<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 11, 1999
REGISTRATION NO. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GLOBIX CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7373 13-3781263
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
295 LAFAYETTE STREET
NEW YORK, NEW YORK 10012
(212) 334-8500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
MARC H. BELL
PRESIDENT AND CHIEF EXECUTIVE OFFICER
GLOBIX CORPORATION
295 LAFAYETTE STREET
NEW YORK, NEW YORK 10012
(212) 334-8500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE OF AGENT FOR SERVICE)
PLEASE SEND COPIES OF ALL COMMUNICATIONS TO:
<TABLE>
<S> <C>
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
</TABLE>
------------------------
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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $.01 par value per share...................... $63,537,500 $17,663.43
- ----------------------------------------------------------------------------------------------------------------
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</TABLE>
(1) Includes shares of common stock which the Underwriters have the option to
purchase to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) of the Securities Act of 1933, as amended.
------------------------
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 -- JANUARY , 1999
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS
JANUARY , 1999
GLOBIX LOGO
SHARES OF COMMON STOCK
- --------------------------------------------------------------------------------
THE COMPANY:
- - We are a leading provider of Internet
connectivity and sophisticated Internet-based
solutions 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:
- - The Company is offering of the shares and existing stockholders are
offering of the shares.
- - The underwriters have an option to purchase an additional shares
from the Company and a selling stockholder to cover over-allotments.
- - There is an existing trading market for these shares. The reported last sale
price on January 7, 1999 was $14.875 per share.
- - We plan to use the proceeds from this offering to fund the completion of our
network backbone and for general corporate purposes. We may also use a
portion of the net proceeds to make investments in, or acquire, complementary
businesses. We will not receive any proceeds from the shares sold by the
selling stockholders.
- - Closing: , 1999.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Per Share Total
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Public offering price (estimated): $ $
Underwriting fees:
Proceeds to Company:
Proceeds to selling stockholders
- -------------------------------------------------------------------------------------
</TABLE>
THIS INVESTMENT INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 8.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
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
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary............. 3
Risk Factors................... 8
Use of Proceeds................ 23
Price Range of Common Stock and
Dividend Policy.............. 24
Capitalization................. 25
Dilution....................... 26
Selected Consolidated Financial
Data......................... 27
Management's Discussion and
Analysis of Financial
Condition and Results of
Operations................... 28
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business....................... 39
Management..................... 55
Certain Transactions........... 64
Principal and Selling
Shareholders................. 65
Description of Capital Stock... 67
Underwriting................... 74
Legal Matters.................. 76
Experts........................ 76
Available Information.......... 77
Reports to Security Holders....
Index to the Company's
Financial Statements......... F-1
</TABLE>
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in the common stock
offered in this prospectus.
<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. 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 connectivity and sophisticated
Internet-based solutions to large and medium size businesses. We provide our
customers with a comprehensive range of high performance, flexible and scalable
products and services designed to enable them to take full advantage of the
Internet in order to more effectively carry out their evolving business
strategies. Components of our "end-to-end" Internet solutions include:
- dedicated Internet access
- Internet Data Center facilities for hosting customer web sites on our
servers (web hosting) and housing customer-owned web servers and related
equipment (co-location)
- Internet-related hardware and software sales and systems and network
integration
- systems administration and web site management
- value-added solutions such as e-commerce, streaming media, network
security and web development
- instructor-led corporate training
In December 1995, we began offering Internet access from our facility in New
York City, where most of our customers have substantial operations. We are
currently building new state-of-the-art facilities in New York City, London and
the San Francisco Bay area to expand into those major business centers and to
better serve the needs of our existing multiregional and multinational
customers. We market and support our products and services through locally-based
direct sales, system and network engineering, application design and customer
care professionals. Due to our strong local market presence, we are better able
to evaluate the needs of our customers and quickly respond with tailored
solutions. We also provide our customers conveniently located facilities and the
systems management expertise to cost-effectively outsource all or part of their
Internet or information technology (IT) functions. We believe that our ability
to offer a broad range of end-to-end Internet solutions, combined with our local
sales and support professionals and high performance Internet Data Center
facilities, differentiates us from our competition.
OUR CUSTOMERS
As of November 30, 1998, we had over 800 business customer accounts for
Internet products and services. Our customers are in a variety of data-intensive
industries such as
3
<PAGE> 5
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, National Hockey League, Nomura Securities, Ogilvy &
Mather, RealNetworks, Standard & Poors and Tishman Speyer Properties.
OUR FACILITIES AND NETWORK EXPANSION
We offer our products and services from our existing facility in New York
City. 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 feeds, uninterruptable power supplies with back-up
generators, a dry fire suppression system, raised floor and fault
tolerant environmental controls
- a Network Operations Center, which provides 24 hour a day, 7 day a week
(24 X 7) monitoring
- on-site customer care, sales and marketing, and network and systems
engineering operations
The new SuperPOP facilities will significantly increase our ability to provide
web hosting and co-location services by increasing total Internet Data Center
capacity from approximately 2,000 square feet to approximately 63,000 square
feet. All three new SuperPOP facilities are expected to be completed and
operational by June 30, 1999.
We are also currently establishing a fully redundant, dedicated, high-speed
network backbone which will serve many of the major business centers in the
United States, as well as London, England. Our network backbone will
significantly increase data transmission capacity, improve reliability and
reduce unit data transmission costs. We have taken the following steps to
implement this project:
- In October 1998, we entered into an Indefeasible Right of Use (IRU)
agreement with Qwest Communications which gives us the exclusive right to
use portions of Qwest's global fiber network for a 20 year period. We
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. We intend
to use $15.0 million of the proceeds of this offering to maintain our
OC-3 capacity.
- We are in the process of establishing both public and private peering, or
interconnection, relationships with major backbone providers. Public
peering takes place at a physical location, usually a Network Access
Point (NAP), designed for the exchange of Internet traffic between
private backbone providers. Private peering is an agreement between two
Internet Service Providers (ISPs) to pass traffic between one another at
private connection points along each other's network backbone, allowing
traffic to pass from one network to another without having to traverse
the public Internet and public peering points.
- We are establishing Points of Presence, or POPs, in Washington, D.C.,
Chicago and Los Angeles, as part of a planned program of establishing
POPs in other major business centers in the United States and Europe
In April 1998, we completed a $160.0 million debt financing to fund the
build-out of our new SuperPOP facilities and network backbone.
4
<PAGE> 6
OUR MARKET OPPORTUNITY
Businesses are increasingly utilizing the Internet for mission-critical
applications, such as sales and marketing, customer service and project
coordination. We are well positioned to take advantage of the significant market
opportunity that exists to provide Internet access and value-added Internet
services to businesses. For example, International Data Corporation, or IDC,
predicts that U.S. corporate Internet access revenues will grow over 50%
annually from approximately $2.0 billion in 1997 to approximately $6.7 billion
in 2000. In addition, IDC predicts that U.S. value-added Internet services, such
as web hosting and security, will grow approximately 172% annually from $351.7
million in 1997 to approximately $7.0 billion in 2000. In particular, U.S. web
hosting revenues are expected to grow approximately 145% annually from $246.7
million in 1997 to $3.6 billion in 2000. IDC also predicts that Europe will
experience similar strong growth with corporate Internet access revenue
increasing 49% annually from $1.0 billion in 1997 to approximately $3.4 billion
in 2000 and revenue from value-added services increasing 79% annually from $95.0
million in 1997 to approximately $547.0 million in 2000.
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 or global ISPs and smaller local or regional ISPs. Large ISPs
focus primarily on Internet access products, and generally do not maintain a
significant local presence or offer a full range of value-added Internet
services. Smaller ISPs typically lack the resources to provide and support a
full range of Internet products and services. We believe our comprehensive
approach encompassing a broad range of Internet solutions, a strong local
presence and a sophisticated infrastructure in close proximity to our customers
enables us to effectively compete against both large national or global ISPs and
smaller local or regional ISPs.
OUR GROWTH STRATEGY
Our objective is to become the leading provider of sophisticated end-to-end
Internet connectivity and Internet-based solutions 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
- cross-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. (NAFT). 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.
------------------------
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.
5
<PAGE> 7
THE OFFERING
Common stock offered:
By the Company.............................. shares
By the selling stockholders ................ shares
Total............................... shares
Common stock to be outstanding after
the offering................................ shares(1)
Use of proceeds............................... To fund the completion of our
network backbone 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
- ---------------
(1) Based on the number of shares outstanding as of November 30, 1998. Excludes,
as of November 30, 1998, (i) 1,128,521 shares of common stock issuable upon
exercise of options outstanding under the Company's 1995 and 1998 Stock
Option Plans at a weighted average exercise price of $6.36 per share and
(ii) 735,700 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $ per share. Also
excludes 320,125 shares of common stock issuable upon exercise of options
granted on January 9, 1999 under the 1998 Stock Option Plan at an exercise
price of $15.00 per share and 127,790 additional shares of common stock
reserved for issuance under the 1995 and 1998 Stock Option Plans, as of that
date.
6
<PAGE> 8
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE
YEAR MONTHS
ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, ----------------------------
1994 1995(1) 1996 1997 1998
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues...................................... $6,524 $8,738 $10,374 $17,400 $ 20,595
Cost of revenues.............................. 5,192 7,292 8,599 13,699 13,322
Total operating expenses...................... 1,432 1,315 3,463 6,711 12,006
Income (loss) from operations................. (100) 131 (1,688) (3,010) (4,733)
Net income (loss)............................. (144) 39 (1,893) (3,115) (11,156)
Basic and diluted net income (loss) per
share(2).................................... $(0.11) $ 0.02 $ (0.72) $ (1.01) $ (3.08)
Weighted average common shares outstanding.... 1,294 1,725 2,633 3,075 3,626
OTHER FINANCIAL DATA:
EBITDA(3)..................................... $ (41) $ 199 $(1,469) $(2,335) $ (3,423)
Capital expenditures.......................... 103 150 1,955 1,542 23,270
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
--------------------------
ACTUAL AS ADJUSTED(4)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $ 76,111 $ --
Restricted cash and investments........................... 60,480 --
Working capital........................................... 75,859 --
Total assets.............................................. 182,266 --
Long-term debt and notes payable.......................... 161,489 --
Stockholders' equity...................................... 2,719 --
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1997 1998 1998 1998
<S> <C> <C> <C> <C> <C>
QUARTERLY CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenues:
Internet............................ $ 569 $1,328 $1,441 $ 1,637 $ 2,042
Server sales and integration........ 2,963 3,412 2,911 4,059 3,765
------- ------ ------ ------- -------
Total revenues.................. 3,532 4,740 4,352 5,696 5,807
Cost of revenues:
Internet............................ 509 335 401 399 397
Server sales and integration........ 2,575 2,779 2,343 3,401 3,267
------- ------ ------ ------- -------
Total cost of revenues.......... 3,084 3,114 2,744 3,800 3,664
Total operating expenses.............. 1,955 1,851 2,134 3,406 4,615
Loss from operations.................. (1,507) (225) (526) (1,510) (2,472)
Net loss.............................. (1,584) (281) (588) (4,070) (6,217)
</TABLE>
- -------------------------
(1) The Company changed its fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months.
(2) 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."
(3) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. However, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles,
should not be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or cash flow as a measure
of liquidity, and should be examined in conjunction with the Company's
consolidated financial statements and notes thereto included elsewhere in
this prospectus.
(4) As adjusted to reflect the application of the net proceeds from the sale of
the shares of common stock offered by the Company and after
deducting the underwriting discount and estimated offering expenses.
7
<PAGE> 9
RISK FACTORS
You should carefully consider the following factors and other information
in this prospectus before you decide to buy shares of our common stock. 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. In such case,
the trading price of our common stock could decline, and you may lose all or
part of the money you paid to buy our common stock.
This prospectus contains forward-looking statements based on our current
expectations, assumptions, estimates and projections about Globix and our
industry. These forward-looking statements involve risks and uncertainties. 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 here 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.
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 September
30, 1998, our total long-term debt and notes payable was approximately $161.5
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 of this offering will be adequate to meet our presently
anticipated requirements for working capital, capital expenditures and debt
service at least through the year ending September 30, 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> 10
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. For more detailed
information concerning our indebtedness and related matters, see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Notes 5 and 7 of Notes to
Consolidated Financial Statements."
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, respectively. As of September 30, 1998, our accumulated
deficit was approximately $16.2 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. For more detailed information concerning
our financial condition and results of operations, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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 November 30, 1998, we had
188 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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<PAGE> 11
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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<PAGE> 12
- 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. For a more detailed discussion, please see
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"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
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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- 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. For a more detailed discussion
of the competition we face, see "Business--Competition."
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. Please see "Management" for detailed information on our key
personnel.
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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.
For a more detailed discussion of government regulation and related
matters, please see "Government Regulations."
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
following this offering, 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. Upon
completion of this offering, we will have outstanding
shares of common stock (based on the number of shares
outstanding as of September 30, 1998 and assuming no exercise of outstanding
options after September 30, 1998). All of these 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 September 30, 1998,
options to purchase 915,605 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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We will enter into a lock-up agreement with the underwriters of this
offering and our executive officers, certain directors and certain stockholders
will enter into similar agreements. These agreements give us and Donaldson,
Lufkin & Jenrette the ability to prevent such people from offering, selling,
transferring or registering our common stock, or other securities convertible
into our common stock, for a period of 120 days after the date of this
prospectus. However, we and Donaldson, Lufkin & Jenrette may waive these
restrictions, in whole or in part, with or without a public announcement. The
sale of a substantial number of shares of our common stock, or the perception
that such sales could occur, could adversely affect prevailing market prices for
our common stock.
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 because of this offering at the fair market value
of the common stock on October 1, 1999. For more detailed information concerning
Mr. Bell's Employment Agreement, please see "Management--Employment Agreement."
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.
BROAD DISCRETION IN USE OF PROCEEDS
Our management can spend most of the proceeds from this offering in ways
with which the stockholders may not agree. For a more detailed description of
our intentions concerning the proceeds of this offering, please see "Use of
Proceeds."
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. See "Description of Capital Stock."
DILUTION
Investors purchasing shares in the offering will incur immediate and
substantial dilution in net tangible book value per share. For a more detailed
discussion of such dilution, please see "Dilution."
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USE OF PROCEEDS
The net proceeds to Globix from the sale of the shares of
common stock offered by Globix are estimated to be approximately million
($ million if the underwriters' over-allotment option is exercised in full),
at an assumed public offering price of per share and after
deducting the estimated underwriting discount and offering expenses payable by
Globix.
Globix intends to use the net proceeds from the offering to fund the
completion of its network backbone, including $15.0 million to exercise its
option under the Qwest IRU agreement to maintain its OC-3 fiber capacity, 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 the 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.
23
<PAGE> 25
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
Globix's common stock has been quoted on the Nasdaq SmallCap Market since
our initial public offering on January 30, 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 for the years ended
September 30, 1997 and 1998, the quarter ended December 31, 1998 and the period
from January 1, 1999 through January 7, 1999.
<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 January 7, 1999)............... 14 7/8 10 7/8
</TABLE>
On January 7, 1999, the reported last sale price of the common stock on the
Nasdaq SmallCap Market was 14 7/8. As of November 30, 1998, 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 its $160.0
million debt financing, the Company's 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.
24
<PAGE> 26
CAPITALIZATION
The following table sets forth the capitalization of Globix as of September
30, 1998 on (i) an actual basis and (ii) as adjusted to reflect the sale by the
Company of shares of common stock offered hereby at an assumed public
offering price of $ , after deducting the estimated underwriting
discounts and commissions and offering expenses payable by the Company. 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
SEPTEMBER 30, 1998
-----------------------
ACTUAL AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities........ $ 76,111 $ --
======== ====
Restricted cash and investments......................... $ 60,480 $ --
======== ====
Current portion of note payable......................... $ 2,398 $ --
-------- ----
Long-term debt:
Long-term note payable, net of current portion........ 1,199 --
Long-term debt, net of unamortized discount of
$2,108............................................. 157,892 --
-------- ----
Total long-term debt, net of current portion....... 159,091 --
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(1)..................................... 41 --
Additional paid-in capital.............................. 17,248 --
Unrealized gain on securities available for sale........ 1,676 --
Accumulated deficit..................................... (16,246) --
-------- ----
Total stockholders' equity......................... 2,719 --
-------- ----
Total capitalization............................. $164,208 $ --
======== ====
</TABLE>
- -------------------------
(1) Excludes, as of September 30, 1998, (i) 915,605 shares of common stock
issuable upon exercise of options outstanding under the Company's 1995 and
1998 Stock Option Plans at a weighted average exercise price of $6.39 per
share and (ii) 735,700 shares of common stock issuable upon exercise of
outstanding warrants at a weighted average exercise price of $ per share.
Also excludes 320,125 shares of common stock issuable upon exercise of
options granted on January 9, 1999 under the Company's 1998 Stock Option
Plan at an exercise price of $15.00 per share and 127,790 additional shares
of common stock reserved for issuance under the 1995 and 1998 Stock Option
Plans, as of that date.
25
<PAGE> 27
DILUTION
The net tangible book value of Globix as of September 30, 1998 was $(3.5)
million, or $(0.84) 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 of the shares of common stock offered by Globix hereby at an
assumed public offering price of $ per share and the application of the
estimated net proceeds, the net tangible book value of Globix as of September
30, 1998 would have been $ million, or $ per share of common stock.
This represents an immediate increase in the net tangible book value of $
per share to existing stockholders and an immediate dilution in the net tangible
book value of $ per share to new investors of common stock in this offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed public offering price per share.................. $ --
Net tangible book value per share as of September 30,
1998................................................ $ --
Increase per share attributable to new investors....... $ --
Net tangible book value per share after the offering..... $ --
--------
Dilution per share to new investors...................... $ --
========
</TABLE>
The foregoing discussion excludes, as of September 30, 1998, (i) 915,605 shares
of common stock issuable upon exercise of options outstanding under the
Company's 1995 and 1998 Stock Option Plans at a weighted average exercise price
of $6.39 per share and additional shares of common stock reserved for
issuance under the 1995 and 1998 Stock Option Plans, and (ii) 735,700 shares of
common stock issuable upon exercise of outstanding warrants at a weighted
average exercise price of $ per share. If these options and warrants were to
be exercised in full for cash, pro forma net tangible book value per share after
the offering would be $ , the increase per share attributable to new
investors would be $ , and the dilution per share to new investors would be
$ .
26
<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
The selected financial data for the years ended September 30, 1996, 1997
and 1998 are derived from financial statements of the Company which have been
audited by Arthur Andersen LLP, independent public accountants, and included
elsewhere in this prospectus. The selected financial data for the year ended
December 31, 1994 and the nine months ended September 30, 1995 are derived from
financial statements of the Company which have been audited by Arthur Andersen
LLP, independent public accountants, and are not presented separately in this
prospectus. The following selected 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
YEAR MONTHS
ENDED ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, ------------------------------
1994 1995(1) 1996 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS:
Revenues.................................................. $6,524 $8,738 $10,374 $17,400 $ 20,595
Costs and expenses:
Cost of revenues........................................ 5,192 7,292 8,599 13,699 13,322
Selling, general and administrative..................... 1,373 1,213 3,187 6,036 10,696
Depreciation and amortization........................... 59 68 219 675 1,310
Research and development................................ -- 34 57 -- --
------ ------ ------- ------- --------
Total costs and expenses.............................. 6,624 8,607 12,062 20,410 25,328
------ ------ ------- ------- --------
Income (loss) from operations............................. (100) 131 (1,688) (3,010) (4,733)
Interest income......................................... -- -- 121 72 1,953
Interest and financing expenses......................... (30) (73) (99) (177) (8,376)
Write-off of debt issuance costs........................ -- -- (257) -- --
------ ------ ------- ------- --------
Income (loss) before taxes................................ (130) 58 (1,923) (3,115) (11,156)
Provision for (benefit from) taxes........................ 14 19 (30) -- --
------ ------ ------- ------- --------
Net income (loss)......................................... $ (144) $ 39 $(1,893) $(3,115) $(11,156)
====== ====== ======= ======= ========
Basic and diluted net income (loss) per share(2).......... $(0.11) $ 0.02 $ (0.72) $ (1.01) $ (3.08)
====== ====== ======= ======= ========
Weighted average common shares outstanding................ 1,294 1,725 2,633 3,075 3,626
OTHER FINANCIAL DATA:
EBITDA(3)................................................. $ (41) $ 199 $(1,469) $(2,335) $ (3,423)
Capital expenditures...................................... 103 150 1,955 1,542 23,270
AS OF AS OF SEPTEMBER 30,
DECEMBER 31, ----------------------------------------------
1994 1995 1996 1997 1998
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities.......... $ 68 $ 222 $ 2,342 $2,401.. $ 76,111
Restricted cash and investments........................... -- -- 400 325.... 60,480
Working capital........................................... 330 180 3,468 1,981.. 75,859
Total assets.............................................. 1,368 2,962 7,810 11,025.. 182,266
Long-term debt and notes payable.......................... 50 123 39 1,258.. 161,489
Stockholders' equity...................................... 227 299 6,090 5,014.. 2,719
</TABLE>
- -------------------------
(1) The Company changed its fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months.
(2) 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."
(3) EBITDA is earnings from operations before interest, taxes, depreciation and
amortization. EBITDA is included herein because management believes that
certain investors find it to be a useful tool for measuring a company's
ability to service its debt. However, EBITDA does not represent cash flow
from operations, as defined by generally accepted accounting principles,
should not be considered as a substitute for net income or net loss as an
indicator of the Company's operating performance or cash flow as a measure
of liquidity, and should be examined in conjunction with the consolidated
financial statements and notes thereto of the Company included elsewhere in
this prospectus.
27
<PAGE> 29
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 appearing
elsewhere in this prospectus. The following discussion contains forward-looking
statements based on the Company's current expectations, assumptions, estimates
and projections about the Company and its industry. The Company'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. Globix does 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.
OVERVIEW
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 November 30, 1998, Globix's
customer base for Internet products and services had grown to over 800 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
28
<PAGE> 30
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 revenue from 6.2% to 31.3%. Globix expects that the Internet
Division revenues will continue to grow as a percentage of total revenues.
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
29
<PAGE> 31
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 has not recognized any depreciation expense for the year ended September
30, 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.
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. For the years ended September 30, 1996, 1997 and 1998, the Company
generated operating cash flows of approximately $(1.9) million, $(2.5) million
and $115,000, respectively, and incurred net losses of approximately $1.9
million, $3.1 million and $11.2 million, respectively. 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 September 30,
1998, the Company had generated an accumulated deficit of approximately $16.2
million.
30
<PAGE> 32
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>
RESULTS OF OPERATIONS
The following table sets for certain consolidated statement of operations
data for the years ended September 30, 1996, 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>
YEAR ENDED SEPTEMBER 30,
------------------------------------
1996 1997 1998
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C>
Revenues:
Internet.................................. 6.2% 13.9% 31.3%
Server sales and integration.............. 93.8 86.1 68.7
----- ----- -----
Total revenues......................... 100.0 100.0 100.0
----- ----- -----
Cost and expenses:
Cost of revenues.......................... 82.9 78.7 64.7
Selling, general and administrative....... 30.7 34.7 51.9
Depreciation and amortization............. 2.1 3.9 6.4
Research and development.................. 0.6 -- --
----- ----- -----
Total costs and expenses............... 116.3 117.3 123.0
Loss from operations........................ (16.3) (17.3) (23.0)
Interest and financing (expenses) income,
net....................................... 0.2 (0.6) (31.2)
Write-off of debt issuance costs............ (2.5) -- --
----- ----- -----
Loss before taxes........................... (18.6) (17.9) (54.2)
Income tax benefit.......................... 0.3 -- --
----- ----- -----
Net loss.................................... (18.3)% (17.9)% (54.2)%
===== ===== =====
</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.
31
<PAGE> 33
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 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 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.
The Company 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 increase in interest income 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
$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, the Company
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
32
<PAGE> 34
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, the Company
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, the Company established an additional reserve of $360,000 for Returned
Merchandise Allowances to properly reflect the value of its receivables from
vendors of hardware and software to the Company. The Company considers this
event to be non-recurring.
QUARTERLY RESULTS OF OPERATION
The following table sets forth quarterly consolidated statement of
operations data for the years ended September 30, 1997 and 1998. The quarterly
consolidated statement of operations data is derived from the Company's
unaudited financial statements, which in management's opinion has been prepared
on substantially the same basis as the Company's audited financial statements
and include 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. The Company's quarterly results of operations are not necessarily
indicative of the Company's results of operations for any future period.
33
<PAGE> 35
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1996 1997 1997 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA:
Revenues:
Internet................................... $ 354 $ 723 $ 768 $ 569
Server sales and integration............... 3,342 4,506 4,175 2,963
------ ------ ------ -------
Total revenues....................... 3,696 5,229 4,943 3,532
------ ------ ------ -------
Cost of revenues:
Internet................................... 235 351 209 509
Server sales and integration............... 2,555 3,751 3,515 2,575
------ ------ ------ -------
Total cost of revenues............... 2,790 4,102 3,724 3,084
------ ------ ------ -------
Gross profit............................... 906 1,127 1,219 448
Selling, general and administrative........ 1,445 1,392 1,461 1,738
Depreciation and amortization.............. 156 139 161 217
------ ------ ------ -------
Total operating expenses............. 1,601 1,531 1,622 1,955
------ ------ ------ -------
Loss from operations......................... (695) (404) (403) (1,507)
Interest and financing income (expense),
net...................................... 14 11 (54) (77)
------ ------ ------ -------
Net loss..................................... $ (681) $ (393) $ (457) $(1,584)
====== ====== ====== =======
Basic and diluted net loss per share......... $(0.22) $(0.13) $(0.15) $ (0.51)
====== ====== ====== =======
Weighted average common shares outstanding... 3,084 3,043 3,046 3,075
<CAPTION>
QUARTER ENDED
---------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1997 1998 1998 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATION
Revenues:
Internet................................... $1,328 $1,441 $ 1,637 $ 2,042
Server sales and integration............... 3,412 2,911 4,059 3,765
------ ------ ------- -------
Total revenues....................... 4,740 4,352 5,696 5,807
------ ------ ------- -------
Cost of revenues:
Internet................................... 335 401 399 397
Server sales and integration............... 2,779 2,343 3,401 3,267
------ ------ ------- -------
Total cost of revenues............... 3,114 2,744 3,800 3,664
------ ------ ------- -------
Gross profit............................... 1,626 1,608 1,896 2,143
Selling, general and administrative........ 1,609 1,870 3,010 4,207
Depreciation and amortization.............. 242 264 396 408
------ ------ ------- -------
Total operating expenses............. 1,851 2,134 3,406 4,615
------ ------ ------- -------
Loss from operations......................... (225) (526) (1,510) (2,472)
Interest and financing income (expense),
net...................................... (56) (62) (2,560) (3,745)
------ ------ ------- -------
Net loss..................................... $ (281) $ (588) $(4,070) $(6,217)
====== ====== ======= =======
Basic and diluted net loss per share......... $(0.08) $(0.17) $ (1.16) $ (1.52)
====== ====== ======= =======
Weighted average common shares outstanding... 3,448 3,448 3,510 4,091
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------
DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997 1997 1997
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATIONS DATA:
Revenues:
Internet................................... 9.6% 13.8% 15.5% 16.1% 28.0%
Server sales and integration............... 90.4 86.2 84.5 83.9 72.0
------ ------ ------ ------- ------
Total revenues....................... 100.0 100.0 100.0 100.0 100.0
------ ------ ------ ------- ------
Cost of revenues:
Internet(1)................................ 66.4 48.5 27.2 89.5 25.2
Server sales and integration(2)............ 76.5 83.2 84.2 86.9 81.4
------ ------ ------ ------- ------
Total cost of revenues............... 75.5 78.4 75.3 87.3 65.7
------ ------ ------ ------- ------
Gross profit............................... 24.5 21.6 24.7 12.7 34.3
Selling, general and administrative........ 39.1 26.6 29.6 49.2 33.9
Depreciation and amortization.............. 4.2 2.7 3.3 6.1 5.1
------ ------ ------ ------- ------
Total operating expenses............. 43.3 29.3 32.9 55.3 39.0
------ ------ ------ ------- ------
Loss from operations......................... (18.8) (7.7) (8.2) (42.6) (4.7)
Interest and financing income (expense),
net...................................... 0.4 0.2 (1.1) (2.2) (1.2)
------ ------ ------ ------- ------
Net loss................................... (18.4)% (7.5)% (9.3)% (44.8)% (5.9)%
====== ====== ====== ======= ======
<CAPTION>
QUARTER ENDED
------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998
(AS A PERCENTAGE OF TOTAL REVENUES)
<S> <C> <C> <C>
CONSOLIDATED QUARTERLY STATEMENT OF OPERATION
Revenues:
Internet................................... 33.1% 28.7% 35.2%
Server sales and integration............... 66.9 71.3 64.8
------ ------- -------
Total revenues....................... 100.0 100.0 100.0
------ ------- -------
Cost of revenues:
Internet(1)................................ 27.8 24.4 19.4
Server sales and integration(2)............ 80.5 83.8 86.7
------ ------- -------
Total cost of revenues............... 63.1 66.7 63.1
------ ------- -------
Gross profit............................... 36.9 33.3 36.9
Selling, general and administrative........ 43.0 52.8 72.4
Depreciation and amortization.............. 6.0 7.0 7.0
------ ------- -------
Total operating expenses............. 49.0 59.8 79.4
------ ------- -------
Loss from operations......................... (12.1) (26.5) (42.5)
Interest and financing income (expense),
net...................................... (1.4) (44.9) (64.5)
------ ------- -------
Net loss................................... (13.5)% (71.4)% (107.0)%
====== ======= =======
</TABLE>
- -------------------------
(1) As a percentage of total Internet Division revenue
(2) As a percentage of total Server Sales and Integration Division revenue
34
<PAGE> 36
The Company's quarterly operating results may vary significantly depending
upon factors such as customer demand for the Company's 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; the ability to attract, retain and motivate qualified personnel;
changes in the growth rate of Internet usage; the mix of revenues from the
Company's two segments; the mix of revenues from the Company's various Internet
solutions; the timing of the expansion of the Company's operations; changes in
the Company's pricing policies or those of the Company's competitors; the
introduction of new solutions by Globix or its competitors; the mix of domestic
and international sales once the Company's 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 the Company's 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. The
Company believes that its recent revenue growth has been limited by the shortage
of space at its current Internet Data Center facility. To address this shortage,
the Company is currently building three new SuperPOPs.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, the Company has satisfied its 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, the Company
completed an initial public offering of 1,279,642 shares of its common stock and
661,250 redeemable common stock purchase warrants (the IPO Warrants) to purchase
an additional 661,250 shares of common stock. The net proceeds of the public
offering were approximately $7.4 million. In September 1997, the Company
completed a private placement of 400,000 shares of common stock with net
proceeds to the Company of $2.0 million. On April 30, 1998, Globix 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, Globix 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 Globix. The notes are
collateralized by a first priority security interest in such escrow account. In
July 1998, the Company called the outstanding IPO Warrants for redemption.
Substantially all of the IPO Warrants were exercised and the net proceeds to the
Company were approximately $4.3 million.
Cash, cash equivalents and marketable securities increased from $2.4
million as of September 30, 1997 to $76.1 million as of September 30, 1998. This
increase of
35
<PAGE> 37
approximately $73.7 million was primarily the result of the proceeds of the debt
financing, offset by the $60.5 million of restricted cash and investments (which
consists of approximately $57.0 million held in escrow plus interest), $15.3
million paid for the land and building which will house the new New York
SuperPOP facility and $8.0 million for the purchase of other equipment necessary
to expand Internet operations.
At September 30, 1998, the Company had working capital of approximately
$75.9 million, as compared to working capital of approximately $2.0 million at
September 30, 1997. Working capital increased primarily because of the $160.0
million debt financing partially offset by the net loss of $11.2 million
(including $1.3 million of non-cash depreciation and amortization expense).
Working capital was reduced by $50.2 million held as the long-term portion of
restricted cash and investments to fund interest payments on the notes. In
addition working capital was reduced by $17.0 million relating to the
acquisition by the Company of the land and building which will house the New
York SuperPOP facility. At September 30, 1998, the Company also carried a
long-term liability of $2.6 million in connection with such acquisition.
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 September
30, 1998, approximately $945,000 was outstanding under this credit line.
The Company refinanced certain of its furniture and computer equipment in
April 1997 in the amount of approximately $874,000 from Finova Capital
Corporation. Such loan is for a term of three years, bears interest at 12.2% per
annum and is self-liquidating over its term. As of September 30, 1998,
approximately $524,000 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.
As of September 30, 1998, the Company had spent approximately $2.5 million
to construct and equip its three new SuperPOP facilities. The Company estimates
that it will spend an additional $47.5 million to complete the SuperPOPs and
$16.0 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 plans to use a portion of the proceeds of this offering to
exercise this option. The Company expects its new SuperPOP facilities and
network backbone to become operational by June 30, 1999.
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 net proceeds of this offering at least through fiscal
2000.
36
<PAGE> 38
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 (IT) systems, including the
hardware and software that enable the Company 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, the Company 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 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, financial condition and
results of operations.
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 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 IT and non-IT systems could result in claims of
37
<PAGE> 39
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 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, financial condition and results of operations.
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 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. 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
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.
38
<PAGE> 40
BUSINESS
OVERVIEW
Globix is a leading provider of Internet connectivity and sophisticated
Internet-based solutions to large and medium size businesses. Globix provides
its customers with a comprehensive range of high performance, flexible and
scalable products and services, designed to enable them to take full advantage
of the Internet in order to more effectively carry out their evolving business
strategies. Components of Globix's "end-to-end" solutions include:
- dedicated Internet access
- Internet Data Center facilities for web hosting and co-location
- Internet-related hardware and software sales and systems and network
integration
- systems administration and web site management
- value-added solutions such as e-commerce, streaming media, network
security and web development
- instructor-led corporate training
In December 1995, Globix began offering Internet access from its facility in New
York City, where most of its customers have substantial operations. Globix is
currently building new state-of-the-art facilities in New York City, London and
the San Francisco Bay area to expand into those major business centers and to
better serve the needs of its existing multiregional and multinational
customers. Globix markets and supports its products and services through
locally-based direct sales, system and network engineering, application design
and customer care professionals. Due to its strong local presence, Globix is
better able to evaluate the needs of its customers and quickly respond with
tailored solutions. Globix also provides its customers conveniently located
facilities and the systems management expertise to cost-effectively outsource
all or part of their Internet or IT functions. Globix believes that its ability
to offer a broad range of end-to-end Internet solutions, combined with its local
sales and support professionals and high performance Internet Data Center
facilities, differentiates the Company from its competitors.
Globix offers Internet access from its initial SuperPOP facility in New
York City. Globix is 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 feeds, uninterruptable power supplies with back-up
generators, a dry fire suppression system, raised floor and fault
tolerant environmental controls
- a Network Operations Center, which provides 24 X 7 monitoring
- on-site customer care, sales and marketing, systems administration and
administrative operations
The new SuperPOP facilities will significantly increase Globix's ability to
provide web hosting and co-location services by increasing its total Internet
Data Center capacity from approximately 2,000 square feet to approximately
63,000 square feet. All three new SuperPOP facilities are expected to be
completed and operational by June 30, 1999.
The Company is also currently establishing a fully redundant, dedicated,
high-speed, network backbone which will serve many of the major business centers
in the United States,
39
<PAGE> 41
as well as London, England. Globix's network backbone will significantly
increase data transmission capacity, improve reliability and reduce unit data
transmission costs. The Company has taken the following steps to implement this
project:
- In October 1998, Globix entered into an IRU agreement with Qwest
Communications giving it the exclusive right to use portions of Qwest's
global fiber network for a 20 year period. We will initially have the
right to use 6,500 route miles of OC-3 capacity fiber (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. We intend to use $15.0 million of
the proceeds of this offering to maintain our OC-3 capacity.
- Globix is in the process of establishing both public and private peering,
or interconnection, relationships with major backbone providers. Public
peering takes place at a physical location, usually a Network Access
Point (NAP) designed for the exchange of Internet traffic between private
backbone providers. Private peering is an agreement between two Internet
Service Providers (ISPs) to pass traffic between one another at private
connection points along each other's network backbone, allowing traffic
to pass from one network to another without having tor traverse the
public Internet and public peering points.
- Globix is establishing Points of Presence, or POPs, in Washington, D.C.,
Chicago and Los Angeles, as part of a planned program of establishing
POPs in other major business centers in the United States and Europe
In April 1998, Globix completed a $160.0 million debt financing to fund the
build-out of its new SuperPOP facilities and network backbone.
As of November 30, 1998, Globix had over 800 business customer accounts for
Internet products and services. Globix's customers are in a variety of
data-intensive industries such as advertising, financial services, media,
publishing and retail. Internet customers include 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.
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 e-commerce technologies, and convenient, fast
and inexpensive Internet access. According to International Data Corporation, or
IDC, 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 ISP revenues, including both corporate and residential access, in the
United States are projected to grow from $4.6 billion in 1997 to $18.3 billion
in 2000.
Businesses initially established corporate Internet sites as a means to
improve internal and external corporate communications. Today, businesses are
increasingly utilizing the Internet for mission-critical applications, such as
sales and marketing, customer service and project coordination. The Internet
presents a compelling profit opportunity for businesses as
40
<PAGE> 42
it enables them to reduce operating costs, access valuable information and reach
new markets. To leverage the Internet, businesses must adopt one or both of the
fundamental Internet service platforms--Internet access and web site presence.
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 over 50% annually from approximately $2.0 billion in 1997 to
approximately $6.7 billion in 2000. 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, value-added Internet services, such as
web hosting and security, will grow approximately 172% annually from $351.7
million in 1997 to approximately $7.0 billion in 2000. In particular, U.S. web
hosting revenues are expected to grow approximately 145% annually from $246.7
million in 1997 to $3.6 billion in 2000. IDC also predicts Europe will
experience similar strong growth with corporate Internet access revenue
increasing 49% annually from $1.0 billion in 1997 to approximately $3.4 billion
in 2000 and revenue from value-added services increasing 79% annually from $95.0
million in 1997 to approximately $547.0 million in 2000.
In order to ensure the quality, reliability and availability of these
Internet operations, corporate information technology, or IT, departments make
substantial investments in developing Internet expertise and infrastructure.
These IT 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 e-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 IT 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 solutions has resulted in
a highly fragmented industry with the proliferation of over 6,400 ISPs operating
worldwide with approximately 4,000 ISPs operating within the United States.
These ISPs primarily consist of large national or global ISPs and smaller local
or regional ISPs. The large national or global ISPs are generally more focused
on Internet access products and rely on indirect sales, telemarketing and remote
network operation centers to serve their customers. In addition, such 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, the Company believes that the needs of large
and medium size businesses for comprehensive Internet solutions are underserved
by both large national or global ISPs and smaller local or regional ISPs.
THE GLOBIX SOLUTION
Globix provides its customers with a comprehensive range of high
performance, flexible and scalable products and services, including dedicated
Internet access, web hosting and co-location, Internet-related hardware and
software, systems and network integration, systems administration and web site
management, value-added solutions such as e-commerce, streaming media, network
security and web development, and instructor-led corporate training. Many of the
Company's customers do not have the network infrastructure or Internet expertise
to build, maintain and support mission-critical Internet
41
<PAGE> 43
solutions. The Company'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 VARs, ISPs and IT service
providers, thereby significantly increasing the customer's ability to take full
advantage of the Internet on a timely basis. Key advantages of the Globix
solution are as follows:
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 meet with sales consultants, maintain co-located
equipment, interface with technicians, engineers, designers and customer care
representatives and attend instructor-led training classes. The Company's new
SuperPOPs in New York City, London and the San Francisco Bay area will also be
strategically located near its targeted customer base. The Company believes that
maintaining a strategic local presence near its customers provides it with a
competitive advantage over many large ISPs 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 Internet solutions
providers to operate its own high-performance Internet Data Center in that
market.
High Performance; Reliable Infrastructure. Globix's infrastructure is
designed to provide the performance that its customers require for
mission-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 low-latency
and peak network performance. The Company believes that its monitoring systems,
combined with its trained 24 X 7 support staff, provide customers with a highly
effective means of monitoring, responding to and resolving problems. The
Company'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. The Company is also
establishing a fully redundant, dedicated, high-speed network backbone which
will significantly increase network capacity, improve reliability and reduce
unit data transmission costs.
Scaleability and Flexibility. The Company's solutions are designed to be
flexible and scaleable, ensuring customers a consistently high level of
performance as their Internet operations expand. The Company 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. The Company 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. The Company maintains
relationships with leading Internet hardware and software manufacturers such as
Sun Microsystems, Silicon Graphics, Compaq Computers, Cisco Systems, Microsoft,
Netscape and Check Point Software. These relationships provide the Company with
advance knowledge of innovative and sophisticated technologies and enhances its
ability to recommend and integrate such
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technologies into end-to-end Internet solutions. The Company is committed to
maintaining its expertise in leading Internet technologies.
GROWTH STRATEGY
Globix's objective is to become the leading provider of sophisticated
end-to-end Internet connectivity and Internet-based solutions to large and
medium size businesses in key global business markets. To achieve this
objective, Globix intends to:
Continue to Invest Extensively in Infrastructure. Globix intends to
capitalize on the trend by corporate IT departments to outsource
mission-critical Internet operations by continuing to make significant
investments to improve and expand its infrastructure. The Company'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, the Company is developing
POPs in Washington D.C., Chicago and Los Angeles to establish a market presence
in these cities and 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 backbone, which is
also currently under construction. This infrastructure expansion will position
Globix to aggressively pursue new dedicated access, web hosting and co-location
opportunities. The Company also believes it can achieve significant economies of
scale by leveraging the fixed costs associated with its network backbone and
Internet Data Center facilities. The Company is continually 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 is committed to offering new
technologies to its customers. Globix continually expands the breadth of its
services and its technical expertise to optimize its end-to-end solutions. As
new products and technologies become commercially available, Globix actively
integrates them into its product mix. For example, in 1998 Globix built a team
within the Company 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
needs for Internet products and services and actively seeks to cross-sell
additional products and services to address such needs. For example, the Company
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
end-to-end solutions and enable it to become a more integral component of its
customers' IT 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
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combining targeted branding initiatives with its strong local presence. The
Company began a print advertising campaign in June 1998 to establish brand
recognition for Globix in the New York metropolitan area. The Company advertised
in major business publications including Crains New York, The New York Times and
The Wall Street Journal. In addition, the Company has increased its presence at
industry trade shows. The Company will 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 broad range of end-to-end solutions
including: (i) dedicated Internet access; (ii) Internet Data Center facilities
for 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. Each of the Company's new SuperPOP facilities will offer substantially
the same range of products and services.
DEDICATED INTERNET ACCESS
Globix provides a variety of connectivity solutions, including dedicated
Internet access, hardware and software implementation and system and security
consulting which provide businesses high-speed continuous access to the
Internet. The Company's dedicated Internet access services are provided to
customers at speeds ranging from 56Kbps to 45Mbps. However, the majority of the
Company's connectivity customers purchase 1.5Mbps or higher levels of service.
In addition, the Company provides turnkey 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 the Company's customers receive 24 X 7
technical support. The Company is currently participating in trials of new
access technologies, such as xDSL, and expects to deploy additional
connectivity-related enhanced services, such as Internet conference calling, by
June 30, 1999.
WEB HOSTING
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. The Company'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
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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, e-commerce and database products. Globix 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,
update password protection, 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. The Company also offers dedicated server web
hosting solutions for larger customers that require substantially more server
and network capacity than 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
facility. The Company provides all its web hosting customers with 24 X 7
monitoring, network and systems administration and maintenance, tape back-ups
and security monitoring. This solution 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 an 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. The
Company's co-location services include fault-tolerant physical facilities and
reliable, high bandwidth Internet connectivity tailored to meet the outsourcing
needs of its customers' mission-critical Internet operations. The Company
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 X 7 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. Globix is currently building new state-of-the-art SuperPOP facilities
in New York City, London and the San Francisco Bay area. 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 designed for co-location and web
hosting
- a 61,000 square foot facility located in Santa Clara, California,
containing a 24,000 square foot Internet Data Center
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- a 35,000 square foot facility, located in London's West End district,
containing a 14,000 square foot Internet Data Center
The Internet Data Centers will be connected by a fully redundant,
dedicated, high speed network backbone. All three facilities are expected to be
completed and operational by June 30, 1999.
The Company's new Internet Data Center facilities will feature
uninterruptable power supplies with back-up generators, a dry fire suppression
system, raised floor and fault tolerant environmental controls, 24 X 7
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. Each facility will also feature
multiple redundant links to the building housing the Internet Data Center from
the network backbone via separate fiber feeds from separate suppliers, direct
links to public peering points, and two separate 20 amp circuits from different
suppliers to each customer's rack or cage.
INTERNET-RELATED HARDWARE AND SOFTWARE SALES
Product resales are an integral part of providing end-to-end solutions.
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
Systems. Globix also provides application-specific software products including
browsers, electronic mail and other solutions from a variety of leading
manufacturers, including Microsoft, Netscape and Oracle which allow its
customers to navigate and utilize the Internet.
SYSTEMS AND NETWORK INTEGRATION
Globix's 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, the
Company will configure all equipment it sells by loading customer programs,
connecting equipment to the network, and servicing the customer's hardware and
software. The Company'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's system administration and web site management solutions support
its customers' Internet operations by providing the customer with detailed
monitoring, reporting and management systems to control their Internet-related
hardware, software and network applications. The Company's solutions 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
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systems and web management systems enable Globix and its customers to jointly
manage Internet operations housed at the Company's Internet Data Center and at
its customers' in-house facilities. The Company's comprehensive system
administration and web 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 impacts 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 customer's web sites. The Company maintains a dedicated team of expert
production, design and management personnel which are available for large-scale
web development projects.
E-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 the Company's customers to change products and prices easily and
cost-effectively. The Company also offers credit card authorization and
processing solutions that enable its customers to accept payment directly over
the Internet. This is accomplished through a Cybercash server maintained by the
Company. This server can interface with any of the Company's web hosting or
co-location customers, allowing them to offer their clients a secured socket
layer environment to type a credit card number in a browser for the purpose of
conducting a business transaction. The Company also provides fully integrated
turnkey e-commerce solutions that simplify and facilitate online commerce
without the need for IT support.
Security Solutions. The nature of business Internet traffic demands
protection from unauthorized access. 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 (URL) blocking. Globix also offers a Virtual Private Network (VPN)
solution which offers end-to-end security while greatly reducing the cost of
leased line connectivity to remote offices, remote users and business partners.
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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 has emerged as one of the leading providers of streaming
media services, offering complete integrated, in-house services, including
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 Systems, at the Consumer
Electronics Show. The Company 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 on a value-added basis to its
business customers, often in conjunction with a sale of Internet connectivity,
hardware and software products or value-added solutions. Globix offers
instructor-led training on multiple network platforms (Windows 98, Windows NT,
Mac and Unix), Internet applications (Java, HTML, Macromedia and VRML), office
applications (MS Office, Lotus Notes, Lotus Smart Suite) and 3-dimensional
computer animation programs (Alias, Discrete Logic, Soft Image). 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.
The Company maintains training rooms at its New York SuperPOP facility
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 applications. 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 has grown its customer base to over 800 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. The Company believes it has benefitted from its large base of
business customers located in New York involved in the advertising and media
industries. Because many of these customers design websites and develop Internet
content
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for their clients, they are often in a position to refer their clients to Globix
for Internet access, web hosting and co-location services.
GLOBIX NETWORK INFRASTRUCTURE
Current Infrastructure. Globix's current infrastructure is designed to provide
highly available Internet connectivity to its dedicated access, web hosting and
co-location customers. The Company operates an Internet Data Center in its
current New York City facility providing high bandwidth, highly reliable
connectivity to the Internet and other companies located within the New York
metropolitan area. Within the Internet Data Center, the Company deploys a
fully-redundant, high-speed, switched local area network (LAN). The Company'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
unique router. Utilizing these diverse feeds, the Company's network dynamically
routes traffic over the backbone provider best able to deliver the data in the
most efficient manner. The Company believes that direct connections to these
major backbone providers enables the Company 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 (SONET) ring and connects customer traffic to the
Internet through high speed dedicated leased lines. The Company also maintains
diverse ISDN circuits available to customers as a back-up to their dedicated
lines. The Company's New York facility contains a Network Operation Center,
staffed 24 X 7 by system engineers, who are responsible for monitoring the
performance of both the Company's network equipment and customer equipment.
Network Backbone Expansion. The Company is currently establishing its own
network backbone to replace its existing leased bandwidth. The Company's network
backbone expansion is designed to offer greater reliability, improved
performance and additional functionality at a lower per unit data transmission
cost. The Company's network backbone will also connect its SuperPOP facilities
in New York City, London and the San Francisco Bay area, as well as the
Company's planned POPs in Chicago, Los Angeles and Washington, D.C. The Company
anticipates that its network backbone will become fully operational by June 30,
1999.
In October 1998, the Company entered into an IRU agreement with 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. Globix intends to use $15.0 million of the proceeds of
this offering to maintain its right to OC-3 capacity. If the Company were to
choose not to exercise this option, its domestic network backbone would be
reduced to DS-3 capacity. The IRU agreement also provides Globix with the right
to further upgrade to OC-48 fiber capacity.
The Company's SuperPOPs and POPs will have multiple, redundant and diverse
connections to both the Globix network backbone and local Internet exchange
points. Each SuperPOP and POP will be connected to the Globix network backbone
through diverse, redundant OC-3c links provided by both the incumbent local
telephone companies (ILECs), such as Pacific Bell, Bell Atlantic, Ameritech,
British Telecom and competitive local exchange carriers (CLECs), such as MFS and
Teleport. In addition, connectivity to the Internet exchange points will be
provided by multiple DS-3 or OC-3c links, provided by ILECs and CLECs. All lines
are strategically placed on different routers to avoid any
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single point of failure. Should any SuperPOP lose connectivity to either the
Globix network backbone or a local peering point, traffic will be immediately
and seamlessly routed over an alternative link.
The Company's SuperPOPs and POPs under construction are located near and
connected to most of the major Internet peering points, including MAE-East,
MAE-West, Ameritech NAP and Sprint NAP. The Company's presence at these public
exchange points, combined with private connections to other ISPs, connect its
customers to the Internet. A combination of public and private peering
interconnections will allow the Company to achieve fast, reliable delivery of
content with limited latency. The Company is instituting a general policy of
keeping significant unutilized network capacity for its LAN, wide area network
(WAN) and public and private peering links to allow for spikes in demand or line
outages. The Company is actively pursuing both public and private peering
agreements.
The Company 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 the Company's Network
Operations Centers and POPs. The global operations center will be staffed 24 X 7
by distinct teams of individuals dedicated to maintaining the highest quality of
service. From the global operations center, the network administrators will
monitor Globix's entire network architecture from the Company's network backbone
to the end-user interface. The global operations center network administrators
will be able to efficiently identify and correct any network problems either by
direct action or by the activation of the system engineers located at any of the
Company'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
High quality customer service and support is critical to the Company's
objective of retaining and developing its customers. The Company has made
significant investments in customer service personnel and systems that enhance
customer care and service throughout the complete customer life cycle from order
entry and billing to selling of value-added services. As of November 30, 1998,
the Company's technical and customer service group consisted of 72 individuals.
To ensure consistency in the quality and approach to customer care, customer
care associates attend an extensive formal technical training and certification
program. In connection with its customer care initiatives, the Company seeks to
continuously improve systems that increase productivity and enhance customer
satisfaction. 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 tract, route and report on customer service
issues. A customer service specialist is assigned to each customer issue, and
acts as a liaison, tracking the customer issue to resolution. Network operations
can remotely service customer connections to the Company's network. In addition,
field service personnel are dispatched in the event of an equipment failure that
cannot be serviced remotely. As part of the Company's expansion strategy, the
Company is developing fully redundant network operations centers
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at its new SuperPOP facilities. Globix believes that the quality of its
technical and customer service group has been a major factor in its high
customer retention rate.
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. The
Company 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, the Company 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 systems engineers, direct mail, inbound
and outbound telemarketing, seminars and trade show participation. The Company
has developed compensation and training programs to attract and train high
quality, motivated Internet sales consultants. As of November 30, 1998, Globix
had a direct sales force consisting of approximately 53 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
the Company access to potential Internet service customers in the manufacturers'
customer base, while enabling the manufactures to offer their customers an
integrated package of hardware, software and Internet services and products. The
Company believes that these strategic alliances provide Globix the opportunity
to cost-effectively add new customers. The Company co-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. The Company uses radio and
print advertising in targeted markets and publications to enhance awareness and
acquire leads for the Company's direct sales team. The Company's print
advertisements are placed in trade journals, local technology sections of
newspapers and special-interest publications. The Company attempts to create
brand awareness by participating in industry trade shows such as PC Expo,
Internet and Electronic Commerce, and Internet World. The Company also uses
direct mailings, telemarketing programs, web marketing, co-marketing agreements
and joint promotional efforts to reach new corporate customers. The Company
attempts to retain its customers through active and responsive customer support
as well as by continually offering new value-added services.
COMPETITION
The market served by the Company is intensely competitive, and such
competition is increasing. There are few substantial barriers to entry, and the
Company expects that it will face additional competition from existing
competitors and new market entrants in the future.
The Company believes that a reliable network, a broad range of quality
products and services, a knowledgeable sales force and the quality of customer
care currently are the primary competitive factors in the Company's targeted
market and that price is generally
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secondary to these factors. The Company's current and potential competitors in
the market include: (i) other ISPs, and (ii) global, regional, and local
telecommunications companies.
Other ISPs. The Company's current and potential competitors in the market
include ISP's 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 Exodus, Frontier GlobalCenter, GTE Genuity, DIGEX
and Verio. While the Company 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 the Company.
Telecommunications Carriers. Many long distance companies including AT&T,
Cable & Wireless, Sprint and MCI WorldCom offer Internet access services and
compete with the Company. Recent reforms in the federal regulation of the
telecommunications industry have created greater opportunities for ILECs and
CLECs to enter the Internet connectivity market. The Company believes that there
is a move toward horizontal integration by ILECs and CLECs through acquisitions
of or joint ventures with ISPs to meet the Internet connectivity requirements of
the business customers of long distance and local carriers. Accordingly, the
Company 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 the Company 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 the Company believes that its ability to attract business customers
and to market value-added services is a key to its future success, there can be
no assurance that its competitors will not introduce comparable services or
products at similar or more attractive prices in the future or that the Company
will not be required to reduce its prices to match competition. Furthermore,
there can be no assurance that more of the Company's competitors will not shift
their focus to attracting business customers, resulting in even more competition
for the Company. There can be no assurance that the Company will be able to
offset the effects of any such competition or resulting price reductions.
Increased competition could result in erosion of the Company's market share and
could have a material adverse effect on the Company's business, financial
condition and results of 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.
52
<PAGE> 54
Moreover, a number of laws and regulations have been proposed and are currently
being considered by federal, state and foreign legislatures with respect to such
issues. The nature of any new laws and regulations and the manner in which
existing and new laws and regulations may be interpreted and enforced cannot be
fully determined. For example, in 1998, Congress passed and the president signed
into law: (i) The Digital Millennium Copyright Act, which provides stronger
copyright protection for software, music and other works on the Internet. Under
this law, ISPs and website operators must register with the U.S. Copyright
Office to avoid liability for infringement by their subscribers; (ii) Child
Online Protection Act (COPA), which makes illegal the communication of material
that is harmful to minors on the world wide web for commercial purposes in such
a manner as to be available to minors. COPA also contains a section that
requires websites to obtain parental consent before collecting information from
children 12 and younger; (iii) 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; and (iv) The Internet Tax Freedom Act, which provides a
three-year moratorium on "discriminatory" taxes in order to give state and
federal lawmakers time to develop a more comprehensive approach to Internet
taxation. The adoption of any future laws or regulations might decrease the
growth of the Internet, decrease demand for the services of the Company, impose
taxes or other costly technical requirements or otherwise increase the cost of
doing business or in some other manner have a material adverse effect on the
Company or its customers, each of which could have a material adverse effect on
the Company's business, results of operations and financial condition. In
addition, 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 is uncertain. The vast majority
of such laws were adopted prior to the advent of the Internet and related
technologies and, as a result, do not contemplate or address the unique issues
of the Internet and related technologies. Changes to such laws intended to
address these issues, including some recently proposed changes, could create
uncertainty in the marketplace which could reduce demand for the services of the
Company or increase the cost of doing business as a result of costs of
litigation or increased service delivery costs, or could in some other manner
have a material adverse effect on the Company's business, results of operations
and financial condition. Any such new legislation or regulation, or the
application of laws or regulations from jurisdictions whose laws may not
currently apply to the Company's business, could 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
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.
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<PAGE> 55
EMPLOYEES
As of November 30, 1998, Globix employed approximately 188 full-time
employees. Of these, approximately 38 are administration, 78 are in sales and
marketing and 72 are 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
satisfactory.
FACILITIES
The Company currently leases approximately 32,000 square feet at 295
Lafayette Street, New York, New York. The facility currently houses the
Company's New York Internet Data Center and executive offices. When the
Company'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 in June of 1999.
The following sets forth additional information concerning the 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 Not Applicable 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., the Company and two
individuals. The Complaint alleges that the Company tortiously interfered with
the plaintiff's contractual and business relations with General Media
International Inc. and seeks unspecified damages. The litigation is in the
pre-trial discovery phase. The Company believes it has meritorious defenses and
intends to vigorously contest the claim.
54
<PAGE> 56
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
William T. Jahnke.................. 45 Vice President, Solution Sales
Scott Safran....................... 43 Vice President, Training
Anthony Previte.................... 33 Vice President, Engineering
Robert Knoll....................... 34 Vice President, Operations
Francine Formisano................. 45 Vice President, Customer Service
and Support
Terri Pearson ..................... 35 Vice President, International
Richard A. Topolewski Jr. ......... 37 Vice President, Internet Sales
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 the Company in 1989. Since re-focusing the Company on Internet-related
services, Mr. Bell has appeared on numerous television broadcasts and has been
frequently quoted in numerous national publications regarding Internet-related
topics. Mr. Bell has 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. Mr. Bell is a member of the Board of Directors of Cybernet Data
Systems, Inc., the "publisher" of the web site Edgar-on-Line.com.
ROBERT B. BELL has served as Executive Vice President and Chief Financial
Officer of the Company since 1994. Mr. Bell is also the Managing Director of the
Company's UK subsidiary, Globix Limited. Prior to joining the Company, 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 the law of international
real estate joint ventures and investment. He is the author of Joint Ventures in
Real Estate published by John Wiley & Sons. Prior to
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<PAGE> 57
1994, Mr. Bell was for many years an Adjunct Professor at New York University.
Mr. Bell is the father of Marc H. Bell. Mr. Bell has a B.S. degree from New York
University and a J.D. degree from the University of California at Berkeley.
MARC JAFFE, Senior Vice President, Operations, joined the Company in
January 1995. Mr. Jaffe has extensive experience in the use of computers and
telecommunications in the advertising and marketing industry. Mr. Jaffe recently
developed an Internet-focused marketing strategy that won the prestigious
CreaTech Award, presented by Advertising Age magazine, and has spoken at
numerous Internet conferences. Prior to joining Globix, Mr. Jaffe was a
department manager at Sid Paterson Advertising Inc. in New York City, which he
joined in 1989. Mr. Jaffe graduated from Colgate University in 1989, where he
received a Bachelor of Arts Degree.
ALAN LEVY, Treasurer and Chief Accounting Officer, joined the Company 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.
WILLIAM T. JAHNKE has been Vice President, Solution Sales of the Company
since March 1997 and the Director of Corporate Sales of the Company since August
1995. From January 1995 to July 1995, Mr. Jahnke was an independent business and
technology consultant. From February 1989 to December 1994, Mr. Jahnke was
President and Chief Operating Officer of Vernon Computer Rentals and Leasing,
where he implemented a nationwide asset management program for vendors,
including Apple, used by several thousand United States sales representatives.
Mr. Jahnke received a B.S. Degree in Computer Science from Seneca College in
1975.
SCOTT SAFRAN has been Vice President, Training and Interactive Development
since June 1997 and the Director of Corporate Training since joining the Company
in March 1995. From December 1994 to March 1995, he was a Senior Account Manager
at IBM Skill Dynamics Corporation. From December 1989 to December 1994, Mr.
Safran held various sales positions at AT&T. Mr. Safran has a Bachelor of Arts
in English Literature and a Master of Business Administration from St. Johns
University.
ANTHONY PREVITE, Vice President, Technology, joined the Company 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.
ROBERT KNOLL, Vice President Operations, joined the Company in January
1998. From December 1996 to January 1998, Mr. Knoll was the Vice President of
Operations and Business Affairs at K2 Design, Inc., an interactive advertising
agency. From November 1990 to December 1996, Mr. Knoll was the Vice President of
Client Services at NW Ayer/DirectPro, an advertising agency. Mr. Knoll's other
experience includes management-level positions at American Express and
MacMillan, Inc./KG Advertising.
56
<PAGE> 58
FRANCINE FORMISANO, Vice President of Customer Service and Support, joined
the Company 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, Ms. Formisano held various positions at IBM, most recently as a
Project Manager in the Electronic Commerce Internet Division.
TERRI PEARSON, Vice President, International, and Director of Operations
for Globix Limited, joined the Company in October 1998. Ms. Pearson directs all
aspects of the subsidiary's daily operations, including recruiting. From 1995 to
1998, Ms. Pearson was the Director of Human Resources and Operations at Demon
Internet, U.K.'s largest ISP. From 1992 to 1995, Ms. Pearson served as the
General Manager of World Viewdata Travel Services, Ltd., a division of BT
Prestel.
RICHARD TOPOLEWSKI, JR., Vice President, Internet Sales, joined the Company
in May 1997. From January 1994 to May 1997, Mr. Topolewski was the Director of
Northeast Partner Sales for MFS Communications. Mr. Topolewski was a National
Sales Manager with Metromedia Communications from November 1990 through January
1994. Mr. Topolewski received a Bachelor of Science degree from Johnson and
Wales University in Business Management.
ROBERT MILSTEIN, Vice President, Marketing, joined the Company in March
1996. In December 1989, Mr. Milstein founded Milstein Computer Graphics, a
provider of marketing, advertising and design services. From May 1989 to
December 1989, Mr. Milstein served as the Production Manager of a magazine
publishing company. Mr. Milstein received his Bachelor of Science degree from
Cornell University in 1989.
PAUL ASHER, Vice President, Facilities and Secretary, joined the Company in
July 1994. Mr. Asher was named Vice President, Facilities in August 1998. Prior
to that, Mr. Asher served as the Company's Special Projects Manager. Prior to
joining the Company, Mr. Asher had his own equipment rental company. Mr. Asher
has a Bachelor of Arts degree from the University of Rochester.
TSUYOSHI SHIRAISHI has been a director of the Company 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. Mr. Shiraishi is a Japanese citizen and a resident of Singapore.
MARTIN FOX has been a director of the Company 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 e-commerce and catalogue specialty
retailer of consumer products.
DR. RICHARD VIDEBECK has been a director of the Company 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.
57
<PAGE> 59
ANTHONY ST. JOHN, LORD ST. JOHN OF BLETSO has been a director of the
Company 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. He is
also a director of Globix Limited and 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. He
qualified as an attorney/solicitor in Capetown, South Africa.
SID PATERSON has been a director of the Company 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% 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 $8.625 per share on October 1, 1995 and October 1, 1996,
respectively. In September 1997, such options were re-priced at $6.125 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 (i) the first day of Globix's fiscal year or (ii) 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 the Company.
58
<PAGE> 60
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.
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, 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 1997 200,000 -- -- --
Executive Officer 1996 165,000 -- -- --
Robert B. Bell................................... 1998 151,042 -- -- 30,000
Executive Vice 1997 125,000 -- -- 90,000
President and 1996 100,504 -- -- --
Chief Financial
Officer
Marc Jaffe....................................... 1998 133,250 -- -- 50,000
Senior Vice 1997 89,000 -- -- 25,000
President, Operations 1996 64,083 -- -- 5,000
William T. Jahnke................................ 1998 100,000 -- -- 10,000
Vice President, 1997 82,800 -- -- 12,000
Solution Sales 1996 80,000 -- -- 6,000
Scott Safran..................................... 1998 107,203 -- -- 20,000
Vice President, 1997 60,547 -- -- 5,000
Training 1996 17,385 -- -- --
</TABLE>
59
<PAGE> 61
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 the
Company's estimate or projection of the Company's future common stock
prices. These amounts represent certain assumed rates of appreciation in the
value of the Company'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> 62
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. 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(1)
-------------------------------- ----------------------------
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>
- ---------------
(1) 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.
EMPLOYMENT AGREEMENT
The Company 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 the Company's common stock on
June 30 of the current year over the highest per share market price of the
Company'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 the Company. In March 1998, Mr. Bell received stock
options to purchase (i) 69,500 shares of common stock at an exercise price of
$7.15 per share and (ii) 142,000 shares of common stock at an exercise price of
$6.50 per share upon the closing of certain financing for the Company. In
addition, as of September 30 of each fiscal year, if there is an increase in the
total shares of common stock outstanding of the Company due to an equity
offering or acquisition, Mr. Bell is entitled to receive a stock option to
purchase shares of common stock equal to 25% of such increase, at an exercise
price at least equal to the fair market price of the Company's common stock.
In September 1998, Mr. Bell borrowed $155,000 from the Company. The loan
matures five years after the date made and bears interest at the rate of 8.0%
per annum. Interest which 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 the Company during 1997. The loan is due in
2002 and bears interest at the rate of 8.75% per annum.
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<PAGE> 63
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, the Company. The Stock Option Committee has discretionary
authority to determine the types of stock options to be granted, the persons
eligible to receive stock options, those to whom options may be granted, the
number of shares to be subject to such options, the exercise price of such
option and the terms of the stock option agreements. The exercise price will be
determined by the Stock Option Committee and be paid in cash, certified or bank
check, or in stock of the Company 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% 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 (i) the first day of
Globix's fiscal year or (ii) 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 January 9, 1999, total unexercised options to purchase approximately
312,730 shares of Common Stock were outstanding under the 1995 Stock Option
Plan, including options to purchase approximately 149,500 shares granted to the
Company's executive officers and directors. The exercise prices of such options
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. On January 8, 1998, the Board of Directors of the
Company 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, the Company. 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 the Company 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 five equal successive annual installments over the five-year
period measured
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<PAGE> 64
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 the Company'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 (i) the first day of Globix's fiscal year or (ii) 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 January 9, 1999, the Company had granted options to purchase
1,105,166 shares of Common Stock under the 1998 Stock Option Plan, including
options to purchase 544,416 shares granted to the Company's executive officers
and directors. The exercise price of such options range from $5.00 to $15.00 per
share. The term of the options is ten years from the date of grant.
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<PAGE> 65
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 the Company. 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."
The Company utilizes Sid Paterson Advertising, Inc., an entity controlled
by Mr. Sid Paterson, a director of the Company, as its agent to place Company
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 (BLP), 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. The Company also
entered into an agreement with the minority partner of BLP, giving the Company
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 the Company's IPO 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 the Company. The Company will hold such shares pursuant to a Share Deposit
Agreement, dated January 24, 1996 among Harpoon, Mr. Bell, the Company and
Rickel & Associates, Inc. The Deposit Shares will be returned to their
respective owners in January 2004.
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<PAGE> 66
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of Globix common stock (a) as of December 31, 1998 and (b) immediately
following the offering by: (i) the selling stockholder, (ii) each person or
entity who is known by Globix to own beneficially 5% or more of the outstanding
shares of common stock, (iii) each executive officer in office as of December
31, 1998, (iv) each director, and (v) all executive officers and directors of
the Company as a group.
<TABLE>
<CAPTION>
SHARES OWNED PRIOR SHARES OWNED AFTER
TO THE OFFERING(1) THE OFFERING
---------------------- SHARES ----------------------
NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
<S> <C> <C> <C> <C> <C>
SELLING STOCKHOLDER:
VMR Luxembourg S.A.(3)....... % 125,000 -- %
NAMED EXECUTIVE OFFICERS, DIRECTORS
AND 5% STOCKHOLDERS:
Marc H. Bell(4).............. 1,699,193 39.7 -- 1,699,193
Robert B. Bell(5)............ 120,051 2.8 -- 120,051
Marc Jaffe(6)................ 26,767 * -- 26,767
Alan Levy(7)................. 4,501 * -- 4,501
Tsuyoshi Shiraishi(8)........ 612,500 14.8 -- 612,500
Martin Fox(9)................ 16,000 * -- 16,000
Dr. Richard Videbeck(10)..... 16,000 * -- 16,000
Lord Anthony St. John(11).... 15,000 * -- 15,000
Sidney Paterson(12).......... 20,000 * -- 20,000
All executive officers and
directors as a group (9
persons)(13).............. 1,917,512 42.8% -- 1,917,512 %
</TABLE>
- -------------------------
* Indicates beneficial ownership of less than one percent of the total
outstanding common stock.
(1) Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if such person has or
shares the power to vote or direct the voting of such security or the power
to dispose or direct the disposition of such security. A person is also
deemed to be a beneficial owner of any securities if that person has the
right to acquire beneficial ownership within 60 days. Accordingly, more
than one person may be deemed to be a beneficial owner of the same
securities. Unless otherwise indicated by footnote, the named entities or
individuals have sole voting and investment power with respect to the
shares of common stock beneficially owned.
(2) Applicable percentage of ownership is based on 4,140,166 shares outstanding
prior to this offering and shares to be outstanding upon
consummation of this offering, but does not include shares
to be issued if the Underwriters' over-allotment option is exercised in
full.
(3) VMR Luxembourg S.A.'s address is Chateau Woltz, 34 rue Neuve, L-5560,
Remich, Luxembourg.
(4) Includes (i) 944,693 shares owned directly by Mr. Bell (125,000 shares of
which are pledged to an unrelated third party which financed Mr. Bell's
acquisition of such shares pursuant to a security agreement), (ii) the
right to acquire 142,000 shares
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<PAGE> 67
pursuant to currently exercisable stock options, and (iii) 612,500 shares
owned by Harpoon, an entity controlled by Mr. Shiraishi, a director of the
Company, which 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 the Company's directors.
The Irrevocable Proxy terminates in June 2004.
(5) Includes the right to acquire 120,000 shares pursuant to currently
exercisable stock options.
(6) Includes the right to acquire 26,667 shares pursuant to currently
exercisable stock options and options which vest within 60 days.
(7) Includes the right to acquire 4,500 shares pursuant to currently
exercisable stock options.
(8) Mr. Shiraishi's shares are held through Harpoon. Mr. Shiraishi, a director
of the Company, is the sole shareholder of Harpoon. Harpoon has granted the
Underwriters an option to purchase up to shares of common stock
solely to cover over-allotments. If the Underwriters' over-allotment is
exercised in full, Mr. Shiraishi will beneficially own % of the common
stock after consummation of the offering. Mr. Shiraishi's address is
Harpoon Holdings, Ltd., 2 Handy Road, #11-09 Cathay Building, Singapore
229233.
(9) Mr. Fox has 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 06805.
(10) Dr. Videbeck has 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.
(11) Includes the right to acquire 10,000 shares pursuant to currently
exercisable stock options. Lord St. John's address is 97 Cadogan Gardens,
London SW3 2RE, United Kingdom.
(12) Mr. Paterson has 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.
(13) Includes stock options to purchase 345,167 shares which are either
currently exercisable or exercisable within 60 days.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized capital stock of Globix consists of 20,000,000 shares of
common stock, par value $.01 per share, and 500,000 shares of preferred stock,
par value $.01 per share. The preferred stock may be issued with such rights,
designations and privileges (including redemption and voting rights) as the
Board may, from time to time, determine. Globix's Board of Directors approved,
and Globix's stockholders at the 1998 Annual Meeting of Stockholders held on
April 16, 1998 adopted, an amendment to Globix's Certificate of Incorporation to
increase the number of authorized shares of common stock from 10,000,000 to
20,000,000, par value $.01 per share. This amendment to the Certificate of
Incorporation became effective on June 1, 1998.
COMMON STOCK
As of November 30, 1998 there were 4,140,116 shares of common stock
outstanding which are held of record by approximately 41 stockholders, which
does not include individual participants in security position listings.
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders of 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
In connection with its public offering of common stock in early 1996, the
Company sold to the underwriter of the offering, Rickel & Associates, Inc., for
nominal consideration, underwriter's warrants to purchase 115,000 shares of
common stock and additional warrants to purchase 57,500 shares. The
underwriter's warrants expire on
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<PAGE> 69
January 23, 2001 and are exercisable at $10.94 per share of common stock and
$0.165 per additional warrant. The additional warrants expire on January 23,
2001, and are exercisable at $11.64 per share of common stock.
The Company 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 $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 such shares are
subject to adjustment in certain events, including the payment by the Company of
dividends, other than cash dividends.
REGISTRATION RIGHTS
Commencing on May 1, 1999, the holders of the common stock purchase
warrants issued on April 30, 1998 in connection with the Company's $160.0
million debt financing, are entitled to certain 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. The
holders of 25% or more of the warrants are entitled to demand that the Company
register the shares of common stock underlying the warrants under the Securities
Act, subject to certain limitations. The Company is not required to effect more
than three such registrations pursuant to the demand registration rights. In
addition, the warrant holders are entitled to certain piggyback registration
rights with respect to the registration of the shares of common stock underlying
the warrants under the Securities Act. The demand and piggyback registration
rights are subject to certain 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 such registration. The Company is
generally required to bear all of the expenses of all such registrations, except
underwriting discounts and commissions. Registration of any of the shares of
common stock underlying the warrants would result in such shares becoming freely
tradable without restriction under the Securities Act immediately upon
effectiveness of such registration.
In connection with the Company's IPO in 1996, the underwriter for such
offering was granted a warrant (the Warrant) to purchase 115,000 shares of
common stock and additional warrants to purchase 57,500 shares of common stock
(the Additional Warrants). Under the terms of the Warrant Agreement, the Company
is required to notify the underwriter or its assigns (a Holder) prior to filing
a registration statement under the Securities Act to register any securities of
the Company. Any Holder, until January 24, 2004, may require the Company to
include for registration in any such registration statement the Warrant, the
Additional Warrants and the common stock underlying such warrants held by such
Holder. The registration rights granted to the Holders are subject to customary
restrictions, conditions and limitations. In addition, at any time prior to
January 24, 2001, any Holder owning over 51% of the common stock underlying the
Warrant and the Additional Warrants shall be entitled to demand that the Company
register the shares such Holder owns under the Securities Act, subject to
"piggyback" rights of other holders. The demand and piggyback registration
rights are subject to certain 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 such registration. The Company is
generally required to bear all of the expenses of all such registrations, except
underwriting discounts and commissions. Registration of any of the shares of
common stock underlying the warrants would result in such shares becoming
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<PAGE> 70
freely tradable without restriction under the Securities Act immediately upon
effectiveness of such registration.
Pursuant to a Consulting Agreement (the Consulting Agreement) dated as of
November 18, 1998, between the Company and Value Management Research A.G. (VMR),
the Company is required to register up to 125,000 shares owned by VMR Luxembourg
S.A. under the Securities Act by February 16, 1999. This Registration Statement
is intended to satisfy the Company's obligations under the Consulting Agreement
with respect to such shares. VMR has exercised its rights to register 125,000
shares in this offering. See "Principal and Selling Stockholders."
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
Globix is a Delaware Corporation and subject to Section 203 of the Delaware
General Corporation Law (the Delaware Law), an anti-takeover law. In general,
Section 203 of the Delaware Law prohibits an "interested stockholder" (defined
generally as a person owning 15% or more of a corporation's outstanding voting
stock) from engaging in a "business combination" (as defined below) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the Board of Directors and the holders of at least 66 2/3% of the outstanding
shares of voting stock not owned by the interested stockholder. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. This statute could prohibit or
delay the accomplishment of mergers or other takeover or change in control
attempts with respect to Globix and, accordingly, 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 provides that any action required or permitted to be taken
by the stockholders of Globix may be taken at a duly called annual or special
meeting of the stockholders, or without a meeting, if a written consent is
signed by a majority of the holders of outstanding common stock. The By-laws
provide that a majority of stockholders or members of the Board of Directors can
change the size of Board, but to no less than two directors, and fill vacancies
on the Board. The By-Laws provide that one-third of the issued and outstanding
shares present at a meeting of the stockholders of Globix shall constitute a
quorum for the transaction of all business which shall come before the meeting.
The By-laws provide that stockholders seeking to bring business before an
annual meeting of stockholders, or to nominate candidates for election as
directors at an annual meeting of stockholders, must provide timely notice
thereof in writing. To be timely, a stockholder's notice must be delivered to or
mailed and received at Globix's principal executive offices, not less than 120
days nor more than 150 days prior to the first anniversary of the date of
Globix's notice of annual meeting provided with respect to the previous year's
annual meeting of stockholders. The By-laws also specify certain requirements as
to the form and content of a stockholder's notice. These provisions may preclude
stockholders from bringing matters before an annual meeting of stockholders or
from making nominations for directors at an annual meeting of stockholders.
The authorized but unissued shares of common stock and preferred stock are
available for future issuance without stockholder approval. These additional
shares may be utilized 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
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<PAGE> 71
discourage an attempt to obtain control of Globix by means of a proxy contest,
tender offer, merger or otherwise.
The Delaware Law provides generally that the affirmative vote of a majority
of the shares entitled to vote on any matter is required to amend a
corporation's certificate of incorporation or bylaws, unless a corporation's
certificate of incorporation or bylaws, as the case may be, requires a greater
percentage.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Certificate of Incorporation provides that, except to the extent
prohibited by the Delaware Law, Globix's directors shall not be personally
liable to Globix or its stockholders for monetary damages for any breach of
fiduciary duty as directors of Globix. Under the Delaware Law, the directors
have a fiduciary duty to Globix which is not eliminated by this provision of the
Certificate of Incorporation and, in appropriate circumstances, equitable
remedies such as injunctive or other forms of nonmonetary relief will remain
available. In addition, each director will continue to be subject to liability
under the Delaware Law for breach of the director's duty of loyalty to Globix,
for acts or omissions which are found by a court of competent jurisdiction to be
not in good faith or which involve intentional misconduct, or knowing violations
of law, for actions leading to improper personal benefit to the director, and
for payment of dividends or approval of stock repurchases or redemptions that
are prohibited by the Delaware Law. This provision also does not affect the
directors' responsibilities under any other laws, such as the Federal securities
laws or state or Federal environmental laws. Globix has obtained liability
insurance for its officers and directors.
Section 145 of the Delaware Law empowers a corporation to indemnify its
directors and officers and to purchase insurance with respect to liability
arising out of their capacity or status as directors and officers, provided that
this provision shall not eliminate or limit the liability of a director: (i) for
any breach of the director's 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) arising under
Section 174 of the Delaware Law, or (iv) for any transaction from which the
director derived an improper personal benefit. The Delaware Law provides further
that the indemnification permitted thereunder shall not be deemed exclusive of
any other rights to which the directors and officers may be entitled under the
corporation's bylaws, any agreement, a vote of stockholders or otherwise. The
Certificate eliminates the personal liability of directors to the fullest extent
permitted by Section 102(b)(7) of the Delaware Law and provides that Globix
shall fully indemnify any person who was or is a party or is threatened to be
made a party to any threatened, pending or completed action, suit or proceeding
(whether civil, criminal, administrative or investigative) by reason of the fact
that such person is or was a director or officer of Globix, or is or was serving
at the request of Globix as a director or officer of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
against expenses (including attorney's fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding.
In addition, the By-laws of the Company provide that Globix is required to
indemnify its officers and directors 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. At present, Globix is not aware of any pending or threatened
litigation or proceeding involving a director, officer, employee or agent of
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<PAGE> 72
Globix in which indemnification would be required or permitted. Globix believes
that the provisions discussed above are necessary to attract and retain
qualified persons as directors and officers.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is
Continental Stock Transfer & Trust Company.
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<PAGE> 73
SHARES ELIGIBLE FOR FUTURE SALE
Upon the closing of this offering, the Company will have an aggregate
of shares of common stock outstanding, assuming no exercise of
the underwriters' over-allotment option and no exercise of outstanding options
or warrants. Of the outstanding shares, the shares sold in this
offering will be freely tradable, except that any shares held by "affiliates" of
the Company (as that term is defined in Rule 144 promulgated under the
Securities Act) may only be sold in compliance with the limitations described
below. The remaining shares of common stock will be deemed "restricted
securities" as defined under Rule 144. Restricted securities may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144 or 144(k) promulgated under the Securities Act,
which rules are summarized below. Subject to the lock-up agreements described
below and the provisions of Rules 144 and 144(k), additional shares will be
available for sale in the public market as follows:
<TABLE>
<CAPTION>
NUMBER OF SHARES DATE
<S> <C>
After the date of this prospectus
At various times after 90 days from the
date of this prospectus (Rule 144)
At various times after 180 days from the
date of this prospectus (Rule 144)
After 180 days from the date of this
prospectus (subject, in some cases, to
volume limitations)
</TABLE>
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 (i) 1% of the then
outstanding shares of common stock (approximately shares immediately
after this offering) or (ii) 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 the Company 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 the Company, 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 December
31, 1998, there were outstanding options to purchase 1,097,771 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.
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The Company'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."
The Company 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 the Company may issue, and grant options to purchase, shares of common
stock under the 1998 Stock Option Plan. In addition, the Company 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.
Following this offering, under certain circumstances and subject to certain
conditions, holders of warrants to purchase 735,700 shares of the Company's
outstanding common stock will have certain registration rights with respect to
such shares of common stock underlying the warrants to require the Company 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
the Company. See "Description of Securities -- Registration Rights."
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<PAGE> 75
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 the Company 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..................................................
</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
over-allotment 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 the Company and the selling stockholder 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 COMPANY STOCKHOLDERS
----------------------------- -----------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
<S> <C> <C> <C> <C>
Per share................
Total....................
</TABLE>
The Company will pay the offering expenses, estimated to be $
The Company and the selling stockholder have granted to the underwriters an
option, exercisable for 30 days from the date of the underwriting agreement, to
purchase up to additional shares at the public offering price less the
underwriting fees. The underwriters may exercise such option solely to cover
over-allotments, 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.
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<PAGE> 76
The Company and the selling stockholder have agreed to indemnify the
underwriters against certain civil liabilities, including liabilities under the
Securities Action of 1933, or to contribute to payments that the underwriters
may be required to make in respect of any of those liabilities.
The Company, the executive officers and directors of the Company, and
certain stockholders of the Company 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, the Company has agreed not to
file any registration statement with respect to, and each of its executive
officers, directors and certain stockholders of the Company 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 the Company,
the selling stockholder 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.
75
<PAGE> 77
LEGAL MATTERS
The validity of the issuance of the common stock offered hereby has been
passed upon for the Company 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 accounts, 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.
76
<PAGE> 78
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 (the Securities Act), 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.
77
<PAGE> 79
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 - F-7
Notes to Consolidated Financial Statements.................. F-8 - F-20
</TABLE>
F-1
<PAGE> 80
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> 81
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..................................... 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> 82
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> 83
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> 84
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> 85
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> 86
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
was 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, 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.
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> 87
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> 88
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> 89
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Although these estimates are based on management's knowledge
of current events and actions it may undertake in the future, they may
ultimately differ from actual results.
RECENT 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
F-11
<PAGE> 90
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 (BLP) 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 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
F-12
<PAGE> 91
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 purchase price of $14.03 per share. The
notes will mature on May 1, 2005. Interest on the
F-13
<PAGE> 92
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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. The
Company 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.
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.
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.
F-14
<PAGE> 93
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 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.
F-15
<PAGE> 94
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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%.
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
F-16
<PAGE> 95
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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.
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.
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
F-17
<PAGE> 96
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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).
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
F-18
<PAGE> 97
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
$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>
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.
F-19
<PAGE> 98
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
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 Company
advertisements in various print publications. Amounts paid to Sid Paterson
Advertising, Inc. for the year 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. 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 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-20
<PAGE> 99
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
JANUARY , 1999
GLOBIX LOGO
SHARES OF COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
LEHMAN BROTHERS
- --------------------------------------------------------------------------------
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................................. $
NASD filing fee......................................
Nasdaq National Market listing fee...................
Blue sky and expenses (including legal fees).........
Transfer agent fees..................................
Printing.............................................
Legal Fees and Expenses..............................
Accounting Fees and Expenses.........................
Miscellaneous........................................
Total........................................... $
</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 the Company shall
indemnify its directors and officers under certain circumstances, including
those circumstances in which indemnification would otherwise be discretionary,
and the Company is required to advance expenses to its officers and directors as
incurred in connection with proceedings against them for which they may be
indemnified.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In the past three years, the Company 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, the Company completed a private placement of 400,000
shares of Common Stock through Value Management and Research GmbH for a total
consideration of $2.2 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, the Company 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, the Company 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 the Company and
Donaldson, Lufkin & Jenrette Securities Corporation.**
3.1 Certificate of Incorporation of the Company, as amended.(10)
3.2 By-laws of the Company, 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 the Company 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 the Company and ING Baring (U.S.)
Securities, Inc. (the Initial Purchaser), dated April 24,
1998.(8)
10.2 Warrant Agreement between the Company and Marine Midland
Bank, as Warrant Agent, dated as of April 30, 1998.(8)
10.3 Registration Rights Agreement between the Company and the
Initial Purchaser, dated as of April 30, 1998.(8)
10.4 Warrant Registration Rights Agreement between the Company
and the Initial Purchaser, 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 the
Company, 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 the Company,
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 the Company 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 the Company, 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 the Company, from Marc H. Bell, dated
April 2, 1997 and June 30, 1997.(6)
10.18 Agreement by and between the Company 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 Bell Technology Group Ltd., and Cisco
Systems Capital Corporation granting credit approval for
$1,000,000 for leasing transactions, dated as of December
15, 1997.(7)
10.20+ Purchase Agreement between Hanover Equities, Inc. and the
Company dated as of June 2, 1998.(12)
10.21+ Purchase Agreement between Young Woo and the Company dated
as of June 2, 1998.(12)
10.22 Lease between Mission Plaza LLC and the Company dated as of
July 24, 1998.(13)
10.23 First Amendment to Lease by and between Mission Plaza LLC
and the Company dated October 8, 1998 and effective as of
July 24, 1998.(13)
10.24 Lease by and between Corston Holdings Limited, Globix
Limited and the Company 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
the Company dated as of October 5, 1998.(13)
10.27++ Letter Agreement between Princeton Capital LLC, Hanover
Equities, Inc. and the Company, dated January 8, 1999.**
10.28++ Operating Agreement of BLP Acquisition LLC dated as of July
2, 1998.**
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.
++ Confidential treatment to be sought for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
II-3
<PAGE> 103
(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 the Company's Annual Report on Form 10-KSB/A
for the year ended September 30, 1996.
(4) Incorporated by reference to the Company's Report on Form 8-K/A filed July
18, 1997.
(5) Incorporated by reference to the Company'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 the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
(8) Incorporated by reference to the Company's Report on Form 8-K filed May 11,
1998.
(9) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
filed on March 16, 1998.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-57993) filed June 29, 1998.
(11) Incorporated by reference to the Company's Registration Statement on Form
S-4/A (File No. 333-57993) filed August 7, 1998.
(12) Incorporated by reference to the Company's Report on Form 8-K/A filed
September 16, 1998.
(13) Incorporated by reference to the Company's 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.
II-4
<PAGE> 104
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-5
<PAGE> 105
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this 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 January 8, 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.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities indicated below:
Dated: January 8, 1999 /s/ MARC H. BELL
--------------------------------------
Marc H. Bell, President, Chief
Executive Officer and Director
(Principal Executive Officer)
Date: January 8, 1999 /s/ ROBERT B. BELL
--------------------------------------
Robert B. Bell, Executive Vice
President, Chief Financial Officer and
Director (Principal Financial Officer)
Date: January , 1999 /s/
--------------------------------------
Martin Fox, Director
Date: January , 1999 /s/
--------------------------------------
Tsuyoshi Shiraishi, Director
II-6
<PAGE> 106
Date: January 8, 1999 /s/ RICHARD VIDEBECK
---------------------------------------
Richard Videbeck, Director
Date: January 8, 1999 /s/ SID PATERSON
--------------------------------------
Sid Paterson, Director
Date: January , 1999 /s/
--------------------------------------
Anthony St. John, Director
Date: January 8, 1999 /s/ ALAN LEVY
--------------------------------------
Alan Levy, Treasurer and
Chief Accounting Officer
(Principal Accounting Officer)
II-7
<PAGE> 107
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
<S> <C>
1. Form of Underwriting Agreement between the Company and
Donaldson, Lufkin & Jenrette Securities Corporation.**
3.1 Certificate of Incorporation of the Company, as amended.(10)
3.2 By-laws of the Company, 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 the Company 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 the Company and ING Baring (U.S.)
Securities, Inc. (the Initial Purchaser), dated April 24,
1998.(8)
10.2 Warrant Agreement between the Company and Marine Midland
Bank, as Warrant Agent, dated as of April 30, 1998.(8)
10.3 Registration Rights Agreement between the Company and the
Initial Purchaser, dated as of April 30, 1998.(8)
10.4 Warrant Registration Rights Agreement between the Company
and the Initial Purchaser, 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 the
Company, 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 the Company,
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 the Company and Puck Associates,
dated as of July 23, 1996.(3)
10.12 Loan and Security Agreement between Finova Capital
Corporation (Finova) and the Company, 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> 108
<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 the Company, from Marc H. Bell, dated
April 2, 1997 and June 30, 1997.(6)
10.18 Agreement by and between the Company 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 Bell Technology Group Ltd., and Cisco
Systems Capital Corporation granting credit approval for
$1,000,000 for leasing transactions, dated as of December
15, 1997.(7)
10.20+ Purchase Agreement between Hanover Equities, Inc. and the
Company dated as of June 2, 1998.(12)
10.21+ Purchase Agreement between Young Woo and the Company dated
as of June 2, 1998.(12)
10.22 Lease between Mission Plaza LLC and the Company dated as of
July 24, 1998.(13)
10.23 First Amendment to Lease by and between Mission Plaza LLC
and the Company dated October 8, 1998 and effective as of
July 24, 1998.(13)
10.24 Lease by and between Corston Holdings Limited, Globix
Limited and the Company 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
the Company dated as of October 5, 1998.(13)
10.27++ Letter Agreement between Princeton Capital LLC, Hanover
Equities, Inc. and the Company, dated January 8, 1999.**
10.28++ Operating Agreement of BLP Acquisition LLC dated as of July
2, 1998.**
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.
++ Confidential treatment to be sought 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 the Company's Annual Report on Form 10-KSB/A
for the year ended September 30, 1996.
<PAGE> 109
(4) Incorporated by reference to the Company's Report on Form 8-K/A filed July
18, 1997.
(5) Incorporated by reference to the Company'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 the Company's Annual Report on Form 10-KSB for
the year ended September 30, 1997.
(8) Incorporated by reference to the Company's Report on Form 8-K filed May 11,
1998.
(9) Incorporated by reference to the Company's Proxy Statement on Schedule 14A
filed on March 16, 1998.
(10) Incorporated by reference to the Company's Registration Statement on Form
S-4 (File No. 333-57993) filed June 29, 1998.
(11) Incorporated by reference to the Company's Registration Statement on Form
S-4/A (File No. 333-57993) filed August 7, 1998.
(12) Incorporated by reference to the Company's Report on Form 8-K/A filed
September 16, 1998.
(13) Incorporated by reference to the Company's Report on Form 10-KSB filed
December 29, 1998.
<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
January 6, 1999
