitted from its large number of
business customers located in New York involved in the advertising and media
industries. Because many of these customers design web sites and develop
Internet content for their clients, they are often in a position to refer their
clients to Globix for Internet access, web hosting and co-location services.
INTERNET DATA CENTERS
Globix currently operates an Internet data center in its existing New York
facility. Globix believes its ability to sell additional hosting and co-location
services has been limited in the recent past because its present Internet data
center, with capacity totaling approximately 2,000 square feet, is fully
utilized. Globix is currently building new state-of-the-art SuperPOP facilities
in New York City, London and the San Francisco Bay area, which will increase its
Internet data center capacity to approximately 63,000 square feet. The SuperPOPs
under construction include:
- a 160,000 square foot facility located in New York City, containing a
25,000 square foot Internet data center
- a 62,000 square foot facility located in Santa Clara, California,
containing a 24,000 square foot Internet data center
- a 35,000 square foot facility located in London's West End district,
containing a 14,000 square foot Internet data center
Globix's new Internet data centers will be connected by a fully redundant,
dedicated, high speed network. All three facilities are expected to be completed
and operational by June 30, 1999. The new Internet data center facilities will
feature uninterruptable power supplies with back-up generators, a dry fire
suppression system, raised floor, fault tolerant environmental controls, 24 hour
a day, 7 day a week monitoring and high levels of security. Customers will be
able to select from shared rack facilities, secure cabinets or enclosed cage
facilities based upon their business and technical requirements. In addition,
each facility will feature multiple redundant links to the building housing the
Internet data
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center from the network via separate fiber connections from separate suppliers,
direct links to public peering points, and two separate 20 amp circuits from
separate power grids to each customer's rack or cage.
GLOBIX NETWORK INFRASTRUCTURE
Current Infrastructure. Globix's current network infrastructure is
designed to provide high bandwidth, highly reliable access to its customers
located within the New York metropolitan area. Within its current Internet data
center, Globix deploys a fully-redundant, high-speed, switched local area
network. Globix's current Internet data center is connected to the Internet by
multiple DS-3 fiber connections provided by UUNET, Cable & Wireless and Sprint,
each connected to a dedicated router. Utilizing these diverse connections,
Globix's network dynamically routes traffic over the network of the provider
best able to deliver the data in the most efficient manner. Globix believes that
direct connections to these major providers enables it to provide highly
reliable service levels even when one of the carriers suffers congestion or an
outage. Globix provides leased line connectivity to customers via Bell
Atlantic's OC-12 synchronous optical network, or SONET ring, and connects
customer traffic to the Internet through high speed dedicated leased lines.
Globix also maintains diverse ISDN circuits available to customers as a back-up
to their dedicated lines. Globix's New York facilities contain a network
operation center, staffed 24 hours a day, 7 days a week by system engineers, who
are responsible for monitoring the performance of both Globix's network
equipment and customer equipment.
Network Expansion. Globix is currently establishing its own network
infrastructure to replace its existing leased bandwidth. Globix's network
expansion is designed to offer greater reliability, improved performance and
additional functionality at a lower per unit data transmission cost. Globix's
network will also connect its SuperPOP facilities in New York City, London and
the San Francisco Bay area, as well as Globix's planned points of presence,
known as POPs, in Chicago and Washington, D.C. Globix anticipates that its
network will become fully operational by June 30, 1999.
In October 1998, Globix entered into an Indefeasible Right of Use, or IRU,
agreement with Qwest, under which Globix has the exclusive right to use portions
of Qwest's planned 18,449 mile MacroCapacity fiber network for a 20 year period.
Globix will initially have the right to use 6,500 route miles of OC-3 fiber
capacity coast-to-coast in the United States and a DS-3 fiber link from the
United States to the United Kingdom. Globix intends to use $15.0 million of the
proceeds of this offering to maintain its right to OC-3 capacity. If Globix were
to choose not to exercise this option, its domestic network would be reduced to
DS-3 capacity. The agreement also provides Globix with the right to further
upgrade to OC-48 fiber capacity.
Globix's SuperPOPs and POPs will have multiple and diverse connections to
both the Globix network and local Internet exchange points. Each SuperPOP and
POP will be connected to the Globix network through diverse, redundant OC-3c
links provided by both local telephone companies, including Pacific Bell, Bell
Atlantic, Ameritech, British Telecom and competitive local exchange carriers,
including MFS and Teleport. In addition, these companies will provide access to
the Internet exchange points through the use of multiple DS-3 or OC-3c links.
All lines are strategically placed on different routers to avoid any single
point of failure. Should any SuperPOP lose its connection to either the Globix
network or a local peering point, traffic will be immediately and seamlessly
routed over an alternative link.
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Globix is in the process of establishing relationships, known as peering
relationships, with other Internet service providers. Peering relationships can
take the form of either public peering or private peering. Public peering takes
place at a physical location, usually a network access point, designed for the
exchange of Internet traffic between private Internet service providers. Private
peering involves an agreement between two Internet service providers allowing
traffic to pass between each other's network at private connection points
without having to traverse the public Internet and public peering points.
Globix's planned SuperPOPs and POPs will be located near and connected to most
of the major public Internet peering points, including MAE-East, MAE-West,
Ameritech's network access point and Sprint's network access point. Globix's
presence at these public exchange points, combined with private connections to
other Internet service providers is how Globix connects its customers to the
Internet. Globix is instituting a general policy of keeping significant
unutilized network capacity for its local area network, wide area network and
public and private peering links to allow for spikes in demand or line outages.
Globix is actively pursuing both public and private peering agreements. To date,
we have entered into two private peering agreements.
Globix is currently constructing a global operations center located at the
new SuperPOP in New York City. The global operations center will serve as the
command, control and communications center for all of Globix's network
operations centers and points of presence. The global operations center will be
staffed 24 hours a day, 7 days a week by teams of individuals dedicated to
maintaining the highest quality of service. Globix's entire network
infrastructure, from the national and transatlantic fiber network to the
interface with the customer, will be monitored by network administrators located
in the global operations center. The network administrators will be able to
efficiently identify and correct any network problems either themselves or by
dispatching system engineers located at any of Globix's network operations
centers. The customer support facilities within the global operations center
will utilize state-of-the-art equipment and technologies, including automatic
call distribution, automatic number identification and a database of customer
information and history. The global operations center's advanced network
management and monitoring capabilities will enable Globix to quickly identify
and respond to potential problems or service disruptions, often before a
customer notices the problem.
CUSTOMER SUPPORT
Globix believes that the high quality of its technical and customer service
group has been a major factor in its high customer retention rate. Globix has
made significant investments in customer service personnel and systems that
enhance customer support during the course of the relationship with the
customer, from order entry and billing to selling of additional Internet
products and services. As of December 31, 1998, Globix's technical and customer
service group consisted of 86 individuals. To ensure consistency in the quality
and approach to customer support, customer support staff members attend an
extensive formal technical training and certification program. A member of the
customer support staff is assigned to and tracks each problem or difficulty
experienced by a customer until the situation is satisfactorily resolved. Often
problems or difficulties can be resolved remotely. In addition, field service
personnel are dispatched in the event of an equipment failure that cannot be
serviced remotely. Globix is currently upgrading its customer support system and
will utilize a leading customer support trouble ticketing and workflow
management system from Remedy Corporation to track, route and report on customer
service issues.
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SALES AND MARKETING
Globix has built its sales and marketing approach in an effort to respond
effectively to the growing opportunities in the corporate Internet market.
Globix seeks to combine the technical skills and experience of its direct sales
force with the sales and marketing resources available to it through its
strategic alliances with selected hardware and software manufacturer. As a
result, Globix offers its products and services to a broad and diverse range of
customers in its targeted markets.
Direct Sales. Globix maintains a direct sales force of Internet sales
consultants. Because they are locally based, these Internet sales consultants
are able to meet face-to-face with prospective customers to discuss their
Internet needs and technical requirements and develop tailored solutions. Direct
marketing tactics used include direct contacts with potential corporate accounts
by the Internet sales consultants and computer systems engineers, direct mail,
telemarketing, seminars and trade show participation. Globix has developed
compensation and training programs to attract and train high quality, motivated
Internet sales consultants. As of December 31, 1998, Globix had a direct sales
force consisting of approximately 63 Internet sales consultants.
Strategic Alliances. Globix has established a number of strategic
alliances with selected computer hardware and software manufacturers, including
Microsoft, Sun Microsystems, Check Point Software and RealNetworks, which give
Globix access to potential Internet service customers in the manufacturers'
customer base, while enabling the manufacturers to offer their customers an
integrated package of hardware, software and Internet services and products. In
February 1999, Globix established a strategic relationship with Covad
Communications to assist in the deployment of high-capacity xDSL service to
Globix's customers. Globix believes that these strategic alliances provide
Globix the opportunity to cost-effectively add new customers. Globix jointly
markets with these vendors through direct mail programs, joint seminar
development and joint trade show involvement.
Marketing. Globix's marketing program is intended to build national and
local strength and awareness of the Globix brand. Globix uses radio and print
advertising in targeted markets and publications to enhance awareness and
acquire leads for its direct sales team. Globix's print advertisements are
placed in trade journals, local technology sections of newspapers and
special-interest publications. Globix attempts to create brand awareness by
participating in industry trade shows such as PC Expo, Internet and Electronic
Commerce, and Internet World. Globix also uses direct mailings, telemarketing
programs, Internet marketing, joint marketing and promotional efforts to reach
new corporate customers.
COMPETITION
The market served by Globix is intensely competitive, and competition is
increasing. There are few substantial barriers to entry, and Globix expects that
it will face additional competition from existing competitors and new market
entrants in the future.
Globix believes that a reliable network, a broad range of quality products
and services, a knowledgeable sales force and the quality of customer support
currently are the primary competitive factors in Globix's targeted market and
that price is generally secondary to these factors. Globix's current and
potential competitors in the market include other Internet service providers and
global, regional, and local telecommunications companies.
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Other ISPs. Globix's current and potential competitors in the market
include Internet service providers with a significant national or global
presence which focus on business customers, such as Concentric Network, PSINet
and UUNET. Globix also competes with national and regional ISPs which have
facilities in the New York metropolitan area, including DIGEX, Exodus, Frontier
GlobalCenter, GTE Genuity and Verio. While Globix believes that its level of
customer service and support and target market distinguish it from these
competitors, many of these competitors have greater financial, technical, and
marketing resources, larger customer bases, greater name recognition, and more
established relationships in the industry than Globix.
Telecommunications Carriers. Many long distance companies including AT&T,
Cable & Wireless, MCI WorldCom and Sprint offer Internet access services and
compete with Globix. Recent changes in federal regulation have created greater
opportunities for telecommunications companies to enter the Internet access
market. Globix believes that there is a move toward horizontal integration by
telecommunications companies through acquisitions of or joint ventures with ISPs
to meet the Internet access requirements of the business customers of long
distance and local carriers. Accordingly, Globix expects that it will experience
increased competition from the traditional telecommunications carriers. In
addition to their greater network coverage, market presence, and financial,
technical, and personnel resources, many of these telecommunications carriers
also have large existing commercial customer bases.
Other Competitors. Because Globix offers a broad range of goods and
services, it encounters competition from numerous businesses which provide one
or more similar goods or services. For example, Globix encounters competition
from numerous resellers of computer equipment and providers of video streaming.
Globix does not believe that any of the competitors in its target market offer
as broad a range of Internet products and services.
While Globix believes that its ability to attract business customers and to
market Internet products and services is a key to its future success, there can
be no assurance that its competitors will not introduce comparable products or
services at similar or more attractive prices in the future or that Globix will
not be required to reduce its prices to match competition. Furthermore, there
can be no assurance that more of Globix's competitors will not shift their focus
to attracting business customers, resulting in even more competition for Globix.
There can be no assurance that Globix will be able to offset the effects of any
such competition or resulting price reductions. Increased competition could
result in erosion of Globix's market share and could have a material adverse
effect on Globix's business, financial condition and results of operation.
GOVERNMENT REGULATION
There is currently only a small body of laws and regulations directly
applicable to access to or commerce on the Internet. However, due to the
increasing popularity and use of the Internet, it is possible that a number of
laws and regulations may be adopted at the international, federal, state and
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations have been
proposed and are currently being considered by federal, state and foreign
legislatures with respect to these issues. The nature of any new laws and
regulations and the manner in which existing and new laws and
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regulations may be interpreted and enforced cannot be fully determined. For
example, in 1998, Congress passed and the President signed into law:
- The Digital Millennium Copyright Act, which provides stronger copyright
protection for software, music and other works on the Internet. Under
this law, Internet service providers and web site operators must register
with the U.S. Copyright Office to avoid liability for infringement by
their subscribers.
- Child Online Protection Act, which makes illegal the communication of
material that is harmful to minors on the Internet for commercial
purposes in such a manner as to be available to minors. This law also
contains a section that requires web sites to obtain parental consent
before collecting information from children 12 and younger.
- Child Protection and Sexual Predator Punishment Act, which imposes
stronger criminal penalties for using the Internet to solicit minors for
sexual purposes and criminalizes sending obscene material to persons
under the age of 16.
- The Internet Tax Freedom Act, which provides a three-year moratorium on
taxes deemed discriminatory in order to give state and federal lawmakers
time to develop a more comprehensive approach to Internet taxation.
In addition, there is substantial uncertainty as to the applicability to
the Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy. The vast majority of these laws were adopted prior to the
advent of the Internet and, as a result, did not contemplate the unique issues
of the Internet. Future developments in the law might decrease the growth of the
Internet, impose taxes or other costly technical requirements, create
uncertainty in the market or in some other manner have an adverse effect on the
Internet. These developments could, in turn, have a material adverse effect on
Globix's business, financial condition or results of operations.
The United Kingdom and the European Union have adopted legislation which
has a direct impact on business conducted over the Internet and on the use of
the Internet. For example, the United Kingdom Defamation Act of 1996 protects an
Internet service provider, under certain circumstances, from liability for
defamatory materials stored on its servers. The European Directive on the
Protection of Consumers is expected to have a direct effect on the use of the
Internet for commercial transactions and will create an additional layer of
consumer protection legislation with respect to electronic commerce. In
addition, numerous other regulatory schemes are being contemplated by
governmental authorities in both the United Kingdom and the European Union. As
in the United States, there is uncertainty as to the enactment and impact of
foreign regulatory and legal developments. These developments may have a
material and adverse impact on our business, financial condition and results of
operations.
EMPLOYEES
As of December 31, 1998, Globix employed 217 full-time employees. Of these,
43 were in administration, 88 in sales and marketing and 86 in technical and
customer service. In addition to its full-time employees, Globix also employs
part-time personnel from time to time in various departments. None of Globix's
employees are covered by a collective bargaining agreement. Globix believes that
its employee relations are good.
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FACILITIES
Globix currently leases approximately 32,000 square feet at 295 Lafayette
Street, New York, New York. The facility currently houses Globix's New York
Internet data center and executive offices. When Globix's new facilities become
operational, the current New York facility will be used for sales and
administrative personnel. In July 1998, Globix, through BLP Acquisition LLC, a
New York limited liability company over 99% owned by wholly-owned subsidiaries
of Globix, purchased the land and the nine-story building located at 139 Centre
Street, New York, New York.
In July 1998, Globix signed a triple net lease commencing January 15, 1999
to rent space in Santa Clara, California. In October 1998, Globix signed a lease
for the rental of space at Prospect House, 80 New Oxford Street, London,
England. Each of these facilities is currently under construction and will
ultimately house a SuperPOP, which will include an Internet data center, and
facilities for technical, sales and administrative personnel. Globix expects to
begin operations in the new facilities on a coordinated basis by June 30, 1999.
The following sets forth additional information concerning these
facilities:
<TABLE>
<CAPTION>
APPROXIMATE
EXPIRATION DATE NUMBER
LOCATION IF LEASED OF SQUARE FEET
<S> <C> <C>
295 Lafayette Street 2007 32,000
New York, New York
139 Centre Street Owned 160,000
New York, New York
2807 Mission College Boulevard 2014 62,000
Santa Clara, California
Prospect House 2014 35,000
80 New Oxford Street
London, United Kingdom
</TABLE>
LEGAL PROCEEDINGS
In January 1997, an action was commenced by Triumph Communications and
Fiber Services, Inc. in the Supreme Court of the State of New York, County of
New York against General Media International Inc., Globix and two individuals.
The complaint alleged that Globix tortiously interfered with the plaintiff's
contractual and business relations with General Media International Inc. and
sought unspecified damages. While Globix believed it had meritorious defenses,
in February 1999, it settled the action by paying $40,000 to avoid future
litigation costs.
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MANAGEMENT
The directors, executive officers, and other key employees of Globix, and
their ages and positions as of December 31, 1998, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Marc H. Bell(1).................... 31 President, Chief Executive Officer
and Director
Robert B. Bell(2).................. 59 Executive Vice President, Chief
Financial Officer and Director
Marc Jaffe......................... 31 Senior Vice President, Operations
Alan Levy.......................... 36 Treasurer and Chief Accounting
Officer
Christopher D. Peckham............. 33 Vice President, Network Engineering
Michael J. Martini................. 38 Vice President, North American
Sales
Alayne C. Gyetvai.................. 40 Vice President, Professional
Services
Anthony Previte.................... 33 Vice President, Technology
Francine Formisano................. 45 Vice President, Customer Service
and Support
Terri Pearson ..................... 35 Vice President, U.K. Operations
Robert Milstein ................... 31 Vice President, Marketing
Paul Asher ........................ 29 Vice President, Facilities and
Secretary
Tsuyoshi Shiraishi................. 54 Director
Martin Fox(1)...................... 63 Director
Dr. Richard Videbeck(2)............ 74 Director
Lord Anthony St. John.............. 41 Director
Sid Paterson(1)(2)................. 58 Director
</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 Globix in 1989. Mr. Bell has appeared on numerous television broadcasts
and has been quoted in several national publications regarding Internet-related
topics. Mr. Bell is a member of the Board of Directors of Cybernet Data Systems,
Inc., the "publisher" of the web site Edgar-Online.com. 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. Mr. Bell is the son of Robert B. Bell.
ROBERT B. BELL has served as Executive Vice President and Chief Financial
Officer of Globix since 1994. Mr. Bell is also the Managing Director of Globix's
UK subsidiary. Mr. Bell spent three years at Coopers & Lybrand. Thereafter, he
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, and
specialized in taxation, investments and international real estate joint
ventures. He is the author of Joint Ventures in Real Estate published by John
Wiley & Sons. Prior to 1994, Mr. Bell was for many years an Adjunct Professor at
New York University. Mr. Bell has a B.S. degree from New York University and a
J.D. degree from the University of California at Berkeley. Mr. Bell is the
father of Marc H. Bell.
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MARC JAFFE, Senior Vice President, Operations, joined Globix in January
1995. Prior to joining Globix, Mr. Jaffe was a department manager at Sid
Paterson Advertising Inc. in New York City, which he joined in 1989. Mr. Jaffe
developed an Internet-focused marketing strategy that won the prestigious
CreaTech Award in 1996, presented by Advertising Age magazine, and has spoken at
numerous Internet conferences. Mr. Jaffe graduated from Colgate University,
where he received a Bachelor of Arts Degree.
ALAN LEVY, Treasurer and Chief Accounting Officer, joined Globix 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,
marketer and distributor of cosmetics and over-the-counter pharmaceuticals. From
August 1990 to March 1994, Mr. Levy was a Technical Manager with the American
Institute of Certified Public Accountants. 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.
CHRISTOPHER D. PECKHAM, Vice President, Network Engineering, rejoined
Globix in February 1999. From August 1997 to February 1999, Mr. Peckham was
Manager of Network Engineering for ICON, a national Internet service provider.
From August 1995 through August 1997, Mr. Peckham served as Senior Systems and
Networking Administrator for Globix. From May 1995 through August 1995, Mr.
Peckham held the position of Director of Technology for the Interactive Media
Division of Database America. Mr. Peckham has a B.S. and a Masters degree in
Electrical Engineering from the New Jersey Institute of Technology.
MICHAEL J. MARTINI, Vice President, North American Sales, joined Globix in
January 1999. From May 1997 to October 1998, Mr. Martini was the Vice President,
Global Accounts at Bridge Information Systems (formerly Dow Jones Markets). From
January 1993 to April 1997, Mr. Martini served as the Vice President, Global
Accounts Manager at Reuters America, Inc. Mr. Martini received his Bachelor's
degree in Marketing from Miami University.
ALAYNE C. GYETVAI, Vice President, Professional Services, joined Globix in
January 1999. From September 1994 to August 1998, Ms. Gyetvai held senior-level
positions at Silicon Graphics, Inc., most recently as the Director of Global
Professional Services and Global Web Implementation. From January 1989 to
September 1994, Ms. Gyetvai served as a Site Manager, Senior Systems Engineer
and Senior Consultant for Sun Microsystems. Ms. Gyetvai earned a Bachelor's
degree in Computer Science and a Masters in Probability Mechanics from the
University of Colorado and a Bachelor's degree in Electrical Engineering
Computer Engineering from the University of New Mexico.
ANTHONY PREVITE, Vice President, Technology, joined Globix in October 1998.
From July 1991 to October 1998, Mr. Previte was the Vice President, Special
Projects for Emcor Group, Inc., a publicly traded electrical and mechanical
engineering and construction firm. While at Emcor Group, Mr. Previte was
involved in the design and construction of over one million square feet of
secure data center facilities for companies such as Prudential Securities,
Morgan Stanley and Nomura Securities. Mr. Previte has a degree in aerospace
engineering from Polytechnic Institute of New York.
FRANCINE FORMISANO, Vice President, Customer Service and Support, joined
Globix in September 1998. From December 1996 to August 1998, Ms. Formisano was
the Director of Operations at Dow Jones & Co. Inc. From 1983 through November
1996,
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<PAGE> 52
Ms. Formisano held various positions at IBM, most recently as a Project Manager
in the Electronic Commerce Internet Division.
TERRI PEARSON, Vice President, U.K. Operations, joined Globix in October
1998. Ms. Pearson directs the daily operations of Globix's U.K. subsidiary,
including recruiting. From 1995 to 1998, Ms. Pearson was the Director of Human
Resources and Operations at Demon Internet, U.K.'s largest Internet service
provider. From 1992 to 1995, Ms. Pearson served as the General Manager of World
Viewdata Travel Services, Ltd., a division of BT Prestel.
ROBERT MILSTEIN, Vice President, Marketing, joined Globix in March 1996.
Prior to joining Globix, Mr. Milstein founded and operated his own marketing,
advertising and design services company. Mr. Milstein received his Bachelor of
Science degree from Cornell University.
PAUL ASHER, Vice President, Facilities and Secretary, joined Globix in July
1994. Mr. Asher was named Vice President, Facilities in August 1998. Prior to
that, Mr. Asher served as Globix's Special Projects Manager. Prior to joining
the Company, Mr. Asher founded and operated his own equipment rental company.
Mr. Asher has a Bachelor of Arts degree from the University of Rochester.
TSUYOSHI SHIRAISHI has been a director of Globix since July 1994. Mr.
Shiraishi has been the Chairman of Century World PTE Ltd., an investment
consulting firm, and the Managing Director of Harpoon Holdings Ltd. a British
Virgin Islands holding company, since 1992. From 1990 to 1994, Mr. Shiraishi was
the Director of Marketing & Investment for Kajima Overseas Asia PTE Ltd., a
subsidiary of Kajima Corporation, an international construction company. In
addition, since 1990, Mr. Shiraishi has been Vice Chairman of Century
International Hotels, which operates and manages 21 hotels in the Pacific Rim.
He is the sole shareholder of Harpoon, which is a major stockholder of the
Company.
MARTIN FOX has been a director of Globix since October 1995. Mr. Fox has
been, for more than five years, the President, Chief Executive Officer, and a
director of Initio, Inc., a publicly owned electronic commerce and catalogue
specialty retailer of consumer products.
DR. RICHARD VIDEBECK has been a director of Globix since October 1995.
Since 1983, Dr. Videbeck has been an independent consultant in consumer risk
analysis, particularly for retailers and banks. 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 has been a director of Globix
since October 1997. Since 1978, Lord St. John has served as a sitting member of
the House of Lords of the Parliament of the United Kingdom and an Extra
Lord-in-Waiting to Her Majesty the Queen. He is also a member of The House of
Lords' European Union Sub-Committee on Economic and Financial Affairs, Trade and
External Relations. Since 1993, he has served as a consultant to Merrill Lynch
and is a Registered Representative of the London Stock Exchange. Lord St. John
is also a director of Globix's UK subsidiary and serves as its Director of
Business Development. He received his BA and BSC from Capetown University and
LLB from the University of South Africa and an LLM (Masters of Law) from the
London School of Economics.
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<PAGE> 53
SID PATERSON has been a director of Globix since February 1998. He has been
President and Chief Executive Officer of Sid Paterson Advertising Inc. for more
than five years.
DIRECTOR COMPENSATION
Under the 1995 Stock Option Plan, each non-employee director of Globix who
does not beneficially own more than 5.0% of Globix's outstanding common stock
was entitled to receive annually (on the first day of Globix's fiscal year or
the first day of the term of directorship), options to purchase a total of 3,000
shares of common stock. Such options are immediately exercisable, have a
ten-year term, subject to certain restrictions, and are exercisable at the
market price of the common stock at the date of the grant. Messrs. Fox and
Videbeck each received option grants for 3,000 shares of common stock at a price
of $7.00 per share and $8.63 per share on October 1, 1995 and October 1, 1996,
respectively. In September 1997, such options were re-priced at $6.13 per share
and remain outstanding.
Under the 1998 Stock Option Plan, each non-employee Board member who is
considered a "Non-Employee Director" under Rule 16b-3 of the Securities Exchange
Act of 1934 will be granted an option to purchase shares of common stock on the
earlier of (1) the first day of Globix's fiscal year or (2) the first day of his
or her term as director. The option will become exercisable in full 12 months
after the date of grant. The exercise price per share of each such option will
be the market price per share of common stock on the option grant date. Each
option will have a maximum term of ten years, subject to earlier termination
following the optionee's cessation of Board service. Pursuant to this program,
Mr. Fox, Dr. Videbeck, Lord St. John and Mr. Paterson each received option
grants for 10,000 shares of common stock at a price of $6.25 per share on
October 1, 1998. In addition, in March 1998, Mr. Fox, Dr. Videbeck and Mr.
Paterson each received options to purchase a total of 10,000 shares of common
stock at a price of $6.50 per share, the market price of the underlying shares
on the date of the grant, which became exercisable in September 1998.
In addition, at the discretion of the Board of Directors, directors may be
reimbursed for reasonable travel expenses in attending Board and committee
meetings. In October 1997, Lord St. John received options to purchase a total of
10,000 shares of common stock at a price of $7.25 per share (the fair market
value of the underlying shares on the date of grant) in lieu of receiving any
cash compensation. During the year ended September 30, 1998, Mr. Fox received
$10,195 in consulting fees from Globix.
STOCK OPTION COMMITTEE
Globix's Board of Directors has a Stock Option Committee that administers
the 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
Globix's Board of Directors has an Audit Committee that monitors Globix's
corporate financial reporting and its internal and external audits, 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 Paterson
and Dr. Videbeck.
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<PAGE> 54
EXECUTIVE COMPENSATION
The following Summary Compensation Table sets forth the compensation for
the years ended September 30, 1998, 1997 and 1996 for Globix's Chief Executive
Officer and its four most highly compensated executive officers (other than the
Chief Executive Officer) whose cash compensation exceeded $100,000 in the year
ended September 30, 1998 (collectively referred to as the named executive
officers):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
--------------------------- ------------
OTHER
ANNUAL SECURITIES
COMPEN- UNDERLYING
NAME AND POSITION YEAR SALARY BONUS SATION OPTIONS
<S> <C> <C> <C> <C> <C>
Marc H. Bell..................................... 1998 $250,000 $ -- $ -- 211,500
President and Chief Executive Officer 1997 200,000 -- -- --
1996 165,000 -- -- --
Robert B. Bell................................... 1998 151,042 -- -- 30,000
Executive Vice President and Chief Financial
Officer 1997 125,000 -- -- 90,000
1996 100,504 -- -- --
Marc Jaffe....................................... 1998 133,250 -- -- 50,000
Senior Vice President, Operations 1997 89,000 -- -- 25,000
1996 64,083 -- -- 5,000
William T. Jahnke................................ 1998 100,000 -- -- 10,000
Vice President, Solution Sales 1997 82,800 -- -- 12,000
1996 80,000 -- -- 6,000
Scott Safran..................................... 1998 107,203 -- -- 20,000
Vice President, Training 1997 60,547 -- -- 5,000
1996 17,385 -- -- --
</TABLE>
53
<PAGE> 55
OPTION GRANTS IN LAST FISCAL YEAR
OPTION GRANTS IN FISCAL 1998
The following table summarizes options granted during the year ended
September 30, 1998 to the named executive officers:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SECURITIES GRANTED TO PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES OPTION TERM(3)
NAME OPTIONS IN FISCAL EXERCISE EXPIRATION -----------------------
---- GRANTED(1) YEAR(2) PRICE DATE 5% 10%
<S> <C> <C> <C> <C> <C> <C>
Marc H. Bell.................. 69,500 10.2% $7.15 3/17/08 $230,623 $ 674,798
20.8 6.50 3/17/08 563,501 1,471,024
142,000
Robert B. Bell................ 30,000 4.4 6.50 3/17/08 119,049 310,780
Marc Jaffe.................... 50,000 7.3 5.00 1/08/08 152,628 398,436
William T. Jahnke............. 10,000 1.5 5.00 1/08/08 30,526 79,687
Scott Safran.................. 20,000 2.9 5.00 1/08/08 61,051 159,374
</TABLE>
- -------------------------
(1) These options have been granted pursuant to Globix's 1998 Stock Option Plan.
The options to purchase 142,000 shares of common stock granted to Marc H.
Bell and the options to purchase 30,000 shares of common stock granted to
Robert B. Bell are fully vested. All other options listed on this table vest
over five years at a rate of 20.0% on each anniversary of the date of the
grant.
(2) During the year ended September 30, 1998, Globix granted employees options
to purchase 682,375 shares of common stock under the 1995 and 1998 Stock
Option Plans.
(3) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. The 5% and
10% assumed annual rates of compounded stock price appreciation are mandated
by rules of the Securities and Exchange Commission and do not represent
Globix's estimate or projection of Globix's future common stock prices.
These amounts represent certain assumed rates of appreciation in the value
of Globix's common stock from the fair market value on the date of grant.
Actual gains, if any, on stock option exercises are dependent on the future
performance of the common stock and overall stock market conditions. The
amounts reflected in the table may not necessarily be achieved.
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<PAGE> 56
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
The following table shows the number of shares covered by both exercisable
and unexercisable stock options held by the named executive officers as of the
year ended September 30, 1998, and the values for exercisable and unexercisable
options. Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation is based on
the fair market value at September 30, 1998 of $6.25 per share, less the
exercise price. No options were exercised during the year ended September 30,
1998 by the named executive officers.
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SEPTEMBER 30, 1998 SEPTEMBER 30, 1998
-------------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Marc H. Bell............. 142,000 69,500 $ -- $ --
Robert B. Bell........... 120,000 -- 11,250 --
Marc Jaffe............... 11,666 68,334 625 63,750
William T. Jahnke........ 8,000 20,000 375 13,250
Scott Safran............. 1,667 23,333 208 25,417
</TABLE>
EMPLOYMENT AGREEMENT
Globix and Marc H. Bell are parties to an employment agreement, dated as of
April 10, 1998, which expires on June 30, 2005. The 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, beginning on June 30,
1999, Mr. Bell is entitled to receive an annual bonus equal to 10,000 times the
increase, if any, of the per share market price of Globix's common stock on June
30 of the current year over the highest per share market price of Globix's
common stock on each July 1 during the term of the agreement.
Pursuant to the terms of the employment agreement, Mr. Bell is entitled to
receive stock options from Globix. In March 1998, Mr. Bell received stock
options to purchase 69,500 shares of common stock at an exercise price of $7.15
per share and 142,000 shares of common stock at an exercise price of $6.50 per
share.
Pursuant to the employment agreement, Mr. Bell is entitled to receive, on
September 30 of each fiscal year, an option to purchase shares of common stock
equal to 25% of any increase in the total shares of Globix common stock
outstanding during the prior twelve months as a result of equity offerings or
acquisitions. The exercise price of the option would be equal to the market
price of Globix's common stock on the date of grant and would be exercisable
immediately. On March 2, 1999 Mr. Bell agreed to surrender this right pursuant
to an amendment to the employment agreement, which is conditioned upon the
consummation of this offering. Under the terms of the amendment, in lieu of this
right, Mr. Bell is entitled to receive a one-time option to purchase an amount
of shares of Globix common stock equal to 25% of the difference between the
number of shares outstanding immediately after the closing of this offering and
the number outstanding as of October 1, 1998. The exercise price of this option
will be the same as the price to the public in this offering.
In September 1998, Mr. Bell borrowed $155,000 from Globix. The loan matures
five years after the date made and bears interest at the rate of 8.0% per annum.
Interest which
55
<PAGE> 57
accrues during the first two years of the loan is not payable until the end of
such two year period.
Pursuant to the terms of Mr. Bell's previous employment agreement, he
borrowed a total of $145,408 from Globix during 1997. The loan is due in 2002
and bears interest at the rate of 8.75% per annum.
STOCK OPTION PLANS
1995 Stock Option Plan. Globix has adopted the 1995 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, Globix. 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 will be determined by
the Stock Option Committee and be paid in cash, certified or bank check, or in
stock of Globix valued at its then fair market value or by having Globix
withhold, from the shares of common stock otherwise issuable upon exercise of
the option, that number of shares having an aggregate fair market value equal to
the aggregate exercise price. Options generally become exercisable in three
equal successive annual installments over the three-year period measured from
the grant date. In the event of an acquisition of Globix (whether by merger or
asset sale), the Board may provide that all outstanding options will terminate
if not exercised within 30 days of notice from Globix provided that the
acquisition is consummated within six months of such notice. 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. Globix 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.
Under the 1995 Stock Option Plan, each non-employee Board member (excluding
any person who directly or indirectly beneficially owns more than 5.0% of
Globix's common stock) will be granted a fully-vested immediately exercisable
option to purchase 3,000 shares of common stock on the earlier of (1) the first
day of Globix's fiscal year or (2) the first day of his or her term as director.
The exercise price per share of each such option will be the fair market value
per share of common stock on the option grant date. Each option will have a
maximum term of ten years, subject to earlier termination following the
optionee's cessation of Board service.
As of February 26, 1999, total unexercised options to purchase
approximately 306,616 shares of Common Stock were outstanding under the 1995
Stock Option Plan, including options to purchase approximately 179,500 shares
granted to Globix's executive officers and directors. The exercise prices of the
total unexercised options under the 1995 Stock Option Plan range from $5.25 to
$12.63 per share. The term of the options is ten years from the date of grant.
1998 Stock Option Plan. Globix has adopted 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, Globix. The Stock Option Committee has discretionary authority
to determine the types of stock options to be granted, the persons 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 will be determined by the Stock Option Committee and may be paid
in cash, certified or bank check, or in stock of Globix valued at its then
56
<PAGE> 58
fair market value or by having Globix withhold, from the shares of common stock
otherwise issuable upon exercise of the option, that number of shares having an
aggregate fair market value equal to the aggregate exercise price. Options
generally become exercisable in five equal successive annual installments over
the five-year period measured from the grant date. In the event of an
acquisition of Globix (whether by merger or asset sale), the Board may provide
that all outstanding options will terminate if not exercised within 30 days of
notice from Globix provided that the acquisition is consummated within six
months of such notice. 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 Globix's stockholders
at the 1998 Annual Meeting of Stockholders held on April 16, 1998. Globix 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.
Under the 1998 Stock Option Plan, each non-employee Board member who is
considered a "Non-Employee Director" under Rule 16b-3 of the Securities Exchange
Act of 1934 will be granted an option to purchase shares of common stock on the
earlier of (1) the first day of Globix's fiscal year or (2) the first day of his
or her term as director. The option will become exercisable in full 12 months
after the date of grant. The exercise price per share of each such option will
be the fair market value per share of common stock on the option grant date.
Each option will have a maximum term of ten years, subject to earlier
termination following the optionee's cessation of Board service. Non-Employee
Directors are eligible to receive additional option grants at the discretion of
the Stock Option Committee. See "Director Compensation" for grants made to
directors under the 1998 Stock Option Plan.
As of February 26, 1999, Globix had outstanding options to purchase
1,048,416 shares of Common Stock under the 1998 Stock Option Plan, including
options to purchase 624,416 shares granted to the Company executive officers and
directors. The exercise price of total unexercised options under the 1998 Stock
Option Plan range from $5.00 to $15.00 per share. The term of the options is ten
years from the date of grant.
1999 Stock Option Plan and Amendment to Marc H. Bell's Employment
Agreement. On March 2, 1999, Globix's board of directors approved the 1999
Stock Option Plan having terms similar to those of the 1995 and 1998 Stock
Option Plans. The board also approved an amendment to Marc H. Bell's employment
agreement, conditioned upon the closing of this offering. Under the amendment,
Mr. Bell has agreed to surrender his right to receive an option each year to
purchase shares of common stock in an amount equal to 25% of any increase in the
number of outstanding shares of common stock which occurred during the prior
twelve months. In its place, Mr. Bell will be entitled to receive a one-time
option to purchase shares of Globix common stock in an amount equal to 25% of
the difference between the number of shares of common stock outstanding
immediately after the closing of this offering and the number outstanding as of
October 1, 1998. The exercise price of this option will be the same as the price
to the public in this offering. It is anticipated that options to purchase up to
an aggregate of approximately 2,500,000 shares of common stock may be granted
pursuant to the 1999 Stock Option Plan and the amendment to Mr. Bell's
employment agreement.
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<PAGE> 59
CERTAIN TRANSACTIONS
Mr. Marc H. Bell currently has two loans outstanding from Globix. In
September 1998, Mr. Bell borrowed $155,000 from Globix pursuant to an employment
agreement, dated April 10, 1998. This loan matures in 2003 and bears interest at
the rate of 8.0% per annum. Under Mr. Bell's previous employment agreement, Mr.
Bell borrowed $145,408 from Globix. This loan matures in 2002 and bears interest
at the rate of 8.75% per annum. Both loans are currently outstanding. See
"Management -- Employment Agreement."
Globix utilizes Sid Paterson Advertising, Inc., an entity controlled by Mr.
Sid Paterson, a director of Globix, as its agent to place our advertisements in
various print publications. Amounts paid to Sid Paterson Advertising, Inc. for
the year ended September 30, 1998 were approximately $507,000, which includes
amounts due to the publications for printing the advertisements.
In July 1998, Globix, through BLP Acquisition LLC, a New York limited
liability company over 99% owned by wholly-owned subsidiaries of Globix,
purchased the land and the nine-story building located at 139 Centre Street, New
York, New York. The total acquisition cost of approximately $17.0 million
includes the cost of purchasing the right to acquire the Centre Street property.
Of the $17.0 million, $15.3 million was paid in July 1998 and $1.65 million is
due in June 1999, secured by a standby letter of credit. Globix also entered
into an agreement with the minority partner of BLP, giving it the right to
purchase, and the minority partner the right to sell, at any time prior to
November 2005, the minority interest at any time for a purchase price of $2.6
million. This obligation is secured by a standby letter of credit. A former
owner of the right to purchase the Centre Street property is entitled to
additional consideration if BLP sells the Centre Street property. Such amount
will be equal to the greater of (a) $1.0 million (subject to increase after June
1, 2018 by 10% and an additional 10% every fifth year thereafter), and (b) 10%
of the gross sales price of the property if such sales price is greater than
$17.5 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources."
In connection with Globix's initial public offering in 1996, Marc H. Bell
and Harpoon, an entity controlled by Mr. Shiraishi, a director of the Company,
have each deposited 210,000 shares of the common stock owned by them (the
Deposit Shares) with Globix. Globix holds such shares pursuant to a Share
Deposit Agreement, dated January 24, 1996 among Harpoon, Mr. Bell, Globix and
Rickel & Associates, Inc. The Deposit Shares will be returned to their
respective owners in January 2004.
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<PAGE> 60
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Globix common stock (a) as of February 26, 1999 and (b) immediately
following the offering by: (1) the selling stockholders, (2) each person or
entity who is known by Globix to own beneficially 5.0% or more of the
outstanding shares of common stock, (3) each executive officer in office as of
February 26, 1999, (4) each director, and (5) all executive officers and
directors of Globix as a group. The applicable percentage of ownership is based
on 4,153,396 shares outstanding on February 26, 1999 and 8,234,186 shares to be
outstanding upon consummation of this offering, but does not include shares to
be issued if the overallotment option is exercised. Unless otherwise indicated,
the address for those listed below is c/o Globix Corporation, 295 Lafayette St.,
New York, NY 10012.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
PRIOR AFTER
TO THE OFFERING THE OFFERING
------------------- SHARES -------------------
NUMBER PERCENT OFFERED NUMBER PERCENT
<S> <C> <C> <C> <C> <C>
SELLING STOCKHOLDERS:
VMR Luxembourg S.A.(1)............... 125,000 3.0% 125,000 -- -- %
Gregg A. Smith(2).................... 92,657 2.2 20,353 72,304 *
Kenneth D. Rickel(3)................. 27,340 * 27,340 -- --
Robert Rickel(4)..................... 9,113 * 9,113 -- --
Marvin Numeroff(5)................... 9,113 * 9,113 -- --
Richard Silverman(6)................. 9,113 * 9,113 -- --
David Prince(7)...................... 1,823 * 1,823 -- --
Jordan Feinstein(8).................. 1,823 * 1,823 -- --
Michael Eaton(9)..................... 4,556 * 2,112 2,444 *
EXECUTIVE OFFICERS, DIRECTORS
AND 5% STOCKHOLDERS:
Marc H. Bell(10)..................... 1,713,093 39.8 -- 2,336,610 24.8
Robert B. Bell(11)................... 120,051 2.8 -- 120,051 1.4
Marc Jaffe(12)....................... 26,667 * -- 26,667 *
Alan Levy(13)........................ 4,501 * -- 4,501 *
Tsuyoshi Shiraishi(14)............... 612,500 14.7 400,000 212,500 2.6
Martin Fox(15)....................... 16,000 * -- 16,000 *
Dr. Richard Videbeck(16)............. 16,000 * -- 16,000 *
Lord Anthony St. John(17)............ 10,000 * -- 10,000 *
Sidney Paterson(18).................. 20,000 * -- 20,000 *
Janus Capital Corporation(19)........ 513,872 12.3 -- 513,872 6.2
All executive officers and directors
as a group (9 persons)............ 2,138,812 47.4% 400,000 2,762,329 28.7%
</TABLE>
- -------------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
(1) Does not include 225,000 shares pledged by Marc H. Bell pursuant to a
security agreement. VMR Luxembourg S.A.'s address is Chateau Woltz, 34 rue
Neuve, L-5560, Remich, Luxembourg.
(2) Mr. Smith's address is 599 Lexington Avenue, New York, NY 10022.
(3) Mr. Kenneth D. Rickel's address is 300 E. 54th Street, New York, NY 10022.
(4) Mr. Robert Rickel's address is 7255 Ayshire Lane, Boca Raton, FL 33434.
59
<PAGE> 61
(5) Mr. Numeroff's address is 81 Wooster Street, New York, NY 10012.
(6) Mr. Silverman's address is 61 Broadway, New York, NY 10006.
(7) Mr. Prince's address is 805 Third Avenue, New York, NY 10022.
(8) Mr. Feinstein's address is 805 Third Avenue, New York, NY 10022.
(9) Mr. Eaton's address is 1 State Street Plaza, New York, NY 10004.
(10) Includes (a) 944,693 shares owned directly by Mr. Bell (225,000 shares of
which are pledged to VMR Luxembourg S.A., which financed Mr. Bell's
acquisition of such shares pursuant to a security agreement), and (b) the
right to acquire 155,900 shares pursuant to currently exercisable stock
options. The number of shares shown as owned prior to the offering includes
612,500 shares owned by Harpoon, an entity controlled by Mr. Shiraishi, a
director of Globix. Harpoon is selling 400,000 shares in this offering.
Harpoon's shares are subject to an Irrevocable Proxy entered into between
Harpoon and Marc H. Bell, dated as of October 1, 1995 (the Irrevocable
Proxy), pursuant to which Harpoon has granted Mr. Bell the sole right to
vote such shares with respect to the election of Globix's directors. The
number of shares shown as owned after the offering includes the shares
subject to an option which Mr. Bell will receive under his employment
agreement, as amended, immediately after the closing of this offering. See
"Management -- Employment Agreement."
(11) Includes the right to acquire 120,000 shares pursuant to currently
exercisable stock options.
(12) Includes the right to acquire 26,667 shares pursuant to currently
exercisable stock options and options which vest within 60 days.
(13) Includes the right to acquire 4,500 shares pursuant to currently
exercisable stock options.
(14) Mr. Shiraishi's shares are held through Harpoon. Mr. Shiraishi's address is
Harpoon Holdings, Ltd., 2 Handy Road, #11-09 Cathay Building, Singapore
229233.
(15) Includes the right to acquire the number of shares shown pursuant to
currently exercisable stock options. Mr. Fox's address is 10 Henry Street,
Teeterboro, NJ 07608.
(16) Includes the right to acquire the number of shares shown pursuant to
currently exercisable stock options. Dr. Videbeck's address is 3249 East
Angler's Stream, Avon Park, FL 33825.
(17) Includes the right to acquire 10,000 shares pursuant to currently
exercisable stock options. Does not include 3,000 shares held in trust for
the benefit of Lord St. John's wife and children, to which Lord St. John
disclaims beneficial ownership. Lord St. John's address is 97 Cadogan
Gardens, London SW3 2RE, United Kingdom.
(18) Includes the right to acquire 10,000 shares pursuant to currently
exercisable stock options. Mr. Paterson's address is 99 Madison Avenue, New
York, NY 10016.
(19) Based upon a Schedule 13G filed on February 10, 1999 by Janus Capital
Corporation, Thomas H. Bailey and Janus Venture Fund. The shares shown are
subject to shared voting and investment power. Includes 4,850 currently
exercisable warrants, each of which is convertible into 3.52 shares of
common stock. The address of each of the filing persons is 100 Fillmore
Street, Denver, CO 80206-4923.
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<PAGE> 62
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Globix consists of 20,000,000 shares of
common stock, par value $0.01 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. On March 2, 1999, Globix's board of
directors approved an amendment to Globix's certificate of incorporation to
increase the number of authorized shares of common stock from 20,000,000 to
50,000,000, par value $0.01 per share. This amendment to the certificate of
incorporation will be submitted for stockholder approval at the next annual
meeting of stockholders.
COMMON STOCK
As of February 26, 1999 there were 4,153,396 shares of common stock
outstanding. Holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders of Globix. 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
Globix, 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 Globix 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, par value $.01
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 Globix. 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 Globix currently has no plans to issue
any shares of preferred stock.
WARRANTS
Globix has outstanding warrants to purchase 563,200 shares of its common
stock, which were issued in connection with the debt financing in April 1998.
The holders of the warrants are entitled to purchase 3.52 shares of common stock
at a purchase price of $14.03 per share at any time prior to May 1, 2005, the
expiration date of the warrants. The number of shares which may be purchased
upon the exercise of the warrants and the purchase price for these
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<PAGE> 63
shares are subject to adjustment in certain events, including the payment by
Globix of dividends, other than cash dividends.
In connection with its public offering of common stock in early 1996,
Globix sold to the underwriter of the offering, Rickel & Associates, Inc., for
nominal consideration, underwriter's warrants. The underwriter's warrants expire
on January 23, 2001 and entitle Rickel or its distributees to purchase 121,417
shares of common stock and additional warrants to purchase 60,858 shares. The
underwriter's warrants are exercisable at $10.94 per share of common stock and
$0.17 per additional warrant. The additional warrants expire on January 23,
2001, and are exercisable at $11.64 per share of common stock. Holders of
underwriter's warrants are exercising their warrants and selling shares of
common stock in this offering. After this offering, there will be outstanding
underwriter's warrants to purchase 80,454 shares of common stock and additional
warrants to purchase 21,031 shares of common stock.
REGISTRATION RIGHTS
Commencing on May 1, 1999, the holders of 25.0% of the common stock
purchase warrants issued on April 30, 1998 in connection with Globix's $160.0
million debt financing, are entitled to demand and piggyback registration rights
with respect to the registration of the shares of common stock underlying the
warrants under the Securities Act of 1933, as amended. Globix is not required to
effect more than three registrations pursuant to the demand registration rights.
The demand and piggyback registration rights are subject to conditions and
limitations, among them the right of an underwriter of an offering to limit the
number of shares of common stock underlying the warrants for inclusion in the
registration. Globix is generally required to bear all of the expenses of all
such registrations, except underwriting discounts and commissions.
The holders of the warrants originally issued to the underwriter of
Globix's initial public offering, which will remain outstanding after this
offering, are entitled to demand and piggyback registration rights for their
warrant shares. The demand registration rights expire on January 24, 2001 and
the piggyback registration rights expire on January 24, 2004. The demand and
piggyback registration rights are subject to conditions and limitations, among
them the right of an underwriter of an offering to limit the number of shares of
common stock underlying the warrants for inclusion in the registration. Globix
is generally required to bear all of the expenses of all such registrations,
except underwriting discounts and commissions.
Pursuant to a Consulting Agreement dated as of November 18, 1998, between
Globix and Value Management Research A.G., Globix is required to register up to
125,000 shares owned by Value Management Research Luxembourg S.A. under the
Securities Act by February 16, 1999. This Registration Statement is intended to
satisfy Globix's obligations under the Consulting Agreement with respect to such
shares. Value Management Research has exercised its rights to register 125,000
shares in this offering.
ANTI-TAKEOVER EFFECTS OF DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Globix is a Delaware Corporation and subject to Section 203 of the Delaware
General Corporation Law. This section requires the vote of at least two-thirds
of the outstanding voting stock of a company not owned by an interested
stockholder to approve certain business combinations. Section 203 defines
interested stockholder as any entity or person owning 15.0% or more of the
outstanding voting stock of the company and any entity or person affiliated
with, controlling on controlled by such entity or person. As a result, this
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<PAGE> 64
statute may discourage attempts to acquire Globix, including attempts that might
result in a premium over the market price for the shares of common stock held by
stockholders.
Globix's by-laws provide that stockholders must comply with an advance
notice procedure for the nomination of candidates for election as directors as
well as for other stockholder proposals to be considered at annual meetings of
stockholders. In general, notice of intent to nominate a director or raise
matters at annual meetings will have to be received by Globix. These provisions
may preclude stockholders from bringing matters before an annual meeting of
stockholders or from making nominations for directors.
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be used for a variety of corporate purposes, including future public
offerings to raise additional capital, corporate acquisitions and employee
benefit plans. The existence of authorized but unissued shares of common stock
and preferred stock could render more difficult or discourage an attempt to
obtain control of Globix by means of a proxy contest, tender offer, merger or
otherwise.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for Globix's common stock is Continental
Stock Transfer & Trust Company.
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<PAGE> 65
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, Globix will have an aggregate of
8,234,186 shares of common stock outstanding, assuming no exercise of the
underwriters' overallotment option and no exercise of outstanding options or
warrants, other than the exercise of warrants by certain selling stockholders.
All of the outstanding shares will be freely tradable, except shares held by
"affiliates" (as that term is defined in Rule 144 promulgated under the
Securities Act) of Globix after this offering. Shares held by affiliates may
only be sold in compliance with the limitations described below.
In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated), including an affiliate, who has
beneficially owned shares for at least one year is entitled to sell, within any
three-month period commencing 90 days after the date of this prospectus, a
number of shares that does not exceed the greater of (1) 1% of the then
outstanding shares of common stock (approximately 82,341 shares immediately
after this offering) or (2) the average weekly trading volume in the common
stock during the four calendar weeks preceding the date on which notice of such
sale is filed, subject to certain restrictions. In addition, a person who is not
deemed to have been an affiliate of Globix at any time during the 90 days
preceding a sale and who has beneficially owned the shares proposed to be sold
for at least two years would be entitled to sell such shares under Rule 144(k)
without regard to the requirements described above. To the extent that shares
were acquired from an affiliate of Globix, such person's holding period for the
purpose of effecting a sale under Rule 144 commences on the date of transfer
from the affiliate.
On July 26, 1996, Globix filed a registration statement with the Commission
pursuant to which it registered the 360,000 shares of common stock issued or
issuable upon the exercise of options granted under the 1995 Stock Option Plan.
Such registration statement became immediately effective upon filing. On June
24, 1998, Globix filed a registration statement with the Commission pursuant to
which it registered the 1,200,000 shares of common stock issued or issuable upon
the exercise of options granted under the 1998 Stock Option Plan. Such
registration statement became immediately effective upon filing. As of February
26, 1999, there were outstanding options to purchase 1,355,032 shares of common
stock which will be eligible for sale in the public market from time to time
subject to vesting under the 1995 and 1998 Stock Option Plans. The possible sale
of a significant number of such shares by the holders thereof may have an
adverse affect on the price of the common stock.
Globix's directors, officers and certain stockholders have agreed that they
will not sell, directly or indirectly, any shares of common stock without the
prior written consent of Donaldson, Lufkin & Jenrette for a period of 120 days
from the date of this prospectus. See "Underwriting."
Globix has agreed not to sell or otherwise dispose of any shares of common
stock during the 120-day period following the date of the prospectus, except
that Globix may issue shares of common stock upon the exercise of outstanding
warrants and options and grant options to purchase shares of common stock under
the existing stock option plans and the stock option plan and amendment to Marc
H. Bell's employment agreement approved by the board of directors on March 2,
1999. In addition, Globix may issue shares of common stock in connection with
any acquisition of another company if the terms of such issuance provide that
such common stock shall not be resold prior to the expiration of the 120-day
period referenced in the preceding sentence.
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<PAGE> 66
Following this offering, under certain circumstances and subject to certain
conditions, holders of warrants to purchase 664,685 shares of Globix's
outstanding common stock will have certain registration rights with respect to
such shares of common stock underlying the warrants to require Globix to
register such shares of common stock under the Securities Act, and they will
have certain rights to participate in any future registration of securities by
Globix. See "Description of Securities -- Registration Rights."
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<PAGE> 67
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated 1999, the underwriters named below, who are represented by Donaldson,
Lufkin & Jenrette Securities Corporation, Bear, Stearns & Co. Inc. and Lehman
Brothers Inc. have severally agreed to purchase from Globix the number of shares
set forth opposite their names below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS: SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.......
Bear, Stearns & Co. Inc...................................
Lehman Brothers Inc.......................................
Total.................................................. 4,605,790
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters by their counsel and
to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares (other than those covered by the overallotment
option described below) if they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to certain dealers at the public offering
price less a concession not in excess of $ per share. The underwriters may
allow, and such dealers may re-allow, a concession not in excess of $ per
share on sales to certain other dealers. After the initial offering of the
shares to the public, the representatives may change the public offering price
and such concessions.
The following table shows the underwriting fees to be paid to the
underwriters by Globix and the selling stockholders in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional shares of common stock.
<TABLE>
<CAPTION>
PAID BY SELLING
PAID BY GLOBIX STOCKHOLDERS
----------------------------- -----------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
<S> <C> <C> <C> <C>
Per share................
Total....................
</TABLE>
Globix will pay the offering expenses, estimated to be $1.0 million.
Globix has granted to the underwriters an option, exercisable for 30 days
from the date of the underwriting agreement, to purchase up to 690,869
additional shares at the public offering price less the underwriting fees. The
underwriters may exercise such option solely to cover overallotments, if any,
made in connection with this offering. To the extent that the underwriters
exercise such option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to such underwriter's initial purchase commitment.
Globix and the selling stockholders have agreed to indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Action of 1933, or to
66
<PAGE> 68
contribute to payments that the underwriters may be required to make in respect
of any of those liabilities.
Globix, the executive officers and directors of Globix, and certain
stockholders of Globix have agreed that, for a period of 120 days from the date
of this prospectus, they will not, without the prior written consent of
Donaldson, Lufkin & Jenrette: (1) offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer or dispose
of, directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or (2) enter
into any swap or other arrangement that transfers all or a portion of the
economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in clause (1) or (2) is
to be settled by the delivery of common stock, or such other securities, in cash
or otherwise). In addition, during such period, Globix has agreed not to file
any registration statement with respect to, and each of its executive officers,
directors and certain stockholders of Globix has agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock without the prior written consent of Donaldson, Lufkin &
Jenrette.
Other than in the United States, no action has been taken by Globix, the
selling stockholders or the underwriters that would permit a public offering of
the shares of common stock included in this offering in any jurisdiction where
action for that purpose is required. The shares included in this offering may
not be offered or sold, directly or indirectly, nor may this prospectus or any
other offering material or advertisement in connection with the offer and sale
of any such shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of the common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock included in this offering in any jurisdiction where that
would not be permitted or legal.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of common stock in the open market to cover syndicate short
positions or to stabilize the price of the common stock. These activities may
stabilize or maintain the market price of the common stock above independent
market levels. The underwriters are not required to engage in these activities
and may end any of these activities at any time.
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<PAGE> 69
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has been
passed upon for Globix by Milberg Weiss Bershad Hynes & Lerach LLP, One
Pennsylvania Plaza, New York, New York 10119. Certain legal matters in
connection with the offering have been passed upon for the Underwriters by
Brobeck, Phleger & Harrison LLP, New York, New York.
EXPERTS
The financial statements included in this Prospectus and elsewhere in the
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said reports.
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<PAGE> 70
AVAILABLE INFORMATION
Globix files reports, proxy statements and other information with the
Commission. Those reports, proxy statements and other information may be
obtained:
- - At the Public Reference Room of the Commission, Room 1024--Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549;
- - At the public reference facilities at the Commission's regional offices
located at Seven World Trade Center, 13th Floor, New York, New York 10048 or
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661;
- - By writing to the Commission, Public Reference Section, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549;
- - At the offices of The Nasdaq Stock Market, Reports Section, 1735 K Street,
N.W., Washington, D.C. 20006; or
- - From the Internet site maintained by the Commission at http://www.sec.gov,
which contains reports, proxy and information statements and other information
regarding issuers that file electronically with the Commission.
Some locations may charge prescribed or modest fees for copies.
Globix has filed with the Commission a registration statement under the
Securities Act of 1933, as amended, with respect to the common stock offered
hereby. This prospectus, which is a part of the registration statement, does not
contain all the information set forth in, or annexed as exhibits to, such
registration statement, certain portions of which have been omitted pursuant to
rules and regulations of the Commission. For further information with respect to
Globix and the common stock, reference is made to such registration statement,
including the exhibits thereto, copies of which may be inspected and copied at
the aforementioned facilities of the Commission. Copies of such registration
statement, including the exhibits, may be obtained from the Public Reference
Section of the Commission at the aforementioned address upon payment of the fee
prescribed by the Commission.
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<PAGE> 71
GLOBIX CORPORATION AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets -- As of September 30, 1997 and
September 30, 1998........................................ F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1996, September 30, 1997 and September 30,
1998...................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the years ended September 30, 1996,
September 30, 1997 and September 30, 1998................. F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1996, September 30, 1997 and September 30,
1998...................................................... F-6
Notes to Consolidated Financial Statements.................. F-8
Consolidated Balance Sheet -- As of December 31, 1998....... F-22
Consolidated Statements of Operations for the three months
ended
December 31, 1997 and December 31, 1998................... F-23
Consolidated Statements of Cash Flows for the three months
ended
December 31, 1997 and December 31, 1998................... F-24
Notes to Consolidated Financial Statements.................. F-25
</TABLE>
F-1
<PAGE> 72
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: GLOBIX CORPORATION:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (formerly Bell Technology Group, Ltd.) (a Delaware corporation) and
Subsidiaries as of September 30, 1997 and 1998, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended September 30, 1998. 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 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1998 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
December 14, 1998
New York, New York
F-2
<PAGE> 73
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
------------------------------
1997 1998
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............................. $ 2,401 $ 61,473
Marketable securities.................................. -- 14,638
Accounts receivable, net of allowance for doubtful
accounts of $195 and $410, respectively............. 3,260 4,861
Inventories............................................ 487 392
Prepaid expenses and other current assets.............. 728 1,699
Restricted cash........................................ -- 10,317
------- --------
Total current assets................................ 6,876 93,380
Investments, restricted.................................. 325 50,163
Property and equipment, net.............................. 3,549 30,872
Debt issuance costs, net of accumulated amortization of
$393................................................... -- 6,214
Other assets............................................. 275 1,637
------- --------
Total assets........................................ $11,025 $182,266
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term borrowings.................................. $ 2,001 $ --
Current portion of notes payable....................... 335 2,398
Accounts payable....................................... 2,011 6,185
Accrued expenses....................................... 426 193
Accrued interest expense............................... -- 8,667
Deferred revenues...................................... 123 78
------- --------
Total current liabilities........................... 4,896 17,521
Long-term note payable, net of current portion........... 923 1,199
Long-term debt, net of unamortized discount of $2,108.... -- 157,892
Other long term liabilities.............................. 192 2,935
------- --------
Total liabilities................................... 6,011 179,547
------- --------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $.01 par value; 500,000 shares
authorized; no shares issued and outstanding........ -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 3,448,450 and 4,140,116 shares issued
and outstanding, respectively....................... 34 41
Additional paid-in capital............................. 10,069 17,247
Unrealized gain on securities available for sale....... -- 1,676
Accumulated deficit.................................... (5,089) (16,245)
------- --------
Total stockholders' equity.......................... 5,014 2,719
------- --------
Total liabilities and stockholders' equity.......... $11,025 $182,266
======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
<PAGE> 74
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
Revenues............................ $ 10,374 $ 17,400 $ 20,595
Costs and expenses:
Cost of revenues.................. 8,599 13,699 13,322
Selling, general and
administrative................. 3,187 6,036 10,696
Depreciation and amortization..... 219 675 1,310
Research and development.......... 57 -- --
---------- ---------- ----------
Total costs and expenses....... 12,062 20,410 25,328
Loss from operations................ (1,688) (3,010) (4,733)
Interest income................... 121 72 1,953
Interest and financing expense.... (99) (177) (8,376)
Write-off of debt issuance
costs.......................... (257) -- --
---------- ---------- ----------
Loss before taxes................... (1,923) (3,115) (11,156)
Benefit from taxes.................. 30 -- --
---------- ---------- ----------
Net loss............................ $ (1,893) $ (3,115) $ (11,156)
========== ========== ==========
Basic and diluted loss per share.... $ (0.72) $ (1.01) $ (3.08)
========== ========== ==========
Weighted average common shares
outstanding--basic and diluted.... 2,633,400 3,075,235 3,625,794
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 75
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED
GAIN
COMMON STOCK ADDITIONAL ON SECURITIES TOTAL
------------------ PAID-IN AVAILABLE ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL FOR SALE DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balance, September 30, 1995............... 1,725,000 $18 $ 362 $ -- $ (81) $ 299
Stock issuance in connection with
bridge financing................... 35,710 -- 250 -- -- 250
Proceeds from Initial Public
Offering, net of expenses of
$1,602............................. 1,322,500 13 7,421 -- -- 7,434
Net loss............................. -- -- -- -- (1,893) (1,893)
--------- --- ------- ------ -------- --------
Balance, September 30, 1996............... 3,083,210 31 8,033 -- (1,974) 6,090
Proceeds from Private Placement,
net................................ 400,000 4 1,979 -- -- 1,983
Proceeds from exercise of stock
options and warrants, net.......... 8,098 -- 56 -- -- 56
Correction of outstanding
shares............................. (42,858) (1) 1 -- -- --
Net loss............................. -- -- -- -- (3,115) (3,115)
--------- --- ------- ------ -------- --------
Balance, September 30, 1997............... 3,448,450 34 10,069 -- (5,089) 5,014
Unrealized increase in value of
investments........................ -- -- 1,676 -- 1,676
Warrants issued in connection with
senior note offering............... -- 2,253 -- -- 2,253
Issuance of common stock upon
exercise of options and warrants,
net................................ 691,666 7 4,925 -- -- 4,932
Net loss............................. -- -- -- (11,156) (11,156)
--------- --- ------- ------ -------- --------
Balance, September 30, 1998............... 4,140,116 $41 $17,247 $1,676 $(16,245) $ 2,719
========= === ======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 76
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $(1,893) $(3,115) $(11,156)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization............ 219 675 1,310
Write-off and amortization of discount
and debt issuance costs............... 250 -- 538
Benefit for deferred taxes............... (30) -- --
Changes in operating assets and
liabilities:
Increase in accounts receivable.......... (424) (1,412) (1,602)
Decrease in inventories.................. 85 271 96
(Increase) decrease in prepaid expenses
and other current assets.............. (183) 31 (1,571)
(Increase) decrease in other assets...... (69) 48 (207)
Increase (decrease) in accounts
payable............................... (45) 736 4,175
(Decrease) increase in accrued
expenses.............................. 122 278 (233)
Increase in accrued interest expense..... -- -- 8,667
(Decrease) increase in deferred
revenues.............................. 91 (44) (45)
Other long term liabilities.............. -- -- 143
------- ------- --------
Net cash provided by (used in)
operations............................... (1,877) (2,532) 115
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in restricted cash.............. -- -- (10,317)
Investment in marketable securities...... -- -- (12,962)
Investment in long-term restricted
investments........................... (400) -- (49,838)
Investment in Cybernet Data Systems...... -- -- (1,000)
Purchases of property and equipment, net
of landlord reimbursement in 1997..... (1,955) (1,542) (23,270)
------- ------- --------
Net cash used in investing activities...... (2,355) (1,542) (97,387)
------- ------- --------
</TABLE>
F-6
<PAGE> 77
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
---------------------------------------------
1996 1997 1998
<S> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from senior note offering net of
offering expenses of $6,608.............. $ -- $ -- $153,392
Net proceeds from (repayments of) short
term borrowings....................... (712) 2,001 (2,001)
Shareholder loan......................... -- (145) (155)
Proceeds from notes payable for equipment
refinancing........................... (83) 873 --
Repayments of notes payable.............. -- (196) (424)
Proceeds from private placement.......... -- 1,544 600
Proceeds from initial public offering,
net of offering costs of $1,602....... 7,434 -- --
Repayments of stockholder loan........... (287) -- --
Proceeds from exercise of stock options
and warrants, net..................... -- 56 4,932
------- ------- --------
Net cash provided by financing
activities............................... 6,352 4,133 156,344
------- ------- --------
Net increase in cash and cash
equivalents.............................. 2,120 59 59,072
Cash and cash equivalents, Beginning of
period................................... 222 2,342 2,401
------- ------- --------
Cash and cash equivalents, Ending of
period................................... $ 2,342 $ 2,401 $ 61,473
======= ======= ========
Supplemental disclosure of cash flow
information:
Cash paid for interest................... $ 54 $ 166 $ 223
Cash paid for income taxes............... 13 28 51
Non-cash investing and financing
activities:
Equipment acquired under capital lease
obligations........................... -- 540 1,113
Capital expenditures included in accounts
payable, notes payable and other long
term liabilities...................... -- -- 6,702
Proceeds receivable associated with
private placement..................... -- 600 --
Issuance of common stock in connection
with private placement................ -- 100 --
Warrants issued in connection with senior
note offering......................... -- -- 2,253
Issuance of common stock in connection
with bridge financing................. 250 -- --
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE> 78
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Globix Corporation and Subsidiaries (the "Company") was originally
incorporated in New York in 1989 as NAFT International Ltd. In July 1994, PFM
Technologies Corporation, a newly formed affiliate of NAFT, acquired NAFT and
its affiliated corporations in a tax-free exchange of common stock. The Company
reincorporated in Delaware in 1995 under the name Bell Technology Group Ltd. The
Company changed its name to Globix Corporation on June 1, 1998.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements herein include the accounts of the
Company, NAFT International Ltd., PFM Communications Inc., NAFT Computer Service
Inc., GameNet Corp., Bluestreak Digital Inc., BLP Acquisitions LLC (since July
1998), ATC Merger Corp., BTG Technology Group Ltd. and Globix Limited. 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
Commencing with 1996, the Company began segment reporting of its results of
operations into two divisions: (1) the "Internet Division" and (2) the "Server
Sales and Integration Division." The Internet Division provides dedicated
Internet access, web hosting, co-location, value-added solutions (such as
e-commerce, streaming media, network security and web development), and
instructor-led corporate training. The Server Sales and Integration Division
provides Internet-related hardware and software sales and systems and network
integration.
In the opinion of management, the Company will be able to finance its
business as currently conducted from its current working capital and from the
proceeds of the $160.0 million debt offering completed in April 1998 at least
through fiscal year 1999.
F-8
<PAGE> 79
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
SEGMENT INFORMATION
The Company's activities fall within two reporting segments: the Internet
Division and the Server Sales and Integration Division. The following table sets
forth segment information for the years ended September 30, 1996, 1997 and 1998:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997 1998
(IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Internet.................................. $ 641 $ 2,414 $ 6,448
Server sales and integration.............. 9,733 14,986 14,147
------- ------- --------
Consolidated........................... $10,374 $17,400 $ 20,595
======= ======= ========
Operating income (loss):
Internet.................................. $ (360) $ (84) $ 1,146
Server sales and integration.............. (268) (379) 721
------- ------- --------
Consolidated(1)........................ $(1,688) $(3,010) $ (4,733)
======= ======= ========
Identifiable assets:
Internet.................................. $ 1,132 $ 2,105 $ 7,808
Server sales and integration.............. 3,443 5,782 3,732
------- ------- --------
Consolidated(2)........................ $ 7,810 $11,025 $182,266
======= ======= ========
</TABLE>
(1) Includes unallocated corporate overhead of $1,060, $2,547 and $6,600,
respectively, for the years ended September 30, 1996, 1997 and 1998. Such
amounts include executive salaries of $389, $616 and $824, respectively, for
the years ended September 30, 1996, 1997 and 1998, as well as rent, payroll
charges for administrative staff and professional fees.
(2) Includes corporate assets not allocable to a particular segment of $3,235,
$3,138, and $170,726 for the years ended September 30, 1996, 1997 and 1998,
respectively.
PER SHARE DATA
During 1997, SFAS No. 128 "Earnings per Share" was issued and became
effective for the Company's September 30, 1998 financial statements. SFAS No.
128 establishes new standards for computing and presenting earnings per share
(EPS). The new standard requires the presentation of basic EPS and diluted EPS.
Basic EPS is calculated by dividing income available to common shareholders by
the weighted average number of shares of common stock outstanding during the
period. Diluted EPS is calculated by dividing income available to common
shareholders by the weighted average number of common shares outstanding
adjusted to reflect potentially dilutive securities. Diluted EPS has not been
presented since the inclusion of outstanding options would be antidilutive. The
Company's September 30, 1996 and 1997 financial statements have been restated to
reflect this pronouncement.
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. As of
September 30, 1997 and 1998 cash equivalents consist of $2,401 and $71,790
($61,473 included in cash and cash equivalents and $10,317 included in
restricted cash), respectively.
F-9
<PAGE> 80
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. The Company maintains cash and cash equivalents with
various major financial institutions which invest primarily in U.S. Government
instruments, high quality corporate obligations, certificates of deposit and
commercial paper. The Company believes that concentrations of credit risk with
respect to trade accounts receivable are limited due to the large number of
entities comprising the Company's customer base.
SIGNIFICANT VENDOR
One vendor comprised approximately $2,384 or 21% of the Company's inventory
purchases during the fiscal year ended September 30, 1998. If such vendor ceases
to supply the Company, management is confident it can procure comparable
services at similar costs elsewhere.
MAJOR CUSTOMER
One customer comprised approximately $2,355 or 11% of the Company's
revenues during the fiscal year ended September 30, 1998.
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.
INVESTMENTS
Marketable equity securities are reported at fair value. Unrealized gains
and losses from those securities which are classified as available-for-sale are
reported as a separate component of shareholders' equity.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, less accumulated depreciation or
amortization computed on the straight-line method. Buildings are depreciated
over their estimated useful life of forty years. Furniture and equipment are
depreciated over their estimated useful lives, generally five years. Leasehold
improvements are amortized over the term of the lease or life of the asset,
whichever is shorter.
LONG-LIVED ASSETS
The Company's policy is to record long-lived assets at cost. These assets
are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amounts of the assets may not be recoverable. Furthermore, the
assets are evaluated for continuing value and proper useful lives by comparison
to expected future cash projections.
REVENUE RECOGNITION
Revenues consist primarily of dedicated Internet access fees, web hosting
and co-location fees, sales of third-party hardware and software, fees from
systems and network integration, sales of systems administration and web site
management services sales of value-added Internet solutions (such as e-commerce,
streaming media, network security and web development), and fees from
instructor-led corporate training. Payments received
F-10
<PAGE> 81
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 derived
from value-added Internet solutions are recognized as the project progresses.
Projects are generally completed within a three month period.
COST OF REVENUES
Cost of revenues in the Company's Internet Division consists primarily of
telecommunications costs and direct labor costs for systems administration, web
site management, value-added solutions and corporate training. For the Server
Sales and Integration Division, the cost of revenues primarily consists of
acquisition costs of third-party hardware and software.
RESEARCH AND 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 6 for additional
discussion.
RECLASSIFICATION
Certain amounts in the fiscal 1997 financial statements have been
reclassified to conform with fiscal 1998 presentation.
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.
F-11
<PAGE> 82
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for the reporting and display of
comprehensive income and its components in a full set of financial statements.
The Company's consolidated financial statements will be required to include
comprehensive income disclosures beginning with the first quarter of fiscal year
1999. Restatement of prior period information will be made for comparative
purposes. Comprehensive loss for the years ended September 30, 1996, 1997 and
1998 amounted to $1,893, $3,115 and $9,480, respectively.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information," which changes the way public companies
report information about operating segments. SFAS No. 131, which is based on the
management approach to segment reporting, establishes requirements to report
selected segment information quarterly and to report entity-wide disclosures
about products and services, major customers, and the material countries in
which the entity holds assets and reports revenue. The Company will adopt SFAS
No. 131 in fiscal year 1999. The Company does not believe the adoption of SFAS
No. 131 will have a material effect on results of operation or financial
condition.
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1997 1998
<S> <C> <C>
Land............................... $ -- $ 1,997
Building........................... -- 19,075
Leasehold improvements............. 686 3,554
Computer hardware and software and
network equipment................ 3,725 7,907
Furniture and delivery equipment... 238 749
Less: accumulated depreciation and
amortization..................... (1,100) (2,410)
------- -------
Property and equipment, net........ $ 3,549 $30,872
======= =======
</TABLE>
Included in total property and equipment at September 30, 1997 and 1998, is
$1,413 and $2,526, respectively, of assets held under capital lease obligations
and $417 and $417, respectively, representing internally developed software
costs. Also, included in building and land is $1,098 of capitalized interest as
of September 30, 1998 related to the purchase of the facility at 139 Centre
Street. In addition, included in computer hardware and software and network
equipment is $153 and $153, respectively related to the implementation of a new
MIS system in September 30, 1997 and 1998.
Depreciation and amortization expense for the years ended September 30,
1996, 1997 and 1998, was $219, $675 and $1,310, respectively.
On July 1, 1998, the Company through BLP Acquisitions LLC, a New York
limited liability company and over 99% owned by the Company, purchased the land
and building located at 139 Centre Street, New York, New York, from Bank Leumi
USA, a New York
F-12
<PAGE> 83
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
banking corporation. The nine story building contains approximately 160,000
square feet of floor space. The Company intends to house its New York SuperPOP
facility and operations in the new premises. The Company expects the New York
SuperPOP facility to be completed and operational by June 30, 1999.
A former owner of the right to purchase the Centre Street property is
entitled to additional consideration if BLP sells the Centre Street property.
Such amount will be equal to the greater of (a) $1.0 million (subject to
increase after June 1, 2018 by 10% and an additional 10% every fifth year
thereafter), or (b) 10% of the gross sales price of the property if such sales
price is greater than $17.5 million.
3. OTHER ASSETS
Other assets includes the investment in Cybernet Data Systems, loans due
from Marc H. Bell, security deposits and other assets.
On July 23, 1998, the Company entered into a Securities Purchase Agreement
with Cybernet Data Systems, Inc., a Delaware Corporation(Cybernet). Cybernet is
the publisher of the web site "Edgar-Online.com." Under the Securities Purchase
Agreement, the Company purchased for $1.0 million, 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
semiannually 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. If the Company converted
the Cybernet Debenture into common stock and exercised its Cybernet Warrant, the
Company would own approximately 20% of the outstanding shares of Cybernet. In
addition, Cybernet has signed a five year exclusive contract with the Company
for web hosting services.
4. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value.
LONG AND SHORT-TERM DEBT
The carrying amount of the Company's short-term borrowings approximates
fair value. The fair value of the Company's long-term debt, including current
portions, is determined based on market prices for similar debt instruments or
on the current rates offered to the Company for debt with similar maturities.
As of September 30, 1998, the fair value based upon quotes from securities
dealers and carrying value of the Company's notes were $128,000 and $157,892,
respectively.
5. SENIOR NOTE OFFERING
In April 1998, the Company completed a $160.0 million debt financing
consisting of 160,000 units, each unit consisting of a note in the principal
amount of $1 and one warrant to purchase 3.52 shares of common stock (total of
563,200 shares of common stock) at a
F-13
<PAGE> 84
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
purchase price of $14.03 per share. The notes will mature on May 1, 2005.
Interest on the notes accrues at a rate of 13.0% per annum and is payable
semi-annually in arrears on May 1 and November 1 of each year, commencing
November 1, 1998. Globix has deposited with an escrow agent $57,000, that
together with the interest received thereon, will be sufficient to pay, when
due, the first six interest payments. The notes are collateralized by a first
priority security interest in the escrow account. The notes are senior unsecured
obligations of the Company and rank pari passu in right of payment with all
existing and future unsecured and unsubordinated indebtedness and rank senior in
right of payment to any future subordinated indebtedness. In connection with the
warrants issued with the senior notes, the Company has assigned an original
issue discount of approximately $2,300. In addition, the Company incurred costs
associated with the offering of approximately $6,600. These amounts are being
amortized by the Company over seven years.
6. 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 $0.10 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 $0.10 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.
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. The net proceeds amounted to approximately $800.
In June 1998, the Company called for redemption of the IPO Warrants. Prior
to the redemption date of July 8, 1998, 581,472 of the 592,055 then outstanding
IPO Warrants were exercised at an exercise price of $7.44 per common share. The
remaining 10,483 warrants were redeemed by the Company at a price of $.10 per
IPO Warrant. The net proceeds recognized by the Company from the IPO warrant
redemption amounted to approximately $4.3 million.
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. 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 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 was received by the Company in September
1997. The remaining $600 was classified as a current asset as of September 30,
1997 and was received by the Company in October 1997.
F-14
<PAGE> 85
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BRIDGE FINANCING
In October 1995, the Company borrowed $250 in a bridge financing. The notes
issued in connection with the bridge financing carried interest at 9.0% 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 and interest expense of $37
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. Options 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 (see note 3) is equal to or greater than 100% of the
fair market value of the stock on the date of grant.
In April 1998, the Company's Board of Directors (the Board) adopted, and
its stockholders approved, the 1998 Stock Option Plan (the 1998 Plan), which
provides for the grant of stock options to purchase up to 1,200,000 shares of
common stock to any employee, non-employee director, or consultant at the
Board's discretion. Under the 1998 Plan, these options may not be exercised
after ten years from the date of grant. Options issued to employees are
exercisable ratably over a five-year period. Under the 1998 Plan, options shall
be granted each year to non-employee directors on the first day of the Company's
fiscal year or on the first day of the term as director at a purchase price
equal to the fair market value on the date of grant. In addition, the
Non-Employee director stock options shall be exercisable in full twelve months
after the date of grant unless determined otherwise by the stock option
committee.
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 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
F-15
<PAGE> 86
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
No. 123, the Company's net loss and loss per share would have been increased to
the following pro forma amounts:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
------------------------------
1996 1997 1998
<S> <C> <C> <C>
Net loss:
As reported............................... $(1,893) $(3,115) $(11,156)
Pro forma................................. (2,316) (3,308) (13,394)
Basic and diluted loss per share:
As reported............................... $ (0.72) $ (1.01) $ (3.08)
Pro forma................................. (0.88) (1.08) (3.69)
</TABLE>
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.
Option activity for the three years ended September 30, 1998 is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
NUMBER 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............................... 390,897 7.41
Canceled.............................. (284,065) 8.39
Exercised............................. (7,998) 7.00
-------- -----
Options outstanding, September 30,
1997.................................. 301,564 6.13
Granted............................... 682,375 6.25
Canceled.............................. (62,018) 5.91
Exercised............................. (6,316) 6.13
-------- -----
Options outstanding, September 30,
1998.................................. 915,605 $6.39
======== =====
</TABLE>
There were 563,062 options available for future grant at September 30,
1998.
The weighted average fair value of options granted is $2.89, $3.76 and
$5.27 for the years ended September 30, 1996, 1997 and 1998, 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 1996, 1997 and 1998, respectively: risk-free
interest rate of 5.8%, 6.2% and 5.6% expected life of 4, 6 and 6 years; expected
volatility of 42%, 42% and 111% and expected dividend yield of 0%.
F-16
<PAGE> 87
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
The following table summarized information with respect to stock options
outstanding at September 30, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ----------------------------
NUMBER OF OPTIONS WEIGHTED NUMBER OF OPTIONS
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
AT REMAINING AVERAGE AT AVERAGE
RANGE OF SEPTEMBER 30, CONTRACTUAL EXERCISE SEPTEMBER 30, EXERCISE
EXERCISE PRICES 1998 LIFE PRICE 1998 PRICE
<S> <C> <C> <C> <C> <C>
$5.00 - $7.50 844,230 8.33 $ 5.97 412,153 $ 6.36
$7.50 - $10.75 50,375 9.25 10.73 1,667 10.50
$10.75 - $13.25 21,000 8.86 12.86 4,333 12.63
</TABLE>
DEPOSIT SHARES
In connection with the Company's initial public offering, Marc H. Bell and
Harpoon Holdings Ltd. 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.
7. COMMITMENTS AND CONTINGENCIES
REVOLVING CREDIT AGREEMENT
The Company has a Revolving Credit Agreement with NationsCredit (Nations)
which may be used to finance its inventory up to a maximum of $1.0 million. The
availability of credit is based upon the balance of collateral available which
is 80% of its current accounts receivable and 50% of its inventory. As of
September 30, 1998, the Company had available credit of $1.0 million of which
$268 is outstanding. The outstanding balance as of September 30, 1997 was
approximately $2.0 million.
NOTES PAYABLE
In connection with the purchase of the land and building at 139 Centre
Street, New York, New York in July 1998 (see note 2), the Company is indebted to
an individual for the rights to purchase this property in the amount of $1,650.
The $1,650 is due on demand and has been recorded in current portion of notes
payable as of September 30, 1998. The Company also entered into an agreement
with the minority partner of BLP Acquisitions LLC, giving the Company the right
to purchase, and the minority partner the right to sell, the minority interest
at any time for a purchase price of $2,600. Interest at 7.0% per annum is
payable monthly in arrears. The $2,600 is payable no later than November 15,
2005 and has been recorded in other long-term liabilities as of September 30,
1998.
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 year ended September 30, 1996, 1997 and 1998 was $253, $549 and
$560, respectively.
F-17
<PAGE> 88
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 escalating to $564 in the
final year. Under the lease, the landlord reimbursed the Company $500 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
$325. In order to obtain a standby letter of credit, the Company maintains a
restricted certificate of deposit presently in the amount of $325. As of March
1999, this amount is to be reduced to $250 if the Company is not in default
under the terms of the lease. Therefore, $75 of this deposit is classified as
other current assets and $250 is included in "Long-term Restricted Cash" of the
Company's consolidated balance sheets as of September 30, 1998.
Globix maintains a $1.0 million credit line from Cisco Systems Capital
Corporation (CSC) to lease Cisco System products and associated peripherals. The
terms of this line, which was entered into in December 1997, provided for 180
days of borrowing and a maximum borrowing limit of $1.0 million. However, CSC
has informally permitted the Company to continue to borrow under this line and
to exceed the stated $1.0 million limit. Amounts borrowed under the line are to
be repaid over a 36 month period with the Company having the option of
purchasing the equipment for $1.00 at the end of the lease term. As of September
30, 1998, approximately $945 was outstanding under this credit line.
The Company refinanced certain of its furniture and computer equipment in
April 1997 in the amount of approximately $874 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. As of September 30, 1998, approximately $524
was outstanding under this loan.
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.
In July 1998, the Company signed a 15 year triple net lease commencing
January 15, 1999 to rent approximately 62,000 square feet of office space in
Santa Clara, California at an annual base rental of approximately $1.3 million.
The building is currently under construction, and completion is scheduled for
December 1998. The Company intends to house its San Francisco Bay area SuperPOP
facility in its Santa Clara property. The Company expects the San Francisco Bay
area SuperPOP to be operational by June 30, 1999. As per the lease agreement,
the Company will be required to pay a security deposit of $400 upon completion
of certain construction terms.
The Company has signed an additional long-term agreement with Qwest
Communications and a lease for its London facility as described in the
subsequent events note (see note 11).
F-18
<PAGE> 89
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Future minimum lease and loan payments under these agreements including
payments under the London lease (see note 11) are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
SEPTEMBER 30, OPERATING CAPITAL
<S> <C> <C>
1999......................................... $ 1,382 $ 915
2000......................................... 3,561 783
2001......................................... 3,570 440
2002......................................... 3,579 75
2003......................................... 3,595 --
Thereafter................................... 35,586 --
Less: Amount representing interest... -- (250)
------- ------
Present value of net minimum lease
payments.................................. $51,273 $1,963
======= ======
</TABLE>
8. INCOME TAXES
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 Company's ability to realize
benefits by generating taxable income in the future. The Company has a tax loss
carryforward of approximately $17.0 million at September 30, 1998. This
carryforward expires between 2011 and 2013. Pursuant to Section 382 of the
Internal Revenue Code, the usage of these net operating loss carryforwards may
be partially limited due to changes in ownership that have occurred. The Company
has not yet determined the impact that changes in ownership have had on net
operating loss carryforwards, if any.
The benefit from the provision for taxes of $30 for the fiscal year ended
September 30, 1996 represents reversal of deferred taxes provided in prior
years.
The provision for income taxes on historical net income for the years ended
September 30, 1996, 1997 and 1998 differs from the amount computed by applying
the federal statutory rate due to the following:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997 1998
<S> <C> <C> <C>
Statutory federal income tax rate............... (34)% (34)% (34)%
State and local taxes, net of federal benefit... (11) (11) (11)
Other........................................... (1) (0) (0)
Valuation allowance............................. 44 45 45
--- ---- ----
Effective income tax rate....................... (2)% (0)% (0)%
=== ==== ====
</TABLE>
F-19
<PAGE> 90
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-------------------------------
1996 1997 1998
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Tax depreciation and amortization in excess
of book depreciation and amortization.... $ (13) $ (265) $ (418)
Capitalized interest........................ -- -- (497)
Net operating loss carry forward............ 734 1,908 7,508
Allowance for doubtful accounts............. 29 255 242
Deferred Rent............................... -- 81 152
Valuation allowance......................... (750) (1,979) (6,987)
----- ------- -------
Total net deferred tax
liabilities...................... -- -- --
===== ======= =======
</TABLE>
9. 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 per year and a bonus equal to 5% of the annual pre-tax net income of the
Company in excess of $1.0 million (50% of the Bonus Pool) to the extent, if any,
that the Bonus Pool exceeds $100.
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. These loans
were pursuant to his existing employment agreement. The loans mature in June
2002.
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
per year, increasing annually at the rate of 5% 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 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. Any loan taken
thereunder will mature five years after the date made and bear interest at the
rate of 8.0% per annum. However, the interest accruing during the first two
years is not payable until the end of such two year period. Mr. Bell borrowed
from the Company $155 in September, 1998.
10. RELATED PARTIES TRANSACTION
The Company utilizes Sid Paterson Advertising, Inc., an entity controlled
by Mr. Sid Paterson, a director of the Company, as its agent to place the
Company advertisements in various print publications. Amounts paid to Sid
Paterson Advertising, Inc. for the year
F-20
<PAGE> 91
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ended September 30, 1998 were approximately $507, which includes amounts due to
the publishing companies to pay for the Company's advertisements.
11. SUBSEQUENT EVENTS
QWEST COMMUNICATIONS
In October 1998, the Company entered into an IRU agreement with Qwest
Communications Corporation (Qwest), under which the Company has the exclusive
right to use portions of Qwest's planned 18,449 mile MacroCapacity fiber network
for a 20 year period. The Company will initially have the right to use 6,500
route miles of OC-3 fiber capacity coast-to-coast in the United States and a
DS-3 fiber link from the United States to the United Kingdom. The Company is
currently committed to Qwest for a fee of $9,192 of which it had paid $919 at
contract. The balance is payable by October 1999. In addition, the Company has
the right to increase its capacity on the Qwest network at the cost of $1.50
multiplied by the number of DS-0 (64 kbs per second) V&H Miles (length in miles
between the termination points of a Qwest network segment using airline miles
and determined based on the vertical and horizontal geographic coordinates of
the locations of the termination points). The Company is also liable for a
monthly operating and maintenance charge of $.0035 per each DS-0 V&H Mile. The
Company will amortize the total contract value over the term of the agreement of
20 years.
LONDON FACILITY
In October 1998, the Company signed a lease with Corston Holdings Limited
(a United Kingdom Corporation) for a 15 year term through September 2014 for the
rental of 33,500 square feet at Prospect House, 80 New Oxford Street, London,
United Kingdom, at an annual base rent of L1,080 (approximately $1,836 in U.S.
dollars) with rental payments commencing in October 1999. The Company intends to
build a SuperPOP data center in the new premises, which will also provide space
for sales and administrative personnel.
F-21
<PAGE> 92
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
SEPT. 30, DEC 31,
1998 1998
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 61,473 $ 43,110
Marketable securities..................................... 14,638 14,210
Accounts receivable, net of allowance for doubtful
accounts of $435 and $410 as of December 31, 1998 and
September 30, 1998, respectively....................... 4,861 5,343
Inventories............................................... 392 326
Prepaid expenses and other current assets................. 1,699 2,633
Restricted cash........................................... 10,317 5,117
-------- --------
Total current assets.............................. 93,380 70,739
Investments, restricted..................................... 50,163 45,356
Property and equipment, net................................. 30,872 60,985
Debt issuance costs, net of accumulated amortization of $644
and $393, respectively.................................... 6,214 5,963
Other assets................................................ 1,637 1,858
-------- --------
Total assets...................................... $182,266 $184,901
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable.......................... 2,398 2,790
Accounts payable.......................................... 6,185 11,829
Accrued expenses and other liabilities.................... 193 8,767
Accrued interest expense.................................. 8,667 3,467
Deferred revenues......................................... 78 31
-------- --------
Total current liabilities......................... 17,521 26,884
Long-term note payable,less current portion............... 1,199 1,848
Long-term debt, net of discount........................... 157,892 157,977
Other long term liabilities............................... 2,935 2,944
-------- --------
Total liabilities................................. 179,547 189,653
-------- --------
Commitments and contingencies Stockholders' equity
(deficit)
Preferred stock, $.01 par value; 500,000 shares
authorized; no shares issued and outstanding.......... -- --
Common stock, $.01 par value; 20,000,000 shares
authorized; 4,140,116 shares issued and outstanding... 41 41
Additional paid-in capital............................. 17,247 17,247
Accumulated other comprehensive income................. 1,676 2,024
Accumulated deficit.................................... (16,245) (24,064)
-------- --------
Total stockholders' equity (deficit).............. 2,719 (4,752)
-------- --------
Total liabilities and stockholders' equity........ $182,266 $184,901
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-22
<PAGE> 93
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-------------------
1997 1998
<S> <C> <C>
Revenues.................................................... $4,740 $ 5,929
Costs and expenses:
Cost of revenues.......................................... 3,114 3,702
Selling, general and administrative....................... 1,610 5,566
Depreciation and amortization............................. 242 507
------ -------
Total costs and expenses.......................... 4,966 9,775
Loss from operations........................................ (226) (3,846)
Interest and financing expenses, net of interest income of
$944 in 1998 and $7 in 1997............................ (56) (3,973)
------ -------
Loss before taxes........................................... (282) (7,819)
Provision for taxes......................................... -- --
Net loss.................................................... $ (282) $(7,819)
====== =======
Basic and diluted loss per share............................ $(0.08) $ (1.89)
Weighted average common shares outstanding -- basic and
diluted................................................... 3,448 4,140
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-23
<PAGE> 94
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------
1997 1998
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $ (282) $ (7,819)
Adjustments to reconcile net (loss) to net cash provided
by (used in) operating activities:
Depreciation and amortization.......................... 242 507
Amortization of discount and debt issuance costs....... -- 336
Provision for bad debt................................. 20 25
Changes in operating assets and liabilities:
(Increase) in accounts receivable......................... (307) (506)
Decrease (increase) in inventories........................ (7) 65
Decrease (increase) in prepaid expenses and other current
assets................................................. 543 (934)
(Increase) in other assets................................ (83) (221)
Increase in accounts payable.............................. 541 5,644
Increase (decrease) in accrued expenses and other
liabilities............................................ (391) 274
(Decrease) in accrued interest expense.................... -- (5,200)
Decrease in deferred revenues............................. (35) (47)
Increase in other long-term liabilities................... -- 9
------ --------
Net cash provided by (used in) operations................... 241 (7,867)
------ --------
Cash flows from investing activities:
Purchases of property and equipment....................... (829) (22,320)
Use of restricted cash.................................... -- 5,200
Use of long-term restricted investments................... -- 4,807
Sale of marketable securities............................. -- 776
------ --------
Net cash used in investing activities....................... (829) (11,537)
------ --------
Cash flows from financing activities:
Repayment of short term borrowings........................ (91) --
Proceeds of notes payable................................. 212 1,328
Repayments of notes payable............................... (313) (287)
Additional costs incurred with private placement in
September 1997......................................... (59) --
------ --------
Net cash provided by (used in) financing activities......... (251) 1,041
------ --------
Net decrease in cash, cash equivalents and restricted
cash...................................................... (839) (18,363)
Cash, cash equivalents and restricted cash, beginning of
period................................................. 2,401 61,473
------ --------
Cash, cash equivalents and restricted cash, end of
period................................................. $1,562 $ 43,110
====== ========
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 33 $ 10,557
====== ========
Non-cash investing activities (see Note 7)
</TABLE>
The accompanying notes are an integral part of these consolidated statements
F-24
<PAGE> 95
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
The consolidated balance sheets as of December 31, 1998, statements of
operations for the three months ended December 31, 1997 and 1998, and the
statements of cash flows for the three months ended December 31, 1997 and 1998
have been prepared by Globix Corporation and Subsidiaries (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/A for the fiscal year ended September 30, 1998 on file with the Securities
and Exchange Commission. Results of operations for the three 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.
For those subsidiaries and affiliates whose functional currency is
considered to be the British Pound, assets and liabilities are translated using
period-end rates of exchange. Revenues and expenses are translated at the
average rates of exchange during the period. Translation differences of those
foreign companies' financial statements are included in the cumulative
translation adjustment account of shareholders' equity.
In the opinion of management, the unaudited interim financial statement
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. SENIOR NOTE OFFERING
In April 1998, the Company successfully completed a private offering for
$160.0 million consisting of 160,000 units, each unit consisting of $1 principal
amount of 13% Senior Notes due 2005 and one warrant to purchase 3.52 shares of
common stock (total of 563,200 shares of common stock) at a purchase price of
$14.03 per share. The Notes will mature on May 1, 2005. Interest on the notes is
payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998. The Company has deposited with an escrow agent
$57.0 million, that together with the interest received thereon, will be
sufficient to pay, when due, the first six interest payments. The Notes are
collateralized by a first priority security interest in the escrow account. The
Notes are senior unsecured obligations of the Company and rank pari passu in
right of payment with all existing and future unsecured and unsubordinated
indebtedness and rank senior in right of payment to any future subordinated
indebtedness. The accrued interest expense on the balance sheet represents two
months of interest on the notes which will be paid from the escrow account on
May 1, 1999. An original issue discount of approximately $2.3 million and
expenses of the offering of approximately $6.6 million are being amortized over
seven years.
3. NOTES PAYABLE
The Company maintains a $1.0 million credit line from Cisco Systems Capital
Corporation to lease Cisco products and associated peripherals. The terms of
this line, which was entered into in December 1997, provided for 180 days of
borrowing and a maximum borrowing limit of $1.0 million. However, Cisco has
informally permitted the Company to continue to borrow under this line and to
exceed the stated $1.0 million limit.
F-25
<PAGE> 96
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
Amounts borrowed under the line are to be repaid over a 36-month period with the
Company having the option of purchasing the equipment for $1.00 at the end of
the lease term. As of December 31, 1998, approximately $1.6 million was
outstanding under this credit line.
4. COMMITMENTS AND CONTINGENCIES
In July 1998, the Company signed a 15 year triple net lease which commences
upon completion of construction, to rent approximately 62,000 square feet of
office space in Santa Clara, California at an annual base rental of
approximately $1.6 million. The Company is building its San Francisco Bay area
SuperPOP facility in its Santa Clara property. Construction of the building is
substantially complete and the facilities opening is being coordinated with the
opening of its New York and London Super POP's. The Company expects the San
Francisco Bay area SuperPOP to be operational by June 30, 1999.
In October 1998, the Company signed a lease which terminates in September
2014 for the rental of 33,500 square feet at Prospect House, 80 New Oxford
Street, London, United Kingdom, at an annual base rent of pound sterling 1,080
(approximately $1,836 in U.S. dollars). Rental payments will commence in October
1999. The Company is recognizing the rental expense on a straight line basis
over the term of the lease. The Company is building a SuperPOP facility in the
new premises, which will also provide space for sales and administrative
personnel.
In October 1998, the Company entered into an IRU agreement with Qwest
Communications Corporation, under which the Company has the exclusive right to
use portions of Qwest's planned 18,449 mile MacroCapacity fiber network for a 20
year period. The Company will initially have the right to use 6,500 route miles
of OC-3 fiber capacity coast-to-coast in the United States and a DS-3 fiber link
from the United States to the United Kingdom. The Company is currently committed
to Qwest for a fee of $9,192 of which it had paid $919 at contract. The
remaining obligation is included in other liabilities as of December 31, 1998.
The balance is payable by October 1999. The Company will amortize the total
contract value over the term of the agreement of 20 years.
5. LOSS PER SHARE
The following table summarizes securities that were outstanding as of
December 31, 1997 and 1998, but not included in the calculation of diluted net
loss per share because such shares are antidilutive. Accordingly, basic and
diluted net loss per share do not differ for any period presented.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
<S> <C> <C>
Options................................................... 341,064 1,097,771
Warrants.................................................. 868,433 735,700
</TABLE>
F-26
<PAGE> 97
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
6. COMPREHENSIVE INCOME
On October 1, 1998, the Company adopted Statement of Financial Accounting
Standards ('SFAS') No. 130, 'Reporting Comprehensive Income,' which establishes
standards for reporting and displaying comprehensive income, as defined, and its
components. Accumulated other comprehensive income is reported in the
consolidated balance sheets and includes unrealized gain on securities available
for sale and cumulative foreign currency translation adjustment.
Comprehensive income was as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED DECEMBER 31,
--------------------
1997 1998
<S> <C> <C>
Net loss............................................... $ (282) $(7,819)
Other comprehensive income:
Change in unrealized gain on securities available for
sale.............................................. -- 337
Foreign currency translation adjustment.............. -- 11
------- -------
Comprehensive income................................... $ (282) $(7,470)
======= =======
</TABLE>
7. NON-CASH INVESTING ACTIVITIES
The IRU agreement with Qwest entered into in October 1998 is reflected as a
purchase of property and equipment ($9.2 million). The balance due under the
contract of $8.3 million is included in accrued expenses and other liabilities
as of December 31, 1998.
8. SUBSEQUENT EVENTS
Pursuant to his employment agreement, Marc H. Bell, the Company's President
and Chief Executive Officer, is entitled to receive, on September 30 of each
fiscal year, an option to purchase shares of common stock equal to 25% of any
increase in the total shares of the Company's common stock outstanding during
the prior twelve months as a result of equity offerings or acquisitions. The
exercise price of the option would be equal to the market price of the Company's
common stock on the date of grant and would be exercisable immediately. On March
2, 1999, Mr. Bell agreed to surrender this right pursuant to an amendment to the
employment agreement, which is conditioned upon the consummation of the proposed
public offering. Under the terms of the amendment, in lieu of this right, Mr.
Bell is entitled to receive a one-time option to purchase shares of the
Company's common stock in an amount equal to 25% of the difference between the
number of shares outstanding immediately after the closing of its currently
proposed public offering of common stock and the number outstanding as of
October 1, 1998. The exercise price of this option will be the same as the
selling price to the public.
Also on March 2, 1999, the Company's board of directors approved the 1999
Stock Option Plan. It is anticipated that options to purchase up to an aggregate
of approximately 2,500,000 shares of common stock may be granted pursuant to the
1999 Stock Option Plan and the amendment to Mr. Bell's employment agreement.
F-27
<PAGE> 98
GRAPHICAL
ILLUSTRATION
OF
GLOBIX
PRODUCTS AND
SERVICES
<PAGE> 99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
MARCH , 1999
[GLOBIX LOGO]
4,605,790 SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
---------------------
DLJDIRECT INC.
WIT CAPITAL CORPORATION
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell those securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor any
sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of the company
have not changed such the date hereof.
- --------------------------------------------------------------------------------
<PAGE> 100
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fees.
<TABLE>
<CAPTION>
AMOUNT
<S> <C>
SEC registration fee............................... $ 37,456
NASD filing fee.................................... 13,973
Nasdaq National Market listing fee................. 67,875
Blue sky and expenses (including legal fees)....... 15,000
Transfer agent fees................................ 35,000
Printing........................................... 300,000
Legal Fees and Expenses............................ 325,000
Accounting Fees and Expenses....................... 135,000
Miscellaneous...................................... 70,696
----------
Total......................................... $1,000,000
</TABLE>
Globix will bear all expenses shown above.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Globix'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. Globix's By-laws provide that it shall indemnify its
directors and officers under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, and
Globix is required to advance expenses to its officers and directors as incurred
in connection with proceedings against them for which they may be indemnified.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, Globix made the following sales of unregistered
securities pursuant to exemptions from the registration requirements of the
Securities Act of 1933, as amended (the Securities Act).
In September 1997, Globix completed a private placement of 400,000 shares
of Common Stock through Value Management and Research GmbH for a total
consideration of $2.2 million. 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
II-1
<PAGE> 101
warrant was exercised in June 1998. The foregoing was exempt from the provisions
of the Act pursuant to Section 4(2) thereof.
On April 30, 1998, Globix issued 160,000 units, each consisting of $1,000
principal amount of 13% Senior Notes due 2005 and one warrant to purchase 3.52
shares of common stock. These securities were issued pursuant to an exemption
under Rule 144A of the Securities Act to ING Baring (U.S.) Securities, Inc. as
the initial purchaser. The aggregate discount to the initial purchaser was
approximately $5.6 million. In August 1998, Globix registered the Senior Notes
which were part of such offering on a registration statement on Form S-4 and
exchanged such Senior Notes for new Senior Notes with substantially identical
terms and conditions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
1 Form of Underwriting Agreement between Globix and Donaldson,
Lufkin & Jenrette Securities Corporation.**
3.1 Certificate of Incorporation of Globix, as amended.(10)
3.2 By-laws of Globix, as amended.(11)
4.1 Specimen Stock Certificate.(2)
4.2 Form of Underwriter's Warrant issued to Rickel & Associates,
Inc.(2)
4.3 Indenture between Globix and Marine Midland Bank, as
Trustee, dated April 30, 1998.(8)
4.4 Form of $160,000,000 13% Senior Note, Series A, due 2005.(8)
4.5 Form of $160,000,000 13% Senior Notes, Series B, due
2005.(10)
4.6 Form of Warrant to purchase Common Stock expiring May 1,
2005.(8)
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP.**
10.1 Purchase Agreement between Globix and ING Baring (U.S.)
Securities, Inc., dated April 24, 1998.(8)
10.2 Warrant Agreement between Globix and Marine Midland Bank, as
Warrant Agent, dated as of April 30, 1998.(8)
10.3 Registration Rights Agreement between Globix and ING Baring
(U.S.) Securities, dated as of April 30, 1998.(8)
10.4 Warrant Registration Rights Agreement between Globix and ING
Baring (U.S.) Securities, dated as of April 30, 1998.(8)
10.5 Escrow and Security Agreement between Marine Midland Bank,
as Escrow Agent, Marine Midland Bank, as Trustee, and
Globix, dated as of April 30, 1998.(8)
10.6 1995 Stock Option Plan, adopted September 29, 1995.(1)
10.7 1998 Stock Option Plan, adopted April 16, 1998.(9)
10.8 Irrevocable Proxy Agreement between Harpoon Holdings Ltd.
and Marc H. Bell, dated as of October 1, 1995.(1)
10.9 Employment Agreement between Marc H. Bell and Globix, dated
as of April 10, 1998.(13)
10.10 Share Deposit Agreement between Marc H. Bell, Harpoon
Holdings Ltd., Globix, and Rickel & Associates Inc.(2)
10.11 Agreement of Lease between Globix and Puck Associates, dated
as of July 23, 1996.(3)
</TABLE>
II-2
<PAGE> 102
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
<S> <C>
10.12 Loan and Security Agreement between Finova Capital
Corporation (Finova) and Globix, dated as of May 1, 1997.(4)
10.13 Guaranty by NAFT in favor of Finova, dated as of May 1,
1997.(4)
10.14 Guaranty by NAFT Computer Service Corp. in favor of Finova,
dated as of May 1, 1997.(4)
10.15 Guaranty by Bluestreak Digital, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
10.16 Guaranty by PFM Communications, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
10.17 Promissory Notes to Globix, from Marc H. Bell, dated April
2, 1997 and June 30, 1997.(6)
10.18 Agreement by and between Globix and Value Management &
Research GmbH for the sale of an aggregate of 382,609 shares
of Common Stock, dated as of September 24, 1997.(5)
10.19 Agreement between Globix, and Cisco Systems Capital
Corporation granting credit approval for $1,000,000 for
leasing transactions, dated as of December 15, 1997.(7)
10.20+ Purchase Agreement between Hanover Equities, Inc. and Globix
dated as of June 2, 1998.(12)
10.21+ Purchase Agreement between Young Woo and Globix dated as of
June 2, 1998.(12)
10.22 Lease between Mission Plaza LLC and Globix dated as of July
24, 1998.(13)
10.23 First Amendment to Lease by and between Mission Plaza LLC
and Globix dated October 8, 1998 and effective as of July
24, 1998.(13)
10.24 Lease by and between Corston Holdings Limited, Globix
Limited and Globix dated October 15, 1998.(13)
10.25 Deed of Guaranty between Bank Leumi (UK) Plc, Corston
Holdings Limited, and Globix Limited dated October 15,
1998.(13)
10.26 IRU Agreement between Qwest Communications Corporation and
Globix dated as of October 5, 1998.(13)
10.27 Letter Agreement between Princeton Capital LLC, Hanover
Equities, Inc. and Globix, dated January 8, 1999.*
10.28 Operating Agreement of BLP Acquisition LLC dated as of July
2, 1998.*
10.29 Amendment to Marc H. Bell Employment Agreement, dated as of
March 2, 1999.**
21 List of Subsidiaries.(13)
23.1 Consent of Milberg Weiss Bershad Hynes & Lerach LLP
(included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.*
</TABLE>
- -------------------------
* Filed herewith.
** To be supplied by Amendment.
+ Confidential treatment granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
(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. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
II-3
<PAGE> 103
(3) Incorporated by reference to Globix's Annual Report on Form 10-KSB/A for
the year ended September 30, 1996.
(4) Incorporated by reference to Globix's Report on Form 8-K/A filed July 18,
1997.
(5) Incorporated by reference to Globix's Report on Form 8-K filed October 8,
1997.
(6) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333 23259) filed March 13, 1997.
(7) Incorporated by reference to Globix's Annual Report on Form 10-KSB for the
year ended September 30, 1997.
(8) Incorporated by reference to Globix's Report on Form 8-K filed May 11,
1998.
(9) Incorporated by reference to Globix's Proxy Statement on Schedule 14A filed
on March 16, 1998.
(10) Incorporated by reference to Globix's Registration Statement on Form S-4
(File No. 333-57993) filed June 29, 1998.
(11) Incorporated by reference to Amendment No. 1 filed August 7, 1998 to
Registration Statement (File No. 333-57993) filed June 29, 1998.
(12) Incorporated by reference to Globix's Report on Form 8-K/A filed September
16, 1998.
(13) Incorporated by reference to Globix's Annual Report on Form 10-KSB filed
December 29, 1998.
ITEM 17. UNDERTAKINGS
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.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 104
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, State of New York, on March 3, 1999.
GLOBIX CORPORATION
By /s/ MARC H. BELL
------------------------------------
Marc H. Bell, President and
Chief Executive Officer
We, the undersigned directors and/or officers of Globix Corporation (the
Company), hereby severally constitute and appoint Marc H. Bell, President Chief
Executive Officer, and Robert B. Bell, Executive Vice President and Chief
Financial Officer, and each of them individually, with full powers of
substitution and resubstitution, our true and lawful attorneys, with full powers
to them and each of them to sign for us, in our names and in the capacities
indicated below, the Registration Statement on form S-1 filed with the
Securities and Exchange Commission, and any and all amendments to said
Registration Statement (including post-effective amendments), and any
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, in connection with the registration under the Securities
Action of 1933, as amended, of equity securities of the Company, and to file or
cause to be filed the same, with all exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto
said attorneys, and each of them full power and authority to do and perform each
and every act and thing requisite and necessary to be done in connection
therewith, as fully to all intents and purposes as each of them might or could
do in person, and hereby ratifying and confirming all that said attorneys, and
each of them, or their substitute or substitutes, shall do or cause to be done
by virtue of this Power of Attorney.
Dated: January 25, 1999 /s/ MARTIN FOX
--------------------------------------
Martin Fox, Director
Dated: January 25, 1999 /s/ TSUYOSHI SHIRAISHI
--------------------------------------
Tsuyoshi Shiraishi, Director
Dated: January 25, 1999 /s/ ANTHONY ST. JOHN
--------------------------------------
Anthony St. John, Director
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed by the
following persons in the capacities indicated below:
Dated: March 3, 1999 /s/ MARC H. BELL
--------------------------------------
Marc H. Bell, President, Chief
Executive Officer and Director
(Principal Executive Officer)
II-5
<PAGE> 105
Date: March 3, 1999 /s/ ROBERT B. BELL
---------------------------------------
Robert B. Bell, Executive Vice
President, Chief Financial Officer and
Director (Principal Financial Officer)
Date: March 3, 1999 *
--------------------------------------
Martin Fox, Director
Date: March 3, 1999 /s/ TSUYOSHI SHIRAISHI
--------------------------------------
Tsuyoshi Shiraishi, Director
Date: March 3, 1999 *
--------------------------------------
Richard Videbeck, Director
Date: March 3, 1999 *
--------------------------------------
Sid Paterson, Director
Date: March 3, 1999 *
--------------------------------------
Anthony St. John, Director
Date: March 3, 1999 *
--------------------------------------
Alan Levy, Treasurer and
Chief Accounting Officer
(Principal Accounting Officer)
*By: /s/ MARC H. BELL
--------------------------------------
Marc H. Bell
Attorney-in-fact
II-6
<PAGE> 106
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1 Form of Underwriting Agreement between Globix and Donaldson,
Lufkin & Jenrette Securities Corporation.**
3.1 Certificate of Incorporation of Globix, as amended.(10)
3.2 By-laws of Globix, as amended.(11)
4.1 Specimen Stock Certificate.(2)
4.2 Form of Underwriter's Warrant issued to Rickel & Associates,
Inc.(2)
4.3 Indenture between Globix and Marine Midland Bank, as
Trustee, dated April 30, 1998.(8)
4.4 Form of $160,000,000 13% Senior Note, Series A, due 2005.(8)
4.5 Form of $160,000,000 13% Senior Notes, Series B, due
2005.(10)
4.6 Form of Warrant to purchase Common Stock expiring May 1,
2005.(8)
5 Opinion of Milberg Weiss Bershad Hynes & Lerach LLP.**
10.1 Purchase Agreement between Globix and ING Baring (U.S.)
Securities, Inc., dated April 24, 1998.(8)
10.2 Warrant Agreement between Globix and Marine Midland Bank, as
Warrant Agent, dated as of April 30, 1998.(8)
10.3 Registration Rights Agreement between Globix and ING Baring,
(U.S.) Securities, dated as of April 30, 1998.(8)
10.4 Warrant Registration Rights Agreement between Globix and ING
Baring, (U.S.) Securities, dated as of April 30, 1998.(8)
10.5 Escrow and Security Agreement between Marine Midland Bank,
as Escrow Agent, Marine Midland Bank, as Trustee, and
Globix, dated as of April 30, 1998.(8)
10.6 1995 Stock Option Plan, adopted September 29, 1995.(1)
10.7 1998 Stock Option Plan, adopted April 16, 1998.(9)
10.8 Irrevocable Proxy Agreement between Harpoon Holdings Ltd.
and Marc H. Bell, dated as of October 1, 1995.(1)
10.9 Employment Agreement between Marc H. Bell and Globix, dated
as of April 10, 1998.(13)
10.10 Share Deposit Agreement between Marc H. Bell, Harpoon
Holdings Ltd., the Company, and Rickel & Associates Inc.(2)
10.11 Agreement of Lease between Globix and Puck Associates, dated
as of July 23, 1996.(3)
10.12 Loan and Security Agreement between Finova Capital
Corporation (Finova) and Globix, dated as of May 1, 1997.(4)
10.13 Guaranty by NAFT in favor of Finova, dated as of May 1,
1997.(4)
10.14 Guaranty by NAFT Computer Service Corp. in favor of Finova,
dated as of May 1, 1997.(4)
10.15 Guaranty by Bluestreak Digital, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
</TABLE>
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
10.16 Guaranty by PFM Communications, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
10.17 Promissory Notes to Globix, from Marc H. Bell, dated April
2, 1997 and June 30, 1997.(6)
10.18 Agreement by and between Globix and Value Management &
Research GmbH for the sale of an aggregate of 382,609 shares
of Common Stock, dated as of September 24, 1997.(5)
10.19 Agreement between Globix, and Cisco Systems Capital
Corporation granting credit approval for $1,000,000 for
leasing transactions, dated as of December 15, 1997.(7)
10.20+ Purchase Agreement between Hanover Equities, Inc. and Globix
dated as of June 2, 1998.(12)
10.21+ Purchase Agreement between Young Woo and Globix dated as of
June 2, 1998.(12)
10.22 Lease between Mission Plaza LLC and Globix dated as of July
24, 1998.(13)
10.23 First Amendment to Lease by and between Mission Plaza LLC
and Globix dated October 8, 1998 and effective as of July
24, 1998.(13)
10.24 Lease by and between Corston Holdings Limited, Globix
Limited and Globix dated October 15, 1998.(13)
10.25 Deed of Guaranty between Bank Leumi (UK) Plc, Corston
Holdings Limited, and Globix Limited dated October 15,
1998.(13)
10.26 IRU Agreement between Qwest Communications Corporation and
Globix dated as of October 5, 1998.(13)
10.27 Letter Agreement between Princeton Capital LLC, Hanover
Equities, Inc. and Globix, dated January 8, 1999.*
10.28 Operating Agreement of BLP Acquisition LLC dated as of July
2, 1998.*
10.29 Amendment to Marc H. Bell Employment Agreement, dated as of
March 2, 1999.**
21 List of Subsidiaries.(13)
23.1 Consent of Milberg Weiss Bershad Hynes & Lerach LLP
(included in Exhibit 5).
23.2 Consent of Arthur Andersen LLP.*
</TABLE>
- -------------------------
* Filed herewith.
** To be supplied by Amendment.
+ Confidential treatment granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
(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. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
(3) Incorporated by reference to Globix's Annual Report on Form 10-KSB/A for
the year ended September 30, 1996.
(4) Incorporated by reference to Globix's Report on Form 8-K/A filed July 18,
1997.
(5) Incorporated by reference to Globix's Report on Form 8-K filed October 8,
1997.
<PAGE> 108
(6) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333 23259) filed March 13, 1997.
(7) Incorporated by reference to Globix's Annual Report on Form 10-KSB for the
year ended September 30, 1997.
(8) Incorporated by reference to Globix's Report on Form 8-K filed May 11,
1998.
(9) Incorporated by reference to Globix's Proxy Statement on Schedule 14A filed
on March 16, 1998.
(10) Incorporated by reference to Globix's Registration Statement on Form S-4
(File No. 333-57993) filed June 29, 1998.
(11) Incorporated by reference to Amendment No. 1 filed August 7, 1998 to
Registration Statement (File No. 333-57993) filed June 29, 1998.
(12) Incorporated by reference to Globix's Report on Form 8-K/A filed September
16, 1998.
(13) Incorporated by reference to Globix's Annual Report on Form 10-KSB filed
December 29, 1998.
<PAGE> 1
Exhibit 10.27
January 8, 1999
Globix Corporation
295 Lafayette Street
3rd Floor
New York, New York 10012
Ladies and Gentlemen:
Reference is made to the Purchase Agreement between Hanover
Equities, Inc. ("Hanover") and Globix Corporation ("Globix"), dated June 2, 1998
(the "Purchase Agreement"). Hanover entered into the Purchase Agreement as
nominee for Princeton Capital LLC ("Princeton") and all right, title and
interest of Hanover in, to and under the Purchase Agreement has now been
formally assigned to and assumed by Princeton. Hanover has also assigned all of
its right, title and interest in and to BLP Acquisition LLC (the "LLC") to
Princeton.
This is to set forth our agreement and understanding as follows:
1. The parties acknowledge that Princeton owns a .005% interest in
the LLC, that ATC Merger Corp. owns a 94.893% interest in the LLC and BTG
Technology Group, Ltd. owns a 5.102% interest in the LLC.
2. Concurrently herewith Princeton is executing and delivering to
Milberg Weiss Bershad Hynes & Lerach LLP, attorneys for Globix, an undated
Assignment of Limited Liability Company Interest, which shall be held in escrow
by such law firm until the Closing Date (as that term is defined in the Purchase
Agreement), at which time it shall be dated the Closing Date and delivered by
such law firm to Globix.
3. Section 2 of the Purchase Agreement is hereby amended to read in
its entirety as follows:
2. PURCHASE PRICE. The aggregate purchase price for the Interest
shall be the sum of two million six hundred thousand dollars ($2,600,000)
payable at the Closing (as that term is hereinafter defined) by the
execution and delivery by Purchaser of a negotiable promissory note for
two million six hundred thousand dollars ($2,600,000), at an annual
interest rate of seven percent (7%) interest only, payable monthly,
principal payable on November 15, 2005 or such earlier date as Seller
shall demand. On or before January 11, 1999, Purchaser shall deliver to
Seller an irrevocable and unconditional standby letter of credit issued by
a New York City commercial bank, reasonably acceptable to
<PAGE> 2
Page 2
Seller to secure payment of the promissory note. The letter of credit
shall provide for an expiration date of November 30, 2005. It is
understood and agreed that, in the event the letter of credit shall be
drawn upon by Seller or the transferee of the letter of credit, the
Closing shall be deemed to have occurred concurrently with such drawing,
with no further action on the part of Seller or such transferee being
required and no further obligation on the part of Purchaser.
4. The following sentence shall be added to Section 10 of the
Purchase Agreement:
In no event shall an assignment by Globix of its right, title and interest
in, to and under this Agreement relieve Globix of its obligations under
this Agreement.
5. Except as expressly set forth herein, the Purchase Agreement
shall continue in full force and effect in accordance with its original terms.
If the foregoing is in accordance with your understanding, kindly so
indicate by signing this letter in the place provided below.
Very truly yours ,
PRINCETON CAPITAL LLC
By Hanover Equities, Inc.,
its member
By /s/ Sheldon Reiter
-------------------------------
Sheldon Reiter, President
HANOVER EQUITIES, INC.
By /s/ Sheldon Reiter
-------------------------------
Sheldon Reiter, President
AGREED:
GLOBIX CORPORATION
By /s/ Marc H. Bell, President
-------------------------------
(Title)
<PAGE> 1
Exhibit 10.28
OPERATING AGREEMENT
OF BLP ACQUISITION LLC
A NEW YORK LIMITED LIABILITY COMPANY
Operating Agreement, dated as of July 2, 1998, by and between the Persons
who have executed the signature page(s) hereto as Members and who from time to
time hereafter execute this Agreement as Members.
W I T N E S S E T H:
WHEREAS, the parties have formed a limited liability company (together
with any successor limited liability company, the "Company") under the New York
Limited Liability Company Law (the "Act") and upon the terms and conditions of
this Agreement; and
WHEREAS, the Members wish to set forth their agreement as to how the
business and affairs of the Company shall be managed and their rights and
obligations with respect to the Company.
NOW THEREFORE, in consideration of the mutual promises contained in this
Agreement, the parties hereby agree as follows:
ARTICLE I
FORMATION AND BUSINESS OF THE COMPANY
1.1 FORMATION. The Company was organized on May 27, 1998, in accordance with
and pursuant to the Act.
1.2 NAME. The name of the Company is BLP Acquisition LLC. The Company may do
business under that name and, as permitted by applicable law, under any other
name determined from time to time by the Members.
1.3 PURPOSE OF THE COMPANY. The purpose of the Company shall be to engage only
in the purchase, ownership, financing and management of the real property
located at 139 Centre Street, New York, New York ("139 Centre Street"). The
Company may exercise all powers necessary to or reasonably connected with the
Company's business from time to time, and may engage in all activities
necessary, customary, related or incidental to the foregoing.
1.4 PRINCIPAL OFFICE. The Company's principal place of business shall be
located at 295 Lafayette Street, New York, New York 10012, or such other place
determined from time to time by ATC Merger Corp., a New York corporation
("ATC"), which has been designated Member-Manager of the Company.
1.5 REGISTERED AGENT. The Secretary of State of the State of New York is
designated as agent of the Company upon whom process against it may be served.
The post office address within the State of New York to which the Secretary of
State of the State of
<PAGE> 2
New York shall mail a copy of any process against the Company served upon him or
her is c/o Globix Corporation, attention Marc Bell, 295 Lafayette Street, New
York, New York 10012. The registered agent may be changed from time to time by
the Member-Manager upon the filing of the name and address of the new registered
agent with the Secretary of State of the State of New York pursuant to the Act.
1.6 TERM. The term of the Company shall commence on the date hereof and
continue until the Company is dissolved in accordance herewith and with the Act.
1.7 MEMBERS. The names, addresses, facsimile numbers, taxpayer identification
numbers and Percentage Interests of the Members are set forth on Exhibit A
attached hereto, as amended from time to time.
ARTICLE II
DEFINITIONS
2.1 DEFINITIONS. As used herein, the following terms shall have the respective
meanings set forth below:
"ACT" shall have the meaning set forth in the preamble of this
Agreement.
"AGREEMENT" shall mean this Operating Agreement, as originally
executed and as amended from time to time in accordance with the terms hereof
and with the Act.
"CERTIFICATE" shall mean the Certificate of Formation of the Company
in the form attached hereto as Exhibit B.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COMPANY" shall mean BLP Acquisition LLC, a New York limited
liability company.
"ENTITY" shall mean any corporation, limited liability company,
partnership, limited partnership, venture, trust, estate, governmental entity or
other entity.
"FISCAL YEAR" shall mean the Company's accounting, tax and fiscal
year, which shall be the calendar year.
"MEMBER" shall mean any Person executing this Agreement as of the
date hereof as a member or hereafter admitted to the Company as a member as
provided in this Agreement, but excluding any Person who has ceased to be a
Member in the Company. As the context may require, in connection with the
allocation of any item of income, gain, loss, deduction, profit or distribution,
but not otherwise, the term "Member" shall include unadmitted transferees of
Members who are treated as
2
<PAGE> 3
partners of the Company for federal income tax purposes.
"MEMBERSHIP INTEREST" shall mean, for each Member, the percentage
interest set forth opposite such Member's name on Exhibit A hereto.
"PERSON" shall mean any natural person or Entity.
"PROFITS" and "LOSSES" of the Company for any Fiscal Year shall mean
an amount, to be determined as soon as practicable after the close of such
Fiscal Year, which is equal to the taxable income or loss of the Company for
such Fiscal Year, as determined in accordance with Section 703(a) of the Code,
and as adjusted as follows: (i) Company income exempt from U.S. federal income
taxation and not otherwise taken into account shall be added to such taxable
income or loss, (ii) Company expenses and costs not deductible or properly
chargeable to capital for federal income tax purposes and not otherwise taken
into account shall be subtracted from such taxable income or loss, (iii) all
items of Company income, gain, loss or deduction shall be computed without
reference to any basis adjustments under Section 734(b) or Section 743(b) of the
Code, and (iv) any items of Company income, gain, loss or deduction which are
specially allocated pursuant to Section 5.2 hereof shall not be taken into
account.
2.2 REFERENCES. All references herein to one gender shall include the others
and the singular shall include the plural and vice versa as appropriate. All
references to an Entity shall be deemed to include its successors and assigns,
to the extent succession or assignment is not restricted by this Agreement.
Unless otherwise expressly provided, all references to "Articles" or "Sections"
are to Articles or Sections of this Agreement and all references to "Exhibits"
are to the exhibits attached hereto, each of which is made a part hereof for all
purposes.
ARTICLE III
MEMBERS; TRANSFERS OF INTERESTS
3.1 MEMBERS. The Members of the Company are those Persons set forth on Exhibit
A.
3.2 REPRESENTATIONS AND WARRANTIES. Each Member hereby represents and warrants
to the Company and each other Member that: (a) such Member's authorization,
execution, delivery and performance of this Agreement do not conflict with any
other agreement or arrangement to which that Member is a party or by which it is
bound or with any law or regulation to which that Member is subject; (b) such
Member is acquiring its Membership Interest for its own account and not with a
view to a sale or distribution thereof in violation of any securities laws and
such Member has received, or has had access to, all information which it
considers necessary or advisable to that Member's decision concerning its
acquisition of the Membership Interest; and (c)
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this Agreement constitutes a valid, binding and enforceable agreement of that
Member, subject to general equitable principles and except as the enforceability
thereof may be limited by applicable bankruptcy, insolvency, reorganization,
moratorium or other similar laws of general application relating to creditors'
rights.
3.3 ADDITIONAL INTERESTS. Additional Persons may be admitted as Members, only
with the consent of, and upon the terms and conditions determined by, the
Member-Manager. Exhibit A shall be amended from time to time to reflect the
name, address and capital contribution of any Person admitted as an additional
Member.
3.4 TRANSFER OF INTERESTS.
(a) No Member shall sell, assign, pledge or otherwise transfer or encumber
(collectively, "transfer") all or any part of its interest in the Company, and
no transferee of all or any part of the interest of a Member shall be admitted
as a substituted Member, without, in either event, having obtained the prior
written consent of the Member-Manager. Notwithstanding anything to the contrary
in the preceding sentence, the Members agree that Princeton Capital LLC
("Princeton") shall have the right to grant a security interest in its
Membership Interest to a financial institution, provided, however, that at the
time the security interest is granted such financial institution shall execute
and deliver an agreement to the effect that such financial institution (i) has
received a copy of this Agreement and the Put Call Agreement (as defined in
Section 3.4(c)), and (ii) agrees to be bound by all the terms and conditions of
this Agreement and the Put Call Agreement in the event of foreclosure on the
security interest.
(b) The Members shall amend Exhibit A hereto from time to time to reflect
transfers permitted under and made in accordance with this Section 3.4. Any
purported transfer in violation of this Section 3.4 shall be null and void and
shall not be recognized by the Company.
(c) The Members acknowledge that certain Purchase Agreement dated as of
June 2, 1998, as amended (the "Put Call Agreement"), between Hanover Equities,
Inc. ("Hanover") as nominee for Princeton, and Globix Corporation ("Globix").
Hanover has assigned all its right, title and interest in and to the Put Call
Agreement to Princeton. The Put Call Agreement sets forth the terms and
conditions pursuant to which Princeton can require Globix to purchase all of
Princeton's right, title and interest in the Company, and pursuant to which
Globix can require Princeton to sell all of it's right, title and interest in
the Company to Globix.
3.5 WITHDRAWAL. No Member shall have the right to withdraw from the Company
except with the consent of the Member-Manager. The
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provisions hereof with respect to distributions upon withdrawal are exclusive
and no Member shall be entitled to claim any further or different distribution
upon withdrawal under Section 509 of the Act or otherwise.
ARTICLE IV
CAPITAL CONTRIBUTIONS
4.1 CAPITAL CONTRIBUTIONS.
(a) Effective as of the date hereof, each of the Members has contributed
the amount of cash set forth next to such Member's name on Exhibit A hereto as a
capital contribution ("Capital Contribution").
(b) No Member shall have any obligation to make any Capital Contribution
other than the Capital Contribution referred to in Section 4.1(a).
4.2 CAPITAL ACCOUNTS. The Company shall maintain for each Member a single,
separate capital account that shall reflect the value of such Member's
investment in the Company (a "Capital Account"). Capital Accounts shall be
maintained in accordance with the rules of Treasury Regulation Section
1.704-1(b)(2)(iv), and the provisions of this Agreement relating to the
maintenance of Capital Accounts shall be interpreted and applied in a manner
consistent therewith.
4.3 RETURN OF CONTRIBUTIONS. A Member is not entitled (except as otherwise
expressly provided by other provisions of this Agreement) to the return of any
part of its Capital Contributions or to be paid interest in respect of either
its Capital Account or its Capital Contributions. An unrepaid Capital
Contribution is not a liability of the Company or of the other Members. A Member
is not required to contribute or to lend any cash or property to the Company to
enable the Company to return any other Members' Capital Contributions.
4.4 DEFICIT CAPITAL ACCOUNTS. Notwithstanding any other provision hereof to
the contrary, to the extent that a deficit, if any, exists in the Capital
Account of any Member, such deficit shall not be an asset of the Company and
such Member shall not be obligated to contribute such amount to the Company to
bring the balance of such Member's Capital Account to zero.
ARTICLE V
ALLOCATIONS AND DISTRIBUTIONS
5.1 ALLOCATIONS. After giving effect to the special allocations set forth in
Section 5.2, Profits and Losses of the Company for each taxable period and all
items of income, gain, loss and deduction taken into account in computing
Profits and Losses for such taxable period shall be allocated to the Members in
accordance with their respective Membership Interests, provided,
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however, that Profits shall be allocated to Princeton pursuant to Section
5.3(b).
5.2 SPECIAL ALLOCATIONS. Notwithstanding the provisions of Section 5.1 of this
Agreement to the contrary, the following special allocations shall be made for
each taxable period in the following order and priority:
(a) The Treasury Regulations promulgated under Code Section 704(b)
relating to the qualified income offset, minimum gain chargeback, minimum gain
chargeback with respect to Member nonrecourse debt, the allocation of
nonrecourse deductions and the allocation of items of deduction, loss or
expenditure relating to Member nonrecourse debt are hereby incorporated by this
reference and shall be applied to the allocation of Company items of income,
gain, loss or deduction in the manner necessary to comply with such Treasury
Regulations. For purposes of this Section 5.2(a), nonrecourse deductions of the
Company shall be allocated among the Members in proportion to their respective
Membership Interests.
(b) Code Section 704(c) Allocations. When the fair market value of a
Company asset is different from its adjusted tax basis for income tax purposes,
then, solely for federal, state and local income tax purposes and not for
purposes of computing Capital Accounts, income, gain, loss, deduction and credit
with respect to such assets ("Section 704(c) Assets") shall be allocated among
the Members to take this difference into account in accordance with the
principles of Code Section 704(c), as set forth herein and in the Treasury
Regulations thereunder and under Code Section 704(b). To correct distortions
created by the "ceiling rule" of Treasury Regulation Section 1.704-3(b)(1), to
the extent permitted or required by Treasury Regulations, the Company may make
curative allocations of Company tax items (other than those with respect to
Section 704(c) Assets) so that allocations of tax items may be made to effect
the purposes of Code Sections 704(b) and 704(c) by allocating the tax
consequences of precontribution gain or loss to a contributing Member.
(c) Curative Allocations. In the event that items of income, gain, loss or
deduction are allocated pursuant to Section 5.2(a) above, subsequent items of
income, gain, loss or deduction will first be allocated (subject to the
provisions of Section 5.1(b)(i)) to the Members in a manner designed to result
in each Member having a Capital Account balance equal to what it would have been
had the original allocation of Profit or Loss, or items thereof pursuant to
Section 5.2(a) not occurred.
5.3 DISTRIBUTIONS.
(a) Distributions of cash or other assets of the Company shall be made at
such time and in such amounts as may be determined by the Member-Manager to each
Member in accordance
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with its Membership Interest, provided, however, that distributions to Princeton
or its designee shall be made in accordance to the provisions of Section 5.3(b)
herein.
(b) In lieu of any distributions to be made to Princeton in accordance
with its Membership Interest, the Company shall pay Princeton a preferred
guaranteed distribution of $15,167 per month (the "Monthly Amount"). The Monthly
Amount shall be payable, in arrears, on the first day of each month commencing
August 1, 1998. It is understood and agreed that upon the Closing Date, as such
term is defined in the Put Call Agreement, the Company's obligation to pay
Princeton the Monthly Amount, other than amounts accrued and unpaid, shall
terminate.
(c) Princeton acknowledges its obligation to reimburse the Company the
amount of $1,000 for expenses incurred in connection with the acquisition of 139
Centre Street. Princeton hereby authorizes the Company to deduct such amount
from the Monthly Amount.
(d) To the extent necessary to comply with applicable federal or state tax
requirements, the Company shall be permitted to withhold from any amounts
distributed to Members and the amount of any such withholding shall be deemed
distributed to such Member.
5.4 GAIN OR LOSS FROM SALE OF 139 CENTRE STREET.
Notwithstanding any provision of this Article V to the contrary, with
respect to any gain or loss realized as a result of the sale of 139 Centre
Street by the Company, any distribution of gains or allocation of losses
resulting from such sale shall be made to each Member in accordance with its
respective Membership Interest.
5.5 ADDITIONAL CONSIDERATION DUE UPON THE SALE OF THE PROPERTY LOCATED AT 139
CENTRE STREET.
Globix, which is the sole shareholder of ATC and BTG Technology Group
Ltd., entered into a Purchase Agreement with Young Woo, individually and as
nominee ("Woo"), dated as of June 2, 1998 (the "Purchase Agreement"). As
additional consideration under the Purchase Agreement, Globix agreed to pay to
Woo a sum equal to the greater of One Million Dollars ($1,000,000) (the "Cash
Portion") or ten percent (10%) of the sales price of the land and building
located at 139 Centre Street (the "Property") if the gross sales price is in
excess of Seventeen Million Five Hundred Fifty Thousand Dollars ($17,550,000)
when, as and if the Property is sold by Globix or any of its subsidiaries,
including without limitation, the Company, prior to June 1, 2018. Effective June
1, 2018, the Cash Portion shall be increased by 10% to $1,100,000 and thereafter
the Cash Portion (as previously increased) shall be further increased every
fifth year by ten percent (10%). In the event Globix, the Company or any of its
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other subsidiaries contracts to sell the Property, it will, within 21 days
thereafter, provide written notice to Woo, which notice shall be accompanied by
a copy of such contract. This Section 5.5 cannot be modified or deleted in whole
or in part without the written prior consent of Woo.
ARTICLE VI
MANAGEMENT PROVISIONS
6.1 MANAGEMENT AND AUTHORITY. Management of the Company shall be vested in the
Members, and all powers of the Company shall be exercised by or under the
authority of, and the business and affairs of the Company shall be managed under
the direction of, the Members. Unless otherwise expressly provided in this
Agreement, such powers shall be exercised by the agreement of the Members.
Notwithstanding the foregoing, ATC, the Manager, shall carry out the normal
course of business of the Company including any decisions or matters required to
be approved by consent of the Members under this Agreement and shall have full
power and authority on behalf of the Company to:
(a) appoint such officers and employees or other persons as the Members
deem appropriate to manage the day-to-day operations of the Company, and to
terminate such officers and employees;
(b) employ accountants, legal counsel and other experts to perform
services for the Company, define their duties and authority and compensate them
from Company funds;
(c) employ Persons to provide services, of any nature, to the Company,
define their responsibilities and compensate them from Company funds;
(d) delegate to any Person the authority to execute any document or
instrument on behalf of the Company which is necessary to carry out the intent
and purpose of this Agreement;
(e) delegate to any Person the authority to execute on behalf of the
Company all agreements, instruments and documents which are necessary to the
business of the Company;
(f) acquire property in the ordinary course of the Company's business from
any Person;
(g) purchase life, liability and other insurance to protect the Company's
property and business;
(h) establish bank accounts in the name of the Company and establish the
identity of all signatories entitled to draw against such accounts for the
benefit of the Company;
(i) invest Company funds in time deposits, short-term governmental
obligations, commercial paper or other similar investments or in any other
capital asset or investment in the
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ordinary course;
(j) execute on behalf of the Company all instruments and documents,
including, without limitation, checks, drafts, notes and other negotiable
instruments, mortgages or deeds of trust, security agreements, financing
statements, documents providing for the acquisition or disposition of the
Company's property, assignments, bills of sale, leases, partnership agreements,
and any other instruments or documents necessary, in the opinion of the Members,
to the business of the Company and relating to transactions that have been
approved in accordance with this Agreement;
(k) enter into any and all other agreements on behalf of the Company with
any other Person (including Members), for any purpose in the ordinary course, in
such forms as the Members may approve;
(l) institute, prosecute and defend legal, administrative or other suits
or proceedings in the Company's name; and
(m) do and perform any and all other lawful acts as may be necessary or
appropriate to conduct the Company's business.
6.2 INDEMNIFICATION. To the fullest extent permitted by law, the Company shall
indemnify and hold harmless any Person from and against any and all losses,
costs, liabilities, damages and expenses (including, costs of suit and
reasonable attorney's fees) they may incur by reason of the fact that such
Person is or was a Manager, Member, officer or employee of the Company;
provided, however, that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have acted with gross
negligence or fraudulently.
ARTICLE VII
BOOKS, RECORDS AND BANK ACCOUNTS
7.1 MAINTENANCE OF BOOKS. The books of account for the Company shall be
maintained on an accrual basis in accordance with the terms of this Agreement.
The calendar year shall be the fiscal year of the Company for tax and accounting
purposes.
7.2 ACCOUNTING PRINCIPLES. All accounting of the Company (and all other
accounting done pursuant to this Agreement) shall be done in accordance with
generally accepted accounting principles consistently applied ("GAAP") at the
time of effect, to the extent applicable, except where GAAP is inconsistent with
the requirements of this Agreement or with regulatory requirements to which the
Company (or any of its subsidiaries) is bound; provided, however, Capital
Accounts shall be maintained in accordance with Section 4.2.
7.3 BANK ACCOUNTS. The Members shall cause the Company to establish, maintain
and designate signatories on one or more
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separate bank and investment accounts for Company funds in the Company name with
such financial institutions and firms as the Member-Manager may select and
designate signatories thereon. The Company's funds shall not be commingled with
the funds of any other Person.
7.4 TAX MATTERS PARTNER.
(a) The Member-Manager shall be the "tax matters partner" of the Company
as defined in Section 6231(a)(7) of the Code. The tax matters partner shall (i)
maintain such books and records of the Company at the offices of the Company as
are necessary in carrying out its responsibilities hereunder, (ii) have the
authority to make such day to day adjustments and decisions with respect to the
accounting and tax issues as are required in furtherance thereof, (iii) cause
the Company to prepare or cause to be prepared on its behalf all Federal, state,
and other tax returns required to be filed by the Company, and (iv) have the
authority to take any actions permitted by law to be taken by a tax matters
partner which the tax matters partner believes, in its sole discretion, are
necessary or appropriate.
(b) The designated tax matters partner may resign at any time by providing
a written statement to that effect to the Company; provided, however, such
resignation shall be effective only at such time as a successor tax matters
partner shall have been duly elected. Such written resignation statement shall
also be filed with the Internal Revenue Service in accordance with Temp. Treas.
Reg. Section 301.6231(a)(7)-1T.
ARTICLE VIII
DISSOLUTION
8.1 DISSOLUTION. The Company shall be dissolved and its affairs shall be wound
up upon the first to occur of any of the following:
(a) The written consent of all the Members;
(b) The entry of a decree of judicial dissolution under Section 702 of the
Act; or
(c) The death, retirement, resignation, expulsion, bankruptcy or
dissolution of a Member or the occurrence of any other event which terminates
the continued membership of a Member in the Company, unless the business of the
Company is continued by the agreement of all remaining Members within 90 days
following the occurrence of any such event.
ARTICLE IX
GENERAL PROVISIONS
9.1 NOTICES. All notices and other communications (collectively, "notices")
provided for or permitted to be given
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under this Agreement shall be in writing and shall be given by depositing the
notice in the United States mail, addressed to the Person to be notified,
postage paid and registered or certified with return receipt requested, or by
such notice being delivered in person or by facsimile communication to such
party. Unless otherwise expressly set forth herein, notices given or served
pursuant hereto shall be effective upon receipt by the Person to be notified.
All notices to be sent to a Member shall be sent to or made at, and all payments
hereunder shall be made at, the address set forth on Exhibit A hereto or such
other address as that Member may specify by notice to the Company.
9.2 ENTIRE AGREEMENT; WAIVERS AND MODIFICATIONS.
(a) This Agreement constitutes the entire agreement of the Members
relating to the Company and supersedes any and all prior contacts,
understandings, negotiations and agreements with respect to the Company and the
subject matter hereof, whether oral or written.
(b) This Agreement and the Certificate may be amended or modified from
time to time only by a written instrument executed by each of the Members,
except, to the extent permitted by the Act, for ministerial changes and changes
necessitated by the admission of new Members, in each case as approved by the
Members.
(c) Any waiver or consent, express, implied or deemed, to or of any breach
or default by any Person in the performance by that Person of its obligations
with respect to the Company or any action inconsistent with this Agreement is
not a waiver of or consent to any other breach or default in the performance by
that Person of the same or any other obligations of that Person with respect to
the Company or any other such action. Failure on the part of a Person to
complain of any act of any Person or to declare any Person in default with
respect to the Company, irrespective of how long that failure continues, does
not constitute a waiver by that Person of its rights with respect to that
default until the applicable statute-of-limitation period has run. Except with
respect to the matters described in the first sentence of this Section 9.2(c),
all waivers and consents hereunder shall be in writing and shall be delivered to
the other Members in the manner set forth in Section 9.1.
9.3 BINDING EFFECT; NO THIRD PARTY BENEFICIARIES. Subject to the restrictions
on transfer set forth herein, this Agreement is binding on and inures to the
benefit of the Members and their respective heirs, legal representatives,
successors and assigns. Nothing in this Agreement shall provide any benefit to
any third party or entitle any third party to any claim, cause of action, remedy
or right of any kind, it being the intent of the parties that this Agreement
shall not be construed as a third-party beneficiary contract.
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9.4 GOVERNING LAW. This agreement is governed by and shall be construed in
accordance with the law of the State of New York, excluding any conflict-of-laws
rule or principle that might refer the governance or construction of this
agreement to the law of another jurisdiction. If any provision of this Agreement
or the application thereof to any Person or circumstance is held invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of that provision shall be enforced to the greatest extent permitted by law.
9.5 FURTHER ASSURANCES. In connection with this Agreement and the transactions
contemplated hereby, each Member shall execute and deliver any additional
documents and instruments and perform any additional acts that may be necessary
or appropriate to effectuate and perform the provisions of this Agreement and
those transactions.
9.6 WAIVER OF CERTAIN RIGHTS. Each Member irrevocably waives any right (but
not any power) it might have to maintain any action for dissolution of the
company or for partition of the property of the Company. If any Member maintains
any action for such dissolution or partition, such Member shall be liable to the
Company and the other Members for all monetary damages suffered by them as a
result thereof (including, indirect, incidental and consequential damages).
9.7 COUNTERPARTS. This agreement may be executed in multiple counterparts with
the same effect as if each of the signing parties had signed the same document.
All counterparts shall be construed together and constitute the same instrument.
9.8 SUCCESSORS AND ASSIGNS. Subject to the limitations and restrictions set
forth in this Agreement, this Agreement shall be binding on and insure to the
benefit of the successors and
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assigns of the Membership Interests of the parties hereto.
IN WITNESS WHEREOF, the Members have executed this Agreement as of the
date first set forth above.
ATC MERGER CORP.
By: /s/ Marc H. Bell
--------------------------------
Name: Marc H. Bell
Title: President
BTG TECHNOLOGY GROUP LTD.
By: /s/ Marc H. Bell
--------------------------------
Name: Marc H. Bell
Title: President
PRINCETON CAPITAL LLC
By Hanover Equities, Inc.,
its member
By: /s/ Sheldon Reiter
--------------------------------
Name: Sheldon Reiter
Title: President
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EXHIBIT A
<TABLE>
<CAPTION>
INITIAL CAPITAL PERCENTAGE
MEMBERS CONTRIBUTION INTEREST
- ------- ------------ --------
<S> <C> <C>
ATC Merger Corp. $18,600,000.00 94.893%
295 Lafayette Street
New York, NY 10012
Phone: (212) 334-8500
Fax: (212) 334-8509
Tax ID #:
BTG Technology Group Ltd. $1,000,000.00 5.102%
295 Lafayette Street
New York, NY 10012
Phone: (212) 334-8500
Fax: (212) 334-8509
Tax ID #:
Princeton Capital LLC $ 1,000.00 0.005%
c/o Kalnick Klee &
Green, P.C.
767 Third Avenue
New York, NY 10017
Phone: (212) 751-2400
Fax: (212) 751-6943
Tax ID #:
</TABLE>
<PAGE> 1
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
Arthur Andersen LLP
New York, New York
March 2, 1999
