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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 2000
Commission File No. 0-25615
Globix Corporation
(Exact name of registrant as specified in its charter)
Delaware 13-3781263
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
139 Centre Street, New York, New 10013
York (Zip Code)
(address of principal executive
offices)
Registrant's Telephone number, including (212) 334-8500
area code:
Securities registered pursuant to Section 12(g) of the Act:
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Title of Each Class Name of Each Exchange on Which Registered
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Common Stock, $.01 par value Nasdaq National Market
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Indicate by check mark whether registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No
Indicate by checkmark if disclosure of delinquent filers pursuant to item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
As of December 18, 2000, the aggregate market value of voting stock held
by non-affiliates of the registrant, based upon the closing sales price for the
registrant's common stock, as reported on the Nasdaq National Market, was
approximately $147.7 million (calculated by excluding shares owned beneficially
by directors and named executive officers).
Number of shares of registrant's common stock outstanding as of December
18, 2000 was 37,333,000.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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GLOBIX CORPORATION
Table of Contents
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Part I
Item 1. Business................................................... 1
Item 2. Properties................................................. 9
Item 3. Legal Proceedings.......................................... 10
Item 4. Submission of Matters To a Vote of Security Holders........ 10
Part II
Item 5. Market For Registrant's Common Equity and Related 11
Stockholder Matters........................................
Item 6. Selected Financial Data.................................... 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 13
Item 7A. Quantitative and Qualitative Disclosures About Market 21
Risk.......................................................
Item 8. Financial Statements....................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 22
Part III
Item 10. Directors and Executive Officers of the Registrant......... 23
Item 11. Executive Compensation..................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and 30
Management.................................................
Item 13. Certain Relationships and Related Transactions............. 32
Part IV
Item 14. Exhibits and Reports on Form 8-K........................... 33
Signatures.............................................................. 34
Exhibits
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PART I
Item 1. Business
We are a leading full-service provider of sophisticated Internet solutions
to businesses. Our solutions include field operations, which provide secure,
and fault-tolerant Internet data centers, high performance network services,
which provide connectivity to the Internet and complex Internet-based
application services, which include hosting, streaming media and GlobixMail.
These three major elements of our total Internet solution combine to provide
our customers with the ability to create, operate and scale their increasingly
complex Internet operations in a cost-efficient manner.
Our customers primarily use our products and services to maintain complex
computer equipment in a secure fault-tolerant environment with connectivity to
a high-speed, high-capacity, direct link to the Internet and to support complex
Internet applications. We currently offer our products and services from our
Internet data centers facilities in New York City, London and Santa Clara,
California. Our teams of account managers, computer system and network
engineers and customer support specialists are based at each of these
locations. We also maintain Internet data centers in Atlanta and the Washington
D.C. suburb of McLean, Virginia. Our strong local market presence enables us to
evaluate the needs of our customers and quickly respond with tailored
solutions. We also provide our customers the ability to outsource the systems
administration and technical management of their Internet presence. Our
products are flexible and scaleable, allowing us to modify the size and breadth
of the services we provide. We believe that our ability to offer a broad range
of Internet products and services, combined with our local sales and support
professionals and high performance Internet data center facilities and network,
differentiates us from our competitors.
Recent Developments
Due to recent developments in the capital markets, we have determined that
Globix cannot rely upon obtaining additional funding from these markets on an
acceptable basis within the near future. Consequently, we have modified our
expansion plan to delay, scale-back and eliminate certain facilities and the
purchase of related equipment. Although the full details of this plan have not
been finalized or fully negotiated, it provides for certain anticipated costs
associated with these modifications. The plan assumes that Globix will be able
to obtain additional financing from its suppliers and to refinance its new
Greenwich Street, New York property, which is currently debt free. The plan
also assumes certain costs and cost savings as we reduce the number of
facilities under construction. There can be no assurance that these assumptions
will prove correct. Based on these assumptions, our plan is fully funded to
fiscal 2003 when Globix expects to become free cash flow positive. We will
continue to monitor the capital markets with a view towards obtaining
additional funding to accelerate the growth of our business.
To effectuate its plan, on December 21, 2000 Globix entered into a lease
termination agreement with respect to its planned Boston facility. This
represents a significant step in achieving our goal of a fully funded business
plan. To date, we have also received commitments for vendor financing totaling
approximately $23 million.
Also, in December 2000, Globix granted approximately 1.6 million stock
option awards under its existing stock option plans and approximately 3.1
million restricted stock awards to over 700 employees and directors. The
restricted stock awards vest 25% per year over a four-year period. In light of
the recent decline in the market price of our stock, which effectively rendered
inadequate our existing equity incentive program, management has implemented
these equity grants in its continuing effort to align employee incentives with
stockholders interests.
Industry Overview
The Internet has experienced rapid growth and has emerged as a global medium
for communications and commerce. Internet access, which is considered part of
our network services group, and value-added Internet
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application services, represent two of the fastest growing segments of the
telecommunications services market. The Internet's growth is driven by a number
of factors, including:
. the large and increasing number of personal computers in the office and
in the home linked to the Internet, advances in network designs,
. increased availability of Internet-based software and applications,
. the emergence of useful content and electronic commerce technologies,
and
. convenient, fast and inexpensive Internet access.
According to the Dataquest/Gartner Group, an independent research firm, the
total number of Internet users worldwide reached approximately 129 million in
1998 and is forecast to increase to approximately 404 million by 2003.
According to Dataquest, total worldwide Internet service provider revenues,
including both corporate and residential access, are projected to grow from
approximately $17.0 billion in 1998 to approximately $49.4 billion in 2003.
Forrester Research, another independent research firm, has estimated that the
number of U.S. enterprises with an online presence will increase from
approximately 1.8 million in 1998 to approximately 4.3 million in 2003.
Businesses initially established corporate Internet sites as a means to
improve internal and external corporate communications. Today, businesses are
increasingly utilizing the Internet for functions critical to their core
business strategies, such as sales and marketing, customer service and project
coordination. The Internet presents a compelling profit opportunity for
businesses as it enables them to reduce operating costs, access valuable
information and reach new markets. To maintain a significant presence on the
Internet, businesses typically purchase Internet access services and establish
a web site. Internet access provides companies with a basic gateway to the
Internet, allowing them to transfer e-mail, access information, and connect
with employees, customers and suppliers. Dataquest predicts that worldwide
corporate Internet access revenues will grow 27% annually from approximately
$6.9 billion in 1998 to approximately $22.7 billion in 2003. 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 of providing product information, order entry and customer service.
According to International Data Corp., revenues in the United States from
value-added Internet application services, such as electronic commerce and
security services will grow 34% annually from approximately $3.0 billion in
1998 to approximately $12.9 billion in 2003. Forrester Research has estimated
that the market for managed and custom hosting in the United States will grow
from less than $1.4 billion in 1999 to over $19.8 billion in 2004. Dataquest
predicts Europe will experience similar strong growth, with corporate Internet
access revenue increasing 40% annually from approximately $1.7 billion in 1998
to approximately $9.1 billion in 2003.
To ensure the quality, reliability and availability of their Internet
operations, corporate information technology departments will need to make
substantial investments to develop Internet expertise and infrastructure.
Information technology groups are challenged to implement their organizations'
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 and resources in
electronic commerce systems, security and privacy technologies, application and
database programming, mainframe and legacy system integration technologies and
advanced user interface and multimedia production.
Due to these demands, many businesses have chosen to outsource Internet
application development, implementation and support, particularly the hosting
and management of their Internet-based applications, to increase performance,
provide continuous operation and reduce Internet operating expenses. This
follows an overall movement toward outsourcing of information technology
services. According to Forrester Research, businesses in the United States are
now spending approximately 25% of their overall information technology budgets
on external service providers.
The rapidly growing need for Internet access and other Internet products and
services has resulted in a highly fragmented industry with the proliferation of
Internet service providers operating worldwide as well as within the United
States. These ISPs primarily consist of large national and global ISPs and
smaller local and
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regional ISPs. Large national and global ISPs generally focus on Internet
access and rely on indirect sales, telemarketing and remote network operation
centers to serve their customers. These large national and global ISPs
typically do not offer a full range of services. Smaller local or regional ISPs
typically focus on serving their local market and lack the resources to provide
and support a full range of Internet products and services. Accordingly, Globix
believes that the needs of businesses for comprehensive Internet products and
services are not being met by the larger national and global or smaller local
and regional ISPs that constitute most of Globix's competitors.
The Globix Solution--Products and Services
Globix provides its customers with a comprehensive range of Internet
solutions. Many of Globix's customers do not have the network infrastructure or
Internet expertise to build, maintain and support critical Internet operations.
Globix's comprehensive range of products and services enable its customers to
address their needs cost-effectively without having to assemble products and
services from different suppliers, Internet service providers and information
technology firms, thereby significantly increasing the customer's ability to
take advantage of the Internet on a timely basis. Key components of the Globix
solution are:
Globix Field Operations
Internet Data Centers. Globix built and operates Internet data centers in
New York City, London, and Santa Clara, as follows:
. 190,000 square foot facilities located in New York City;
. 62,000 square foot facility located in Santa Clara, California; and
. 35,000 square foot facility located in London's West End district.
Through the acquisition of Comstar.net, Inc. in August 2000 we also acquired
Internet data centers in Atlanta of approximately 10,000 square feet and the
Washington, DC suburb of McLean, Virginia of approximately 12,000 square feet.
While these facilities offer high quality service to our customers in those
areas, they do not provide all of the features of our previously existing
facilities. Such facilities are currently being upgraded to include most, if
not all, of the characteristics of existing Globix facilities. Globix is also
presently constructing additional Internet data centers in New York and London
and expanding its existing Santa Clara data center. (See Properties, Facilities
Under Development)
The Globix Internet data centers facilities include:
Electrical Infrastructure. The Globix electrical infrastructure consists of
two major components: a distribution system and an emergency power generation
system. The distribution system consists of demarcation power, power
distribution units, static transfer switches, uninterruptible power supplies,
and a utility service bus. The emergency power system consists of automatic
transfer devices, emergency service bus, and emergency power generation.
Precision Environmental Control Systems. Globix utilizes a closed loop heat
rejection system for environmental control. A closed loop system differs from
an open system in the way rejection is handled. In a closed loop system the
water used for heat rejection is circulated through a closed piping system and
large coils on heat rejection equipment cool the water. In an open system the
water is partially evaporated at a cooling tower to cool the water and must be
replenished constantly. While open loop systems are more economical to install
and operate, they will not function if the evaporated water is not replaced. In
the event of a water main outage, Globix can continue to operate because it
uses a closed loop system.
FM-200 and Other Fire Suppression Systems. The Globix fire suppression
systems consist of both above and below raised floor and other detection
systems, a central control panel, abort stations and extinguishing mechanisms.
The detection system is capable of detecting a fire condition prior to a
visible smoke condition.
Comprehensive Security System. The Globix security system incorporates
distributed control with central monitoring located within the security center.
The use of distributed control with central monitoring prevents tampering at
any given point in the system without at least one other system being aware of
the tamper. The
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three components of the Globix security system are a comprehensive state-of-
the-art security system, trained security personnel, and closed circuit
television cameras. All primary entry and egress points have card access
readers installed. All Internet data center and support system area entries
have fingerprint biometric access devices installed. In addition, Globix
security personnel staff the facilities 24x7 while roving security personnel
patrol the exterior of the premises.
Co-Location. Globix offers co-location solutions for customers who choose to
own and maintain their own servers, but require the physically secure, climate-
controlled environment of the Globix Internet data centers. A Globix customer
can choose to co-locate in a cabinet, a cage or a GLOBOXTM, Globix's
proprietary secured cage. A data cabinet, the smallest co-location service
offering, can house multiple servers. The cabinet is locked and outfitted for
multiple, redundant network hand-offs and two power feeds. A cage serves the
needs of a larger enterprise usually deploying the most complex solutions. The
cage is fabricated out of 12-gauge wire mesh, and is also secure with multiple
hand-offs. The GLOBOX co-location offering is identical to the cage except that
its walls are solid, two-ply steel and is available with a variety of security
devices for the client demanding the highest security and anonymity.
Globix supports a number of leading Internet networking, server, storage and
application platforms, including those from Check Point Software, Cisco,
Compaq, Critical Path, EMC, Juniper, Microsoft, MicroMuse, Netscape, Nortel,
Storage Technologies and Sun Microsystems. This multi-vendor flexibility
enables Globix to offer its clients a broad range of technology best suited to
serve their particular needs.
Internet Server and Application Sales. Server and application sales are an
integral part of providing our clients with a sophisticated end-to-end
solution. As part of Globix's integrated approach through our strategically
located Internet data centers, we offer our clients both the servers and the
applications they need in order to operate and expand their Internet presence.
Globix also provides the integration services to configure both software and
servers to client needs.
Globix Network Services
Network Infrastructure. The Globix network infrastructure is designed to
meet the service and quality requirements of businesses executing Internet-
based strategies. Globix's network infrastructure is designed for high
availability and low latency, and utilizes a single autonomous system number
globally performing cold-potato routing. Cold potato routing is a technique
whereby Globix's network equipment monitors and interprets additional routing
information supplied by its peers. By using this information, the Globix
infrastructure carries the traffic on its network to common peering or traffic
exchange points nearest the origination point of the traffic request. This way,
traffic is carried on a Globix-controlled network to the greatest extent
possible and therefore does not suffer from the congestion or high latency of
public networks, which causes communications on the Internet to slow. In fact,
the design and performance of the global network allows Globix to offer
superior quality commitments and Service Level Agreements, and deploy future
applications like our EarthCacheTM content distribution network solution.
Backbone. The existing domestic Globix backbone is based on Asynchronous
Transfer Mode, transported over SONET operating at OC-3 (155Mbs), that is in
the process of being converted to a Packet over SONET Network that will operate
at speeds up to OC-48 (2.4Gbs). The existing OC-3 Globix domestic backbone
connects to our New York and Santa Clara Internet data centers, and backbone
points of presence in Chicago and Washington, DC. The new OC-48 Globix domestic
backbone connects to the New York and Santa Clara data centers and the backbone
POPs in Boston, Chicago, Seattle, Los Angeles, and Washington, DC with Dallas
and Atlanta POPs planned for deployment in 2001.
The Globix European backbone is a Packet over SONET network operating at OC-
48 (2.4Gbs) currently connecting London, Amsterdam, Frankfurt, and Paris. The
domestic and European networks are connected by two OC-3 transatlantic
crossings.
Both of these Globix network sections interconnect to numerous network
access points, commercial Internet exchanges, and other Internet, application,
and network service providers.
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Peering. Globix has established numerous peering relationships with other
Internet, application, and network service providers. These peering
relationships take the form of either public or private peering connections.
Public peering takes place at a network access point or commercial Internet
exchange, designed for the exchange of traffic between service providers.
Private peering involves an agreement between service providers allowing
traffic to pass between each other's networks using connections that do not
have to traverse either the public Internet or public peering points. Globix
currently has agreements to peer with more than 450 organizations that
represent over 1250 peering connections, making it one of the largest Internet
peering networks. Globix's current backbone connects to points of presence at
the following network access points and commercial Internet exchanges: MAE-East
ATM, MAE-West ATM, MAE-East FDDI, MAE-West FDDI/ NASA Ames, Ameritech NAP,
Sprint NAP, Pacific Bell NAP, Boston MXP, NYIIX, LINX, LoNAP, D-GIX, AMSIX,
deCIX, MIXITA, SFINX, VIX, Espanix, BNIX, DIX and CIXP.
Network Operations. Globix has constructed a global operations center
located at the Internet data center in New York City. The global operations
center serves as the command, control and communications center for all of
Globix's network operations, customer support centers, and points of presence.
The global operations center is staffed 24X7 by teams dedicated to maintaining
the highest quality of service. Network administrators located in the global
operations center monitor Globix's entire network infrastructure. The network
administrators are able to identify and correct network problems either
themselves or by dispatching system engineers located at Globix's customer
support centers. The global operations center utilizes state-of-the-art
equipment and technologies, including custom applications and commercial
software for the monitoring and management of network and systems services, a
suite of commercial tools customized for problem identification and resolution.
Customer Support Center. The customer support center's call center is
operated 24X7, and equipped with advanced telecommunications systems capable of
automatic call distribution, automatic number identification, quality assurance
recording and archiving, and intelligent call routing. A sophisticated trouble
ticketing and knowledge database of customer information and history aids to
ensure that Globix's customer base is well serviced.
Dedicated Internet Access. Globix offers a variety of dedicated Internet
access solutions, which provide businesses high-speed continuous access to the
Internet. Globix provides dedicated Internet access services to customers at
transmission speeds up to 155Mbps. The majority of Globix's Internet access
customers purchase 1.5Mbps or higher levels of bandwidth. In addition, Globix
provides other valuable services, such as domain name registration, local loop
provisioning, Internet address assignment, router configuration, e-mail
configuration, security planning and management and technical consulting
services. Globix also provides new Internet-access technologies, such as
digital subscriber lines, and intends to deploy additional connectivity-related
enhanced services as such services become commercially viable.
Application Services
Streaming Media. Globix is a leading provider of streaming media services.
These services include the three main components of streaming media technology:
production, encoding and hosting. Production involves creating a video and/or
audio recording of an event, such as a music performance, sports competition or
business meeting. Encoding involves converting the recording into a format that
can be transmitted over the Internet. Hosting provides access to the encoded
stream for Internet users via live, archived or pay-per-view formats. Globix
has produced, encoded and/or hosted several hundred webcasts including: The
launch of Microsoft Windows 2000, House of Blues Summerfest 2000 concert
series, numerous space shuttle launches for Space.com, fashion shows for
Giorgio Armani, community awareness programs by Radio Shack, and many other
webcasts for companies such as TIBCO, Honeywell, Cisco, ITN, Major League
Soccer, Ketchum and Group W. Globix has developed a proprietary hardware and
software system, called the RoadEncodeTM, which facilitates on-site encoding
and streaming of live events. Globix currently has deployed five RoadEncode
units and uses them to webcast multiple events.
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EarthCache. The EarthCache content distribution system is a content delivery
system that will complement the existing Globix network infrastructure and
provide businesses with improved website and application performance, faster
content delivery times, and better customer content management. We believe
EarthCache will have several advantages over other content delivery networks
because of its ability to leverage the network infrastructure that Globix has
built along with our extensive worldwide peering network of more than 1250
peering-connection agreements with some 450 organizations. With the source
content being transmitted over the Globix network infrastructure, Globix will
maintain better control over the quality of service and the network's ability
to redirect and manage customer content. Globix is in the process of building
out the infrastructure for the service, which is expected to become
commercially available in 2001.
Hosting. Globix offers hosting solutions on both the NT and UNIX platforms,
in either a dedicated or shared server environment. Dedicated hosting is
designed for businesses with special bandwidth requirements and application
requests. Customers are offered hardware and software configurations to meet
customer-specific needs. Shared hosting means that the customer's content
resides on a large hosting infrastructure with multiple clients. Globix's
hosting services are tailored to Internet presences that require high
availability and scalability without significant infrastructure and related
overhead costs.
GlobixMail. GlobixMail is the electronic mail service offering from
Globix's Messaging Service product line. It is an open-standard compliant
application with a low cost of ownership business mail system. The GlobixMail
service is designed to perform as a high availability application on a Globix-
managed infrastructure. Within weeks of its November 2000 launch, the
GlobixMail system supported over 800,000 users.
Managed Services. Globix provides full-life-cycle system and network
administration. At project inception, Globix installs and configures
applications and equipment designed by Globix solutions architects or as
specified by the customer. Generally, Internet business strategies require
dedicated, highly-skilled technical resources available 24X7. Most of our
customers do not have these resources internally available. Globix offers
administration, maintenance, and problem resolution services for a variety of
popular operating systems databases, Internet-based applications, Internet
network devices, and hardware and software security solutions.
Growth Strategy
Globix's objective is to become the leading provider of sophisticated
Internet solutions to business enterprises in key global markets. To achieve
this objective, Globix intends to:
Continue to Invest Extensively in Infrastructure. Globix intends to
capitalize on the trend by corporate information technology departments to
outsource critical Internet operations by continuing to make significant
investments to improve and expand its infrastructure. We expect to increase our
gross square footage during the current year by approximately 400,000 square
feet. In addition, Globix has established POPs or network access points in
Boston, Chicago, Washington D.C., Amsterdam, Brussels, Copenhagen, Frankfurt,
Geneva, Milan, Madrid, Paris, Stockholm and Vienna. Globix also believes it can
achieve significant economies of scale by leveraging the fixed costs associated
with its network infrastructure and Internet data center facilities resulting
in a scaleable and flexible solution for its customers
Strategically Locate Near Customers. Globix's close proximity to its
customers, combined with a broad range of services, makes it convenient for
customers to maintain or co-locate their equipment at Globix's facilities and
meet with account managers, technicians, engineers and customer support staff.
Globix's facilities in New York City, London, England, Santa Clara, California,
Atlanta, Georgia and Washington, DC. are strategically located near our
targeted customer base of business enterprises. Globix believes that
maintaining a strategic local presence near its customers provides it with an
advantage over competitors that utilize centralized telecenters and network
operations centers.
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Expand Product and Service Offerings. Globix seeks to continually expand the
breadth of its product and service offerings using new technologies to enable
its customers to better utilize the Internet.
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
requirements for Internet products and services and actively seeks to cross-
sell additional products and services to address these requirements. The
Internet data center facilities have significantly increased Globix's capacity
and enable it to more effectively sell hosting and co-location services and
value-added Internet products across its customers' geographically disparate
locations. Globix believes that this strategy will expand the number of
customers for its products and services and enable it to become a more integral
component of its current customers' information technology infrastructure.
Enhance the Globix Brand Name in Target Markets while Acquiring New
Customers and Prospects. Globix seeks to continue to develop and increase its
brand image as a leading full-service provider of Internet solutions for
business in its core markets and across all of its product lines. According to
research from the International Data Group, brand awareness is directly related
to increases in purchasing consideration among IT buyers, and ultimately
establishes long-term brand preference and customer loyalty. Globix marketing
includes a full complement of communications tools to continue to effectively
build the Globix brand and acquire new customer leads. Globix marketing
activities include national call centers in the US and UK, public and press
relations, targeted direct mail and outbound telemarketing programs, local and
national print advertising, corporate Web site and interactive marketing,
outdoor advertising, events and trade shows, educational seminars, and
strategic vendor alliances. Globix marketing and lead generation programs are
targeted primarily at business and IT decision-makers involved in the strategic
or mission-critical Internet decisions within their organizations. Marketing
investments are made with an eye on maximizing return measured by the growth of
Globix brand equity, and new customer leads and conversions. Therefore the
marketing plan is evaluated and revised quarterly. Globix has been covered in
numerous articles and has provided expert commentary for the national business
and trade media in the US and the UK, including major features in the New York
Times and Streaming Media trade publications, as well as appearances on CNBC
and MSNBC. Globix business and trade advertising has included publications such
as Fortune, Business 2.0, CIO, Network World, Information Week, Web Hosting,
Streaming Media, and Wired. Globix also advertises in major national and local
newspapers including the New York Times, Wall Street Journal, London Times,
Financial Times and Evening Standard and the San Jose Mercury News and San
Francisco Chronicle. In addition, Globix has had a significant presence at
industry trade shows in both the U.S. and U.K., such as ISPCON, Streaming Media
East/West, and Internet World. Globix outdoor exposure includes a fleet of
London taxis custom painted with Globix messaging, and a billboard in New York
City across from one of the world's busiest business-to-business exposition
sites, the Jacob Javits Convention Center. Globix plans to continue to
aggressively build brand recognition by marketing its full range of services
using a wide range of media outreach and advertising programs, online campaigns
and joint-promotions with key hardware and software vendors.
Make Strategic Investments and Acquisitions. Globix may make strategic
investments in Internet service and design companies which may enter into long-
term, exclusive agreements for Globix to provide hosting, co-location and
dedicated Internet access services. Globix may also make acquisitions to deepen
and broaden its market presence, expand its strengths in Internet connectivity,
co-location, hosting and add to or enhance its line of Internet products and
application services. Recent examples of strategic investments and acquisitions
include:
. The August 30, 2000 acquisition of all the outstanding shares of
Comstar.net, Inc., a Georgia Corporation, for a purchase price of
approximately $6.8 million in stock and cash. Comstar.net, Inc. is a
provider of Internet services to middle market business, educational
institutions and government organizations. These services are provided
from two Internet data centers located in Atlanta, Georgia and the
Washington, DC. Area;
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. On November 1, 2000, Globix entered into an agreement with iWon.com,
Inc. to form a joint venture called Integrated Communications Partners,
LLC to develop and administer an interactive directory-based
communications network providing email messaging and other services to
businesses. The joint venture is owned 51% by Globix and 49% by iWon.
Under the agreement, Globix will provide technology development, co-
location, bandwidth and related infrastructure services to the joint
venture on an exclusive basis for an initial term of five years. Globix
will also market services on behalf of the joint venture. In exchange
for these services, Globix will receive fees and will share in the
distribution of the joint venture's earnings. iWon has agreed to use the
services provided by the joint venture and act as the joint venture's
exclusive advertising sales agent.
Government Regulation
In the Untied States and other countries in which Globix conducts its
business, Globix's Internet services are not currently subject to direct
regulation other than pursuant to laws applicable to businesses operating on
the Internet. In certain jurisdictions in which Globix operates, however,
Globix's provision of Internet-related telecommunications network services (for
example, the provision of telecommunications network facilities used for
Internet access) may be subject to laws and regulations governing
telecommunications services. Such laws, as they apply to Internet-Related
telecommunications facilities, are evolving in many jurisdictions. In
jurisdictions where laws and regulations currently apply to the types of
telecommunications network services that Globix provides, Globix will ensure
that it complies with those laws and regulations, which often require that
companies such as Globix obtain regulatory authorizations and pay fees each
year to regulatory authorities. As these laws and regulations evolve in their
applicability to the provision of Internet-related services, it is possible
that Globix could be subject to further regulations with additional licensing
requirements and/ or fee payment obligations.
In addition to the evolving set of laws and regulations that govern Globix's
telecommunications network services in certain jurisdictions, it is likely that
laws and regulations concerning the provisions of Internet services will be
adopted, implemented, and challenged at the international, federal, state, or
local levels. These laws might cover issues such as user privacy, obscenity,
pricing, consumer protection, taxation, advertising, intellectual property
rights, information security, liability for certain types of content, and the
convergence of traditional telecommunications services with Internet
communications. A number of laws and regulations are currently being considered
by federal, state, and foreign legislatures with respect to such issues.
The nature of any new international, federal, state or local laws and
regulations and the manner in which existing laws and regulations may be
interpreted and enforced cannot be fully determined. The adoption of any future
laws or regulations or adverse application of existing laws to the Internet
industry might decrease the growth of the Internet, decrease demand for the
services of Globix, impose taxes, fees or other types of charges or other
costly technical requirements or otherwise increase the cost of doing business,
or in some manner have a material adverse effect on Globix or its customers,
each of which could have a material adverse effect on Globix's business,
financial position, results of operations and cash flows.
Employees
As of November 30, 2000, Globix had approximately 850 full-time employees:
approximately 720 in the United States and 130 outside the United States,
including approximately 440 in technical/operational and customer service, 270
in sales and marketing and 140 in executive and general and administrative
positions. 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.
8
<PAGE>
The following is a list of our executive officers as of November 30, 2000:
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Marc H. Bell 33 Chief Executive Officer, President and Chairman of
the Board of Directors
Alfred G. Binford 40 Senior Vice President, President--Network Services
Group
Peter L. Herzig 38 Senior Vice President, Chief Operating Officer--
Application Services Group
Marc Jaffe 33 Senior Vice President, Chief Operating Officer--Field
Operations
Anthony L. Previte 35 Senior Vice President, Chief Technology Officer
Brian L. Reach 45 Senior Vice President, Chief Financial Officer
</TABLE>
Item 2. Properties
Facilities in Operation:
In July 1998, Globix purchased the land and the nine-story building located
at 139 Centre Street, New York, New York.
Globix also leases approximately 32,000 square feet at 295 Lafayette Street,
New York, New York. This facility houses Globix's original New York Internet
data center and certain administrative offices.
In July 1998, Globix signed a lease commencing January 15, 1999 for data
center 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. Construction at both of these facilities was completed in June/July
1999 and each houses an Internet data center and facilities for technical,
sales and administrative personnel.
In August 2000, Globix closed its acquisition of Comstar.net, Inc. which
resulted in the acquisition of existing leases for Internet data centers in
Atlanta and the Washington, DC area. Also acquired were leases for office
facilities in Atlanta.
Facilities under Development:
In September 2000, Globix purchased the land and the nine-story building
located at 415 Greenwich Street, New York, New York to serve as its third New
York City Internet data center. Demolition and reconstruction are continuing
toward an anticipated opening early in the third quarter of fiscal 2001.
In July 2000, Globix entered into a lease for its second London Internet
data center, containing 178,000 square feet. Construction and fit -out are in
progress for an anticipated opening early in 2001.
Additionally, leases were entered into during 2000 in Boston, Seattle and
Los Angeles for planned Internet data centers. However, as a result of the
recent tightening in the capital markets and the increased costs and investment
associated with Internet data center construction and, as disclosed in "Recent
Developments," Globix is in the process of reconsidering or renegotiating
facility development plans in these areas.
9
<PAGE>
As of September 30, 2000 the following table sets forth additional
information concerning Globix's facilities:
<TABLE>
<CAPTION>
Approximate
Leased property gross
Location expiration date square feet
-------- --------------- -----------
<S> <C> <C>
139 Centre Street Owned 160,000
New York, New York
415 Greenwich Street Owned 197,000
New York, New York
295 Lafayette Street 2007 32,000
New York, New York
2807 Mission College Boulevard 2014 62,000
Santa Clara, California
Prospect House 2014 35,000
80 New Oxford Street
London, England
1 Oliver's Yard 2030 178,000
55-71 City Road
London, England
Data Center and Sales Offices 2004 10,000
Atlanta, Georgia
Washington, DC 2010 12,000
Data Center and Sales Offices
8201 Greensboro Drive
McLean, Virginia
176 Lincoln Street 2015 438,000
Boston, Massachusetts
100/150 Andover Park West 2021 201,000
Seattle, Washington
841 Apollo/831 S. Nash St. 2015 189,000
Los Angeles, California
</TABLE>
The Company considers that, in general, its physical properties are well
maintained, in good operating condition and adequate for its purposes.
Item 3. Legal Proceedings
We are not party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of Globix's fiscal year ended September 30, 2000
there were no matters submitted to a vote of security holders.
10
<PAGE>
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) Globix's Common Stock is traded on the Nasdaq National Market System
under the symbol GBIX. The following table indicates high and low bid prices
for the periods indicated based upon information supplied by Nasdaq, Inc. Such
over-the-counter market quotations reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not necessarily represent actual
transactions. The following bid prices are for the fiscal year ended September
30:
<TABLE>
<CAPTION>
2000 Low High
---- ------ ------
<S> <C> <C>
first quarter................................................ $ 7.62 $30.59
second quarter............................................... $25.69 $67.13
third quarter................................................ $14.00 $38.50
fourth quarter............................................... $18.00 $37.50
<CAPTION>
1999 Low High
---- ------ ------
<S> <C> <C>
first quarter................................................ $ 4.00 $13.94
second quarter............................................... $10.13 $45.00
third quarter................................................ $27.00 $65.00
fourth quarter............................................... $31.50 $51.13
</TABLE>
(b) Number of Holders of Common Stock. The number of holders of record of
Globix's Common Stock on December 4, 2000 was 187. In addition, management
believes Globix common stock is held by in excess of 32,000 other shareholders
whose shares are held in street name for the beneficial owners by various banks
and securities firms.
(c) Dividends. Globix split its common stock two-for-one in December 1999
and January 2000. These were accomplished by way of a stock dividend. Globix
paid cash dividends totaling $3.5 million on its Series A Convertible Preferred
Stock during the fiscal year ending September 30, 2000. An additional $1.5
million was accrued and unpaid at September 30, 2000. There were no cash
dividends paid by Globix on its Common Stock during the fiscal year ended
September 30, 2000. Under the terms of the Globix's 12.5% Senior Notes due
2010, Globix's ability to pay cash dividends is contractually limited. It is
not anticipated that cash dividends will be paid to the holders of Globix's
Common Stock in the foreseeable future.
Item 6. Selected Financial Data
The following table sets forth for the periods indicated selected
consolidated financial and operating data for Globix. The consolidated balance
sheet data and consolidated statement of operations data as of and for the
years ended September 30, 1996, 1997, 1998, 1999 and 2000 have been derived
from our Consolidated Financial Statements. The following selected consolidated
financial and operating data are qualified by and should be read in conjunction
with our more detailed Consolidated Financial Statements and notes thereto and
the discussion under "Management's Discussion and Analysis of Financial
Condition and Results of Operations" included in Part II, Items 7 and 8 of this
Form 10-K.
11
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except share and per share data)
<TABLE>
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $ 10,374 $ 17,400 $ 20,595 $ 33,817 $ 81,287
Operating costs and
expenses:
Cost of revenue........ 8,599 13,699 13,322 22,184 42,513
Selling, general and
administrative........ 3,244 6,036 10,696 36,495 98,113
Depreciation and
amortization.......... 214 675 1,310 6,329 18,228
---------- ---------- ---------- ---------- ----------
Total operating costs
and expenses.......... 12,062 20,410 25,328 65,008 158,854
Loss from operations.... (1,688) (3,010) (4,733) (31,191) (77,567)
Interest and financing
expense............... (326) (177) (8,376) (18,386) (57,831)
Other income, net...... -- -- -- -- 1,779
Interest income........ 121 72 1,953 6,192 24,749
Loss before
extraordinary item..... (1,893) (3,115) (11,156) (43,385) (108,870)
Extraordinary loss on
early extinguishment
of debt -Note 4....... -- -- -- -- (17,577)
---------- ---------- ---------- ---------- ----------
Net loss................ (1,893) (3,115) (11,156) (43,385) (126,447)
Dividends and accretion
on preferred stock.... -- -- -- -- (5,768)
---------- ---------- ---------- ---------- ----------
Net loss attributable to
common stockholders.... $ (1,893) $ (3,115) $ (11,156) $ (43,385) $ (132,215)
========== ========== ========== ========== ==========
Basic and diluted loss
per share attributable
to common stockholders'
before extraordinary
loss................... $ (0.18) $ (0.25) $ (0.77) $ (1.73) $ (3.23)
Extraordinary loss per
share................. -- -- -- -- $ (0.50)
---------- ---------- ---------- ---------- ----------
Basic and diluted loss
per share attributable
to common
stockholders........... $ (0.18) $ (0.25) $ (0.77) $ (1.73) $ (3.73)
========== ========== ========== ========== ==========
Weighted average common
shares outstanding-
basic and diluted...... 10,533,600 12,300,840 14,503,176 25,116,800 35,484,040
========== ========== ========== ========== ==========
<CAPTION>
Year Ended September 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash flows provided by
(used in) operating
activities............. $ 1,877 $ 2,532 $ 115 $ (36,897) $ (94,318)
Cash flows used in
investing activities... $ 2,355 $ 1,542 $ 97,387 $ 58,774 $ 149,939
Cash flows provided by
financing activities... $ 6,352 $ 4,133 $ 156,344 $ 135,589 $ 509,395
Capital expenditures.... $ 1,955 $ 2,082 $ 31,085 $ 98,110 $ 150,876
<CAPTION>
September 30,
----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents,
short term investments
and marketable
securities............. $ 2,342 $ 2,401 $ 76,111 $ 111,412 $ 378,510
Restricted cash and
investments............ $ 400 $ 325 $ 60,480 $ 45,039 $ 43,178
Working capital......... $ 3,468 $ 1,980 $ 75,859 $ 101,216 $ 366,139
Total assets............ $ 7,810 $ 11,025 $ 182,226 $ 302,518 $ 729,591
Current portion of short
term debt.............. $ 39 $ 2,336 $ 2,398 $ 2,088 $ 2,173
Long-term debt, less
current portion........ $ -- $ 923 $ 159,091 $ 161,005 $ 621,809
Stockholders' (deficit)
equity................. $ 6,090 $ 5,014 $ 2,719 $ 106,405 $ (18,030)
</TABLE>
12
<PAGE>
Item 7. 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 the financial statements
appearing elsewhere in this offering memorandum. The following discussion
contains forward-looking statements based on Globix's current expectations,
assumptions, estimates and projections about Globix and its industry. Globix's
results could differ materially from those anticipated in these forward-looking
statements as a result of various factors, including the risks and
uncertainties discussed in "Risk Factors" and elsewhere in this offering
memorandum.
Overview
Globix was founded in 1989 as a value-added reseller 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, Globix raised
net proceeds of approximately $7.4 million through an initial public offering
of its common stock and subsequently began to offer Internet access products
and services to business customers. 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.
In 1998, Globix undertook a major expansion plan in order to more
aggressively pursue opportunities resulting from the tremendous growth of the
Internet. In April 1998, Globix completed a $160.0 million offering of 13%
senior notes. In June and July 1999, Globix completed construction of its
current Internet data center facilities in New York City, London and Santa
Clara, California and began operations at each facility.
In March 1999, Globix completed a public offering of 16,000,000 shares of
its common stock, resulting in net proceeds to Globix of approximately $136.6
million.
In December 1999, Globix completed the private placement of 80,000 shares of
Series A Preferred Stock to affiliates of Hicks, Muse, Tate & Furst
Incorporated, resulting in net proceeds of $75.3 million.
In February 2000, Globix completed a $600.0 million debt financing to fund
(a) the continued expansion of its facilities and network and (b) the tender
offer to purchase all of the outstanding 13% Senior Notes, $160.0 million
principal amount. The purchase price of the tender, completed on February 8,
2000, was 106.5% of principal amount plus all accrued and unpaid interest.
For fiscal periods ending on or before September 30, 2000 Globix reports its
results of operations in two operating segments: the "Internet Division" and
the "Server Sales and Integration Division." The Internet Division provides
dedicated Internet access, web-hosting, co-location and application services,
(such as, streaming media, network security and server administration and
network monitoring). The Server Sales and Integration Division provides
Internet-related hardware and software, systems and network integration.
Revenue from the Internet Division has grown significantly as a percentage of
total revenue, increasing from 6% in 1996 to 65% in 2000. Globix expects that
Internet Division revenues will continue to grow both absolutely and as a
percentage of total revenues.
Globix continues to derive a portion of its total revenue from sales of
third-party hardware and software, including workstation, web and database
servers, network equipment, and server and application software licenses.
Globix intends to continue to offer higher-margin workstation, server and
software components as a complement to its Internet solutions. Globix maintains
a limited inventory of hardware and software and typically purchases such
products from third-party vendors only upon receipt of a customer order. The
second largest component of Globix's total revenue is hosting and co-location
services and its customers' associated Internet bandwidth requirements,
including charges for fixed amounts of bandwidth availability and incremental
fees for additional bandwidth use. In addition to fees based on bandwidth,
Globix charges its co-location
13
<PAGE>
customer's monthly fees for the use of its physical facilities. Globix's
hosting and co-location contracts typically range from one to two years. The
third largest component of Globix's total revenue is from dedicated Internet
access services to business customers. Globix's Internet access customers
typically sign one or two-year contracts that provide for fixed, monthly-
recurring service fees and a one-time installation fee. Application services
are charged on a monthly, fixed price or time and materials basis.
Cost of revenue for the Internet Division consists primarily of
telecommunications costs for Internet access, hosting and co-location
customers. Telecommunications costs include the cost of providing local loop
costs for connecting dedicated access customers to the Globix network, leased
line and associated costs related to connecting with our peering partners, and
costs associated with leased lines connecting our facilities to our backbone
and aggregation points of presence. Cost of revenue for the Server Sales and
Integration Division consist primarily of acquisition costs of third-party
hardware and software.
Selling, general and administrative expenses consist primarily of sales and
marketing personnel and related occupancy costs; advertising costs; salaries
and occupancy costs for executive, financial, personnel recruitment and
administrative personnel and related operating expenses associated with network
operations, customer service and field services. Globix continues to hire a
significant number of additional personnel to staff its facilities and Internet
data centers and to expand its sales and marketing, network operations,
customer service and field services personnel. Accordingly, Globix expects
selling, general and administrative expenses to continue to increase for the
foreseeable future.
Globix depreciates its capital assets on a straight-line basis over the
useful life of the assets, ranging from 3 to 40 years. Globix began to
recognize depreciation expense in the year ended September 30, 1999 for its
Internet data centers in New York, London and Santa Clara, California upon
commencement of operations at each of these facilities. In addition, Globix
amortizes debt discount and issuance costs associated with its debt financings
over the term of those obligations using the effective interest method.
Globix historically has experienced negative cash flow from operations and
has incurred net losses. Globix's ability to generate positive cash flow from
operations and achieve profitability is dependent upon Globix's ability to
continue to grow its revenue base and achieve further operating efficiencies.
For the years ended September 30, 1998, 1999 and 2000, Globix generated
positive (negative) cash flows from operations of approximately $0.12 million,
$(36.9) million and $(94.3) million, respectively, and incurred net losses of
approximately $11.2 million, $43.4 million and $126.4 million, respectively.
Globix expects to continue to experience negative cash flow from operations and
to incur net losses as a result of its significant investment in the expansion
of its network and facilities, the hiring of additional personnel and interest
expense related to the 12.5% senior notes. As of September 30, 2000, Globix had
an accumulated deficit of approximately $186.1 million.
Year Ended September 30, 2000 As Compared To The Year Ended September 30, 1999
Revenue. Total revenue for the year ended September 30, 2000 increased
140.4% to $81.3 million from $33.8 million for the year ended September 30,
1999. Revenue from the Internet Division for the year ended September 30, 2000
increased 307.3% to $53.1 million from $13.0 million for the year ended
September 30, 1999. This increase was primarily attributable to having a full
year of operations for three Internet data centers opened during the prior
year. Availability of new data center space provided the growing number of
account managers with an opportunity to increase the number of customers and
upsell existing accounts. Revenue from the Server Sales and Integration
Division increased 35.7% to $28.2 million for the year ended September 30, 2000
from $20.8 million for the year ended September 30, 1999. This increase was
primarily attributable to a planned shift in product mix toward higher priced
and higher margin products. The increase in Internet Division revenue as a
percentage of total revenue reflects our continued shift in product mix toward
Internet related sales.
14
<PAGE>
Cost of Revenue. Cost of revenue for the year ended September 30, 2000 was
$42.5 million or 52.3% of total revenue as compared to $22.2 million or 65.6%
of total revenue for the year ended September 30, 1999. The increase in cost of
revenue was primarily attributable to an increase in data transmission costs
because of higher network operating and maintenance expenses associated with
the expansion of the network backbone. As utilization of the network increases
in future years, we expect to realize a reduction in per unit data transmission
costs due to the network's scalability and fixed cost structure.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended September 30, 2000 were $98.1 million or 120.7% of
total revenue as compared to $36.5 million or 107.9% of total revenue for the
year ended September 30, 1999. Approximately $37.6 million or 61.0% of the
increase was attributable to an increase in sales and marketing, engineering,
recruiting, finance and administrative personnel necessitated by the growth in
Internet-related operations. The number of employees increased from
approximately 450 as of September 30, 1999 to approximately 850 as of September
30, 2000. Marketing expenses increased to $11.5 million for the year ended
September 30, 2000 from $4.8 million for the year ended September 30, 1999. The
marketing increase is primarily attributable to costs related to a branding and
advertising campaign.
Depreciation and Amortization. Depreciation and amortization increased to
$18.2 million for the year ended September 30, 2000 as compared to $6.3 million
for the year ended September 30, 1999. The increase was primarily related to
the increase in construction costs and equipment purchases related to the
network infrastructure enhancements of the three Internet data centers during
the year ended September 30, 2000.
Interest and Financing Expense and Interest Income. Interest and financing
expense increased to $57.8 million for the year ended September 30, 2000 as
compared to $18.4 million for the year ended September 30, 1999. The increase
is a result of interest costs associated with the 13% senior notes being
recorded for six months of fiscal 2000 until the tender offer for such debt in
March 2000 in addition to the interest costs associated with the 12.5% senior
notes from February 2000 through September 2000. The increase in interest
income to $24.7 million for the year ended September 30, 2000 reflects the
increased cash position derived from the net proceeds of the February 2000 debt
financing and the December 1999 issuance of the Series A Convertible Preferred
Stock.
Other Income. The increase in other income to $1.8 million for the year
ended September 30, 2000 is a result of the gain realized on the sale of
investments and marketable securities.
Net Loss and Net Loss Attributable To Common Stockholders. As a result of
the above, Globix reported a net loss of $126.4 million and net loss
attributable to common stockholders of $132.2 million for the year ended
September 30, 2000 or $3.73 per share (including the extraordinary loss of
$17.6 million or $0.50 per share impact from the loss on early extinguishment
of the Company's 13% Senior Notes due in 2005) as compared to a net loss and a
net loss attributable to common stockholders of $43.4 million or $1.73 loss per
share for the year ended September 30, 1999.
Year Ended September 30, 1999 As Compared To The Year Ended September 30, 1998
Revenue. Total revenue for the year ended September 30, 1999 increased 64.2%
to $33.8 million from $20.6 million for the year ended September 30, 1998.
Revenue from the Internet Division for the year ended September 30, 1999
increased 102% to $13.0 million from $6.4 million for the year ended September
30, 1998. This increase was primarily attributable to the opening of three
Internet data centers and the related increase in the number of customers to
which we provide Internet connectivity, hosting and co-location services. Also
contributing to the increase is an improvement in the average annual revenue
realized per new business customer and an increase in the business account
retention rate. Revenue from the Server Sales and Integration Division
increased 47% to $20.8 million for the year ended September 30, 1999 from $14.1
million for the year ended September 30, 1998. This increase was primarily
attributable to a planned shift in product mix toward
15
<PAGE>
higher priced and higher margin products. The increase in Internet Division
revenues as a percentage of total revenues reflects our continued shift in
product mix toward Internet related sales.
Cost of Revenue. Cost of revenue for the year ended September 30, 1999 was
$22.2 million or 65.6% of total revenues as compared to $13.3 million or 64.7%
of total revenue for the year ended September 30, 1998. The increase in cost of
revenue was primarily attributable to an increase in data transmission costs
because of higher network operating and maintenance expenses associated with
the expansion of the network backbone. As utilization of the network increases
in future years, we expect to realize a reduction in per unit data transmission
costs due to the network's scalability and fixed cost structure.
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended September 30, 1999 were $36.5 million or 108% of
total revenue as compared to $10.7 million or 51.9% of total revenue for the
year ended September 30, 1998. Approximately $14.0 million or 56% of the
increase was 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 approximately 170 as
of September 30, 1998 to approximately 450 as of September 30, 1999. Marketing
expenses increased to $4.8 million for the year ended September 30, 1999 from
$1.3 million for the year ended September 30, 1998. The marketing increase is
primarily attributable to costs related to a branding and advertising campaign.
Depreciation and Amortization. Depreciation and amortization increased to
$6.3 million for the year ended September 30, 1999 as compared to $1.3 million
for the year ended September 30, 1998. The increase was primarily related to
the construction costs and equipment purchased for the network infrastructure
enhancements of the three SuperPOP facilities during the year ended September
30, 1999. We anticipate that our depreciation and amortization expenses will
continue to increase significantly as we expand our network and data centers.
Interest and Financing Expense and Interest Income. The increase in interest
expense is a result of interest costs associated with the 13% senior notes
being recorded for a full year in fiscal 1999. This interest expense was
partially offset by an increase in interest income related to the increased
cash position derived from the net proceeds of the public equity offering in
March 1999. We amortized debt discount and issuance costs of $8.9 million
associated with the 13% senior notes over seven years using the effective
interest method.
Net Loss and Loss Per Share. As a result of the above, we reported a net
loss of $43.4 million or $1.73 per share for fiscal 1999 as compared to a net
loss of $11.2 million or $0.77 per share for the year ended September 30, 1998.
Year Ended September 30, 1998 As Compared To The Year Ended September 30, 1997
Revenue. Total revenue 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.
Revenue 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. Revenue from the Internet Division
increased 167.1% to $6.4 million for the year ended September 30, 1998 from
$2.4 million for the year ended September 30, 1997. This increase was primarily
attributable to an increase in the number of customers to which we provided
Internet access services. The increase in percentage of Internet Division
revenues as a percentage of total revenues reflected our shift in product mix
toward Internet-related sales.
Cost of Revenue. Cost of revenue 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 revenue for the year ended September 30, 1997. The decrease in cost of
revenue in absolute dollars and as a percentage of total revenue was primarily
a result of an increase in higher margin Internet revenues as a percentage of
total revenue.
16
<PAGE>
Selling, General and Administrative. Selling, general and administrative
expenses for the year ended September 30, 1998 were $10.7 million or 51.9% of
total revenues as compared to $6.0 million or 34.7% of total revenues for the
year ended September 30, 1997. This increase in absolute dollars and as a
percentage of total revenues was primarily attributable to an increase in sales
and marketing, engineering, training and administration personnel necessitated
by the growth in Internet-related operations. The number of employees increased
from 90 as of September 30, 1997 to approximately 170 as of September 30, 1998.
We increased expenditures in advertising from $325,000 for the year ended
September 30, 1997 to $1.3 million for the year ended September 30, 1998.
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.
Interest and Financing Expenses and Interest Income. Interest expense for
the year ended September 30, 1998 was $8.4 million as compared to $0.2 million
for the year ended September 30, 1997. The increase in interest expense is a
result of the 13% senior notes completed in April 1998. The increase in
interest income reflects the increased cash position derived from the net
proceeds of the 13% senior notes. We amortized debt discount and issuance costs
of $8.9 million associated with the 13% senior notes over seven years using the
effective interest method.
Net Loss and Loss Per Share. As a result of the above, we reported a net
loss of $11.2 million or $0.77 per share for fiscal 1998 as compared to a net
loss of $3.1 million or $0.25 per share for the year ended September 30, 1997.
Cash Flows for the Years Ended September 30, 2000, 1999 and 1998
Cash flows (used in) provided by operating activities were $(94.3) million
in 2000, $(36.9) million in 1999 and $0.12 million in 1998. Cash flows from
operating activities can vary significantly from period to period depending
upon the timing of operating cash receipts and payments, especially accounts
receivable, prepaid expenses and other assets, and accounts payable and accrued
liabilities. In all three years, our net losses were the primary component of
cash used in operating activities, offset by non-cash depreciation and
amortization expenses relating to our build out of our network and facilities
and non-cash amortization of debt discount and issuance costs.
Cash flows used in investing activities were $149.9 million for 2000, $58.8
million for 1999 and $97.4 million for 1998. Investments in capital
expenditures related to our network and facilities were $150.9 million for
2000, $98.1 million for 1999 and $31.1 million for 1998. Of this amount, $142.6
million for 2000, $83.4 million for 1999 and $23.3 million for 1998 was
expended in cash and the balance was financed under financing arrangements or
remained in accounts payable and accrued liabilities at each year-end.
Cash flows provided by financing activities were $509.4 million for 2000,
$135.6 million for 1999, and $156.3 million for 1998. In 2000, Globix received
net proceeds from the 12.5% senior notes of $580.0 million, $75.3 million
proceeds from issuance of preferred stock, $20.1 million net proceeds from
mortgage financing and $10.1 million of proceeds from the exercise of stock
options and warrants, partially offset by the use of cash of $170.4 million
associated with the tender offer for the 13% senior notes. In 1999, Globix
received net proceeds from the issuance of common stock of $136.6 million and
$1.9 million of proceeds from the exercise of stock options and warrants. In
1998, Globix received net proceeds from the 13% senior notes of $153.4 million
and $4.9 million of proceeds from the exercise of stock options and warrants
17
<PAGE>
Liquidity and Capital Resources
Globix has historically had losses from operations, which have been funded
primarily through the issuance of debt and equity securities. In fiscal 1999,
we received net proceeds of approximately $136.6 million from equity
financings.
In December 1999 Globix issued $80.0 million in new Series A Convertible
Preferred Stock to affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks
Muse") to expand our build-out of Internet data centers and other facilities.
The Company incurred approximately $4.75 million of issuance costs associated
with the Series A Convertible Preferred Stock transaction, of which $3.2
million was a fee paid to Hicks Muse. The preferred stock is convertible into
common stock at any time and cannot be called for redemption for five years.
Under the agreement, the Series A Convertible Preferred Stock is subject to
mandatory redemption in 2014 and yields an annual dividend rate of 7.5% payable
quarterly in cash or additional preferred stock at the option of Globix.
In January 2000, Globix obtained a $21.0 million loan secured by a first
mortgage on the building at 139 Centre Street housing Globix's New York
Internet data center. The loan accrues interest at a rate of 9.16% (subject to
adjustment on February 11, 2010) annually using a 25-year amortization schedule
and is due February 2010.
In February, 2000, the Company closed on its offering for $600.0 million
12.5% Senior Notes due 2010 in a private placement resulting in net proceeds of
approximately $580.0 million. In March 2000 Globix completed its tender offer
to purchase for cash all of its outstanding 13% Senior Notes due 2005, $160.0
million in principal amount. The purchase price in the tender offer was 106.5%
of the principal amount, plus accrued and unpaid interest.
In addition certain computer and network equipment has been financed through
vendors and financial institutions under capital and operating lease
arrangements. We intend to continue to make significant capital expenditures
during the next twelve months as we expand our Internet data centers and
network. We expect to finance such capital expenditures primarily through
existing cash and vendor financing and a mortgage or sale-leaseback with
respect to our new Greenwich Street, New York property. At September 30, 2000
Globix has additional committed but unused equipment financing arrangements
with several vendors totaling approximately $23.2 million
As of September 30, 2000, we had $421.7 million of cash, cash equivalents,
short term investments, restricted cash, restricted investments and marketable
securities. At September 30, 2000, we had working capital of approximately
$366.1 million, as compared to working capital of approximately $101.2 million
at September 30, 1999. Working capital increased $264.9 million primarily
because of the net proceeds from financing activities offset by the net loss of
$126.4 million (including $18.2 million of non-cash depreciation and
amortization expense). Globix also paid cash dividends totaling $3.5 million on
its Series A Convertible Preferred Stock during the fiscal year ending
September 30, 2000. An additional $1.5 million of dividends was accrued and
unpaid at September 30, 2000.
Due to recent developments in the capital markets, we have determined that
Globix cannot rely upon obtaining additional funding from these markets on an
acceptable basis within the near future. Consequently, we have modified our
expansion plan to delay, scale-back and eliminate certain facilities and the
purchase of related equipment. Although the full details of this plan have not
been finalized or fully negotiated, it provides for certain anticipated costs
associated with these modifications. The plan assumes that Globix will be able
to obtain additional financing from its suppliers and to refinance its new
Greenwich Street, New York property, which is currently debt free. The plan
also assumes certain costs and cost savings as we reduce the number of
facilities under construction. There can be no assurance that these assumptions
will prove correct. Based on these assumptions, our plan is fully funded to
fiscal 2003 when Globix expects to become free cash flow positive. We will
continue to monitor the capital markets with a view towards obtaining
additional funding to accelerate the growth of our business.
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<PAGE>
To effectuate its plan, on December 21, 2000 Globix entered into a lease
termination agreement with respect to its planned Boston facility. This
represents a significant step in achieving our goal of a fully funded business
plan. To date, we have also received commitments for vendor financing totaling
approximately $23 million.
Segment Information
The Company's activities fall within two operating segments: the Internet
Division and the Server Sales and Integration Division. The following table
sets forth industry segment information for the years ended September 30, 1998,
1999 and 2000:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenue:
Internet......................................... $ 6,448 $ 13,033 $ 53,083
Server sales and integration..................... 14,147 20,784 $ 28,204
-------- -------- --------
Consolidated................................... $ 20,595 $ 33,817 $ 81,287
======== ======== ========
Operating income (loss):
Internet......................................... $ 1,146 $(13,001) $(39,920)
Server sales and integration..................... 721 1,019 3,403
Corporate........................................ (6,600) (19,209) (41,050)
-------- -------- --------
Consolidated................................... $ (4,733) $(31,191) $(77,567)
======== ======== ========
Identifiable assets:
Internet......................................... $ 7,808 $ 57,503 221,457
Server sales and integration..................... 3,732 6,074 3,812
Corporate........................................ 170,726 238,941 504,322
-------- -------- --------
Consolidated................................... $182,266 $302,518 $729,591
======== ======== ========
</TABLE>
The following table sets forth geographic segment information for the years
ended September 30, 1998, 1999 and 2000:
<TABLE>
<CAPTION>
Year ended September 30,
----------------------------
1998 1999 2000
-------- -------- --------
<S> <C> <C> <C>
Revenue:
United States..................................... $ 20,595 $ 33,674 $ 73,697
Europe............................................ -- 143 $ 7,590
-------- -------- --------
Consolidated.................................... $ 20,595 $ 33,817 $ 81,287
======== ======== ========
Operating income (loss):
United States..................................... $ (4,733) $(27,590) $(64,477)
Europe............................................ -- (3,601) $(13,090)
-------- -------- --------
Consolidated.................................... $ (4,733) $(31,191) $(77,567)
======== ======== ========
Identifiable assets:
United States..................................... $179,494 $282,479 718,942
Europe............................................ 2,772 20,039 10,649
-------- -------- --------
Consolidated.................................... $182,266 $302,518 $729,591
======== ======== ========
</TABLE>
Income Taxes
The Company is in an accumulated loss position for both financial and income
tax reporting purposes. The Company has U.S. Federal income tax loss
carryforwards of approximately $175 million at September 30, 2000. These income
tax loss carryforwards expire between 2011 and 2020. Pursuant to Section 382 of
the Internal Revenue Code, the use of these net operating loss carryforwards
may be limited due to changes in ownership that have occurred. The Company is
evaluating the impact, if any, that changes in ownership could
19
<PAGE>
have on net operating loss carryforwards. As of September 30, 2000, the Company
also has net operating loss carryforwards of approximately $19 million from its
United Kingdom subsidiaries, which do not expire under U.K. tax rules. For
financial reporting purposes, income tax benefits through September 30, 2000
related to both U.S. Federal and foreign income tax losses are fully offset by
a valuation allowance due to the uncertainty of the Company's ability to
realize income tax benefits by generating taxable income in the future.
Capital Structure
Globix's capital structure at September 30, 2000 consisted of 12.5% Senior
Notes, mortgage and capital lease obligations, Series A Redeemable Convertible
Preferred Stock and common stock. Prior to the December 1999 closing of the
Hicks Muse investment there were no outstanding shares of preferred stock.
Total borrowings at September 30, 2000 were $624.4 million, which included
$2.7 million in current obligations and $621.7 million in Senior Notes,
mortgage and other notes payable and long-term capital lease obligations.
Commitments
As of September 30, 2000, Globix had commitments to certain
telecommunications carriers totaling $17.1 million payable in various years
through 2010. Additionally, as of September 30, 2000, Globix has various
agreements to lease facilities and equipment and is obligated to make future
minimum lease payments of approximately $497.4 million on operating leases
expiring in various years through 2020.
In connection with the construction of Internet data centers, Globix is
contractually committed as of September 30, 2000 to various equipment
manufacturers and building contractors for equipment and construction services
totaling approximately $67.0 million.
As of September 30, 2000 Globix had issued collateralized letters of credit
aggregating $34.3 million. The related funds are included in restricted cash
and investments on the consolidated balance sheet.
Conversion to the Euro
On January 1, 1999, eleven of the fifteen member countries of the European
Union established a fixed conversion rate between their existing sovereign
currencies and a new currency called the "Euro." These countries have 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. Thereafter and
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 does not anticipate that the implementation of the Euro will have a
material adverse effect on its business operations as the operations of Globix
expands into other European countries. However there are no assurances that the
implementation of the Euro will not have a material adverse affect on Globix's
business, financial condition and results of operations. In addition, Globix
cannot predict the impact the Euro will have on currency exchange rates or
Globix's currency exchange risk.
Recent Technical Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities,"("SFAS No. 133"), as amended, which is
effective for all quarters of the fiscal year beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging securities. Globix expects the adoption of SFAS No.
133 will not have a material impact on Globix's consolidated financial
position, results of operations and cash flows.
20
<PAGE>
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No.
101 expresses the view of the SEC Staff in applying generally accepted
accounting principles to certain revenue recognition issues. Globix is required
to adopt SAB No. 101 in its fiscal year ending September 30, 2001. Globix has
preliminarily determined that the adoption of SAB No. 101 will result in a one
time non-cash charge in fiscal 2001 for the cumulative effect of a change in
accounting principal in the range of $2.0 to $3.0 million. Such amount will be
recorded as deferred revenue and recognized as revenue in the statement of
operations over the estimated remaining contract life. Globix does not expect
the adoption of SAB No. 101 to have any economic impact to its business
operations or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation-An Interpretation of APB Opinion No. 25". The interpretation
clarifies the application of APB Opinion No. 25 in specified events. The
interpretation was effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998 and prior to the effective date. To
the extent that events covered by this interpretation occurred during the
period after December 15, 1998, but prior to the effective date, the effects of
applying this interpretation would be recognized on a prospective basis from
the effective date. Accordingly, upon initial application of the final
interpretation, (a) no adjustments would be made to the financial statements
for periods before the effective date and (b) no expense would be recognized
for any additional compensation cost measured that is attributable to periods
before the effective date. Globix expects that the adoption of this
interpretation will not have a material impact on its consolidated financial
position, results of operations and cash flows.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At September 30, 2000, we had financial instruments consisting of fixed rate
debt, mortgage payable marketable securities, short term investments and other
investments. The substantial majority of our debt obligations consist of the
Senior Notes, which bear interest at 12.5% and mature May 1, 2010. Annual
maturities of our capital lease obligations are as follows: $2.2 million in
2001, $0.9 million in 2002, $0.2 million in 2003, $0.1 million in 2004 and
thereafter. The mortgage interest is payable at 9.16% (subject to adjustment on
February 11, 2010) based on a 25 year amortization schedule. Principal and
interest payments of $178.5 are payable monthly and any balance of the
principal and all accrued and unpaid interest is due and payable in February
2025. At September 30, 2000, the fair value of Globix's Senior Notes was
approximately $432 million.
Marketable securities include Globix's strategic investment in Edgar On-
Line, a publicly traded entity, which is recorded at its fair market value.
Globix does not hedge its exposure to fluctuations in the value of its equity
securities.
Our other investments are generally fixed rate investment grade and
government securities denominated in U.S. dollars. At September 30, 2000, all
of our investments are due to mature within twelve months except $36.1 million
and the carrying value of such investments approximates fair value. At
September 30, 2000, $43.2 million of our cash and investments were restricted
in accordance with the terms of certain collateral obligations.
We actively monitor the capital and investing markets in analyzing our
capital raising and investing decisions.
Globix is also subject to market risk associated with foreign currency
exchange rates. Globix's business plan includes the expansion of the U.K.
operation. To date, Globix has not utilized financial instruments to minimize
its exposure to foreign currency fluctuations. Globix will continue to analyze
risk management strategies to minimize foreign currency exchange risk in the
future.
Globix believes it has limited exposure to financial market risks, including
changes in interest rates. The fair value of our investment portfolio or
related income would not be significantly impacted by a 100 basis
21
<PAGE>
point increase or decrease in interest rates due mainly to the short-term
nature of the major portion of our investment portfolio. An increase or
decrease in interest rates would not significantly increase or decrease
interest expense on debt obligations due to the fixed nature of the substantial
majority of our debt obligations.
Item 8. Financial Statements
Financial Statements are attached hereto following page F-2.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
During fiscal years 2000 and 1999 there were no changes in or disagreements
with Globix's independent accountant on accounting or financial disclosure.
Forward Looking Information and Risk Factors
This Report on Form 10-K contains certain forward-looking statements
concerning, among other things, the Company's plans and objectives for future
operations, planned products and services, potential expansion into new
markets, and anticipated customer demand for our existing and future products
and services. The Private Securities Litigation Reform Act of 1995 provides a
"safe harbor" for forward-looking statements to encourage the inclusion of
prospective information so long as those statements are accompanied by
meaningful cautionary statements identifying factors that could cause actual
results to differ materially. Among the factors that could cause actual
results, performance or achievement to differ materially from those described
or implied in the forward-looking statements are:
. potential marketplace or technology changes, rendering existing products
and services obsolete,
. changes in or the lack of anticipated changes in the regulatory
environment in various countries, including potential legislation
increasing our exposure to content distribution and intellectual
property liability
. changes in customer purchasing policies and practices,
. Globix's ability to recruit and retain sufficient and qualified
personnel needed to staff our expanding operations,
. the ability of Globix to raise additional capital to finance expansion,
. the sufficiency of existing cash and cash flow to complete our business
plan and fund our working capital and debt service,
. Globix's large existing debt obligations and history of operating
losses,
. the ability of Globix to integrate, operate and further expand and
upgrade our network, and
. the continued growth, use and improvement of the Internet, along with
the risks inherent in new product and service introductions and the
entry into new geographic markets.
22
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The directors, executive officers, and other key employees of Globix, and
their ages and positions as of November 30, 2000, are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Marc H. Bell............ 33 President, Chief Executive Officer and Chairman
Robert B. Bell.......... 61 Director of International Affairs and Director
Alfred G. Binford....... 40 Senior Vice President, President--Network
Services Group
Peter L. Herzig......... 38 Senior Vice President, Chief Operating Officer--
Application Services Group
Marc Jaffe.............. 33 Senior Vice President, Chief Operating Officer--
Field Operations
Anthony L. Previte...... 35 Senior Vice President, Chief Technology Officer
Brian L. Reach.......... 45 Senior Vice President, Chief Financial Officer
Paul L. Bonnington...... 41 Vice President, Marketing
Shawn P. Brosnan........ 38 Vice President and Corporate Controller
Alan Patrick............ 40 Vice President, Corporate Development
Christopher D. Peckham.. 35 Vice President, Information Technology
Sheldon Reiter.......... 58 Vice President, Real Estate
Richard Rose............ 54 Vice President, Business Development
Lord Anthony St. John... 43 Vice President, Business Development, and
Director
Daniel Utevsky.......... 50 General Counsel, Assistant Secretary
Martin Fox.............. 63 Director
Jack D. Furst........... 40 Director
Michael J. Levitt....... 41 Director
Sid Paterson............ 58 Director
Harshad Shah............ 50 Director
Tsuyoshi Shiraishi...... 54 Director
Dr. Richard Videbeck.... 75 Director
</TABLE>
Marc H. Bell, has been the President and Chief Executive Officer since he
founded Globix in 1989. He has appeared on numerous television broadcasts and
has been quoted in several national publications regarding Internet-related
topics. He has a Bachelor of Science degree in accounting from Babson College
and an M.S. degree in real estate finance from New York University. Mr. Bell is
the son of Robert B. Bell.
Robert B. Bell, has served as Director of International Affairs of Globix
since July 2000. Prior to that he served for more than five years as Executive
Vice President of Globix. He also served as Chief Financial Officer from 1994
through September 1999. Mr. Bell is also the Managing Director of Globix's U.K.
subsidiary. Mr. Bell spent three years at Coopers & Lybrand. Thereafter, he was
a practicing attorney in New York City at the firm of Bell, Kalnick, Beckman,
Klee and Green, which Mr. Bell founded in the early 1970s, and specialized in
taxation, investments and international real estate joint ventures. He is the
author of Joint Ventures in Real Estate published by John Wiley & Sons. Prior
to 1994, Mr. Bell was for many years an Adjunct Professor at New York
University. He has a Bachelor of Science degree from New York University and a
J.D. degree from the University of California at Berkeley. Mr. Bell is the
father of Marc H. Bell.
Alfred G. Binford, Senior Vice President and President-Network Services
Group, joined Globix in October 2000. Prior to joining Globix, Mr. Binford was
Senior Vice President of Broadcast services of its Real Broadcast Network
Division of RealNetworks Inc. from April 2000 to September 2000 Mr. Binford
also served as Senior Vice President and Chief Marketing Officer of Intermedia
Communications, the parent of Digex Corporation from March 1999 to April 2000.
Prior to that he was President and Chief Executive Officer of Verizon Long
Distance where he was employed since September 1994.
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<PAGE>
Peter L. Herzig, Senior Vice President and Chief Operating Officer-
Application Services Group, joined Globix in October 2000. Prior to joining
Globix, Mr. Herzig was Executive Vice President and Chief Financial Officer at
iWon.com, from March 2000 to October 2000, where his responsibilities included
managing iWon's relationship with Globix. Previously, Mr. Herzig was a Senior
Managing Director and Head of Global Capital Markets Services for Bear, Stearns
& Co., from 1998 to March 2000 where he provided strategic capital-structure
advisory services to a broad spectrum of domestic and international clients,
including many new media technology companies experiencing growth with the
expansion of the Internet. Prior to that he was employed by Goldman Sachs since
1989.
Marc Jaffe, Senior Vice President, Chief Operating Officer--Field
Operations, joined Globix in January 1995. Prior to joining Globix, Mr. Jaffe
was a department manager at Sid Paterson Advertising Inc. in New York City,
which he joined in 1989. Mr. Jaffe graduated from Colgate University, where he
received a Bachelor of Arts degree.
Anthony L. Previte, Senior Vice President, Chief Technology Officer, joined
Globix in October 1998. From July 1991 to October 1998, Mr. Previte was the
Vice President, Special Projects for Emcor Group, Inc., a publicly traded
electrical and mechanical engineering and construction firm. While at Emcor
Group, Mr. Previte was involved in the design and construction of over one
million square feet of secure data center facilities for companies such as
Prudential Securities, Morgan Stanley and Nomura Securities. Mr. Previte has a
degree in aerospace engineering from Polytechnic Institute of New York.
Brian L. Reach, Senior Vice President, Chief Financial Officer, joined
Globix in September 1999. From May 1997 to August 1999, Mr. Reach was the Chief
Financial Officer of IPC Communications, a provider of integrated
telecommunications equipment and services to the financial industry. During his
tenure at IPC, Mr. Reach successfully guided IPC through its leveraged
recapitalization and financially restructured IPC enabling it to invest in
strategic acquisitions and next generation technologies. Prior to IPC, Mr.
Reach was the Chief Financial Officer of Celadon Group, Inc. and Cantel
Industries, Inc. Mr. Reach is a certified public accountant and received his
Bachelor of Science degree in accounting from the University of Scranton.
Paul L. Bonnington, Vice President, Marketing, joined Globix in May 1999.
From August 1994 to February 1999, Mr. Bonington was an executive with
Mecklermedia Corporation, a producer of Internet publications, trade shows and
web sites. In 1998, he was named Mecklermedia's Senior Vice President of
Strategic Planning and Marketing. From 1994 to 1997, Mr. Bonington headed
Mecklermedia's print division as publisher of Internet World magazine, and
later as Senior Vice President/Group Publisher following the launch of Web
Week, Web Developer and Internet Shopper magazines. Mr. Bonington has a
Bachelor of Science degree in business economics from the State University of
New York, Oneonta.
Shawn P. Brosnan, Vice President and Corporate Controller, joined Globix in
November 1999. Prior to joining Globix, Mr. Brosnan spent over 15 years with
Ernst & Young, one of the leading professional services organizations
worldwide. During his tenure at Ernst & Young, he was a business advisor with
extensive experience in the areas of accounting, finance, financial reporting,
mergers and acquisitions and process improvement. Mr. Brosnan is a certified
public accountant and received his Bachelor of Science degree in accounting
from Providence College.
Alan Patrick, Vice President, Corporate Development, joined Globix in May
2000. Prior to joining Globix, Mr. Patrick was head of Strategy & Business
Development for Hosting & ASP at British Telecom, Plc since November 1996.
Prior to that he was a consultant with McKinsey & Co since 1994. Mr. Patrick
holds a BS and MS in Engineering from the University of the Witwatersrand in
South Africa.
Christopher D. Peckham, Vice President, Information Technology, rejoined
Globix in February 1999. From August 1997 to February 1999, Mr. Peckham was
Manager of Network Engineering for ICON, a national Internet service provider.
From August 1995 through August 1997, Mr. Peckham served as Senior Systems and
Networking Administrator for Globix. From May 1995 through August 1995, he held
the position of Director
24
<PAGE>
of Technology for the Interactive Media Division of Database America. Mr.
Peckham has Doctoral, Master and Bachelor of Science degrees in electrical
engineering from the New Jersey Institute of Technology.
Sheldon Reiter, Vice President, Real Estate, joined Globix in May 2000.
Prior to joining Globix, Mr. Reiter was a practicing corporate and real estate
attorney for 32 years, specializing in construction, development and financing
of real property. He was a partner in Bell, Kalnick, Beckman, Klee & Green and
its successor firm. In addition, Mr. Reiter was a real estate developer of
shopping centers, office buildings and hotels. Mr. Reiter was admitted to the
New York Bar in 1967. He received his Bachelor's degree from New York
University and a Juris Doctor degree from Brooklyn Law School.
Richard Rose, Vice President, Business Development, joined Globix in May
2000. Prior to joining Globix, Mr. Rose was with British Telecom Plc (BT) from
September 1995, working as a General Manager in BT's Outsourcing and Customized
Solutions Division, where he led the successful negotiation and implementation
to run the largest telecommunications outsourced contract in Europe. In May
1997, he joined the International M&A Development Group where he was
responsible for managing a number of European fixed line and Internet and
Multimedia transactions. He has a Masters Degree in Mathematics from London
University.
Anthony St. John, Lord St. John of Bletso, Vice President, Business
Development has been a director of Globix since October 1997. In September
1999, Lord St. John became Globix's Vice President, Business Development. Since
1978, Lord St. John has served as a sitting member of the House of Lords of the
Parliament of the United Kingdom and an Extra Lord-in-Waiting to Her Majesty
the Queen. He is also a member of The House of Lords' European Union Sub-
Committee on Economic and Financial Affairs, Trade and External Relations.
Since 1993, he has served as a consultant to Merrill Lynch and is a Registered
Representative of the London Stock Exchange. Lord St. John is also a director
of Globix's U.K. subsidiary and serves as its Director of Business Development.
He received his Bachelor of Arts and Bachelor of Science degrees from Capetown
University and Bachelor of Laws from the University of South Africa and a
Masters of Law from the London School of Economics.
Daniel Utevsky, General Counsel, joined Globix in December 1999. From July
1993 to November 1999, Mr. Utevsky was Vice President, General Counsel and
Corporate Secretary of IPC Communications, a provider of integrated
telecommunications equipment and services to the financial industry. Mr.
Utevsky was admitted to the New York bar in 1984. He received his Bachelor of
Business Administration degree in economics from the University of Memphis and
a Juris Doctor degree from Benjamin N. Cardozo School of Law.
Martin Fox, has been a director of Globix since October 1995. Mr. Fox has
been, for more than five years, the President, Chief Executive Officer, and a
director of Initio, Inc., a publicly owned company, which has been an
electronic commerce and catalogue specialty retailer of consumer products.
Jack D. Furst, has been a director of Globix since December 1999. Mr. Furst
has been a partner of Hicks, Muse, Tate & Furst Incorporated since 1989. Mr.
Furst serves as a director of American Tower Corporation, Cooperative
Computing, Inc., Hedstrom Holdings, Inc., Home Interiors & Gifts, Inc.,
International Wire Group, Inc., LLS Corp., Triton Energy Limited and
Viasystems, Inc. Mr. Furst received his B.S. degree from the College of
Business Administration at Arizona State University and his M.B.A. from the
Graduate School of Business at the University of Texas.
Michael J. Levitt, has been a director of Globix since December 1999. Mr.
Levitt has been a partner of Hicks, Muse, Tate & Furst Incorporated since 1996.
From 1993 through 1995, Mr. Levitt was a Managing Director and Deputy Head of
Investment Banking with Smith Barney Inc. Mr. Levitt serves as a director of
AMFM Inc., Awards.com, El Sitio, Inc., G.H. Mumm/Perrier/Jouet, Grupo MVS, S.A.
de C.V., Ibero-American Media Partners II Ltd., International Home Foods, Inc.,
Regal Cinemas, Inc., RCN Corporation and STC Broadcasting, Inc. Mr. Levitt
attended the University of Michigan, from which he received his B.B.A. and J.D.
25
<PAGE>
Sid Paterson, has been a director of Globix since February 1998. He has been
President and Chief Executive Officer of Sid Paterson Advertising Inc. for more
than five years.
Harshad Shah, has been a director of Globix since April 2000. Mr. Shah has
been involved in real estate investment and development since 1982. Mr. Shah
has been President of Leyland Equities Corp. since December 1995. From 1982 to
1985, Mr. Shah was President of Crescent Equities, Inc. From 1970 to 1982 he
was a Vice President of Manufacturers Hanover Trust Company (now Chase
Manhattan Bank). Mr. Shah attended the Elphinstone College in Bombay, India
where he received a B.A. in Economics and the Indian Institute of Management
where he received a Masters Degree in Business Administration.
Tsuyoshi Shiraishi, has been a director of Globix since July 1994. Mr.
Shiraishi has been the Chairman of Century World PTE Ltd., an investment
consulting firm, and the Managing Director of Harpoon Holdings Ltd., a British
Virgin Islands holding company, since 1992. From 1990 to 1994, he 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.
Dr. Richard Videbeck, has been a director of Globix since October 1995.
Since 1983, Dr. Videbeck has been an independent consultant in consumer risk
analysis, particularly for retailers and banks. From 1974 until 1986, he 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.
The Securities and Exchange Commission (the "SEC") has adopted rules
relating to the obligation of directors, certain officers and five percent
shareholders to file beneficial ownership reports under Section 16 (A) of the
Securities Exchange Act of 1934. One such rule requires disclosure by the
Registrant of filings which, under the SEC's rules, are not deemed to be
timely. During its review with respect to fiscal 2000, Globix determined that
certain directors (Messrs. Fox, Paterson, Shiraishi, St. John and Videbeck) did
not file all such reports on a timely basis.
26
<PAGE>
Item 11. Executive Compensation
The following Summary Compensation Table sets forth the compensation for the
years ended September 30, 2000, 1999 and 1998 for Globix's Chief Executive
Officer and its three most highly compensated executive officers (other than
the Chief Executive Officer) and a former executive officer whose cash
compensation exceeded $100,000 in the year ended September 30, 2000
(collectively referred to as the named executive officers):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------- Securities
Other Annual Underlying
Name and Position Year Salary ($) Bonus ($) Compensation ($) Options (#)
----------------- ---- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Marc H. Bell........... 2000 367,500 831,125 -- --
President and Chief
Executive Officer 1999 350,000 331,875 -- 4,788,244
1998 250,000 -- -- 846,000
Robert B. Bell ........ 2000 275,000 -- -- 50,000
Former Executive Vice
President 1999 240,625 -- -- --
1998 151,042 -- -- 120,000
Marc Jaffe ............ 2000 250,000 -- -- --
Senior Vice President,
Chief Operating
Officer 1999 215,685 -- -- 480,000
1998 133,250 -- -- 200,000
Anthony L. Previte .... 2000 200,000 -- -- --
Senior Vice President,
Chief Technology
Officer 1999 141,585 -- -- 400,000
1998 -- -- -- --
Brian L. Reach ........ 2000 250,000 50,000 -- --
Senior Vice President,
Chief Financial
Officer 1999 20,000 -- -- 400,000
</TABLE>
Effective July 2000, Mr. Robert B. Bell became Director of International
Affairs and ceased to be an executive officer of Globix.
Mr. Reach joined Globix on September 1, 1999.
Option Grants in Last Fiscal Year
The following table summarizes options granted during the year ended
September 30, 2000 to the named executive officers:
<TABLE>
<CAPTION>
Individual Grants Potential Realizable
---------------------- Value at Assumed
Number of % of Total Annual Rates of Stock
Securities Options Price Appreciation
Underlying Granted to for Option Term ($)
Options Employees in Exercise Expiration ----------------------
Name Granted Fiscal Year Price ($) Date 5% 10%
---- ---------- ------------ --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Marc H. Bell............ -- -- -- -- -- --
Robert B. Bell.......... 40,000 2.1 8.86 11/1/09 577,280 919,222
10,000 0.5 29.19 4/4/10 475,474 757,113
Marc Jaffe.............. -- -- -- -- -- --
Brian L. Reach.......... -- -- -- -- -- --
Anthony L. Previte...... -- -- -- -- -- --
</TABLE>
27
<PAGE>
The options on the preceding table have been granted pursuant to Globix's
2000 and 1999 Stock Option Plans and vest on the first anniversary of the date
of the grant. During the year ended September 30, 2000, Globix granted
employees options to purchase 1,863,550 shares of common stock under the 1998,
and 1999, and 2000 Stock Option Plans.
The amounts shown as potential realizable value represent hypothetical gains
that could be achieved for the respective options if exercised at the end of
the option term. The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange Commission
and do not represent Globix's estimate or projection of Globix's future common
stock prices. These amounts represent certain assumed rates of appreciation in
the value of Globix's common stock from the fair market value on the date of
grant. Actual gains, if any, on stock option exercises are dependent on the
future performance of the common stock. The amounts reflected in the table may
not necessarily be achieved.
Option Exercises and Fiscal Year-End Option Values
The following named executive officers exercised options during the fiscal
year ended September 30, 2000:
Mr. Robert B. Bell, exercised options to purchase 480,000 shares at prices
ranging from $18.88 to $26.53 per share which resulted in realized value of
$10,446,182.
Mr. Marc Jaffe, exercised options to purchase 180,000 shares at prices
ranging from $9.99 to $55.81 per share which resulted in realized value of
$3,366,771.
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, 2000, and the values for exercisable and unexercisable
options. Options are in-the-money if the market value of the shares covered
thereby is greater than the option exercise price. This calculation is based on
the fair market value at September 30, 2000 of $23.38 per share, less the
exercise price.
Fiscal Year-End Option Values
<TABLE>
<CAPTION>
Number of Value of Unexercised
Securities Underlying In-the-Money Options at
Unexercised Options at September 30, 2000
September 30, 2000 ($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Marc H. Bell................ 5,467,444 166,800 87,705,242 3,600,712
Robert B. Bell.............. -- 50,000 -- 522,450
Marc Jaffe.................. 116,000 504,000 1,534,812 2,655,000
Anthony L. Previte.......... 80,000 320,000 987,399 655,597
Brian L. Reach.............. 80,000 320,000 914,960 3,659,840
</TABLE>
Employment Agreements
Marc H. Bell. Effective June 1, 1998, Globix entered into a seven year
employment agreement with Mr. Marc H. Bell. Under this agreement his base
salary for fiscal year 2000 was $367,500, which increases annually at the rate
of five percent. In addition, Mr. Bell receives an annual bonus equal to ten
thousand times the increase, if any, of the market price per share of Globix's
common stock on each June 30 over the highest per share market price of
Globix's common stock on any preceding July 1 during the term of the agreement.
During the years ended September 30, 2000 and 1999 Mr. Bell received bonuses of
approximately $853,125, and $331,875, respectively under this provision of the
employment agreement. The employment agreement also provides that he may
require Globix to lend him up to a total of $155,000. Any loan taken thereunder
will
28
<PAGE>
mature five years after the date made and bear interest at the rate of eight
percent per annum. However, the interest accruing during the first two years is
not payable until the end of such two-year period. At September 30, 2000 and
1999, Mr. Bell had no outstanding borrowings under such loan arrangement.
Pursuant to the terms of the employment agreement, as amended, Mr. Bell is
also entitled to stock option grants to purchase shares of common stock. The
term of such option is ten years from the date of grant. During the years ended
September 30, 2000, 1999 and 1998 Mr. Bell was granted options to purchase
shares of common stock totaling 0, 4,096,580 and 691,664, respectively, under
this agreement.
Robert B. Bell. Globix and Robert B. Bell are parties to an employment
agreement, dated as of July 21, 1999, which expires on March 31, 2002. The
employment agreement provides for a base salary of $275,000 per year,
increasing annually at the rate of 5.0% per year starting October 1, 2000.
Pursuant to the terms of the employment agreement, Globix has established a
deferred compensation plan in the form of an irrevocable trust which Globix
funds to the extent of $250,000 for each fiscal quarter commencing with the
quarter ended March 31, 1999, until the total amount held in the trust reaches
$3.0 million. The employment agreement provides that if the agreement
terminates for any reason or there is a change of control, Globix shall, within
five business days thereafter, contribute to the trust the difference between
the amount held by the trust on the date of the termination or change of
control and $3.0 million, if any. Upon the termination of the employment
agreement, Mr. Bell will be entitled to receive payments of $20,000 per month
from the trust, subject to annual increases for cost of living adjustments.
Upon Mr. Bell's death, the payments from the trust shall be reduced by fifty
percent and this reduced amount shall be paid to Mr. Bell's designee for a
period of two years.
Pursuant to the employment agreement, in the event of a change of control
during the term of the employment agreement, Mr. Bell shall have the right to
terminate the employment agreement at any time after the change of control.
Upon any termination of the employment agreement prior to May 31, 2002 but
after a change of control, Mr. Bell shall be entitled to receive a payment
equal to 2.99 times his annual compensation, including bonuses, if any, during
the one year preceding the date of termination. In addition, upon a change of
control, Mr. Bell shall have the right, exercisable within six months after the
change of control, to require Globix to purchase all or a portion of his
options to acquire shares in Globix at a price equal to the greater of the then
fair market value of Globix's common stock or $12.50 per share less the
exercise price under such options.
Alfred G. Binford. Mr. Binford accepted employment with Globix pursuant to
the terms of an employment offer letter dated August 31, 2000. The terms of the
employment offer letter provide for a signing bonus of $60,000, a base salary
of $225,000 per year and an annual performance bonus of up to $113,000, based
upon mutually agreed criteria, payable after each fiscal year-end. In addition,
Mr. Binford is entitled to receive stock options. In October 2000, Mr. Binford
received stock options to purchase 100,000 shares of common stock at an
exercise price of $23.31 per share, which vest ratably over five years. Globix
has assured Mr. Binford a pre-tax in-the-money value of at least $2,000,000 for
his exercisable stock options on or before the second anniversary of the grant
date, provided that Mr. Binford's employment with Globix has not been
terminated prior to such date by Globix for cause or by Mr. Binford for any
reason. In the event of a shortfall, Globix, at its option, may pay the
difference in cash or its common stock.
Directors Compensation
Each non-employee director of Globix, who does not beneficially own more
than 5% of Globix's outstanding common stock, is granted upon election or re-
election at the annual meeting of stockholders, options to purchase 10,000
shares of common stock. These options are exercisable in full beginning 12
months after the date of grant, have a ten-year term, and are exercisable at
fair market value on the date of the grant. Effective April 4, 2000, Globix
implemented a cash compensation program pursuant to which its directors who are
not also officers of or employed by Globix or any of its majority-owned
subsidiaries, will receive fees of
29
<PAGE>
$2,000 for personal attendance or $500 for telephonic attendance at board
meeting and $1,250 for personal attendance or $250 for telephonic attendance at
committee meetings. In addition, at the discretion of the Board of Directors,
directors may be reimbursed for reasonable travel expenses in attending Board
and committee meetings.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the beneficial
ownership of Globix common stock as of December 18, 2000:
. each person or entity who is known by Globix to own beneficially 5% or
more of the outstanding shares of common stock;
. each named executive officer as of December 18, 2000;
. each director; and
. all named executive officers and directors of Globix as a group.
The applicable percentage of ownership is based on 37,333,000 shares
outstanding on December 18, 2000. Unless otherwise indicated, the address for
those listed below is c/o Globix Corporation, 139 Centre St., New York, NY
10013.
<TABLE>
<CAPTION>
Named Executive Officers, Director sand 5% Number of Shares Percent
Stockholders: Beneficially Owned of Class
------------------------------------------ ------------------ --------
<S> <C> <C>
Marc H. Bell...................................... 5,680,245 13.3
Robert B. Bell.................................... 40,000 *
Marc Jaffe........................................ 192,404 *
Anthony L. Previte................................ 84,800 *
Brian L. Reach.................................... 90,000 *
Lord Anthony St. John............................. 84,000 *
7 Cadogan Gardens
London SW32RE
Martin Fox........................................ 90,000 *
10 Henry Street
Teterboro, NJ 07608
Jack D. Furst..................................... 40,000 *
200 Crescent Court
Dallas, Texas 75201
Michael J. Levitt................................. 40,000 *
200 Crescent Court
Dallas, Texas 75201
Sid Paterson...................................... 125,000 *
99 Madison Avenue
New York, NY 10016
Tsuyoshi Shiraishi................................ 252,500 *
Harpoon Holdings, Ltd.
2 Handy Road,
#11-09 Cathay Building,
Singapore 229233
Dr. Richard Videbeck.............................. 74,200 *
3249 East Angler's Stream
Avon Park, FL 33825
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Named Executive Officers, Director sand 5% Number of Shares Percent
Stockholders: Beneficially Owned of Class
------------------------------------------ ------------------ --------
<S> <C> <C>
Harshad Shah...................................... 300 *
145 East 48th Street
New York, New York 10017
Thomas O. Hicks................................... 8,000,000 17.6
200 Crescent Court
Dallas, Texas 75201
HM4 Globix Qualified Fund, LLC.................... 7,264,400 16.3
200 Crescent Court
Dallas, Texas 75201
HMTF Equity Fund IV (1999), L.P................... 7,264,400 16.3
200 Crescent Court
Dallas, Texas 75201
HM4/GP (1999) Partners, L.P....................... 7,315,900 16.4
200 Crescent Court
Dallas, Texas 75201
Hicks, Muse GP (1999) Partners IV, L.P............ 7,613,200 16.9
200 Crescent Court
Dallas, Texas 75201
Hicks, Muse (1999) Fund IV, LLC................... 7,613,200 16.9
200 Crescent Court
Dallas, Texas 75201
Firsthand Capital Management, Inc................. 3,641,500 9.8
Kevin Michael Landis
125 South Market
San Jose, California 95113
Janus Capital Corporation......................... 4,558,000 12.2
100 Fillmore Street
Denver, CO 80206-4923
All executive officers and directors as a Group
(13 persons)..................................... 6,580,949 15.1
</TABLE>
--------
* Less than 1%
Under the rules of the Securities and Exchange Commission, a person is
deemed to be the beneficial owner of a security if that 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 the 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.
The amount shown for Marc H. Bell includes 301 shares owned directly and
5,467,444 stock options to purchase shares exercisable within 60 days. The
amount shown also includes 212,500 shares owned by Harpoon Holdings, Ltd., an
entity controlled by Mr. Shiraishi, a director of Globix. Harpoon's shares are
subject to an Irrevocable Proxy entered into between Harpoon and Marc H. Bell,
dated as of October 1, 1995, pursuant to which Mr. Bell has the sole right to
vote such shares with respect to the election of Globix's directors.
The amount shown for Robert B. Bell includes 40,000 stock options to
purchase shares exercisable within 60 days.
The amount shown for Mr. Jaffe includes 116,000 stock options to purchase
shares exercisable within 60 days and 666 shares owned by Mr. Jaffe's minor
child to which Mr. Jaffe disclaims beneficial ownership.
The amount shown for Mr. Previte includes 84,800 stock options to purchase
shares exercisable within 60 days.
31
<PAGE>
The amount shown for Mr. Reach includes 80,000 stock options to purchase
shares exercisable within 60 days.
The amount shown for Lord St. John includes 72,000 stock options to purchase
shares exercisable within 60 days and 12,000 shares held in trust for the
benefit of Lord St. John's wife and children, to which trust Lord St. John
disclaims beneficial ownership.
The amount shown for Mr. Fox includes 40,000 stock options to purchase
shares exercisable within 60 days.
The amount shown for Mr. Furst includes 40,000 stock options to purchase
shares exercisable within 60 days.
The amount shown for Mr. Levitt includes 40,000 stock options to purchase
shares exercisable within 60 days.
The amount shown for Mr. Paterson includes 90,000 stock options to purchase
shares exercisable within 60 days.
The amount shown for Mr. Shiraishi includes 40,000 stock options to purchase
shares exercisable within 60 days and 212,500 shares held through a controlled
entity, Harpoon Holdings, Ltd., for which Marc H. Bell also holds an
irrevocable proxy.
The amount shown for Dr. Videbeck includes 40,000 stock options to purchase
shares exercisable within 60 days.
The amounts shown for Thomas O. Hicks, HM4 Globix Qualified Fund, LLC, HMTF
Equity Fund IV (1999), L.P., HM4/GP (1999) Partners, L.P., Hicks, Muse GP
(1999) Partners IV, L.P., and Hicks, Muse (1999) Fund IV, LLC are based upon
Form 4s filed by those persons on July 10, 2000. The amounts shown assume
conversion to common stock of all Series A 7.5% Convertible Preferred Stock
beneficially owned by such entities. The shares shown are subject to shared
voting and investment power.
Messrs. Furst and Levitt, each a director of Globix, were appointed to the
Board of Directors on behalf of the holders of the Series A 7.5% Convertible
Preferred Stock.
The amount shown for Firsthand Capital Management, Inc. and Kevin Michael
Landis are based on a Schedule 13G jointly filed by such persons on December 4,
2000.
The amount shown for Janus Capital Corporation is based upon public filings
and correspondence received by the registrant from Janus.
The amount shown for all executive officers and directors as a group,
include 6,580,949 stock options to purchase shares exercisable within 60 days.
Item 13. Certain Relationships and Related Transactions
See "Employment Contracts" above for a description of certain loans Globix
had made to Marc H. Bell.
A company owned by a family member of Harshad Shah, a director of Globix
since April 4, 2000, holds a promissory note from Globix in the amount of $2.6
million, carrying an interest rate of 7% that arose from Globix's acquisition
of 139 Centre Street. Interest payments totaled approximately $45,000 and
$181,000 in Fiscal 1999 and 2000, respectively.
See "Liquidity and Capital Resources" section of the Management Discussion
and Analysis above for a description of certain fees paid to Hicks, Muse, Tate
& Furst Incorporated.
32
<PAGE>
PART IV
Item 14. Exhibits and Reports on Form 8-K
(a) Exhibits. See index of exhibits annexed hereto.
(b) Reports on Form 8-K. None
33
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Globix Corporation
/s/ Marc H. Bell
By: _________________________________
Marc H. Bell, President,
Chief Executive Officer and
Chairman
Date: December 22, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Marc H. Bell President, Chief Executive December 22, 2000
______________________________________ Officer and Chairman
Marc H. Bell
/s/ Brian L. Reach Senior Vice President and December 22, 2000
______________________________________ Chief Financial Officer
Brian L. Reach
/s/ Shawn P. Brosnan Vice President, Corporate December 22, 2000
______________________________________ Controller and Chief
Shawn P. Brosnan Accounting Officer
/s/ Robert B. Bell Director of International December 22, 2000
______________________________________ Affairs and Director
Robert B. Bell
Vice President, Business December 22, 2000
______________________________________ Development and Director
Anthony St. John
/s/ Martin Fox Director December 22, 2000
______________________________________
Martin Fox
/s/ Jack Furst Director December 22, 2000
______________________________________
Jack Furst
/s/ Michael Levitt Director December 22, 2000
______________________________________
Michael Levitt
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Sid Paterson Director December 22, 2000
______________________________________
Sid Paterson
/s/ Harshad Shah Director December 22, 2000
______________________________________
Harshad Shah
/s/ Tsuyoshi Shiraishi Director December 22, 2000
______________________________________
Tsuyoshi Shiraishi
/s/ Richard Videbeck Director December 22, 2000
______________________________________
Richard Videbeck
</TABLE>
35
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets--As of September 30, 2000 and September 30,
1999..................................................................... F-3
Consolidated Statements of Operations--For the years ended September 30,
2000, September 30, 1999 and September 30, 1998.......................... F-4
Consolidated Statements of Changes in Stockholders' (Deficit) Equity--For
the years ended September 30, 2000, September 30, 1999 and September 30,
1998..................................................................... F-5
Consolidated Statements of Cash Flows--For the years ended September 30,
2000, September 30, 1999 and September 30, 1998.......................... F-6
Notes to Consolidated Financial Statements................................ F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of
Directors of Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (a Delaware corporation) and Subsidiaries as of September 30, 2000
and 1999, and the related consolidated statements of operations, stockholders'
(deficit) equity and cash flows for each of the three years in the period ended
September 30, 2000. 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 auditing standards generally
accepted in the United States. 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, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 2000 in conformity with accounting principles generally accepted
in the United States.
Arthur Andersen LLP
New York, New York
November 14, 2000
F-2
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
September 30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents............................... $ 363,877 $101,471
Short-term investments.................................. 9,948 --
Marketable securities................................... 4,685 9,941
Accounts receivable, net of allowance for doubtful
accounts of $4,072 and $707, respectively.............. 21,403 7,798
Inventories............................................. 38 1,282
Prepaid expenses and other current assets............... 4,403 2,649
Restricted cash......................................... 7,093 8,848
--------- --------
Total current assets.................................. 411,447 131,989
Investments, restricted................................... 36,085 36,191
Property, plant and equipment, net........................ 248,424 122,653
Debt issuance costs, net of accumulated amortization of
$719 and $1,030, respectively............................ 20,217 5,583
Goodwill, net of accumulated amortization of $197 in
2000..................................................... 6,650 --
Other assets.............................................. 6,768 6,102
--------- --------
Total assets.......................................... $ 729,591 $302,518
========= ========
Liabilities and Stockholders' (Deficit) Equity
Current liabilities:
Capital Lease and other obligations..................... $ 2,173 $ 2,088
Accounts payable........................................ 16,964 10,439
Accrued liabilities..................................... 13,669 9,579
Accrued interest........................................ 12,502 8,667
--------- --------
Total current liabilities............................. 45,308 30,773
Capital Lease obligations, net of current portion......... 1,135 2,896
Mortgage Payable.......................................... 20,674 --
Senior Notes, net of unamortized discount of $1,891 in
1999..................................................... 600,000 158,109
Other long term liabilities............................... 4,462 4,335
--------- --------
Total liabilities..................................... 671,579 196,113
Redeemable convertible preferred stock.................... 76,042 --
Stockholders' (Deficit) Equity:
Common stock, $.01 par value; 500,000,000 and 75,000,000
shares authorized; 37,307,315 and 33,300,020 shares
issued and outstanding, respectively..................... 373 333
Additional paid-in capital................................ 165,890 155,423
Accumulated other comprehensive income.................... 1,784 10,279
Accumulated deficit....................................... (186,077) (59,630)
--------- --------
Total stockholders' (deficit) equity.................. (18,030) 106,405
--------- --------
Total liabilities and stockholders' (deficit) equity.... $ 729,591 $302,518
========= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year ended September 30,
-------------------------------------
2000 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Revenue................................. $ 81,287 $ 33,817 $ 20,595
Operating costs and expense:
Cost of revenue....................... 42,513 22,184 13,322
Selling, general and administrative... 98,113 36,495 10,696
Depreciation and amortization......... 18,228 6,329 1,310
----------- ----------- -----------
Total operating costs and expenses...... 158,854 65,008 25,328
----------- ----------- -----------
Loss from operations.................... (77,567) (31,191) (4,733)
Interest and financing expense........ (57,831) (18,386) (8,376)
Interest income....................... 24,749 6,192 1,953
Other Income, net..................... 1,779 -- --
----------- ----------- -----------
Loss before extraordinary item.......... (108,870) (43,385) (11,156)
Extraordinary loss on early
extinguishment of debt............... (17,577) -- --
----------- ----------- -----------
Net loss................................ (126,447) (43,385) (11,156)
Dividends and accretion on preferred
stock................................ (5,768) -- --
----------- ----------- -----------
Net loss attributable to common stock-
holders'............................... $ (132,215) $ (43,385) $ (11,156)
=========== =========== ===========
Basic and diluted loss per share
attributable to common stockholders'
before extraordinary loss.............. $ (3.23) $ (1.73) $ (0.77)
Extraordinary loss per share............ (0.50) -- --
----------- ----------- -----------
Basic and diluted net loss per share
attributable to common stockholders'... $ (3.73) $ (1.73) $ (0.77)
=========== =========== ===========
Weighted average common shares outstand-
ing--basic and diluted................. 35,484,040 25,116,800 14,503,176
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Common Stock
-----------------
Accumulated Total
Additional Other Stockholders'
Paid-in Comprehensive Accumulated (Deficit)
Shares Amount Capital Income Deficit Equity
---------- ------ ---------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance, October 1,
1997................... 13,793,800 $138 $ 9,965 $ -- $ (5,089) $ 5,014
Warrants issued in
connection with senior
note offering.......... -- -- 2,253 -- -- 2,253
Issuance of common stock
upon exercise of
options and warrants,
net.................... 2,766,664 28 4,904 -- -- 4,932
Comprehensive Income
(Loss):
Net loss.............. -- -- -- -- (11,156) --
Unrealized holding
gains................ -- -- -- 1,676 -- --
Total Comprehensive
Loss................... -- -- -- -- -- (9,480)
---------- ---- -------- ------ --------- ---------
Balance, September 30,
1998................... 16,560,464 166 17,122 1,676 (16,245) 2,719
Issuance of common stock
in conjunction with
public offering, net of
offering costs of
$11,915................ 16,000,000 160 136,458 -- -- 136,618
Issuance of common stock
upon exercise of
options and warrants,
net.................... 739,556 7 1,843 -- -- 1,850
Comprehensive Income
(Loss):
Net loss.............. -- -- -- -- (43,385) --
Unrealized holding
gains................ -- -- -- 8,523 -- --
Foreign Currency
translation
adjustment........... -- -- -- 80 -- --
Total Comprehensive
Loss................... -- -- -- -- -- (34,782)
---------- ---- -------- ------ --------- ---------
Balance, September 30,
1999................... 33,300,020 333 155,423 10,279 (59,630) 106,405
Issuance of common stock
in conjunction with
acquisition............ 241,236 2 6,180 -- -- 6,182
Issuance of common stock
upon exercise of
options and warrants,
net.................... 3,766,059 38 10,055 -- -- 10,093
Dividends and accretion
on preferred stock..... -- -- (5,768) -- -- (5,768)
Comprehensive Income
(Loss):
Net loss.............. -- -- -- -- (126,447) --
Unrealized holding
losses............... -- -- -- (5,763) -- --
Foreign Currency
translation
adjustment........... -- -- -- (2,732) -- --
Total Comprehensive
Loss................... -- -- -- -- -- (134,942)
---------- ---- -------- ------ --------- ---------
Balance, September 30,
2000................... 37,307,315 $373 $165,890 $1,784 $(186,077) $ (18,030)
========== ==== ======== ====== ========= =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from operating activities
Net loss....................................... $(126,447) $(43,385) $(11,156)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization.................. 18,228 6,329 1,310
Amortization of debt discount and issuance
costs......................................... 1,022 849 538
Extraordinary loss on early extinguishment of
debt.......................................... 17,577 -- --
Gain on sale of short term investments......... (1,238) -- --
Gain on sale of marketable securities.......... (601) -- --
Changes in operating assets and liabilities:
Accounts receivable, net....................... (13,221) (2,937) (1,602)
Inventories.................................... 1,244 (890) 96
Prepaid expenses and other current assets...... (1,471) (950) (1,571)
Other assets................................... 366 (766) (207)
Accounts payable............................... (1,270) 3,911 4,175
Accrued liabilities............................ 7,827 904 (278)
Accrued interest............................... 3,539 -- 8,667
Other.......................................... 127 38 143
--------- -------- --------
Net cash provided by (used in) operating
activities.................................... (94,318) (36,897) 115
Cash flows from investing activities
Investment in restricted cash.................. (9,740) -- (10,317)
Use of restricted cash and investments......... 17,374 22,269 --
Investment in marketable securities............ -- -- (12,962)
Investment in restricted cash and investments.. (15,262) (6,247) (49,838)
Proceeds from sale of marketable securities.... 1,125 14,638 --
Investment in strategic investments............ (1,033) (6,000) (1,000)
Purchases of property, plant and equipment..... (142,589) (83,434) (23,270)
Purchase of Comstar.net, Inc., net of cash
acquired...................................... 186 -- --
--------- -------- --------
Net cash used in investing activities.......... (149,939) (58,774) (97,387)
</TABLE>
F-6
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Cash flows from financing activities
Proceeds from 12.5% Senior Notes offering, net
of offering expenses........................... $ 580,000 $ -- $ --
Proceeds from issuance of preferred stock, net.. 75,250 -- --
Proceeds from 13% Senior Notes offering, net of
offering expenses.............................. -- -- 153,392
Proceeds from issuance of common stock, net..... -- 136,618 --
Repayment of 13% Senior Notes................... (170,400)
Payments of dividends on preferred stock........ (3,475)
Repayments of short term borrowings............. -- -- (2,001)
Shareholder (Advance) Repayment................. -- 300 (155)
Proceeds from mortgage payable, net............. 20,064 -- --
Repayments of mortgage payable and capital lease
obligations.................................... (2,137) (3,179) (424)
Proceeds from private placement................. -- -- 600
Proceeds from exercise of stock options and
warrants, net.................................. 10,093 1,850 4,932
--------- -------- --------
Net cash provided by financing activities....... 509,395 135,589 156,344
Effects of exchange rate changes on cash and
cash equivalents............................... (2,732) 80 --
--------- -------- --------
Net increase in cash and cash equivalents....... 262,406 39,998 59,072
Cash and cash equivalents, beginning of year.... 101,471 61,473 2,401
--------- -------- --------
Cash and cash equivalents, ending of year....... $ 363,877 $101,471 $ 61,473
========= ======== ========
Supplemental disclosure of cash flow information
Cash paid for interest.......................... $ 55,260 $ 21,256 $ 223
Cash paid for income taxes...................... $ 72 $ 38 $ 51
Non-cash investing and financing activities:
Equipment acquired under capital lease
obligations.................................... $ -- $ 4,566 $ 1,113
Capital expenditures included in accounts
payable, accrued liabilities and other long
term liabilities............................... $ 8,287 $ 10,110 $ 6,702
Cumulative dividends and accretion on preferred
stock.......................................... $ 2,293 $ -- $ --
Warrants issued in connection with 13% Senior
Notes.......................................... $ -- $ -- $ 2,253
Acquisition of Subsidiary:
Fair value of net assets acquired............. $ 9,833
Liabilities assumed........................... (3,441)
Common stock issued........................... (6,182)
---------
Net cash paid for acquisition................. 210
Cash acquired in acquisition.................. (396)
---------
Net cash acquired in acquisition.............. $ (186)
=========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(All Dollars in Thousands, Except Share and Per Share Data)
1. Organization and Significant Accounting Policies
Organization and Nature of Operations
Globix Corporation and Subsidiaries ("Globix" or the "Company") was
originally incorporated in New York in 1989 as NAFT International Ltd. In July
1994, PFM Technologies Corporation, a newly formed affiliate of NAFT, acquired
NAFT and its affiliated corporations in a tax-free exchange of common stock.
The Company reincorporated in Delaware in 1995 under the name Bell Technology
Group Ltd. The Company changed its name to Globix Corporation on June 1, 1998.
The Company is a leading full-service provider of sophisticated Internet
solutions to businesses. The Company's solutions include secure and fault-
tolerant Internet data centers, high performance network connectivity to the
Internet, web hosting and support for complex Internet-based applications.
These three major elements of the total Internet solution combine to provide
customers with the ability to create, operate and scale their increasingly
complex Internet operations in a cost efficient manner. Customers of Globix
primarily use these products and services to maintain complex computer
equipment in a secure fault-tolerant environment with connectivity to a high-
speed, high-capacity, direct link to the Internet and support complex Internet
applications. The Company currently offers its products and services from
facilities in New York City, Santa Clara, California, Atlanta, Georgia,
Washington, DC and London, England. The Company operates in two segments: the
"Internet Division" and the "Server Sales and Integration Division". The
Internet Division provides dedicated Internet access, hosting, co-location and
application services, (such as electronic commerce, streaming media, network
security and server administration and network monitoring). The Server Sales
and Integration Division provides Internet-related hardware and software,
systems and network integration.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
Management 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. Actual results may differ from those estimates.
Revenue Recognition
Revenue consists primarily of web hosting, co-location and dedicated
Internet access fees, fees from systems and network integration, sales of
systems administration and application services (such as streaming media,
electronic commerce, network security and fees from instructor-led corporate
training) and sales of third-party hardware and software.
Monthly service revenue related to web hosting, co-location and Internet
access is recognized over the period services are provided. Service and
equipment installation revenue is recognized at completion of installation and
upon commencement of service. Revenue derived from application services is
recognized as the project progresses. Projects are generally completed within
less than one year. Payments received in advance of providing services are
deferred until the period such services are provided. Equipment sales and
installation revenue is recognized when installation is completed.
F-8
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Cost of Revenue
Cost of revenue in the Company's Internet Division consists primarily of
telecommunications costs. For the Server Sales and Integration Division, the
cost of revenues primarily consists of acquisition costs of third-party
hardware and software.
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.
Investments
Investments in marketable securities are reported at fair value. Unrealized
gains and losses from those securities, which are classified as available-for-
sale, are reported as "unrealized holding gains and losses" as a separate
component of stockholders' equity. At September 30, 2000 marketable securities
have a cost basis of approximately $1.5 million.
Investments in non-marketable securities with less than twenty percent
ownership interest are accounted for under the cost method and are included in
other assets in the consolidated balance sheets.
Inventories
Inventories consist of computer hardware and software, parts and related
items. Inventories are carried at the lower of cost or market determined by the
first-in, first-out method.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, less accumulated
depreciation or amortization computed on the straight-line method. Buildings
and building improvements are depreciated over their estimated useful life of
up to forty years. Computer hardware and software, network equipment and
furniture and equipment are depreciated over their estimated useful lives,
ranging from three to seven years. Leasehold improvements are amortized over
the term of the lease or life of the asset, whichever is shorter.
Goodwill and Unaudited Proforma Results of Operations
On August 30, 2000, the Company acquired all the outstanding shares of
Comstar.net, Inc., a Georgia Corporation, for a purchase price of approximately
$6.9 million (including transaction costs) in stock and cash. In connection
with the acquisition, the Company assumed liabilities of approximately $3.4
million and acquired assets of approximately $9.8 million. The acquisition was
recorded under the purchase method of accounting. Results of operations for the
acquired business have been included in the consolidated statements of
operations beginning August 31, 2000. The acquisition resulted in goodwill
totaling approximately $6.8 million. Goodwill represents costs in excess of
fair value of net assets acquired and is amortized over a three-year period
using the straight line method.
F-9
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
The following unaudited pro forma consolidated statements of operations data
for the twelve months ended September 30, 2000 and 1999, gives effect to the
acquisition of Comstar.net, Inc. as if this acquisition had occurred on October
1, 1998:
<TABLE>
<CAPTION>
Twelve months
ended September
30,
-------------------
2000 1999
--------- --------
<S> <C> <C>
Revenue............................................... $ 85,600 $ 36,783
Net Loss.............................................. $(135,082) $(50,687)
Net loss attributable to common stockholders'......... $(140,850) $(50,687)
Basic and diluted, net loss per share attributable to
common stockholders'................................. $ (3.97) $ (2.02)
</TABLE>
The above unaudited pro forma consolidated results of operations data gives
effect to purchase accounting adjustments. These pro forma results have been
prepared for comparative purposes only and do not purport to be indicative of
what operating results would have been had the acquisition actually taken place
on October 1, 1998, and may not be indicative of future operating results.
Long-Lived Assets
The Company reviews the carrying amount of long lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount
may not be recoverable. Measurement of any impairment would include a
comparison of estimated future operating cash flows anticipated to be generated
during the remaining life of the asset to the net carrying value of the asset.
Deferred Issuance Costs
Costs incurred to obtain financing through the issuance of long term debt
have been reflected as an asset in the accompanying consolidated balance
sheets. Costs incurred to obtain financing through the issuance of preferred
stock have been reflected as a reduction in the carrying value of the issued
preferred stock. These costs are amortized over the term of the related
financing. In 2000, certain debt was redeemed at which time the remaining
balance of unamortized discount and issuance costs were written off and
included in extraordinary loss on early extinguishment of debt (See note 4).
Foreign Currency Translation
The financial statements of the Company's foreign subsidiaries have been
translated in accordance with Statement of Financial Accounting Standard No.
52, "Foreign Currency Translation". The subsidiaries' assets and liabilities
are translated into U.S. Dollars at the year-end rate of exchange. Income and
expense items are translated at the average exchange rate for the year. The
resulting foreign currency translation adjustment is included in stockholders'
equity as a component of accumulated other comprehensive income. Transaction
gains and losses are recorded in the consolidated statement of operations.
Income Taxes
Deferred income taxes are provided for differences between financial
statement and income tax bases of assets and liabilities using enacted tax
rates in effect in the years in which the differences are expected to reverse.
The Company provides a valuation allowance on net deferred tax assets when it
is more likely than not that such assets will not be realized.
F-10
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Stock-Based Compensation
As permitted by Financial Accounting Standards Board Statement No. 123,
"Accounting or Stock-Based Compensation" ("SFAS No. 123"), which establishes a
fair value based method of accounting for stock-based compensation plans, the
Company has elected to follow Accounting Principal Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB No. 25") for recognizing
stock-based compensation expense for financial statement purposes. 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.
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 8 for the additional disclosures required under SFAS
No. 123.
Loss per Share
Basic loss per share is calculated by dividing net loss attributable to
common shareholders by the weighted average number of shares of common stock
outstanding during the period. Diluted loss per share is calculated by dividing
net loss attributable to common shareholders by the weighted average number of
common shares outstanding, adjusted for potentially dilutive securities.
Diluted loss per share has not been presented since the inclusion of
outstanding convertible preferred stock, stock options and warrants would be
antidilutive. The following table summarizes the equivalent number of common
shares assuming the related securities that were outstanding as of September
30, 2000 and 1999 had been converted, but not included in the calculation of
diluted loss per share because such shares are antidilutive:
<TABLE>
<CAPTION>
September 30,
---------------------
2000 1999
---------- ----------
<S> <C> <C>
Convertible preferred stock............................ 8,000,000 --
Stock Options.......................................... 10,298,100 10,724,000
Warrants............................................... 194,800 2,506,000
---------- ----------
18,492,900 13,230,000
========== ==========
</TABLE>
The following is a reconciliation of net loss attributable to common
stockholders' for the years ended September 30, 2000,1999 and 1998:
<TABLE>
<CAPTION>
2000 1999 1998
---------- ---------- ----------
<S> <C> <C> <C>
Numerator:
Loss before extraordinary item............ $ (108,870) $ (43,385) $ (11,156)
Dividend and accretion on preferred
stock.................................... (5,768) -- --
---------- ---------- ----------
Net loss attributable to common
stockholders' before extraordinary item.. (114,638) (43,385) $ (11,156)
Extraordinary loss on early extinguishment
of debt.................................. (17,577) -- --
---------- ---------- ----------
Net loss attributable to common
stockholders'............................ $ (132,215) $ (43,385) $ (11,156)
========== ========== ==========
Denominator:
Weighted average shares outstanding-basic
and diluted.............................. 35,484,040 25,116,800 14,503,176
========== ========== ==========
</TABLE>
F-11
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars 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 and cash equivalents, short-term
investments, restricted cash and investments, marketable securities and
accounts receivable. The Company maintains cash and cash equivalents, short-
term investments, and restricted cash and investments 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 and geographic
dispersion of customers comprising the Company's customer base. The Company
performs ongoing credit evaluations of its customers and maintains reserves for
potential losses.
Three vendors comprised approximately seventy-eight percent (36%, 22%, and
20% individually) of the Company's inventory purchases during the year ended
September 30, 1999. One vendor comprised approximately twenty-one percent
during the year ended September 30, 1998. If such vendors cease to supply the
Company, management is confident it can procure comparable products at similar
costs elsewhere.
Fair Value of Financial Instruments
For cash and cash equivalents, short-term investments, restricted cash and
investments and marketable securities, the carrying amount 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.
Reclassifications
Certain prior year information has been reclassified to conform with fiscal
2000 presentation.
Recent Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," ("SFAS No. 133"), as amended, which is
effective for all quarters of the fiscal year beginning after June 15, 2000.
This Statement establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging securities. The Company expects that the adoption of
SFAS No. 133 will not have a material impact on the Company's consolidated
financial position, results of operations and cash flows.
In December 1999, the Securities and Exchange Commission ("SEC") issued SAB
No. 101 "Revenue Recognition in Financial Statements" ("SAB No. 101"). SAB No.
101 expresses the view of the SEC Staff in applying generally accepted
accounting principles to certain revenue recognition issues. The Company is
required to adopt SAB No. 101 in its fiscal year ending September 30, 2001. The
Company has preliminarily determined that the adoption of SAB No. 101 will
result in a one time non-cash charge in fiscal 2001 for the cumulative effect
of a change in accounting principal in the range of $2.0 to $3.0 million. Such
amount will be recorded as deferred revenue and recognized as revenue in the
statement of operations over the estimated remaining contract life. The Company
does not expect the adoption of SAB No. 101 to have any economic impact to its
business operations or cash flows.
In March 2000, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation--An Interpretation of APB Opinion No. 25". The interpretation
clarifies the application of APB Opinion No. 25 in specified events. The
interpretation was effective July 1, 2000, but covers certain events occurring
during the period after December 15, 1998 and prior to the effective date. To
the extent that events covered by this interpretation occurred during the
period after December 15, 1998, but prior to the effective date, the effects of
applying this interpretation would be
F-12
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
recognized on a prospective basis from the effective date. Accordingly, upon
initial application of the final interpretation, (a) no adjustments would be
made to the financial statements for periods before the effective date and (b)
no expense would be recognized for any additional compensation cost measured
that is attributable to periods before the effective date. The Company expects
that the adoption of this interpretation will not have a material impact on the
Company's consolidated financial position, results of operations and cash
flows.
2. Property, Plant and Equipment
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
September 30,
------------------
2000 1999
-------- --------
<S> <C> <C>
Land.................................................... $ 1,997 $ 1,997
Building and building improvements...................... 55,416 51,828
Leasehold improvements.................................. 30,927 25,917
Computer hardware and software and network equipment.... 67,552 46,384
Furniture and equipment................................. 7,198 5,266
-------- --------
163,090 131,392
Less: Accumulated depreciation and amortization......... (25,731) (8,739)
Add: Construction in progress........................... 111,065 --
-------- --------
Property, plant and equipment, net...................... $248,424 $122,653
======== ========
</TABLE>
Certain computer and network equipment are recorded under capital leases
that aggregated approximately $6.0 million and $7.1 million as of September 30,
2000 and 1999, respectively. Accumulated amortization on the assets recorded
under capital leases aggregated approximately $3.2 million and $1.4 million as
of September 30, 2000 and 1999, respectively.
Costs incurred prior to completion of construction of Internet data centers
and network are reflected as construction in progress in the accompanying
consolidated balance sheets and will be recorded as property, plant and
equipment at the date each Internet data center or network segment becomes
operational. Construction in progress includes direct expenditures for
construction of the Internet data center facilities and related network
equipment and is stated at cost. Capitalized costs include costs incurred under
the construction contract, advisory, consulting and legal fees, labor and
interest incurred during the construction phase. Capitalized interest is
included in property, plant and equipment under the provisions of SFAS No. 34
totaling approximately $2.2 million, $3.8 million and $1.1 million at September
30, 2000, 1999 and 1998, respectively.
The Company owns the land and building located at 139 Centre Street, New
York, New York. The nine-story building with approximately 160,000 square feet
of floor space houses the Company's corporate headquarters and state of the art
SuperPOP facility. A former owner of the right to purchase the Centre Street
property is entitled to additional consideration if Globix sells the property.
Such amount will be equal to the greater of (a) $1.0 million (subject to
increase after June 1, 2018 by ten percent and an additional ten percent every
fifth year thereafter), or (b) ten percent of the gross sales price of the
property if such sales price is greater than $17.5 million.
3. Other Assets
Other assets include the Company's investment in NetSat Express, Inc., other
minority-owned investments, security deposits and other assets. In August 1999,
the Company purchased for $5.0 million, twelve and one-
F-13
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
half percent of the outstanding securities of NetSat Express, Inc. ("NetSat
Express"), a subsidiary of Globecomm System Inc. NetSat Express is a provider
of satellite-based Internet access services, digital media distribution
services, and integrated data, voice and video communications services. In
addition, the Company and NetSat Express entered into a strategic agreement
pursuant to which NetSat Express will acquire ISP access and VPN services from
the Company, while the Company will utilize NetSat Express' IP based satellite
services for connection of foreign peering points to the Internet.
4. Senior Notes
In April 1998, the Company completed a $160.0 million debt financing (the
"13% Senior Notes") consisting of 160,000 units, each unit consisting of a note
in the principal amount of one thousand dollars and one warrant to purchase
14.08 shares of common stock (total of 2,252,800 shares of common stock) at a
purchase price of $3.51 per share. The 13% Senior Notes were to mature on May
1, 2005. Interest on the 13% Senior Notes accrued at a rate of 13% per annum
and was payable semi-annually in arrears on May 1 and November 1 of each year,
commencing November 1, 1998. Globix deposited $57.0 million with an escrow
agent at closing, which amount, with interest, was sufficient to pay, when due,
the first six interest payments under the 13% Senior Notes. The 13% Senior
Notes were collateralized by a first priority security interest in the escrow
account. The 13% Senior Notes were unsecured obligations of the Company and
ranked pari passu in right of payment with all existing and unsecured an
unsubordinated indebtedness and rank senior in right of payment to any future
subordinated indebtedness. In connection with the warrants issued with the 13%
Senior Notes, the Company had assigned an original issue discount of
approximately $2.3 million.
On January 28, 2000, the Company announced that it had entered into an
agreement to sell $600.0 million 12.5% senior notes (the "12.5% Senior Notes")
due 2010 in a private placement to a group of initial purchasers and in March
2000 completed a tender offer to purchase all of the outstanding 13% Senior
Notes, $160.0 million in principal amount. The purchase price in the tender
offer was 106.5% of the principal amount, plus accrued and unpaid interest. On
February 8, 2000 the Company closed on its offering for the $600.0 million
12.5% Senior Notes due 2010, resulting in net proceeds of approximately $580.0
million, after underwriting fees and offering expenses. The tender offer and
related redemption of the outstanding 13% Senior Notes also resulted in a one
time charge of $17,577 or $0.50 per share which has been recorded as an
extraordinary item in the statement of operations. As a result of the
redemption of the 13% Senior Notes all restrictions related to the escrow
deposit were released and such funds are no longer restricted as to use.
The 12.5% Senior Notes mature on February 1, 2010. Interest on the 12.5%
Senior Notes is payable semiannually on February 1 and August 1 of each year,
commencing August 1, 2000. The 12.5% Senior Notes are 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
offering the Company incurred costs of approximately $20.0 million that are
being amortized over ten years using the effective interest method.
As of September 30, 2000, the fair value of the Company's 12.5% Senior Notes
was approximately $432 million based upon quotes from securities dealers.
5. Mortgage Payable
On January 25, 2000, the Company borrowed $21.0 million from a financial
institution pursuant to a mortgage note secured by the Company's property at
139 Centre Street, New York. Interest is payable at 9.16% (subject to
adjustment on February 11, 2010) based on a 25 year amortization schedule.
Principal and interest
F-14
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
payments of $178.5 are payable monthly and any balance of the principal and all
accrued and unpaid interest is due and payable in February 2025.
6. Redeemable Convertible Preferred Stock
During November 1999 the Company designated 250,000 shares of its authorized
Preferred Stock, $0.01 par value, as a Series A. At September 30, 2000, there
were 80,000 Series A Preferred Shares outstanding and 170,000 Series A
Preferred Shares reserved for issuance. On April 4, 2000 the shareholders of
the Company voted to amend the Company's certificate of incorporation to
increase the Company's authorized preferred stock to 5,000,000 shares.
On December 3, 1999, the Company issued $80.0 million (80,000 shares) in
Series A Convertible Preferred Stock (the "Series A Preferred Stock") to
affiliates of Hicks, Muse, Tate & Furst Incorporated ("Hicks Muse") to expand
the build-out of its SuperPOPs and other facilities. The Series A Preferred
Stock is convertible into common stock at $10.00 per share at any time and may
not be called for redemption by the Company for five years. Under the
agreement, the Series A Preferred Stock is subject to mandatory redemption in
2014 and yields an annual dividend of 7.5% payable quarterly in cash or
additional Series A Preferred Stock, at the option of the Company. The holders
of the Series A Preferred Stock have a liquidation preference of $1,000 per
share and are entitled to cumulative dividends.
The Series A Preferred Stock is recorded in the accompanying consolidated
balance sheet outside the stockholders equity section due to its mandatory
redemption feature. The Company incurred approximately $4,750 of issuance costs
in connection with the Series A Preferred Stock transaction. Such costs have
been recorded as a reduction of the carrying amount of the Series A Preferred
Stock and are being accreted through a charge to additional paid in capital
over the five-year period to the earliest redemption date.
On April 4, 2000 the Company's Board of Directors declared payment of cash
dividends on the outstanding Series A Preferred Stock for the periods ending
December 31, 1999, March 31, 2000 and June 30, 2000. On July 26, 2000 the
Company's Board of Directors declared payment of cash dividend on the
outstanding shares Series A Preferred Stock for the period ending September 30,
2000. In April 2000 the Company paid cash dividends totaling $1,975 to the
holders of the Series A Preferred Stock. On both June 30, 2000 and October 4,
2000 the Company paid cash dividends totaling $1,500 to the holders of the
Series A Preferred Stock.
7. Stockholders' Equity
Secondary Public Offering
In March 1999, the Company completed a public offering of 16,000,000 shares
of the Company's common stock. The Company received proceeds, net of expenses,
from the public offering of approximately $136.6 million. In addition, the
Company received proceeds of $0.9 million resulting from the exercise of 80,790
warrants to purchase 323,160 shares of common stock.
Initial Public Offering
In January 1996, the Company sold, in an initial public offering, 4,600,000
shares of Common Stock at an initial offering price of $1.75 per share, and
575,000 Redeemable Purchase Warrants for $0.10 per warrant. Each warrant
entitles the holder to purchase 4 shares of the Company's common stock for
$1.93 per share. The
F-15
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
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 received from
the public offering amounted to approximately $6.6 million.
In March 1996, the underwriter of the initial public offering exercised its
over-allotment option to purchase 518,568 common shares from the Company for
$1.75 per share. The net proceeds amounted to approximately $0.8 million.
In June 1998, the Company called for redemption of the IPO Warrants. Prior
to the redemption date of July 8, 1998, 581,472 of the 592,055 then outstanding
IPO Warrants were exercised at an exercise price of $1.86 per common share. The
remaining 10,483 warrants were redeemed by the Company at a price of $0.10 per
IPO Warrant. The net proceeds received from the exercise of IPO warrants
amounted to approximately $4.3 million.
Private Placement
In September 1997, the Company sold 1,530,436 shares of its common stock in
a private transaction for a total consideration of $2.1 million. 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 $0.1 million in cash and 69,564 shares
of common stock was paid to the investors and were offset against the proceeds
of the issuance.
Amended Certificate of Incorporation
On April 4, 2000 the shareholders of the Company voted to amend the
Company's certificate of incorporation to increase the Company's authorized
common stock to 500,000,000 shares.
Stock Splits
On December 10, 1999 the Company announced a two-for-one stock split of its
outstanding shares of common stock, which was paid on December 30, 1999. On
January 10, 2000, the Company announced an additional two-for-one stock split
of its outstanding shares of common stock, payable on January 31, 2000.
Stockholders' equity has been restated to give retroactive recognition to both
stock splits for all periods presented in the accompanying financial statements
by reclassifying from additional paid-in-capital to common stock the par value
of the additional shares arising from the splits. In addition, all references
to number of shares, per share amounts and stock options data have been
restated to reflect the stock splits.
8. Employee Benefits Plan
Stock Option Plans
In April 2000, the Company's stockholders approved, the 2000 Stock Option
Plan (the "2000 Option Plan"), which provides for the grant of stock options to
purchase up to 1,675,000 shares of common stock to any employee, non-employee
director, or consultant at the Board's discretion. Under the 2000 Option 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.
In April 1999, the Company's stockholders approved, the 1999 Stock Option
Plan (the "1999 Option Plan"), which provides for the grant of stock options to
purchase up to 6,000,000 shares of common stock to
F-16
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
any employee, non-employee director, or consultant at the Board's discretion.
Under the 1999 Option 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.
In April 1998, the Company's stockholders approved, the 1998 Stock Option
Plan (the "1998 Option Plan"), which provides for the grant of stock options to
purchase up to 4,800,000 shares of common stock to any employee, non-employee
director, or consultant at the Board's discretion. Under the 1998 Option 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 2000, 1999 and 1998 Option Plans, options are granted to non-
employee directors upon election at the annual meeting of stockholders 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
compensation committee.
In 1995, the Company's stockholders approved, the 1995 Stock Option Plan
(the "1995 Option Plan"), which reserved 1,440,000 shares of common stock for
issuance under the 1995 Option Plan. Under the 1995 Option Plan, the term of
the options issued are determined by the stock option committee and range from
five to ten 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.
There were 5,943,925 options available for future grant at September 30,
2000.
Fair Value of Stock Options
For disclosure purposes under SFAS No. 123, the fair value of each option
grant is estimated on the date of grant using the Black-Scholes option
valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
2000 1999 1998
----- ---- -----
<S> <C> <C> <C>
Expected life (in years)................................. 6.0 6.0 6.0
Risk-free interest rate.................................. 6.3% 5.4% 5.6%
Volatility............................................... 122.0% 94.0% 111.0%
Dividend yield........................................... 0.0% 0.0% 0.0%
</TABLE>
Utilizing these assumptions, the weighted average fair value of options
granted is $20.80, $6.49 and $1.32 for the years ended September 30, 2000, 1999
and 1998, respectively.
Under the above model, the total value of stock options granted would be
amortized on a pro forma basis over the option-vesting period. Had the Company
determined compensation expense for these stock options under the fair value
method of SFAS No. 123, the Company's net loss attributable to common
stockholders' and net loss per share attributable to common stockholders' would
have been increased to the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
2000 1999 1998
--------- -------- --------
<S> <C> <C> <C>
Pro forma net loss attributable to common
stockholders'.............................. $(139,340) $(76,305) $(13,394)
========= ======== ========
Pro forma basic and diluted, net loss per
share attributable to common
stockholders'.............................. $ (3.93) $ (3.04) $ (0.92)
========= ======== ========
</TABLE>
F-17
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options. The effects of
applying SFAS No. 123 in this pro forma disclosure are not indicative of future
amounts as additional stock option awards are anticipated in future years.
Summary Stock Option Activity
The following table summarizes stock option information with respect to all
stock options for the three years ended September 30, 2000:
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
---------- --------
<S> <C> <C>
Options outstanding, October 1, 1997.................... 1,231,589 $1.53
Granted............................................... 2,729,500 1.56
Canceled.............................................. (261,673) 1.39
Exercised............................................. (18,664) 1.67
---------- -----
Options outstanding, September 30, 1998................. 3,680,752 1.60
Granted............................................... 7,839,844 8.21
Canceled.............................................. (532,344) 3.58
Exercised............................................. (264,272) 1.52
---------- -----
Options outstanding, September 30, 1999................. 10,723,980 6.33
Granted............................................... 1,863,550 23.30
Canceled.............................................. (834,803) 12.55
Exercised............................................. (1,454,635) 1.79
---------- -----
Options outstanding, September 30, 2000................. 10,298,092 $9.54
========== =====
</TABLE>
The following table summarizes information about the outstanding and
exercisable options at September 30, 2000:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Options Contractual Exercisable Options Exercise
Prices Outstanding Life Price Outstanding Price
-------- ----------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C> <C>
$1.25--$2.63 2,569,692 7.50 $ 1.52 1,781,551 $ 1.58
$2.68--$9.00 681,100 8.44 $ 5.08 54,840 $ 4.60
$9.25--$9.25 4,096,580 8.49 $ 9.25 4,096,580 $ 9.25
$9.50--$12.02 1,851,470 8.86 $11.60 286,110 $11.80
$15.88--$29.63 623,350 9.77 $25.34 -- $ --
$30.00--$58.19 475,900 9.37 $33.06 -- $ --
---------- ---- ------ --------- ------
10,298,092 8.43 $ 9.54 6,219,081 $ 7.13
========== ==== ====== ========= ======
</TABLE>
F-18
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
401(k) Plan
The Company offers its eligible U.S. employees the opportunity to
participate in a defined contribution retirement plan qualifying under the
provisions of Section 401(k) of the Internal Revenue Code ("the Plan"). Each
employee is eligible to contribute, on a tax-deferred basis, a portion of
annual earnings not to exceed certain federal income tax limitations. On
January 1, 2000, the Plan was amended to include company matching contributions
for all participants making elective deferrals. The Company makes contributions
for all eligible employees who contribute to the Plan in an amount not to
exceed 50% of each participant's first 4% of compensation contributed as
elective deferrals for the Plan year. The Company contributed approximately
$0.27 million to the Plan during the period ended September 30, 2000.
9. Credit Agreements and Capital Lease Obligations
The Company maintains a $1.0 million credit line from an equipment vendor to
lease 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, the vendor 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. At September 30, 2000, approximately $2.5 million
was outstanding under this credit line and is included in the capital lease
obligations in the table below.
In addition, the Company has additional equipment financing arrangements
with several vendors totaling approximately $23.2 million. At September 30,
2000 there were no amounts outstanding under such financing arrangements.
Capital Lease Obligations
Future minimum lease payments due under capital leases are as follows:
<TABLE>
<CAPTION>
Year Ending September 30 Amount
------------------------ ------
<S> <C>
2001............................................................... $2,184
2002............................................................... 933
2003............................................................... 183
2004............................................................... 134
2005............................................................... 5
Thereafter......................................................... --
Less: Amount representing interest................................. (343)
------
Present value of net minimum lease payments........................ $3,096
======
</TABLE>
10. Commitments
Leases
The Company has minimum monthly usage/maintenance levels for data and fiber
with certain of its telecommunications carriers expiring in various years
through 2010. The Company also leases certain of its facilities and various
equipment under non-cancelable operating leases expiring in various years
through 2020. Total rent expense for all operating leases for the year ended
September 30, 2000, 1999 and 1998 was $4.1 million, $1.3 million and $0.56
million, respectively.
F-19
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
Future minimum payments due under these operating leases and
telecommunications carrier usage commitments are as follows:
<TABLE>
<CAPTION>
Year Ending September 30 Telecom Leases
------------------------ ------- --------
<S> <C> <C>
2001........................................................ $10,277 $ 14,700
2002........................................................ 2,566 26,200
2003........................................................ 978 28,400
2004........................................................ 978 30,800
2005........................................................ 978 30,700
Thereafter.................................................. 1,327 366,600
------- --------
Total..................................................... $17,104 $497,400
======= ========
</TABLE>
Equipment and Services
In connection with the construction of the Company's Internet data centers
the Company is contractually committed as of September 30, 2000 to various
equipment manufacturers and building contractors for equipment and construction
services totaling approximately $67 million.
Letters of Credit
As of September 30, 2000 the Company had collateralized letters of credit
aggregating $34.3 million. The related funds are included in restricted cash
and investments on the accompanying consolidated balance sheet.
Employment and Other Contractual Agreements
Effective June 1, 1998, the Company entered into a seven year employment
agreement, with an Officer and Director providing for a base salary of $0.35
million per year, increasing annually at the rate of five percent starting
October 1, 1999. In addition, the individual will receive an annual bonus equal
to ten thousand times the increase, if any, of the fair market value per share
of the Company's common stock measured during the twelve month period ending on
June 30 of each year of the agreement, commencing with the year beginning July
1, 1998. During the years ended September 30, 2000 and 1999 the individual
received bonuses of approximately, $0.85 million and $0.33 million,
respectively under this provision of the employment agreement. The employment
agreement also provides that he may require the Company to lend such officer up
to a total of $155. Any loan taken there under will mature five years after the
date made and bear interest at the rate of eight percent per annum. However,
the interest accruing during the first two years is not payable until the end
of such two-year period. At September 30, 2000 and 1999 the Officer had no
outstanding borrowings under such loan arrangement. Pursuant to the terms of
the employment agreement, as amended, the individual is also entitled to stock
option grants to purchase shares of common stock. The term of such option is
ten years from the date of grant. During the years ended September 30, 2000,
1999 and 1998 the individual was granted options to purchase shares of common
stock totaling 0, 4,096,580, and 691,664, respectively, under this agreement.
In connection with employment arrangements with certain other employees the
Company is also committed to minimum compensation obligations under employment
arrangements expiring in various years through 2002. Minimum payments due under
these arrangements aggregating approximately $4.1 million of which
approximately $2.4 million is due during the year ended September 30, 2001.
F-20
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
11. Income Taxes
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
Year ended September 30,
---------------------------
2000 1999 1998
-------- -------- -------
<S> <C> <C> <C>
Deferred tax assets (liabilities):
Tax depreciation and amortization in excess of
book depreciation and amortization........... $ (209) $ (348) $ (418)
Net operating loss carryforwards (U.S. Federal
Tax)......................................... 78,622 23,375 7,508
Allowance for doubtful accounts............... 1,631 283 242
Deferred Rent................................. 149 149 152
Deferred compensation......................... 641 -- --
Valuation allowance........................... (80,834) (23,459) (7,484)
-------- -------- -------
Total net deferred tax liabilities.......... $ -- $ -- $ --
======== ======== =======
</TABLE>
The provision for income taxes for the years ended September 30, 2000, 1999
and 1998 differs from the amount computed by applying the federal statutory
rate due to the following:
<TABLE>
<CAPTION>
Year ended September 30,
--------------------------------
2000 1999 1998
-------- -------- --------
<S> <C> <C> <C>
Statutory federal income tax rate....... (34)% (34)% (34)%
State and local taxes, net of federal
benefit................................ (11)% (11)% (11)%
Valuation allowance..................... 45 % 45 % 45 %
-------- -------- --------
Effective income tax rate............... -- % -- % -- %
======== ======== ========
</TABLE>
The Company is in an accumulated loss position for both financial and income
tax reporting purposes. The Company has U.S. Federal income tax loss
carryforwards of approximately $175 million at September 30, 2000. These income
tax loss carryforwards expire between 2011 and 2020. Pursuant to Section 382 of
the Internal Revenue Code, the usage of these net operating loss carryforwards
may be limited due to changes in ownership that have occurred. The Company has
not yet determined the impact, if any, that changes in ownership have had on
net operating loss carryforwards. As of September 30, 2000, the Company also
has net operating loss carryforwards of approximately $19 million from its
United Kingdom Subsidiaries, which do not expire under U.K. tax rules. For
financial reporting purposes, income tax benefits through September 30, 2000
related to both U.S. Federal and foreign income tax losses are fully offset by
a valuation allowance due to the uncertainty of the Company's ability to
realize income tax benefits by generating taxable income in the future.
12. Segment Information
The Company reports segment information under SFAS No. 131, which
establishes standards for reporting information about operating segments in
annual financial statements, and requires selected information about operating
segments in interim financial reports issued to stockholders. It also
establishes standards for disclosures about products and services and
geographic areas. Operating segments are components of an enterprise for which
separate financial information is available and which is evaluated regularly by
the Company's chief operating decision-maker, or decision making group, in
deciding how to allocate resources and assess performance. Operating segments
are managed separately and represent strategic business units that offer
different products and serve different markets.
F-21
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
The Company's activities fall within two operating segments: the Internet
Division and the Server Sales and Integration Division. The following table
sets forth industry segment information for the years ended September 30, 2000,
1999 and 1998:
<TABLE>
<CAPTION>
Year ended September 30,
-----------------------------
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Revenue:
Internet...................................... $ 53,083 $ 13,033 $ 6,448
Server sales and integration.................. 28,204 20,784 14,147
-------- --------- --------
Consolidated................................ $ 81,287 $ 33,817 $ 20,595
======== ========= ========
Operating income (loss):
Internet...................................... $(39,920) $$(13,001) $ 1,146
Server sales and integration.................. 3,403 1,019 721
Corporate..................................... (41,050) (19,209) (6,600)
-------- --------- --------
Consolidated................................ $(77,567) $ (31,191) $ (4,733)
======== ========= ========
Identifiable assets:
Internet...................................... $221,457 $ 57,503 $ 7,808
Server sales and integration.................. 3,812 6,074 3,732
Corporate..................................... 504,322 238,941 170,726
-------- --------- --------
Consolidated................................ $729,591 $ 302,518 $182,266
======== ========= ========
The following table sets forth geographic segment information for the years
ended September 30, 2000, 1999 and 1998:
<CAPTION>
Year ended September 30,
-----------------------------
2000 1999 1998
-------- --------- --------
<S> <C> <C> <C>
Revenue:
United States................................. $ 73,697 $ 33,674 $ 20,595
Europe........................................ 7,590 143 --
-------- --------- --------
Consolidated................................ $ 81,287 $ 33,817 $ 20,595
======== ========= ========
Operating income (loss):
United States................................. $(64,477) $ (27,590) $ (4,733)
Europe........................................ (13,090) (3,601) --
-------- --------- --------
Consolidated................................ (77,567) $ (31,191) $ (4,733)
======== ========= ========
Identifiable assets:
United States................................. $718,942 $ 282,479 179,494
Europe........................................ 10,649 20,039 2,772
-------- --------- --------
Consolidated................................ $729,591 $ 302,518 $182,266
======== ========= ========
</TABLE>
13. Related Party Transactions
The Company utilizes an entity controlled by a Director of the Company, as
its agent to place the Company's advertisements in various print publications.
Amounts paid to this entity for the years ended
F-22
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
September 30, 2000, 1999 and 1998 were approximately $0.1 million, $1.5
million and $0.5 million, respectively. A substantial portion of these amounts
constitutes the pass-through of amounts payable to the publishing companies
for the Company's advertisements.
14. Selected Quarterly Financial Data (Unaudited)
Selected unaudited financial information for the quarterly periods in 2000
and 1999 is presented below:
<TABLE>
<CAPTION>
Three Months Ended
December 31,
----------------------
1999 1998
---------- ----------
<S> <C> <C>
Revenue............................................... $ 16,145 $ 5,929
Loss from operations.................................. (16,963) (3,846)
Net loss.............................................. (20,811) (7,819)
Dividends and accretion on preferred stock............ (531) --
---------- ----------
Net loss attributable to common stockholders.......... $ (21,342) $ (7,819)
========== ==========
Basic and diluted net loss per share attributable to
common stockholders.................................. (0.64) (0.47)
========== ==========
Weighted average common shares outstanding--basic and
diluted.............................................. 33,557,678 16,560,464
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------------
2000 1999
---------- ----------
<S> <C> <C> <C>
Revenue............................................ $ 17,913 $ 7,086
Loss from operations............................... (19,984) (5,757)
Loss before extraordinary item..................... (29,548) (9,650)
Extraordinary loss on early extinguishment of
debt.............................................. (17,577) --
---------- ----------
Net loss........................................... (47,125) (9,650)
Dividends and accretion on preferred stock......... (1,762) --
---------- ----------
Net loss attributable to common stockholders....... $ (48,887) $ (9,650)
========== ==========
Basic and diluted net loss per share attributable
to common stockholders before extraordinary loss.. $ (0.90) $ (0.55)
Extraordinary loss per share....................... (.51) --
---------- ----------
Basic and diluted net loss per share attributable
to common stockholders............................ $ (1.41) $ (0.55)
========== ==========
Weighted average common shares outstanding--basic
and diluted....................................... 34,617,361 17,505,800
========== ==========
</TABLE>
F-23
<PAGE>
GLOBIX CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(All Dollars in Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenue............................................... $ 21,376 $ 9,381
Loss from operations.................................. (19,773) (7,192)
Net loss.............................................. (30,112) (8,809)
Dividends and accretion on preferred stock............ (1,738) --
---------- ----------
Net loss attributable to common stockholders.......... $ (31,850) $ (8,809)
========== ==========
Basic and diluted net loss per share attributable to
common stockholders.................................. $ (0.87) $ (0.27)
========== ==========
Weighted average common shares outstanding--basic and
diluted.............................................. 36,672,360 33,113,500
========== ==========
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
September 30,
----------------------
2000 1999
---------- ----------
<S> <C> <C>
Revenue............................................... $ 25,853 $ 11,421
Loss from operations.................................. (20,847) (14,396)
Net loss.............................................. (28,398) (17,107)
Dividends and accretion on preferred stock............ (1,738) --
---------- ----------
Net loss attributable to common stockholders.......... $ (30,136) $ (17,107)
========== ==========
Basic and diluted net loss per share attributable to
common stockholders.................................. $ (0.81) $ (0.52)
========== ==========
Weighted average common shares outstanding--basic and
diluted.............................................. 37,085,711 33,205,568
========== ==========
</TABLE>
F-24
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
3.1 Certificate of Incorporation of Globix, as amended.(7)
3.2 By-laws of Globix, as amended.*
4.1 Specimen Stock Certificate.(2)
4.6 Form of Warrant to purchase Common Stock expiring May 1, 2005.(3)
4.7 Specimen Series A 7.5% Convertible Preferred Stock Certificate.(11)
4.8 Certificate of Designations, Preferences and Rights of Series A 7.5%
Convertible Preferred Stock Certificate.(11)
4.9 Indenture between Globix and HSBC Bank USA, as Trustee, dated as of
February 8, 2000.(12)
4.10 Form of 12.5% Senior Note due February 1, 2020.(12)
10.1 Warrant Registration Rights Agreement between Globix and ING Baring,
(U.S.) Securities, dated as of April 30, 1998.(3)
10.2 1995 Stock Option Plan, adopted September 29, 1995.(1)
10.3 1998 Stock Option Plan, adopted April 16, 1998.(4)
10.4 Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and Marc H.
Bell, dated as of October 1, 1995.(1)
10.5 Employment Agreement between Marc H. Bell and Globix, dated as of
April 10, 1998.(6)
10.6+ Purchase Agreement between Young Woo and Globix dated as of June 2,
1998.(5)
10.7 Amendment to Marc H. Bell Employment Agreement, dated as of March 2,
1999.(7)
10.8 Stock Option Agreement between Globix and Marc H. Bell, dated as of
March 26, 1999.(7)
10.9 1999 Stock Option Plan, adopted April 23, 1999.(8)
10.10 Employment Agreement between Robert B. Bell and Globix, dated as of
July 21, 1999.(9)
10.11 Purchase Agreement between Globix and HMTF-IV Acquisition Corp. dated
as of November 5, 1999.(10)
10.12 Registration Rights Agreement for 12.5% Senior Notes, dated as of
February 8, 2000.(12)
10.13 Trust Agreement between Globix and Arnold N. Bressler, as Trustee,
dated as of July 21, 1999.*
10.14 2000 Stock Option Plan, adopted April 4, 2000.(13)
10.15 Employment Offer letter from Globix to Alfred Binford dated August
31, 2000.*
21 List of Subsidiaries.*
23 Consent of Arthur Andersen LLP.*
</TABLE>
--------
* Filed herewith.
+ Confidential treatment granted for certain portions of this Exhibit
pursuant to Rule 406 promulgated under the Securities Act.
(1) Incorporated by reference to Globix's Registration Statement on Form SB-2
(File No. 33-98978) filed November 3, 1995.
(2) Incorporated by reference to Amendment No. 2 to Globix's Registration
Statement filed January 23, 1996, declared effective January 24, 1996.
<PAGE>
(3) Incorporated by reference to Globix's Report on Form 8-K filed May 11,
1998.
(4) Incorporated by reference to Globix's Proxy Statement on Schedule 14A
filed on March 16, 1998.
(5) Incorporated by reference to Globix's Report on Form 8-K/A filed September
18, 1998.
(6) Incorporated by reference to Globix's Annual Report on Form 10-KSB filed
December 29, 1998.
(7) Incorporated by reference to Globix's Quarterly Report on Form 10-Q filed
May 15, 2000.
(8) Incorporated by reference to Globix's Proxy Statement on Schedule 14A
filed on March 24, 1999.
(9) Incorporated by reference to Globix's Quarterly Report on Form 10-QSB
filed August 16, 1999.
(10) Incorporated by reference to Globix's Report on Form 8-K filed November
29, 1999.
(11) Incorporated by reference to Globix's Annual Report on Form 10-K filed
December 29, 1999.
(12) Incorporated by reference to Globix's Report on Form 8-K filed February
14, 2000.
(13) Incorporated by reference to Globix's Proxy Statement on Schedule 14 filed
March 8, 2000.
