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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1999
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 York 10013
(address of principal executive offices) (Zip Code)
Registrant's Telephone number, including area code: (212) 334-8500
Securities registered pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, $.01 par value NASDAQ National Stock Exchange
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 2, 1999, 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 Stock Market, was
approximately $249.0 million (calculated by excluding shares owned beneficially
by directors and officers).
Number of shares of registrant's common stock outstanding as of December
2, 1999 was 8,393,228.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
Globix Corporation
Table of Contents
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Page
Part I
Item 1. Business .....................................................1
Item 2. Properties ..................................................11
Item 3. Legal Proceedings ...........................................11
Item 4. Submission of Matters To a Vote of Security Holders .........11
Part II
Item 5. Market For Registrant's Common Equity and Related
Stockholder Matters .........................................12
Item 6. Selected Financial Data .....................................12
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations .........................13
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk .................................................20
Item 8. Financial Statements and Supplementary Data..................21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure .........................21
Part III
Item 10. Directors and Executive Officers of the Registrant ..........21
Item 11. Executive Compensation ......................................23
Item 12. Security Ownership of Certain Beneficial Owners and
Management ..................................................25
Item 13. Certain Relationships and Related Transactions ..............26
Part IV
Item 14. Exhibits and Reports on Form 8-K.............................26
Signatures 27
Exhibits 1
PART I
Item 1. Business
We are a leading full service provider of sophisticated Internet solutions
to business enterprises. Our solutions include secure and fault tolerant
Internet data centers, high performance network connectivity to the Internet and
support for complex web site applications. These three major elements of our
total Internet solution provide our customers with the ability to 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 support complex web
site applications. We currently offer our products and services from our new
SuperPOP facilities in New York City, London and Santa Clara, CA. Our teams of
account managers, computer system and network engineers and customer support
specialists are located at each SuperPOP. Our strong local market presence
enables us to evaluate the needs of our customers and quickly respond with
tailored solutions as needed. We also provide our customers the ability to
outsource the maintenance of their web sites. Our products are flexible and
scaleable, allowing us to modify the size and breadth of the services we
provide. We believe that our ability to offer a broad range of Internet products
and services, combined with our local sales and support professionals and high
performance Internet data center facilities and network, differentiates us from
our competitors.
Industry Overview
The Internet has experienced rapid growth in the 1990's and has emerged as
a global medium for communications and commerce. Internet access and value-added
Internet services represent two of the fastest growing segments of the
telecommunications services market. The Internet's growth is driven by a number
of factors, including the large and increasing number of personal computers in
the office and in the home linked to the Internet, advances in network designs,
increased availability of Internet-based software and applications, the
emergence of useful content and electronic commerce technologies, and
convenient, fast and inexpensive Internet access. According to 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 $49.4
billion in 2003. Forrester Research, Inc, another independent research firm, has
estimated that the number of U.S. enterprise businesses online 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
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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 along with the
establishment of a web site. Internet access provides companies with its basic
gateway to the Internet, allowing it 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 $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
Forrester Research, revenues in the United States from value-added Internet
services, such as electronic commerce and security services will grow 34%
annually from approximately $3.0 billion in 1998 to $12.9 billion in 2003.
Forrester Research has estimated that the market for managed Web site hosting in
the United States will grow from less than $1.0 billion in 1998 to over $14.0
billion in 2003. Dataquest predicts Europe will experience similar strong
growth, with corporate Internet access revenue increasing 40% annually from
approximately $1.7 billion in 1998 to $9.1 billion in 2003.
In order to ensure the quality, reliability and availability of these
Internet operations, corporate information technology departments make
substantial investments in developing Internet expertise and infrastructure.
These information technology groups are challenged by the need to implement
their organization's Internet business strategy, adopt new and rapidly changing
technologies and continuously update content. The implementation, establishment
and maintenance of these solutions require significant technical expertise in a
number of areas, such as electronic commerce systems, security and privacy
technologies, application and database programming, mainframe and legacy
integration technologies and advanced user interface and multimedia production.
As a result, corporate information technology departments are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation and reduce Internet operating expenses.
A growing number of businesses using the Internet as part of their
business strategy have chosen to outsource Internet application development,
implementation and support, particularly the hosting and management of their Web
sites and Internet applications. 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 outsourced services.
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 regional ISPs. The large national and global ISPs are
generally more focused on Internet access and rely on indirect sales,
telemarketing and remote network operation centers to serve their customers. In
addition, large national and global ISPs typically do not offer a full range of
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 who constitute most of
Globix's competitors.
The Globix Solution
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
more cost-effectively address their needs 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 Facilities
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Internet Data Centers. Globix operates state-of-the-art SuperPOP
facilities in New York City, London and Santa Clara, CA, which have increased
its aggregate Internet data center capacity to approximately 63,000 square feet.
The SuperPOP facilities include:
o 192,000 square foot facilities located in New York City, containing
26,000 square feet of Internet data center space.
o 62,000 square foot facility located in Santa Clara, California,
containing a 23,000 square foot Internet data center.
o 35,000 square foot facility located in London's West End district,
containing a 14,000 square foot Internet data center.
Electrical Infrastructure. The Globix electrical infrastructure consists
of two major components; a distribution system and an emergency power generation
system. The distribution system is based on redundant diverse distributed
components consisting of demarcation power, power distribution units, static
transfer switches, uninterruptible power supplies, and a utility service bus.
The emergency power generation system consists of automatic transfer devices,
emergency service bus, and emergency power generation. The Globix grounding and
bonding system is designed and installed to exceed the Telecommunications
Industry Association standards.
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 regards to how heat 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. Because Globix uses a closed loop system, in the event of
a water main outage, Globix can continue to operate. The environmental control
units maintain an average space temperature of 72(degree)F at 50% relative
humidity. Air filtration is accomplished by the use of both pre-filters and high
efficiency air filters.
FM-200 Fire Suppression System. The Globix FM-200 fire suppression systems
consist of both above and below raised floor detection systems, central control
panel, abort stations, and FM-200 agent storage containers. 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 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 man the facilities 24x7 while roving security personnel constantly
police the exterior of the premises.
Globix Network
Network Infrastructure. The Globix network infrastructure is designed to
meet the service and quality requirements of businesses executing Internet based
strategies. Globix network infrastructure is designed for high availability, low
latency, and resiliency. Globix has instituted a general policy of keeping its
network infrastructure capacity significantly underutilized. This allows for
traffic spikes such as those created during large live streaming media events or
sudden increases in customer usage. Globix is one of a few select service
providers who perform Global "cold-potato" routing. Cold-potato routing is where
Globix network equipment listens to additional routing information supplied by
its peers. By listening to this information, the Globix infrastructure carries
the traffic on its
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network to the nearest common peering or traffic exchange point. This insures
the traffic is carried on a Globix controlled network and therefore would not
suffer from the congestion or high latency of public networks.
Backbone. The Globix backbone is based on Asynchronous Transfer Mode (ATM)
technology that is designed for the high-speed transfer of data and offers a
variety of quality of service options. Our ATM backbone rides over a protected
synchronous optical network. The current Globix domestic backbone connects the
Globix SuperPOPs and Globix backbone POPs with a ring topology. The London
SuperPOP is connected to Globix's domestic backbone by a protected transatlantic
connection. The total carrying capacity of the Globix backbone is 2.2 Gbs with a
current sustained utilization of 225 Mbs. Each of these POPs is connected to the
Globix backbone by multiple fault tolerant connections. In addition, Globix
connects to numerous Network Access Points, Commercial Internet Exchanges, and
connects to other Internet, application, and network service providers. These
connections are provided by multiple carriers over multiple connections to
diminish the negative impact of the loss of a single connection.
Peering. Globix has established peering relationships with other Internet,
application, and network service providers. These peering relationships take the
form of either public or private peering. Public peering takes place at a
network access point or commercial Internet exchange, designed for the exchange
of network traffic between two service providers. Private peering involves an
agreement between two service providers allowing traffic to pass between each
other's networks by using connections that do not have to traverse the public
Internet or public peering points. Globix currently has agreements to peer with
more than 200 organizations that represent over 550 peering connections making
it one of the largest peering Internet 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, Ameritech NAP, Sprint NAP, Pacific Bell NAP, NASA Ames, NYIIX,
LINX, LoNAP, D-GIX, AMSIX, deCIX, MIXITA, SFINX, CIXP, and VIX.
Network Operations. Globix has constructed a global operations center
located at the SuperPOP 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 of individuals 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 various commercial tools customized for problem identification and
resolution for both technology and non-technology assets, and a knowledge
database of customer information and history. The global operations center's
call center is equipped with advanced telecommunications systems, capable of
automatic call distribution, automatic number identification, quality assurance
recording and archiving, and intelligent call routing.
Customer Support Center. Each of the Globix SuperPOP facilities contains a
customer support center staffed 24x7. System administrators, network
administrators, and Internet data center technicians staff the customer support
center. These personnel are responsible for monitoring, maintenance and
administration of both the Globix's SuperPOP infrastructure and customer
equipment.
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Globix Application Services
Our application services allow us to meet expanding Internet operation
needs of our customers in an increasingly complex Internet environment. Globix
offers supports for a variety of Internet products which allow customers to take
advantage of cutting-edge Internet technology. Through close relationships with
leading Internet hardware and software manufactures such as Alteon, Check Point
Software, Cisco, Compaq, Juniper, Micromuse, Microsoft, Netscape, Oracle, Real
Networks, and Sun Microsystems, Globix is able to stay in the forefront of the
newest Internet technologies. As a result customers can take advantage of the
scalability that these application services can offer and eliminate the need to
utilize multiple sources to meet their Internet needs.
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. Globix's new,
geographically diverse SuperPOP facilities have increased Globix's total
Internet data center capacity from approximately 2,000 square feet to
approximately 63,000 square feet. In addition, Globix has established points of
presence, or POPs, in Chicago, Washington D.C., Amsterdam, Frankfurt, Geneva,
Milan, Paris and Stockholm. 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 our customers. In August 1999, Globix entered into a
strategic agreement with NetSat Express, Inc., a subsidiary of Globecomm Systems
Inc., whereby Globix will utilize NetSat Express' satellite-based Internet
access services for connection of certain foreign peering points to the U.S.
Internet. Globix believes that this relationship with NetSat Express will enable
it to establish a presence in global business markets that are not otherwise
connected to Globix's network, and for which connecting such markets to Globix's
network by traditional means would be cost prohibitive.
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, meet
with account managers, technicians, engineers and customer support staff.
Globix's new SuperPOP in New York City, London and Santa Clara, CA 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 with centralized
telecenters and network operations centers.
Expand Product and Service Offerings. Globix seeks to continually expand
the breadth of its product and service offerings using new technologies to
enable its customers to better utilize the Internet. For example, Globix has
built a team focused exclusively on the use of streaming media technology. With
this capability, Globix has produced and/or hosted several hundred events in a
variety of industries, including live music events such as Eric Clapton, David
Bowie, Rod Stewart and Korn concerts, New York State Governor George Pataki's
State-of-the State address, and the keynote address by the CEO of Cisco, John
Chambers at the Consumer Electronics Show. Globix also recently broadcast the
Holyfield/Lewis championship boxing match. Globix intends to introduce a number
of other new products and services in the near future including virtual private
network, or VPN.
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Cross-sell Additional Products and Services. Globix seeks to attract and
retain new customers, as well as leverage its customer base by cross-selling
additional products and services to existing customers. Globix consults on a
regular basis with its customers in order to better understand their growing
need for Internet products and services and actively seeks to cross-sell
additional products and services to address these needs. For example, Globix
originally established a relationship with BPI Communications, the publisher of
BillBoard and Ad week, as its computer hardware supplier. This relationship has
evolved over time to include multiple dedicated access products,
Internet-related equipment sales and consulting services. The new SuperPOP
facilities have significantly increased Globix's capacity and enable it to more
effectively sell web hosting and co-location services and value-added Internet
products across its customers' geographically disparate locations. Globix
believes that this strategy will expand the number of customers for its products
and services and enable it to become a more integral component of its current
customers' information technology infrastructure.
Enhance the Globix Brand Name in Target Markets. Globix seeks to expand
market share, increase customer loyalty and develop brand recognition in key
business markets by combining targeted branding initiatives with its strong
local presence. Globix has established a print advertising campaign in order to
enhance brand recognition for Globix on a worldwide basis. Globix advertises in
major business publications and trade journals targeted to business and
technical Internet decision-makers. These publications include Fortune, Business
2.0, CIO, Computer World, Internet Week, Network Computing, Network World, PC
Week, Information Week and PC Magazine in the U.S. and similar titles in the
U.K. In addition, Globix has increased its presence at industry trade shows in
both the U.S. and U.K., such as ISPCON, PC Expo, Streaming Media East/West,
Siebold and the Internet World shows in both the U.S. and U.K. Globix plans to
continue to aggressively build brand recognition by marketing its full range of
services through an advertising campaign using traditional media, online
campaigns and joint-promotions with key hardware and software vendors.
Make Strategic Investments and Acquisitions. Globix may make strategic
investments in smaller Internet service and design companies that couple equity
growth opportunities with long-term exclusive agreements to provide dedicated
Internet access, co-location and hosting services. For example, in July 1998,
Globix made a $1.0 million investment in EDGAR Online, Inc., formerly Cybernet
Data Systems, the publisher of the web site "Edgar-Online.com." Under that
agreement, Globix has the exclusive right for a five-year period to provide
EDGAR Online web hosting services. In June 1999, Globix invested an additional
$1.0 million in EDGAR Online when it exercised a warrant to purchase an
additional 666,667 shares of EDGAR Online common stock. 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 services. In August 1999, Globix made a $5.0 million
investment in NetSat Express, Inc., a subsidiary of Globecomm Systems Inc., a
provider of satellite-based Internet access services, digital media distribution
services, and integrated data, voice and video communications services. Globix
and NetSat have entered into a strategic agreement pursuant to which NetSat will
acquire Internet access and virtual private network services from Globix, while
Globix will utilize NetSat's Internet protocol based satellite services for
connection of certain foreign peering points to the U.S. Internet. Under the
terms and conditions of the Globix 13% Senior Notes due 2005, Globix has certain
limitations on the aggregate amount of strategic investments.
Products and Services
Globix provides its customers with a comprehensive range of high
performance, flexible and scaleable products and services, as described below:
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. Within its
state-of-the-art Internet data centers, protected by its Uninterruptible Power
Supply system, standby diesel generators with battery back-up and FM200 dry
fire-suppression system, Globix offers three co-location products: (a) data
cabinets, (b) cages and (c) the GloBOX(TM). The cabinet can house multiple
servers, but is the smallest co-location service offering. The cabinet is
lockable, outfitted for
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multiple, redundant network hand-offs and two power feeds. A cage, serves the
needs of a larger enterprise usually deploying the most complex solutions. A
Globix 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 5mm metal, for the client demanding the
highest security and anonymity and is available with a variety of security
devices.
All co-location customers are furnished with two Globix ID badges,
identifying them as a Globix customer, which gives them 24 x 7 access to their
equipment in our Internet data centers. This allows the customers to administer,
upgrade and maintain their own equipment on there own time schedule.
Alternatively, the customer can outsource the systems administration and
maintenance of their site. Globix supports most leading Internet hardware and
software platforms, including those from Cisco, Compaq, CheckPoint Software,
Microsoft, Netscape, Storage Technologies and Sun Microsystems. This
multi-vendor flexibility enables Globix to offer its clients a broad range of
technology best suited to its needs.
Hosting
Globix offers cost-efficient 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, application
requests or security needs. Globix customizes server and software configurations
that tailor bandwidth, processor speeds and memory requirements to customer
specific needs. Globix's hosting services are tailored to the customers whose
web site demands 100% availability and scalability without significant
infrastructure and overhead costs. Shared hosting implies that the customers
content is on a server with several other clients. While this shared environment
does not affect performance, flexibility is limited by community rules that
govern the overall server. All hosting services are provided from Globix's
secure, state-of-the-art Internet Data Centers, utilizing 24 x 7 monitoring
systems and the power of Globix's high-capacity network.
Dedicated Internet Access
Globix offers a variety of dedicated Internet access solutions, which
provide businesses high-speed continuous access to the Internet. Globix's
dedicated Internet access services are provided to customers at transmission
speeds ranging from 56Kbps to 45Mbps. However, the majority of Globix's Internet
access customers purchase 1.5Mbps or higher levels of service. In addition,
Globix provides provisioning services, such as domain name registration, local
loop provisioning, Internet address assignment, router configuration, e-mail
configuration, security planning and management technical consulting services.
All of Globix's Internet access customers receive 24x7 technical support. Globix
also provides new access technologies, such as Digital Subscriber Lines through
a strategic relationship with Covad Communications, 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 is converting the recording into a form that can be
sent 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 events including: Eric Clapton, David
Bowie, Rod Stewart and Korn concerts, New York State Governor George Pataki's
State-of-the State address, and a tradeshow keynote address by Cisco CEO John
Chambers. We also recently webcast the Holyfield/Lewis championship boxing match
and Paul McCartney's live Cavern Club concert. Globix has developed a
proprietary hardware and software system, called the RoadEncode(TM), which
facilitates on site encoding and streaming of live events. Globix currently has
deployed five RoadEncode(TM) units and uses them to webcast multiple events.
Globix believes that it is one of the few providers that offer expertise in all
three components of streaming media technology.
Electronic Commerce Solutions. Globix offers project management services
of commerce-enabling solutions for its hosting and co-location customers. Some
of these services include: business to consumer i.e.
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shopping cart solutions, business to business, warehousing logistics and
fulfillment solutions, and pay-per-view and also provides fully integrated
turnkey electronic commerce solutions that simplify and facilitate online
commerce.
Collaborative and Messaging Solutions. Globix also may administer and
maintain for its customers such applications as: Lotus Domino, Microsoft
Exchange, email i.e. Netscape Mail, and other collaborative and messaging
applications.
Solutions Architecture. Globix solutions architects provide our customers
with design resources from variety of specialized disciplines that are not
readily available from their internal resources or require skill sets beyond
that typically found in system administrators. Typical solutions include
geographic distribution which routes internet users to the closest site, high
availability server farms where high traffic volume is balanced among multiple
servers, and fault tolerant network security systems.
System & Network Administration. Globix provides full life cycle system
and network administration. At project inception, Globix will install and
configure applications and equipment as designed by Globix solutions architects
or as specified by the customer. As most Internet business strategies require
dedicated highly skilled technical resources available 24x7, it becomes evident
to most businesses that these skills are not readily available within the staff
core to their business. Globix offers services to its customer base at each of
its SuperPOP facilities for the administration, maintenance, and problem
resolution of a variety of popular operating systems and Internet based
applications.
Internet Related Hardware and Software Sales
Hardware resale is an integral part of providing an end-to-end solution to
Globix's customers. Globix assists its customers in identifying appropriate
hardware and software components tailored for their Internet needs. Generally,
Globix sells the hardware and software to its customers under reseller
agreements with major vendors. Globix is authorized to sell a full range of
equipment and hardware required to connect to the Internet, including servers
from manufacturers such as Sun Microsystems, Compaq and Silicon Graphics, and
networking components, including routers and switches, from leading
manufacturers such as Cisco. Globix also provides application-specific software
products including browsers, electronic mail and other solutions from a variety
of leading manufacturers, including Microsoft, Netscape and Oracle, which allow
its customers to navigate and utilize the Internet.
Customers
Globix has established a diversified base of Internet customers in a
variety of Internet-intensive industries, such as media and publishing,
financial services, retail, healthcare and technology. Since initiating Internet
services in December 1995, Globix's customer base has grown to approximately
1,550 large and medium size business customer accounts, including Acclaim
Entertainment, Bloomingdale's, Earthweb, Ebookers.com, Edgar Online Inc.,
General Media International (Penthouse), GiftCertificates.com, Hachette
Fillipacchi Magazines, MaMaMedia, Microsoft, Montefiore Medical Center,
RealNetworks, Standard & Poors ,Tishman Speyer Properties and Unify Corporation.
Sales and Marketing
Globix has built its sales and marketing approach to respond effectively
to the growing opportunities in the corporate Internet market. Globix combines
the technical skills and experience of its direct sales force with the sales and
marketing resources available to it through its strategic alliances with
selected hardware and software manufacturers. As a result, Globix offers its
products and services to a broad and diverse range of customers in its targeted
markets through the following sales channels and marketing efforts:
Direct Sales. Globix maintains a direct sales force of account managers.
Because they are locally based, these account managers are able to meet
face-to-face with prospective customers to discuss their Internet needs and
technical requirements and develop tailored solutions. Direct marketing tactics
used include direct contacts with potential corporate accounts by the Account
managers and computer systems engineers, direct mail, telemarketing, seminars
and trade show participation. Globix has developed compensation and training
programs to attract and
8
train high quality, motivated Account managers. As of September 30, 1999, Globix
had a direct sales force including over 100 account managers.
Strategic Alliances. Globix has established a number of strategic
alliances with selected computer hardware and software manufacturers, including
Microsoft, Sun Microsystems, Check Point Software and RealNetworks. These
alliances give Globix access to potential Internet service customers in the
manufacturers' customer base, while enabling the manufacturers to offer their
customers an integrated package of hardware, software and Internet services and
products. Globix also seeks to establish multi-tier distribution relationships
with suppliers and other sales agents and representatives, either directly or
through distributors. In August 1999, Globix established a strategic
relationship with NetSat Express to assist in the deployment of satellite-based
Internet access services to Globix's customers. Globix believes that these
strategic alliances provide Globix the opportunity to cost-effectively add new
customers. Globix jointly markets with these vendors through direct mail
programs, joint seminar development and joint trade show involvement.
Marketing. Globix's marketing program is intended to build national and
local strength and awareness of the Globix brand. Globix uses print and
electronic media advertising in targeted markets and publications to enhance
awareness and acquire leads for its direct sales team. Globix's print
advertisements are placed in business magazines, trade journals, local
technology sections of newspapers and special-interest publications. Globix
creates brand awareness by participating in industry trade shows such as
Internet World and PC Expo. Globix also uses direct mailings, telemarketing
programs, Internet marketing, joint marketing and promotional efforts to reach
new corporate customers. The corporate website at www.globix.com is where
customers and prospects are directed for information about Globix products and
services. Inquires are handled via web based electronic forms. The website is
promoted through links with alliance partners' web sites, paid banners and print
promotions and is a strategic to Globix customer service and brand identity.
Competition
The market served by Globix is intensely competitive, and competition is
increasing. There are few substantial barriers to entry, and Globix expects that
it will face additional competition from existing competitors and new market
entrants in the future.
Globix believes that superior facilities, a reliable network, a broad
range of quality products and services, a knowledgeable sales force and the
quality of customer support currently are the primary competitive factors in
Globix's targeted market and that price is generally secondary to these factors.
Globix's current and potential competitors in the market include other Internet
service providers and global, regional, and local telecommunications companies.
Other Internet service providers. Globix's current and potential
competitors in the market include Internet service providers with a significant
national or global presence that focus on business customers, such as DIGEX,
Exodus, Global Crossings' GlobalCenter, NaviSite, PSINet and UUNET. While Globix
believes that its level of customer service and support and target market
distinguish it from these competitors, many of these competitors have greater
financial, technical, and marketing resources, larger customer bases, greater
name recognition, and more established relationships in the industry than
Globix.
Telecommunications Carriers. Many long distance and cable companies
including, AT&T, British Telecom, Cable & Wireless, Level 3, MCI WorldCom,
Qwest, and Sprint offer Internet access services and compete with Globix. Recent
changes in federal regulation have created greater opportunities for
telecommunications companies to enter the Internet access market. Globix
believes that there is a move toward horizontal integration by
telecommunications companies through acquisitions of or joint ventures with
ISP's to meet the Internet access requirements of the business customers of long
distance and local carriers. Accordingly, Globix expects that it will experience
increased competition from the traditional telecommunications carriers. In
addition to their greater network coverage, market presence, and financial,
technical, and personnel resources, many of these telecommunications carriers
also have large existing commercial customer bases.
9
Other Competitors. Because Globix offers a broad range of products and
services, it encounters competition from numerous businesses that provide one or
more similar products or services. For example, Globix encounters competition
from numerous manufacturers and resellers of computer equipment and providers of
video streaming. Globix does not believe that any of the competitors in its
target market offer as broad a range of Internet products and services.
Government Regulation
In the United States and the other countries in which Globix conducts its
business, Globix is not currently subject to direct regulation other than
pursuant to laws applicable to businesses generally, including business
operating on the Internet. However, it is likely that laws and regulations will
be adopted implemented and challenged at the international, federal, state or
local levels with respect to the Internet, covering issues such as user privacy,
freedom of expression, pricing, characteristics and quality of products and
services, taxation, advertising, intellectual property rights, information
security and the convergence of traditional telecommunications services with
Internet communications. Moreover, a number of laws and regulations 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 the adverse application of existing laws to the
Internet industry might decrease the growth of the Internet, decrease demand for
services of Globix, impose taxes or other costly technical requirements or
otherwise increase the cost of doing business or in some other manner have a
material adverse effect on Globix or its customers, each of which could have a
material adverse effect on Globix's business, results of operations and
financial condition.
Employees
As of September 30, 1999, Globix had approximately 450 full-time
employees: approximately 390 in the United States and 60 outside the United
States, including approximately 150 in technical / operational and customer
service, 170 in sales and marketing and 130 in 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.
The following is a list of our executive officers as of September 30,
1999.
Name Age Title
- ---- --- -----
Marc H. Bell 32 Chairman, Chief Executive Officer and Chairman of the
Board of Directors
Robert B. Bell 60 Executive Vice President, Business Development and
Director
Marc Jaffe 32 Senior Vice President, Chief Operating Officer
Anthony Previte 34 Senior Vice President, Chief Technology Officer
Brian L. Reach 44 Senior Vice President, Chief Financial Officer
Forward Looking Information
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
10
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 general economic conditions, competition,
potential technology changes, changes in or the lack of anticipated changes in
the regulatory environment in various countries, changes in customer purchasing
policies and practices, the ability to raise additional capital to finance
expansion, large existing debt obligations, history of operating losses, our
ability to integrate, operate and further expand and upgrade our network,
failure by Qwest to deliver our dedicated network, failure to maintain adequate
peering relationships, encountering competition from numerous other businesses
that provide similar products and services and the risks inherent in new product
and service introductions and the entry into new geographic markets. Cautionary
statements regarding the risks, uncertainties and other factors associated with
these forward-looking statements are discussed under "Risk Factors" appearing in
our other periodic reports and documents filed with the Securities and Exchange
Commission.
Item 2. Properties
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 the Globix's original New York
Internet Data Center and certain administrative offices.
In July 1998, Globix signed a triple net lease commencing January 15, 1999
to rent space in Santa Clara, California. In October 1998, Globix signed a lease
for the rental of space at Prospect House, 80 New Oxford Street, London,
England. Construction at both of these facilities was completed in June/ July
1999 and houses a SuperPOP, which includes an Internet Data Center, and
facilities for technical, sales and administrative personnel.
As of September 30, 1999 the following table sets forth-additional
information concerning Globix's facilities:
Leased property Approximate number of gross
Location expiration date square feet
- -------- --------------- ---------------------------
139 Centre Street Owned 160,000
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
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, 1999
there were no matters submitted to a vote of security holders.
11
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 figures are for the fiscal year ended September 30.
1999 Low High
---- --- ----
first quarter.................................. $ 4 $ 13 15/16
second quarter................................. 10 1/8 45 1/2
third quarter.................................. 27 65
fourth quarter................................. 31 1/2 51 1/8
1998 Low High
---- --- ----
first quarter.................................. $ 4 $ 9 3/16
second quarter................................. 4 3/8 12
third quarter.................................. 9 1/16 15 15/16
fourth quarter................................. 5 3/16 14 5/16
(b) Number of Holders of Common Stock. The number of holders of
record of Globix's Common Stock on December 2, 1999 was 92. In addition,
management believes Globix common stock is held by in excess of 400 other
shareholders whose shares are held in street name by various banks and
securities firms.
(c) Dividends. There were no dividends or other distributions made
by Globix during the fiscal year ended September 30, 1999. Under the terms of
the Globix's 13% Senior Notes due 2005, Globix's ability to pay cash dividends
is contractually limited. It is anticipated that cash dividends will not be paid
to the holders of Globix's Common Stock in the foreseeable future.
(d) Subsequent Event. On December 9, 1999, Globix's Board of
Directors approved a two-for-one stock split of Globix's outstanding shares of
common stock. The stock split will entitle each stockholder of record at the
close of business on December 20, 1999 to receive one additional share of common
stock for every one share owned. The additional shares will be distributed by
Globix's transfer agent on, or about, December 30, 1999.
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 nine
months ended September 30, 1995 has been derived from our Consolidated Financial
Statements. We changed our fiscal year end from December 31 to September 30 in
1995. Consequently, the 1995 fiscal year consisted of nine months. The
consolidated balance sheet data and consolidated statement of operations data as
of and for the years ended September 30, 1996, 1997, 1998 and 1999 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.
12
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands of U.S. dollars, except per share)
Nine - Months
Ended Year Ended September 30,
--------- ------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA:
Revenue $ 8,738 $ 10,374 $ 17,400 $ 20,595 $ 33,817
Operating costs and expenses:
Cost of revenue 7,292 8,599 13,699 13,322 22,184
Selling, general and administrative 1,247 3,244 6,036 10,696 36,495
Depreciation and amortization 68 214 675 1,310 6,329
--------- --------- --------- --------- ---------
Total operating costs and expenses 8,607 12,062 20,410 25,328 65,008
Income(loss) from operations 131 (1,688) (3,010) (4,733) (31,191)
Interest and financing expense (73) (326) (177) (8,376) (18,386)
Interest income -- 121 72 1,953 6,192
Net income(loss) $ 39 $ (1,893) $ (3,115) $ (11,156) $ (43,385)
========= ========= ========= ========= =========
Basic and diluted loss per share $ 0.02 $ (0.72) $ (1.01) $ (3.08) $ (6.91)
========= ========= ========= ========= =========
Weighted average common shares
Outstanding-
basic and diluted 1,725 2,633 3,075 3,626 6,279
========= ========= ========= ========= =========
Nine - Months
Ended Year Ended September 30,
--------- ------------------------------------------------
1995 1996 1997 1998 1999
--------- --------- --------- --------- ---------
OTHER FINANCIAL DATA:
Cash flows used in operating activities $ 306 $ 1,877 $ 2,532 $ 115 $ 36,897
Cash flows used in investing activities $ 150 $ 2,355 $ 1,542 $ 97,387 $ 58,774
Cash flows provided by financing activities $ 356 $ 6,352 $ 4,133 $ 156,344 $ 135,589
Capital expenditures $ 150 $ 1,955 $ 1,542 $ 23,270 $ 83,434
September 30,
--------------------------------------------------------------
1995 1996 1997 1998 1999
--------------------------------------------------------------
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities $ 222 $ 2,342 $ 2,401 $ 76,111 $ 111,412
Restricted cash and investments $ -- $ 400 $ 325 $ 60,480 $ 45,039
Working capital $ 180 $ 3,468 $ 1,980 $ 75,859 $ 101,216
Total assets $ 2,962 $ 7,810 $ 11,025 $ 182,226 $ 302,518
Current portion of debt $ 788 $ 39 $ 2,336 $ 2,398 $ 2,088
Long-term debt, less current portion $ 47 $ -- $ 923 $ 159,091 $ 161,005
Stockholders' equity $ 299 $ 6,090 $ 5,014 $ 2,719 $ 106,405
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
You should read the following discussion in conjunction with our
Consolidated Financial Statements and notes thereto included in Part II, Item 8
of this Form 10-K. The results shown herein are not necessarily indicative of
the results to be expected in any future periods. This discussion contains
forward-looking statements based on current expectations that involve risks and
uncertainties.
General
Globix was founded in 1989 as a value-added reseller, or VAR, primarily
focused on providing custom computer hardware and software solutions for desktop
publishing. By 1995, Globix recognized the growing demand by businesses for
electronic information delivery and began to re-shape its corporate strategy to
focus on offering Internet products and services. In early 1996, 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
13
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 debt financing to
fund the expansion of its physical facilities and the acquisition and build-out
of its network backbone. Globix has completed construction of the new
state-of-the-art SuperPOP facilities in New York City, London and Santa Clara,
CA and has begun operations at each facility. The new SuperPOP increase Globix's
total Internet Data Center capacity to approximately 63,000 square feet.
In March 1999, Globix completed a public offering of 4,000,000 shares of
its common stock, resulting in proceeds to Globix, after expenses, of
approximately $136.6 million. The proceeds from that offering are being used to
fund the continued expansion of Globix's network and for general corporate
purposes.
Globix reports its results of operations in two operating segments: (i)
the "Internet Division" and (ii) the "Server Sales and Integration Division."
The Internet Division provides dedicated Internet access, hosting, co-location,
application services (such as streaming media, electronic commerce, and
collaborative and messaging solutions ) and solutions architecture and system
administration. The Server Sales and Integration Division provides
Internet-related hardware and software sales and systems and network
integration. Since 1996, revenue from the Internet Division have grown
significantly as a percentage of total revenue from 6.2% to over 39% in 1999.
Globix expects that the Internet Division revenues will continue to grow as a
percentage of total revenues.
Globix continues to derive a portion of its total revenues from sales of
third-party hardware and software, including workstation web and database
servers, network equipment, and server and application software. Globix intends
to continue to offer higher-margin workstation, server and software components
as a complement to its Internet solutions. Globix maintains a limited inventory
of hardware and software and typically purchases such products from third-party
vendors only after receipt of a customer order. The second largest component of
Globix's total revenues is derived from providing dedicated Internet access
services to business customers. Globix's Internet access customers typically
sign one or two-year contracts that provide for fixed, monthly-recurring service
fees and a one-time installation fee. Globix also derives revenues from web
hosting and co-location services based upon its customers' bandwidth
requirements, including charges for fixed amounts of bandwidth availability and
incremental fees for additional bandwidth use. In addition to fees based on
bandwidth, Globix charges its co-location customer's monthly fees for the use of
its physical facilities. Globix's web hosting and co-location contracts
typically range from one to two years. Application services are charged on a
monthly, fixed price or time and materials basis.
Cost of revenues for the Server Sales and Integration Division consist
primarily of acquisition costs of third-party hardware and software. Cost of
revenues for the Internet Division consist primarily of telecommunications costs
for Internet access, hosting and co-location customers and direct labor costs
for, application services. Telecommunications costs include the cost of
providing local telephone lines into the Globix SuperPOP, costs related to the
use of third-party networks, and costs associated with leased lines. Cost of
revenues for web development and application services consist of labor and
overhead costs for the personnel performing such services, including the cost of
project management, quality control and project review.
Selling, general and administrative expenses consist primarily of sales
and marketing personnel and related occupancy costs; advertising costs; salaries
and occupancy costs for executives, financial and administrative personnel; and
personnel recruitment and related operating expenses associated with network
operations, customer service and field services. Globix has recently hired a
number of members of its senior management. Globix is in the process of hiring a
significant number of additional personnel to staff its three new SuperPOP
facilities and to expand its sales and marketing, network operations, customer
service and field services personnel. Accordingly, Globix expects selling,
general and administrative expenses to continue to significantly increase for
the foreseeable future.
14
Depreciation and amortization expense increased significantly in fiscal
1999 due to the expansion of the SuperPOP facilities. Globix depreciates its
capital assets on a straight-line basis over the useful life of the assets,
ranging from 5 to 40 years. Globix began to recognize depreciation expense in
the year ended September 30, 1999 for its new SuperPOP in New York, London and
Santa Clara, CA upon commencement of operations at each of these facilities. In
addition, debt discount and issuance costs of $8.9 million relating to its
$160.0 million debt financing, is being amortized over seven years 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, 1999, 1998 and 1997, Globix generated
positive(negative) cash flows from operations of approximately $(36.9) million,
$0.1million and $(2.5) million, respectively, and incurred net losses of
approximately $43.4 million, $11.2 million and $3.1million, 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 physical facilities, the establishment of its network backbone, the hiring
of additional personnel and the interest expense related to the $160.0 million
debt financing. As of September 30, 1999, Globix had an accumulated deficit of
approximately $59.6 million.
Year Ended September 30, 1999 as Compared to the Year Ended September 30, 1998
Results of Operations
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 Globix's
three new SuperPOP and the related increase in the number of customers to which
Globix provides 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 lower unit sales partially offset by a planned shift in product mix toward
higher priced and higher margin products. The increase in percentage of Internet
Division revenues as a percentage of total revenues reflects Globix's 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 revenues 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 associated with the
expansion of the network backbone. As utilization of the network increases in
future years, Globix expects 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 revenues as compared to $10.7 million or 51.9% of total revenues for the
year ended September 30, 1998. 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 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 principally attributable to costs related to a
branding and advertising campaign.
Interest and Financing Expense and Interest Income. The increase in
interest expense is a result of interest costs associated with the $160.0
million debt financing 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 secondary
public offering in March 1999. Globix is also amortizing debt discount and
issuance costs of $8.9 million relating to the $160.0 million debt financing
over seven years using the effective interest method.
15
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 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.
Net Loss and Loss per Share. As a result of the above, Globix reported a
net loss of $43.4 million or $6.91 per share for fiscal 1999 as compared to a
net loss of $11.2 million or $3.08 per share for the year ended September 30,
1998.
Year Ended September 30, 1998 as Compared to the Year Ended September 30, 1997
Results of Operations
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. Revenues from the Internet Division increased
167.1% to $6.4 million for the year ended September 30, 1998 from $2.4 million
for the year ended September 30, 1997. This increase was primarily attributable
to an increase in the number of customers to which Globix provided Internet
connectivity. The increase in percentage of Internet Division revenues as a
percentage of total revenues reflected the Globix's 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 revenues for the year ended September 30, 1997. The decrease in cost of
revenue in absolute dollars and as a percentage of total revenues was primarily
a result of an increase in higher margin Internet revenues as a percentage of
total revenue.
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.
Globix increased expenditures in advertising from $0.325 million for the year
ended September 30, 1997 to $1.3 million for the year ended September 30, 1998.
Interest and Financing Expense and Interest Income. The increase in
interest expense is a result of the $160.0 million debt financing completed in
April 1998. The increase in interest income reflects the increased cash position
derived from the net proceeds of the debt financing. Globix is amortizing debt
discount and issuance costs of $8.9 million relating to the $160.0 million debt
financing over seven years.
Depreciation and Amortization. Depreciation and amortization increased to
$1.3 million for the year ended September 30, 1998 as compared to $675,000 for
the year ended September 30, 1997. The increase was primarily related to
equipment purchased for use in the Internet Division during the year ended
September 30, 1998.
Net Loss and Loss per Share. As a result of the above, Globix reported a
net loss of $11.2 million or $3.08 per share for fiscal 1998 as compared to a
net loss of $3.1 million or $1.01 per share for the year ended September 30,
1997.
Income Taxes
In fiscal 1999, we generated a pretax U.S. book loss of approximately
$40.6 million and pretax non-U.S. book loss of approximately $2.8 million. As of
September 30, 1999, we had net operating loss carryforwards of
16
approximately $55.9 million for U.S. income tax purposes. The use of the U.S.
net operating loss carryforwards may be subject to limitations under the rules
regarding a change in stock ownership as determined by the Internal Revenue
Code. These U.S. net operating loss carryforwards may be carried forward in
varying amounts until 2019. Additionally, at September 30, 1999, we had net
operating loss carryforwards of approximately $3.3 million from the United
Kingdom subsidiaries, which do not expire under U.K. tax rules.
We have provided a valuation allowance against our deferred tax assets
since realization of these benefits cannot be reasonably assured. The change in
valuation allowance was an increase of $16.0 million and $5.5 million in 1999
and 1998, respectively. We did not recognize any current or deferred income tax
expense or benefit for any of the three years ended September 30, 1999.
Segment Information
Globix'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, 1999, 1998 and
1997(All dollars in 000's):
Year ended September 30,
1999 1998 1997
--------- --------- ---------
Revenues:
Internet $ 13,033 $ 6,448 $ 2,414
Server sales and integration 20,784 14,147 14,986
--------- --------- ---------
Consolidated $ 33,817 $ 20,595 $ 17,400
========= ========= =========
Operating income (loss):
Internet $ (13,001) $ 1,146 $ (84)
Server sales and integration 1,019 721 (379)
Corporate (1) 19,209 6,600 2,547
--------- --------- ---------
Consolidated $ (31,191) $ (4,733) $ (3,010)
========= ========= =========
Identifiable assets:
Internet $ 57,503 $ 7,808 $ 2,105
Server sales and integration 6,074 3,732 5,782
Corporate 238,941 170,726 3,138
--------- --------- ---------
Consolidated $ 302,518 $ 182,266 $ 11,025
========= ========= =========
(1) Includes unallocated corporate. Such amounts include executive compensation
of $1,482, $824 and $616, respectively, for the years ended September 30, 1999,
1998 and 1997, as well as rent, payroll for administrative staff and
professional fees.
Liquidity and Capital Resources
We have historically had losses from operations, which have been funded
primarily through borrowings, including and capital lease financings from
vendors and financial institutions, and through the issuance of debt and equity
securities. In fiscal 1999, we received net proceeds of approximately $136.6
million from equity financings.
On November 8, 1999 Globix announced an agreement to issue $80.0 million
in new Series A Convertible Preferred Stock to Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") to expand the build-out of the Globix
state-of-the-art SuperPOP Internet Data Centers in Europe and the United States.
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
17
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. The conversion price of $40.00 per
share represented a premium of 25% over the October 25, 1999 closing price, is
the date when the terms of the transaction were agreed. The transaction closed
on December 3, 1999 and, as a result, Hicks Muse owns approximately 19% of
Globix's outstanding common stock on an as converted basis.
Cash Flows for the Years Ended September 30, 1999, 1998 and 1997
Cash flows (used in) provided by operating activities were ($36.9) million
in 1999, $0.1 million in 1998 and ($2.5) million in 1997. 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 significant non-cash depreciation
and amortization expenses relating to our build out of our network assets and
non-cash amortization of debt discount and issuance costs.
Cash flows used in investing activities were $58.8 million for 1999, $97.4
million for 1998 and $1.5 million for 1997. Investments in our network and
facilities during 1999 resulted in total additions to fixed assets of $83.4
million. Of this amount, $14.7 million was financed under financing arrangements
or remained in accounts payable at year-end, and $68.7 million was expended in
cash. For 1998, total additions were $23.2 million, of which $7.8 million was
financed under equipment financing agreements or remained in accounts payable at
year-end and $15.4 million was expended in cash, and for 1997, additions were
$1.5 million, with $0.5 million financed and $1.0 million expended in cash.
During 1998, $73.0 million from the proceeds of the 13% Senior Notes
offering was invested in marketable securities, investments and restricted cash.
During 1999, $30.6 million of these investments were liquidated for interest
payments, capital expenditures, operating cash flow and strategic investments.
Cash flows provided by financing activities were $135.6 million for 1999,
$156.3 million for 1998, and $4.1 million for 1997. 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 issuance of Senior Notes of $153.4 million and
$4.9 million of proceeds from the exercise of stock options and warrants. In
1997, Globix completed a private placement for proceeds of $2.1 million ($600,
of which was received in 1998). In 1999, 1998 and 1997, Globix made repayments
aggregating $3.2 million, $0.4 million, and $0.2 million, respectively, on our
capital lease obligations and notes payable.
As of September 30, 1999, we had $156.5 million of cash, cash equivalents,
restricted cash, restricted investments and marketable securities. At September
30, 1999, Globix had working capital of approximately $101.2 million, as
compared to working capital of approximately $75.9 million at September 30,
1998. Working capital increased $25.3 primarily because of the $136.6 million
net proceeds from the secondary offering partially offset by the net loss of
$43.4 million (including $6.3 million of non-cash depreciation and amortization
expense and approximately $0.1 million of non-cash amortization of debt discount
and issuance costs).
Capital Structure
Globix's capital structure at September 30, 1999 consisted of 13% Senior
Notes, capital lease obligations, preferred stock and common stock. Prior to the
December 3, 1999 closing of the Hicks Muse investment there were no outstanding
shares of preferred stock.
Total borrowings at September 30, 1999 were $163.1 million, which included
$2.1 million in current obligations and $161.0 million in Senior Notes and
long-term capital lease obligations.
18
Commitments, Capital Expenditures and Future Financing Requirements
As of September 30, 1999, Globix had commitments to certain
telecommunications vendors totaling $41.3 million payable in various years
through 2017. Additionally, Globix has various agreements to lease office space
and facilities and, as of September 30, 1999, Globix is obligated to make future
minimum lease payments of $49.8 million on non-cancelable operating leases
expiring in various years through 2014.
In October 1998, Globix entered into an Indefeasible Right of Use ("IRU")
agreement with Qwest Communications Corporation ("Qwest"), under which Globix
has the exclusive right to use portions of Qwest's planned 18,449-mile
MacroCapacity fiber network for a twenty-year period. Globix will initially have
the right to use fiber link from the United States to the United Kingdom. Globix
is currently committed to Qwest for a fee of approximately $9.2 million of which
it paid approximately $0.9 million at contract signing.
We presently believe, based on the flexibility we expect to have in the
timing of orders of bandwidth, in outfitting our points-of-presence with
appropriate telecommunications and computer equipment, and in controlling the
pace and scope of our anticipated build-out of our Internet network, that we
will have a reasonable degree of flexibility to adjust the amount and timing of
such capital expenditures in response to our then existing financing
capabilities, market conditions, competition and other factors. Accordingly, we
believe that working capital generated from operations, together with other
existing working capital, from existing credit facilities, from capital lease
financings, and from future equity or debt financings, which we presently expect
to be able to obtain when needed, will be sufficient to meet the currently
anticipated working capital and capital expenditure requirements of our
operations. There can be no assurance, however, that we will have access to
sufficient additional capital and/or financing on satisfactory terms to enable
us to meet our capital expenditure and working capital requirements.
Year 2000 Discussion
Many currently installed computer systems and software products are coded
to accept or recognize only two digit entries in the date code field. These
systems and software products will need to accept four digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and/or software used by many companies and governmental agencies may
need to be upgraded to comply with such Year 2000 requirements or risk system
failure or miscalculations causing disruptions of normal business activities.
State of Readiness. Globix has completed our assessment of the Year 2000
readiness of its information technology ("IT") systems, including the hardware
and software that enable Globix to provide and deliver its solutions, and its
non-IT systems. Globix's assessment consisted of (i) quality assurance testing
of its internally developed proprietary software and systems; (ii) contacting
third-party vendors and licensors of material hardware, software and services
that are both directly and indirectly related to the delivery of Globix's
solutions to its customers; (iii) contacting vendors of material non-IT systems;
(iv) assessment of repair or replacement requirements; (v) implementation; and
(vi) creation of contingency plans in the event of Year 2000 failures. Globix
will continue to perform Year 2000 simulations on its software to test system
readiness as new systems are deployed. Based on the results of the Year 2000
simulation testing, Globix has revised and updated the code of its software and
systems as necessary to improve the Year 2000 compliance of its software. Globix
has been informed by its vendors of material hardware and software components of
its IT systems that the products used by Globix are currently Year 2000
compliant. Globix has assessed the materiality of its non-IT systems and has
obtained assurances of Year 2000 compliance from providers of material non-IT
systems.
Costs. To date, Globix has not incurred any material expenditures in connection
with identifying or evaluating Year 2000 compliance issues. Most of its expenses
have related to the operating costs associated with time spent by employees in
the evaluation process and Year 2000 compliance matters generally. At this time,
the Company does not believe material additional amounts will be expended
related to further revisions to its software and systems. Although the Company
does not anticipate that such expenses will be material, such expenses, if
higher than anticipated, could have a material adverse effect on Globix's
business, results of operations and financial condition.
Risks. Globix is not currently aware of any Year 2000 compliance problems
relating to its IT or non-IT systems that would have a material adverse effect
on Globix's business, results of operations and financial condition. There
19
is no assurance that Globix will not discover Year 2000 compliance problems in
its software and systems that will require substantial revisions. In addition,
there is no assurance that third party software, hardware or services
incorporated into Globix's material IT and non-IT systems will not need to be
revised or replaced, all of which could be time consuming and expensive. The
failure of Globix to fix its software or to fix or replace third-party software,
hardware or services on a timely basis could result in lost revenues, increased
operating costs and the loss of customers and other business interruptions, any
of which could have a material adverse effect on Globix's business, results of
operations and financial condition. Moreover, the failure to adequately address
Year 2000 compliance issues in its IT and non-IT systems could result in claims
of mismanagement, misrepresentation or breach of contract and related
litigation, which could be costly and time-consuming to defend.
In addition, there can be no assurance that governmental agencies, utility
companies, telecommunication companies, other Internet service providers, third
party service providers, hardware and software manufacturers and others outside
Globix's control will be Year 2000 compliant. The failure by such entities to be
Year 2000 compliant could result in a systemic failure beyond the control of
Globix, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent Globix from delivering its services to its customers,
decrease the use of the Internet or prevent users from accessing the web sites
of its customers. Any of these occurrences could have a material adverse effect
on Globix's business, results of operations and financial condition.
Contingency Plan. Globix plans to fully staff all SuperPOP facilities to provide
high levels of resources in the event of unforeseen circumstances.
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's international expansion to date has been primarily in the United
Kingdom, which has not adopted the Euro. 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 accurately predict the impact
the Euro will have on currency exchange rates or Globix's currency exchange
risk.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
At September 30, 1999, we had financial instruments consisting of fixed
rate debt, marketable securities and other investments. The substantial majority
of our debt obligations consist of the Senior Notes, which bear interest at 13%
and mature May 1, 2005. Annual maturities of our capital lease obligations are
as follows: $2.4 million in 2000, $2.1 million in 2001, $0.8 million in 2002,
$0.1 million in 2003, $0.1 million in 2004 and thereafter. At September 30,
1999, the fair value of Globix's Senior Notes was $139.2 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, 1999, all of
our investments are due to mature within twelve months except $36.2 million and
the carrying value of such investments approximates fair value. At September 30,
1999, $45.0 million of our cash, restricted cash and investments were restricted
in accordance with the terms of our financing arrangements.
20
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 current business plan includes the expansion of the
U.K. operation and further construction of facilities in Europe in fiscal year
2000. 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.
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 1999 and 1998 there were no changes in or
disagreements with Globix's independent accountant on accounting or financial
disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
As of September 30, 1999, Globix's directors and executive officers were
as follows:
Name Age Position
- --------------------- --- -------------------------------------------------
Marc H. Bell 32 Chairman, Chief Executive Officer and Director
Robert B. Bell 60 Executive Vice President, Business Development
Marc Jaffe 32 Senior Vice President, Chief Operating Officer
Anthony Previte 34 Senior Vice President, Chief Technology Officer
Brian L. Reach 44 Senior Vice President, Chief Financial Officer
Alan Levy 36 Treasurer and Chief Accounting Officer
Lord Anthony St. John 42 Vice President, Business Development and Director
Tsuyoshi Shiraishi 54 Director
Martin Fox 63 Director
Dr. Richard Videbeck 75 Director
Sid Paterson 58 Director
Marc H. Bell has been the President and Chief Executive Officer since he
founded Globix in 1989. Mr. Bell has appeared on numerous television broadcasts
and has been quoted in several national publications regarding Internet-related
topics. Mr. Bell is a member of the Board of Directors of Edgar Online, the
"publisher" of the web site Edgar-Online.com. Mr. Bell has a B.S. degree in
accounting from Babson College and a M.S. degree in Real Estate Finance from New
York University. Mr. Bell is the son of Robert B. Bell.
Robert B. Bell, Executive Vice President, Business Development since
August 1999, prior to that he served as Executive Vice President and Chief
Financial Officer of Globix since 1994. Mr. Bell is also the Managing Director
of Globix's UK subsidiary, Globix Limited. Prior to joining Globix, Mr. Bell
spent three years at Coopers & Lybrand. Thereafter, he was a practicing attorney
in New York City at the firm of Bell, Kalnick, Beckman, Klee and Green, which
Mr. Bell founded in the early 1970s, and specialized in taxation, investments
and international real estate joint ventures. He is the author of Joint Ventures
in Real Estate published by John Wiley & Sons. Prior to 1994, Mr. Bell was for
many years an Adjunct Professor at New York University. Mr. Bell has a B.S.
degree from New York University and a J.D. degree from the University of
California at Berkeley. Mr. Bell is the father of Marc H. Bell.
21
Marc Jaffe, Senior Vice President, Chief Operating Officer, joined Globix
in January 1995. Prior to joining Globix, Mr. Jaffe was a department manager at
Sid Paterson Advertising Inc. in New York City, which he joined in 1989. Mr.
Jaffe developed an Internet-focused marketing strategy that won the prestigious
CreaTech Award, presented by Advertising Age magazine, and has spoken at
numerous Internet conferences. Mr. Jaffe graduated from Colgate University in
1989, where he received a Bachelor of Arts Degree.
Anthony Previte, Senior Vice President, Chief Technology Officer since
July, 1999, prior to that he served as Vice President, Technology since
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 Reach, Senior Vice President and 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.
Alan Levy, Treasurer and Chief Accounting Officer, joined Globix in
February 1997. From March 1994, to February 1997, Mr. Levy was the Assistant to
the Vice President of Finance of Del Laboratories, Inc., a manufacturer,
marketer and distributor of cosmetics and over-the-counter pharmaceuticals. From
August 1990 to March 1994, Mr. Levy was a Technical Manager with the American
Institute of Certified Public Accountants. Prior to August 1990, Mr. Levy was a
manager for Ernst & Young. He is a Certified Public Accountant and received his
Bachelor's degree in Public Accounting from Long Island University, C.W. Post
Campus. Effective November 19, 1999 Mr. Levy resigned from Globix.
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 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 UK
subsidiary and serves as its Director of Business Development. He received his
BA and BSC from Capetown University and LLB from the University of South Africa
and an LLM (Masters of Law) from the London School of Economics.
Tsuyoshi Shiraishi has been a director of Globix since July 1994. Mr.
Shiraishi has been the Chairman of Century World PTE Ltd., an investment
consulting firm, and the Managing Director of Harpoon Holdings Ltd. A British
Virgin Islands holding company since 1992. From 1990 to 1994, Mr. Shiraishi was
the Director of Marketing & Investment for Kajima Overseas Asia PTE Ltd., a
subsidiary of Kajima Corporation, an international construction company. In
addition, since 1990, Mr. Shiraishi has been Vice Chairman of Century
International Hotels, which operates and manages 21 hotels in the Pacific Rim.
He is the sole shareholder of Harpoon, which is a major shareholder of Globix.
Martin Fox has been a director of Globix since October 1995. Mr. Fox has
been, for more than five years, the President, Chief Executive Officer and a
director of Initio, Inc., a publicly owned electronic commerce and catalogue
specialty retailer of consumer products.
Dr. Richard Videbeck has been a director of Globix since October 1995.
Since 1983, Dr. Videbeck has been an independent consultant in consumer risk
analysis, particularly for retailers and banks. From 1974 until 1986 Dr.
Videbeck was a professor of Sociology at the University of Illinois at Chicago.
From 1974 until 1977, Dr.
22
Videbeck was the Dean of the Doctor of Arts Program of the Graduate College of
the University of Illinois at Chicago.
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.
The Securities and Exchange Commission has adopted rules relating to the
filing ownership reports under Section 16 (A) of the Securities Exchange Act of
1934. One such rule requires disclosure of filings which under the Commission's
rules, are not deemed to be timely. During its review, Globix determined that.
Marc H. Bell and Robert B. Bell did not file timely, regarding the conversion of
50 IPO warrants into common stock and Mr. Jaffe regarding the conversion of 100
IPO warrants into common stock.
Item 11. Executive Compensation
The following Summary Compensation Table sets forth the compensation for
the fiscal years ended September 30, 1999, 1998 and 1997 for Globix's Chief
Executive Officer and its four most highly compensated executive officers (other
than the Chief Executive Officer), collectively referred to as the named
executive officers:
Long - Term
Compensation
Annual Compensation Awards
------------------- ------
Other Securities
Annual Underlying
Name and Position Year Salary Bonus Compensation Options
---- -------- -------- ------------ ---------
Marc H. Bell 1999 $350,000 $331,875 -- 1,197,061
Chairman and Chief 1998 $250,000 -- -- 211,500
Executive Officer 1997 $200,000 -- -- --
Robert B. Bell 1999 $240,625 -- -- --
Executive Vice President, 1998 $151,042 -- -- 30,000
Business Development 1997 $125,000 -- -- 90,000
Marc Jaffe 1999 $215,685 $ 56,250 -- 120,000
Senior Vice President, Chief 1998 $133,250 -- -- 50,000
Operating Officer 1997 $ 89,000 -- -- 25,000
Anthony Previte 1999 $141,585 -- -- 100,000
Senior Vice President, Chief 1998 -- -- -- --
Technology Officer 1997 -- -- -- --
Alan Levy 1999 $105,625 $ 40,000 -- --
Treasurer 1998 $ 84,580 -- -- 10,000
1997 -- -- -- 7,500
Compensation of Directors
Under the 1999 Stock Option Plan, each non-employee Board member who is
considered a "Non-Employee Director" under Rule 16b-3 of the Securities Exchange
Act of 1934 will be granted an option to purchase a minimum of 3,000 shares of
common stock on the earlier of (i) the first day of Globix's fiscal year or (ii)
the first day of his or her initial term as director. The option will become
exercisable in full 12 months after the date of grant. The exercise price per
share of each such option will be the market price per share of common stock on
the option grant date. Each option will have a maximum term of ten years,
subject to earlier termination following the optionee's
23
cessation of Board service. Pursuant to this program, Mr. Fox, Dr. Videbeck, and
Mr. Paterson each received option grants for 10,000 shares of common stock at a
price of $47.6875 per share on October 1, 1999. Also on October 1, 1999 Robert
B. Bell and Lord St. John received option grants for 10,000 shares of common
stock at a price of $47.6875 per share.
In addition, at the discretion of the Board of Directors, directors may be
reimbursed for reasonable travel expenses in attending Board and committee
meetings. In October 1997, Lord St. John received options to purchase a total of
10,000 shares of common stock at a price of $7.25 per share (the fair market
value of the underlying shares on the date of grant) in lieu of receiving any
cash compensation. During the year ended September 30, 1998, Mr. Fox received
$10,195 in consulting fees from Globix.
Employment Contracts
Marc H. Bell. Effective June 1, 1998, Globix entered into an employment
agreement with Mr. Bell providing for a base salary of $0.35 million per year,
increasing annually at the rate of 5% starting October 1, 1999. In addition, the
individual will receive an annual bonus equal to 10,000 times the increase, if
any, of the fair market value per share of Globix's common stock measured during
the 12 month period ending on June 30 of each year of the agreement, commencing
with the year beginning July 1, 1998. During the year ended September 30,1999 he
received a bonus totaling approximately $332 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. Any loan taken thereunder will mature
five years after the date made and bear interest at the rate of 8.0% per annum.
However, the interest accruing during the first two years is not payable until
the end of such two-year period. At September 30, 1999 and 1998 the Officer had
outstanding borrowings of $0 and $155 under such loan arrangement.
Pursuant to the terms of the employment agreement, Mr. Bell is entitled to
receive stock options from Globix. In March 1998, Mr. Bell received stock
options to purchase (i) 69,500 shares of common stock at an exercise price of
$7.15 per share and (ii) 142,000 shares of common stock at an exercise price of
$6.50 per share upon the closing of certain financing for the Company. In
addition, in connection with the employment contract Mr. Bell is entitled to
receive, on September 30 of each fiscal year, an option to purchase shares of
common stock equal to 25% of any increase in the total shares of Globix common
stock outstanding during the prior twelve months as a result of equity offerings
or acquisitions. The exercise price of the option is equal to the market price
of Globix's common stock on the date of grant and are exercisable immediately.
At October 1, 1998 Mr. Bell was granted an option to purchase 172,916 shares of
Globix common stock at $6.25 per share under this provision of the employment
agreement. On March 2, 1999 Mr. Bell agreed to surrender this right pursuant to
an amendment to the employment agreement. Under the terms of the amendment, in
lieu of this right, Mr. Bell is entitled to receive a one-time option to
purchase an amount of shares of Globix common stock equal to 25% of the
difference between the number of shares outstanding immediately after the
closing of March 26, 1999 public offering and the number of outstanding as of
October 1, 1998. This provision of the amended employment agreement yielded the
individual an option to purchase 1,024,145 shares of Globix common stock at an
exercise price of $37.25 per share, the same as the price to the public in the
public offering. The term of the option is ten years from the date of grant.
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 $0.275 million per year,
increasing annually at the rate of 5% 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 (the "Trust")
which Globix will fund to the extent of $0.25 million 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 upon a
Change of Control, Globix shall, within five business days thereafter,
contribute to the Trust the difference between the amounts held by the Trust on
the date of the Change of Control and $3.0 million. Upon the termination of the
employment agreement, Mr. Bell will be entitled to receive payments of $0.02
million per month from the Trust, subject to annual increases for cost of living
adjustments. Upon Mr. Bell's death, the then payments from the Trust shall be
reduced by fifty percent and the 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 such
24
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, 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 fifty dollars per share less the
exercise price under such options.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) The following table sets forth, as at December 2, 1999, certain
information concerning stock ownership of Globix by (i) each person who is known
by Globix to own beneficially more than 5% of the outstanding common shares of
Globix, (ii) each of the companies directors and (iii) all directors and
officers of Globix as a group. Except as otherwise indicated, all such persons
have both sole voting and investment power over the shares beneficially owned by
them.
Percent
Number of Shares of
Name and Address Beneficially Owned Class
- ---------------- ------------------ -----
Marc H. Bell 2,110,154 21.7%
Robert Bell 120,051 1.4%
Marc Jaffe 41,767 *
Anthony Previte 2,000 *
Anthony St. John
7 Cadogan Gardens
London SW32RE 20,000 *
Martin Fox
10 Henry Street
Teterboro, NJ 07608 24,000 *
Sid Paterson
99 Madison Avenue
New York, NY 10016 30,000 *
Tsuyoshi Shiraishi
Harpoon Holdings, Ltd.
2 Handy Road,
#11-09 Cathay Building,
Singapore 229233 212,500 2.5%
Dr. Richard Videbeck
3249 East Angler's Stream
Avon Park, FL 33825 26,000 *
Janus Capital Corporation 513,872 6.1%
All executive officers and
directors as a Group (9 persons) 2,887,844 29.0%
* 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 such person has or shares
the power to vote or direct the voting of such security or the power to dispose
or direct the disposition of such security. A person is also deemed to be a
beneficial owner of any securities if that person has the right to acquire
beneficial ownership within 60 days.
25
The address of each of the named individuals, except where noted
above, is c/o Globix Corporation, 139 Centre Street, New York, NY 10013.
The amount shown for Mr. Bell includes 544,693 shares owned directly
by Mr. Bell and 1,352,961 stock options to purchase shares exercisable within 60
days. Mr. Bell's holdings include 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 Harpoon has granted Mr.
Bell the sole right to vote such shares with respect to the election of Globix's
directors.
The amount shown for Robert B. Bell includes 120,000 stock options
to purchase shares exercisable within 60 days.
The amount shown for Mr. Jaffe includes 10,000 stock options to
purchase shares exercisable within 60 days.
The amount shown for Mr. Previte includes 2,000 stock options to
purchase shares exercisable within 60 days.
The amount shown for Lord St. John includes 20,000 stock options to
purchase shares exercisable within 60 days. Does not include 3,000 shares held
in trust for the benefit of Lord St. John's wife and children, to which Lord St.
John disclaims beneficial ownership.
The amount shown for Mr. Fox includes 18,000 stock options to
purchase shares exercisable within 60 days.
The amount shown for Mr. Paterson includes 20,000 stock options to
purchase shares exercisable within 60 days.
Mr. Shiraishi's shares are held through Harpoon.
The amount shown for Dr. Videbeck includes 26,000 stock options to
purchase shares exercisable within 60 days.
The amounts shown for Janus Capital Corporation are based upon a
Schedule 13G filed on February 10, 1999 by Janus Capital Corporation, Thomas H.
Bailey and Janus Venture Fund. The shares shown are subject to shared voting and
investment power. Includes 4,850 currently exercisable warrants, each of which
is convertible into 3.52 shares of common stock. The address of each of the
filing persons is 100 Fillmore Street, Denver, CO 80206-4923.
The amount shown for all executive officers and directors as a
group, include 1,568, 961 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
has made to Marc H. Bell.
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
26
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the Registrant had duly caused this Amendment to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: December 29, 1999 Globix Corporation
By: /s/ Marc H. Bell
Marc H. Bell, Chairman and
Chief Executive Officer
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.
Date: December 29, 1999 /s/ Marc H. Bell
----------------
Marc H. Bell, Chairman of the Board and
Chief Executive Officer
Date: December 29, 1999 /s/ Brian L. Reach
------------------
Brian L. Reach, Senior Vice President and
Chief Financial Officer
Date: December 29, 1999 /s/ Shawn P. Brosnan
--------------------
Shawn P. Brosnan, Vice President, Corporate
Controller and Chief Accounting Officer
Date: December 29, 1999 Anthony St. John
----------------
Anthony St. John, Vice President,
Business Development and Director
Date: December 29, 1999 /s/ Robert B. Bell
------------------
Executive Vice President,
Business Development and
Director
Date: December 29, 1999 /s/ Martin Fox
--------------
Martin Fox, Director
Date: December 29, 1999 /s/ Tsuyoshi Shiraishi
----------------------
Tsuyoshi Shiraishi, Director
Date: December 29, 1999 /s/ Richard Videbeck
--------------------
Richard Videbeck, Director
Date: December 29, 1999 /s/ Sid Paterson
----------------
Sid Paterson, Director
27
Date: December 29, 1999 Jack Furst
----------
Jack Furst, Director
Date: December 29, 1999 Michael Levitt
--------------
Michael Levitt, Director
28
Index to Consolidated Financial Statements
PAGE
Report of Independent Public Accountants.................................. F-2
Consolidated Balance Sheets -- As of September 30, 1999 and
September 30, 1998...................................................... F-3
Consolidated Statements of Operations -- For the years ended
September 30, 1999, September 30, 1998 and September 30,
1997.................................................................... F-4
Consolidated Statements of Changes in Stockholders'
Equity -- For the years ended September 30, 1999,
September 30, 1998 and September 30, 1997............................... F-5
Consolidated Statements of Cash Flows -- For the years ended
September 30, 1999, September 30, 1998 and September 30,
1997.................................................................... F-6
Notes to Consolidated Financial Statements................................ F-8
F-1
Report of Independent Public Accountants
To the Board of Directors and Stockholders of Globix Corporation:
We have audited the accompanying consolidated balance sheets of Globix
Corporation (a Delaware corporation) and Subsidiaries as of September 30, 1999
and 1998, and the related consolidated statements of operations, stockholders'
equity and cash flows for each of the three years in the period ended September
30, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Globix Corporation and
Subsidiaries as of September 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
September 30, 1999 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
November 18, 1999
New York, New York
F-2
GLOBIX Corporation and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
September 30,
1999 1998
--------- ---------
Assets
Current assets:
Cash and cash equivalents $ 101,471 $ 61,473
Marketable securities 9,941 14,638
Accounts receivable, net of allowance for
doubtful accounts of $707 and $410,
respectively 7,798 4,861
Inventories 1,282 392
Prepaid expenses and other current assets 2,649 1,699
Restricted cash 8,848 10,317
--------- ---------
Total current assets 131,989 93,380
Investments, restricted 36,191 50,163
Property, plant and equipment, net 122,653 30,872
Debt issuance costs, net of accumulated
amortization of $1,030 and $393,
respectively 5,583 6,214
Other assets 6,102 1,637
--------- ---------
Total assets $ 302,518 $ 182,266
========= =========
Liabilities and Stockholders' Equity
Current liabilities:
Capital Lease obligations $ 2,088 $ 2,398
Accounts payable 10,439 6,185
Accrued liabilities 9,579 271
Accrued interest 8,667 8,667
--------- ---------
Total current liabilities 30,773 17,521
Capital Lease obligations, net of current portion 2,896 1,199
Senior Notes, net of unamortized discount of
$1,891 and $2,108, respectively 158,109 157,892
Other long term liabilities 4,335 2,935
--------- ---------
Total liabilities 196,113 179,547
Stockholders' Equity:
Preferred stock, $.01 par value; 500,000 shares
authorized; no shares issued and outstanding -- --
Common stock, $.01 par value; 75,000,000 and
20,000,000 shares authorized; 8,325,005
and 4,140,116 shares issued and outstanding,
respectively 83 41
Additional paid-in capital 155,673 17,247
Accumulated other comprehensive income 10,279 1,676
Accumulated deficit (59,630) (16,245)
--------- ---------
Total stockholders' equity 106,405 2,719
--------- ---------
Total liabilities and Stockholders' Equity $ 302,518 $ 182,266
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GLOBIX Corporation and Subsidiaries
Consolidated Statements of Operations
(In thousands, except share and per share data)
Year ended September 30,
1999 1998 1997
----------- ----------- -----------
Revenue $ 33,817 $ 20,595 $ 17,400
Operating costs and expenses:
Cost of revenues 22,184 13,322 13,699
Selling, general and administrative 36,495 10,696 6,036
Depreciation and amortization 6,329 1,310 675
----------- ----------- -----------
Total operating costs and expenses 65,008 25,328 20,410
----------- ----------- -----------
Loss from operations (31,191) (4,733) (3,010)
Interest and financing expense (18,386) (8,376) (177)
Interest income 6,192 1,953 72
----------- ----------- -----------
Net loss $ (43,385) $ (11,156) $ (3,115)
=========== =========== ===========
Basic and diluted loss per share $ (6.91) $ (3.08) $ (1.01)
=========== =========== ===========
Weighted average common shares outstanding-
basic and diluted 6,279,200 3,625,794 3,075,235
=========== =========== ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GLOBIX Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(In thousands, except share and per share data)
Accumulated
Common Stock Additional Other Total
-------------------------- Paid-in Comprehensive Accumulated Stockholders'
Shares Amount Capital Income Deficit Equity
-------------------------- -------------------------------------------------------------
-------------------------- -------------------------------------------------------------
Balance, September 30, 1996 3,083,210 $ 31 $ 8,033 $ -- $ (1,974) $ 6,090
Proceeds from Private
Placement, net 400,000 4 1,979 -- -- 1,983
Issuance of common stock upon
exercise of options and
warrants, net 8,098 -- 56 -- -- 56
Correction of outstanding shares (42,858) (1) 1 -- -- --
Comprehensive Income (Loss):
Net loss -- -- -- -- (3,115) --
Total Comprehensive Loss -- -- -- -- -- (3,115)
-------------------------- -------------------------------------------------------------
Balance, September 30, 1997 3,448,450 34 10,069 -- (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 691,666 7 4,925 -- -- 4,932
Comprehensive Income (Loss):
Net loss -- -- -- -- (11,156) --
Unrealized holding gains -- -- -- 1,676 -- --
Total Comprehensive Loss -- -- -- -- -- (9,480)
-------------------------- -------------------------------------------------------------
Balance, September 30, 1998 4,140,116 41 17,247 1,676 (16,245) 2,719
Issuance of common stock in conjunction
with public offering, net of offering
costs of $11,915 4,000,000 40 136,578 -- -- 136,618
Issuance of common stock upon exercise
of options and warrants, net 184,889 2 1,848 -- -- 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 8,325,005 $ 83 $ 155,673 $ 10,279 $ (59,630) $ 106,405
========================== =============================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GLOBIX Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
Year ended September 30,
1999 1998 1997
-------- -------- --------
Cash flows from operating activities
Net loss $(43,385) $(11,156) $ (3,115)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization 6,329 1,310 675
Amortization of debt discount and
issuance costs 849 538 --
Changes in operating assets and
liabilities:
Accounts receivable (2,937) (1,602) (1,412)
Inventories (890) 96 271
Prepaid expenses and other current
Assets (950) (1,571) 31
Other assets (766) (207) 48
Accounts payable 3,911 4,175 736
Accrued liabilities 904 (278) 234
Accrued interest -- 8,667 --
Other 38 143 --
-------- -------- --------
Net cash provided by (used in)
operating activities (36,897) 115 (2,532)
Cash flows from investing activities
Investment in restricted cash -- (10,317) --
Use of restricted cash 1,469 -- --
Investment in marketable securities -- (12,962) --
Investment in long-term restricted
investments (6,247) (49,838) --
Proceeds from sale of marketable
securities 14,638 -- --
Use of long-term restricted investments 20,800 -- --
Investment in NetSat Express (5,000) -- --
Investment in Cybernet Data Systems
(Edgar Online) (1,000) (1,000) --
Purchases of property, plant and
equipment, net of landlord
reimbursement in 1997 (83,434) (23,270) (1,542)
-------- -------- --------
Net cash used in investing activities (58,774) (97,387) (1,542)
F-6
GLOBIX Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In thousands, except share and per share data)
Year ended September 30,
1999 1998 1997
--------- --------- ---------
Cash flows from financing activities
Proceeds from issuance of common
stock, net 136,618 -- --
Proceeds from senior note offering,
net of offering expenses of $6,608 -- $ 153,392 --
Net proceeds from (repayments of)
short term borrowings -- (2,001) $ 2,001
Shareholder loan 300 (155) (145)
Proceeds from notes payable for
equipment refinancing -- -- 873
Repayments of notes payable (3,179) (424) (196)
Proceeds from private placement 600 1,544
Proceeds from exercise of stock
options and warrants, net 1,850 4,932 56
--------- --------- ---------
Net cash provided by financing
activities 135,589 156,344 4,133
--------- --------- ---------
Effects of exchange rate changes on
cash and cash equivalents 80 -- --
Net increase in cash and cash
equivalents 39,998 59,072 59
Cash and cash equivalents, beginning
of year 61,473 2,401 2,342
--------- --------- ---------
Cash and cash equivalents, ending of
year $ 101,471 $ 61,473 $ 2,401
========= ========= =========
Supplemental disclosure of cash flow
information
Cash paid for interest $ 21,256 $ 223 $ 166
Cash paid for income taxes $ 38 $ 51 $ 28
Non-cash investing and financing
activities:
Equipment acquired under capital lease
obligations $ 4,566 $ 1,113 $ 540
Capital expenditures included in
accounts payable, notes payable and
other long term liabilities $ 10,110 $ 6,702 --
Proceeds receivable associated with
private placement -- -- $ 600
Issuance of common stock in connection
with private placement -- -- $ 100
Warrants issued in connection with
Senior Notes -- $ 2,253 --
The accompanying notes are an integral part of these consolidated financial
statements.
F-7
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
1. THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION 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 provider of Internet connectivity and advanced
Internet services for businesses in the United States and Europe. The Globix
application service program is available for mission critical Internet
operations, those applications include Co-Location, Web Hosting, Dedicated
Access, Streaming Media, E-Commerce and Internet Security. Globix offers these
services and manages its network from its three SuperPOP's located in New York,
London and Santa Clara, CA. Currently Globix has agreements for over 550 peering
connections making it one of the largest peering Internet networks. The Company
operates in two divisions: (1) the "Internet Division" and (2) the "Server Sales
and Integration Division." The Internet Division provides dedicated Internet
access, hosting, co-location, application services (such as streaming media,
electronic commerce, , and collaborative and messaging solutions), and solutions
architecture and system administration. 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
Revenues consist primarily of dedicated Internet access fees, hosting and
co-location fees, sales of third-party hardware and software, fees from systems
and network integration, sales of systems administration and web site management
services, sales of application services (such as streaming media, electronic
commerce, and collaborative and messaging solutions), and solutions architecture
and system administration.
Monthly service revenue related to Internet access, web hosting and
co-location 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 a
three-month period. 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.
COST OF REVENUES
Cost of revenues in the Company's Internet Division consists primarily of
telecommunications costs and direct labor costs for systems administration, web
site management and application services. For the Server Sales and Integration
Division, the cost of revenues primarily consists of acquisition costs of
third-party hardware and software.
F-8
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
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, 1999 marketable
securities have a cost basis of $2.0 million.
Investments in less than twenty percent owned businesses 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 forty
years. Computer hardware and software, network equipment and furniture and
equipment are depreciated over their estimated useful lives, generally five
years. Leasehold improvements are amortized over the term of the lease or life
of the asset, whichever is shorter.
LONG-LIVED ASSETS
The Company 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.
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-9
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(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 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 6 for the additional disclosures required under SFAS No. 123.
COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income"("SFAS No. 130"), which requires that changes in
comprehensive income be shown in a financial statement that is displayed with
the same prominence as other financial statements. The Company has adopted this
statement in 1999 as the Company has unrealized gains and losses on marketable
securities classified as available for sale and has foreign currency translation
adjustments from its operations in foreign countries. The Company has restated
1998 and 1997 amounts to present information on a comparable basis.
LOSS PER SHARE
Basic loss per share is calculated by dividing income available 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
income available 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 options
would be antidilutive.
CONCENTRATIONS OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash equivalents,
restricted cash and investments, marketable securities and accounts receivable.
The Company maintains cash and cash equivalents, 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.
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, 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.
F-10
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
SEGMENT DISCLOSURES
In 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information" ("SFAS No. 131"), which changes the way
public companies report information about segments. SFAS No. 131, which is based
on the management approach to segment reporting, includes requirement to report
selected segment information quarterly, and entity wide disclosures about
products and services, major customers, and geographic data. The Company has
provided the information required by SFAS No. 131 in Note 10.
RECLASSIFICATIONS
Certain prior year information has been reclassified to conform with
fiscal 1999 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. Currently, as the Company has no
derivative instruments, the adoption of SFAS No. 133 would have no impact on the
Company's financial condition or results of operations.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
September 30,
1999 1998
--------- ---------
Land $ 1,997 $ 1,997
Building 51,828 19,075
Leasehold improvements 25,917 3,554
Computer hardware and software and network equipment 46,384 7,907
Furniture and equipment 5,266 749
--------- ---------
131,392 33,282
Less: accumulated depreciation and amortization (8,739) (2,410)
--------- ---------
Property, plant and equipment, net $ 122,653 $ 30,872
========= =========
Included in property, plant and equipment at September 30, 1999 and 1998,
is $7.1 million and $2.5 million, respectively, of assets held under capital
lease obligations. Also, included in building and leasehold improvements is $4.9
million and $1.1 million of capitalized interest as of September 30, 1999 and
1998, respectively, related to the construction of the SuperPOP facilities in
New York, Santa Clara and London.
The Company owns the land and building located at 139 Centre Street, New
York, New York. The nine-story building with 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.
F-11
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
3. OTHER ASSETS
Other assets include the company's investment in NetSat Express, Inc.,
security deposits and other assets. In August 1999, the Company purchased for
$5.0 million, tweleve and one-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 in
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 U.S. Internet.
4. SENIOR NOTES
In April 1998, the Company completed a $160.0 million debt financing (the
"Senior Notes") consisting of 160,000 units, each unit consisting of a note in
the principal amount of $1 and one warrant to purchase 3.52 shares of common
stock (total of 563,200 shares of common stock) at a purchase price of $14.03
per share. The Senior Notes will mature on May 1, 2005. Interest on the notes
accrues at a rate of 13.0% per annum and is payable semi-annually in arrears on
May 1 and November 1 of each year, commencing November 1, 1998. Globix deposited
$57 million with an escrow agent at closing, such amount, with interest is
sufficient to pay, when due, the first six interest payments under the Senior
Notes. The notes are collateralized by a first priority security interest in the
escrow account. The 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 warrants issued with the
Senior Notes, the Company has assigned an original issue discount of
approximately $2.3 million. In addition, the Company incurred costs associated
with the offering of approximately $6.6 million. These amounts are being
amortized over seven years using the effective interest method.
As of September 30, 1999, the fair value of the Company's Senior Notes was
$139.2 million based upon quotes from securities dealers.
5. STOCKHOLDERS' EQUITY
SECONDARY PUBLIC OFFERING
In March 1999,the Company completed a public offering of 4,000,000 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.
INITIAL PUBLIC OFFERING
In January 1996, the Company sold, in an initial public offering,
1,150,000 shares of Common Stock at an initial offering price of $7.00 per
share, and 575,000 Redeemable Purchase Warrants for $0.10 per warrant. Each
warrant entitles the holder to purchase one share of the Company's common stock
for $7.70 per share. The warrants are redeemable by the Company at $0.10 per
warrant at any time after January 24, 1997 if certain conditions are met. The
net proceeds which the Company received from the public offering amounted to
approximately $6.6 million.
In March 1996, the underwriter of the initial public offering exercised
its over-allotment option to purchase 129,642 common shares from the Company for
$7.00 per share. The net proceeds amounted to approximately $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 $7.44 per common share. The
remaining 10,483 warrants were redeemed by the Company at a price of $.10 per
IPO Warrant. The net
F-12
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
proceeds recognized by the Company from the exercise of IPO warrants amounted to
approximately $4.3 million.
PRIVATE PLACEMENT
In September 1997, the Company sold 382,609 shares of its common stock in
a private transaction for a total consideration of $2.2 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 17,391 shares of
common stock was paid to the investors and were offset against the proceeds of
the issuance.
AMENDED CERTIFICATE OF INCORPORATION
On April 23, 1999 the shareholders of the Company voted to amend the
Company's certificate of incorporation to increase the Company's authorized
common stock to 75,000,000 shares.
6. EMPLOYEE BENEFIT PLANS
STOCK OPTION PLANS
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 1,500,000 shares of common stock to 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 1,200,000 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 1999 Option Plan and 1998 Option Plan, options are granted each
year to non-employee directors on the first day of the Company's fiscal year or
on the first day of the term as director at a purchase price equal to the fair
market value on the date of grant. In addition, the Non-Employee director stock
options shall be exercisable in full twelve months after the date of grant
unless determined otherwise by the stock option committee.
In 1995, the Company's stockholders approved, the 1995 Stock Option Plan
(the "1995 Option Plan"), which reserved 360,000 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 1,328,369 options available for future grant at September 30,
1999.
STOCK OPTION REPRICING
On September 30, 1997, 250,064 options previously issued to employees and
directors with a weighted average exercise price of $8.32 were canceled and
reissued at $6.125, the fair market value of the Company's common stock on the
date of reissuance. This revaluation did not alter or amend any other provision
of the optionee's original option agreement, including the vesting period and
option term.
F-13
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
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:
1999 1998 1997
---- ----- ----
Expected life (in years) 6.0 6.0 6.0
Risk-free interest rate 5.4% 5.6% 6.2%
Volatility 94.0% 111.0% 42.0%
Dividend yield 0.0% 0.0% 0.0%
Utilizing these assumptions, the weighted average fair value of options
granted is $25.95, $5.27 and $3.76 for the years ended September 30, 1999, 1998
and 1997, 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 and loss per share would have
been increased to the following pro forma amounts:
Year ended September 30,
1999 1998 1997
---- ---- ----
Pro forma net loss $(76,305) $(13,394) $(3,308)
Pro forma basic and diluted
Loss per share $ (12.15) $ (3.69) $ (1.08)
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.
F-14
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
SUMMARY STOCK OPTION ACTIVITY
The following table summarizes stock option information with respect to
all stock options for the three years ended September 30, 1999:
Weighted
Average
Number of Exercise
Shares Price
------------ --------
Options outstanding, September 30, 1996 202,730 $ 7.04
Granted 390,897 7.41
Canceled (284,065) 8.39
Exercised (7,998) 7.00
---------- ------
Options outstanding, September 30, 1997 301,564 6.13
Granted 682,375 6.25
Canceled (62,018) 5.91
Exercised (6,316) 6.13
---------- ------
Options outstanding, September 30, 1998 915,605 6.39
Granted 1,960,644 32.95
Canceled (134,787) 14.47
Exercised (64,068) 6.11
========== ======
Options outstanding, September 30, 1999 2,677,394 $25.40
========== ======
The following table summarizes information about the outstanding and
exercisable options at September 30, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -----------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERGAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISABLE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE OUTSTANDING PRICE
- ----------------- ----------- ----------- ----------- ----------- ---------
$5.00 - $9.00 976,140 8.12 $ 6.04 632,851 $ 6.27
$10.50 - $15.375 226,509 9.12 $15.00 12,083 $12.22
$25.125 - $33.875 28,900 9.57 $28.91 -- --
$37.25 1,024,145 9.48 $37.25 1,024,145 $37.25
$38.00 - $48.0625 421,700 9.83 $46.76 -- --
========= =========
2,677,394 1,669,079
========= =========
401(k) PLAN
The Company offers its qualified employees the opportunity to participate
in a defined contribution retirement plan qualifying under the provisions of
Section 401(k) of the Internal Revenue Code. Each employee is eligible to
contribute, on a tax deferred basis, a portion of annual earnings not to exceed
certain federal income tax limitations. The Company does not match employee
contributions and therefore does not incur any expense related to the 401(k)
plan.
F-15
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
7. REVOLVING CREDIT AGREEMENTS AND CAPITAL LEASE OBLIGATIONS
REVOLVING CREDIT AGREEMENTS
The Company has a Revolving Credit Agreement with a bank (the "Revolving Line")
which may be used to finance its inventory up to a maximum of $1.0 million. The
credit available under the Revolving Line is based upon the balance of
collateral available, which is eighty percent of current accounts receivable and
fifty percent of inventory. As of September 30, 1999, the Company had available
credit of $1.0 million of which $176 is outstanding and is included in accounts
payable in the consolidated balance sheets.
The Company also maintains a $1.0 million credit line from Cisco Systems
Capital Corporation ("CSC") to lease Cisco System products and associated
peripherals. The terms of this line, which was entered into in December 1997,
provided for 180 days of borrowing and a maximum borrowing limit of $1.0
million. However, CSC has informally permitted the Company to continue to borrow
under this line and to exceed the stated $1.0 million limit. Amounts borrowed
under the line are to be repaid over a 36-month period with the Company having
the option of purchasing the equipment for $1.00 at the end of the lease term.
As of September 30, 1999, approximately $3.9 million was outstanding under this
credit line and is included in the capital lease obligations in the table below.
CAPITAL LEASE OBLIGATIONS
Future minimum lease payments due under capital leases are as follows:
Year Ending September 30 Amount
------------------------ ------
2000 $ 2,447
2001 2,113
2002 775
2003 147
2004 139
Less: Amount representing interest (637)
--------
Present value of net minimum lease payments $ 4,984
========
8. COMMITMENTS
LEASES
The Company has minimum monthly usage levels of data and voice
communications with certain of its telecommunications vendors. The Company also
leases certain of its SuperPOP facilities and various office furniture and
equipment under non-cancelable operating leases expiring in various years
through 2014. Total rent expense for all operating leases for the year ended
September 30, 1999, 1998 and 1997 was $1,277, $560 and $549, respectively.
Future minimum payments due under these operating leases and
telecommunications vendor usage commitments are as follows:
Year Ending September 30 Telecom. Leases
------------------------ -------- ------
2000 $ 5,196 $ 3,561
2001 5,317 3,570
2002 5,317 3,579
2003 5,317 3,595
2004 5,317 3,636
Thereafter 14,842 31,950
-------- -------
Total $ 41,306 $49,891
======== =======
F-16
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
QWEST IRU AGREEMENT
In October 1998, the Company entered into an Indefeasible Right of Use
("IRU") agreement with Qwest Communications Corporation ("Qwest"), under which
the Company has the exclusive right to use portions of Qwest's planned 18,449
mile MacroCapacity fiber network for a twenty year period. The Company will
initially have the right to use 6,500 route miles of OC-3 fiber capacity
coast-to-coast in the United States and a DS-3 fiber link from the United States
to the United Kingdom. The Company is currently committed to Qwest for a fee of
approximately $9.2 million of which it paid approximately $0.9 million at
contract signing. The balance is recorded in accrued liabilities in the
consolidated balance sheets. In addition, the Company has the right to increase
its capacity on the Qwest network at additional cost to the Company. The Company
is also liable for monthly operating and maintenance charges. The Company began
to amortize the total contract value over the twenty year term of the agreement
during the forth quarter of 1999.
EMPLOYMENT AGREEMENT
Effective June 1, 1998, the Company entered into a seven year employment
agreement, with an Officer and Director providing for a base salary of $.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 year ended September 30,1999 the individual received a bonus
of approximately $0.33 million under this provision of the employment agreement.
The employment agreement also provides that he may require the Company to lend
him up to a total of $155. Any loan taken thereunder 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, 1999 and 1998 the Officer had
outstanding borrowings of $0 and $155 under such loan arrangement.
Pursuant to the terms of the employment agreement, on September 30 of each
fiscal year, the individual is also entitled to an annual stock option to
purchase shares of common stock equal to twenty-five percent of any increase in
the total shares of common stock outstanding during the prior twelve months as a
result of equity offerings or acquisitions. The exercise price of the option is
equal to the market price of common stock on the date of grant and twenty-five
percent is exercisable immediately. On October 1, 1998 the individual was
granted an option to purchase 172,916 shares of common stock under this
provision of the employment agreement. On March 2, 1999 the individual agreed to
surrender this right pursuant to an amendment to the employment agreement. Under
the terms of the amendment, in lieu of this right, the individual received a
one-time option to purchase an amount of shares of common stock equal to
twenty-five percent of the difference between the number of shares outstanding
immediately after the closing of March 26, 1999 public offering and the number
of shares outstanding as of October 1,1998. This provision of the amended
employment agreement yielded the individual an option to purchase 1,024,145
shares of common stock. The term of the option is ten years from the date of
grant.
F-17
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
9. INCOME TAXES
Significant components of the Company's deferred tax assets and
liabilities are as follows:
Year ended September 30,
1999 1998 1997
-------- -------- --------
Deferred tax assets (liabilities):
Tax depreciation and amortization in excess
of book depreciation and amortization $ (348) $ (418) $ (265)
Net operating loss carry forwards 23,375 7,508 1,908
Allowance for doubtful accounts 283 242 255
Deferred Rent 149 152 81
Valuation allowance (23,459) (7,484) (1,979)
-------- -------- --------
Total net deferred tax liabilities $ -- $ -- $ --
======== ======== ========
The provision for income taxes for the years ended September 30, 1999,
1998 and 1997 differs from the amount computed by applying the federal statutory
rate due to the following:
Year ended September 30,
1999 1998 1997
--- --- ---
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 0% 0% 0%
=== === ===
The Company is in an accumulated loss position for both financial
reporting and income tax purposes. The Company has a U.S Federal income tax
carryfowards of approximately $55.9 million at September 30, 1999. These income
tax loss carryforwards expire between 2011 and 2019. Pursuant to Section 382 of
the Internal Revenue Code, the usage of these net operating loss carryforwards
may be partially limited due to changes in ownership that have occurred. The
Company has not yet determined the impact, if any, that changes in ownership
have had on net operating loss carryforwards. As of September 30,1999, the
Company also has net operating loss carryforwards of approximately $3.3 million
from its United Kingdom Subsidiaries which will expire under U.K. tax rules. For
financial reporting purposes, income tax benefits through September 30,1999 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.
10. SEGMENT INFORMATION
During fiscal 1999, the Company adopted SFAS No. 131. SFAS No. 131
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-18
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(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, 1999, 1998
and 1997:
Year ended September 30,
1999 1998 1997
--------- --------- ---------
Revenues:
Internet $ 13,033 $ 6,448 $ 2,414
Server sales and integration 20,784 14,147 14,986
--------- --------- ---------
Consolidated $ 33,817 $ 20,595 $ 17,400
========= ========= =========
Operating income (loss):
Internet $ (13,001) $ 1,146 $ (84)
Server sales and integration 1,019 721 (379)
Corporate (1) 19,209 6,600 2,547
--------- --------- ---------
Consolidated $ (31,191) $ (4,733) $ (3,010)
========= ========= =========
Identifiable assets:
Internet $ 57,503 $ 7,808 $ 2,105
Server sales and integration 6,074 3,732 5,782
Corporate 238,941 170,726 3,138
--------- --------- ---------
Consolidated $ 302,518 $ 182,266 $ 11,025
========= ========= =========
(1) Includes unallocated corporate overhead. Such amounts include executive
compensation of $1,482, $824 and $616, respectively, for the years ended
September 30, 1999, 1998 and 1997, as well as rent, payroll for administrative
staff and professional fees.
The following table sets forth geographic segment information for the
years ended September 30, 1999, 1998 and 1997:
Year ended September 30,
1999 1998 1997
--------- --------- ---------
Revenues:
United States $ 33,674 $ 20,595 $ 17,400
Europe 143 -- --
--------- --------- ---------
Consolidated $ 33,817 $ 20,595 $ 17,400
========= ========= =========
Operating income (loss):
United States $ (27,590) $ (4,733) (3,010)
Europe (3,601) -- --
--------- --------- ---------
Consolidated $ (31,191) $ (4,733) $ (3,010)
========= ========= =========
Identifiable assets:
United States $ 282,479 $ 179,494 $ 11,025
Europe 20,039 2,772 --
--------- --------- ---------
Consolidated $ 302,518 $ 182,266 $ 11,025
========= ========= =========
F-19
Globix Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(In Thousands, Except Share and per Share Data)
11. 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 year ended September 30, 1999 and 1998 were
approximately $1.5 million and $0.5 million, respectively, which includes
amounts due to the publishing companies to pay for the Company's advertisements.
12. SUBSEQUENT EVENT
On November 8, 1999 the Company announced an agreement to issue $80.0
million in new Series A Convertible Preferred Stock to Hicks, Muse, Tate & Furst
Incorporated ("Hicks Muse") to expand the build-out of the Globix
state-of-the-art SuperPOP Internet Data Centers in Europe and the United States.
The Preferred Stock is convertible into common stock at any time and cannot be
called for redemption for five years. Upon closing, Hicks Muse will own
approximately nineteen percent of the Company's outstanding common stock on an
as converted basis. Under the agreement, the Series A Convertible Preferred
Stock is subject to mandatory redemption in 2014 and yields an annual dividend
rate of seven and one-half percent payable quarterly in cash or additional
Preferred Stock at the option of the Company. The conversion price of $40.00 per
share represents a premium of twenty-five percent over the October 25, 1999
closing price, which is when the terms of the transaction were agreed upon.
F-20
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Certificate of Incorporation of Globix, as amended.(16)
3.2 By-laws of Globix, as amended.(11)
4.1 Specimen Common Stock Certificate.(2)
4.2 Form of Underwriter's Warrant issued to Rickel & Associates,
Inc.(2)
4.3 Indenture between Globix and Marine Midland Bank, as Trustee,
dated April 30, 1998.(8)
4.4 Form of $160,000,000 13% Senior Note, Series A, due 2005.(8)
4.5 Form of $160,000,000 13% Senior Notes, Series B, due 2005.(10)
4.6 Form of Warrant to purchase Common Stock expiring May 1,
2005.(8)
4.7 Specimen Series A 7.5% Convertible Preferred Stock
Certificate.*
4.8 Certificate of Designations, Preferences and Rights of Series
A 7.5% Convertible Preferred Stock Certificate. (Filed as an
exhibit to Exhibit 10.32)
10.1 Purchase Agreement between Globix and ING Baring (U.S.)
Securities, Inc., dated April 24, 1998.(8)
10.2 Warrant Agreement between Globix and Marine Midland Bank, as
Warrant Agent, dated as of April 30, 1998.(8)
10.3 Registration Rights Agreement between Globix and ING Baring,
(U.S.) Securities, dated as of April 30, 1998.(8)
10.4 Warrant Registration Rights Agreement between Globix and ING
Baring, (U.S.) Securities, dated as of April 30, 1998.(8)
10.5 Escrow and Security Agreement between Marine Midland Bank, as
Escrow Agent, Marine Midland Bank, as Trustee, and Globix,
dated as of April 30, 1998.(8)
10.6 1995 Stock Option Plan, adopted September 29, 1995.(1)
10.7 1998 Stock Option Plan, adopted April 16, 1998.(9)
10.8 Irrevocable Proxy Agreement between Harpoon Holdings Ltd. and
Marc H. Bell, dated as of October 1, 1995.(1)
10.9 Employment Agreement between Marc H. Bell and Globix, dated as
of April 10, 1998.(13)
10.10 Agreement of Lease between Globix and Puck Associates, dated
as of July 23, 1996.(3)
10.11 Loan and Security Agreement between Finova Capital Corporation
(Finova) and Globix, dated as of May 1, 1997.(4)
10.12 Guaranty by NAFT in favor of Finova, dated as of May 1,
1997.(4)
10.13 Guaranty by NAFT Computer Service Corp. in favor of Finova,
dated as of May 1, 1997.(4)
10.14 Guaranty by Bluestreak Digital, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
10.15 Guaranty by PFM Communications, Inc., in favor of Finova,
dated as of May 1, 1997.(4)
10.16 Promissory Notes to Globix, from Marc H. Bell, dated April 2,
1997 and June 30, 1997.(6)
10.17 Agreement by and between Globix and Value Management &
Research GmbH for the sale of an aggregate of 382,609 shares
of Common Stock, dated as of September 24, 1997.(5)
10.18 Agreement between Globix, and Cisco Systems Capital
Corporation granting credit approval for $1,000,000 for
leasing transactions, dated as of December 15, 1997.(7)
10.19+ Purchase Agreement between Hanover Equities, Inc. and Globix
dated as of June 2, 1998.(12)
10.20+ Purchase Agreement between Young Woo and Globix dated as of
June 2, 1998.(12)
10.21 Lease between Mission Plaza LLC and Globix dated as of July
24, 1998.(13)
10.22 First Amendment to Lease by and between Mission Plaza LLC and
Globix dated October 8, 1998 and effective as of July 24,
1998.(13)
10.23 Lease by and between Corston Holdings Limited, Globix Limited
and Globix dated October 15, 1998.(13)
10.24 Deed of Guaranty between Bank Leumi (UK) Plc, Corston Holdings
Limited, and Globix Limited dated October 15, 1998.(13)
10.25 IRU Agreement between Qwest Communications Corporation and
Globix dated as of October 5, 1998.(13)
1
10.26 Letter Agreement between Princeton Capital LLC, Hanover
Equities, Inc. and Globix, dated January 8, 1999.(14)
10.27 Amendment to Marc H. Bell Employment Agreement, dated as of
March 2, 1999.(16)
10.28 Stock Option Agreement between Globix and Marc H. Bell, dated
as of March 26, 1999.(16)
10.29 1999 Stock Option Plan, adopted April 23, 1999. (17)
10.30 Employment Agreement between Robert B. Bell and Globix, dated
as of July 21, 1999. (18)
10.31 Purchase Agreement between Globix Corporation and HMTF-IV
Acquisition Corp. dated as of November 5, 1999. (19)
21 List of Subsidiaries.*
23 Consent of Arthur Andersen LLP.
- ----------
* 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 Registration Statement on Form SB-2 (File No.
33-98978) (the Registration Statement) filed November 3, 1995.
(2) Incorporated by reference to Amendment No. 2 to the Registration Statement
filed January 23, 1996, declared effective January 24, 1996.
(3) Incorporated by reference to Globix's Annual Report on Form 10-KSB/A for the
year ended September 30, 1996.
(4) Incorporated by reference to Globix's Report on Form 8-K/A filed July 18,
1997.
(5) Incorporated by reference to Globix's Report on Form 8-K filed October 8,
1997.
(6) Incorporated by reference to Amendment No. 4 filed November 6, 1997 to
Registration Statement (File No. 333 23259) filed March 13, 1997.
(7) Incorporated by reference to Globix's Annual Report on Form 10-KSB for the
year ended September 30, 1997.
(8) Incorporated by reference to Globix's Report on Form 8-K filed May 11, 1998.
(9) Incorporated by reference to Globix's Proxy Statement on Schedule 14A filed
on March 16, 1998.
(10) Incorporated by reference to Globix's Registration Statement on Form S-4
(File No. 333-57993) filed June 29, 1998.
(11) Incorporated by reference to Amendment No. 1 filed August 7, 1998 to
Registration Statement (File No. 333-57993) filed June 29, 1998.
(12) Incorporated by reference to Globix's Report on Form 8-K/A filed September
16, 1998.
(13) Incorporated by reference to Globix's Annual Report on Form 10-KSB filed
December 29, 1998.
(14) Incorporated by reference to Amendment No. 1 filed March 4, 1999 to
Registration Statement on Form S-1 (File No. 333-70375) filed January 11, 1999.
(15) Incorporated by reference to Amendment No. 2 filed March 17, 1999 to
Registration Statement on Form S-1 (File No. 333-70375) filed January 11, 1999.
(16) Incorporated by reference to Globix's Quarterly Report on Form 10-QSB filed
May 17, 1999.
2
(17) Incorporated by reference to Globix's Proxy Statement on Schedule 14A filed
March 24, 1999.
(18) Incorporated by reference to Globix's Quarterly Report on Form 10-QSB filed
August 16, 1999.
(19) Incorporated by reference to Globix's Report on Form 8-K filed November29,
1999.
3