<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
[x] AMENDMENT NO. 1 TO QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended: December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _____ Commission file
number 1-14168
Globix Corporation
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
13-3781263
(IRS Employer Identification No.)
295 Lafayette Street, 3rd. Floor, New York, NY 10012
(Address of principal executive offices)
(212) 334-8500
(Issuer's telephone number)
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [x] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes or common
equity, as of the latest practicable date:
4,146,614 shares of Common Stock as of February 3, 1999
Transitional Small Business Disclosure Format (Check One): Yes [ ] No [x]
<PAGE> 2
Globix Corporation
and Subsidiaries
Table of Contents
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Balance Sheet as of December 31, 1998 and
September 30, 1998 2
Consolidated Statements of Operations
For the Three Months Ended December 31, 1998 and 1997 3
Consolidated Statements of Cash Flows
For the Three Months Ended December 31, 1998 and 1997 4
Notes to Consolidated Financial Statements 5-7
Item 2. Management's Discussion and Analysis of Financial Condition 8-14
and Results of Operations
RISK FACTORS 15-29
PART II - OTHER INFORMATION 30
</TABLE>
<PAGE> 3
Globix Corporation and Subsidiaries
Consolidated Balance Sheets
<TABLE>
<CAPTION>
Dec 31, Sept 30,
1998 1998
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 43,110,067 $ 61,473,285
Marketable securities 14,209,892 14,638,173
Accounts receivable, net of allowance for
doubtful accounts of $435,000 and $410,000
as of December 31, 1998 and
September 30, 1998, respectively 5,342,637 4,861,219
Inventories 326,584 391,848
Prepaid expenses and other current assets 2,632,669 1,699,117
Restricted cash 5,116,667 10,316,667
------------- -------------
Total current assets 70,738,516 93,380,309
Investments, restricted 45,356,259 50,163,109
Property and equipment, net 60,985,117 30,871,719
Debt issuance costs, net of accumulated
amortization of $644,250 and $393,321 5,963,544 6,214,473
Other assets 1,857,861 1,636,762
------------- -------------
Total assets $ 184,901,297 $ 182,266,372
============= =============
Liabilities and Stockholders' Equity
Current liabilities:
Current portion of notes payable 2,789,605 2,397,777
Accounts payable 11,829,053 6,185,460
Accrued expenses and other liabilities 8,766,861 192,913
Accrued interest expense 3,466,667 8,666,667
Deferred revenues 31,119 78,166
------------- -------------
Total current liabilities 26,883,305 17,520,983
Long-term notes payable,less current portion 1,848,200 1,199,429
Long-term debt, net of discount 157,977,200 157,892,200
Other long term liabilities 2,943,924 2,934,675
------------- -------------
Total liabilities 189,652,629 179,547,287
------------- -------------
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 41,401 41,401
Additional paid-in capital 17,247,354 17,247,354
Accumulated other comprehensive income 2,024,360 1,675,907
Accumulated deficit (24,064,447) (16,245,577)
------------- -------------
Total stockholders' equity (deficit) (4,751,332) 2,719,085
------------- -------------
Total liabilities and stockholders'
equity (deficit) $ 184,901,297 $ 182,266,372
============= =============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
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<PAGE> 4
Globix Corporation
and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
<S> <C> <C>
Revenues $ 5,928,650 $ 4,739,567
Costs and expenses:
Cost of revenues 3,702,175 3,113,899
Selling, general and administrative 5,565,542 1,609,438
Depreciation and amortization 506,699 241,860
----------- -----------
Total costs and expenses 9,774,416 4,965,197
----------- -----------
Loss from operations (3,845,766) (225,630)
Interest and financing expenses, net
of interest income of $944,497 in 1998
and $7,426 in 1997 (3,973,104) (55,984)
----------- -----------
Loss before taxes (7,818,870) (281,614)
Provision for taxes -- --
----------- -----------
Net loss $(7,818,870) $ (281,614)
=========== ===========
Basic and diluted loss per share ($1.89) ($0.08)
Weighted average common shares outstanding -
basic and diluted 4,140,116 3,448,450
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
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<PAGE> 5
Globix Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
December 31,
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (7,818,870) $ (281,614)
Adjustments to reconcile net (loss)
to net cash provided by (used in) operating
activities
Depreciation and amortization 506,699 241,860
Amortization of discount and
debt issuance costs 335,929 --
Provision for bad debt 25,000 20,000
Changes in operating assets and liabilities:
(Increase)in accounts receivable (506,418) (306,695)
Decrease (increase) in inventories 65,264 (6,984)
Decrease (increase) in prepaid expenses
and other current assets (933,552) 542,726
(Increase) in other assets (221,099) (83,118)
Increase in accounts payable 5,643,593 540,743
Increase (decrease) in accrued expenses
and other liabilities 273,948 (391,228)
(Decrease)in accrued interest expense (5,200,000) --
Decrease in deferred revenues (47,047) (35,447)
Increase in other long-term liabilities 9,249 --
------------ ------------
Net cash provided by (used in) operations (7,867,304) 240,243
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (22,320,097) (828,761)
Use of restricted cash 5,200,000 --
Use of long-term restricted cash 4,806,850 --
Sale of marketable securities 776,734 --
------------ ------------
Net cash used in investing activities (11,536,513) (828,761)
------------ ------------
Cash flows from financing activities:
Repayment of short term borrowings -- (90,805)
Proceeds of notes payable 1,328,219 211,568
Repayments of notes payable (287,620) (313,037)
Additional costs incurred with private
placement in September 1997 -- (59,138)
------------ ------------
Net cash provided by(used in)financing activities 1,040,599 (251,412)
------------ ------------
Net increase (decrease) in cash,
cash equivalents and restricted cash (18,363,218) (839,930)
Cash, cash equivalents and
restricted cash, beginning of period 61,473,285 2,401,446
------------ ------------
Cash, cash equivalents and
restricted cash, end of period $ 43,110,067 $ 1,561,516
============ ============
Supplemental disclosure of cash flow information:
Cash paid for interest $ 10,557 $ 33
============ ============
Non-cash investing activities (See Note 7)
</TABLE>
The accompanying notes are an integral part of these consolidated
statements.
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<PAGE> 6
GLOBIX CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 1998 and 1997, and the
statements of cash flows for the three months ended December 31, 1998 and 1997
have been prepared by Globix Corporation (the "Company") without audit. All
material inter-company accounts and transactions have been eliminated. The
consolidated results should be read in conjunction with the audited financial
statements and notes thereto included in the Company's Form 10KSB/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
$160,000,000 consisting of 160,000 units, each unit consisting of $1,000
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
$57,000,000, 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. 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.
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<PAGE> 7
3. NOTES PAYABLE
The Company 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 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 1,080,000
(approximately $1,836,000 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 (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. 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. The Company is
currently committed to Qwest for a fee of $9,192,176 of which it had paid
$919,218 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.
Page - 6 -
<PAGE> 8
5. LOSS PER SHARE
The following table summarizes securities that were outstanding as of December
31, 1998 and 1997, 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,
1998 1997
---- ----
<S> <C> <C> <C>
Options 1,097,771 341,064
Warrants 735,700 868,433
</TABLE>
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 for the three months ended December 31, 1998 and 1997 was
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Net loss $(7,818,870) $(281,614)
Other comprehensive income:
Change in unrealized gain on
securities available for sale 337,145 --
Foreign currency translation
adjustment 11,308 --
----------- ---------
Comprehensive income $(7,470,417) $(281,614)
=========== =========
</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
On January 11, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for a $63.5 million underwritten public
offering of its Common Stock. The underwriters on the offering are Donaldson,
Lufkin & Jenrette, Bear, Stearns & Co. Inc., and Lehman Brothers Inc.
Page - 7 -
<PAGE> 9
PART I 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 such statements and notes
appearing elsewhere herein.
Globix was founded in 1989 as a value-added reseller, or VAR, primarily focused
on providing custom computer hardware and software solutions for desktop
publishing. By 1995, Globix recognized the growing demand by businesses for
electronic information delivery and began to re-shape its corporate strategy to
focus on offering Internet products and services. In early 1996, the Company
raised net proceeds of approximately $7.4 million through a public offering of
its common stock and subsequently, began to offer Internet access products and
services to business customers. By the end of 1996, the Company had grown its
Internet customer base 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 solutions designed to enable its customers to more
effectively capitalize on the Internet as a business tool. These solutions
include web hosting, co-location, systems administration and web site
management, and value-added Internet services such as e-commerce, streaming
media, network security and web development. As of December 31, 1998, Globix's
customer base for Internet products and services had grown to approximately 850
large and medium size business customer accounts.
In 1998, the Company undertook a major expansion plan in order to more
aggressively pursue web hosting and co-location customers and other related
opportunities. In April 1998, the Company completed a $160.0 million debt
financing to fund the expansion of its physical facilities and the acquisition
and build-out of its network backbone. The Company 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 the Company'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, the Company
entered into an IRU agreement with Qwest which gives the Company exclusive
rights to use portions of Qwest's global network for a 20 year period. The
Company will initially have the right to use 6,500 route miles of OC-3 fiber
capacity (upgradable to OC-48) coast-to-coast in the United States and a DS-3
fiber link from the United States to the United Kingdom. The completion of the
Company's network backbone, which includes the Qwest bandwidth, is expected to
significantly increase the Company's network capacity and enable the Company to
offer a wider variety of higher-speed Internet and Internet-related products and
services to a larger customer base. The Company is also establishing POPs in
Washington DC, Chicago and Los Angeles as part of a planned program of
establishing POPs 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: (i) the "Internet Division" and (ii) 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. Over the last three years, revenues from the Internet Division have
grown significantly as a percentage of total revenues 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.
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<PAGE> 10
The Company 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 solutions. The Company maintains a limited
inventory of hardware and software and typically purchases such 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. The Company'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. The Company also
derives revenues from web 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, the Company charges its co-location
customers monthly fees for the use of its physical facilities. The Company'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 the Company's SuperPOP, costs related to the use of third-party networks,
and costs associated with leased lines. The Company 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 the Company's network backbone and the acquisition of the
right to use the Qwest bandwidth. As utilization of the network backbone
increases in future years, the Company 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 development and value-added
solutions consist 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 care and field services. The Company has recently hired a number of
members of its senior management. The Company 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
care and field services personnel. Accordingly, the Company expects selling,
general and administrative expenses to continue to significantly increase for
the foreseeable future.
Depreciation and amortization expenses are expected to increase significantly
beginning in fiscal 1999. The Company depreciates its capital assets on a
straight line basis over the useful life of the assets, ranging from 5 to 40
years. In addition, the Company is amortizing debt issuance costs of $6.6
million relating to its $160.0 million debt financing over seven years. The
Company did not recognize any depreciation expense for the three months 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 the
Company will begin recognizing depreciation expense for them upon completion,
which is expected by June 30, 1999.
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<PAGE> 11
The Company historically has experienced negative cash flow from operations and
has incurred net losses. The Company's ability to generate positive cash flow
from operations and achieve profitability is dependent upon the Company's
ability to continue to grow its revenue base and achieve further operating
efficiencies. The Company 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
backbone, the hiring of additional personnel and the interest expense in
connection with the $160.0 million debt financing. The Company believes that its
new SuperPOPs and network backbone infrastructure will enable it to achieve
further economies of scale as it continues to expand its customer base. However,
there can be no assurance that the Company will be able to realize sufficient
future revenues to offset its present investment in its physical facilities,
network backbone and the hiring of additional personnel, or that it will be able
to achieve or sustain revenue growth, positive cash flow or profitability in the
future. As of December 31, 1998, the Company had generated an accumulated
deficit of approximately $24.1 million.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED DECEMBER 31, 1998 AND 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 the Company provided Internet connectivity. The increase in percentage of
Internet Division revenues as a percentage of total revenues reflected the
Company's 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 and administration personnel
necessitated by the growth in operations. The number of full time employees
increased from 84 as of December 31, 1997 to 211 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,
the Company 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.
Page - 10 -
<PAGE> 12
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. The Company is 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 equipment purchased for use in the Internet Division.
NET LOSS AND LOSS PER SHARE. As a result of the above, the Company 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.
LIQUIDITY AND CAPITAL RESOURCES
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.
At December 31, 1998, the Company 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
purchase its network backbone from Qwest Communications. 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, the Company had spent approximately $21.5 million to
construct and equip its three new SuperPOP facilities. The Company estimates
that it will spend an additional $29.5 million to complete the SuperPOPs and
$8.3 million to complete its network backbone. In addition, the Company has an
option from Qwest to maintain the capacity of its domestic network backbone at
OC-3 bandwidth levels for the balance of the 20 year term of its agreement for
an additional payment of $15.0 million. The Company can exercise this option at
any time prior to December 31, 1999. If the Company were to choose not to
exercise this option, its domestic network backbone would be reduced to DS-3
capacity. The Company expects its new SuperPOP facilities and network backbone
to become operational by June 30, 1999.
The Company maintains 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 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 December
31, 1998, approximately $1.6 million was outstanding under this credit line.
Page - 11 -
<PAGE> 13
On January 11, 1999, the Company filed a registration statement with the
Securities and Exchange Commission for a $63.5 million underwritten public
offering of its Common Stock. The underwriters on the offering are Donaldson,
Lufkin & Jenerette, Bear, Sterns & Co. Inc., and Lehman Brothers.
In the opinion of management, the Company will be able to finance its business
as currently conducted and as currently planned from its current working capital
and the proceeds of the offering at least through fiscal 2000. There can be no
assurance that that the offering will be completed. If it is not completed, the
Company will be able to finance its business as currently conducted and
currently planned from its current working capital at least through December 31,
1999. The Company would then be required to seek financing through alternate
means. However, there is no assurance that the Company will be able to obtain
such alternate financing.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information, which is for fiscal years beginning after
December 31, 1997. This statement revises standards for public companies to
report financial and descriptive information about reportable operating segments
and certain other geographic information. The Company is evaluating methods for
adoption of these statements, if necessary, and currently does not expect these
new pronouncements to have a material impact on its consolidated financial
statements.
YEAR 2000 DISCUSSION
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 such Year 2000 requirements or risk system failure or
miscalculations causing disruptions of normal business activities.
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<PAGE> 14
STATE OF READINESS. Globix has made a preliminary assessment of the Year 2000
readiness of its information technology ("IT") systems, including the hardware
and software that enable Globix to provide and deliver its solutions, and its
non-IT systems. Globix's plan consists of (i) quality assurance testing of its
internally developed proprietary software and systems; (ii) 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
solutions to its customers; (iii) contacting vendors of material non-IT systems;
(iv) assessment of repair or replacement requirements; (v) repair or
replacement; (vi) implementation; and (vii) creation of contingency plans in the
event of Year 2000 failures. Globix plans to perform a Year 2000 simulation on
its software during the second quarter of fiscal 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 IT systems that the products used by
Globix are currently Year 2000 compliant. The Company is currently assessing the
materiality of its non-IT systems and will seek assurances of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, Globix will not be able
to completely evaluate whether its IT systems or non-IT systems will need to be
revised or replaced. The Company plans to complete this phase of 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, the Company 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 the Company 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, results of operations and financial
condition.
RISKS. Globix is not currently aware of any Year 2000 compliance problems
relating to its IT or non-IT systems that would have a material adverse effect
on Globix's business, results of operations and financial condition. There is no
assurance that the Company will not 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 IT and non-IT systems will not need to be
revised or replaced, all of which could be time consuming and expensive. The
failure of Globix to fix its software or to fix or replace third-party 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 IT and non-IT systems could result in claims
of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
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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 the
Company, 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 accessing the web sites
of its customers. Any of these occurrences could have a material adverse effect
on Globix's business, results of operations and financial condition.
Contingency Plan. As discussed above, the Company 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 have adopted the Euro as
their common legal currency on that date, which trades on currency exchanges and
is available for non-cash transactions. The existing sovereign currencies will
remain legal tender in these countries until January 1, 2002. 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. The Company 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 a
material adverse affect on the Company's business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material effect on its competitive position. In addition, the Company cannot
accurately predict the impact the Euro will have on currency exchange rates or
the Company's currency exchange risk.
FORWARD LOOKING STATEMENTS
The foregoing management discussion and analysis contains certain
forward-looking statements. Due to the fact that the Company faces intense
competition in a business characterized by rapidly changing technology, and must
raise additional capital in order to continue with its existing capital
expenditure program, actual results and outcomes may differ materially from any
such forward looking statements. Future results of operations are, in general,
difficult to forecast due to the fast moving pace of the industry. Additional
information concerning factors that could cause actual results to differ
materially from those in the forward looking statements is contained under the
heading "Risk Factors" below.
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<PAGE> 16
RISK FACTORS
You should carefully consider the following factors and other information. The
risks and uncertainties described below are not the only ones facing our
company. Additional risks and uncertainties may also adversely impair our
business operations. If any of the following risks actually occur, our business,
financial condition or results of operations would likely suffer.
RISK ASSOCIATED WITH SUBSTANTIAL INDEBTEDNESS AND OUR ABILITY TO SERVICE OUR
DEBT
We are highly leveraged due to our large outstanding debt obligations. As a
result, we have significant ongoing debt service requirements. As of December
31, 1998, our total long-term debt and notes payable was approximately $162.6
million. Our high level of indebtedness could have several important effects on
our future operations, including the following:
- a substantial portion of our cash flow from operations 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, including
possible investment activities
- our ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes
or 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 and utilizing our new SuperPOP facilities, establishing our enhanced
network backbone infrastructure and expanding our product and service offerings.
We can not 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 working capital from
operations, our existing credit facilities, available capital lease financings
and proceeds from our proposed offering will be adequate to meet our presently
anticipated requirements for working capital, capital expenditures and debt
service at least through fiscal 2000. We cannot assure you, however, that our
business will generate sufficient cash flow from operations or that future
working capital borrowings will be available in an amount sufficient to enable
us to service our debt or to make necessary capital expenditures. If we are
unable to generate sufficient cash flow to service our debt, we may have to
refinance some or all of our existing debt. We cannot assure you that we
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<PAGE> 17
will be able to raise additional capital for any such refinancing in the future.
If we are unable to generate or raise sufficient cash to both service our debt
and to grow our business, our business, financial condition and results of
operations will be materially and adversely affected.
RISK ASSOCIATED WITH OUR CONTINUING LOSSES
We have incurred significant losses since inception. We incurred net losses
of approximately $3.1 million and $11.2 million for the years ended September
30, 1997 and 1998 and $7.8 million for the three months ended December 31, 1998,
respectively. As of December 31, 1998, our accumulated deficit was approximately
$24.1 million. Since the year ended September 30, 1995, we have not been
profitable. We may never be profitable again or, if we become profitable, we may
be unable to sustain our profitability. We expect to continue to incur
significant expenditures because of the interest we must pay on our debt and the
fact that certain expenses, must be incurred in order to expand our business.
Among such expenses are costs to expand our facilities and network backbone and
sales and marketing, network operations and general and administrative expenses.
As a result, we expect to continue to incur significant losses for the
foreseeable future. Moreover, we cannot assure you that after incurring such
expenses, there will be an increase in our revenues. If revenues grow more
slowly than we anticipate, or if operating expenses exceed our expectations, our
business, financial condition and results of operations will be materially and
adversely affected.
RISKS ASSOCIATED WITH NEED TO MANAGE FACILITIES EXPANSION AND GROWTH
As we continue to increase the scope of our operations both domestically
and internationally, our workforce has grown. As of December 31, 1998, we had
211 full-time employees in comparison to 50 full-time employees as of September
30, 1995. In addition, we plan to continue to significantly expand our sales and
marketing and customer care organizations both domestically and internationally.
A key element of our business strategy is the expansion of our network
through the opening of additional SuperPOPs and POPs. Recently, our growth has
been limited by the shortage of space for co-location services at our Internet
Data Center facility in New York. To address this shortage, we are currently
building new state-of-the-art SuperPOP facilities in New York City, London and
the San Francisco Bay area. We are also currently establishing a network
backbone. Our success will depend on our ability to expand our network
infrastructure through these new facilities. The building of our new facilities
and network backbone will require us to expend substantial resources to purchase
or lease real estate facilities, make the necessary improvements to these
facilities, purchase equipment, install telecommunications networks and hire
network, administrative, customer care, and sales and marketing personnel. We
may not be successful in expanding or adapting our network infrastructure to
meet our customers' demands.
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Our growth has placed, and our anticipated future growth in our operations
will continue to place, a significant strain on our management systems and
resources. As a result, we need to:
- expand our management team
- train and manage a growing number of employees in multiple and
geographically diverse locations
- continue to expand and upgrade our network infrastructure
- continue to improve our financial and managerial controls and our
reporting systems and procedures
In addition, we need to attract and retain additional highly-qualified
management, technical and sales and marketing employees. Competition for
qualified employees is intense. We cannot assure you that we will be successful
in attracting and retaining the people we need. Our business, financial
condition and results of operations will be materially and adversely affected if
we are unable to effectively manage our growth or facilities expansion.
SHIFTING FOCUS OF OUR BUSINESS
We have been shifting our focus from selling desktop publishing related
computer and peripheral equipment to selling Internet connectivity and
sophisticated Internet-based solutions through our Internet Division. Our
end-to-end solutions include: (i) dedicated Internet access (ii) web hosting and
co-location, (iii) Internet-related hardware and software sales and systems and
network integration, (iv) systems administration and web site management, (v)
value-added solutions such as e-commerce, streaming media, network security and
web development, and (vi) instructor-led corporate training. We cannot assure
you that our strategy to shift the focus of our business will be successful.
The following demonstrates the increasing percentage of revenues derived
from our Internet Division:
<TABLE>
<CAPTION>
INTERNET SERVICES AS
YEAR ENDED A PERCENTAGE OF
SEPTEMBER 30, TOTAL REVENUES
<S> <C>
1996........................ 6.2%
1997........................ 13.9
1998........................ 31.3
</TABLE>
While we expect a greater percentage of our revenues to be derived in the
future from our Internet Division, we cannot assure you that we will succeed in
continuing to grow our Internet services business.
Our Internet Division has been in operation only since 1995. Most of our
Internet-related services, other than dedicated Internet access, web hosting and
co-location, have been introduced since 1997. Accordingly, we have a limited
operating history in this 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. These include:
- ability to sustain historical revenue prices and growth rates
- ability to sustain historical operating margins
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- need to manage our expanding operations
- competition
- ability to attract, retain and motivate qualified personnel
- ability to maintain our current, and develop new, strategic relationships
- ability to anticipate and adapt to the changing Internet market
- ability to attract and retain a large number of customers
If we fail to adequately address these risks, our business, financial
condition and results of operations will be materially and adversely affected.
DEPENDENCE ON NETWORK INFRASTRUCTURE
In order to succeed, we must provide our customers with reliable Internet
connectivity. Our success will depend upon our ability to expand our network
infrastructure as our customer base gets larger and as the needs of our
customers for Internet connectivity and solutions become more sophisticated. We
are currently building new state-of-the-art SuperPOP facilities in New York
City, London and the San Francisco Bay area. We are also currently establishing
a network backbone. Our expansion will require substantial financial,
operational and management resources. We may not be successful in expanding or
adapting our network infrastructure to meet our customers' demands. A delay in
the opening of our new SuperPOP facilities, particularly the New York facility,
would materially and adversely affect our business, financial condition and
results of operations.
Any of the following network infrastructure related problems could have a
material and adverse effect on our business, financial condition and results of
operations:
- failure to expand our network infrastructure on a timely basis
- failure to expand our network infrastructure at a commercially reasonable
cost
- failure to adapt our network infrastructure to changing customer
requirements
- failure to adapt our network infrastructure to changing industry
standards
- failure to maintain sufficient capacity on our network
- failure to maintain security
In October 1998, we entered into an IRU agreement with Qwest which gives us
the exclusive right to use portions of Qwest's global fiber network for a 20
year period. Our future success is highly dependent on this IRU agreement.
Qwest, however, has not completed building its coast-to-coast network and has
already experienced some delays. Any further delays in completing the Qwest
network would materially and adversely affect our business, financial condition
and results of operations.
NEED TO ESTABLISH AND MAINTAIN PEERING RELATIONSHIPS
The Internet is comprised of several network providers who operate their
own networks and interconnect their networks at various public and private
peering points, through "peering arrangements" with one another. Our ability to
establish and maintain peering relationships is necessary in order to
effectively exchange traffic with ISPs without having to pay the higher costs of
transit services and in order to maintain high network performance levels. These
arrangements are not subject to regulation and are subject to revision in terms,
conditions or costs over time. We cannot assure you that other ISPs will
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maintain peering relationships with us. In addition, increasing requirements or
costs may be imposed on us in order to establish and maintain peering
relationships with ISPs, particularly national ISPs. Failure to establish and
maintain peering relationships would adversely affect the level of connectivity
available to our customers or cause us to incur additional operating
expenditures by paying for transit, either of which could have a material
adverse effect on our business, financial condition and results of operations.
In addition, if these network providers were to increase the pricing associated
with utilizing their networks, we may be required to identify alternative
methods through which we can distribute our customers' content. If we are not
able to access on a cost-effective basis alternative networks to distribute our
customers' content or pass through any additional costs of utilizing these
networks to our customers, our business, financial condition and results of
operations would be materially adversely affected.
QUARTERLY OPERATING RESULTS ARE SUBJECT TO SIGNIFICANT FLUCTUATIONS
Our revenues and operating results may vary significantly from quarter to
quarter due to a number of factors, not all of which are in our control. These
factors include:
- customer demand for our solutions
- seasonal fluctuations in revenue, principally during the summer and
year-end holidays
- significant sales of Internet-related hardware and software in any
particular quarter
- ability to attract, retain and motivate qualified personnel
- changes in the growth rate of Internet usage
- the mix of revenues from our two segments
- the mix of revenues from our various Internet solutions
- the timing of the expansion of our operations
- changes in our pricing policies or those of our competitors
- the introduction of new solutions 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
- general economic and market conditions
Our revenues are difficult to forecast. In addition, we plan to
significantly increase our operating expenses to bring our new SuperPOPs and
network backbone online and to market and support our solutions. It will be
difficult for us to adjust 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
would be materially and adversely affected. This would likely affect the market
price of our common stock.
Due to all of the foregoing factors and the other risks discussed in this
section, 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.
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RISKS ASSOCIATED WITH INTERNATIONAL EXPANSION
We currently operate only in the United States. We are currently building a
new state-of-the-art SuperPOP facility in London, England. We expect to begin
operations in London by June 30, 1999. We intend to continue to expand our
international operations and international sales and marketing efforts. To date,
we have limited experience in developing versions of our solutions for markets
other than the New York market and no experience in marketing, selling and
distributing our solutions internationally.
International operations are subject to other inherent risks, including:
- the impact of recessions in economies outside the United States
- changes in regulatory requirements
- reduced, or uncertainty of, protection for intellectual property rights
- potentially adverse tax consequences
- difficulties and costs of staffing and managing foreign operations
- political and economic instability
- technology export and import restrictions or prohibitions
- fluctuations in currency exchange rates
- imposition of exchange controls
- language and cultural barriers
- seasonal reductions in business activity during the summer months in
Europe and certain other parts of the world
These risks may materially and adversely affect our business, financial
condition and results of operations.
DEPENDENCE UPON SUPPLIERS
Our success will depend upon third-party network infrastructure providers,
including the capacity we lease from telecommunications network suppliers. In
particular, we are currently dependent on Sprint, Cable & Wireless, UUNET and
certain other data communication and telecommunication providers for our
backbone capacity and are therefore dependent on such companies to maintain the
operational integrity of our backbone. Furthermore, our new network backbone
will rely on a number of public and private peering interconnections to deliver
our services. If the carriers that operate the Internet exchange points were to
discontinue their support of the peering points and no alternative providers
emerged, or such alternative providers increased the cost of utilizing the
Internet exchange points, the distribution of content through the Internet
exchange points, including content distributed by us, would be significantly
constrained. Furthermore, as traffic through the Internet exchange points
increases, if commensurate increases in bandwidth are not added, our ability to
distribute content rapidly and reliably through these networks will be
materially adversely affected.
We recently entered into an IRU agreement with Qwest which gives us the
exclusive right to use portions of Qwest's global fiber network for a 20 year
period. Qwest, however,
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has not completed building its coast-to-coast network and has already
experienced some delays. Any further delays in completing the Qwest network, or
any interruption of service once the network is completed, would materially and
adversely affect our business, financial condition and results of operations.
Some of our suppliers, including the regional Bell operating companies and
competitive local exchange carriers, currently are subject to various price
constraints, including tariff controls, which in the future may change. Recent
regulatory changes may increase the prices that these carriers may charge us.
This could have a material and adverse effect on our business, financial
condition and results of operations.
In addition, many of our agreements with suppliers (including our peering
partners) are either on a year-to-year basis or allow the supplier to terminate
the agreement following a certain notice period. Accordingly, we cannot assure
you that our suppliers will continue to provide us with bandwidth access,
services or equipment.
We also rely on other vendors to supply us with computer hardware, software
and networking equipment. These products are available from only a few sources.
Currently, we primarily buy these products from Silicon Graphics, Sun
Microsystems, Compaq, Intergraph and Cisco. We also rely on Cisco for network
design and 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 an
affordable price.
We have in the past experienced delays in receiving telecommunications
services and shipments of equipment purchased for resale. We may not be able to
obtain such telecommunication services and 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.
RISKS ASSOCIATED WITH POTENTIAL INVESTMENTS OR ACQUISITIONS
We may make investments in or acquire complementary businesses, products,
services or technologies. From time to time we have had discussions with
companies regarding our acquiring, or investing in, their businesses, products,
services or technologies. However, we currently have no agreement relating to
any such investment or acquisition. Moreover, the terms and conditions of our
$160.0 million debt financing limit our ability to make investments in non
wholly-owned subsidiaries. Because of these limitations, we are currently
precluded from making such investments. Our strategy is subject to the following
risks:
- we may not be able to identify suitable investment or acquisition
candidates
- if the purchase price for the acquisition consists of cash, we may need
to use all or a portion of our available cash, including proceeds from
this offering
- even if we do identify such suitable candidates, we cannot assure you
that we will be able to make such investments or acquisitions on
commercially acceptable terms
- we may not be able to consummate any acquisition or successfully
integrate the acquired services, products and personnel of any
acquisition into our operations
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<PAGE> 23
- 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 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
RISK OF SYSTEM FAILURE
Our business depends on the efficient and uninterrupted operation of our
computer and communications hardware systems and infrastructure. We currently
maintain most of our computer systems in our facilities in New York. While we
have taken certain precautions, interruptions could result from natural
disasters as well as power loss, telecommunications failure and similar events.
We lease telecommunications lines from local and regional carriers. Any
interruption in service by these carriers or a failure to provide us with
adequate lines to meet our demands for capacity, would materially and adversely
affect our business, financial condition and results of operations. Any system
interruptions could reduce the attractiveness of our services. Despite the
precautions we have taken, unanticipated problems affecting our systems have
from time to time in the past caused, and in the future could cause,
interruptions in the delivery of our solutions. Our customer contracts currently
provide a limited service level warranty related to the continuous availability
of service on a 24 X 7 basis. This warranty is generally limited to the issuance
of a credit consisting of free service for a specified limited period of time
for disruptions in Internet connectivity services. To date, only a limited
number of our customers have been entitled to receive credits for free services.
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.
SECURITY RISKS
We have taken measures to protect the integrity of our infrastructure and
the privacy of confidential information. Despite the measures we have taken,
however, 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 such problems may result in
claims against us or liability on our part. Such claims, regardless of their
ultimate outcome, could result in costly litigation and could have a
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material adverse effect on our business and reputation and on our ability to
attract and retain customers for our products and services.
DEPENDENCE ON THE INTERNET
Our products and services are targeted toward users of 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.
In addition, 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
connectivity products and services for a number of reasons, including:
- inconsistent quality of service
- lack of availability of cost-effective, high-speed options
- a limited number of local access points for corporate users
- inability to integrate business applications on the Internet
- the need to deal with multiple and frequently incompatible vendors
- inadequate protection of the confidentiality of stored data and
information moving across the Internet
- lack of tools to simplify Internet access and use
In particular, numerous published reports have indicated that a perceived
lack of security of commercial data, such as credit card numbers, has
significantly impeded commercial exploitation of the Internet to date. We can
not assure you that encryption or other technologies will be developed that
satisfactorily address these security concerns. Published reports have also
indicated that capacity constraints caused by growth in the use of the Internet
may impede the further growth of the Internet. If the Internet does not grow at
the rates which we presently anticipate, our business, financial condition and
results of operations will be materially and adversely affected.
RAPID TECHNOLOGICAL CHANGE IN A NEW MARKET
The market for Internet solutions has only recently begun to develop and is
rapidly evolving. We cannot assure you that this market will prove to be viable
or that it will grow as quickly as we expect. Our market is characterized by:
- rapid technological change
- frequent new product and service introductions
- evolving industry standards
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. Our success will also
depend on our ability to:
- use leading technologies
- enhance our existing solutions
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- develop new products and services that address the needs of our customers
- respond to technological advances and emerging industry standards in a
cost-effective and timely basis
If we are unable to successfully respond to these developments or do not
respond in a cost-effective way, our business, financial condition and results
of operations will be materially and adversely affected.
Our ability to compete successfully is also dependent upon the continued
compatibility of our services with products and services offered by various
vendors. Although we intend to support emerging standards in the market for
Internet protocols, industry standards may not be established. If such industry
standards are established, we may not be able to conform to these new standards
in a timely fashion and maintain a competitive position in the market. Our
products and services rely on the continued widespread commercial use of
Transmission Control Protocol/Internetwork Protocol (TCP/IP) and asynchronous
transfer mode (ATM) technologies. Alternative protocol standards have been or
are being developed for the Internet. If any of these alternative protocols
become widely adopted, there may be a reduction in the use of TCP/IP or ATM
technologies. The announcement or introduction of new products or services or
any change in industry standards may cause customers to defer or cancel
purchases of existing products or services. Any deferral or cancellation of
customer purchases, may have a material and adverse affect on our business,
financial condition and results of operations.
INTENSE COMPETITION
Competition for Internet products and services is intense and we expect
that competition will continue to intensify.
Our competitors include other ISPs, such as:
- ISPs with a national or global presence, including Concentric Network,
PSINet and UUNET
- national and regional ISPs with a presence in the New York metropolitan
area including Exodus, Frontier GlobalCenter, GTE Genuity, DIGEX and
Verio
Our competitors also include telecommunications companies, such as:
- AT&T, Cable & Wireless, Sprint and MCI WorldCom
- regional Bell operating companies which offer Internet access, such as
Bell Atlantic
Following the completion of our new SuperPOP facilities, we will be also
competing with the London and San Francisco Bay area facilities of the global
and national ISPs listed above. In addition, we will be competing with other
ISPs including:
- international ISPs with a presence in the United Kingdom, including BT
Internet, Demon Internet (recently acquired by Scottish Telecom), Easynet
and Energis.
- regional ISPs with a presence in the San Francisco Bay area, including
AboveNet, Conxion, GeoNet (recently acquired by Level 3) and NaviSite.
- regional Bell operating companies which offer Internet access in the San
Francisco Bay area, such as Pacific Bell
Because we offer a broad range of goods and services, we encounter
competition from numerous businesses which provide one or more similar goods or
services. For example, we
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encounter competition from numerous resellers of Internet-related hardware and
software, and providers of corporate training, systems and network integration
services and value-added Internet solutions such as e-commerce, streaming media,
network security and web development.
We believe that our ability to compete depends upon many factors, both
within and beyond our control, including the following:
- the timing and market acceptance of new solutions and enhancements to
existing solutions developed either by us or our competitors
- customer care and support efforts
- sales and marketing efforts
- the ease of use, performance, price and reliability of solutions
developed either by us or our competitors
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 than
we do
This may allow them to respond more quickly than we can to new or emerging
technologies and changes in customer requirements. It may also allow them to
devote greater resources than we can to the development, promotion and sale of
their products and services. Our competitors may develop Internet products or
services that are superior to or have greater market acceptance than our
solutions. Such competitors may also engage in more extensive research and
development, undertake more 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. As a result, it is possible that new competitors may emerge and
rapidly acquire significant market share.
New competitors, including large computer hardware, software, media and
other technology and telecommunications companies, may enter our market. 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 services. For example, telecommunications companies may be able to
provide customers with reduced communications costs in connection with their
Internet access services, reducing the overall cost of their solutions and
significantly increasing pricing pressures on us. We may not be able to offset
the effects of any such 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. Such increased price competition could result in an
erosion of our market share, a failure to attain profitability
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and could have a material and adverse effect on our business, financial
condition and results of operations. We cannot assure you that we will 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.
YEAR 2000 COMPLIANCE
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.
We plan to perform a Year 2000 simulation on our software by March 31, 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 vendors
of material hardware and software components of our IT systems that the products
used by us are currently Year 2000 compliant. We are currently assessing the
materiality of our non-IT systems and will seek assurances of Year 2000
compliance from providers of material non-IT systems. Until such testing is
complete and such vendors and providers are contacted, we will not be able to
completely evaluate whether our IT systems or non-IT systems will need to be
revised or replaced. The cost of these revisions or replacements is not expected
to be material to our financial position or results of operations. However, we
cannot assure you that such revisions and replacements can be completed on
schedule or within estimated costs or will successfully address our Year 2000
compliance issues.
In addition, we can not 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. 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.
DEPENDENCE ON KEY PERSONNEL
Our future success depends to a significant extent on the continued service
of our key technical, sales and senior management personnel, in particular, Marc
H. Bell, our President and Chief Executive Officer. The loss of the services of
any of our key employees, would likely have a material adverse effect on our
business, financial condition and results of operations. Our future success also
depends on our continuing to attract, retain and motivate highly skilled
employees.
Competition for employees in our industry is intense. We may be unable to
retain our key employees or attract, assimilate or retain other highly qualified
employees in the future. Our employees may voluntarily terminate their
employment with us at any time. We have from time to time in the past
experienced, and we expect to continue to experience in the future, difficulty
in hiring and retaining highly skilled employees with appropriate
qualifications.
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GOVERNMENT REGULATIONS AND LEGAL UNCERTAINTIES
We are subject to various laws and regulations relating to our business.
Because of the Internet's popularity and increasing use, new laws and
regulations with respect to the Internet have been or in the future may be
adopted. Such laws and regulations may cover issues such as:
- user privacy
- pricing
- content
- copyrights
- distribution
- characteristics and quality of products and services
In addition, the growth of the Internet, coupled with publicity regarding
Internet fraud, may lead to the enactment of more stringent consumer protection
laws. These laws may impose additional burdens on our business. The enactment of
any additional laws or regulations may impede the growth of the Internet, which
could decrease our potential revenues or otherwise adversely affect our
business, financial condition and results of operations.
Laws and regulations directly applicable to Internet communications are
becoming more prevalent. The most recent session of the U.S. Congress enacted
Internet laws regarding on-line copyright infringement, children's privacy and
taxation. Such legislation could dampen the growth in use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium. The European Union recently enacted new privacy regulations.
These are all recent enactments, and there is uncertainty regarding their
marketplace impact. The laws governing the Internet, however, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws such as those governing
intellectual property, privacy, libel and taxation apply to the Internet. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could adversely affect us. If we
were alleged to violate federal, state or foreign, civil or criminal law, even
if we could successfully defend such claims, our business, financial condition
and results of operations may be materially and adversely affected.
Several telecommunications carriers are seeking to have communications over
the Internet regulated by the Federal Communications Commission (FCC) in the
same manner as other more traditional telecommunications services. Additionally,
local telephone carriers have petitioned the FCC to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on such providers. If the FCC
adopts rules in accordance with the carriers' requests, the costs of using the
Internet could increase substantially. This, in turn, could slow the growth of
use of the Internet. Any such legislation or regulation could materially and
adversely affect our business, financial condition and results of operations.
The FCC may also seek to regulate some segments of our activities as basic
telecommunications services. We cannot assure you that regulatory authorities of
states within which we operate will not seek to regulate aspects of our
activities as telecommunications services. Changes in the regulatory environment
relating to the Internet connectivity market, including regulatory changes that
directly or indirectly affect
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telecommunications costs or increase the likelihood or scope of competition from
other telecommunications companies, could affect the prices at which we sell our
services. We cannot predict the impact, if any, that future regulation or
regulatory changes may have on our business and we cannot assure you that such
future regulation will not have a material adverse effect on our business,
financial condition and 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
ISP 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 e-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. Such
developments may have a material and adverse impact on our business, financial
condition and results of operations.
POSSIBLE LIABILITY FOR PUBLISHING OR DISTRIBUTING CONTENT 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 websites we host. For
example, lawsuits may be brought against us claiming that material inappropriate
for viewing by young children can be accessed from the websites 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.
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock (including
shares issued upon the exercise of outstanding options) in the public market,
the market price of our common stock could fall. Such sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate. All of these outstanding shares
are freely tradeable.
In addition, we have registered for resale 1,560,000 shares of common stock
reserved for issuance under our stock option plans. As of December 31, 1998,
options to purchase 1,094,937 shares of common stock were outstanding and will
be eligible for sale in the public market from time to time subject to vesting.
These stock options generally have exercise prices significantly below the
current price of our common stock. The possible sale of a significant number of
these shares may cause the price of our common stock to fall.
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Under the terms of his Employment Agreement, Marc H. Bell, our President and
Chief Executive Officer, is entitled to receive stock options to purchase that
number of shares as equals 25% of the increase in the number of outstanding
shares during each fiscal year. Consequently, Mr. Bell will receive options to
purchase shares, the number of which cannot be determined at this time if the
company's proposed public offering is consumated. The exercise price of the
options will be the fair market value as of October 1, 1999.
POSSIBLE VOLATILITY OF STOCK PRICE
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.
ANTI-TAKEOVER PROVISIONS
Provisions of our Certificate of Incorporation, our Bylaws 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.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on form 8-K
Not Applicable
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Globix Corporation
Date: March 3, 1999 By: /s / Marc H. Bell
-------------------------------------------------
Marc H. Bell, President & CEO
Date: March 3, 1999 By: /s / Robert B. Bell
-------------------------------------------------
Robert B. Bell, Exec. Vice President & CFO
Date: March 3, 1999 By: /s / Alan Levy
-------------------------------------------------
Alan Levy, Treasurer and Chief Accounting Officer
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