<PAGE>
As filed with the Securities and Exchange Commission on June 14, 1999
Registration No. 333-77105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DIGEX, INCORPORATED
(Exact name of registrant as specified in its charter)
----------------
Delaware 4813
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
One Digex Plaza
Beltsville, MD 20705
(301) 847-5000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Nancy G. Faigen
President and Chief Executive Officer
Digex, Incorporated
One Digex Plaza
Beltsville, MD 20705
(301) 847-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Ralph J. Sutcliffe, Esq. Raymond Y. Lin, Esq.
Kronish Lieb Weiner & Hellman LLP Latham & Watkins
1114 Avenue of the Americas 885 Third Avenue
New York, New York 10036-7798 New York, New York 10022-4802
(212) 479-6000 (212) 906-1200
----------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
<TABLE>
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
<CAPTION>
Proposed
Proposed Maximum
Number of Maximum Aggregate
Title of Securities Shares to be Offering Price Offering Amount of
to be Registered Registered Per Share Price (1) Registration Fee
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
par value $.01 per
share................ $ $100,000,000 $27,800
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED JUNE 14, 1999
PROSPECTUS
Shares
[DIGEX logo]
Class A Common Stock
--------------
This is an initial public offering of shares of the Class A Common Stock of
Digex, Incorporated. We are selling all of the shares of Class A Common Stock
offered under this prospectus. The underwriters have an option to purchase a
maximum of additional shares of Class A Common Stock from us to cover over-
allotments of shares.
It is currently estimated that the initial public offering price will be
between $ and $ per share. We have applied to have our Class A Common
Stock approved for listing on the Nasdaq National Market under the symbol
"DIGX."
Immediately following this offering, we will have outstanding two classes of
common stock. The holders of Class A Common Stock are entitled to one vote for
each share, whereas the holders of Class B Common Stock are entitled to 10
votes for each share. The rights of holders of our common stock are
substantially the same in all other respects.
See "Risk Factors" beginning on page about the risks you should consider
before buying shares of our Class A Common Stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
--------------
<TABLE>
<CAPTION>
Per
Share Total
------ -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds, before expenses, to us................................ $ $
</TABLE>
--------------
Joint Lead Managers
Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette
Book Running
Manager
--------------
CIBC World Markets Legg Mason Wood Walker
Incorporated
The date of this prospectus is , 1999
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.
Digex
Our Company
Digex is a leading provider of Web site hosting services to businesses and
organizations implementing complex, interactive Web sites and Web-based
applications. From major corporations to Internet start-ups, our customers
leverage our services to rapidly and cost-effectively deploy secure and
reliable business solutions including on-line banking, on-line procurement and
electronic retailing. We provide the computer hardware, software, network
technology, and systems management necessary to offer our customers
comprehensive outsourced Web site hosting solutions.
We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth. We
currently provide hosting services to over 500 customers, including such well-
known companies as American Century Investments, Bally Total Fitness, Budget
Rent-A-Car, Compaq, Forbes, J. Crew, Kraft, Nike and Universal Studios. We
operate two state-of-the-art data centers strategically positioned on the east
and west coasts of the United States. In these data centers, we house over
1,400 Windows NT and UNIX-based servers which we own and manage. Our revenues
have grown at a compounded annual growth rate of 184% over the past two years
from $2.8 million in 1996 to $22.6 million in 1998. Our revenue for the three
months ended March 31, 1999 was $9.4 million. The following are among the key
factors that we believe will continue to drive our growth:
. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;
. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;
. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and
. a network of over 120 business partnership alliances which provide
complementary design, development and integration services for our
customers and which represent a significant source of new customer
referrals for Digex.
Our Market Opportunity
According to Forrester Research, Inc., the Web site hosting market is
projected to increase to over $10.0 billion by 2002, of which $9.0 billion is
expected to be complex Web site management services. In addition to the overall
expansion and increasing pervasiveness of the Internet, we believe one of the
key drivers of growth in the Web hosting industry is the increasing number of
businesses that have elected to outsource the management of their Web sites and
related operations. Web sites are mission-critical for virtually all Web-
centric companies and are becoming increasingly strategic for many mainstream
enterprises. At the same time, these operations and applications are becoming
more complex and challenging to operate. We offer customers a comprehensive
outsourcing solution designed to reduce costs, speed implementation, reduce
technology risks and provide guaranteed operating performance.
2
<PAGE>
Our Strategy
Our objective is to shape and lead the global market for Web site and
application hosting solutions. We intend to achieve this goal through a
strategy focused on:
. expanding our premier Web site hosting capabilities;
. addressing industry-specific customer needs;
. developing next generation service offerings; and
. expanding our capabilities through selective strategic alliances and
acquisitions.
Our History
Our business started in 1996 as the Web site hosting unit of Business
Internet, Inc., previously known as DIGEX, Incorporated, a company that was
principally an Internet access and Web site hosting services provider. Business
Internet went public in October 1996 under the name DIGEX, Incorporated, and
was acquired by Intermedia in July 1997. In contemplation of this offering, we
were incorporated as Digex, Incorporated in April 1999, and Business Internet
contributed our assets to the newly formed Digex, Incorporated in order to
effect a recapitalization of our business. In this prospectus, we will refer to
the Web site hosting unit of Business Internet, as it existed prior to its
acquisition by Intermedia, as the "Predecessor," and to Digex, Incorporated,
together with our predecessors, as "Digex," "we," "us" and "our." We will refer
to our parent company, Intermedia Communications Inc., and its subsidiaries, as
"Intermedia."
Our Address and Telephone Number
The address of our principal executive offices is One Digex Plaza,
Beltsville, Maryland 20705 and our telephone number is (301) 847-5000.
----------------
The information on any of our Web sites, such as www.digex.net or
www.digex.com, is not a part of this prospectus.
Digex and the Digex logo are two of our service marks. This prospectus also
contains trademarks and trade names of other companies.
3
<PAGE>
The Offering
Class A Common Stock offered by
Digex.......................... shares (1)
Common Stock to be outstanding
after the offering............. shares of Class A Common Stock
shares of Class B Common Stock (2)
Use of proceeds................. We intend to use the net proceeds from this
offering to purchase or construct
Telecommunications Related Assets. (3)
Proposed Nasdaq National Market
symbol......................... DIGX
- --------
(1) Excludes shares to be sold by Digex if the underwriters' over-allotment
option is exercised in full, as described in "Underwriting."
(2) The Class B Common Stock is fully convertible into Class A Common Stock, on
a one-for-one basis, at any time at the option of the holder or upon the
transfer of the Class B Common Stock to any person or entity not affiliated
with Intermedia.
(3) Due to certain restrictions in the bond indentures of Intermedia, our
parent company, we will be required to use all of the net proceeds of this
offering to purchase or construct Telecommunications Related Assets. The
term "Telecommunications Related Assets" is defined under "Risk Factors--
Digex is controlled by Intermedia," and would include data centers and
related capital expenditures. In addition, we have made arrangements for
Intermedia to purchase from us some of the Telecommunications Related
Assets purchased with the net proceeds of this offering. We expect to be
able to use the proceeds of such sales to Intermedia to the extent
necessary for working capital purposes and to fund operating losses. This
arrangement is explained under "Use of Proceeds" and "Certain Relationships
and Related Transactions--Sale of Telecommunications Related Assets to
Intermedia."
----------------
Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
4
<PAGE>
Summary Financial Data
The following table sets forth summary financial data of Digex for the period
from July 7, 1997, the date of acquisition of the Predecessor by Intermedia, to
December 31, 1997, the year ended December 31, 1998, and the three months ended
March 31, 1998 and 1999, and of the Predecessor for the year ended December 31,
1996 and the period from January 1, 1997 to July 6, 1997. The summary
historical financial data has been derived from Digex's and the Predecessor's
financial statements which have been audited by Ernst & Young LLP, with the
exception of the unaudited financial statements as of and for the three months
ended March 31, 1998 and 1999, and are included elsewhere in this prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of the Predecessor as if such acquisition
had occurred on January 1, 1997. The presentation of pro forma financial
information is made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
In the following table, pro forma basic and diluted net loss per share have
been calculated assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented.
5
<PAGE>
You should read the summary financial and other data below in conjunction
with our audited and unaudited interim financial statements and the related
notes included elsewhere in this prospectus. You should also read the
accompanying "Selected Financial Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations," contained in this
prospectus.
<TABLE>
<CAPTION>
Predecessor Digex
------------------------ --------------------------------------------------------------------------
Historical Historical Pro Forma Historical
------------------------ --------------- ------------ --------------------------------------
Three months ended
Period from March 31,
Period from July 7, 1997 ------------------------
January 1, (date of
Year ended 1997 to acquisition) to Year ended Year ended
December 31, July 6, December 31, December 31, December 31,
1996 1997 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except pro forma share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 3,869 $ 9,392
Costs and expenses:
Cost of operations..... 2,002 4,149 1,739 2,808 6,710 887 1,652
Cost of services....... 684 1,817 1,611 3,428 7,044 1,107 3,952
Selling, general and
administrative........ 3,194 7,001 6,087 13,088 17,512 3,637 8,069
Depreciation and
amortization.......... 591 519 2,753 4,850 8,109 2,027 4,314
Charge off of purchased
in-process research
and development....... -- -- 15,000 (1) 15,000 (1) -- -- --
------- ------- ------------ ----------- ----------- ---------- ----------
Total costs and
expenses............... 6,471 13,486 27,190 39,174 39,375 7,658 17,987
------- ------- ------------ ----------- ----------- ---------- ----------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (27,562) (16,740) (3,789) (8,595)
Income tax benefit...... -- -- 1,440 4,710 159 -- --
------- ------- ------------ ----------- ----------- ---------- ----------
Net loss................ $(3,668) $(9,066) $ (18,558) $ (22,852) $ (16,581) $ (3,789) $ (8,595)
======= ======= ============ =========== =========== ========== ==========
Pro forma net loss
Per common share:
Basic.................. -- -- $ (18,558.00) $(22,852.00) $(16,581.00) $(3,789.00) $(8,595.00)
============ =========== =========== ========== ==========
Diluted................ -- -- $ (18,558.00) $(22,852.00) $(16,581.00) $(3,789.00) $(8,595.00)
============ =========== =========== ========== ==========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 1,000 1,000 1,000 1,000 1,000
============ =========== =========== ========== ==========
Other Financial Data:
EBITDA before certain
charges (2)............ $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (1,762) $ (4,281)
Capital expenditures.... 1,445 1,004 8,016 9,020 30,969 2,401 32,001
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 March 31, 1999
------------ --------------------------
Actual Actual As Adjusted (3)
------------ ----------- --------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (4).... $ -- $ -- $ --
Working capital.................. 1,231 4,997
Property and equipment, net...... 39,059 67,488
Total assets..................... 77,739 107,393
Capital lease obligations,
including current maturities.... 2,089 1,833
Total owner's equity............. 70,845 102,287
</TABLE>
- --------
(1) This amount represents a one-time charge to operations for the charge off
of purchased in-process research and development related to the Predecessor
in connection with Intermedia's purchase of Business Internet on July 7,
1997.
(2) EBITDA before certain charges consists of loss before tax benefit,
depreciation and amortization and the charge off of purchased in-process
research and development. EBITDA before certain charges does not represent
funds available for management's discretionary use and is not intended to
represent cash flow from operations. This caption excludes components that
are significant in understanding and assessing our results of operations
and cash flows. In addition, EBITDA before certain charges is not a term
defined by generally accepted accounting principles and as a result our
measure of EBITDA before certain charges might not be comparable to
similarly titled measures used by other companies. We believe that EBITDA
before certain charges is often reported and widely used by analysts,
investors and other interested parties in the Web hosting industry.
Accordingly, we are disclosing this information to permit a more
comprehensive analysis of our operating performance relative to other
companies in our industry. EBITDA before certain charges is presented to
enhance an understanding of our operating results and should not be
construed (i) as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of our operating performance or (ii)
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. See the financial
statements and notes thereto contained elsewhere in this prospectus for
more detailed information.
(3) As Adjusted as of March 31, 1999 gives effect to the offering as if it had
occurred on March 31, 1999.
(4) We have historically participated in Intermedia's centralized cash
management system and, as a result, have not carried cash balances on our
financial statements. With the closing of this offering, we will be
maintaining and reporting cash balances in our financial statements.
7
<PAGE>
RISK FACTORS
Investing in our Class A Common Stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below before
you purchase any of our Class A Common Stock. These risks and uncertainties are
not the only ones we face. Unknown additional risks and uncertainties, or ones
that we currently consider immaterial, may also impair our business operations.
If any of these risks or uncertainties actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Class A Common Stock could
decline, and you could lose all or part of your investment.
We have a limited operating history and our business model is still evolving,
which makes it more difficult for you to evaluate our company and its
prospects.
We were established in January 1996 to provide Web site hosting services for
businesses deploying complex, mission-critical Web sites, which remains our
primary focus. Our range of service offerings has changed since 1996 and our
business model is still new and developing. For example, we recently began
offering integrated business solutions and enterprise services. Because some of
our services are new, we cannot be sure that businesses will buy them. As a
result, the revenue and income potential of our business is unproven. Our
limited operating history makes predicting future results difficult. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the new and rapidly evolving market for Web hosting
services. To address these risks, among other things, we must:
. provide reliable, technologically current and cost-effective services;
. continue to upgrade and expand our infrastructure;
. market our brand name and services effectively;
. maintain and develop our business partnership alliances; and
. retain and attract qualified personnel.
We have a history of significant losses and expect these losses to continue in
the foreseeable future.
We have experienced operating losses and negative cash flows from operations
in each annual period from inception. As of December 31, 1998, our accumulated
losses since January 1, 1996 have amounted to approximately $47.9 million. We
had a net loss of $16.6 million for the year ended December 31, 1998. While our
revenues have grown in recent periods, we cannot assure you that this growth
will continue. In connection with our expansion plans, we anticipate making
significant investments in sales, marketing, technical and customer support
personnel, as well as in our data center infrastructure. As a result of our
expansion plans, we expect our net losses and negative cash flows from
operations to continue for the foreseeable future. We cannot assure you that we
will ever become or remain profitable or that we will generate positive cash
flows from operations.
Our quarterly and annual results may fluctuate, resulting in fluctuations in
the price of our Class A Common Stock.
Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing significant fluctuations in our future
quarterly and annual results of operations due to a variety of factors, many of
which are outside our control, including:
. demand for and market acceptance of our services;
. introductions of new services by us and our competitors;
. capacity utilization of our data centers;
. timing of customer installations;
. the mix of services we sell;
8
<PAGE>
. customer retention;
. the timing and magnitude of our capital expenditures, including
construction costs related to the expansion of our operations;
. changes in our pricing policies and those of our competitors;
. fluctuations in bandwidth used by customers;
. our retention of key personnel; and
. other general economic factors.
For these and other reasons, in some future quarters, our results of
operations may fall below the expectations of securities analysts or investors,
which could negatively affect the market price of our Class A Common Stock.
We operate in a relatively new and evolving market with uncertain prospects for
growth.
The market for Web site hosting and related services has only recently begun
to develop and is evolving rapidly. Our future growth, if any, will depend on
the continued trend of businesses to outsource their Web site hosting and
management systems, and our ability to market our services effectively. There
can be no assurance that the market for our services will develop, that our
services will be adopted, or that businesses will use these Internet-based
services in the degree or manner that we expect. It is possible that at some
point businesses may find it cheaper, more secure or otherwise preferable to
host their Web sites internally and decide not to outsource the management of
their Web sites. If we are unable to react quickly to changes in the market, if
the market fails to develop, or develops more slowly than expected, or if our
services do not achieve market acceptance, then we are unlikely to become or
remain profitable.
We may be unable to achieve our operating and financial objectives due to
significant competition in the Web hosting industry.
The market for hosting Web sites is highly competitive. There are few
substantial barriers to entry and we expect intense competition from existing
and future competitors. The principal competitive factors in this market
include Internet system engineering expertise, network capability, quality of
service and price.
Our current and potential competitors in the market include Web hosting
service providers, Internet service providers ("ISPs"), telecommunications
companies and large information technology outsourcing firms. Our competitors
may operate in one or more of these areas and include companies such as
AboveNet Communications, AT&T, Cable & Wireless, Concentric Network, EDS,
Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM, Intel, Level 3
Communications, MCI WorldCom, PSINet, Qwest Communications International, and
USinternetworking.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
possess. As a result, some of our competitors may be able to develop and expand
their network infrastructures and service offerings more quickly, adapt to new
technologies and changes in customer requirements more quickly, take advantage
of acquisition and other opportunities more readily, devote greater resources
to the marketing and sale of their products and adopt more aggressive pricing
policies than we can. In addition, some competitors have entered and will
likely continue to enter into joint ventures or alliances to provide additional
services which may be competitive with those we provide.
Some of our competitors may be able to bundle other telecommunications
services in connection with their Web site hosting services, which could allow
them to reduce the relative prices of their Web site hosting services. We may
not be able to overcome the effects of any such price reductions. In addition,
we believe the
9
<PAGE>
Web hosting market is likely to experience consolidation in the near future,
which could result in increased price and other competition that would make it
more difficult for us to compete. See "Business--Competition."
Our data centers and the networks we rely on are sensitive to harm from human
actions and natural disasters. Any resulting disruption could significantly
damage our business and reputation.
We believe our reputation for providing reliable service to our customers is
critical to our future success. Our reputation largely depends on the
performance and security of our data centers and equipment, and of the network
infrastructure of our connectivity providers, including our principal provider,
Intermedia. Our data centers and equipment, and the networks we use, however,
are subject to damage from human error and tampering, natural disasters, power
loss, capacity limitations, software defects, breaches of security,
telecommunications failures, intentional acts of vandalism and other factors
that have caused, and will continue to cause, interruptions in service or
reduced capacity for our customers. Despite precautions we have taken and plan
to take, the occurrence of a natural disaster or other unanticipated problems
could result in interruptions in the services we provide to our customers. Such
an occurrence could have a materially negative impact on our business and
reputation. We also often provide our customers with service level agreements.
If we do not meet the required service levels, we may have to provide credits
to our customers, which could significantly reduce our revenues.
Our customers often maintain confidential information on our servers. We
strive to protect this information and our network from unauthorized access,
computer viruses and other security threats by using encryption, authentication
technology, biometric identifiers and security guards. However, such measures
have been circumvented in the past and could be circumvented in the future. Our
customer information and network may be vulnerable to the accidental or
intentional actions of Internet users, current and former employees or others.
Such acts could potentially jeopardize the security of confidential information
such as credit card and bank account numbers stored in our system and our
customers' computer systems. Additionally, the time and expense required to
eliminate computer viruses and alleviate other security problems could be
significant and impair our service quality.
Any interruptions in service, capacity limitations, damage to equipment or
security breaches could seriously harm our reputation for reliable service and
cause us to lose customers. Additionally, in the event of any resulting harm to
customers, we could be held liable for damages. Awards for such damages might
exceed our liability insurance by an unknown but significant amount and could
seriously harm our business.
We could not provide adequate service to our customers if we were unable to
secure sufficient network capacity to meet our future needs on reasonable terms
or at all.
We must continue to expand and adapt our network arrangements to accommodate
an increasing amount of data traffic and changing customers' requirements.
Prior to the closing of this offering, we expect to enter into a two-year
network services agreement with Intermedia. We will be required to purchase,
and Intermedia will be required to provide, at least 70% of our network
capacity requirements that we do not fulfill through our own peering
arrangements. Currently, we rely on Intermedia to provide all of our capacity
requirements. We cannot be sure that Intermedia will be able to continue to
meet our network capacity requirements. Intermedia has 30 days to notify us if
it is unable to meet our network capacity requirements, in which case we can
enter into short-term contracts with third-party suppliers only to obtain the
additional capacity which Intermedia is unable to provide. This could delay our
obtaining additional capacity and result in our having to pay higher prices for
such additional network capacity. Such capacity might not be available at all.
As a result, we cannot assure you that we will have access to sufficient
network capacity to meet our present needs or expected future demands. Our
failure to achieve or maintain high capacity data transmission could negatively
impact service levels to our existing customers and limit our ability to
attract new customers, which would harm our business.
10
<PAGE>
Our business, in large part, depends on network services we receive from
Intermedia. Any disruption of these services or Intermedia's inability to
maintain its peering relationships could be costly and harmful to our business.
We currently rely exclusively on Intermedia for network services. Intermedia
operates its own coast-to-coast Internet Protocol network, which qualifies it
as a tier-one service provider of Internet connectivity services. If our
network services agreement with Intermedia were to be terminated, we would need
to rapidly secure an alternative provider of these services. As a result, we
could incur transition costs and our monthly costs of operations could
increase. In addition, such a transition could have a detrimental effect on our
customer service levels.
The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering relationships
are arrangements that permit ISPs to exchange traffic with one another without
having to pay for the cost of transit services. Peering relationships are a
competitive factor that allow some Web hosting companies to provide faster data
transmission than others. We believe Intermedia's tier-one status and numerous
peering relationships enable it to provide us faster data transmission than
many other ISPs provide. If Intermedia fails to adapt its network
infrastructure to meet industry requirements for peering or loses its peering
relationships for any other reason, then our transmission rates could be
reduced, resulting in a decrease in service quality we provide to our
customers.
Providing services to customers with mission-critical Web sites could
potentially expose us to lawsuits for customers' lost profits or other damages.
Because our Web hosting services are critical to many of our customers'
businesses, any significant interruption in our services could result in lost
profits or other indirect or consequential damages to our customers. Even
though the standard terms and conditions of our customer contracts disclaim our
liability for any such damages, a substantial number of our customers have not
executed those terms and conditions, and those customers could bring a lawsuit
against us claiming lost profits or other consequential damages as the result
of a service interruption or other Web site problems that the customer may
ascribe to us. We believe we would have meritorious defenses to any such claim,
but there can be no assurance we would prevail. In such cases, we could be
liable for substantial damage awards. Such damage awards might exceed our
liability insurance by unknown but significant amounts, which would seriously
harm our business.
Digex is controlled by Intermedia, which could involve multiple risks for you
as a stockholder.
Intermedia controls a majority of our voting power, and Intermedia's
interests in us may conflict with your interests as a stockholder. Intermedia,
through its wholly-owned subsidiary, Business Internet, owns all of the issued
and outstanding shares of our Class B Common Stock. When this offering is
completed, Intermedia will own shares of Class B Common Stock. Each share
of Class B Common Stock is entitled to 10 votes, as compared to one vote for
each share of Class A Common Stock to be sold in this offering. Thus, after
this offering is completed, Intermedia will control approximately % of the
voting power of Digex, and will be able to control the management and affairs
of Digex, and all matters submitted to our stockholders for approval, including
the election and removal of directors, and any merger, consolidation or sale of
all or substantially all of our assets. As a result, the price of our Class A
Common Stock may be affected.
We depend on Intermedia to fund our working capital and operating losses, but
Intermedia's ability to fund these needs is limited by its own substantial
indebtedness. Because we are subject to the restrictions under Intermedia's
indentures, we will be required to use all of the net proceeds of this offering
to purchase Telecommunications Related Assets, as defined under "Use of
Proceeds," within 270 days of this offering. We will not be able to use the
proceeds of this offering directly to fund operating losses, working capital or
other uses that are not purchases of Telecommunications Related Assets. Because
we anticipate operating losses and a significant need for working capital for
the foreseeable future, we expect we will have to obtain funds for such
purposes from Intermedia or other sources. However, we are significantly
restricted as to the sources of
11
<PAGE>
funding that are available to us. We have made certain arrangements with
Intermedia, described under "Use of Proceeds" and "Certain Relationships and
Related Transactions--Sale of Telecommunications Related Assets to Intermedia,"
such that we believe the net proceeds of this offering should be sufficient to
fund our capital needs into the second half of 2000. After that date, however,
we will need to find sources of financing which are likely to be significantly
limited.
Intermedia is and, after the offering, will continue to be highly leveraged.
At March 31, 1999, Intermedia had outstanding approximately $3.1 billion of
debt and other liabilities including trade payables, and approximately $875
million of obligations with respect to four outstanding series of preferred
stock. The extent to which Intermedia is leveraged could have a number of
important consequences to you as our stockholder. We are, and expect to
continue to be, dependent on Intermedia for capital to fund our working capital
and operating losses. Intermedia's level of debt will require it to dedicate a
substantial portion of its future cash flow from operations for payment of
principal and interest on its debt, as well as dividends on and the redemption
of its preferred stock. Historically, Intermedia has not generated sufficient
cash flow to cover its operating and investing expenses. For the year ended
December 31, 1998, Intermedia's earnings were insufficient to cover combined
fixed charges and dividends on preferred stock. In addition, because of the
restrictions in the Intermedia indentures, Intermedia has only a limited amount
of cash that may be used for working capital purposes and to fund operating
losses. Consequently, Intermedia may not be able to provide us with a source of
funds for our working capital or operating losses.
Our dependence on Intermedia and the degree to which Intermedia is leveraged
could have important consequences to our future operations, including but not
limited to:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing to fund future
working capital, operating losses, capital expenditures, acquisitions
and other general corporate requirements;
. limiting our flexibility in reacting to changes in our business and the
industry in which we compete; and
. placing us at a competitive disadvantage compared to better capitalized
competitors.
We may require additional funds to finance our business but our ability to
raise such funds is significantly limited by agreements that are binding on
Intermedia. Intermedia has issued debt securities to the public under seven
indentures. As a subsidiary of Intermedia, we are subject to a number of
restrictions under the Intermedia indentures. These restrictions will, among
other things, limit our ability to make certain restricted payments, incur
indebtedness and issue preferred stock, pay dividends or make other
distributions, engage in sale and leaseback transactions, create liens, sell
our assets, issue or sell our equity interests, or enter into certain mergers
and consolidations. As a result, our future financing sources will be
significantly limited and our use of any proceeds, including the net proceeds
of this offering, will be significantly restricted.
Our ability to issue additional capital stock is constrained by Intermedia's
ownership of the Class B Common Stock, which could make it more difficult for
us to raise capital to expand our business. In the future, Intermedia may
elect to sell shares of our Class B Common Stock that it controls to the public
or to distribute such shares to its own stockholders. If as a result of such
sale or distribution, Intermedia would no longer hold more than 50% of the
total voting power of our capital stock, the consent of the majority in
principal amount of the noteholders under the Intermedia indentures would be
required for such a sale or distribution. In addition, if we decide in the
future to issue and sell additional shares of our capital stock such that the
voting power represented by the Class B Common Stock held by Intermedia would
no longer be greater than 50% of the total voting power of our capital stock,
the consent of the majority in principal amount of the noteholders under the
Intermedia indentures would also be required for such a sale. We would be free
of the restrictions in the Intermedia indentures only if Intermedia designated
us as an "unrestricted subsidiary," which would require a consent of a majority
in principal amount of the noteholders under the Intermedia indentures or if
Intermedia sold a sufficient number of its shares of Digex to reduce its voting
power below 50%.
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<PAGE>
Digex and Intermedia have the same legal counsel, and therefore contractual
relationships between Digex and Intermedia might be less advantageous to Digex
than if Digex had separate legal representation. Kronish Lieb Weiner & Hellman
LLP, counsel to Digex, is also counsel to Intermedia. Consequently, Digex does
not have legal representation independent from Intermedia.
If we do not respond effectively and on a timely basis to rapid technological
change and evolving industry standards, our business could suffer.
Internet and networking technology is changing rapidly. Our future success
will depend largely on our ability to:
. offer services that incorporate leading technologies;
. address the increasingly sophisticated and varied needs of our current
and prospective customers;
. respond to technological advances and emerging industry standards on a
timely and cost-effective basis; and
. continue offering services that are compatible with products and
services of other vendors.
Although we often work with various vendors in testing newly developed
products, there can be no assurance such products will be compatible with our
infrastructure or such products will adequately address changing customer
needs. Although we currently intend to support emerging standards, there can be
no assurance industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Our failure to
conform to the prevailing standards, or the failure of common standards to
emerge, could harm our business. In addition, products, services or
technologies developed by others may render our services no longer competitive
or obsolete.
Our business will not grow unless Internet usage grows and Internet performance
remains adequate.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has only recently begun to develop.
Our success will depend on the continued growth in Internet usage. The growth
of the Internet is subject to a high level of uncertainty and depends on a
number of factors, including the growth in consumer and business use of new
interactive technologies, the development of technologies that facilitate
interactive communications, security concerns and increases in data transport
capacity. If the Internet as a commercial medium fails to grow or develops more
slowly than expected, then our business is unlikely to grow.
The recent growth in the use of the Internet in general has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our services. The performance of our Web
site hosting services is ultimately limited by and relies on the speed and
reliability of the networks operated by third parties. Consequently, the growth
of the market for our services depends on improvements being made to the entire
Internet infrastructure to alleviate overloading and congestion.
We may be unable to achieve our operating and financial objectives if we cannot
manage our anticipated growth effectively.
Our business has grown rapidly and we have recently hired key employees and
officers, including our President and Chief Executive Officer, who joined us in
December 1998. As a result, our management team has worked together for only a
brief time. Our future success depends in large part on our ability to manage
the recent and anticipated growth in our business. For us to manage this
growth, we will need to:
. expand and enhance our operating and financial procedures and controls;
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<PAGE>
. replace or upgrade our operational and financial management information
systems; and
. attract, train, manage and retain key employees.
These activities are expected to place a significant strain on our financial
and management resources. If we are unable to manage growth effectively, our
business could suffer.
Our growth depends on our ability to expand data center capacity to meet
anticipated demand.
Continuing to expand capacity is critical to achieving our business strategy.
This expansion is likely to include the need to add new hardware and software,
and may include the opening of additional data centers. We are currently
significantly expanding our data center capacity by constructing two new
facilities, one in Beltsville, Maryland, and another in San Jose, California to
augment our capacity in those regions. We intend to add data center capacity
over the next five years as justified by customer demand. Our ability to do so
successfully depends on:
. anticipating and planning for future demand levels;
. having access to sufficient capital; and
. locating and securing satisfactory data center sites and implementing
the build-out of these sites, all of which may require significant lead
time.
If we cannot expand capacity effectively, our growth will suffer and we may
not be able to adequately meet the demands of existing customers.
Our business would be harmed if we cannot retain and attract key personnel.
Our success also depends in significant part on the continued services of our
key technical, sales and senior management personnel, including our President
and Chief Executive Officer, Nancy G. Faigen. Losing one or more of our key
employees could harm our business. In addition, we have recently hired a number
of key employees and officers, including our President and Chief Executive
Officer, and as a result, our entire management team has worked together for
only a brief time. We also have plans to hire additional executive management
personnel in the near future.
We believe our short and long-term success depends largely on our ability to
attract and retain highly skilled technical, managerial and marketing
personnel, particularly additional management personnel in the areas of
application integration and technical support. Competition for such personnel
is intense. We may not be able to hire or retain the necessary personnel to
implement our business strategy, or we may need to pay higher compensation for
employees than we currently expect. Our inability to attract and retain such
personnel would limit our growth and harm our business.
We could face additional costs and operational disruptions in the future if
Intermedia discontinues providing general and administrative services to us.
Intermedia has provided and is expected to continue to provide many of our
financial, administrative and operational services and related support
functions, including customer billing, legal, human resources, Year 2000
compliance and occasional network engineering. We have a General and
Administrative Services Agreement with Intermedia, as described under "Certain
Relationships and Related Transactions--General and Administrative Services
Agreement," to provide such services over the next five years. Should
Intermedia's provision of these services no longer meet our needs or if
Intermedia unexpectedly stops providing these services for any reason, we could
face significant challenges and costs in transitioning to our own or
alternative general and administrative functions. Such a transition and any
resulting impairment of our operations could harm our financial results.
Regulatory and legal uncertainties could have significant costs or otherwise
harm our business.
The law in the United States relating to the liability of on-line service
providers and ISPs for information disseminated through their systems remains
largely unsettled. In October 1998 Congress enacted the Digital
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<PAGE>
Millennium Copyright Act. This law includes a conditional limitation on the
liability of on-line service providers for copyright infringement for
transmitting, routing, or providing connections, transient storage, caching or
storage at the direction of a user. Since this law is new, we are unsure of how
it will be applied to limit any liability we may face in the future for any
possible copyright infringement. This new law also requires ISPs to follow
certain "notice and take-down" procedures in order to be able to take advantage
of the limitation on liability. We have not yet implemented such procedures nor
evaluated the cost of complying with them. See "Business--Government
Regulation."
It may take years to determine whether and how other existing laws, such as
those governing other types of intellectual property, privacy, libel and
taxation, apply to the Internet. The growth and development of the market for
on-line commerce may also prompt calls for more stringent consumer protection
laws that may impose additional burdens on companies conducting business on-
line. The application of existing laws or promulgation of new laws could cause
us to implement measures to reduce our liability exposure. Such measures could
require us to expend substantial resources or discontinue certain product or
service offerings. Increased attention to liability issues, as a result of
lawsuits, legislation and legislative proposals, could also divert management
attention, result in unanticipated expenses and harm our business. Regulation
of the Internet may also harm our customers' businesses, which could lead to
reduced demand for our services.
We are not currently subject to direct regulation by the Federal
Communications Commission ("FCC") or any other government agency, other than as
to regulations applicable to business in general. However, in the future we may
be subject to regulation by the FCC or other federal or state agencies. Our
costs could increase and our business could suffer depending on the extent to
which our activities might be regulated.
Our business plan contemplates future international operations but there are
numerous risks and uncertainties in offering services outside of the United
States.
We intend to expand into international markets and may build data centers
internationally. We cannot be sure that we will be able to successfully sell
our services or adequately maintain operations outside the United States. In
addition, there are certain risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. ability to secure and maintain the necessary physical and
telecommunications infrastructure;
. challenges in staffing and managing foreign operations; and
. employment laws and practices in foreign countries.
Any of these could adversely affect our international operations.
Furthermore, some foreign governments have enforced laws and regulations on
content distributed over the Internet that are more restrictive than those
currently in place in the United States. Any one or more of these factors could
adversely affect our contemplated future international operations and,
consequently, our business.
We may be unable to protect our intellectual property rights or to continue
using intellectual property that we license from others.
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain of
our proprietary rights. We have no patented technology that would bar
competitors from our market. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
our data or technology, such as our customized Digex Centralized Nervous System
applications.
We also rely on certain technologies licensed from third parties. We cannot
be sure these licenses will remain available to us on commercially reasonable
terms or at all. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.
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<PAGE>
We did not obtain third party consents in connection with our restructuring,
which may allow certain third parties, including some of our customers, to
assert a breach of a contract.
In connection with this offering, Business Internet, our direct parent
company, contributed the Web hosting business to us. This contribution included
an assignment of all of the contracts that are part of our business, including
our customer contracts. We have elected not to seek consents in connection with
this assignment. While the failure to obtain required third party consents
could give a third party the ability to assert a breach of the acquired
contract, we believe this would be unlikely in the case of the restructuring
because all of the assigned contracts were transferred as part of the entire
Web hosting business. Nevertheless, we cannot be sure that one or more third
parties will not assert a breach of our contracts with them because of our
failure to seek or obtain their consents to assignment.
We could lose revenues and our reputation may be damaged if our systems or
those of our customers or our suppliers are not Year 2000 compliant.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this
year, computer systems and software used by many companies may need to be
upgraded to comply with these "Year 2000" requirements. Non-compliant systems
may cause miscalculations which will interfere with business activities or
simply fail to work at all.
We have made arrangements with Intermedia for Year 2000 compliance services.
Under these arrangements, we have implemented a Year 2000 program intended to
ensure our computer systems and applications will function properly beyond
1999. However, we cannot be sure that we will be able to promptly or correctly
address all the Year 2000 issues that could affect our systems, especially
where third parties are involved. Although we have requested assurances from
our suppliers that their products are Year 2000 compliant, some suppliers have
not responded to our request. Despite the assurances we have received, some of
our suppliers' products and services could still fail and affect our operations
in unpredictable ways. If we cannot achieve Year 2000 compliance, our systems
could be disrupted for a period of time. This would cause a loss of revenues,
including requests from customers for credits for downtime. More importantly,
any significant disruption would seriously damage our business reputation. We
might also face lawsuits for damages.
In addition, some of our customers have an option to terminate their
agreements with us if our facilities are not Year 2000 compliant by July 1,
1999. Even though we do not anticipate we will be Year 2000 compliant by such
date, we do not believe that any significant number of customers will exercise
their option to terminate their agreements with us. However, if most of the
customers who have the option to terminate were to exercise that option, our
revenues could decline.
Additionally, we cannot evaluate our customers' Year 2000 readiness. We
believe that we are not responsible for the Year 2000 compliance of our
customers' Web sites and we intend to notify them in writing of this fact and
to urge them to ensure that their sites are Year 2000 compliant. Some of our
customers' sites may fail due to Year 2000 issues and, while we believe that
the failure of any one customer's site will not affect other customers' sites
or our network, we cannot guarantee that this will be the case. Also, to the
extent that a customer's site is not functioning correctly and it is not
possible to determine that the malfunctioning is caused by the customer's
software, the customer may request service credits or we might otherwise have a
difficult time realizing the expected revenues from such a customer.
Our statements regarding the Year 2000 issue are forward-looking statements
subject to a significant number of risks and uncertainties. While we have
attempted to reasonably evaluate the Year 2000 risks that we face, these risks
include many factors which are beyond our control and we cannot be sure of the
type or extent of damages that we might experience. The worst-case scenario
related to the Year 2000 issue would be an overall failure of the national
Internet and telecommunications infrastructure and the electrical grid. If this
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happened, we would be unable to serve our customers for a period of time. Any
national disruption to these systems would have unpredictable and potentially
severe impacts on our business and financial condition.
We strongly urge you to read about our Year 2000 efforts in this prospectus
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Impact of Year 2000."
There has been no prior market for our Class A Common Stock and the market
price of the shares will fluctuate.
There has not been a public market for the Class A Common Stock. We cannot be
sure that an active public market for the Class A Common Stock will develop or
continue after this offering. Prices for the Class A Common Stock will be
determined in the marketplace and may be influenced by many factors, including
variations in our financial results, changes in earnings estimates by industry
research analysts, investors' perceptions of us and general economic, industry
and market conditions. The initial public offering price per share of the Class
A Common Stock has been determined by negotiations among us and the
representatives of the underwriters. Investors may not be able to sell their
Class A Common Stock at or above the initial public offering price.
Additionally, we believe there are relatively few comparable companies that
have publicly traded equity securities. This may also affect the trading price
of the Class A Common Stock after this offering and make it more difficult for
you to evaluate the value of the Class A Common Stock.
The market price of the shares of Class A Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to, among other
things, the following factors:
. actual or anticipated variations in our results of operations;
. announcements of technological innovations;
. new products or services introduced by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions and trends in the Internet;
. acquisitions or strategic alliances involving us, our competitors, our
suppliers or our customers; and
. general market conditions and other factors.
Further, the stock markets, and in particular the Nasdaq National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and that often have been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and reflect price to earnings ratios
substantially above historical levels. There can be no assurance these trading
prices and price to earnings ratios will be sustained. These broad market
factors may adversely affect the market price of our Class A Common Stock. In
the past, following periods of volatility in the market price of a company's
securities, securities class action litigation has often been instituted
against such companies. Such litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources,
which could harm our business.
Future sales of our common stock could adversely affect the price of our Class
A Common Stock.
After this offering is completed, shares of Class A Common Stock will be
issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the shares of Class A Common Stock sold in this
offering will be freely tradable under the Securities Act unless purchased by
our "affiliates," as that term is defined in the Securities Act. In connection
with this offering, our officers and directors and some of our stockholders
will be required to refrain from selling any shares of Common Stock for a
period of [ ] days after the date of this prospectus without the written
consent of . Additionally, shares of
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<PAGE>
Class B Common Stock could be converted to shares of Class A Common Stock and
sold in the future. The market price of our Class A Common Stock could drop due
to sales of a large number of shares of our Class A Common Stock in the market
after this offering or the perception that such sales could occur.
Historically, market prices of start-up and Internet companies' stocks have
been particularly susceptible to such fluctuations. These factors could also
make it more difficult to raise funds through future offerings of Common Stock.
You will suffer immediate and substantial dilution.
Purchasers of the Class A Common Stock being offered will experience
immediate and substantial dilution in the net tangible book value of their
Class A Common Stock. See "Dilution."
The greater voting power of our Class B Common Stock, as well as some
provisions of the Delaware Anti-Takeover Law and of our certificate of
incorporation and bylaws, could discourage a takeover of Digex and adversely
affect the price of the Class A Common Stock.
Upon completion of this offering, our board of directors will have the
authority to issue up to [ ] shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of any of our common stock may be adversely affected
by the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. We have no current plans to issue shares of
preferred stock. We are also subject to certain provisions of Delaware law
which could have the effect of delaying, deterring or preventing a change in
control of Digex, including Section 203 of the Delaware General Corporation
Law, which prohibits us from engaging in any business combination with any
interested stockholder for a period of three years from the date the person
became an interested stockholder unless certain conditions are met. In
addition, our certificate of incorporation and bylaws contain certain
provisions that, together with Intermedia's voting power and ownership of Class
B Common Stock, could discourage potential takeover attempts and make attempts
by stockholders to change management more difficult.
This prospectus includes forward-looking statements which could differ from
actual future results.
Some of the statements in this prospectus that are not historical facts are
"forward-looking statements." Forward-looking statements can be identified by
the use of words such as "estimates," "plans," "anticipates," "expects,"
"intends," "believes" or the negative thereof or other variations thereon or by
discussions of strategy that involve risks and uncertainties. Examples of
forward-looking statements include discussions relating to:
. plans to expand our existing Web site hosting services and applications
for enterprises doing business on the Internet;
. introductions of new products and services;
. proposals to build new data centers in various geographic areas;
. estimates of market sizes and addressable markets for our services and
products;
. anticipated revenues from designated markets during 1999 and later
years; and
. statements regarding the future course of our relationship with
Intermedia.
We wish to caution you that all the forward-looking statements contained in
this prospectus are only estimates and predictions. Our actual results could
differ materially from those anticipated in the forward-looking statements due
to risks, uncertainties or actual events differing from the assumptions
underlying these statements. Such risks, uncertainties and assumptions include,
but are not limited to, those discussed in this prospectus.
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USE OF PROCEEDS
We estimate the net proceeds from the sale of the shares of Class A
Common Stock we are offering will be approximately $ million, at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate such net proceeds will be approximately $ million. The principal
purposes of this offering are to obtain additional capital, create a public
market for our Class A Common Stock and facilitate our future access to the
public capital markets.
Under the terms of Intermedia's indentures, described under "Risk Factors--
Digex is controlled by Intermedia," we will be required to use all of the net
proceeds of this offering to purchase Telecommunications Related Assets.
Telecommunications Related Assets mean assets used in connection with the
business of: (1) transmitting, or providing services relating to the
transmission of, voice, video or data through owned or leased transmission
facilities; (2) creating, developing and marketing communications related
network equipment, software and other devices for use relating to (1); or (3)
evaluating, participating in or pursuing any other activity or opportunity that
is related to those identified in (1) or (2); all as determined in good faith
by the board of directors of Intermedia. We intend to use approximately $ of
the net proceeds to continue to expand and enhance our data center
infrastructure. We have entered into a letter agreement with Intermedia
pursuant to which Intermedia will purchase from us, at our cost, some of the
Telecommunications Related Assets purchased with the net proceeds of this
offering. Intermedia is expected to pay us for these Telecommunications Related
Assets to the extent necessary with funds not subject to restrictions under the
Intermedia indentures that we will use for working capital purposes and to fund
operating losses. The amounts actually expended for such capital expenditures
and working capital purposes may vary significantly, depending on a number of
factors, including our future revenues and Intermedia's availability of funds.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any such acquisition,
and we are not currently engaged in any negotiations with respect to any such
transaction. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We do not anticipate paying any dividends on any of our common stock in the
foreseeable future. Moreover, because we are subject to restrictions under the
Intermedia indentures, we are effectively prohibited from paying dividends. We
may also incur indebtedness in the future which may prohibit or effectively
restrict the payment of dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999 (1) on
an actual basis, (2) on a pro forma basis as if our recapitalization had been
effected on March 31, 1999, and (3) as adjusted to give effect to the sale of
the shares of Class A Common Stock we are offering, at an assumed initial
public offering price of $ per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses that we
will pay and the application of the estimated net proceeds from this offering.
This table should be read in conjunction with the financial statements and the
related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
March 31, 1999
--------------------------------
Actual Pro Forma As Adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents (1)................. $ -- $ -- $
======== ======== ===
Capital lease obligations, including current
maturities................................... $ 1,833 $ --
Stockholder's equity:
Class A Common Stock, $.01 par value; 6,000
authorized;
non-issued and outstanding................. -- --
Class B Common Stock, $.01 par value; 3,000
authorized;
1,000 assumed issued and outstanding....... -- --
Owner's net investment...................... 102,287 --
Additional paid-in capital.................. -- 107,393
Accumulated deficit......................... -- --
-------- -------- ---
Total stockholder's equity ................. 102,287 107,393
-------- -------- ---
Total capitalization.......................... $104,120 $107,393 $
======== ======== ===
</TABLE>
- --------
(1) We have historically participated in Intermedia's centralized cash
management system and, as a result, have not carried cash balances on our
financial statements. With the closing of this offering, we will be
maintaining and reporting cash balances in our financial statements.
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DILUTION
Our net tangible book value as of , 1999 was approximately $ million,
or $ per share of Class A and Class B Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the pro forma number of shares of Class A Common Stock
and Class B Common Stock outstanding as of , 1999. After giving effect to
the issuance and sale of the shares of Class A Common Stock offered hereby
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of , 1999 would
be $ million, or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share......................... $
------
Net tangible book value per share at , 1999........................ $
------
Increase in pro forma net tangible book value per share attributable
to new investors..................................................... $
------
Pro forma net tangible book value per share after offering.............. $
------
Dilution per share to new investors..................................... $
======
</TABLE>
The following table summarizes, on a pro forma basis as of , 1999, the
differences between the number of shares of Common Stock purchased from Digex,
the aggregate cash consideration paid and the average price per share paid by
existing stockholders and new investors purchasing shares of Class A Common
Stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- ---------------------- Price
Number Percent Amount Percent Per Share
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..
New investors..........
-------- -------- --------- --------- ---
Total................
======== ======== ========= ========= ===
</TABLE>
21
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of Digex
for the period from July 7, 1997, the date of acquisition of the Predecessor by
Intermedia, to December 31, 1997, the year ended December 31, 1998 and the
three months ended March 31, 1998 and 1999, and of the Predecessor for the year
ended December 31, 1996 and the period from January 1, 1997 to July 6, 1997.
The selected historical financial data has been derived from Digex's and the
Predecessor's financial statements which have been audited by Ernst & Young
LLP, with the exception of the unaudited financial statements for the three
months ended March 31, 1998 and 1999, and are included elsewhere in this
prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of the Predecessor as if such acquisition
had occurred on January 1, 1997. The presentation of pro forma financial
information was made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
In the following table, pro forma basic and diluted net loss per share have
been calculated assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented.
You should read the selected financial data below in conjunction with our
audited and unaudited interim financial statements and related notes included
elsewhere in this prospectus. You should also read the accompanying
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained later in this prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
---------------------------- -------------------------------------------------------------------------
Historical Historical Pro Forma Historical
---------------------------- --------------- ------------ --------------------------------------
Period from
July 7, 1997
(date of Three months ended
Year ended Period from acquisition) to Year ended Year ended March 31,
December 31, January 1, 1997 December 31, December 31, December 31, ------------------------
1996 to July 6, 1997 1997 1997 1998 1998 1999
------------ --------------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except pro forma share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 3,869 $ 9,392
Costs and expenses:
Cost of operations..... 2,002 4,149 1,739 2,808 6,710 887 1,652
Cost of services....... 684 1,817 1,611 3,428 7,044 1,107 3,952
Selling, general and
administrative........ 3,194 7,001 6,087 13,088 17,512 3,637 8,069
Depreciation and
amortization.......... 591 519 2,753 4,850 8,109 2,027 4,314
Charge off of purchased
in-process research
and development....... -- -- 15,000 (1) 15,000 (1) -- -- --
------- ------- ----------- ----------- ----------- ---------- ----------
Total costs and
expenses............... 6,471 13,486 27,190 39,174 39,375 7,658 17,987
------- ------- ----------- ----------- ----------- ---------- ----------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (27,562) (16,740) (3,789) (8,595)
Income tax benefit...... -- -- 1,440 4,710 159 -- --
------- ------- ----------- ----------- ----------- ---------- ----------
Net loss................ $(3,668) $(9,066) $ (18,558) $ (22,852) $ (16,581) $ (3,789) $ (8,595)
======= ======= =========== =========== =========== ========== ==========
Pro forma net loss per
common share:
Basic.................. -- -- $(18,558.00) $(22,852.00) $(16,581.00) $(3,789.00) $(8,595.00)
=========== =========== =========== ========== ==========
Diluted................ -- -- $(18,558.00) $(22,852.00) $(16,581.00) $(3,789.00) $(8,959.00)
=========== =========== =========== ========== ==========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 1,000 1,000 1,000 1,000 1,000
=========== =========== =========== ========== ==========
Other Data:
EBITDA before certain
charges (2)............ $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (1,762) $ (4,281)
Net cash used in
operating activities... (2,565) (7,172) (6,079) (13,251) (10,930) (2,677) (8,036)
Net cash used in
investing activities... (1,445) (1,004) (55,237) (56,241) (30,969) (2,401) (32,001)
Net cash provided by
financing
activities (3)......... 4,010 8,176 61,316 69,492 41,899 5,078 40,037
Capital expenditures.... 1,445 1,004 8,016 9,020 30,969 2,401 32,001
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
----------------- --------------------------------------------------
December 31, 1996 December 31, 1997 December 31, 1998 March 31, 1999
----------------- ----------------- ----------------- --------------
(In thousands) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital (defi-
ciency)................ $(1,237) $ (351) $ 1,231 $ 4,997
Property and equipment,
net.................... 2,599 12,930 39,059 67,488
Total assets............ 3,173 49,693 77,739 107,393
Capital lease obliga-
tions.................. 1,745 1,980 2,089 1,833
Total owner's equity.... 342 45,527 70,845 102,287
</TABLE>
- --------
(1) This amount represents a one-time charge to operations for charge off of
purchased in-process research and development related to the Predecessor in
connection with Intermedia's purchase of Business Internet on July 7, 1997.
(2) EBITDA before certain charges consists of earnings (loss) before tax
benefit, depreciation and amortization and the charge off of purchased in-
process research and development. EBITDA before certain charges does not
represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. This caption excludes
components that are significant in understanding and assessing our results
of operations and cash flows. In addition, EBITDA before certain charges is
not a term defined by generally accepted accounting principles and as a
result our measure of EBITDA before certain charges might not be comparable
to similarly titled measures used by other companies. We believe that
EBITDA before certain charges is often reported and widely used by
analysts, investors and other interested parties in the Web hosting
industry. Accordingly, we are disclosing this information to permit a more
comprehensive analysis of our operating performance relative to other
companies in our industry. EBITDA before certain charges is presented to
enhance an understanding of our operating results and should not be
construed (i) as an alternative to operating income (as determined in
accordance with GAAP) as an indicator of our operating performance or (ii)
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. See the financial
statements and notes thereto contained elsewhere in this prospectus for
more detailed information.
(3) Net cash provided by financing activities includes capital contributions of
$7,626, $64,085, $41,899, $5,078 and $40,037 for the period from January 1,
1997 to July 6, 1997, the period from July 7, 1997 to December 31, 1997,
the year ended December 31, 1998, and the three months ended March 31, 1998
and 1999, respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
Overview
Digex is a leading provider of Web site and application hosting services to
businesses and organizations operating mission-critical, multi-functional Web
sites and Web-based applications. We also offer related enterprise services,
such as firewall management and stress testing, and consulting services,
including capacity and migration planning and database optimization. We provide
the computer hardware, software, network technology, and systems management
necessary to offer our customers comprehensive outsourced Web site hosting
solutions. We currently provide such services to a diversified customer base
consisting of over 500 customers. We own and manage over 1,400 Windows NT and
UNIX-based servers in our two state-of-the-art data centers which are
strategically positioned on the east and west coasts of the United States.
Our revenues have grown at a compounded annual growth rate of 184% over the
past two years from $2.8 million in 1996 to $22.6 million in 1998. We believe
our singular focus on delivering mission-critical Web site and application
hosting solutions has been the major contributor to our growth.
Our business started in 1996 as the Web site hosting unit of Business
Internet, Inc., previously known as DIGEX, Incorporated, a company that was
principally an Internet access and Web site hosting services provider. Business
Internet went public in October 1996 under the name DIGEX, Incorporated, and
was acquired by Intermedia in July 1997. In contemplation of this offering, we
were incorporated as Digex, Incorporated in April 1999, and Business Internet
contributed our assets to the newly formed Digex, Incorporated in order to
effect a recapitalization of our business.
Revenue. Our revenues consist primarily of monthly fees from sales of our Web
site hosting and other related services. Contracts for these services are
typically between one and three years in length. In addition to Web hosting, we
have also recently begun to offer integrated business solutions, enterprise
services and consulting services and believe that we will begin to derive
increasing amounts of revenues from the sale of these services in the future.
Cost and Expenses. Cost and expenses include:
.cost of operations;
.cost of services;
.selling, general and administrative expenses; and
.depreciation and amortization expense.
Cost of operations consist primarily of the costs for our network
connectivity. We expect our network connectivity requirements to grow in
conjunction with the growth of our overall business and accordingly expect
these costs to increase in the future.
Cost of services consist principally of salaries and benefits for our
technical operations and customer service personnel and facilities
administration, including rent, maintenance and utilities to support our data
centers. We expect our cost of services to increase in dollar amount but to
decline as a percentage of revenue due to economies of scale and expected
improvements in technology and productivity.
Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultant's fees and other miscellaneous expenses. We expect selling, general
and administrative expenses in the future to increase in dollar amount but to
decline as a percentage of revenue.
Depreciation and amortization expense consists primarily of depreciation of
our data center equipment and related assets and amortization of our intangible
assets. We expect these expenses to increase due to our plans to invest
significant capital to expand our data center capacity.
25
<PAGE>
Results of Operations
The following table presents certain information derived from the audited
financial statements for the years ended December 31, 1996, 1997 and 1998 and
the unaudited financial statements for the three months ended March 31, 1998
and 1999 expressed as a percentage of revenue. For the purposes of the
following discussion and analysis, the results of operations of the Predecessor
for the period from January 1, 1997 to July 6, 1997, have been adjusted to
reflect the acquisition of Business Internet by Intermedia as if the
acquisition had occurred at the beginning of 1997 and have been combined with
the results of our operations for the period from July 7, 1997 (date of
acquisition) to December 31, 1997. This computation was done to permit useful,
complete year comparisons between the results for 1996, 1997 and 1998. However,
this pro forma information is not necessarily indicative of the operating
results we would have achieved if the Predecessor had been acquired on January
1, 1997.
<TABLE>
<CAPTION>
Predecessor Digex
------------ -------------------------------------------------
Historical Pro forma Historical
------------ ------------ ------------------------------------
Three months ended
Year ended Year ended Year ended March 31,
December 31, December 31, December 31, -----------------------
1996 1997 1998 1998 1999
------------ ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(As a percentage of revenues)
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of expenses:
Cost of operations.... 71.4 24.2 29.6 22.9 17.6
Cost of services...... 24.4 29.5 31.1 28.6 42.1
Selling, general and
administrative....... 114.0 112.7 77.5 94.0 85.9
Depreciation and
amortization......... 21.1 41.8 35.8 52.4 45.9
Charge off of
purchased in-process
research and
development.......... -- 129.2 -- -- --
------ ------ ----- ----- -----
Total costs and ex-
penses................. 230.9 337.4 174.0 197.9 191.5
------ ------ ----- ----- -----
Loss before income tax-
es..................... (130.9) (237.4) (74.0) (97.9) (91.5)
Income tax benefit...... -- 40.6 0.7 -- --
------ ------ ----- ----- -----
Net loss.............. (130.9)% (196.8)% (73.3)% (97.9)% (91.5)%
====== ====== ===== ===== =====
</TABLE>
Three Months Ended March 31, 1999 Compared to the Three Months Ended March 31,
1998
Revenue. Revenues were $9.4 million for the three months ended March 31,
1999, compared to $3.9 million for the three months ended March 31, 1998, an
increase of 142.8%. The $5.5 million increase in revenue was due primarily to
the increase in our marketing efforts, increase in the number of customers, and
increase in revenues from existing customers. We also experienced an increase
in revenue per server through upgrades and value-added services as compared to
the same period in 1998.
Cost of Operations. Our cost of operations was $1.7 million for the three
months ended March 31, 1999, compared to $.9 million for the three months ended
March 31, 1998. The $.8 million increase was due to additional network costs
resulting from our expanded customer base. We expect costs of operations to
increase in the future in conjunction with our overall growth. As a percentage
of revenue, the cost of operations decreased to 17.6% for the three months
ended March 31, 1999, as compared to 22.9% for the three months ended March 31,
1998. This decrease is due primarily to economies of scale associated with the
expansion of our data centers.
Cost of Services. Our cost of services was $4.0 million for the three months
ended March 31, 1999, compared to $1.1 million for the three months ended March
31, 1998. The $2.9 million increase was due primarily to the hiring of
additional employees in customer service, engineering, facilities
administration, and technical operations to support the growth in customers and
in conjunction with expanding our data center capacity. As a percentage of
revenue, the cost of services increased to 42.1% for the three months ended
March
26
<PAGE>
31, 1999, from 28.6% for the three months ended March 31, 1998. This increase
is related to the costs associated with the additional personnel that were
added since April 1, 1998. We expect the cost of services to increase in amount
during the remainder of 1999 due to anticipated revenue increases, but to
decline as a percentage of revenue due to economies of scale.
Selling, General and Administrative. Expenses increased to $8.1 million for
the three months ended March 31, 1999, compared to $3.6 million for the three
months ended March 31, 1998. The $4.5 million increase was due primarily to
increased departmental expenses associated with sales and marketing efforts. In
order to continue to grow our business, we hired additional sales personnel,
which resulted in increased salaries, commissions and benefits expenses as well
as recruiting fees. We also incurred additional advertising expenses and rent
costs in the first quarter of 1999, as compared to the first quarter of 1998.
Depreciation and Amortization. Depreciation and amortization increased to
$4.3 million for the three months ended March 31, 1999, compared to $2.0
million for the three months ended March 31, 1998. The $2.3 million increase
was principally due to the depreciation of server equipment and other data
center related equipment that were placed in service since April 1, 1998.
Net loss. Net losses increased to $(8.6) million for the three months ended
March 31, 1999, compared to $(3.8) million for the three months ended March 31,
1998.
Year Ended December 31, 1998 Compared to the Pro Forma Year Ended December 31,
1997
Revenue. Revenues were $22.6 million for the year ended December 31, 1998,
compared to $11.6 million for the year ended December 31, 1997, an increase of
94.9%. The $11.0 million increase in revenue was a result of our increased
marketing efforts, and market acceptance of our new products, resulting in
growth in our number of customers. We also experienced increases in revenue
from existing customers through upgrades and value added services. This
translated into higher average revenues per server. Additionally, during 1998
we increased the number of quota-bearing sales representatives.
Cost of Operations. Our cost of operations was $6.7 million for the year
ended December 31, 1998, compared to $2.8 million for the year ended December
31, 1997. The $3.9 million increase was due to increased network capacity
requirements necessary to support our growing business. In addition, we also
experienced an increase in the average network bandwidth per server. As a
percentage of revenue, the cost of operations increased to 29.6% in 1998 from
24.2% in 1997 primarily as a result of our purchasing added network capacity
per server in 1998 as compared to 1997 to improve customer Web site
performance.
Cost of Services. Our cost of services was $7.0 million for the year ended
December 31,1998, compared to $3.4 million for the year ended December 31,
1997. The $3.6 million increase was due primarily to the hiring of additional
engineering and operations staff to support our expanded customer base. As a
percentage of revenue, the cost of services increased to 31.1% in 1998 from
29.5% in 1997.
Selling, General and Administrative. Expenses increased to $17.5 million for
the year ended December 31, 1998, compared to $13.1 million for the year ended
December 31, 1997. The $4.4 million increase was due to higher commission
expenses associated with our increased sales levels as well as increases in our
administrative headcount. As a percentage of revenue, the expenses decreased to
77.5% in 1998 from 112.7% in 1997 due to economies of scale.
Depreciation and Amortization. Depreciation and amortization increased to
$8.1 million for the year ended December 31, 1998, compared to $4.9 million for
the year ended December 31, 1997. The $3.2 million increase was largely due to
increased capital expenditures for servers and other data center related
equipment.
Income Tax Benefit. Our income tax benefit decreased to $159,000 for the year
ended December 31, 1998, compared to $4.7 million for the year ended December
31, 1997. The 1998 income tax benefit represents the recognition of a portion
of the benefits associated with 1998 tax net operating loss carryforwards.
Benefits were recognized in 1998 to the extent of unused deferred tax credits
originating in previous periods.
27
<PAGE>
Net Loss. Net losses decreased to $(16.6) million for the year ended December
31, 1998, compared to $(22.9) million for the year ended December 31, 1997.
Pro Forma Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996
Revenue. Revenues were $11.6 million for the year ended December 31, 1997,
compared to $2.8 million for the year ended December 31, 1996, an increase of
314%. The $8.8 million increase in revenue was due primarily to our increased
marketing and sales efforts and the increased market acceptance of dedicated
Web site hosting as a viable outsourcing solution.
Cost of Operations. Our cost of operations was $2.8 million for the year
ended December 31, 1997, compared to $2.0 million for the year ended December
31, 1996. The $806,000 increase was due to increased network connectivity
expenses in connection with the growth in the number of managed servers. This
increase in our cost of operations was partially offset by the more favorable
network connectivity pricing we received subsequent to Intermedia's acquisition
of Business Internet in July 1997. As a percentage of revenue, the cost of
operations declined to 24.2% in 1997 from 71.4% in 1996, primarily as a result
of the favorable pricing from Intermedia.
Cost of Services. Our cost of services was $3.4 million for the year ended
December 31, 1997, compared to $684,000 for the year ended December 31, 1996.
The $2.7 million increase was due primarily to headcount increases in customer
service and operations during 1997. As a percentage of revenue, the cost of
services increased to 29.5% in 1997 from 24.4% in 1996, primarily due to the
additional customer service and operations employees who were hired in
conjunction with the expansion of our marketing efforts to support the
anticipated growth in our business.
Selling, General and Administrative. Expenses increased to $13.1 million for
the year ended December 31, 1997, compared to $3.2 million for the year ended
December 31, 1996. The $9.9 million increase was due to significant increases
in headcount in our sales, marketing, management information, and
administration departments, as well as one-time expenditures for employee
recruitment, relocation, and training. As a percentage of revenue, the expenses
decreased to 112.7% in 1997 from 114.0% in 1996.
Depreciation and Amortization. Depreciation and amortization increased to
$4.9 million for the year ended December 31, 1997, compared to $591,000 for the
year ended December 31, 1996. The $4.3 million increase was due to the
amortization of intangible assets in connection with the purchase of Business
Internet as allocated to us. This increase was also due to increased capital
expenditures for servers and other data center related equipment connected with
the continued expansion of our business.
Charge off of Purchased In-Process Research and Development. The charge for
purchased in-process research and development of $15.0 million in 1997
represents the amount of purchased in-process research and development
associated with the purchase of Business Internet by Intermedia. In connection
with this acquisition, Intermedia allocated $15.0 million of the purchase price
to in-process research and development projects that relate directly to us.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the in-process research and development had no alternative future uses.
Accordingly, these costs were expensed as a one-time charge to earnings in
1997.
The acquired projects involved development, engineering, and testing
activities associated with the completion of next generation Web site
management services. The primary effort involved the development of an
additional Web site management facility on the West Coast. The development of
technology related to this project was considered valuable as it is critical to
alleviating capacity constraints and adding significant new service
capabilities. Upon completion, the new Web site management facility was
expected to result in faster and easier installation of customers' servers as
well as efficient traffic management with significantly less overhead. Related
efforts involved the development and integration of next generation routers to
support greater transmission capacity, as well as a new software architecture
to assist in balancing traffic loads. Another valuable element involved the
development of site mirroring, the ability to create exact replicas of Web
sites at each of Digex's two sites for greater service reliability. The fair
value assigned to these projects is $15 million.
28
<PAGE>
These projects were completed during 1998. As such, there is no additional
future cost or risk expected with respect to these projects.
Income Tax Benefit. Our income tax benefit increased to $4.7 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The income tax benefit in 1997 results from our ability to recognize the
benefits of our 1997 net tax operating loss carryforward to the extent of
available and unused tax credits that arose in connection with Intermedia's
purchase of Business Internet. Such tax credits relate to the purchase
accounting differences between bases in our identifiable intangible assets.
Net Loss. Net losses decreased to $(22.9) million for the year ended December
31, 1997, compared to $(3.7) million for the year ended December 31, 1996.
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods since inception. These cash usages have been funded by permanent
contributions to capital. Such contributions amounted to $24.5 million, $41.9
million and $40.0 million in 1997, 1998, and the first quarter of 1999,
respectively.
Net cash used in operating activities in 1996, 1997, 1998 and the first
quarter of 1999 was $2.6 million, $13.3 million, $10.9 million and $8.0
million, respectively. Net cash used for operating activities in each of these
periods was primarily the result of operating losses and changes in working
capital.
Net cash used for investing activities in 1996, 1997, 1998 and the first
quarter of 1999 was $1.4 million, $56.2 million, $31.0 million and $32.0
million, respectively. Net cash used for investing activities in each of these
periods was primarily the result of capital expenditures for data center
infrastructure, as well as leasehold improvements, furniture and fixtures and
computers and other equipment. Additionally, in July of 1997, goodwill and
other intangible assets were allocated to us for separate reporting purposes,
and shown as a use of cash. Although we have plans to invest significantly in
property and equipment, we have no material commitments for such items at this
time.
We anticipate we will have significant cash requirements for several years as
we expand our data center capacity, increase our employee base to support such
operations and invest in our marketing organization. In addition, we expect to
invest significantly in the purchase of property and equipment. Our management
believes that the proceeds of this offering will be sufficient to meet our
projected cash needs into the second half of 2000. For a full description of
how we intend to use the proceeds of this offering, see "Use of Proceeds." We
intend to seek funding from external sources to meet our cash needs subsequent
to that date. There can be no assurance that such funding will be available on
terms satisfactory to us. Alternatively, Intermedia may be able to advance
funds to us to meet our requirements after that date, but it has no obligation
to do so.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. To ensure that our computer systems and
applications will function properly beyond 1999, through Intermedia, we have
implemented a Year 2000 program.
Project and State of Readiness
We have developed a five-phase plan that is designed to assess the impact of
the Year 2000 issue on our information technology ("IT") and non-information
technology ("Non-IT") and remediate as necessary the
29
<PAGE>
non-compliant components. This table represents management's best estimates
with respect to our systems as outlined below. The percentages indicate
management's best estimate of completion as of April 30, 1999:
<TABLE>
<CAPTION>
Date of Date of
Phase Completion IT Completion Non-IT Completion
---------------- ---- ---------- ------ ----------
<C> <S> <C> <C> <C> <C>
I. Preliminary Activity 100% 12/31/97 100% 12/31/97
II. Problem Determination 100% 9/30/98 100% 3/31/99
III. Plan Complete & Resources 90% 6/1/99 80% 6/1/99
Committed
IV. Operational Sustainability 50% 9/30/99 50% 9/30/99
V. Fully Compliant 50% 9/30/99 50% 11/30/99
</TABLE>
Because it is not always necessary to complete one phase prior to beginning
the next, some projects within a given phase have been started while there may
be outstanding tasks associated with prior phases. Priority is always placed on
mission critical systems.
Phase I Preliminary Activity
This phase is a phase of awareness and education. The outcome of this phase
was our understanding of the criticality, risks, size and scope of the Year
2000 problem.
Phase II Problem Determination
In this phase we performed an inventory and assessment to determine which
portions of our hardware and software would have to be replaced or modified in
order for our networks, office equipment and information management systems to
function properly after December 31, 1999. Such determinations were based in
part on representations made by hardware and software vendors as to the Year
2000 compliance of the systems we use. However, there can be no assurances that
any vendor representations received by us were accurate or complete. We also
conducted a risk assessment to identify those systems whose failure would be
expected to result in the greatest risk to our business. As of April 30, 1999,
Phase II of the plan was 100% complete with respect to IT and 100% complete
with respect to Non-IT. However, there can be no assurances that mission-
critical equipment has not been overlooked.
Phase III Plan Complete & Resources Committed
During Phase III, we designed a plan to make the necessary modifications to
and/or replace the impacted software and hardware and committed the resources
towards the execution of such a plan. While we believe we have substantially
completed our plan for achieving Year 2000 compliance, the discovery of
additional IT or Non-IT systems requiring remediation could adversely impact
the current plan and the resources required to implement the plan.
Phase IV Operational Sustainability
We are actively engaged in Phase IV, utilizing both internal and external
resources to reprogram, or replace, and test certain components of our networks
and information processing systems for Year 2000 compliance and scheduling the
installation of other necessary hardware and software upgrades. Although we
intend to conduct tests to ensure the equipment is Year 2000 compliant, we will
focus primarily on those systems whose failure would pose the greatest risks to
our operations. There can be no assurance that we have identified all mission
critical IT or Non-IT systems. We will not likely test all of our equipment and
will rely upon vendor representations, if received, where tests are not
conducted. There can be no assurance that any vendor representation will be
accurate or complete. As of April 30, 1999, Phase IV of the plan was 50%
complete for IT and 50% for Non-IT. We expect to complete Phase IV by September
30, 1999.
Phase V Fully Compliant
We plan to be fully compliant on mission-critical components no later than
November 30, 1999, which is prior to any anticipated impact on our operating
systems. Though the majority of the work will be completed
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by the third quarter of 1999, there are elements that will not be completed
(Phase V) until the fourth quarter of 1999 primarily due to limited
availability of compliant software and hardware and prioritization of mission
critical systems. As of April 30, 1999, we estimate that our remediation
efforts are approximately 55% complete overall.
We believe that we have allocated adequate resources for this purpose and
expect our Year 2000 conversion program to be successfully completed on a
timely basis. However, there can be no assurance that it will successfully
implement all of the necessary upgrades in a timely manner. We presently
believe that with modifications to existing software and conversions to new
software and hardware, the Year 2000 issue will not pose significant
operational problems for our systems or have any adverse impact on our
customers or business units. However, if such modifications and conversions are
not made, or are not completed in a timely fashion, the Year 2000 problem could
harm our reputation and business.
Costs
We have tracked Year 2000 costs on a company-wide basis by segregating our
internal and external costs and hardware and software costs. The internal costs
are comprised of employee hours, and external costs are comprised of outside
consultant costs.
The cost estimates presented below do not include system upgrades that would
otherwise result as part of our capital expenditure program. The estimated
costs of the project and the date which we have established to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, unanticipated
mergers and acquisitions, and similar uncertainties.
A summary of historical and estimated costs for the Year 2000 project are
listed below:
<TABLE>
<CAPTION>
External Internal
-------- --------
<S> <C> <C>
Historical through April 30, 1999..................... $338,076 $ 64,720
Estimated additional expenditures for remainder of
1999................................................. 630,761 222,880
-------- --------
Total............................................... $968,837 $287,600
</TABLE>
<TABLE>
<CAPTION>
Software/Hardware
-----------------
<S> <C>
Historical through April 30, 1999..................... $499,302
Estimated additional expenditures for remainder of
1999................................................. 486,698
--------
Total............................................... $986,000
</TABLE>
Risks and Contingency Plan
While we are working to test our own mission-critical systems for Year 2000
compliance, we do not control the systems of our suppliers. We are currently
seeking assurance from our suppliers and strategic business partners regarding
the Year 2000 readiness of their systems. We are currently reviewing data
provided by the Telco Year 2000 Forum to ensure that our suppliers' and
business partners' systems will accurately interact with our systems into and
beyond the Year 2000. The Telco Year 2000 Forum was formed by some of the
largest U.S. telecommunication companies to pool and share testing resources
for common network components and to perform network interoperability testing.
Importantly, we are relying on Intermedia's Year 2000 compliance efforts to
ensure that our connectivity with Intermedia is available after December 31,
1999. Notwithstanding any measures we may take, there is some risk that the
interaction of our systems and those of our suppliers or business partners may
be impacted by the Year 2000 date change. In addition, in light of the vast
interconnection and interoperability of telecommunications networks and the
Internet worldwide, to
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provide services to our customers is dependent in large part on the networks
and systems of other carriers. To the extent the networks and systems of those
carriers are adversely impacted by Year 2000 problems, our ability to service
our customers may be adversely impacted as well. Any such impact could have a
material adverse effect on our operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our results of operations, liquidity or
financial condition. The Year 2000 project is expected to significantly reduce
our level of uncertainty about the Year 2000 problem and, in particular, about
the Year 2000 compliance and readiness of our material suppliers and business
partners. We believe that, with the implementation of new business systems and
completion of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario.
Although it is not possible to assess the likelihood of any of the following
events, each must be included in a consideration of worst case scenarios:
widespread failure of electrical, gas, and similar supplies serving us,
widespread disruption of the services provided by common communications
carriers; similar disruption to the means and modes of transportation for us
and our employees, contractors, suppliers and customers; significant disruption
to our ability to gain access to, and remain working in, office buildings and
other facilities; the failure of substantial numbers of our critical computer
hardware and software systems, including both internal business systems and
systems controlling operational facilities such as electrical generation,
transmission and distribution systems; and the failure of outside entities'
systems, including systems related to banking and finance. We urge you to read
"Risk Factors--We could lose revenues and our reputation may be damaged if our
systems or those of our customers or suppliers are not Year 2000 compliant."
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers, including for lost profits,
or loss of revenue due to service interruptions, inability to fulfill
contractural obligations or bill customers accurately and on a timely basis,
and increased expenses associated with litigation, stabilization of operations
following critical system failures and the execution of contingency plans. We
could also experience an inability by customers and others to pay us on a
timely basis or at all. Under these circumstances, the adverse effects,
although not quantifiable at this time, would be material. Although the U.S.
House of Representatives has passed legislation to limit punitive damages in
lawsuits related to Year 2000 problems, we cannot predict whether such
legislation will ultimately be enacted or whether it would afford us any
meaningful protection from any potential lawsuits.
We believe that our critical systems will be Year 2000 compliant before
January 1, 2000. Intermedia's Year 2000 Executive Steering Committee convened
in first quarter 1999 and is scheduled to meet regularly throughout the year.
This committee includes members of Intermedia's management and our President,
Nancy G. Faigen. The committee is working to oversee and allocate additional
resources, if required, for the final plans for Year 2000 readiness. Having
identified our mission-critical systems and those of our key suppliers, and the
associated risks of failure to ensure that those systems are Year 2000 ready,
we are in the process of devising contingency plans which will be implemented
in the event any such systems are not Year 2000 compliant in a timely manner.
Business continuity plans are under development by us and will be ready for
implementation by the fourth quarter of 1999.
Quantitative and Qualitative Disclosure About Market Risk
Digex believes that it is not sensitive to market risk related to change in
interest rates. We do not have any borrowing arrangements and we do not use
interest rate derivative instruments.
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BUSINESS
Overview
Digex is a leading provider of Web site and application hosting services to
businesses and organizations operating mission-critical, multi-functional Web
sites and Web-based applications. We also offer related enterprise services,
such as firewall management and stress testing, and consulting services,
including capacity and migration planning and database optimization. From major
corporations to Internet start-ups, our clients leverage our services to
rapidly and cost-effectively deploy secure and reliable business solutions
including on-line banking, on-line procurement and electronic retailing. We
provide the computer hardware, software, network technology, and systems
management necessary to provide our customers comprehensive outsourced Web site
hosting solutions.
We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently provides hosting services to over 500 customers, including
American Century Investments, Budget Rent-A-Car, Forbes, J. Crew, Kraft,
Universal Studios and Nike. We operate two state-of-the-art data centers
strategically positioned on the east and west coasts of the United States. In
these data centers, we house over 1,400 Windows NT and UNIX-based servers which
we own and manage. Our revenues have grown at a compounded annual growth rate
of 184% over the past two years from $2.8 million in 1996 to $22.6 million in
1998. The following are among the key factors that we believe will continue to
drive our growth:
. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;
. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;
. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and
. a network of over 120 business partnership alliances which provide
complementary design, development and integration services for our
customers and which represent a significant source of new customer
referrals for Digex.
We believe we have established a reputation for reliable service, prompt Web
site deployment and quality customer service. To meet our customers' evolving
requirements, we continuously seek to identify, test and utilize the best
available technologies and processes. Scalability is a central element of our
operating strategy. Our architecture was specifically designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web site
hosting initiatives. We believe our singular focus of providing mission-
critical Web site hosting services, technical expertise and high quality
facilities has made us a leading provider of Web site hosting services.
Industry Background
Introduction
Use of the Internet, including intranets and extranets, has grown rapidly in
recent years. This growth has been driven by a number of factors, including the
large and growing installed base of personal computers, improvements in network
architectures, increasing numbers of network-enabled applications, the
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. As a result of this growing use, the
Internet has become an important new global communications and commerce medium.
The Internet represents an opportunity for enterprises to interact in new and
different ways with a
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large number of customers, employees, suppliers and partners. Enterprises are
responding to this opportunity by rapidly increasing their investment in
Internet sites and services.
Over the last several years, enterprises that focus solely on distributing
products and services over the Internet have emerged and, more recently,
mainstream businesses have begun to implement Web sites to complement
traditional business models and applications. Among the various factors which
continue to attract these businesses to the Internet is the transformation of
Web sites from being primarily text-based and informational to becoming
interactive, multimedia-enabled and transaction oriented. New technologies and
development tools have also led to the Web-enabling of traditional business
functions and applications such as customer service, procurement, human
resource management and sales force automation. Internet operations and
applications are mission-critical for virtually all Web-centric companies and
are becoming increasingly mission-critical for many mainstream enterprises. At
the same time, these operations and applications are becoming more complex and
challenging to operate. Ensuring the quality, reliability, and availability of
these Internet operations typically requires substantial investments in
developing Internet expertise and infrastructures. However, such a continuing
significant investment of resources is often an inefficient use of an
enterprise's limited resources. As a result, businesses are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation of their Internet solutions, and reduce Internet
operating expenses.
According to Forrester Research, approximately half of the Fortune 1000 firms
they surveyed have outsourced the management of their Web sites. Forrester
reports that companies outsource Web site management primarily for the
following reasons:
. scarcity of technical skills;
. performance;
. speed of implementation; and
. security.
We believe additional benefits of outsourcing the management of a complex Web
site include lower total costs, higher service level guarantees and reduced
risk of technology obsolescence.
Emergence of Web Hosting Service Providers
In order to establish a high quality, reliable Web site or to run a Web-based
application on the Internet, businesses must, among other things, procure and
integrate sophisticated hardware and software, develop application specific
technical skills, and have access to a secure, fault-tolerant physical location
and redundant Internet connectivity. While it is possible for a business to
provide all of these elements in-house, many companies elect to outsource all
or a portion of their Web-site operations to companies offering Web hosting
services. Web hosting companies, in general, provide various infrastructure-
related services, including secure, monitored data centers, uninterrupted power
supply and high-speed network connectivity. We categorize the market for
outsourced Web hosting services into the following:
. Shared Hosting: customers share server hardware and bandwidth with other
customers. Shared hosting provides a price competitive entry point for
individuals and businesses desiring a simple Web site.
. Collocation Hosting: customers own their hardware, software and network
equipment which is housed at the Web site hosting company's facilities.
The customers retain responsibility for the installation, management,
scalability and security of their Web sites. While collocation requires
the customer to assume the majority of the responsibilities for the
operation of its Web site, collocation has been and remains an
attractive option for Web-centric companies with advanced in-house
Internet expertise.
. Dedicated Hosting: customers are provided a complete Web site hosting
solution. Unlike collocation, the service provider supplies the
hardware, software, network equipment and support
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necessary to run the Web site. As Web sites have become more complex,
even large and technically astute businesses have found Internet
technologies and solutions a challenge to manage. For such companies,
including many Fortune 2000 companies, dedicated Web site hosting has
become a preferred alternative.
. Application Hosting: customers are provided the services of dedicated
Web site hosting along with the management of Web-enabled business
applications supporting such common business processes as customer
service, procurement, human resource management and sales force
automation. The service provider implements and configures such business
applications to meet the specific needs of its customers. For large and
small businesses alike, business process hosting offers numerous
benefits, including faster time-to-market, access to advanced
application skills and significantly lower costs of operation.
A variety of companies, such as ISPs and large systems integrators, offer
products and services that attempt to address enterprises' Internet outsourcing
needs. However, we believe the solutions offered by these companies fail to
address certain elements required to ensure that customers' mission-critical
Internet operations are reliable, scalable and responsive. ISPs have
traditionally focused on providing Internet access and many have not developed
the technical expertise and physical resources to support mission-critical Web
sites. In addition, many large systems integrators focus primarily on large
enterprises and traditional information technologies. These firms often lack
the network and Internet expertise required to provide mission-critical
solutions. As a result, we believe a significant opportunity exists for a
highly-focused company to provide a combination of complex Web site hosting,
outsourced applications management and professional consulting services that
enable businesses to implement reliable, high performance and cost effective
mission-critical Internet solutions.
The Digex Solution
We focus primarily on providing dedicated Web site and application hosting
services. Our core competency is developing and managing mission-critical Web
solutions for Fortune 2000 companies and Web-centric businesses. We believe we
are uniquely positioned to assist such businesses in optimizing the potential
of the Internet and their Internet-related applications by providing our
customers with the following key advantages:
A Comprehensive Suite of Web Site and Application Hosting Services. We
provide a suite of services that enable companies to conduct business on the
Internet. Using a large, multi-specialized technical staff of certified
engineers, and through the security and reliability of our state-of-the-art
data centers, we provide the services and expertise to ensure secure, scalable,
high-performance operation of mission-critical Web sites 24 hours a day. These
services include:
. Web site management services such as operating and supporting Windows NT
and UNIX-based dedicated servers, providing server collocation, and
private network connectivity;
. integrated business solutions, which involve the hosting of leading Web-
enabled business software applications such as electronic commerce,
sales force automation and customer care;
. enterprise services such as firewall management, stress testing and
customized Web site activity reporting; and
. consulting services including capacity planning, disaster recovery
planning, migration planning and database optimization.
As part of our services, we provide the installation and maintenance of
industry-leading hardware and software, core technical expertise, high-volume
backup and recovery systems and 24 hours a day monitoring by our Server
Operations Center ("SOC").
High-Performance Internet and Private Network Connectivity. We provide high
performance network connectivity services for our customers' Web sites as well
as direct private networking options for secure "back-end" network connections
to private corporate networks and information systems. Through our network
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services agreement with Intermedia, we offer superior Internet connectivity
that provides the following direct benefits to customers:
. connectivity to a diversely redundant high-speed national network via
Intermedia, a tier-one ISP;
. use of all of Intermedia's public and private peering relationships
permitting direct exchange of traffic with a significantly large number
of carriers and ISPs;
. use of all of Intermedia's regional direct connections to major ISPs,
dial-up carriers, and content service providers; and
. service level agreements guaranteeing high availability and performance.
Digex also intends to provide diversified connectivity options to other major
backbones in addition to Intermedia, offering customers an additional service
enhancement. We also intend to establish and maintain our own public and
private peering arrangements.
Responsive Customer Care and Technical Support. We strive to provide superior
customer service. This includes 24-hour a day direct access to a staff of over
150 customer care and technical support personnel and a variety of proactive
monitoring services from our state-of-the-art SOC. We believe this level of
customer support significantly differentiates Digex in the marketplace.
At our SOC, we monitor and report on the health of servers, networks, and
security devices managed by Digex. The SOC uses a variety of technologies and
tools to monitor specific network devices, such as routers, switches and load
balancing equipment. The SOC oversees a large number of server resources, such
as CPU, system processes, log files, TCP ports and disk space, and security
devices, such as firewalls.
Secure, Fault-Tolerant Data Centers. Our data centers have been engineered to
meet the highest expectations of our most demanding customers across our target
markets, including the particularly stringent requirements of the financial
industry.
Our data centers contain multiple, free-standing computer rooms to provide
containment and isolation. Separate mechanical rooms adjacent to each computer
room house cooling and mechanical equipment, eliminating the possible
introduction of liquid into the computer room from equipment leakage. We use
redundant uninterruptable power supply systems and redundant generators to
ensure that the power system is capable of maintaining power to the data center
in the event of any component failure. State-of-the-art physical security has
been implemented through tightly controlled security zones requiring both card
and biometric identification. Over 100 surveillance cameras record all movement
through the data centers and security guards provide real-time visibility.
Cooling and environmental controls for each data center are designed to monitor
and ensure proper temperature and humidity levels. Finally, all
telecommunications connections enter the data centers through multiple points
from diverse service arrangements to ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.
Predictable Monthly Fees. We provide our services for predictable monthly
fees, enabling our customers to accurately budget costs for Web site hosting
services. These fees are typically contracted as part of one, two or three-year
agreements. These agreements often provide service level guarantees and permit
technology upgrades at any time during the life of a contract.
Digex Strategy
Our objective is to maintain our leadership position in the industry and
continue to shape and lead the global market for hosting complex Web sites. We
intend to accomplish this by delivering secure, scalable, high-performance Web
site hosting solutions. Our business strategy focuses on the following:
Expand Our Premier Web Hosting Capabilities. We are currently expanding the
capacity of our east and west coast data centers. We intend to continue to add
data center capacity over the next five years as justified
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by customer demand. We believe our ability to readily grow and scale our
operations while simultaneously maintaining the highest service levels will
allow us to continue to attain higher revenues, lower marginal unit costs and
higher operating margins. The following are among the key initiatives we have
instituted to maintain the quality and scalability of our operations:
. Our Distributed Internet Server Array ("DISA") architecture is
specifically designed to facilitate Web site operating scalability. DISA
unifies interrelated layers of hardware and software around industry
standard solutions. Our customers are strongly encouraged to adopt the
DISA architecture in implementing their Web initiatives. The consistency
and reliability afforded by our DISA architecture facilitates rapid and
cost-efficient implementation of our customers' Web hosting initiatives.
Other Web hosting companies typically have opted not to standardize
their operating architectures. The resulting multiple architectures
significantly complicate and limit the flexibility of their operations.
. Our technical staff includes over 40 Microsoft certified engineers, as
well as technical experts certified by Cisco Systems and Sun
Mircosystems. We believe this makes our technical staff among the most
highly skilled and trained in the Web hosting industry. Based on
comments by our customers, we believe our technical staff affords us a
competitive advantage and has been instrumental in attracting many of
our Fortune 2000 customers. In addition, we believe the depth and scope
of our staff's technical skill base is essential to our ability to
maintain our high quality service levels. To attract and retain these
individuals, we offer competitive financial incentives, in-house and
external training programs, and the opportunity to work with cutting-
edge technology.
. The Digex Central Nervous System (DCNS) is our end-to-end integrated
customer relationship management system. Currently, DCNS provides
support for key customer care functions like sales management, contract
management, order entry, product fulfillment, problem management, and
billing. It serves as a repository for information about the customer
and a customer's Web site. Future enhancements include Web-enabling
DCNS. This will allow customers to access and view the status of their
account on-line. We believe this functionality will increase customer
satisfaction while reducing customer service costs.
Address Industry-Specific Customer Needs. Our marketing and operating
strategy is designed to exploit our expertise in addressing the unique,
industry-specific needs of our targeted customer base. This targeted customer
base is comprised of companies and agencies in the following industries:
financial services and insurance, media and entertainment, manufacturing,
travel and hospitality, retail and distribution, technology and communications,
healthcare, and government. We have chosen to focus on these specific
industries because we believe they have the highest propensity to outsource
complex, mission-critical Web sites. We believe this strategy provides a number
of benefits including:
. the ability to realize cost efficiencies by developing industry-specific
Web solutions that form the basis for serving other customers in the
same or similar industries;
. the ability to develop industry expertise which will enable us to
proactively address the needs of our customers, thereby differentiating
Digex from the competition; and
. development of a referenceable customer base that validates our
industry-specific Web solutions and expertise.
In conjunction with this strategy, we have designated teams consisting of
individuals from our sales, technical and customer support divisions to focus
exclusively on those specific industries which comprise our target market.
Develop Next Generation Service Offerings. As the underlying technology and
functionality of Web-based products evolve, we believe customers will
continuously demand new service offerings. We believe the depth of our Web site
management skills positions Digex to be a leading provider of next generation
Web-based service offerings. The following are among the new service
initiatives we are currently pursuing:
. Web-Enabled Business Applications. We believe Web hosting will become a
vehicle and platform for operating and supporting leading packaged
software applications that can be used for such common business
processes as e-commerce, sales force automation, customer support and
human
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resource management. We intend to continue partnering with various
software developers, systems integrators and information technology
firms that own and develop these business applications by providing the
Web hosting platform to deliver their applications over the Web. To
date, we focus on providing applications which address the following
areas:
. electronic commerce solutions, such as on-line storefronts, including
electronic catalogs and shopping carts;
. business intelligence solutions, such as analytic applications to
mine corporate data warehouses;
. relationship management solutions, such as customer acquisition,
self-service, and self-sales applications;
. human resources solutions, such as recruiting, training and on-line
benefits applications;
. finance and accounting solutions, such as billing and time-tracking
applications; and
. supply chain management solutions, such as procurement, trading and
other intercompany applications.
. Value-added, Recurring Services. We have developed various value-added
services, which we believe significantly enhance the availability and
effectiveness of our customers' Web sites. Examples of these services
are testing, security, database, reporting and intranet service
offerings. We intend to continue developing services that improve the
effectiveness of Web sites and optimize their performance.
. Proactive Customer Service Management. We believe our hardware and
software monitoring capabilities uniquely position us to anticipate the
Web site hosting needs of our existing customers. We are developing new
tools which will both facilitate the identification of problems with a
customer's existing Web site hosting platform and alert client managers
to the Digex services that can be used to address these issues and
optimize Web site performance.
Expand Capabilities Through Selective Strategic Partnering and
Acquisitions. We currently have partnership alliances with over 120 Web design
and development companies and interactive media agencies. These businesses
typically partner with Digex because our high quality services support and
augment, rather than compete with, their own product and service offerings.
Together with our business partners, we can provide our customers with end-to-
end Web site solutions. In 1998, we created the Digex e-Link Partner
Program(TM), which continues to attract leading interactive media and Web
development companies such as Proxicom, Sapient, Studio Archetype and
Agency.com. In addition, during the second quarter of 1999, we are planning to
launch the Digex app-Link Partner Program(TM) in order to expand our
partnership alliances to include systems integrators, value-added resellers
and consultants. Our partnership programs provide a valuable, cost-effective
channel for our services as well as a highly productive customer referral
source.
In addition, we may seek to opportunistically acquire companies which we
believe will enable us to cost-effectively augment our existing products and
services, technology, infrastructure, skill set, geographic presence or
customer base.
Digex Services
We offer a full range of complementary value-added services designed to
handle the rapidly evolving requirements of complex Web sites. Our services
include the following:
. Web site management services;
. integrated business solutions;
. enterprise services; and
. consulting services.
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Web Site Management Services
Dedicated Web Hosting Services. We offer dedicated Web hosting services
designed to enable reliable, scalable, mission-critical Web sites, based on
industry-leading technologies and offering high service level guarantees. We
operate both Windows NT and UNIX-based servers exclusively using hardware from
Compaq and Sun. By standardizing around the hardware produced by these two
vendors, we are able to quickly, easily and cost-effectively upgrade, configure
and implement the new hardware necessary to accommodate our customers' growing
needs for higher computing speeds and capacity. We offer a number of services
to dedicated Web site management customers to ensure ease of implementation,
security, performance and scalability. Specifically, we provide:
. installation and maintenance of Web sites on Digex server hardware;
. installation and maintenance of Microsoft Windows NT and/or UNIX
operating systems tested and configured by Digex to ensure optimal
Internet performance;
. unlimited help desk support available 24 hours a day with access to
certified technical professionals;
. substantial inventory of parts on-site for rapid upgrading and
maintenance of hardware and software;
. industry and vendor security alerts and maintenance;
. backup and recovery of system information, user information and customer
content to ensure protection against data loss from disaster, hardware
failure, or administration errors; and
. secure remote administration capabilities for easy and ubiquitous remote
management.
Server Collocation Service. Digex's server collocation services provide our
customers with a cost-effective means to collocate customer-owned hardware
within a Digex data center and to benefit from Digex's secured facilities and
network connectivity. Customers also receive 24 hour-a-day physical and remote
access to their equipment.
Data-Center within a Data-Center. The Data-Center within a Data-Center
("DC/DC") service will provide a physically separated, monitored and secured
space within our data centers. DC/DC offers the following specialized features:
. dedicated glass-encased raised floor space with separate logged palm-
scan DC/DC entry;
. dedicated environmental control and monitoring;
. dedicated network bandwidth options;
. dedicated security options;
. standard rack equipment; and
. special rates on Digex services.
Intelligent Networking. We offer a variety of intelligent networking services
to customers with multiple servers, including load balancing and geographical
distribution of network traffic. We expect demand for this product to increase
as more customers move to multiple server solutions.
Private Networking. Our private networking services are primarily used to
securely connect a customer's Web site at Digex to their private corporate
network or information system.
Integrated Business Solutions
Our Integrated Business Solutions provide customers with Web site hosting
services designed specifically to operate and support leading packaged software
applications. We partner closely with various business applications vendors to
build valuable skills around their applications with an emphasis on the
operation of the application on the Internet.
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Our Integrated Business Solutions services specifically target six distinct
functional solution areas: electronic commerce, business intelligence,
relationship management, human resources, finance and accounting solutions and
supply chain management. We provide application rental, application hosting
services and compelling service level guarantees to our customers. The key
benefits of these solutions include:
. installation and maintenance of pre-configured and pre-tested bundles of
the solution on a hardware configuration that handles predicted user
capacity;
. application software rental and upgrades;
. dedicated support personnel;
. advanced data recovery and storage options for the specific application
and database; and
. special rates on other Digex products and services.
Our Integrated Business Solutions services are detailed as follows:
Electronic Commerce Solutions. Our electronic commerce solutions enable
businesses to directly sell products and services over the Internet to create
an on-line storefront, including electronic catalogs and shopping carts. These
solutions include options for order processing, fulfillment, invoicing, and
payment. Digex's private networking products permit businesses to connect their
commerce Web sites to various payment processing centers and private corporate
information systems ensuring customers secure routing of payment information
and transaction processing.
The Pandesic e-Business Solution(TM) is our first electronic commerce
solution offering. Pandesic is a joint venture between SAP and Intel, offering
end-to-end commerce functionality for businesses. Today, Digex manages over 45
customers using the Pandesic solution, representing over 100 servers.
Business Intelligence Solutions. Our business intelligence solutions will
provide customers fast and easy access to corporate information using analytic
applications to mine corporate data warehouses. By leveraging the Internet and
Digex's business intelligence solutions, businesses empower executives,
employees, shareholders, partners, and others with access to up-to-date
information. We believe these applications facilitate sophisticated analysis
and real-time monitoring of important indicators to assist companies in their
decision making processes.
Relationship Management Solutions. Our relationship management solutions will
provide customers with the ability to extend critical business information to
sales personnel and customers. These solutions include customer acquisition,
self-service and self-sales applications.
Human Resources Solutions. Our human resources solutions will provide
customers with the ability to take advantage of the Internet to extend human
resource functionality to employees anywhere, anytime. Companies will be able
to improve their ability to manage open positions, performing activities such
as recruiting and training and to allow employees to access on-line and modify
benefits and other personal information.
Finance and Accounting Solutions. Our finance and accounting solutions will
provide customers with support for accounting, billing, compensation, time
tracking, and other financial management functions. For example, Digex can
manage a company's time and expense reporting application to provide global
access for employees to enter time sheets and expense reports.
Supply Chain Management Solutions. Our supply chain management solutions will
provide customers with application solutions that help businesses improve the
effectiveness and reliability of a company's supply chain system. Using the
Internet as the vehicle, these solutions can extend a company's supply chain
management system to otherwise cost-prohibitive partners, improving performance
and lowering costs.
40
<PAGE>
Enterprise Services
Our enterprise services help companies deploy and maintain effective Web
sites. We believe these value-added, repeatable services will become
increasingly important to our customers as they look to ensure a higher level
of Web site availability, security and reporting. Our enterprise services
include the following:
Testing Services. Our testing services aim to identify problems that could
degrade the expected performance and availability of a customer's Web site. For
example, our stress testing services simulate users accessing a Web site to
provide information for isolating problems, optimizing performance and
accelerating the deployment of Web sites.
Reporting Services. Our reporting services are designed to provide timely,
reliable information about user activity on a customer's Web site. Businesses
can use these reports to assess the effectiveness of their Web sites and to
increase their knowledge of the preferences, habits and demographic
characteristics of their Web site visitors.
Security Services. Our security services are designed to ensure the security
of a customer's Web site. These services include firewalls, encryption and
authentication devices.
Database Services. Our database services provide the installation,
configuration, maintenance and support of leading databases.
Consulting Services
Our consulting services provide customized assistance to customers with
unique architecture, deployment or maintenance requirements. These services
include high-availability design, performance tuning, site architecture
assessment, migration planning, capacity planning, disaster recovery planning
and database optimization. Our consulting services typically assist customers
with limited resources or who lack Internet and technical expertise. Our
consulting engagements typically range from a few hours to a few weeks
depending on the complexity and volume of the services needed. We believe our
consulting services will play an increasingly important role in supporting the
implementation and maintenance of complex Web sites as customers continue to
rapidly adopt emerging technologies.
Customers
We have a large and diverse customer base ranging from Fortune 50 companies
to small and medium size businesses that rely heavily on the Internet. Our
customers are primarily located within the United States. As of April 1, 1999,
we were serving over 500 customers, covering most major industries. Our
customer contracts typically range in duration from one to three years. The
majority of our customers operate in industries which fall within our key
targeted industry segments and include the following well-known companies:
<TABLE>
<CAPTION>
Financial
Services and Media and
Insurance Entertainment Manufacturing Retail and Distribution
- ------------ ----------------- ------------------------ -------------------------
<S> <C> <C> <C>
Allstate
Insurance BBC America ALCOA American Eagle Outfitters
American
Century
Investments The Economist Dole Food Company Authentic Fitness
Ernst &
Young LLP Forbes E&J Gallo Winery Campmor
Northwestern
Mutual Life
Insurance Edmund's Kraft Foods J. Crew
Progressive
Insurance
Companies Inc. Online Liz Claiborne Oakley
Thomson
Financial
Services Miller Freeman Nike WW Grainger
LendingTree Universal Studios Nissan
Sara Lee Corporation
<CAPTION>
Technology and
Government Communications Healthcare Travel & Hospitality
- ------------ ----------------- ------------------------ -------------------------
<S> <C> <C> <C>
U.S. Postal
Service Celarix America's Health Network Budget Rent-A-Car
U.S. Marine
Corps Compaq Bally Total Fitness The Travel Company
U.S.
Department
of
Agriculture JAVU Technologies Claimsnet
Microsoft
</TABLE>
In the past few years, Digex's growth has come from new clients, as well as
existing clients whose Web sites have evolved to become increasingly more
strategic to their overall business goals and objectives.
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<PAGE>
Sales, Marketing and Service Delivery
Our sales objective is to achieve broad market penetration by focusing on
market segments which, we believe, have both a high propensity to outsource and
to deploy complex, mission-critical Web sites. We sell our services directly
through a highly-skilled professional sales force and receive referrals through
an extensive network of business partners.
Direct Sales. As of April 1, 1999, our direct sales force consisted of over
60 experienced, quota-bearing sales representatives. We have organized the
sales force into three units: major accounts, mid-market/Web-centric, and
alternate channel. The major accounts unit focuses on Fortune 2000 companies
and is aligned by industry. The mid-market/Web-centric unit addresses the large
and growing number of referrals coming from our regionally based business
partners, and is organized into three geographic regions: eastern, central and
western United States. Our alternate channel sales group works closely with our
business alliance solutions partners, such as Pandesic. Supporting each of
these units is a site engineering team that provides pre-sales technical
support, including requirements gathering, configuration support, site
architecture, and project management.
Strategic Partners--The Digex e-Link Partner ProgramTM. In 1998, we created
the Digex e-Link Partner Program(TM), which, we believe, has attracted some of
the leading interactive media and Web site development companies to partner
with Digex. To date, our business partners include such companies as Proxicom,
Agency.com, Xerox Connect and T3 Media. We currently have over 120 business
partnership alliances that are a significant source of sales leads and
opportunities. These business partners include Web site developers, Web site
designers, interactive and new media agencies, and systems integrators. We
collaborate, instead of compete, with our partners and complement each other's
skills in an effort to bring the best overall solution to our customers.
Typically, in these collaborative relationships, we focus on Web site hosting,
while our strategic partners concentrate on Web site design, development and
systems integration.
The success of this program has encouraged us to introduce the Digex app-
Link Partner Program(TM). The Digex app-Link Partner Program(TM) will target
consultants and systems integrators, value-added hardware resellers and
application solution providers. Our partnership programs provide incentives to
refer business to us, and we often work together with our partners directly
with the client. Our strategy is to continue leveraging our partners as a
referral channel and a source for identifying market trends and emerging
customer requirements.
Marketing. We intend to continue our transformation into a highly focused,
market driven company. Our marketing organization is responsible for building
Digex's brand awareness, identifying key target markets and developing
innovative services to meet the evolving demands of the marketplace. Another
objective of our marketing effort is to stimulate the demand for Digex services
through a broad range of marketing communications and public relations
activities. Our primary communication vehicles include advertising, trade
shows, direct response programs, event sponsorship and the Digex Web sites.
Data Center Infrastructure
We presently operate two highly secure, fault-tolerant data centers
specifically designed for the 24-hour a day hosting of Web sites and Web-based
applications. Our east coast data center is strategically located near major
network access points in the Washington, D.C. metropolitan area. Our west coast
data center is situated near the western network access points and the
headquarters of many of our strategic technology providers. We are expanding
our total data center capacity to approximately 200,000 square feet in 1999,
and expect to add additional data center capacity over the next five years as
appropriate to meet anticipated customer and market demand.
Our data centers combine the predictability and control of traditional
mainframe-based data centers with the network access and capacity required for
today's Internet-based computing. Our data centers are designed to provide
consistently high service levels while permitting customers to rapidly deploy
new and strategic applications without substantially increasing cost or
incurring risk.
42
<PAGE>
The physical infrastructure and security controls of our data centers have
been designed to support rigorous requirements for secure data storage and
processing. Specifically, our data centers offer the following major physical
benefits to our customers:
.state-of-the-art physical security;
.multi-redundant mechanics, utilities and environmental controls;
.high-performance multi-network points of presence (WebPOPs); and
.fully-integrated customer work-areas.
State-of-the-art physical security. Our data centers include multiple
separate computer rooms offering customers a high degree of containment and
isolation from accidents or disasters occurring within or outside of each data
center. Physical security has been implemented through tightly controlled
security zones requiring both access card and biometric identification. Each
data center has five security zones that require separate access levels to gain
entry. Our highest security zones include computer rooms physically constructed
as a building-within-a-building, with fire suppression and other controls
separate from the remainder of the data center. Fencing above the ceiling and
below the raised floor isolate each security zone. Over 100 surveillance
cameras record all movement through the data centers and security guards
provide real-time visibility. Our cooling towers are surrounded by security
fences and monitored by cameras. Our dual 20,000 gallon diesel fuel tanks are
safely buried underground.
Multi-redundant mechanics, utilities and environmental controls. Within each
data center, separate mechanical rooms exist adjacent to each computer room.
These mechanical rooms house all cooling and mechanical equipment, eliminating
the possible introduction of liquid into the computer rooms from equipment
leakage. We use redundant uninterruptable power supply systems and redundant
generators, to ensure the power system is capable of maintaining power to the
data center in the event of any component failure. Cooling and environmental
controls for each data center are designed to monitor and ensure proper
temperature and humidity.
High-performance WebPOPs. Our data centers include physically separated
WebPOPs, which are network points of presence within our data centers. These
WebPOPs provide high-performance, reliable networking connectivity to multiple
national Internet backbone carriers for our customers. Telecommunications
circuits enter the data centers through multiple points from diverse service
providers. Multiple points of presence ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.
Fully-integrated customer work areas. Our data centers include separate,
private customer work areas. These work areas are isolated from the security
zones that house our servers, permitting customers to work on on-site as
necessary. These work areas provide computing and personal resources, such as
customer breakrooms and wash areas.
Competition
The market served by Digex is highly competitive. There are few substantial
barriers to entry, and we expect to face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include:
. quality of services and scalability of infrastructure;
. network capacity, reliability, security and adaptability to new
technologies;
. Internet system engineering expertise;
. quality of customer service and support;
43
<PAGE>
. relationships with marketing partners and vendors;
. variety of services offered;
. price;
. product innovation;
. financial resources; and
. brand name.
Our current and potential competitors in the market include:
. Web hosting service providers;
. local, regional, national and international ISPs;
. local, regional, national and international telecommunications
companies; and
. large information technology outsourcing firms.
Our competitors may operate in one or more of these areas and include
companies such as AboveNet Communications, AT&T, Cable & Wireless, Concentric
Network, EDS, Exodus Communications, Frontier/GlobalCenter, Globix, GTE, Intel,
Level 3 Communications, MCI WorldCom, PSINet, IBM, Qwest Communications
International, and USinternetworking.
We believe our experience and reputation for delivering high quality, complex
Web site hosting services differentiate us from our key competitors. We focus
on our core competency of Web site and application hosting as opposed to
offering hosting as a complement to a wide range of communication services. We
believe we have defined and offer the industry's most complete set of functions
required to configure, engineer, implement and maintain complex, transactional
Web sites. We believe our DISA architecture, data centers, and technical team
distinguish us from our competition and enable us to provide among the highest
quality end-to-end complex Web site hosting solutions.
Intellectual Property Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We have no patented
technology that would bar competitors from our market. We also rely on certain
technologies we license from third parties, such as Microsoft, Netscape and
Micromuse. There can be no assurance these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could harm our
business. However, other than our trademarks and service marks, we do not
believe that the loss of any particular one of our intellectual property rights
would harm our business.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to or commerce on the Internet.
Congress recently enacted the Digital Millennium Copyright Act, which became
effective in October 1998. The Digital Millennium Copyright Act includes a
limitation on liability of on-line service providers for copyright infringement
for transmitting, routing, or providing connections, transient storage, caching
or storage at the direction of a user. This limitation on liability applies if
the service provider had no actual knowledge or awareness that the transmitted
or stored material was infringing and if certain other conditions are met.
Since this law is new, we are unsure of how it will be applied to limit any
liability we may face in the future for any possible copyright infringement or
copyright-related issues. This new law also requires ISPs to follow certain
"notice and take-down" procedures in order to be able to take advantage of the
limitation on liability. We have not yet implemented such procedures nor
evaluated the cost of complying with them. However, our customers are subject
to an acceptable use policy which prohibits them from posting, transmitting or
storing material on
44
<PAGE>
or through any of our services which, in our sole judgment is (1) in violation
of any local, state, federal or foreign law or regulation, (2) threatening,
obscene, indecent or defamatory or that otherwise could adversely affect any
individual, group or entity or (3) in violation of the intellectual property
rights or other rights of any person. Although this policy is designed to
promote the security, reliability and privacy of our systems and network, there
is no assurance that our policy will accomplish this goal or shield us from
liability under the Digital Millennium Copyright Act.
Despite enactment of the Digital Millenium Copyright Act, the law relating to
the liability of on-line services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon on-line services companies and Internet access providers are
currently pending.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
in turn could harm our business. The adoption of any of these types of laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase our cost of doing business or
in some other manner harm our business.
Due to the increasing popularity and use of the Internet, it is likely a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business or
in some other manner harm our business. In addition, applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies.
Employees
As of April 1, 1999, we employed approximately 436 full-time employees. None
of our employees are covered by a collective bargaining agreement. We believe
that our employee relations are good.
Properties
We currently share leased space with Intermedia totaling approximately 80,000
square feet in two buildings in Beltsville, Maryland. These facilities house
our east coast data center, our executive and administrative offices, and our
regional sales office. At the end of June 1999, we expect to relocate to two
different leased buildings in Beltsville, Maryland occupying a total of
approximately 122,000 square feet. We also lease a total of approximately
76,000 square feet in two other buildings--one in Cupertino, California, and
one in San Jose, California. These house our west coast data facilities and
regional sales office. We believe that our properties are adequate and suitable
for their intended purposes.
Legal Proceedings
We do not believe that there are any pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.
45
<PAGE>
MANAGEMENT
The following sets forth as of April 27, 1999 the name, age and position
within Digex of our current directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David C. Ruberg......... 53 Chairman of the Board
Nancy G. Faigen......... 42 Director; President and Chief Executive Officer
Bryan T. Gernert........ 32 Vice President, Sales, Consulting and Client Services
Marthe S. Lattinville-
Pace................... 45 Vice President, Human Resources
Robert E. London........ 37 Vice President, Marketing Communications
Robert B. Patrick....... 27 Vice President, Marketing and Product Development
Mike P. Renner.......... 36 Vice President, Technical Operations
John F. Scott........... 29 Vice President, Finance
John C. Baker........... 49 Director
Philip A. Campbell...... 62 Director
George F. Knapp......... 67 Director
Pierce J. Roberts,
Jr. ................... 52 Director
</TABLE>
Executive Officers and Directors
David C. Ruberg has served as Director of Digex since April 1999. From
February 1998 to December 1998, he served as President and Chief Executive
Officer of Digex. Mr. Ruberg has served as President, Chief Executive Officer
and a director of Intermedia since May 1993, and as Chairman of the Board of
Intermedia since March 1994. From September 1991 to May 1993, he was an
independent consultant to the computer and telecommunications industries. From
1989 to September 1991, Mr. Ruberg served as Vice President and General Manager
of the Telecommunications Division and then of the Personal Computer/Systems
Integration Division of Data General Corporation, a computer manufacturer. From
1984 to 1989, Mr. Ruberg served as a Vice President of TIE Communications,
Inc., a manufacturer of telecommunications equipment. Mr. Ruberg received his
B.A. in mathematics from Middlebury College and his M.S. in computer science
from the University of Michigan.
Nancy G. Faigen has served as Director of Digex since April 1999 and as
President and Chief Executive Officer since December 1998. From January 1998 to
November 1998, she served as Vice President of IBM e-business solutions, a
business unit of IBM. From October 1996 to January 1998, she served as Vice
President of Global Web Solutions of IBM. From November 1991 to October 1996,
Ms. Faigen served in various managerial and executive positions at IBM, most
recently as Executive Assistant to the CEO, and with the Sales and Services
Division, as Director of Strategy and Business Unit Director. Ms. Faigen holds
a B.A. in Drama and Fine Arts from Dartmouth College.
Bryan T. Gernert has served as Vice President of Sales, Consulting and Client
Services of Digex since October 1998. From September 1996 to September 1998, he
served as Vice President of Sales and Distribution of Digex. Mr. Gernert joined
Digex in April 1995 as Sales Account Manager and was promoted to Director of
Sales in March 1996. From January 1993 to April 1995, he served as National
Sales Manager of Evergreen Information Technologies, Inc. From June 1989 to
January 1993, he was Director of Acquisitions for RCI, Inc. Mr. Gernert holds a
B.S in Business Administration with a concentration in Finance from the
University of Delaware.
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Marthe S. Lattinville-Pace has served as Vice President of Human Resources of
Digex since April 1999. From January 1999 to March 1999 she served as Vice
President, Human Resources of ManorCare Realty. From April 1994 to March 1999,
she served as Director Human Resources, Europe, India & the Middle East for
Waters Corporation. She also served as Director Human Resources & Building
Administration of NYNEX Mobile Communications, from 1992 to 1994. Mrs.
Lattinville-Pace holds a Master in Business Administration from the Haute
Etudes Commerciales of the University of Montreal, a Bachelor in Industrial
Relations from University of Montreal and a Psychology Diploma from Old
Montreal College.
Robert E. London has served as Vice President of Marketing Communications of
Digex since December 1997, and Vice President of Marketing from April 1997 to
December 1997. From January 1995 to April 1997, he served as President of
London, Ink, a marketing communications and consulting firm in Washington, D.C.
From April 1988 to December 1994, he served as Senior Manager of Marketing of
MCI Communications. Mr. London holds a B.S. in Marketing from the University of
Maryland.
Robert B. Patrick has served as Vice President of Marketing and Product
Development of Digex since September 1998. Previously, he was Director of
Business Development for Digex from July 1997 through September 1998. He joined
Digex in September 1996, as Manager of Technical Operations. From June 1993 to
June 1996, he served as a Senior Consultant for Andersen Consulting. From
October 1988 to June 1993, he served as a Senior Computer Specialist for the
Federal Bureau of Investigation. Mr. Patrick holds a B.S. in Management
Information Systems from George Mason University.
Mike P. Renner has served as Vice President of Technical Operations of Digex
since February 1999. From September 1998 to February 1999, he served as Vice
President of Professional Services of Windward Consulting Group, directing
their core technology management consulting services. From July 1998 to
September 1998, he was an independent consultant specializing in high-level
technology management. From August 1997 to July 1998, he served as Director of
Information Technology Solutions of Edgemark Systems, focusing on transitioning
the company from a value-added reseller technical support system to an
information technology solutions delivery organization. From July 1997 to
August 1997, he was an independent technology consultant. From June 1993 to
July 1997, he served as Director of Technical Operations of three companies of
Thomson Corporation: CDA Investment Technologies, Thomson Technology Services
Group and Thomson Electronic Information Resources. Mr. Renner holds a B.S. in
Management Information Systems from James Madison University.
John F. Scott has served as Vice President of Finance of Digex since November
1998. Previously, he was the Director of Strategic Planning from July 1997
through September 1998. From August 1995 to July 1997, he served as a
telecommunications industry consultant with Andersen Consulting, Washington,
D.C. From May 1993 to August 1995, he served as a Senior Financial Officer of
Polysonics Corp. Mr. Scott holds a B.S. in Finance and a B.A. in International
Business from Georgetown University.
John C. Baker has served as Director of Digex since April 1999. He has served
as Director of Intermedia since February 1988. Mr. Baker has been the President
of Baker Capital Corp., a multi-national venture capital firm, since October
1995. He served as Senior Vice President of Patricof & Co. Ventures, Inc., a
multi-national venture capital firm from 1988 until September 1995. Mr. Baker
is currently a Director of FORE Systems, Inc. and Resources Bancshares Mortgage
Group, Inc., both of which are publicly traded corporations.
Philip A. Campbell has served as Director of Digex since April 1999. He has
served as Director of Intermedia since September 1996. Mr. Campbell retired
from Bell Atlantic as Director, Vice Chairman and Chief Financial Officer in
1991. Previously, he served as President of New Jersey Bell, Indiana Bell and
Bell Atlantic Network Services.
George F. Knapp has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. He has been a Principal
of Communications Investment Group, an investment banking firm, since June
1990. From January 1988 until June 1989, Mr. Knapp was an associate at MBW
47
<PAGE>
Management, Inc., a venture capital firm. Prior to that time, he held various
executive positions at ITT Corporation and its subsidiaries, most recently as
Corporate Vice President of ITT Corporation. Mr. Knapp is currently a member of
the Manhattan College Board of Trustees and Chairman of its Finance Committee.
Pierce J. Roberts, Jr. has served as Director of Digex since April 1999.
Since December 1998, Mr. Roberts has served as Director of Intermedia. From
April 1993 to August 1998, Mr. Roberts held various positions at Bear, Stearns
& Co. Inc. and most recently was a Senior Managing Director and head of its
Global Telecommunications Group. From December 1990 to April 1993, Mr. Roberts
was a Managing Director at The Blackstone Group. Prior to that, Mr. Roberts
held various positions at BellSouth.
No family relationship exists between any of the directors and executive
officers of Digex.
Committees of the Board of Directors
Prior to the closing of this offering it is expected that our board of
directors will have standing audit and finance and compensation committees.
Among other functions, the audit and finance committee will:
.make recommendations to the board of directors regarding the selection of
independent auditors;
.review the results and scope of the audit and other services provided by
our independent auditors;
.review our financial statements; and
.review and evaluate our internal control functions.
The compensation committee will make recommendations to the board of
directors regarding the administration of our stock option and stock purchase
plans and with regard to executive compensation and salaries and incentive
compensation for our employees and consultants.
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Summary Compensation Table
The following table sets forth the total compensation for 1998 of our Chief
Executive Officer and each of our other four most highly compensated executive
officers whose total salary and bonus for 1998 exceeded $100,000 (each a named
executive officer, and collectively, the named executive officers).
Securities underlying the options listed in the "Long-Term Compensation
Awards" column are shares of common stock of Intermedia awarded under
Intermedia's 1996 Long-Term Incentive Plan. We expect that, prior to the
closing of this offering, we will adopt a long-term incentive compensation plan
pursuant to which options to purchase shares of our Class A Common Stock will
be issued on the effective date of this prospectus. Prior awards under
Intermedia's 1996 Long-Term Incentive Plan will not be affected by the adoption
of our long-term incentive compensation plan.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------ ------------
Other Securities
Fiscal Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options (#)
- --------------------------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Nancy G. Faigen......... 1998 11,105(1) 50,000 (7)
President and Chief
Executive Officer 1997 --
1996 --
Bryan T. Gernert........ 1998 95,000(2) 166,108(6) (8)
Vice President, Sales,
Consulting and 1997 75,000 126,016(6) 33,552
Client Support 1996 75,000 31,520(6) 13,422
Robert E. London 1998 104,000 24,960 (9)
Vice President,
Marketing
Communications 1997 64,389(3) 17,700 19,172
1996
Robert B. Patrick....... 1998 92,500 5,000 5,000(10)
Vice President,
Marketing and 1997 65,000 7,500 9,586
Product Development 1996 20,000(4) 10,833 3,836
John F. Scott........... 1998 78,750 22,500 7,000(11)
Vice President, Finance 1997 37,661(5) 6,041
1996
</TABLE>
- --------
(1) Ms. Faigen commenced employment with Digex in December 1998. As of June ,
1999, Ms. Fiagen's annual base salary was . She has a target annual
bonus opportunity equal to % of her base salary.
(2) As of June , 1999, Mr. Gernert's annual base salary was . He has a
target annual bonus opportunity equal to % of his base salary.
(3) Mr. London commenced employment with Digex in April 1997. As of June ,
1999, Mr. London's annual base salary was . He has a target annual bonus
opportunity equal to % of his base salary.
(4) Mr. Patrick commenced employment with Digex in September 1996. As of June
, 1999, Mr. Patrick's annual base salary was . He has a target annual
bonus opportunity equal to % of his base salary.
(5) Mr. Scott commenced employment with Digex in July 1997. As of June , 1999,
Mr. Scott's annual base salary was . He has a target annual bonus
opportunity equal to % of his base salary.
(6) These amounts represent commission payments.
(7) On the effective date of this prospectus, options to purchase shares of
Class A Common Stock will be granted to Ms. Faigen, of which will be at
an exercise price equal to $ per share and the balance of which will be
at an exercise price equal to the public offering price.
(8) On the effective date of this prospectus, options to purchase shares of
Class A Common Stock will be granted to Mr. Gernert, of which will be at
an exercise price equal to $ per share and the balance of which will be
at an exercise price equal to the public offering price.
(9) On the effective date of this prospectus, options to purchase shares of
Class A Common Stock will be granted to Mr. London, of which will be at
an exercise price equal to $ per share and the balance of which will be
at an exercise price equal to the public offering price.
(10) On the effective date of this prospectus, options to purchase shares
of Class A Common Stock will be granted to Mr. Patrick, of which will
be at an exercise price equal to $ per share and the balance of which
will be at an exercise price equal to the public offering price.
(11) On the effective date of this prospectus, options to purchase shares
of Class A Common Stock will be granted to Mr. Scott, of which will be
at an exercise price equal to $ per share and the balance of which will
be at an exercise price equal to the public offering price.
49
<PAGE>
Option Grants In Fiscal Year 1998
The following table sets forth certain information regarding Intermedia stock
options granted to our Vice President of Marketing and Product Development, and
Vice President of Finance during the year ended December 31, 1998.
The securities underlying the options listed in the column entitled "Number
of Securities Underlying Options Granted (#)" are shares of common stock of
Intermedia awarded under Intermedia's 1996 Long-Term Incentive Plan. We expect
that, prior to the closing of this offering, we will adopt a long-term
incentive compensation plan pursuant to which options to purchase shares of our
Class A Common Stock will be issued on the effective date of this prospectus.
The percent of total options granted to employees in fiscal year ended
December 31, 1998 represent the percent of total options granted to Intermedia
employees.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation For
Individual Grants Option Terms
------------------------------------------------- ----------------------
Number of Percent of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Granted (#) Fiscal Year (%) Per Share Date 5% 10%
----------- ---------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert B. Patrick....... 5,000 0.20% $26.88 9/29/08 $84,500 $214,200
John F. Scott........... 3,500 0.14% 34.63 7/28/08 76,230 193,165
2,500 0.10% 26.88 9/29/08 42,250 107,100
1,000 0.04% 18.19 11/23/08 11,440 28,990
</TABLE>
Aggregate Option Exercises in 1998 and Last Fiscal Year-End Option Values
The following table shows for each of the named executive officers the number
of shares acquired upon exercise of stock options during 1998, the aggregate
value realized from those exercises, the number of shares covered by both
exercisable and unexercisable options as of December 31, 1998 and the year-end
value of exercisable and unexercisable options as of December 31, 1998.
All shares acquired on exercise were shares of Intermedia common stock.
Securities underlying the options listed in the following table are shares of
common stock of Intermedia awarded under Intermedia's 1996 Long-Term Incentive
Plan.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998 at December 31, 1998
------------------------- -------------------------
# Shares
Acquired $ Value
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nancy G. Faigen......... -0- -0- -0- -0- -0- -0-
Bryan T. Gernert........ 4,544 $303,290 24,208 14,140 $222,400 $116,461
Robert E. London........ 6,390 $187,080 6,391 6,391 $ 61,492 $ 61,492
Robert B. Patrick....... -0- -0- 3,009 9,135 $ 20,680 $ 37,332
John F. Scott........... -0- -0- 782 6,218 -0- -0-
</TABLE>
We expect that, prior to the closing of this offering, we will adopt a long-
term incentive compensation plan pursuant to which options to purchase shares
of our Class A common stock will be granted on the effective date of this
prospectus.
50
<PAGE>
LONG-TERM INCENTIVE PLAN
Prior to this offering, we intend to adopt the Digex, Incorporated Long-Term
Incentive Plan, which will permit awards of stock, stock options, stock
appreciation rights, restricted stock and other stock-based awards as
incentives to our current and prospective employees, officers, directors and
consultants, and those of our subsidiaries or of any person that owns over 50%
of the voting power of our authorized and outstanding voting shares. However,
only our employees are eligible for grants of incentive stock options.
The Long-Term Incentive Plan, also known as the "Plan," will be administered
by the compensation committee of our board of directors or such other committee
as the board may designate to administer the Plan, the members of which shall
consist solely of two or more members of the Board who are "Non-Employee"
directors under Rule 16b-3 of the Exchange Act and "outside directors" under
the Rule 162(m) of the Internal Revenue Code. Regardless of which form of
committee is adopted, such committee will have the authority to select those
employees, officers, directors and consultants whose performances it determines
significantly promote our success to receive discretionary awards under the
Plan, grant the awards, interpret and determine all questions of policy
pertaining to the Plan, adopt rules, regulations, agreements and instruments
deemed necessary for its proper administration and take any and all other
actions deemed necessary or desirable for the proper administration of the Plan
and to effectuate its purposes. In regards to options, the board has the
authority to determine who will receive options, the time at which options will
be granted, the number of shares subject to any option, the exercise price of
an option, the time or times at which the options will become vested and
exercisable, and the duration of the option.
The shares of Digex subject to the Plan will be authorized but unissued
shares of our Class A Common Stock or treasury stock. No more than shares
of our Class A Common Stock may be issued under the plan.
Discretionary Awards:
Stock Options. Awards of stock options grant a right to buy a specified
number of shares of Class A Common Stock at a fixed exercise price during a
specified time, all as the compensation committee may determine.
Incentive Stock Options. Awards may be of incentive stock options, within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or any
successor section. Subject to adjustment, the aggregate number of shares which
may be subject to incentive stock options awards under the Plan shall not
exceed [--] shares.
Stock Appreciation Rights. Awards of stock appreciation rights grant a right,
which may or may not be contained in the grant of a stock option or incentive
stock option, to receive in cash, or its equivalent value in Class A Common
Stock, the excess of the fair market value of a share of Class A Common Stock
on the date the right is surrendered over the option exercise price or other
price specified by agreement.
Restricted Shares. Restricted shares are shares of Class A Common Stock
granted to a participant of the Plan that are subject to forfeiture until
certain restrictions, terms and conditions as the compensation committee may
determine are fulfilled.
Dividend or Equivalent. An award of dividends grants a participant the right
to receive dividends or their equivalent in value in Class A Common Stock, cash
or a combination of both.
Stock Award. Class A Common Stock may be issued to a Plan participant. Such
awards can be granted on a contingent basis.
Other Stock-Based Awards. Other Class A Common Stock-based awards that serve
the same function as the foregoing awards may be granted.
51
<PAGE>
Formula Awards:
Pursuant to the Plan, in addition to any discretionary awards granted to non-
employee directors, and subject to certain restrictions, additional grants of
non-incentive stock options shall be awarded to non-employee directors based on
the following formula: (a) stock options to acquire 20,000 shares of Class A
Common Stock shall be granted on the date of this offering or on the date the
director is elected to the board of directors, exercisable so long as the non-
employee director continues to be a member of the board of directors as to
6,666 of the shares on the January 1 following the date the stock option is
granted and as to an additional 6,667 shares on January 1 of each of the two
years thereafter, and (b) a stock option to acquire 2,000 shares of Class A
Common Stock shall be granted on the date of this offering or on the date the
director is elected to the board of directors and on each anniversary thereof.
Options granted under clause (b) above shall be immediately exercisable upon
grant. If a non-employee director fails to attend 75% of the board meetings in
any calendar year, he or she will forfeit the right to exercise that portion of
the options in clause (a) above that would have been exercisable on the next
following January 1. All stock options granted pursuant to either of the
foregoing formulas shall be granted at the fair market value of the Class A
Common Stock (the initial price to the public in the case of options issued on
the effective date of this prospectus) on the date the options are granted and
shall expire on the earlier of the fifth anniversary of the date the options
were granted or on the first anniversary of the date the non-employee director
ceases to be a member of the board of directors.
General:
If a Plan participant's employment or other relationship with us is
terminated for any other reason besides death or "for cause," and the
participant is thereafter not employed by us, any options granted to the
participant under the Plan may be exercised by the participant at any time
within three months of such termination, to the extent the participant was
entitled to exercise the options at the time of the termination.
A change in the control of Digex or Intermedia will accelerate the date upon
which the options will become exercisable to the extent and under the terms set
forth in the Plan.
The maximum number of shares of Class A Common Stock that may be granted to a
single participant in the Plan in any single year is [ ]. Additionally, no
award shall be assignable.
The Plan may be terminated, modified or amended by the affirmative vote of
the holders of a majority of the votes of our outstanding shares of capital
stock present or represented and entitled to vote at a duly held stockholders'
meeting. The board of directors may terminate the Plan or make modifications or
amendments, provided that the board of directors cannot make any material
amendments to the Plan without prior approval by the holders of Common Stock
having a majority of the voting power thereof present and entitled to vote at a
meeting of stockholders. No termination, modification or amendment of the Plan
may adversely affect the rights previously conferred by an award under the Plan
without the consent of the recipient.
The Plan will become effective on the effective date of this prospectus and
will terminate on the tenth anniversary of that date.
Indemnifications of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
.for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
52
<PAGE>
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by Delaware law, subject to certain very
limited exceptions; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our directors and executive officers to
give them additional contractual assurances regarding the scope of the
indemnification described above and to provide additional procedural
protections. Generally, pursuant to each indemnification agreement, Digex will
indemnify a director or officer who is or was a party to any legal action by or
against the indemnitee due to his or her position as a Digex director or
officer, known as the "indemnitee," against the expenses, judgments, fines and
amounts paid in settlement that were actually and reasonably incurred by the
indemnitee in connection with such legal action, provided that such indemnitee
acted in good faith and in a manner not opposed to the best interests of Digex.
We also intend to obtain directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities.
The limitation of liability and indemnification provisions in our certificate
of incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. They may also have the
effect of reducing the likelihood or derivative litigation against directors
and officers, even though such an action, if successful, might otherwise
benefit us and our stockholders. Furthermore, a stockholder's investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers pursuant to these indemnification
provisions.
There is no pending litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Digex pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
53
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the closing of this offering, we will enter into the following
agreements with Intermedia: General and Administrative Services Agreement,
Master Network Services Agreement, Public Internet Access Services Agreement,
and Customer Network and Application Services Agreement. These agreements are
described below. The General and Administrative Services Agreement is included
as an exhibit to the registration statement of which this prospectus forms a
part.
General and Administrative Services Agreement
Under the General and Administrative Services Agreement, Intermedia will
provide us with a variety of general and administrative services, including:
. finance, accounting and administration services, such as cash management,
corporate banking, risk management, liability insurance, debt management,
filing of state and federal tax returns, coordination of required public
filings, fixed asset reporting, accounts payable and general ledger;
. human resources services, such as employee and labor relations;
. legal services in the areas of labor, employment and litigation
management; and
. Year 2000 compliance services.
The General and Administrative Services Agreement will provide for a one-year
initial term. Thereafter, the term will be automatically renewed for successive
one-year terms, unless at least six months prior to the termination of the term
then in effect either we or Intermedia notifies the other that it does not wish
to renew the term. In addition, we may terminate the agreement on 90-day prior
notice at any time after Intermedia no longer owns more than 50% of the voting
power of our outstanding common stock.
The General and Administrative Services Agreement provides that during the
first year of the agreement, we will pay to Intermedia a monthly fee of
$ for the services provided. Thereafter, the fee payable by us will
be decreased quarterly based on an assessment of the cost of personnel hired by
us during the preceding periods to perform certain of the functions internally.
Master Network Services Agreement, Public Internet Access Services Agreement,
and Customer Network and Application Services Agreement
We expect that Intermedia directly or through Business Internet will be our
preferred provider of a variety of Internet access, network and related value-
added services in the following two categories:
. public internet access services for the transit of data from our data
centers to the Internet, and assisting in the design, implementation and
management of Internet points of presence for the routing of our data
traffic to Intermedia's networks ("Internet Access Services"); and
. customer products and services for resale by us to our customers under
the Digex and/or Intermedia brand ("Customer Services").
Prior to the closing of this offering, we will enter into a Master Network
Services Agreement (the "Master Agreement"), Public Internet Access Services
Agreement (the "Access Agreement"), and Customer Network and Application
Services Agreement with Intermedia (the "Customer Services Agreement") for the
provision of these services to us by Intermedia.
The Master Agreement contains the general terms and conditions under which
Intermedia will provide to us the Internet Access Services and the Customer
Services. The Master Agreement has an initial term of two
54
<PAGE>
years, which is automatically renewable for successive one-year periods. Either
we or Intermedia may elect not to renew the term by giving the other party
notice at least six months before the scheduled expiration of the initial term
or the then current renewal term.
The Access Agreement contains specific provisions that apply to Internet
Access Services. The Customer Services Agreement applies specifically to
Customer Services. The Access Agreement and the Customer Services Agreement,
together, are referred to as the "Services Agreements." Specific service orders
will be issued under each of the Services Agreements to specify the details for
the particular services to be provided.
The Master Agreement provides, among other things, that:
. we will be treated as a most favored customer entitled to rates and fees
as low as those granted by Intermedia to any other customer purchasing
substantially similar services, provided that we purchase 70% of our
requirements from Intermedia other than those fulfilled through our own
peering arrangements ("non-peered network transit services");
. we may request and receive from Intermedia additional services or feature
enhancements to the services described above;
. we and Intermedia will share with each other customer information and may
market products and services to each others' customers; and
. during the term of this agreement and for six months after its
termination, neither party is allowed to compete with the "core" business
of the other. Our core business is defined to include the dedicated Web
hosting business as currently conducted by us. Intermedia's core business
is defined to include the services described in the related Service
Agreements as conducted by Intermedia.
The Master Agreement limits Intermedia's aggregate liability to us to the
average monthly recurring charges paid by us for the particular service to
which our claim may pertain, and also excludes any consequential or other
special damages. Other than specific service level commitments set out in the
Services Agreements, Intermedia's services under the Master Agreement are
provided on an "as is" and "as available" basis without any express or implied
warranties.
Internet Access Services. Under the Access Agreement, we will be required to
purchase from Intermedia, and Intermedia will provide us through its own
network and its peering arrangements, 70% of our requirements for non-peered
network transit services. The Access Agreement contemplates that we will
provide quarterly forecasts of our network capacity requirements to Intermedia.
If Intermedia does not have the capacity to, or otherwise elects not to,
fulfill any portion of this 70% requirement, we may purchase this portion of
the 70% requirement from other network providers. We may purchase the remaining
non-peered network transit services (up to 30% of our requirements) from other
network service providers, provided that Intermedia may take over these
arrangements and succeed to us as provider of record for this transit if
Intermedia determines that doing so will not endanger its tier-one status as a
network service provider and ISP and otherwise comply with law and industry
standards. We believe that this arrangement will enable us to provide customer
diversity and network balancing, and to meet specific customer and
international requirements. Because of our commitment to obtain at least 70% of
our non-peered network service requirements from Intermedia, we will receive
certain discounts on monthly recurring charges based on the volume of our
traffic.
Intermedia has made certain service level commitments to us for its network
transit services. These commitments cover both network availability and
performance, such as packet delivery and latency. In addition, we will be one
of Intermedia's major customers and will receive dedicated support under
Intermedia's Major Customer Program.
Under the Access Agreement, Intermedia will also assist us in the design,
implementation and management of Internet points of presence for the routing of
data traffic from each of our data centers to Intermedia's and other network
service providers' networks.
55
<PAGE>
We expect to pay to Intermedia a total of approximately $ for network
transit services to be provided to us under the Access Agreement during the
first year of the agreement. However, because the Access Agreement provides for
payments based on actual network usage, the actual amounts paid to Intermedia
during the first year may differ from the above estimate if the actual network
requirements of our customers differ from the projected requirements on which
the estimate is based.
Customer Services. Customer Services that Intermedia will provide to us, and
which we will be able to market and sell to our customers under the Digex
and/or Intermedia name, include:
. Internet access services offered by Intermedia to its customers;
. wide area network services, such as frame relay and ATM;
. managed connectivity services;
. value-added services, such as worldwide remote dial access to the
Internet, firewall installation and other security solutions, e-mail
relay back-up services, messenger mail services, fax over IP services
that provide Web-to-fax and fax-to-Web capability, and news services
enabling customers to have access to USENET news groups and to operate
news servers; and
. private line point-to-point services such as 56k, T1 and DSL.
We expect to pay to Intermedia a total of approximately $ for the
services to be provided to us under the Customer Services Agreement during the
first year of the agreement. However, because the Customer Services Agreement
provides for payments based on services actually provided by Intermedia, the
actual amounts paid to Intermedia during the first year may differ from the
above estimate if the actual demand for such services differs from the
projected demand on which the estimate is based.
Sale of Telecommunications Related Assets to Intermedia
We are subject to certain restrictions under the Intermedia indentures, as
described under "Risk Factors -- Digex is controlled by Intermedia, which could
involve some risks for you as a stockholder--We depend on Intermedia to fund
our working capital and operating losses, but Intermedia's ability to fund
these needs is limited by its own substantial indebtedness." Due to such
restrictions, we will be required to use all of the net proceeds of this
offering to purchase Telecommunications Related Assets within 270 days of this
offering. We have entered into a letter agreement with Intermedia pursuant to
which Intermedia will purchase from us, at our cost, some of the
Telecommunications Related Assets purchased with the net proceeds of this
offering. Under the letter agreement, Intermedia is expected to pay us for the
Telecommunications Related Assets so purchased to the extent necessary out of
its funds that are not subject to restrictions under the indentures which we
will use for working capital purposes and to fund operating losses. See "Use of
Proceeds."
Restructuring Transactions
In conjunction with this offering, Business Internet has contributed to us
the Web hosting business described in this prospectus in exchange for all the
shares of our Class B Common Stock.
Relationship with Bear, Stearns & Co. Inc.
Bear, Stearns & Co. Inc. is serving as joint lead underwriting manager of
this offering for Digex. Pierce J. Roberts, Jr., who is currently serving as a
director of Digex, was an employee of Bear Stearns until August 1998.
Immediately prior to his departure from Bear Stearns, Mr. Roberts served as a
Senior Managing Director and head of the Global Telecommunications Group.
Bear Stearns or its affiliates have provided and may in the future provide
investment banking or other financial services to Intermedia, the parent
company of Digex, and its affiliates in the ordinary course of business, for
which it has received and is expected to receive customary fees and expenses.
Bear Stearns has been an initial purchaser for numerous issuances of securities
by Intermedia.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding:
. beneficial ownership of our common stock by each person or entity known
to us to be a beneficial owner of more than 5% of the outstanding shares
of our Common Stock, as of April 27, 1999;
. beneficial ownership of our common stock by each of our directors, our
President and Chief Executive Officer, and our four most highly
compensated executive officers during 1998, as of March 31, 1999; and
. beneficial ownership of our common stock by all of our directors and
executive officers as a group, as of March 31, 1999.
<TABLE>
<CAPTION>
Percentage
Percentage of Class of Voting Power
Beneficially Owned of Common Stock
---------------------- -----------------
Number of
Shares
Securities Beneficially Before After Before After
Beneficial Owner Owned Owned Offering Offering Offering Offering
- ---------------- ------------ ------------ --------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Intermedia Our Class B
Communications Inc. Common Stock 1,000 (1) 100.0% 100.0% 100.0%
3625 Queen Palm Drive
Tampa, Florida 33619
Directors and Executive
Officers:
David C. Ruberg * * * * *
Nancy G. Faigen None * * * * *
Bryan T. Gernert None * * * * *
Robert E. London None * * * * *
Robert B. Patrick None * * * * *
John F. Scott None * * * * *
John C. Baker None * * * * *
Philip A. Campbell None * * * * *
George F. Knapp None * * * * *
Pierce J. Roberts, Jr. None * * * * *
All directors and
executive officers
as a group (12
persons) None * * * * *
</TABLE>
- --------
*Less than 1%
(1) Owned through Intermedia's wholly-owned subsidiary, Business Internet, Inc.
57
<PAGE>
The following table provides information regarding:
. beneficial ownership of common stock of our parent, Intermedia, by each
of our directors, our President and Chief Executive Officer, and our four
most highly compensated executive officers during 1998, as of March 31,
1999; and
. beneficial ownership of common stock of our parent, Intermedia, by all of
our directors and executive officers as a group, as of March 31, 1999.
<TABLE>
<CAPTION>
Percentage of
Class
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Beneficial Owner Securities Owned Owned Offering Offering
- ---------------- ----------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Directors and
Executive Officers:
David C. Ruberg Intermedia common stock 955,168(1) 1.9% 1.9%
Nancy G. Faigen Intermedia common stock 6,666(2) * *
Bryan T. Gernert Intermedia common stock 24,208(3) * *
Robert E. London Intermedia common stock 6,391(4) * *
Robert B. Patrick Intermedia common stock 3,009(5) * *
John F. Scott Intermedia common stock 782(6) * *
John C. Baker Intermedia common stock 79,086(7) * *
Philip A. Campbell Intermedia common stock 26,000(8) * *
George F. Knapp Intermedia common stock 54,365(9) * *
Pierce J. Roberts, Intermedia common stock
Jr. 13,668(10) * *
All directors and
executive officers
as a group (12
persons) Intermedia common stock 1,169,343(1) * *
</TABLE>
- --------
*Less than 1%
(1) Includes 206,664 shares subject to certain vesting requirements and
611,168 shares subject to options exercisable as of March 31, 1999 or
within 60 days thereafter. Excludes 278,832 shares subject to options that
are not exercisable within 60 days of March 31, 1999.
(2) Includes 6,666 shares subject to options exercisable as of March 31, 1999.
Excludes 93,334 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(3) Includes 24,208 shares subject to options exercisable as of March 31,
1999. Excludes 14,140 shares subject to options that are not exercisable
within 60 days of March 31, 1999.
(4) Includes 6,391 shares subject to options exercisable as of March 31, 1999.
Excludes 6,391 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(5) Includes 3,009 shares subject to options exercisable as of March 31, 1999.
Excludes 11,135 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(6) Excludes 6,218 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(7) Includes 50,558 shares of Common stock and 28,528 shares subject to
options exercisable as of March 31, 1999 or within 60 days thereafter.
Excludes 1,142 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(8) Includes 26,000 shares subject to options exercisable as of March 31, 1999
or within 60 days thereafter.
(9) Includes 7,938 shares of Common Stock and 46,427 shares subject to options
exercisable as of March 31, 1999 or within 60 days thereafter. Excludes
1,143 shares subject to options that are not exercisable within 60 days of
March 31, 1999.
(10) Includes 5,000 shares of Common Stock and 8,668 shares subject to options
exercisable as of March 31, 1999 or within 60 days thereafter. Excludes
213,332 shares subject to options that are not exercisable within 60 days
of March 31, 1999.
58
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of shares of Class A Common Stock, $.01 par value per
share, and shares of Class B Common Stock, $.01 par value per share. As of
, 1999, there were outstanding shares of Class B Common Stock, all of
which were owned by Intermedia through Business Internet, its wholly-owned
subsidiary.
The following summary is qualified by our certificate of incorporation and
bylaws, which are included as exhibits to the registration statement of which
this prospectus forms a part.
Common Stock
Shares of Class A Common Stock and Class B Common Stock are substantially
identical in all respects except that: (1) the holders of Class B Common Stock
are entitled to 10 votes per share, and the holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders; and (2) each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the option of the holder and automatically
upon the occurrence of a Conversion Event. A "Conversion Event" is defined as a
direct or indirect transfer of beneficial ownership of Class B Common Stock to
any person or entity that does not control, is not controlled by and is not
under common control with Intermedia.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of our outstanding shares of Common Stock
are entitled to receive dividends out of legally available assets at such times
and in such amounts as the board of directors from time to time may determine.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
votes can elect all of the directors then standing for election. The Common
Stock is not entitled to preemptive rights and, except as described in the
preceding paragraph with respect to Class B Common Stock, is not subject to
conversion or redemption. Upon liquidation, dissolution or winding-up, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock after payment of liquidation
preferences, if any, on any outstanding preferred stock and payment of other
claims of creditors. Each outstanding share of Common Stock, and all Common
Stock paid for after this offering, is duly and validly issued, and fully paid
and nonassessable.
Preferred Stock
The board of directors is authorized, subject to any limitations prescribed
by Delaware law, to issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions thereon.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under certain circumstances, have
the effect of delaying, deferring or preventing a change in control of Digex.
We have no current plan to issue any shares of preferred stock.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law concerning corporate takeovers. This section prevents certain
Delaware corporations from engaging, under certain circumstances, in a
"business combination," which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder," or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date that such stockholder became an "interested stockholder" unless:
59
<PAGE>
. the transaction in which such stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by persons
who are directors and also officers; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to Digex and, accordingly, may discourage
attempts to acquire us.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our Class A Common Stock is Continental
Stock Transfer and Trust Company, located at Two Broadway, New York, New York
10004, with a telephone number of (212) 509-4000.
Listing
We have applied to list our Class A Common Stock on the Nasdaq National
Market under the trading symbol "DIGX."
60
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
shares of our Common Stock, assuming no exercise of the underwriters'
over-allotment option, and shares of Class B Common Stock. All shares of
Class B Common Stock are convertible into shares of our Class A Common Stock,
on a one-for-one basis, at any time at the option of the holder or upon a
direct or indirect transfer to any person or entity not affiliated with
Intermedia. All of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. The shares of Class B Common Stock, and the
shares of Class A Common Stock into which they are convertible, held by
Intermedia are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or 701 promulgated under the Securities Act, which rules are
summarized below.
As a result of the contractual restrictions described below and the
provisions of Rule 144 and 701, the restricted securities will be available for
sale in the public market on the date which is one year from the date of the
effectiveness of the reorganization, subject to the volume limitations and
other conditions of Rule 144. The shares could be available for resale
immediately upon the expiration of such -day period in the event of a
favorable interpretation by the Securities and Exchange Commission of certain
provisions of Rule 144.
Lock-Up Agreements
All of our officers, directors and stockholders have signed lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of or as provided in the
stockholders' agreement.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
Class A Common Stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of Class A Common Stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold immediately upon the
completion of this offering.
61
<PAGE>
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
Stock Options
Prior to this offering, we intend to adopt a long-term incentive plan.
Immediately after this offering, we intend to file a registration statement
under the Securities Act covering shares of Class A Common Stock that
will be reserved for issuance under our long-term incentive plan. Such
registration statement is expected to be filed and become effective as soon as
practicable after the effective date of this offering. Accordingly, shares
registered under such registration statement will, subject to vesting
provisions and Rule 144 volume limitations applicable to our affiliates, be
available for sale in the open market immediately after the 180-day lock-up
agreements expire.
62
<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated ,
1999, the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, CIBC World Markets
Corp. and Legg Mason Wood Walker, Incorporated, have severally agreed to
purchase from Digex the following respective numbers of shares of Class A
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
CIBC World Markets Corp. .......................................
Legg Mason Wood Walker, Incorporated............................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a "comfort letter" from our accountants, the listing of the common
stock on the Nasdaq National Market and no occurrence of an event that would
have a material adverse effect on our business. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for days from
the date of the underwriting agreement, to purchase up to additional shares
at the public offering price less the underwriting fees. The underwriters may
exercise such option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
such option, each underwriter will become obligated, subject to conditions, to
purchase a number of additional shares approximately proportionate to such
underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the public,
the representatives of the underwriters may change the public offering price
and such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the Class A Common Stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>
63
<PAGE>
In order to facilitate the offering of the Class A Common Stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A Common Stock. Specifically, the
underwriters may over-allot shares of the Class A Common Stock in connection
with this offering, thereby creating a short position in the Class A Common
Stock for their own account. Additionally, to cover such over-allotments or to
stabilize the market price of the Class A Common Stock, the underwriters may
bid for, and purchase, shares of the Class A Common Stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our Class A Common Stock at a
level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
We have applied to list our Class A Common Stock on the NASDAQ National
Market under the symbol "DIGX".
Prior to this offering, there has been no public market for our Common Stock.
Consequently, the initial public offering price for our Common Stock will be
determined by negotiation among the Company and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparable companies; and
. estimates of our business potential.
Bear, Stearns & Co. Inc. or its affiliates have provided and may in the
future provide investment banking or other financial services to Intermedia
Communications, Inc., the parent company of Digex, and its affiliates in the
ordinary course of business, for which it has received and is expected to
receive customary fees and expenses. To date, Bear, Stearns has been an initial
purchaser for numerous issuances of securities by Intermedia.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for us by Kronish Lieb Weiner & Hellman LLP, New York, New York.
Ralph J. Sutcliffe, a partner of Kronish Lieb Weiner & Hellman LLP,
beneficially owns 11,490 shares of common stock of Intermedia and owns a
warrant to purchase 200,000 shares of such common stock at an exercise price of
$20.75 per share. Intermedia is Digex's parent entity and will own
approximately % of the voting power of our outstanding common stock when
this offering is completed. Certain legal matters in connection with this
offering will be passed upon for the Underwriters by Latham & Watkins, New
York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1997 and 1998, and for the year ended
December 31, 1996, the period January 1, 1997 to July 6, 1997, the period from
July 7, 1997 (date of acquisition) to December 31, 1997 and the year ended
December 31, 1998, as set forth in their report. We have included our financial
statements (and schedule) in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
64
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus is part of a registration statement on Form S-1 under the
Securities Act that we filed with the Securities and Exchange Commission with
respect to the shares of Class A Common Stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedule filed therewith. For
further information about us and the Class A Common Stock offered by this
prospectus, reference is made to the registration statement and the exhibits
and schedule filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document to which reference is made
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement and the exhibits and schedule
filed therewith may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Please call the SEC at 1-800-SEC-0330 for further informaiton about
its public reference room. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants, including us, that file electronically with the
Commission. The address of the site is http://www.sec.gov.
65
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors--The Company............................... F-2
Report of Independent Auditors--Predecessor............................... F-3
Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999........ F-4
Statements of Operations for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Three Months Ended March 31, 1998 and 1999.... F-5
Statements of Changes in Owner's Equity (Deficit) for the Year Ended
December 31, 1996, and the Period from January 1, 1997 to July 6, 1997,
and the Period from July 7, 1997 (Date of Acquisition) to December 31,
1997, and the Year Ended December 31, 1998, and the Three Months Ended
March 31, 1999........................................................... F-6
Statements of Cash Flows for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Three Months Ended March 31, 1998 and 1999.... F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Digex, Incorporated
We have audited the accompanying balance sheets of Digex, Incorporated
(formerly the Web site hosting unit of Business Internet, Inc.) as of December
31, 1997 and 1998, and the related statements of operations, changes in owner's
equity and cash flows for the period from July 7, 1997 (date of acquisition) to
December 31, 1997, and the year ended December 31, 1998. Our audits included
the financial statement schedule listed in the index at Item 16(b). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule 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 Digex, Incorporated at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from July 7, 1997 (date of acquisition) to December 31,
1997 and the year ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
April 23, 1999
F-2
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Digex, Incorporated
We have audited the accompanying statements of operations, changes in owner's
equity, and cash flows of the Web site hosting unit of Business Internet, Inc.
for the year ended December 31, 1996 and the period from January 1, 1997 to
July 6, 1997. Our audits included the financial statement schedule listed in
the index at Item 16(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 results of operations and cash flows of the Web site
hosting unit of Business Internet, Inc. for the year ended December 31, 1996
and the period from January 1, 1997 to July 6, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
April 23, 1999
F-3
<PAGE>
DIGEX, INCORPORATED
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
March 31,
December 31, 1999
--------------- March 31, Pro Forma
1997 1998 1999 (Note 10)
------- ------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Assets
Current assets:
Accounts receivable, net of
allowances of $369 in
1997 and $719 in 1998 and $740 in
1999................................ $ 2,059 $ 6,127 $ 8,162 $ 8,162
Prepaid expenses and other current
assets.............................. 340 890 1,073 1,073
------- ------- -------- --------
Total current assets................... 2,399 7,017 9,235 9,235
Property and equipment, net............ 12,930 39,059 67,488 67,488
Intangible assets, net................. 34,364 31,204 30,206 30,206
Other assets........................... -- 459 464 464
------- ------- -------- --------
Total assets........................... $49,693 $77,739 $107,393 $107,393
======= ======= ======== ========
Liabilities and owner's equity
Current liabilities:
Accounts payable..................... $ 486 $ 3,341 $ 1,977 $ --
Accrued compensation and other....... 920 843 699 --
Deferred revenue..................... 96 621 597 --
Accrued line costs................... 525 -- -- --
Current portion of capital lease
obligations......................... 723 981 965 --
------- ------- -------- --------
Total current liabilities.............. 2,750 5,786 4,238 --
Capital lease obligations.............. 1,257 1,108 868 --
Deferred tax liability................. 159 -- -- --
------- ------- -------- --------
Total liabilities...................... 4,166 6,894 5,106 --
Owner's equity (see Note 1):
Class A common stock, $.01 par value;
6,000 shares
authorized; none issued and
outstanding in 1998................. -- -- -- --
Class B common stock, $.01 par value;
3,000 shares
authorized; 1,000 assumed issued and
outstanding in 1998 and 1999........ -- -- -- --
Additional paid-in capital........... -- -- -- 107,393
Accumulated deficit.................. -- -- -- --
Owner's net investment............... 45,527 70,845 102,287 --
------- ------- -------- --------
Total owner's equity................... 45,527 70,845 102,287 107,393
------- ------- -------- --------
Total liabilities and owner's equity... $49,693 $77,739 $107,393 $107,393
======= ======= ======== ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF OPERATIONS
(Amounts in thousands, except pro forma share data)
<TABLE>
<CAPTION>
Predecessor The Company
---------------------------- ------------------------------------------------------
Period from
July 7, 1997
(date of Three months ended
Year ended Period from acquisition) to Year ended March 31,
December 31, January 1, 1997 December 31, December 31, ------------------------
1996 to July 6, 1997 1997 1998 1998 1999
------------ --------------- --------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 22,635 $ 3,869 $ 9,392
Costs and expenses:
Cost of operations.... 2,002 4,149 1,739 6,710 887 1,652
Cost of services...... 684 1,817 1,611 7,044 1,107 3,952
Selling, general and
administrative....... 3,194 7,001 6,087 17,512 3,637 8,069
Depreciation and
amortization......... 591 519 2,753 8,109 2,027 4,314
Charge off of
purchased in-process
research and
development.......... -- -- 15,000 -- -- --
------- ------- ----------- ----------- ---------- ----------
Total costs and
expenses............... 6,471 13,486 27,190 39,375 7,658 17,987
------- ------- ----------- ----------- ---------- ----------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (16,740) (3,789) (8,595)
Income tax benefit...... -- -- 1,440 159 -- --
------- ------- ----------- ----------- ---------- ----------
Net loss................ $(3,668) $(9,066) $ (18,558) $ (16,581) $ (3,789) $ (8,595)
======= ======= =========== =========== ========== ==========
Pro forma net loss per common share:
Basic.............................................. $(18,558.00) $(16,581.00) $(3,789.00) $(8,595.00)
=========== =========== ========== ==========
Diluted............................................ $(18,558.00) $(16,581.00) $(3,789.00) $(8,595.00)
=========== =========== ========== ==========
Shares used in computing pro forma basic and
diluted net loss per share.......................... 1,000 1,000 1,000 1,000
=========== =========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CHANGES IN OWNER'S EQUITY (DEFICIT)
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock
--------------------------- Owner's
Class A Class B Additional Retained Net
------------- ------------- Paid-In Earnings Investment
Shares Amount Shares Amount Capital (Deficit) (Deficit) Total
------ ------ ------ ------ ---------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 1,
1996................... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Total allocated costs... -- -- -- -- -- -- 3,177 3,177
Funding for working
capital................ -- -- -- -- -- -- (612) (612)
Funding for purchases of
property, plant and
equipment.............. -- -- -- -- -- -- 1,445 1,445
Net loss................ -- -- -- -- -- -- (3,668) (3,668)
---- ----- ----- ----- -------- ----- -------- ---------
Balance at December 31,
1996................... -- -- -- -- -- -- 342 342
Stock options
exercised.............. -- -- -- -- -- -- 550 550
Total allocated costs... -- -- -- -- -- -- 6,105 6,105
Funding for working
capital................ -- -- -- -- -- -- 517 517
Funding for purchases of
property, plant and
equipment.............. -- -- -- -- -- -- 1,004 1,004
Net loss................ -- -- -- -- -- -- (9,066) (9,066)
---- ----- ----- ----- -------- ----- -------- ---------
Balance at July 6,
1997................... -- $ -- -- $ -- $ -- $ -- $ (548) $ (548)
==== ===== ===== ===== ======== ===== ======== =========
THE COMPANY
Balance at July 7,
1997................... -- $ -- -- $ -- $ -- $ -- $ -- $ --
Contribution from Parent
for Acquisition........ -- -- -- -- -- -- 47,221 47,221
Total allocated costs... -- -- -- -- -- -- 2,698 2,698
Funding for working
capital................ -- -- -- -- -- -- 6,150 6,150
Funding for purchases of
property, plant and
equipment.............. -- -- -- -- -- -- 8,016 8,016
Net loss................ -- -- -- -- -- -- (18,558) (18,558)
---- ----- ----- ----- -------- ----- -------- ---------
Balance at December 31,
1997................... -- -- -- -- -- -- 45,527 45,527
Total allocated costs... -- -- -- -- -- -- 10,018 10,018
Funding for working
capital................ -- -- -- -- -- -- 912 912
Funding for purchases of
property, plant and
equipment.............. -- -- -- -- -- -- 30,969 30,969
Net loss................ -- -- -- -- -- -- (16,581) (16,581)
---- ----- ----- ----- -------- ----- -------- ---------
Balance at December 31,
1998................... -- -- -- -- -- -- 70,845 70,845
Total allocated costs... -- -- -- -- -- -- 3,541 3,541
Funding for working
capital................ -- -- -- -- -- -- 4,495 4,495
Funding for purchases of
property, plant and
equipment.............. -- -- -- -- -- -- 32,001 32,001
Net loss................ -- -- -- -- -- -- (8,595) (8,595)
---- ----- ----- ----- -------- ----- -------- ---------
Balance at March 31,
1999 (unaudited)....... -- -- -- -- -- -- 102,287 102,287
Recapitalization........ -- -- 1,000 -- 107,393 -- (102,287) 5,106
---- ----- ----- ----- -------- ----- -------- ---------
Pro forma balance at
March 31, 1999
(unaudited)............ -- $ -- 1,000 $ -- $107,393 $ -- $ -- $ 107,393
==== ===== ===== ===== ======== ===== ======== =========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Predecessor
----------------------------
Year ended Period from
December 31, January 1, 1997
1996 to July 6, 1997
------------ ---------------
<S> <C> <C>
Operating activities
Net loss................................. $(3,668) $(9,066)
Adjustments to reconcile net loss to cash
flows used in operating activities:
Deferred income taxes................... -- --
Depreciation and amortization........... 591 519
Provision for doubtful accounts......... 41 352
Charge off of purchased in-process
research and development .............. -- --
Changes in operating assets and
liabilities net of the effects of the
acquisition:
Accounts receivable................... (594) (890)
Prepaid expenses and
other current assets................. (21) (54)
Other assets.......................... -- --
Accounts payable and
accrued liabilities.................. 1,086 1,967
------- -------
Net cash used in operating activities.... (2,565) (7,172)
Investing activities
Acquisition of business.................. -- --
Purchases of property and equipment...... (1,445) (1,004)
------- -------
Net cash used in investing activities.... (1,445) (1,004)
Financing activities
Payments on capital leases............... -- --
Exercise of stock options................ -- 550
Net contributions from Parent............ 4,010 7,626
------- -------
Net cash provided by financing
activities.............................. 4,010 8,176
Cash at beginning of the year............ -- --
------- -------
Cash at end of year...................... $ -- $ --
======= =======
Supplemental disclosure of cash flow
information
Noncash investing and financing
activities:
Equipment acquired under capital
leases................................. $ 2,840 $ 829
- --------------------------------------------------
======= =======
<CAPTION>
The Company
----------------------------------------------------
Three months ended
March 31,
-----------------------
Period from
July 7, 1997
(date of
acquisition) to Year ended
December 31, December 31,
1997 1998 1998 1999
--------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Operating activities
Net loss................................. $(18,558) $(16,581) $(3,789) $(8,595)
Adjustments to reconcile net loss to cash
flows used in operating activities:
Deferred income taxes................... (1,440) (159) -- --
Depreciation and amortization........... 2,753 8,109 2,027 4,314
Provision for doubtful accounts......... 498 1,491 150 253
Charge off of purchased in-process
research and development .............. 15,000 -- -- --
Changes in operating assets and
liabilities net of the effects of the
acquisition:
Accounts receivable................... (1,466) (5,559) (810) (2,288)
Prepaid expenses and
other current assets................. (265) (550) (70) (183)
Other assets.......................... -- (459) -- (5)
Accounts payable and
accrued liabilities.................. (2,601) 2,778 (185) (1,532)
--------------- ------------ ----------- -----------
Net cash used in operating activities.... (6,079) (10,930) (2,677) (8,036)
Investing activities
Acquisition of business.................. (47,221) -- -- --
Purchases of property and equipment...... (8,016) (30,969) (2,401) (32,001)
--------------- ------------ ----------- -----------
Net cash used in investing activities.... (55,237) (30,969) (2,401) (32,001)
Financing activities
Payments on capital leases............... (2,769) -- -- --
Exercise of stock options................ -- -- -- --
Net contributions from Parent............ 64,085 41,899 5,078 40,037
--------------- ------------ ----------- -----------
Net cash provided by financing
activities.............................. 61,316 41,899 5,078 40,037
Cash at beginning of the year............ -- -- -- --
--------------- ------------ ----------- -----------
Cash at end of year...................... $ -- $ -- $ -- $ --
=============== ============ =========== ===========
Supplemental disclosure of cash flow
information
Noncash investing and financing
activities:
Equipment acquired under capital
leases................................. $ 846 $ 958 $ 271 $ --
- --------------------------------------------------
=============== ============ =========== ===========
</TABLE>
See accompanying notes.
F-7
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digex, Incorporated (the "Company") was incorporated on April 26, 1999, under
the laws of the State of Delaware. The Company's business was operated as the
Web site hosting unit of Intermedia Communications Inc. ("Intermedia" or the
"Parent Company") since its acquisition by Intermedia on July 7, 1997. On that
date, Intermedia acquired Business Internet, Inc. (previously known as DIGEX,
Incorporated), including the Web site hosting unit (the "Predecessor"), in a
business combination accounted for as a purchase. The Web site hosting unit
presented in the accompanying financial statements had no legal status or
existence prior to the incorporation of the Company on April 26, 1999. The
financial statements of the legal Registrant have been omitted because the
Registrant did not commence operations until May 1, 1999. Prior to April 30,
1999, the Registrant had no assets or liabilities. See also Note 10, which
discloses the contribution of assets on April 30, 1999 by Business Internet,
Inc. to the Registrant.
The Company's operations began in January 1996 to provide complex Web hosting
services, principally to Fortune 2000 companies. The Company's services include
implementing and maintaining secure, scaleable, high-performance Web sites on
the Internet 24 hours a day. In addition, the Company provides a comprehensive
suite of Web management services, including business process solutions and
value-added testing services directed toward improving its customers' overall
Internet performance.
Basis of Presentation
The accompanying financial statements of the Company reflect the carved-out
operations and financial position of the Web site hosting unit of Intermedia
for all periods since July 7, 1997. The accompanying financial statements of
the Predecessor reflect its operations and financial position from inception,
January 1, 1996, to July 6, 1997. As more fully discussed in Note 2, "Related
Party Transactions and Corporate Allocations," the financial statements for all
periods presented include allocations of network costs and corporate expenses.
In addition, for financial reporting purposes, the equity activity of the
Company, prior to its incorporation, and the Predecessor has been accumulated
into a single disclosure caption entitled "Owner's Net Investment."
The Company does not expect to generate positive cash flow from its
operations for several years. As a result, the Company intends to seek funding
from external sources. Management of the Company and of Intermedia believe that
the proceeds of the offering described in Note 12 will be sufficient to meet
the Company's projected cash needs into the second half of 2000. In the event
the contemplated offering does not close, Intermedia, as the Company's indirect
parent, will fund the Company's cash requirements for a period of at least one
year. If the proceeds from the contemplated offering are ultimately less than
currently anticipated, management believes the Company can curtail operating
and capital outlays at levels sufficient to support the Company's current
operations. Intermedia will continue to fund the operating and capital
requirements of the Company until consummation of the offering.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-8
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
(Continued)
Revenue Recognition and Accounts Receivable
Revenues principally consist of installation fees and monthly service fees
charged to customers under contracts having terms that typically range from one
to three years. Installation fees are recognized upon the customer-approved
completion of the Web Site installation. Monthly service fees are recognized in
the month the service is rendered over the contract period. Certain customer
payments for Web site management services received in advance of service
delivery are deferred until the service is performed. Additional services are
recognized in the month the services are performed.
The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally five years for equipment and up to fifteen years for leasehold
improvements. Equipment acquired under capital leases is amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life of the asset, generally five years. The cost of license agreements with
software vendors is amortized over five years.
Intangible Assets
Intangible assets include assets that arose in connection with the purchase
of Business Internet by Intermedia. Identifiable intangible assets arising from
the purchase are stated at cost and consist of trade name, customer lists,
acquired workforce, developed technology and goodwill. Amortization of these
assets is computed using the straight-line method over the estimated periods of
benefit, generally five years for developed technologies and ten years for all
other intangible assets.
Impairment of Long-Lived Assets
In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
the Company reviews its long-lived assets for impairment when events or changes
in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.
Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.
F-9
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
(Continued)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
amounted to $515, $2,016, $2,076, $2,544, $764 and $1,353 for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the period
from July 7, 1997 to December 31, 1997, the year ended December 31, 1998 and
the three months ended March 31, 1998 and 1999, respectively.
Stock-Based Compensation
The Company's employees participated in the stock option plans of Intermedia.
The Company accounts for employee stock-based compensation in accordance with
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations, because the alternative fair value
accounting model provided under Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (SFAS 123), is not required.
Accordingly, in cases where exercise prices equal or exceed fair market value
of the underlying Intermedia common stock, the Company recognizes no
compensation expense. In cases where exercise prices are less than the fair
value, compensation is recognized over the period of performance or vesting
period.
Income Taxes
The operations of the Company and of the Predecessor were included in the
consolidated income tax returns of Intermedia and Business Internet,
respectively. For reporting purposes, the Company has used the asset and
liability method in accounting for income taxes, prescribed in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes except that
the presentation reflects the parent companies as if they were the taxing
jurisdictions. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The income
tax provision is calculated on a separate return basis.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income. This standard requires that total
comprehensive income (loss) be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholder's equity exclusive of
transactions with owners, such as capital contributions and dividends. The
Company and the Predecessor adopted this Standard in 1998 and implemented the
Standard for all years presented herein. The Company's and Predecessor's
comprehensive losses were equal to net losses for all periods presented.
Segment Reporting
The Company and the Predecessor operated during all periods in a single
segment when applying the management approach defined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Pro Forma Earnings (Loss) Per Share
Pro forma basic and diluted net loss per share of the Company has been
calculated using the weighted average common shares and dilutive equivalent
shares issued in connection with the Company's recapitalization, assumed
outstanding for all periods presented.
F-10
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
2. Related Party Transactions and Corporate Allocations
The Predecessor and the Company utilized the central cash management systems
of Business Internet and Intermedia, respectively. Cash requirements during
these periods were satisfied by cash transactions and transfers that were
accounted for through an intercompany account. In addition, the parent
companies charged the Company for identifiable corporate and operating
expenses, such as network cost and corporate overhead cost. Intercompany
account balances for all periods presented have been treated as permanent
contributions and have been reflected as a component of owner's net investment
in the accompanying financial statements.
The following table summarizes corporate charges and allocations included in
the accompanying financial statements:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------------------------------
July 7, 1997
(date of
January 1, acquisition) Three months ended
Year ended 1997 to to Year ended March 31,
December 31, July 6, December 31, December 31, -----------------------
Statement of Operations Caption 1996 1997 1997 1998 1998 1999
- ------------------------------------------------- ------------ ---------- ------------ ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Cost of operations............................... $1,947 $4,001 $1,624 $ 6,494 $ 881 $1,424
Cost of services................................. 189 344 103 1,320 171 494
Selling, general and administrative.............. 1,041 1,760 971 2,204 442 1,623
- -------------------------------------------------- ------ ------ ------ ------- ------ ------
$3,177 $6,105 $2,698 $10,018 $1,494 $3,541
</TABLE>
Management believes that the allocation methodology applied is reasonable.
However, it was not practicable to determine whether the allocated amounts
represent amounts that would have been incurred on a standalone basis.
Explanations of the composition and the method of allocation for the above
captions are as follows:
Cost of Operations
Allocated costs within this caption were the costs of telecommunications
backbone circuits. These costs were allocated to the Company based upon
estimated circuit usage and rate information.
Cost of Services
Allocated costs within this caption were the costs associated with two data
centers (maintenance, utilities and support and employment costs for network
engineering and support, and certain other overhead). These costs were
allocated based upon the employee base.
Selling, General and Administrative
Allocated costs within this caption were the costs of human resources,
information systems services, accounting and back office support, executive
salaries and other general and administrative costs, including rent. All costs
except accounting and back office support were allocated based upon the
employee base. Accounting and back office support were allocated based upon the
relative percentage of monthly recurring revenues.
F-11
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------- March 31
1997 1998 1999
------- ------- ----------- ---
(unaudited)
<S> <C> <C> <C> <C>
Electronics and computer equipment......... $12,163 $36,245 $50,267
Computer software.......................... 1,594 8,153 11,714
Furniture and office equipment............. 121 297 475
Leasehold improvements..................... 227 488 14,472
------- ------- -------
14,105 45,183 76,928
Less accumulated depreciation.............. (1,175) (6,124) (9,440)
------- ------- -------
$12,930 $39,059 $67,488
======= ======= =======
Property and equipment included electronics and computer equipment of $2,051,
$3,009 and $3,009 at December 31, 1997 and 1998, and March 31, 1999,
respectively, that were capitalized pursuant to the terms of capital lease
agreements. Amortization of these assets is included in depreciation expense
for the years ended December 31, 1997 and 1998, and the three months ended
March 31, 1998 and 1999.
Depreciation expense amounted to $591 for the year ended December 31, 1996,
$519 for the period from January 1, 1997 to July 6, 1997, $1,175 for the period
from July 7, 1997 to December 31, 1997, $4,949 for the year ended December 31,
1998, $1,238 for the three months ended March 31, 1998, and $3,316 for the
three months ended March 31, 1999.
4. Intangible Assets
Intangible assets consisted of the following:
<CAPTION>
December 31,
---------------- March 31
1997 1998 1999
------- ------- ----------- ---
(unaudited)
<S> <C> <C> <C> <C>
Goodwill................................... $19,099 $19,099 $19,099
Trade name................................. 9,750 9,750 9,750
Customer list.............................. 3,120 3,120 3,120
Developed technologies..................... 2,720 2,720 2,720
Acquired workforce......................... 1,253 1,253 1,253
------- ------- -------
35,942 35,942 35,942
Less accumulated amortization.............. (1,578) (4,738) (5,736)
------- ------- -------
$34,364 $31,204 $30,206
======= ======= =======
</TABLE>
Amortization expense amounted to $1,578 for the period from July 7, 1997 to
December 31, 1997, $3,160 for the year ended December 31, 1998, $789 for the
three months ended March 31 1998, and $998 for the three months ended March 31,
1999. At the date of acquisition, the trade name was valued at $11,000. The
Company and another operating unit of Intermedia shared the value of this trade
name during the period from July 7, 1997 through December 31, 1998.
F-12
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
5. Stock-Based Compensation Arrangements
Under the provisions of the Intermedia 1996 Long-Term Incentive Plan (1996
Plan), certain employees and directors of the Company have been granted options
to buy shares of Intermedia common stock, generally at market value with terms
of five to ten years. Under the provisions of Business Internet's equity
participation plan, employees were awarded stock options, generally at market
value with terms of five years. Options in Business Internet that were held by
employees of the Predecessor were converted into 456,632 Intermedia options in
the 1996 Plan upon the purchase of Business Internet, applying the same terms
and conditions as existed under the Business Internet Equity Participation
Plan.
The following table summarizes the stock option activity related to employees
of the Predecessor and of the Company:
<TABLE>
<CAPTION>
Number
of Per Share
Shares Option Price
------- ------------
<S> <C> <C>
Outstanding Business Internet options at January 1,
1996............................................... -- $ --
Granted........................................... 483,535 0.13-5.19
Exercised......................................... -- --
Canceled.......................................... 1,102 0.13
-------
Outstanding Business Internet options at December
31, 1996........................................... 482,433 0.13-5.19
Granted........................................... 478,451 1.50-5.12
Exercised......................................... 4,778 0.13-5.00
Canceled.......................................... 3,326 0.13-5.00
------- ------------
Outstanding Business Internet options at July 6,
1997............................................... 952,780 0.13-5.19
======= ============
Outstanding Intermedia options at July 7, 1997...... 456,632 0.26-10.82
Granted........................................... -- --
Exercised......................................... 95,364 0.26-10.82
Canceled.......................................... 1,280 8.99-10.82
------- ------------
Outstanding Intermedia options at December 31,
1997............................................... 359,988 0.26-10.82
Granted........................................... 130,900 16.38-37.00
Exercised......................................... 87,521 0.26-10.82
Canceled.......................................... 183,187 0.26-37.00
------- ------------
Outstanding Intermedia options at December 31,
1998............................................... 220,180 $ 0.26-37.00
======= ============
</TABLE>
The above stock options are not convertible into common stock of the Company.
Pro forma net loss and net loss per share, assuming that the Predecessor and
Digex have applied the fair value model (Black-Scholes Pricing Model) required
by SFAS 123, is as follows:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- --------------------------
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss..................... $(4,395) $(9,645) $ (18,558) $ (16,828)
Net loss per share........... -- -- $(18,558.00) $(16,828.00)
</TABLE>
F-13
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
5. Stock-Based Compensation Arrangements (Continued)
The following table summarizes the significant assumptions used in developing
the pro forma information:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- ---------------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Risk-free interest
rate................... 6.1% 6.1% 6.1% 5.4%
Volatility factor....... 58.0% 58.0% 58.0% 53.0%
Dividend yield.......... -- -- -- --
Weighted average life... 5 years 5 Years 5 years 5 years
</TABLE>
The following table summarizes the weighted average exercise prices of option
activity:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- ---------------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of period................................... $0.13 $6.28 $5.83 $ 5.83
Granted........................................................ 3.07 5.36 -- 26.69
Exercised...................................................... -- 7.45 5.28 6.94
Canceled....................................................... 0.13 8.29 10.02 6.73
----- ----- ----- ------
Balance at end of period......................................... $3.01 $5.83 $5.83 $20.60
</TABLE>
As of December 31, 1998, the weighted average exercise price of exercisable
options was $10.20. Outstanding options as of December 31, 1998 were not
convertible into shares of the Company, had a weighted average remaining
contractual life of 7.4 years. The per share weighted average fair value of
options granted during the year ended December 31, 1996, the period from
January 1, 1997 to July 6, 1997, the period from July 7, 1997 to December 31,
1997, the year ended December 31, 1998 were $1.72, $1.44, $0 and $14.84.
The Company's income tax benefit for the period from July 7, 1997 to December
31, 1997 and the year ended December 31, 1998 are comprised of the following:
<TABLE>
<CAPTION>
Period from
July 7, 1997
to Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C> <C> <C>
Current....................................... $ -- $--
Deferred:
Federal..................................... 1,306 144
State....................................... 134 15
------ ---- --- ---
$1,440 $159
====== ==== === ===
</TABLE>
F-14
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
6. Income Tax Information
The following table reconciles the assumed statutory tax rate with the
effective rate of the Predecessor and the Company:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
Period
from Period from
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Tax benefit at statutory rate..................... (34.0)% (34.0)% (34.0)% (34.0)%
Reconciling items:
State income taxes, net......................... (3.5)% (3.5)% (0.7)% (3.1)%
Charge-off of purchased in-process research and
development.................................... -- -- 25.5 % --
Change in valuation allowance................... 37.0 % 37.1 % 0.0 % 32.0 %
Other items..................................... 0.5 % 0.4 % 2.0 % 4.1 %
----- ----- ----- ----- --- ---
Effective tax rate................................ -- % -- % (7.2) % (1.0)%
- --------------------------------------------------
===== ===== ===== ===== === ===
</TABLE>
At December 31, 1997 and 1998, the Company had temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1997 and 1998
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.............................. $(5,949) $(5,216)
------- -------
Total deferred tax liabilities........................... (5,949) (5,216)
Deferred tax assets:
Net operating loss carryforwards........................... 5,541 10,268
Allowance for bad debts.................................... 138 186
Stock-based compensation................................... 111 111
------- -------
Total deferred tax assets................................ 5,790 10,565
Less: valuation allowance................................ -- (5,349)
------- -------
Net deferred tax asset................................. 5,790 5,216
------- -------
Net deferred tax asset (liability)........................... $ (159) $ --
======= =======
</TABLE>
At December 31, 1998, the Company's net operating loss carryforward for
federal income tax purposes is approximately $27,400, with expiration periods
beginning in 2011 through 2018. As a result of the recapitalization of the
Company, the net operating loss carryforwards will be limited such that no
benefit will enure to the newly formed corporation.
F-15
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
7. Lease Commitments
The Company leases electronic and computer equipment under capital lease
arrangements. The Company also leases office space and office equipment under
operating leases. Future noncancelable lease payments under the Company's lease
commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Future minimum lease payments:
Year ended December 31:
1999................................................. $1,121 $ 881
2000................................................. 892 1,871
2001................................................. 324 1,774
2002................................................. -- 1,628
2003................................................. -- 1,669
Thereafter........................................... -- 8,748
------ -------
2,337 $16,571
=======
Less amount representing interest...................... (248)
------
Present value of lease payments........................ 2,089
Current portion of capital leases...................... (981)
------
Noncurrent portion of capital leases................... $1,108
======
</TABLE>
Lease payments under operating leases include certain rent allocated to the
Company. In the future, rent charges will be included in the General and
Administrative Services Agreement. See Note 10, "Recapitalization and Affiliate
Agreements (Unaudited)."
Rent expense amounted to $121 for the year ended December 31, 1996, $117 for
the period from January 1, 1997 to July 7, 1997, $170 for the period from July
7, 1997 to December 31, 1997, $829 for the year ended December 31, 1998, $125
for the three months ended March 31, 1998, and $271 for the three months ended
March 31, 1999.
8. Pro Forma Loss Per Share (Unaudited)
Pro forma basic and diluted loss per share have been calculated assuming that
the common shares issued in connection with our recapitalization in April 1999
were outstanding for all periods of Digex presented. The following table
summarizes the calculation of pro forma loss per share assuming that the
capitalization of the Company in April 1999 was in effect for all periods
presented below:
<TABLE>
<CAPTION>
Predecessor The Company
------------ ------------------------------------
Period from
July 1, 1997 Three months ended
to Year ended March 31,
December 31, December 31, ----------------------
1997 1998 1998 1999
------------ ------------ ---------- ----------
<S> <C> <C> <C> <C>
Net loss, as reported...................................................... $ (18,558) $ (16,581) $ (3,789) $ (8,595)
=========== =========== ========== ==========
Weighted average common shares (pro forma)................................. 1,000 1,000 1,000 1,000
=========== =========== ========== ==========
- --------------------------------------------------Loss per share:
Basic.................................................................... $(18,558.00) $(16,581.00) $(3,789.00) $(8,595.00)
=========== =========== ========== ==========
Diluted.................................................................. $(18,558.00) $(16,581.00) $(3,789.00) $(8,595.00)
</TABLE>
The above table reflects no adjustments for stock options, as the effect of
options was anti-dilutive.
F-16
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
9. Business Combination
On July 7, 1997, Intermedia purchased the outstanding common stock of
Business Internet, a nationwide Internet services provider and Web site
management company in a business combination accounted for as a purchase. The
purchase price was allocated to the fair values of assets acquired and
liabilities assumed, with the difference recorded as goodwill, which is being
amortized over ten years.
The following table summarizes the allocation of the purchase price to the
acquired assets and assumed net liabilities of the Company:
<TABLE>
<S> <C>
Estimated net fair values of operating assets and
liabilities................................................. $ (3,721)
Purchased intangible assets:
Trade name................................................. 9,750
Customer list.............................................. 3,120
Acquired workforce......................................... 1,253
Developed technologies..................................... 2,720
Goodwill................................................... 19,099
In-process research and development.......................... 15,000
--------
$ 47,221
========
</TABLE>
The amount allocated to in-process research and development ("IPR&D") of
$15,000 was recorded as a one-time charge to operations in 1997 because the
technology was not fully developed and had no alternative future use.
Management is primarily responsible for estimating the fair value of the
purchased IPR&D.
The fair value of the IPR&D was estimated by management using an income
approach. The value allocated to IPR&D was determined by estimating the costs
to develop the purchased technology into commercially viable services,
estimating the resulting net cash flows, excluding the cash flows related to
the portion that was incomplete at the acquisition date, and discounting the
net cash flows to the present value. The forecast was based upon future
discounted cash flows, taking into account the stage of development of the
IPR&D, the costs to develop the IPR&D, the expected income stream, the life
cycle of the technology ultimately developed, and the associated risks. The
selection of the applicable discount rate was based on consideration of the
costs of capital of Digex and Intermedia, as well as other factors including
the useful life of the technology, profitability levels, the uncertainty of
technology advances that were known at the time, and the stage of completion
related to the technology.
The IPR&D involved development, engineering, and testing activities
associated with the completion of next generation Web site management services.
The primary effort involved the development of an additional Web site
management facility on the West Coast. The development of technology related to
this project was considered critical to alleviating capacity constraints and
adding significant new service capabilities. Upon completion, the new Web site
management facility management facility was expected to result in faster and
easier installation of customers' servers as well as efficient traffic
management with significantly less overhead. Related efforts involved the
development and integration of next generation routers to support greater
transmission capacity, as well as a new software architecture to assist in
balancing traffic loads. Another critical element involved the development of
site mirroring, the ability to create exact replicas of Web sites at each of
Digex's two sites for greater service reliability.
At the valuation date, Digex was approximately 75% complete with the
development of its next generation Web site management services, and
substantial progress had been made in the areas of specification, design, and
implementation. In particular, engineers had made significant progress in the
areas of architecture
F-17
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
9. Business Combination (Continued)
development as well as the development of site mirroring capabilities. The
Company anticipated that the R&D would be completed in phases by the end of
1998, after which the Company expected to begin generating economic benefits
from the value of the IPR&D. Total costs to complete were expected to be $100
for the remainder of 1997 and $400 in 1998. Projected future cash flows
attributable to Digex's IPR&D, assuming successful development of such
technologies, were discounted to the present value using a discount rate of
24%.
Intermedia management expected to continue development of the IPR&D efforts
at the valuation date, and believed there was a reasonable chance of
successfully completing such development. However, there was risk associated
with the completion of the IPR&D and there was no assurance that any of the
projects would meet with either technological or commercial success. Failure to
successfully develop and commercialize the IPR&D would result in the loss of
the expected economic return inherent in the fair value allocation.
On an unaudited pro forma basis, assuming the purchase had occurred at the
beginning of the 1997 year, total revenues would have been $11,612, net loss
would have been $(22,852) and net loss per share (basic and diluted) would have
been $(22.85), assuming that the recapitalization discussed in Note 10 had been
in effect for that period. However, pro forma results do not purport to be
indicative of the results that would have occurred if the acquisition had
occurred at the beginning of year.
10. Recapitalization and Affiliate Agreements (Unaudited)
Recapitalization
On April 26, 1999, the Company filed its Certificate of Incorporation in the
state of Delaware. Pursuant to the Certificate, the Company is authorized to
issue up to 9,000 shares of $.01 par value common stock, of which 6,000 will be
classified Class A and 3,000 Class B, and 100 shares of Preferred Stock. The
Class A and Class B common stock will be identified in all respects except that
the Class A will be entitled to one vote for each share and the Class B will be
entitled to ten votes for each share. In addition, on April 30, 1999, Business
Internet contributed the Company's assets to the newly formed corporation.
Liabilities of the Company were retained by Business Internet under this
recapitalization. The unaudited pro forma balance sheet at March 31, 1999
reflect the pro forma effect of this recapitalization.
Master Network Services Agreement
Pursuant to a Master Network Services Agreement, to be finalized before
consummation of the offering as described in Note 12, between Intermedia and
the Company, Intermedia will provide Internet network access, as well as
network-related services. The Master Network Agreement has an initial term of
two years, and requires the Company to purchase at least 70% of its non-peering
Internet and network access requirements from Intermedia. Rates charged to the
Company will generally be consistent with rates incurred during the periods
presented in the accompanying financial statements.
General and Administrative Services Agreement
Pursuant to a General and Administrative Services Agreement, entered into in
April, 1999, between Intermedia and the Company, Intermedia will provide the
back office and administrative services as listed below:
.Corporate Human Resources, including labor relations, payroll and training
.Treasury Management Services
F-18
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
10. General and Administrative Services Agreement (Continued)
.Tax services, including tax return preparation
.Facilities management services and property leasing
.Accounting and back office support services
.Investor relations
.Network engineering services
The General and Administrative Services Agreement has an initial term of five
years. Rates charged to the Company for these services are believed to be
consistent with the allocations in the accompanying financial statements. Rates
for services not previously provided to the Company (e.g. investor relations)
are based upon Intermedia and the Company's best estimate of the fair value of
those services.
11. Segments
As a provider of Web site hosting service, the Company has one reportable
operating segment. The revenue of this single segment is derived from service
offerings as reported in the Company's statement of operations. Substantially
all of the Company's revenue is attributable to customers in the United States.
Additionally, all of the Company's assets are located within the United States.
12. Proposed Public Offering of Common Stock (Unaudited)
The Board of Directors of Intermedia has authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
for the initial public offering of the Company's Class A Common Stock. The
Company contemplates using the proceeds from the proposed public offering to
finance its growth plans.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither Digex nor any underwriter has authorized anyone to provide
prospective investors with different or additional information. This prospec-
tus is not an offer to sell nor is it seeking an offer to buy these securities
in any jurisdiction where such offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of this prospec-
tus, regardless of the time of delivery of this prospectus or any sale of
these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 8
Use of Proceeds.......................................................... 19
Dividend Policy.......................................................... 19
Capitalization........................................................... 20
Dilution................................................................. 21
Selected Financial Data.................................................. 22
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 25
Business................................................................. 33
Management............................................................... 46
Long-Term Incentive Plan................................................. 51
Certain Relationships and Related Transactions........................... 54
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 59
Shares Eligible for Future Sale.......................................... 61
Underwriting............................................................. 63
Legal Matters............................................................ 64
Experts.................................................................. 64
Where You Can Find Additional Information................................ 65
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade these shares of common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[DIGEX logo]
Shares
Class A Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
CIBC World Markets
Legg Mason Wood Walker
Incorporated
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD fee), all of which will be borne by Digex, Incorporated:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee...................... $ 27,800
NASD filing fee.................................................... $ 10,500
Nasdaq National Market listing fee................................. $ 95,000
Blue Sky fees and expenses......................................... $ 7,500
Legal fees and expenses............................................ $350,000
Trustees' and Transfer Agents' fees................................ $
Accountants' fees and expenses..................................... $
Printing costs..................................................... $150,000
Miscellaneous...................................................... $
--------
Total............................................................ $
========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Digex's Certificate of Incorporation provides that Digex shall, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
indemnify all persons whom it may indemnify pursuant thereto (i.e., directors
and officers) and shall advance expenses incurred in defending any proceeding
for which such right to indemnification is applicable, provided that, if the
DGCL so requires, the indemnitee provides Digex with an undertaking to repay
all amounts advanced if it is determined by a final judicial decision that such
person is not entitled to indemnification pursuant to this provision. Digex's
Certificate of Incorporation also contains a provision eliminating the personal
liability of Digex's directors for monetary damages for breach of any fiduciary
duty. By virtue of this provision, under the DGCL, a director of Digex will not
be personally liable for monetary damages for breach of his fiduciary duty as a
director, except for liability for (i) any breach of the director's duty of
loyalty to Digex or its stockholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
dividends or stock purchases or redemptions that are unlawful under the DGCL,
and (iv) any transaction from which a director derives an improper personal
benefit. However, this provision of Digex's Certificate of Incorporation
pertains only to breaches of duty by directors as directors and not in any
other corporate capacity such as officers, and limits liability only for
breaches of fiduciary duties under the DGCL and not for violations of other
laws, such as the federal securities laws.
Our bylaws also provide that we must indemnify our directors, officers,
employees and agents, and that we must advance expenses, as incurred, to our
directors and officers in connection with a legal proceeding to the fullest
extent permitted by Delaware law, subject to certain very limited exceptions.
Prior to the completion of this offering, we intend to enter into
indemnification agreements with each of our directors and executive officers to
give them additional contractual assurances regarding the scope of the
indemnification described above and to provide additional procedural
protections. Generally, pursuant to each indemnification agreement, Digex will
indemnify a director or officer who is or was a party to any legal action by or
against the Indemnitee due to his or her position as a Digex director or
officer, known as the "Indemnitee," against the expenses, judgments, fines and
amounts paid in settlement that were actually and reasonably incurred by the
Indemnitee in connection with such legal action, provided that such Indemnitee
acted in good faith and in a manner not opposed to the best interests of Digex.
II-1
<PAGE>
We also intend to obtain directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities.
As a result of the inclusion of such provision, stockholders may be unable to
recover monetary damages against directors for actions taken by them that
constitute negligence or gross negligence or that are in violation of their
fiduciary duties, although it may be possible to obtain injunctive or other
equitable relief with respect to such actions. The inclusion of this provision
in Digex's Certificate of Incorporation may have the effect of reducing the
likelihood of derivative litigation against directors, and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefited Digex and its stockholders.
There is no pending litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Digex pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Item 15. Recent Sales of Unregistered Securities.
As of April 27, 1999, there had been no sales of Digex's unregistered
securities.
Item 16. Exhibits and Financial Data Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Proposed Form of Underwriting Agreement.*
2.1 Contribution Agreement by and between Digex and Business Internet,
Inc., dated as of April 30, 1999.
2.2 Assignment and Assumption Agreement by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.
2.3 Trademark Assignment by and between Digex and Business Internet, Inc.,
dated as of April 30, 1999.
2.4 Bill of Sale to the Contribution Agreement, dated as of April 30,
1999.
3.1 Certificate of Incorporation of Digex, Incorporated.
3.2 Bylaws of Digex, Incorporated.
3.3 Certificate of Amendment to the Certificate of Incorporation of
Digex.*
4.1 See the Certificate of Amendment to the Certificate of Incorporation
of Digex filed as Exhibit 3.3.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP*
10.1 Customer Agreement by and between Digex and Pandesic, LLC, dated as of
January 7, 1999.*
10.2 Lease by and between Intermedia and Intel Corporation, dated as of
November 10, 1998.
10.3 Lease by and between Intermedia and Ammendale Commerce Center Limited
Partnership, dated as of April 15, 1998.
10.4 Lease by and between Intermedia and 1111 19th Street Associates, dated
as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of February 19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of January 4, 1999.*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
10.7 Software License and Services Agreement by and between Digex and
Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft Corporation,
dated as of [ ].*
10.9 Service Provider Agreement by and between Digex and Sun Microsystems,
Inc., dated as of [ ].*
10.10 Consulting Letter Agreement by and between Digex, Intermedia and
Andersen Consulting LLP, dated as of November 16, 1998.*
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included as part of the signature page of Digex's
registration statement on Form S-1 filed with the Commission on April
27, 1999).
24.2 Power of Attorney (1).
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- --------
(1) Filed as part of Digex's registration statement on Form S-1 filed with the
Commission on April 27, 1999.
* To be filed by Amendment to this Registration Statement.
(b) Financial Statement Schedules.
The financial statements and financial statement schedules filed as part of
this Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page F-1 of
the Prospectus included in this Registration Statement.
2. Financial Statement Schedules.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by Digex pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be an initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Digex
pursuant to the foregoing provisions, or otherwise, Digex has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Digex of expenses incurred or paid by a
director, officer or controlling person of Digex in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, Digex
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Digex has duly caused
this Amendment No. 1 to the Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Beltsville, State
of Maryland, on this 14th day of June, 1999.
Digex, Incorporated
/s/ Nancy G. Faigen
By: _________________________________
Nancy G. Faigen
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officers:
/s/ Nancy G. Faigen President and Chief June 14, 1999
______________________________________ Executive Officer
Nancy G. Faigen
Principal Financial and Accounting Officers:
* Acting Chief Financial June 14, 1999
______________________________________ Officer
Robert M. Manning
* Acting Controller June 14, 1999
______________________________________
Jeanne Walters
/s/ David C. Ruberg Chairman of the Board June 14, 1999
______________________________________
David C. Ruberg
/s/ Nancy G. Faigen Director June 14, 1999
______________________________________
Nancy G. Faigen
* Director June 14, 1999
______________________________________
John C. Baker
* Director June 14, 1999
______________________________________
Philip A. Campbell
* Director June 14, 1999
______________________________________
George F. Knapp
* Director June 14, 1999
______________________________________
Pierce J. Roberts, Jr.
*By: _________________________________
/s/ David C. Ruberg
David C. Ruberg
as attorney-in-fact
</TABLE>
II-4
<PAGE>
DIGEX, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deductions -- End of
Description of Period Expenses Accounts Describe Period
- ----------- ---------- ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
The Predecessor
For the year ended
December 31, 1996:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ -- $ 233 $-- $ -- $ 233
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- 1,358 -- -- 1,358
===== ====== ==== ===== ======
For the period from
January 1, 1997 to July
6, 1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 233 352 -- 278(1) 307
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... 1,358 3,359 -- -- 4,717
===== ====== ==== ===== ======
The Company
For the period from July
7, 1997 to December 31,
1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 307 498 -- 436(1) 369
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- -- -- -- --
===== ====== ==== ===== ======
For the year ended
December 31, 1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 369 1,491 -- 1,141(1) 719
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- 5,349 -- -- 5,349
===== ====== ==== ===== ======
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
1.1 Proposed Form of Underwriting Agreement.*
2.1 Contribution Agreement by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.
2.2 Assignment and Assumption Agreement by and between Digex and
Business Internet, Inc., dated as of April 30, 1999.
2.3 Trademark Assignment by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.
2.4 Bill of Sale to the Contribution Agreement, dated as of April
30, 1999.
3.1 Certificate of Incorporation of Digex, Incorporated.**
3.2 Bylaws of Digex, Incorporated.**
3.3 Certificate of Amendment to the Certificate of Incorporation of
Digex.*
4.1 See the Certificate of Amendment to the Certificate of
Incorporation of Digex filed as Exhibit 3.3.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.*
10.1 Customer Agreement by and between Digex and Pandesic, LLC,
dated as of January 7, 1999.*
10.2 Lease by and between Intermedia and Intel Corporation, dated as
of November 10, 1998.
10.3 Lease by and between Intermedia and Ammendale Commerce Center
Limited Partnership, dated as of April 15, 1998.
10.4 Lease by and between Intermedia and 1111 19th Street
Associates, dated as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a The Murray Company, dated as of February
19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a The Murray Company, dated as of January
4, 1999.*
10.7 Software License and Services Agreement by and between Digex
and Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft
Corporation, dated as of [ ].*
10.9 Service Provider Agreement by and between Digex and Sun
Microsystems, Inc., dated as of [ ].*
10.10 Consulting Letter Agreement by and between Digex, Intermedia
and Andersen Consulting LLP, dated as of November 16, 1998.*
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included as part of the signature page of
Digex's registration statement on Form S-1 filed with the
Commission on April 27, 1999).
24.2 Power of Attorney (1).
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- --------
(1) Filed as part of Digex's registration statement on Form S-1 filed with the
Commission on April 27, 1999.
*To be filed by Amendment.
** Filed as an exhibit to Digex's registration statement on Form S-1 filed with
the Commission on April 27, 1999.
<PAGE>
Exhibit 2.1
CONTRIBUTION AGREEMENT
CONTRIBUTION AGREEMENT, dated as of April 30, 1999, by and between
BUSINESS INTERNET INC., a Delaware corporation ("BII"), and DIGEX INCORPORATED,
---
a Delaware corporation ("Digex").
-----
R E C I T A L S :
---------------
BII is engaged in the business of, among other things, providing Web
hosting and related services (as reflected in the balance sheet attached as
Schedule A, the "Business").
- ---------- --------
Upon the terms and subject to the conditions of this Agreement, the
parties desire that BII contribute to Digex BII's entire interest in the assets
of the Business, in exchange for the issuance by Digex to BII of 1000 shares of
Class B Common Stock, $.01 par value, of Digex (the "Class B Common Shares").
---------------------
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants set forth herein, the parties agree as follows:
1. Contribution of Assets.
----------------------
1.1 Upon the terms and subject to the conditions of this Agreement,
BII hereby contributes, sells, conveys, transfers, assigns and delivers to
Digex, free and clear of any and all mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (collectively, "Liens") all of BII's
right, title and interest in and to all of the assets, properties, goodwill and
business of every kind and description and wherever located, whether tangible or
intangible, real, personal or mixed, directly or indirectly owned by BII or to
which BII is directly or indirectly entitled and, in any case, belonging to or
used or intended to be used in the Business (collectively, the "Assets"), except
------
for the Excluded Domain Name (as defined in Section 1.2), it being acknowledged,
for the avoidance of doubt, that the Business shall not be deemed to include any
assets or properties belonging to or intended to be used in connection with
BII's business of providing public internet access services and customer network
and application services. The Assets shall include, without limitation, all of
the following:
(a) the Business as a going concern;
(b) all computer, furniture, machinery, equipment, furnishings,
operating equipment, supplies and tools, and all parts thereof and
accessions thereto, owned by BII, and other tangible personal
property used or held for use by BII at the locations at which the
Business is conducted, or otherwise owned or held by BII on the
date hereof for use in the conduct of the Business (the
"Equipment");
---------
1
<PAGE>
(c) all inventory (including supplies, work-in-progress, in-transit
inventory and finished goods), owned by BII, which is held for
sale to customers in the ordinary course of the Business (the
"Inventory");
---------
(d) all names, trademarks, trade names, service marks (the
"Trademarks"), know-how, copyrights, patents, patent applications
----------
(including reissues, renewals, continuations, continuations-in-
part, or divisions of any patent or patent application), trade
secrets, instructions, improvements, modifications, suggestions,
proposals, programs, methods, formulas, ideas, writings, and the
like of any sort whatsoever, and any embodiment thereof
including, but not limited to, computer programs, documentation
of programs, plans, specifications, results of technical
investigations and other proprietary information used by BII in
connection with the Business (the "Intellectual Property");
---------------------
(e) all books of account, general, financial and tax records,
invoices, correspondence and other documents records and files
associated with or employed by BII or used in, or relating to,
the Business;
(f) all sales and promotional literature, customer lists and other
sales-related materials owned, used, associated with or employed
by BII in the Business on the date hereof;
(g) all rights of BII under all contracts (including but not limited
to licensing agreements), leases, commitments, and sales and
purchase orders, and under all commitments, used by BII in
connection with the Business (the "Acquired Contracts");
------------------
(h) all governmental and industry franchises, permits, licenses,
agreements, waivers and authorizations held or used by BII in
connection with, or required for, the Business;
(i) the goodwill of BII relating to the Business; and
(j) all claims, causes of action, choses in action, rights of
recovery and rights of set-off of any kind (including rights to
insurance proceeds and rights under and pursuant to all
warranties, representations and guarantees made by suppliers of
products, materials or equipment, or components thereof),
pertaining to, arising out of, and enuring to the benefit of BII
in connection with the Business or the ownership, use, function
or value of any of the Assets.
1.2 Notwithstanding anything herein to the contrary, the Assets shall
not be deemed to include the "Digex.net" domain name (the "Excluded Domain
---------------
Name"), and BII shall
- ----
2
<PAGE>
retain all right, title and interest in and to the Excluded Domain Name. BII
shall use commercially reasonable efforts to decrease and ultimately discontinue
its use of the Excluded Domain Name.
1.3 Concurrently herewith, BII is delivering to Digex (i) the Bill of
Sale attached as Exhibit A annexed hereto, (ii) the Assignment and Assumption
---------
Agreement attached as Exhibit B annexed hereto and (iii) the Trademark
---------
Assignment attached as Exhibit C annexed hereto (collectively, the "Transfer
--------- --------
Documents"). From time to time, pursuant to the reasonable request of Digex,
- ---------
BII, at BII's expense and without any further consideration, will execute and
deliver to Digex such additional instruments and documents of conveyance and
transfer, and do and cause to be done such acts or things, as Digex may
reasonably request in order to more effectively sell, convey, transfer and
assign to Digex, or to perfect or record Digex's interest in or title to, or to
enable Digex to use, any and all of the Assets, or otherwise to carry out the
purposes and intent of this Agreement.
2. Consideration.
-------------
In consideration of the sale and transfer of the Assets, concurrently
herewith, Digex is issuing the Class B Common Shares and delivering to BII
certificates representing the Class B Common Shares.
3. Representations and Warranties of BII.
-------------------------------------
BII hereby represents and warrants to Digex as follows:
3.1 Organization of BII. BII is a corporation duly organized, validly
-------------------
existing and in good standing under the laws of the State of Delaware.
3.2 Authority. BII has all requisite power and authority to execute
---------
and deliver this Agreement and the Transfer Documents, to carry out its
obligations hereunder and thereunder, and to consummate the transactions
contemplated hereby and thereby. BII has obtained all necessary corporate
approvals for the execution and delivery of this Agreement and the Transfer
Documents, the performance of its obligations hereunder and thereunder, and the
consummation of the transactions contemplated hereby and thereby. This Agreement
has been, and upon their execution by BII each of the Transfer Documents will
be, duly executed and delivered by BII and (assuming due authorization,
execution and delivery by Digex) shall constitute BII legal, valid and binding
obligation, enforceable against it in accordance with its terms.
3.3 Non-Contravention. None of the execution and delivery of this
-----------------
Agreement or the Transfer Documents, the performance of the obligations
hereunder or thereunder, or the consummation of the transactions contemplated
hereby and thereby will conflict with BII's Certificate of Incorporation or By-
laws or will, with or without notice, the passage of time or both, constitute a
breach or violation of, be in conflict with, constitute or
3
<PAGE>
create a default under, or result in the creation or imposition of any Liens
under, (a) any contract, indenture, agreement, instrument, mortgage, lease or
commitment to which BII is a party or by which its properties is bound, or to
which it is subject, except that BII has not obtained the consent of the other
party to certain Acquired Contracts to the assignment thereof to Digex, or (b)
any law or statute or any judgment, decree, order, regulation or rule of any
court or governmental or regulatory authority relating to Bll or the Business.
3.4 Litigation, etc. There are no judicial or administrative actions,
---------------
suits, proceedings or investigations, pending or threatened in writing, which
question the validity of this Agreement or challenge any of the transactions
contemplated hereby.
3.5 Ownership and Transfer of Assets. BII has valid, good and
--------------------------------
marketable title to, or in the case of leased or subleased Assets, valid and
subsisting leasehold interests in, all of the Assets, and such Assets are free
and clear of all Liens. BII has the unrestricted right to sell, transfer,
assign, convey and deliver to Digex all right, title and interest in and to, or
in the case of leased or subleased Assets, all right, title and interest in and
to the leasehold interest relating to, the Assets without penalty or other
adverse consequences.
3.6 Status of Agreements. The Acquired Contracts are valid, legally
--------------------
binding and enforceable in accordance with their terms and are in full force
and effect. There are no existing defaults (or events that, with notice or lapse
of time or both, would constitute a default) on the part of BII with respect to
any Acquired Contract.
3.7 Compliance with Laws. The Company is in compliance in all
--------------------
material respects with all laws, rules, regulations and orders of any
governmental body.
3.8 Intellectual Property . BII is not aware of any assertion or
---------------------
claim challenging the validity of any Intellectual Property. The consummation of
the transactions contemplated by this Agreement will not result in the
termination or impairment of any such Intellectual Property. BII has not
received any claim or written notice from any person or entity to the effect
that the use of such Intellectual Property conflicts with or infringes on the
rights of any other person or entity.
4. Representations and Warranties of Digex.
---------------------------------------
Digex represents and warrants to BII as follows:
4.1 Organization of Buyer. Digex is a corporation duly organized,
---------------------
validly existing and in good standing under the laws of the State of Delaware.
4.2 Authority. Digex has all requisite power and authority to execute
---------
and deliver this Agreement, to carry out its obligations hereunder, and to
consummate the transactions contemplated hereby. Digex has obtained all
necessary corporate approvals for the execution and delivery of this Agreement,
the performance of its obligations hereunder, and the
4
<PAGE>
consummation of the transactions contemplated hereby. This Agreement has been
duly executed and delivered by Digex and (assuming due authorization, execution
and delivery by BII) constitute Digex's legal, valid and binding obligation,
enforceable against it in accordance with its terms. When issued in accordance
with the terms of this Agreement, the Class B Common Shares will be duly
authorized, validly issued, fully paid and nonassessable.
4.3 Non-Contravention. None of the execution and delivery of this
-----------------
Agreement by Digex, the performance of its obligations hereunder, or the
consummation by Digex of the transactions contemplated hereby will constitute a
violation of, or be in conflict with, Digex's Certificate of Incorporation and
By-laws or will, with or without notice, the passage of time or both, constitute
a breach or violation of, be in conflict with, create a default under or result
in the creation or imposition of any Liens upon any property of Digex pursuant
to (a) any contract, indenture, agreement, instrument, mortgage, lease or
commitment to which Digex is a party or by which any of its properties are
bound, or to which Digex is subject or (b) any law or statute or any judgment,
decree, order, regulation or rule of any court or governmental or regulatory
authority relating to Digex.
5. General.
-------
5.1 Entire Agreement. This Agreement, together with the Schedules and
----------------
Exhibits hereto and the Transfer Documents, contain the entire understanding of
the parties and supersede all prior agreements and understandings relating to
the subject matter hereof and this Agreement shall not be amended except by a
written instrument hereafter signed by all of the parties hereto.
5.2 Assignment. None of the parties hereto may assign its rights or
----------
delegate its obligations under this Agreement without the written consent of the
other parties hereto. All of the provisions hereof shall be binding upon and
inure only to the benefit of the parties hereto and their respective heirs,
executors, personal representatives and successors.
5.3 Notices. All notices, requests, claims, demands and other
-------
communications hereunder shall be in writing and shall be given or made (and
shall be deemed to have been duly given or made upon receipt) by delivery in
person, by courier service, by cable, by telecopy, by telegram, by telex or by
registered or certified mail (postage prepaid, return receipt requested) to the
parties at the following addresses (or at such other address for a party as
shall be specified by like notice):
(a) if to BII:
1 Digex Plaza
Beltsville, MD 20705
with a copy to:
Kronish Lieb Weiner & Hellman LLP
5
<PAGE>
1114 Avenue of the Americas
New York, New York 10036
Attention: Ralph J. Sutcliffe, Esq.
(b) if to Digex:
1 Digex Plaza
Beltsville, MD 20705
with a copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
Attention: Ralph J. Sutcliffe, Esq.
5.4 Governing Law; Jurisdiction. The validity and construction of
---------------------------
this Agreement and the Transfer Documents shall be governed by the laws of the
State of New York, without regard to the conflicts of law principles thereof.
Any legal action or proceeding with respect to this Agreement or any Transfer
Document shall be brought
6
<PAGE>
exclusively in the courts of the States Of New York located within New York or,
if it can acquire jurisdiction, the Federal District Court for the Southern
District of New York.
IN WITNESS WHEREOF, and intending to be legally bound thereby, the
parties hereto have duly executed and delivered this Agreement or caused
this Agreement to be duly executed and delivered by their duly authorized
officers as of the date and year first above written.
BUSINESS INTERNET INC.
By: /s/ Robert M. Manning
----------------------------------
Name: Robert M. Manning
Title: Vice President, Treasurer
and Assistant Secretary
DIGEX INCORPORATED
By: /s/ Nancy G. Faigen
----------------------------------
Name: Nancy G. Faigen
Title: President and Chief
Executive Officer
<PAGE>
Exhibit 2.2
ASSIGNMENT AND ASSUMPTION AGREEMENT
-----------------------------------
ASSIGNMENT AND ASSUMPTION AGREEMENT dated as of April 30 1999,
between BUSINESS INTERNET, INC., a Delaware corporation having an office at 1
Digex Plaza, Beltsville, Maryland 20705 ("Assignor") and DIGEX, INCORPORATED, a
--------
Delaware corporation having an office at 1 Digex Plaza Beltsville, Maryland
20705 ("Assignee").
--------
RECITALS
--------
WHEREAS, Assignor and Assignee have entered into a Contribution
Agreement dated as of the date hereof (the "Contribution Agreement"), pursuant
----------------------
to which Assignor is transferring to Assignee, among other things, all of
Assignor's right, title and interest under the Acquired Contracts, as such term
is defined in the Contribution Agreement; and
WHEREAS, the parties desire that Assignor assign to Assignee all of
Assignors' rights, title and interest in and to the Acquired Contracts and that
Assignee assume all of Assignor's liabilities and obligations thereunder arising
on or after the date hereof
NOW THEREFORE, in consideration of the foregoing premises, and for
other good and valuable consideration, the parties hereby agree as follows;
1. Assignor hereby assigns and transfers to Assignee, all of
Assignor's rights, title and interest in and to the Acquired Contracts.
2. Assignee hereby accepts such transfer and assumes and agrees to
perform when due all of the liabilities and obligations of Assignor under the
Acquired Contracts arising on or after the date hereof.
3. This agreement constitutes the legal, valid and binding obligations
of Assignor and Assignee enforceable in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this instrument as of
the date first written above.
BUSINESS INTERNET, INC.
By: /s/ Robert M. Manning
-----------------------------------
Name: Robert M. Manning
Title: Vice President, Treasurer and
Assistant Secretary
DIGEX INCORPORATED
By: /s/ Nancy G. Faigen
-----------------------------------
Name: Nancy G. Faigen
Title: President and Chief
Executive Officer
<PAGE>
EXHIBIT 2.3
TRADEMARK ASSIGNMENT
ASSIGNMENT, made as of April 30, 1999, from BUSINESS INTERNET, INC., a
Delaware corporation with an office at 1 Digex Plaza, Beltsville, Maryland 20705
("Assignor"), to DIGEX, INCORPORATED, a Delaware corporation with an office at 1
--------
Digex Plaza, Beltsville, Maryland 20705 ("Assignee").
--------
RECITALS
--------
Assignor and Assignee have entered into a Contribution Agreement dated
as of the date hereof (the "Contribution Agreement"), pursuant to which Assignor
----------------------
is transferring to Assignee, among other things, Assignor's right, title and
interest in and to the Trademarks, as such term is defined in the Contribution
Agreement.
Assignor is the owner of the Trademarks, including, but not limited to
those Trademarks identified on Schedule A attached hereto.
Assignor desires to assign, and Assignee desires to acquire by this
instrument, all of Assignor's right, title and interest in and to the
Trademarks, all goodwill associated therewith, and all common law rights
therein.
NOW, THEREFORE, in consideration of the foregoing premises, and for
other good and valuable consideration, the receipt of which is hereby
acknowledged, Assignor hereby sells, assigns, and transfers to Assignee, its
successors and assigns, all of Assignor's right, title and interest, in and to
the Trademarks, including common law rights, together with all of the goodwill
symbolized by and associated with the Trademarks, all income, royalties, fees,
and payments now or hereafter due or payable in respect thereto, and the right
to file any action and recover damages for any present or future infringement or
misappropriation of the Trademarks or any other rights assigned to Assignee
under this Assignment.
Assignor hereby agrees to execute, acknowledge and deliver to Assignee
all documents as may be necessary to make a record with any government agencies,
courts or third parties, of Assignee's ownership of all right, title and
interest in and to the Trademarks and the goodwill associated therewith.
<PAGE>
IN WITNESS WHEREOF, the parties have duly executed this Trademark
Assignment on the date first above written.
ASSIGNOR: BUSINESS INTERNET, INC.
By: /s/ Robert M. Manning
-------------------------
Name: Robert M. Manning
Title: Vice President, Treasurer,
Assistant Secretary
ASSIGNEE: DIGEX, INCORPORATED
By: /s/ Nancy G. Faigen
-------------------------
Name: Nancy G. Faigen
Title: President and Chief
Executive Officer
<PAGE>
SCHEDULE A
----------
TRADEMARKS
- --------------------------------------------------------------------------------
MARK PTO NO. FILE DATE
- --------------------------------------------------------------------------------
DIGEX E-LINK SN 75 577541 10/27/98 pending
- --------------------------------------------------------------------------------
DIGEX 2001489(text) 10/13/95 registered
SN 75 113168 (design) 6/03/96 registered
SN 75 113193 (design) 6/03/96 registered
- --------------------------------------------------------------------------------
DIGITAL EXPRESS 2106263 10/26/95 registered
GROUP, Inc.
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT 2.4
BILL OF SALE
KNOW ALL MEN BY THESE PRESENTS that BUSINESS INTERNET, INC., a
Delaware corporation ("BII"), for good and valuable consideration, the receipt
---
of which is hereby acknowledged, and pursuant to a Contribution Agreement dated
as of the date hereof (the "Contribution Agreement") by and between BII and
----------------------
DIGEX, INCORPORATED, a Delaware corporation ("Digex"), does hereby transfer,
-----
convey and assign to Digex and its successors and assigns all right, title and
interest of BII, as of the date hereof, in and to all Equipment and Inventory,
as such terms are defined in the Contribution Agreement. Expressly excluded from
this Bill of Sale is any and all right BII has in the Excluded Domain Name (as
defined in the Contribution Agreement).
TO HAVE AND TO HOLD unto Digex and its successors and assigns,
forever.
BII hereby covenants and agrees to execute and deliver, or cause to be
executed and delivered, and to do or make, or cause to be done or made, upon the
reasonable request of Digex, any and all agreements, instruments, papers, acts
or things, supplemental, confirmatory or otherwise, as may reasonably be
required by Digex for the purpose of or in connection with the perfecting or
completing the transfer hereunder of the Equipment and the Inventory and
otherwise carrying out the purposes and intent of the Contribution Agreement.
BII further covenants and agrees that the covenants herein contained
shall inure to the benefit of the successors and assigns of Digex.
The Equipment and the Inventory are transferred, assigned and
delivered to Digex free and clear of any and all Liens (as defined in the
Contribution Agreement).
This Bill of Sale shall not constitute an assignment or transfer of
any interest in any instrument, contract, lease or permit or other agreement or
arrangement or any claim, right or benefit arising hereunder or resulting
therefrom, if an assignment or transfer without the consent of a third party
would constitute a breach or violation thereof or affect adversely the rights of
BII or Digex hereunder, unless and until such consent has been obtained.
This Bill of Sale is intended to implement the provisions of the
Contribution Agreement and shall not be construed to enhance, extend or limit
the rights or obligations of BII or Digex thereunder.
This Bill of Sale shall be construed and enforced in accordance with
and governed by the laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, this Bill of Sale has been executed as of April 30,
1999.
BUSINESS INTERNET, INC.
By: /s/ Robert M. Manning
-------------------------
Name: Robert M. Manning
Title: Vice President, Treasurer,
and Assistant Secretary
<PAGE>
EXHIBIT 10.2
INTEL CORPORATION
NET LEASE
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. SALIENT LEASE TERMS............................................. 1
2. PREMISES........................................................ 2
3. TERM............................................................ 2
4. DELAY IN DELIVERY OF POSSESSION................................. 3
5. MINIMUM RENT.................................................... 3
6. TAXES........................................................... 5
7. COMMON AREAS AND COMMON AREA COSTS.............................. 7
8. ASSIGNMENT AND SUBLETTING....................................... 11
9. PROPERTY INSURANCE.............................................. 15
10. LIABILITY INSURANCE............................................. 16
11. INSURANCE POLICY REQUIREMENTS................................... 17
12. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION............... 18
13. DESTRUCTION..................................................... 20
14. ACCORD AND SATISFACTION......................................... 21
15. SECURITY DEPOSIT................................................ 21
16. USE............................................................. 21
17. COMPLIANCE WITH LAWS AND REGULATIONS............................ 22
18. UTILITIES....................................................... 29
19. ALTERATIONS..................................................... 30
20. MAINTENANCE AND REPAIRS......................................... 33
21. CONDEMNATION.................................................... 33
22. ABANDONMENT..................................................... 35
23. ENTRY BY LESSOR................................................. 35
24. SIGNS........................................................... 36
25. DEFAULT......................................................... 36
26. REMEDIES UPON DEFAULT........................................... 37
27. FORFEITURE OF PROPERTY AND LESSOR'S LIEN........................ 39
28. SURRENDER OF LEASE.............................................. 39
29. LESSOR'S EXCULPATION............................................ 39
30. ATTORNEYS' FEES................................................. 40
31. NOTICES......................................................... 41
32. SUBORDINATION................................................... 42
33. ESTOPPEL CERTIFICATES........................................... 43
34. WAIVER.......................................................... 43
35. HOLDING OVER.................................................... 43
36. SUCCESSORS AND ASSIGNS.......................................... 44
37. TIME............................................................ 44
38. EFFECT OF LESSOR'S CONVEYANCE................................... 44
39. TRANSFER OF SECURITY............................................ 44
40. CORPORATE AUTHORITY............................................. 44
41. WAIVER OF CALIFORNIA CODE SECTIONS.............................. 45
42. WASTE........................................................... 45
43. BANKRUPTCY...................................................... 45
44. LATE CHARGES.................................................... 47
45. MORTGAGEE PROTECTION............................................ 47
46. MISCELLANEOUS PROVISIONS........................................ 48
</TABLE>
<PAGE>
NET LEASE
1. SALIENT LEASE TERMS
THIS LEASE is dated for reference purposes only this 10th day of November, 1998.
1.1 Rent Payment: Intel Corporation
Attn: Real Estate Dept C10-20
5000 W. Chandler Blvd
Chandler, AZ 85226
1.2 Parties and Notice Lessor:
Intel Corporation
Attn: Real Estate Dept C10-20
5000 W. Chandler Blvd
Chandler, AZ 85226
with simultaneous copy to:
Intel Corporation
Attn: Legal Dept
2200 Mission College Blvd
Santa Clara, CA 95052
Lessee:
Intermedia Communications
3625 Queen Palm Drive
Tampa, FL 33619
Attn: Legal Dept.
with simultaneous copy to:
CB/Richard Ellis
Attn: Facilities Management
201 E. Kennedy Blvd, #1121
Tampa, FL 33602
(If more than one party, then the
obligations hereunder shall be joint
and several.)
(Section 46.12)
1.3 Premises: (A) Name and Location of Complex
2950 Zanker Road, San Jose, CA
(B) Leased Premises:
Entire Building/Complex
(C) Approximate building area:
69,700 square feet
(Section 2.2)
1.4 Term: (A) Commencing upon:
November 16, 1998
(B) Term:
Ten (10) years
(Section 3.1)
<PAGE>
1.5 Rent: (A) Minimum Rent:
11/98 - 10/99 $125,460.00
11/99 - 10/00 $128,596.50
11/00 - 10/01 $131,811.41
11/01 - 10/02 $135,106.70
11/02 - 10/03 $138,484.37
11/03 - 10/04 $141,946.47
11/04 - 10/05 $145,495.14
11/05 - 10/06 $149,132.51
11/06 - 10/07 $152,860.83
11/07 - 10/08 $156,682.35
(Section 5.1)
(B) Advance Rent:
$125,460.00
(Section 5.2)
1.6 Security Deposit: none
1.7 Use: General office, telecommunications switching,
web site management, data center and directly
related uses.
(Section 16.1)
1.8 Initial Pro Rata %: 100%
(Section 6.3)
1.9 Contents: This Lease consists of:
Pages 1 through 48
Sections 1 through 46.17
Addenda:
Exhibits:
A - Legal Description of Complex
B - Plan of Complex Showing Location of
Leased Premises
C - Tenant Improvements
D - Acknowledgment of Commencement of
Term
E - Rules and Regulations
F - Condition of the Leased Premises
The above terms are incorporated in this Lease as indicated above and referenced
herein.
<PAGE>
Definitions of the terms in this Lease appear in the following
sections: alterations, 19.2; Award, 21.1(c); bankruptcy event, 43.1; Building,
2.2; Capital Costs, 6.4; Common Area Costs, 7.4; Common Areas, 7.1; Complex,
2.2; Complex Insurance Premium, 8.3(a); Condemnation, 21.1(a); Condemner,
21.1(d); Date of taking, 21.1(b); debtor, 43.1(a); Decision Period, 21.4;
Environmental Laws, 17.3(a); Hazardous Materials, 17.3(a); Hazardous Use,
17.3(b); Leased Premises, 2.2; Lines, 2.2; Minimum Rent, 5.1; Nonterminating
Party, 21.4; notice, 32.2; obligor, 32.3; person, 46.2; Plans, 19.2(b); pro rata
%, 7.3; Real Property Taxes, or Taxes, 6.1; rent or rental, 27.2(a); Rentable
Area, 8.6; Report, 17.3(c); restrictions, 2.3; Security Deposit, 5.2; tax bill,
6.4; Term, 1.4; Terminating Party, 21.4; Termination Notice, 9.6; Transfer of
the Leased Premises, or Transfer, 8.2; uninsured property loss, 13.1; Usable
Area, 8.6; Wetlands, 17.4; Wetlands Laws, 17.4; worth at the time of award,
27.2(b).
2. PREMISES
2.1 Demising Clause.
Lessor hereby leases to Lessee, and Lessee hires from Lessor a portion of
the Complex as hereinafter defined.
2.2 Description.
The term "Complex" shall refer to that parcel of real property as described
with particularity in Exhibit A attached hereto and made a part hereof by
reference, and described generally in Section 1.3(A) hereof. The Complex
contains, among other things, electrical (other than electrical wiring
terminating at or connected to Building standard electrical outlets), cables,
wires, duct work, sensors, switching equipment, control boxes and related
improvements at the Complex, Building or the Leased Premises ("Lines"). The
premises leased herein are described in Section 1.3(B) consisting of the
approximate amount of square footage as specified in Section 1.3(C) hereof (the
"Leased Premises"). The term "Building" shall refer to the Building located on
the Complex.
3. TERM
3.1 Commencement Date.
The term of this Lease shall commence on the date specified in Section
1.4(A) hereof and shall be for the Term specified in Section 1.4(B) hereof,
plus any partial month at the commencement of the Term.
3.2 Acknowledgment of Commencement.
Within thirty (30) days after delivery of the Leased Premises to Lessee,
Lessee shall execute a written acknowledgment of the date of commencement in the
form attached hereto as Exhibit D and by this reference it shall be incorporated
herein.
Page 2
<PAGE>
4. DELAY IN DELIVERY OF POSSESSION
4.1 Delay.
If Lessor, for any reason whatsoever, cannot deliver possession of the
Leased Premises to Lessee at the commencement of the Term for a period of not
more than sixty (60) days, this Lease shall not be void or voidable, nor shall
Lessor be liable for any loss or damage resulting therefrom, but in that event,
there shall be an abatement of rent covering the period between the commencement
of the Term and the time when Lessor delivers possession. If Lessor, for any
reason whatsoever, cannot deliver possession of the Leased Premises to Lessee
within sixty (60) days of the commencement of the Term, Lessee may, in its sole
discretion, elect to terminate this Lease upon five (5) business days written
notice to Lessor. If Lessee does not elect to terminate this Lease there shall
be an abatement of rent covering the period between the commencement of the Term
and the time when Lessor delivers possession.
5. MINIMUM RENT
5.1 Payment.
Lessee shall pay to Lessor at the address specified in Section 1.1, or at
such other place as Lessor may otherwise designate, as "Minimum Rent" for the
Leased Premises the amount specified in Section 1.5(A) hereof, payable in
advance on the first day of each month during the Term. If the Term commences on
other than the first day of a calendar month, the rent for the first partial
month shall be prorated accordingly.
All payments of Minimum Rent (including sums defined as rent in Section
26.2) shall be in lawful money of the United States, and payable without
deduction, setoff, offset, counterclaim, recoupment, notice or demand.
Notwithstanding the foregoing, Tenant shall receive a 90-day waiver of
Minimum Rent commencing upon the first full month after Tenant has completed its
improvements and occupied the Leased Premises.
5.2 Advance Rent.
Lessee shall pay the amount specified in Section 1.5(B) hereof, as first
month's rent, to Lessor within ten (10) business days of the execution of this
Lease but not later than the commencement of the Term as advance rent.
Page 3
<PAGE>
6. TAXES
6.1 Definition.
In this Article 6 the terms "Real Property Taxes" and "Taxes" are used
interchangeably. "Real Property Taxes" as used in this Lease shall include all
Real Property Taxes on the Building, the Complex, the land on which the Building
is situated, and the various estates in the Building and the land, including
this Lease, as well as all personal property taxes levied on Lessor's personal
property located on the Complex and used solely in the operation of the Building
or land, whether or not now customary or within the contemplation of the parties
to this Lease. "Taxes" also shall include the reasonable cost to Lessor of
contesting the amount, validity, or applicability of any Taxes mentioned in this
Section. Further included in the definition of Taxes herein shall be general and
special assessments, fees of every kind and nature, commercial rental tax, levy
or tax (other than inheritance estate taxes) imposed by any authority having
the direct or indirect power to tax, as against any legal or equitable interest
of Lessor in the Leased Premises or in the real property of which the Leased
premises are a part, as against Lessor's right to rent or other income
therefrom, or as against Lessor's business of leasing the Leased Premises, any
tax, fee, or charge with respect to the possession, leasing, operation,
management, maintenance, alteration, repair, use, or occupancy by Lessee, of the
Leased Premises or any portion thereof, the Building, or the Complex, or any tax
imposed in substitution, partially or totally, for any tax previously included
within the definition of Taxes herein, or any additional tax, the nature of
which may or may not have been previously included within the definition of
Taxes. The term "Real Property Taxes" or "Taxes" shall not include any tax which
may be levied upon or against the net income of profits of Lessor or its
successors or assigns.
6.2 Assessments.
Anything to the contrary notwithstanding, with respect to any general or
special assessments which are or may be levied upon or against the Leased
Premises, the Building, the Complex, or the underlying realty which may be
evidenced by improvement or other bonds, and which may be paid in annual or
semi-annual installments, only the current amount of such installment, prorated
for any partial year, and statutory interest, shall be included within the
computation of Taxes for which Lessee is responsible hereunder.
6.3 Proration.
Lessee shall pay, as additional rent to Lessor along with its monthly
payment of Minimum Rent hereunder, its estimated "pro rata share" (as defined
below) of all Real Property Taxes stated in the tax bill in which the Leased
Premises are included, including the parking and Common Areas, as well as the
improvements on all of said land, or otherwise arising under the provisions of
this Article, in accordance with Section 7.2, below. The term "tax bill" as used
herein shall mean the tax bill which includes the Leased Premises, or a group of
tax bills aggregated at the option of Lessor, so long as all such bills relate
to the Complex. "Pro rata share" is defined as that fraction the
Page 4
<PAGE>
numerator of which is the square footage in the Leased Premises and the
denominator of which is the net leaseable area included within the tax bill.
6.4 Estimated Payments.
Lessor shall estimate the amount of Taxes next due and collect from Lessee
on a monthly basis, along with Lessee's payment of Minimum Rent hereunder, the
amount of Lessee's estimated pro rata share of Taxes. On or before March 1 of
each year during the Term, Lessor shall provide Lessee with a reconciliation of
Lessee's account with respect to such estimated Tax payments. In the event it is
established upon such reconciliation that Lessee has not paid a sufficient
amount in estimated Tax payments to cover its pro rata share for the year in
question, Lessee shall pay to Lessor the full amount of any such shortage within
ten (10) business days of date of billing. If it is established that Lessee has
made an overpayment of its Tax obligation upon such reconciliation, Lessee shall
receive, at Lessor's option, either a credit applicable to the next ensuing Rent
payments, or a cash refund within ten (10) business days of said reconciliation.
If Lessor shall receive any refund for overpayment of Taxes for any period
during the Term of this Lease, Lessor shall credit such refund against current
period Taxes owed by Lessee or reimburse Lessee in cash within ten (10) business
days of receipt if said refund is received by Lessor after the expiration or
termination of this Lease. Lessor's obligation to reimburse Lessee for
overpayment of Taxes shall survive the termination or expiration of this Lease.
6.5 Personal Property and Other Taxes.
Lessee shall pay prior to delinquency all Taxes assessed against and levied
upon trade fixtures, furnishings, equipment and all other personal property of
Lessee contained in the Leased Premises or elsewhere. When possible, Lessee
shall cause such trade fixtures, furnishings, equipment and all other personal
property to be assessed and billed separately from the real property of Lessor.
Lessee shall also pay prior to delinquency all Taxes and other taxes in
connection with any testing, investigation, abatement, remediation, removal,
transportation and/or disposal of any Hazardous Materials caused by Lessee, its
employees, agents, representatives, contractors, invitees, subtenants and/or
assigns (or Lessee shall reimburse Lessor, pursuant to any provision of this
Lease granting to Lessor the right to do any of the foregoing and to bill Lessee
therefor). For purposes of this Section 6.5, the terms "Taxes" and "taxes" shall
include, but not be limited to, any fees, charges, fines, penalties and costs
(including, without limitation, permit, approval or licensing fees, charges or
costs). If any of Lessee's said personal property shall be assessed with
Lessor's real property, or if any other Taxes or taxes which are payable by
Lessee pursuant to this Lease or otherwise are assessed against Lessor or
Lessor's real property, Lessee shall pay Lessor the Taxes and other taxes
attributable to Lessee within ten (10) business days after receipt of a written
statement setting forth the Taxes and other taxes attributable to Lessee.
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6.6 Net Rent.
It is the intention of Lessor and Lessee that the rental received by Lessor
be net of any Taxes of any sort to be paid by Lessor, subject to the exclusions
stated in Section 6.1. In the event it shall not be lawful for Lessee to
reimburse Lessor for any of the Taxes covered by this Article, the Minimum Rent
payable to Lessor under the terms of this Lease shall be increased by the amount
of the portion of such Taxes allocable to Lessee so as to net to Lessor the
amount which would have been receivable by Lessor if such Taxes had been
collected directly from Lessee.
7. COMMON AREAS AND COMMON AREA COSTS
7.1 Payment of Lessee.
Lessee shall pay to Lessor, as additional rent along with its payment of
Minimum Rent hereunder, its monthly estimated "pro rata %" (as defined below) of
Common Area Costs as hereinafter defined, in accordance with Section 7.3, below.
Lessee's "pro rata %" shall be 100%.
7.2 Definition of Common Area Costs.
"Common Area Costs" means all sums (including "Capital Costs" as
hereinafter defined and to the extent stated herein) expended by Lessor for
operating, maintaining, repairing, replacing and administering of the Complex,
including, without limitation, painting the exterior walls of the buildings in
the Complex, equipping, policing and protecting, lighting, providing sanitation
and sewer and other services, insuring (including the payment of premiums and
deductible amounts under property and liability insurance policies), repairing,
replacing and maintaining the (i) Common Areas; (ii) all buildings and roofs
within the Complex, and (iii) all other areas, facilities and buildings,
vertical transportation facilities, retention ponds (if applicable), and any and
all facilities and improvements connecting the Complex to off-site buildings or
areas, which are used in connection with the maintenance and/or operation of,
and whether located within or outside of, the Complex; such costs and expenses
shall include, but shall not be limited to, the full cost of: illumination and
maintenance of Complex signs, refuse disposal, water, gas, sewage, electricity
and other utilities (without limitation), including any and all usage, service,
hook up, connection, availability and/or standby fees or charges pertaining to
same, and including all costs associated with the provision, maintenance and
operation of any central telephone service for the Complex and/or utility
systems and/or Lines for the Complex; the operation, maintenance, repair and
replacement of all or any part of the parking areas; snow removal, maintenance
and operation of any temporary or permanent utility, including a sewage disposal
system, within or without the Complex, together with hook up or connection fees
and service charges; compliance with rules, regulations and orders of
governmental authorities pertaining to air pollution control, including the cost
of monitoring air quality; maintenance for wooded areas, retention ponds, lakes
and shoreline areas (if applicable); cleaning, lighting, striping and
landscaping; curbs, gutters, sidewalks, drainage and irrigation ditches,
conduits, pipes and canals located on or adjacent to the Complex; premiums for
liability, casualty, and property insurance; audit fees and
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expenses; supplies; costs of complying with all governmental regulations, rules,
laws, ordinances and codes; cost, lease payment or depreciation of any
equipment, improvements or facilities used in the operation or maintenance of
the Complex or project areas; total compensation and benefits (including
premiums for workers' compensation or any other insurance or other retirement or
employee benefits, and including all costs incurred in providing such benefits)
paid to or on behalf of employees involved in the performance of the work
specified in this Section or employees otherwise providing services to Lessee;
public transit or carpooling facilities; reasonable reserve accounts established
for the purchasing and/or replacement of equipment; community association and/or
property owner's association dues and assessments which may be imposed upon
Lessor by virtue of any recorded instrument affecting title to the Complex; plus
an allowance of three percent (3%) of Rents to Lessor for an
administrative/management fee. Common Areas Costs shall also include, without
limitation, the repair and replacement, resurfacing and repaving of any paved
areas, curbs, gutters or other surfaces or areas within the Complex, the repair
and replacement of any equipment or facilities located within or serving the
Complex, and the cost of any capital repairs, replacements or improvements made
by Lessor to the Complex ("Capital Costs") using GAAP consistently applied.
However, certain Capital Costs (the "Restricted Capital Costs") shall be
includable in Common Area Costs each year only to the extent of that fraction
allocable to the year in questions calculated by amortizing such Restricted
Capital Costs over the reasonably useful life of the improvement resulting
therefrom, as determined by Lessor, with interest on the unamortized balance at
the higher of (i) ten percent (10%) per annum; or (ii) the interest rate as may
have been paid by Lessor for the funds borrowed for the purpose of performing
the work for which the Restricted Capital Costs have been expended, but in no
event to exceed the highest rate permissible by law. The Restricted Capital
Costs subject to such amortization procedure are the following: (x) those costs
for capital improvements to the Complex of a type which do not normally recur
more frequently than every five (5) years in the normal course of operation and
maintenance of facilities such as the Complex (specifically excluding painting
of all or a portion of the Complex); (y) costs incurred for the purpose of
reducing other operating expenses or utility costs, from which Lessee can expect
a reduction in the amounts it would otherwise expend, or reimburse Lessor, and
(z) expenditures by Lessor that are required by governmental law, ordinance,
regulation or mandate, including, without limitation, any "Environmental Laws"
(as defined in Article 17), which were not applicable to the Complex as of the
Lease commencement.
Common Area Costs shall exclude, or have deducted from them, as the case
may be and as shall be appropriate:
(a) Leasing commissions, rent concessions to tenants, capital additions or
improvements made to prepare space for occupancy by a new or existing
tenant;
(b) The salaries and benefits of executive officers of Lessor above the
rank of building or property manager;
(c) Expenditures for capital items, except (i) those which, under
generally accepted accounting principles, are expenses or regarded as
deferred expenses; (ii) capital expenditures required by law; (iii)
expenditures for capital equipment or any other
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capital expenditure, whether purchased, leased, or otherwise engaged,
designed to result in savings or reductions in Common Area Costs, then
the costs to be included within the definition of Common Area Costs
for the year in which the costs are incurred and subsequent years, if
applicable, on a basis reasonably determined by Lessor to the extent
that such items are amortized over such period of time as reasonably
can be estimated as the time in which such savings or reduction in
Common Area Costs are expected to equal Lessor's costs for such
capital equipment or capital expenditure with an interest factor equal
to Lessor's cost of borrowing at the time of the expenditure; and (iv)
expenditures for materials, tools, supplies, and equipment purchased
by Lessor to enable Lessor to supply services which Lessor would
otherwise have obtained from a third party, in any of which cases the
cost of such capital improvements or expenditures shall be included in
Common Area Costs for the year in which the costs are incurred and
subsequent years, amortized on a straightline basis over an
appropriate period, but in no event more than ten (10) years, with an
interest factor equal to Lessor's cost of borrowing in effect at the
time of Lessor's having incurred such expenditure;
(d) Painting, redecorating, or other work or service which Lessor performs
or provided for any tenant or prospective tenant of the Building or
Project other than painting, redecorating, or other work which is
standard for the Complex and performed for a tenant subsequent to its
initial occupancy;
(e) Those costs incurred in negotiating or enforcing leases against
tenants, including attorney's fees;
(f) Any costs or expense related to financing or refinancing;
(g) Payment on ground leases;
(h) Repairs or other work occasioned by fire, wind storm, earthquakes or
other casualty or hazard to the extent that Lessor shall actually
receive proceeds from insurance;
(i) Advertising expenses including those costs incurred in leasing or
procuring new tenant and all leasing commissions;
(j) Repairs or rebuilding necessitated by a condemnation to the extent
that Lessor has received condemnation proceeds for such repairs or
rebuilding;
(k) Depreciation of the Complex or amortization of any mortgage;
(l) Taxes, insurance, utilities or other expenses for which Lessor is
solely reimbursed by any specific tenant of the Complex (as opposed to
tenants in general);
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(m) Charges for Lessor's income tax, franchise tax or similar taxes on
Lessor's business;
(n) Costs of repairing latent construction defects;
(o) Fines, fees and penalties related to Lessor's obligations under this
Lease; and
(p) Management fees in excess of 3% of Rents.
Landlord shall maintain the building foundation and structural integrity of
the Leased Premises at its sole cost and expense.
7.3 Estimated Payments.
Lessor shall estimate Lessee's pro rata % of Common Area Costs due in the
future from Lessee and shall collect from Lessee on a monthly basis, along with
Lessee's payment of Minimum Rent hereunder, one-twelfth (1/12) of the amount of
Lessee's estimated pro rata % of such costs. Lessor shall provide Lessee with a
reconciliation of Lessee's account at least annually, and if such reconciliation
shall indicate that Lessee's account is insufficient to satisfy Lessee's pro
rata % of Common Area Costs for the period estimated, Lessee shall immediately
pay to Lessor any deficiency. Any excess in such account indicated by the
reconciliation shall be credited to Lessee's account to reduce the Rent payments
for the next ensuing period or if during the last year of the Lease Term, paid
to Lessee within twenty (20) business days. Lessee shall have the right to
inspect Lessor's books relating to Common Area Costs, Taxes or Complex Insurance
Premiums for the period of one (1) year following receipt of Lessor's
reconciliation. If material errors in excess of five percent (5%) are discovered
in said inspection, Lessor shall reimburse Lessee's reasonable audit expenses.
7.4 Refuse Disposal.
Lessee shall arrange and pay for Refuse Disposal service at the Leased
Premises. Lessee shall pay Lessor, within ten (10) business days of being billed
therefor, Lessor's cost of the removal from the Leased Premises, the Building,
or the Complex, of any refuse or rubbish which Lessee shall fail to have
removed.
8. ASSIGNMENT AND SUBLETTING
8.1 "Transfer of the Leased Premises" Defined.
The terms "Transfer of the Leased Premises" or "Transfer" as used herein
shall include any assignment of all or any part of this Lease (including
assignment by operation of law), subletting of all or any part of the Leased
Premises or transfer or possession, or granting of the right of possession or
contingent right of possession of all or any portion of the Leased Premises,
including without limitation, license, concession, mortgage, devise,
hypothecation, agency, franchise or management agreement, or suffering any other
person (the agents and servants of Lessee expected) to occupy or
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use the Leased Premises or any portion thereof. If Lessee is a corporation which
is not deemed a public corporation, or is an unincorporated association or
partnership, or Lessee consists of more than one party, the transfer, assignment
or hypothecation of any stock or interest in such corporation, association,
partnership or ownership interest, in the aggregate in excess of twenty-five
percent (25%), shall be deemed a Transfer of the Leased Premises.
8.2 No Transfer Without Consent.
Lessee shall not suffer a Transfer of the Leased Premises or any interest
therein, or any part thereof, or any right or privilege appurtenant thereto
without the prior written consent of Lessor, which consent shall not be
unreasonably withheld, delayed or conditioned. A consent to one Transfer of the
Leased Premises shall not be deemed to be a consent to any subsequent Transfer
of the Leased Premises. Any Transfer of the Leased Premises without such consent
shall (i) be the option of the Lessor.
Lessee shall have the right to allow other parties, including but not
limited to customers, suppliers, and providers to co-locate certain
telecommunications equipment within the Leased Premises. This shall not be
considered an assignment or subletting and will not require Lessor's consent
provided no such other party shall occupy more than five percent (5%) of the
Leased Premises.
8.3 When Consent Granted.
(a) The consent of Lessor to a Transfer may not be unreasonably
withheld, provided that it is agreed to be reasonable for Lessor to consider any
of the following reasons, which list is not exclusive, in electing to consent or
to deny consent:
(i) Financial strength of the proposed transferee is
unacceptable to Lessor in Lessor's good faith business judgment;
(ii) A proposed transferee whose occupation of the Leased
Premises would cause a material diminution in the reputation of the Complex or
the other businesses located therein;
(iii) A proposed transferee whose impact on the common
facilities or the other occupants of the Complex would be disadvantageous;
(iv) A proposed transferee whose use presents a material risk a
violation of Article 19;
(v) A proposed transferee whose occupancy will require a
variation in the terms of this Lease (for example, a variation in the use
clause) or which otherwise adversely affects any interest of Lessor;
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(vi) That the validity of the Transfer is conditioned on the
conformity of the Lessee and transferee with all provisions of this Lease at the
time of Transfer, including, without limitation, the requirement that there be
no uncured notices of default under the terms of this Lease; or
(vii) A proposed transferee who is or is likely to be, or whose
business is or is likely to be, subject to compliance with additional laws or
other governmental requirements beyond those to which Lessee or Lessee's
business is subject.
(b) Notwithstanding the foregoing, Lessee shall have the right,
without the consent of Lessor, but upon prior written notice to Lessor, to
assign this Lease to a company beneficially controlling, controlled by, or under
common control with, Lessee; further provided, however, that in the event that
at any time following such assignment, Lessee wishes to sell, mortgage, devise,
hypothecate or in any other manner whatsoever transfer any portion of the
ownership or beneficial control of the issued and outstanding shares in the
capital stock of such company, such transaction shall be deemed to constitute a
Transfer and shall be subject to all of the provisions of this Article 8 with
respect to a Transfer of the Premises, including, by specific reference, the
provisions of Section 8.7.
8.4 Procedure for Obtaining Consent.
(a) Lessor need not commence its review of any proposed Transfer, or
respond to any request by Lessee with respect to such, unless and until it has
received from Lessee adequate descriptive information concerning the transferee,
the business to be conducted by the transferee, the transferee's financial
capacity, and such other information as may reasonably be required in order to
form a prudent judgement as to the acceptability of the proposed Transfer,
including without limitation, copies of the annual report for the two most
recent years for publicly traded companies or the following:
(i) The past two years' Federal Income Tax returns of the
proposed transferee (or in the alternative the past two years' audited annual
Balance Sheets and Profits and Loss statements, certified correct by a Certified
Public Accountant);
(ii) Banking references of the proposed transferee;
(iii) A resume of the business background and experience of the
proposed transferee;
(iv) Intentionally omitted;
(v) A copy of the instrument by which Lessee proposes to
effectuate to Transfer.
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(b) Lessee shall reimburse Lessor as additional rent for Lessor's
reasonable costs and attorneys' fees not to exceed $1,000.00 incurred in
conjunction with the processing and documentation of any proposed Transfer of
the Leased Premises, whether or not consent is granted.
8.5 Recapture.
(a) By written notice to Lessee (the "Termination Notice") within
fifteen (15) business days following submission to Lessor by Lessee of the
information specified in Section 8.4, Lessor may terminate this Lease in the
event of an assignment of this Lease (except pursuant to Section 8.3(b) above)
or sublet of the entire Leased Premises for the then remaining Term, or
terminate this Lease as to the portion of the Leased Premises to be sublet, if
the sublet is to be of less than the entire Leased Premises but for the entire
remaining Term. In the event Lessor elects to terminate this Lease as to the
portion of the Leased Premises to be sublet, an amendment to this Lease shall be
executed whereby the description of the Leased Premises is restated and Lessee's
obligations for rent and other charges are reduced in proportion to the
reduction in Rentable Area of the Leased Premises caused thereby.
(b) In the event that Lessor terminates this Lease or terminates this
Lease as to that portion of the Premises to be sublet, Lessor may, if it elects,
enter into a new lease covering the Premises or the affected portion thereof
with the intended assignee or sublessee on such terms as Lessor and such person
may agree or enter into a new lease covering the Premises with any other person;
in such event, Lessee shall not be entitled to any portion of the profit, if
any, which Lessor may realize on account of such termination and reletting. From
and after the date of such termination of this Lease, the parties shall have no
further obligations to each other under this Lease except for matters occurring
or obligations arising prior to the date of such termination.
8.6 Reasonable Restriction.
The restrictions on Transfer described in this Article 9 are acknowledged
by Lessee to be reasonable for all purposes, including, without limitation, the
provisions of California Civil Code (the "Code") Section 1951.4(b)(2). Lessee
expressly waives any rights which it might otherwise be deemed to possess
pursuant to Section 1951.2 or 1951.4 of the Code by means of proof that
enforcement of a restriction on use of the Leased Premises would be
unreasonable.
8.7 Effect of Transfer.
If Lessor consents to a Transfer, the following conditions shall apply:
(a) Each and every covenant, condition or obligation imposed upon
Lessee and Lessor by this Lease and each and every right, remedy or benefit
afforded Lessee and Lessor by this Lease shall not be impaired or diminished as
a result of such Transfer.
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(b) Lessee shall pay to Lessor on a monthly basis, fifty percent
(50%) of the excess of any sums of money, or other economic consideration
received by Lessee from the Transferee in such month (whether or not for a
period longer than one month), including higher rent, bonuses, key money, or the
like over the aggregate, of (i) the amortized portion of the reasonable expenses
actually paid by Lessee to unrelated third parties for brokerage commissions,
attorneys' fees, tenant improvements to the Premises, design fees or other costs
incurred as a direct consequence of the Transfer, and, (ii) the total sums which
Lessee pays Lessor under this Lease in such month, or the prorated portion
thereof if the Leased Premises transferred is less than the entire Leased
Premises. The amount so derived shall be paid with Lessee's payment of Minimum
Rent. The term "amortized portion" is that portion of the applicable expenses
calculated by amortizing such applicable expenses over the original term of the
Transfer with interest on the unamortized balance at the higher of (i) ten
percent (10%) per annum; or (ii) the interest rate as may have been paid by
Lessee for the funds borrowed for the purpose of funding the applicable
expenses.
(c) No Transfer, whether or not consent of Lessor is required
hereunder, shall relieve Lessee of its primary obligation to pay the rent and to
perform all other obligations to be performed by Lessee hereunder. The
acceptance of rent by Lessor from any person shall not be deemed to be a waiver
by Lessor of any provision of this Lease or to be a consent to any Transfer of
the Leased Premises.
(d) If Lessor consents to a sublease, such sublease shall not extend
beyond the expiration of the Term.
(e) No Transfer shall be valid and no transferee shall take
possession of the Leased Premises or any part thereof unless, within ten (10)
business days after the execution of the documentary evidence thereof, Lessee
shall deliver to Lessor a duly executed duplicate original of the Transfer
instrument in form satisfactory to Lessor which provides that (i) the transferee
assumes Lessee's obligations for the payment of rent and for the full and
faithful observance and performance of the covenants, terms and conditions
contained herein, (ii) such transferee will, at Lessor's election, attorn
directly to Lessor in the event Lessee's Lease is terminated for any reason on
the terms set forth in the instrument of transfer and (iii) such instrument of
transfer contains such other assurances as Lessor reasonably deems necessary.
9. PROPERTY INSURANCE
9.1 Use of Premises.
No use shall be made or permitted to be made on the Leased Premises, nor
acts done, which will increase the existing rate of insurance upon the Building
in which the Leased Premises are located or upon any other Building in the
Complex or cause the cancellation of any insurance policy covering the Building,
or any part thereof, nor shall Lessee sell, or permit to be kept, used or sold,
in or about the Leased Premises, any article which may be prohibited by the
standard form of "All-Risk" fire insurance policies. Lessee shall, at its sole
cost and expense, comply with any and all requirements
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pertaining to the Leased Premises, of any insurance organization or company,
necessary for the maintenance of reasonable property damage and commercial
general liability insurance, covering the Leased Premises, the Building, or the
Complex.
9.2 Increase in Premiums.
Lessee agrees to pay to Lessor, as additional rent, any increase in
premiums on policies which may be carried by Lessor on the Leased Premises, the
Building or the Complex, or any blanket policies which include the Building or
Complex, covering damage thereto and loss of rent caused by fire and other
perils, resulting from the nature of Lessee's occupancy or any act or omission
of Lessee. All payments of additional rent by Lessee to Lessor pursuant to this
Section 9.2 shall be made within ten (10) business days after receipt by Lessee
or Lessor's billing therefor.
9.3 Pro Rata Share of Premiums.
(a) Lessee shall pay to Lessor, during the Term hereof, as additional
rent, its "proportionate share" (as hereinafter defined) of the insurance
premiums for any property insurance carried by Lessor covering the Complex (the
"Complex Insurance Premium"). Such "proportionate share" is defined as that
fraction of the Complex Insurance Premium the numerator of which is the total
square footage in the Leased Premises and the denominator of which is the total
square footage in all premises to which the Complex Insurance Premium is
applicable. In the event that the property insurance carried by Lessor covering
the Complex is a blanket policy in which other properties not related to the
Complex are included, the Complex Insurance Premium shall be calculated as that
portion of such blanket policy insurance premium which, in Lessor's good faith
judgment, is properly allocable to the Complex.
(b) Lessee shall pay any such premium portion to Lessor in accordance
with Section 9.4, below.
9.4 Estimated Payments.
Lessor shall estimate the amount of Complex Insurance Premium to be due in
the future from Lessee and shall collect from Lessee on a monthly basis, along
with Lessee's payment of Minimum Rent hereunder, the amount of Lessee's
estimated proportionate share of the Complex Insurance Premium. Prior to March 1
of each year, Lessor shall provide Lessee with a reconciliation of Lessee's
account along with a billing for any shortage in the event of a deficiency or
statement for credit applicable to the next ensuing Rent payments (or if during
the last year of the Lease Term, paid to Lessee within twenty (20) business
days), if an overpayment has been made by Lessee.
9.5 Personal Property Insurance.
Lessee shall maintain in full force and effect on all of its fixtures,
furniture, equipment and other business personal property in the Leased Premises
a policy or policies providing protection
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against any peril included within the classification "All Risk" to the extent of
at least ninety percent (90%) of their replacement cost, or that percentage of
the replacement cost required to negate the effect of a coinsurance provision,
whichever is greater. No such policy shall have a deductible in a greater amount
than Ten Thousand Dollars ($10,000.00). Lessee shall also insure in the same
manner the physical value of all its leasehold improvements and alterations in
the Leased Premises. During the Term, the proceeds from any such policy or
policies of insurance shall be used for the repair or replacement of the
fixtures, equipment, and leasehold improvements so insured. Lessor shall have no
interest in said insurance, and will sign all documents necessary or proper in
connection with the settlement of any claim or loss by Lessee. Lessee shall also
maintain business interruption insurance and insurance for all plate glass upon
the Leased Premises. All insurance specified in this Section 10.5 to be
maintained by Lessee shall be maintained by Lessee at its sole cost.
9.6 Intentionally omitted.
10. LIABILITY INSURANCE
10.1 Lessee's Insurance.
Lessee shall, at Lessee's expense, obtain and keep in force during the
Term, a commercial general liability insurance policy insuring Lessee against
the risks of bodily injury and property damage, personal injury, contractual
liability, completed operations, products liability, host liquor liability,
owned and non-owned automobile liability arising out of the ownership, use,
occupancy or maintenance of the Leased Premises and all areas appurtenant
thereto. Such insurance shall be a combined single limit policy in an amount not
less than TWO MILLION DOLLARS ($2,000,000.00) per occurrence with a FIVE MILLION
DOLLAR ($5,000,000.00) annual aggregate and an umbrella policy of THREE MILLION
DOLLARS ($3,000,000.00) any one occurrence. Lessor and any lender or other party
in interest designated by Lessor shall be named as additional insured(s). The
policy shall contain cross-liability endorsements and shall insure performance
by Lessee of the indemnity provisions of this Lease; shall be primary, not
contributing with, and not in excess of coverage which Lessor may carry, shall
state that Lessor is entitled to recovery for the negligence of Lessee even
though Lessor is named as an additional insured, shall provide for severability
of interest; shall provide that an act or omission of one of the insured or
additional insureds which would void or otherwise reduce coverage shall not void
or reduce coverages as to the other insured or additional insured; and shall
afford coverage for all claims based on acts, omissions, injury or damage which
occurred or arose (or the onset of which occurred or arose) in whole or in part
during the Term. The limits of said insurance shall not limit any liability of
Lessee hereunder.
10.2 Workers' Compensation Insurance.
Lessee shall carry Workers' Compensation insurance as required by law,
including an employers' liability endorsement.
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11. INSURANCE POLICY REQUIREMENTS
11.1 General Requirements.
All insurance policies required to be carried by Lessee hereunder shall
conform to the following requirements:
(a) The insurer in each case shall carry a designation in "Best's
Insurance Reports" as issued from time to time throughout the Term as follows:
Policyholders' rating of A; financial rating of not less than VII;
(b) The insurer shall be qualified to do business in the state in
which the Leased Premises are located;
(c) The policy shall be in a form and include such endorsements as
are acceptable to Lessor;
(d) Certificates of insurance shall be delivered to Lessor at
commencement of the Term and certificates of renewal, at least thirty (30) days
prior to the expiration of each policy; and
(e) Each policy shall require that Lessor be notified in writing by
the insurer at least thirty (30) days prior to any cancellation or expiration of
such policy, or any reduction in the amounts of insurance carried.
12. INDEMNIFICATION, WAIVER OF CLAIMS AND SUBROGATION
12.1 Intent and Purpose.
This Article 12 is written and agreed to in respect of the intent of the
parties to assign the risk of loss, whether resulting from negligence of the
parties or otherwise, to the party who is obligated hereunder to cover the risk
of such loss with insurance. Thus, the indemnity and waiver of claims provisions
of this Lease have as their object, so long as such is not in violation of
public policy, the assignment of risk for a particular casualty to the party
carrying the insurance or self-insuring for such risk, without respect to the
causation thereof.
12.2 Waiver of Subrogation.
Lessor and Lessee release each other, and their respective authorized
representatives, from any claims for damage to the Leased Premises and the
Building and other improvements in which the Leased Premises are located, and to
the furniture, fixtures, and other business personal property, Lessee's
improvements and alterations of either Lessor or Lessee, in or on the Leased
Premises and the Building and other improvements in the Leased Premises are
located, including loss of income,
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that are caused by or result from risks insured, self-insured or required under
the terms of this Lease to be insured against under any property insurance
policies carried or to be carried by either of the parties.
12.3 Form of Policy.
Each party shall cause each such insurance policy obtained by it to provide
that the insurance company waives all rights of recovery by way of subrogation
against either party in connection with any damage covered by such policy.
Neither party shall be liable to the other for any damage caused by any peril
included within the classification "All Risk" which is insured, self-insured or
required to be insured against under the terms of this Lease.
12.4 Indemnity.
Lessee, as a material part of the consideration to be rendered to Lessor,
shall indemnify, defend, protect and hold harmless Lessor against all actions,
claims, demands, damages, liabilities, losses, penalties, or expenses of any
kind which may be brought or imposed upon Lessor or which Lessor may pay or
incur by reason of injury to person or property or business, from whatever
cause, all or in any way connected with the acts and omissions of Lessee, or the
improvements or personal property therein or thereon (excluding Lessor's
personal property), including without limitation any liability or injury to the
person or property or business of Lessee, its agents, officers, employees or
invitees. Lessee agrees to indemnify, defend and protect Lessor and hold it
harmless from any and all liability, loss, cost or obligation on account of, or
arising out of, any such injury or loss however occurring, including breach of
the provisions of this Lease and the negligence of the parties hereto. Nothing
contained herein shall obligate Lessee to indemnify Lessor against Lessor's
negligence or willful acts.
12.5 Defense of Claims.
In the event any action, suit or proceeding is brought against either party
by reason of any such occurrence, the indemnifying party, upon the other's
request, will at its expense resist and defend such action, suit or proceeding,
or cause the same to be resisted and defended by counsel designated either by
the indemnifying party or by the indemnifying party's insurer whose policy
covers the occurrence and in either case approved by indemnified party. The
obligations of he parties under this Section arising by reason of any occurrence
taking place during the Term shall survive any termination of this Lease.
12.6 Waiver of Claims.
Lessee, as a material part of the consideration to be rendered to Lessor,
hereby waives all claims against Lessor for damages or injury, as described
below, from any cause arising at any time, including the negligence of the
parties hereto:
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(a) (notwithstanding anything to the contrary contained in this Lease,
including, without limitation, the definition of "Common Area Costs" in Section
7.2, which includes "policing") damages to goods, wares, merchandise and loss of
business, in, upon or about the Leased Premises or the Complex, and injury to
Lessee, its agents, employees, invitees or third persons in, upon or about the
Leased Premises or the Complex, where such damage or injury results from
Lessor's failure to police or provide security for the Complex or Lessor's
negligence in connection therewith, unless due to Lessor's gross negligence or
willful misconduct.
Lessor expressly acknowledges and agrees that the provisions of Section
17.5(b) below apply fully with respect to the matters waived pursuant to this
Section 12.6, and, for such purpose, the term "Released Matters," as used in
Section 17.6(b), shall be deemed to include the matters waived pursuant to this
Section 12.6.
12.7 References.
Wherever in this Article the term Lessor or Lessee is used and such party
is to receive the benefit of a provision contained in this Article, such term
shall refer not only to that party but also to its officers, directors,
shareholders, employees, partners, contractors, agents and mortgagees or other
lienholders.
13. DESTRUCTION
13.1 Rights of Termination.
In the event the Leased Premises suffers (a) an "uninsured property loss"
(as hereinafter defined), or (b) a property loss which cannot be repaired within
one hundred eighty (180) days from the date of destruction under the laws and
regulations of state, federal, county or municipal authorities, or other
authorities with jurisdiction, Lessor may terminate this Lease as at the date of
the damage upon written notice to Lessee following the property loss. In the
event of a property loss of the Leased Premises which cannot be repaired within
one hundred eighty (180) days of the occurrence thereof, Lessee shall have the
right to terminate the Lease by written notice to Lessor within twenty (20) days
following notice from Lessor that the time for restoration shall exceed one
hundred ninety-five (195) days. For purposes of this Lease, the term "uninsured
property loss" shall mean any loss greater than 20% of the replacement cost of
the Building arising from a peril not covered by the standard form of "All Risk"
property insurance policy, whether or not such policy is actually in force.
13.2 Repairs.
In the event of a property loss which may be repaired within one hundred
eighty (180) days from the date of the damage, or, in the alternative, in the
event the parties do not elect to terminate this Lease under the terms of
Section 13.1 above, then this Lease shall continue in full force and effect and
Lessor shall forthwith undertake to make such repairs to reconstitute the Leased
Premises to as
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near the condition as existed prior to the property loss as practicable. Such
partial destruction shall in no way annul or void this Lease except that Lessee
shall be entitled to a proportionate reduction of Minimum Rent following the
property loss and until the time the Leased Premises are restored. Such
reduction shall be an amount which reflects the degree of interference with
Lessee's business. If the parties cannot agree within forty-five (45) days of
the property loss, the matter shall be submitted to arbitration under the rules
of the American Arbitration Association. Upon the resolution of the dispute, the
settlement shall be retroactive and Lessor shall within ten (10) business days
thereafter refund to Lessee any sums due in respect of the reduced rental from
the date of the property loss. Lessor's obligations to restore shall in no way
include any construction originally performed by Lessee or subsequently
undertaken by Lessee, but shall include solely that property constructed by
Lessor prior to commencement of the Term.
13.3 Repair Costs.
The cost of any repairs to be made by Lessor, pursuant to Section 13.2 of
this Lease, shall be paid by Lessor utilizing available insurance proceeds.
13.4 Waiver.
In the event of a property loss occurring during the last two (2) years of
the original Term hereof or of any extension, Lessor need not undertake any
repairs and may cancel this Lease unless Lessee has the right under the terms of
this Lease to extend the Term for an additional period of at least five (5)
years and does so within thirty (30) days of the date of the property loss.
13.5 Lessor's Election.
In the event that the Complex or Building in which the Leased Premises is
situated be destroyed to the extent of not less than thirty-three and one-third
percent (33-1/3%) of the replacement cost thereof, Lessor may elect to terminate
this Lease, whether the Leased Premises be injured or not, in the same manner as
in Section 13.1 above. At all events, a total destruction of the Complex of
which the Leased Premises form a part, or the Leased Premises itself, shall
terminate this Lease.
14. ACCORD AND SATISFACTION
14.1 Acceptance of Payment
No payment by Lessee or receipt by Lessor of a lesser amount of Minimum
Rent or any other sum due hereunder, shall be deemed to be other than on account
of the earliest due rent or payment, nor shall any endorsement or statement on
any check or payment be deemed an accord and satisfaction, and Lessor may accept
such check or payment without prejudice to Lessor's right to recover the balance
of such rent or payment or pursue any other remedy available in this Lease, at
law or in equity. Lessor may accept any partial payment from Lessee without
invalidation of any
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contractual notice required to be given herein (to the extent such contractual
notice is required) and without invalidation of any notice required to be given
pursuant to California Code of Civil Procedure Section 1161, et seq., or of any
successor statute thereto.
15. SECURITY DEPOSIT
Intentionally omitted
16. USE
16.1 Permitted Use.
The Leased Premises may be used and occupied only for the purposes
specified in Section 1.7 hereof, and for no other purpose or purposes. Lessee
shall promptly comply with all laws, ordinances, orders and regulations
affecting the Leased Premises, their cleanliness, safety, occupation and use.
16.2 Hazardous Activities.
Lessee shall not engage in any activities or permit to be kept, used, or
sold in or about the Leased Premises, any article which may be prohibited by the
standard form of fire insurance policies. Lessee shall, at its sole cost and
expense, comply with any and all requirements, pertaining to the Leased
Premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance covering the
Building and appurtenances.
17. COMPLIANCE WITH LAWS AND REGULATIONS
17.1 Lessee's Obligations.
Lessee shall, at its sole cost and expense, comply with all of the
requirement of all municipal, state and federal authorities now in force, or
which may hereafter be in force, pertaining to the Leased Premises and shall
faithfully observe in the use of the Leased Premises all municipal ordinances
and state and federal statutes and regulations now in force or which may
hereafter be in force, including, without limitation, "Environmental Laws" and
the Americans with Disabilities Act, 42 U.S.C. (S)(S) 12101-12213 (and any
rules, regulations, restrictions, guidelines, requirements or publications
promulgated or published pursuant thereto, collectively herein referred to as
the "ADA"), whether or not any of the foregoing were foreseeable or
unforeseeable at the time of the execution of this Lease. Lessee's obligation to
comply with and observe such requirements, ordinances, statutes and regulations
shall apply regardless of whether such requirements, ordinances, statutes and
regulations regulate or relate to Lessee's particular use of the Leased Premises
or regulate or relate to the use of premises in general, and regardless of the
cost thereof. The judgment of any court of competent jurisdiction, or the
admission of Lessee in any action or proceeding against Lessee, whether Lessor
be a party thereto or not, that any such requirement, ordinance, statute or
regulation pertaining to the
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Leased Premises has been violated, shall be conclusive of that fact as between
Lessor and Lessee. Within five (5) business days after receipt of notice or
knowledge of any violation or alleged violation of any Environmental Law(s),
and/or the ADA pertaining to the Complex, any governmental or regulatory
proceedings, investigations, sanctions and/or actions threatened or commenced
with respect to any such violation or alleged violation, and any claim made or
commenced with respect to such violation or alleged violation, Lessee shall
notify Lessor thereof and provide Lessor with copies of any written notices or
information in Lessee's possession.
Lessor represents and warrants that as of October 2, 1998, the Leased
Premises is ADA compliant with respect to the exterior component of the
building. Except to the extent that Lessor's representations above is
inaccurate, Tenant shall pay for all costs associated with making the Leased
Premises ADA compliant.
17.2 Condition of Leased Premises.
Lessee hereby accepts the Leased Premises in the condition existing as of
the Commencement Date, subject to all applicable zoning, municipal, county and
state laws, ordinances, rules, regulations, orders, restrictions of record, and
requirements in effect during the Term or any part of the Term hereof regulating
the Leased Premises, and without representation, warranty or covenant by Lessor,
express or implied, as to the condition, habitability or safety of the Leased
Premises, the suitability or fitness thereof for their intended purposes, or any
other matter, except as specifically set forth herein.
17.3 Hazardous Materials.
(a) Hazardous Materials Defined. As used herein, the term "Hazardous
---------------------------
Materials" shall mean any wastes, materials or substances (whether in the form
of liquids, solids or gases, and whether or not air-borne), which are or are
deemed to be pollutants or contaminants, or which are or are deemed to be
hazardous, toxic, ignitable, reactive, corrosive, dangerous, harmful or
injurious, or which present a risk, to public health or to the environment, or
which are or may become regulated by or under the authority of any applicable
local, state or federal laws, judgments, ordinances, orders, rules, regulations,
codes or other governmental restrictions, guidelines or requirements, any
amendments or successor(s) thereto, replacements thereof or publications
promulgated pursuant thereto (collectively "Environmental Laws"), including,
without limitation, any waste, material or substance which is:
(i) defined as "hazardous waste," "extremely hazardous waste,"
or "restricted hazardous waste" under Sections 25115, 25117 or 25122.7, or
listed pursuant to Section 25140, of the California Health and Safety Code,
Division 20, Chapter 6.5 (Hazardous Waste Control Law);
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(ii) defined as a "hazardous substance" under Section 25316 of
the California Health and Safety Code, Division 20, Chapter 6.8 (Carpenter-
Presley-Tanner Hazardous Substance Account Act);
(iii) defined as a "hazardous material," "hazardous substance,"
or "hazardous waste" under Section 25501 of the California Health and Safety
Code, Division 20, Chapter 6.95 (Hazardous Materials Release Response Plans and
Inventory);
(iv) defined as a "hazardous substance" under Section 25281 of
the California Health and Safety Code, Division 20, Chapter 6.7 (Underground
Storage of Hazardous Substances);
(v) defined as a "waste" or "hazardous substance" under Section
13050 of the California Water Code, Division 7, Chapter 2 (Porter-Cologne Water
Quality Control Act);
(vi) listed as a chemical known to the State of California to
cause cancer or reproductive toxicity pursuant to Section 25249.8 of the
California Health and Safety Code, Division 20, Chapter 6.6 (Safe Drinking Water
and Toxic Enforcement Act of 1986);
(vii) defined as a "hazardous substance" or "pollutant or
contaminant" pursuant to Section 101 of the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. (S)8591
et seq.;
(viii) listed as an "extremely hazardous substance," "hazardous
chemical," or "toxic chemical" pursuant to the Emergency Planning and Community
Right-to-Know Act of 1986, 42 U.S.C. (S) 11001 et seq.;
(ix) listed as a "hazardous substance" in the United States
Department of Transportation Table, 49 C.F.R. 172.101 and amendments thereto, or
by the Environmental Protection Agency (or any successor agency) in 40 C.F.R.
Part 302 and amendments thereto;
(x) defined, listed or designated by regulations promulgated
pursuant to any Environmental Law; or
(xi) any of the following: a pesticide; a flammable explosive;
petroleum, including crude oil or any fraction thereof; asbestos or an asbestos-
containing material; a polychlorinated biphenyl; a radioactive material; or urea
formaldehyde.
In addition to the foregoing, the term "Environmental Laws" shall be deemed
to include, without limitation, local, state and federal laws, judgments,
ordinances, orders, rules, regulations, codes and other governmental
restrictions, guidelines and requirements, any amendments and
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successors thereto, replacements thereof and publications promulgated pursuant
thereto, which deal with or otherwise in any manner relate to, air or water
quality, air emissions, soil or ground conditions or other environmental matters
of any kind.
(b) Use, etc., of Hazardous Materials. Except for reasonable
---------------------------------
quantities of Hazardous Materials used to operate Lessee's and Lessee's
employees vehicle and to clean and maintain the Building, Lessee agrees that
during the Term, there shall be no use, presence, disposal, storage, generation,
leakage, treatment, manufacture, import, handling, processing, release, or
threatened release of Hazardous Materials on, from or under the Leased Premises
by Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns. Lessee shall not be entitled to install any tanks
under, on or about the Leased Premises for the storage of Hazardous Materials
without the express written consent of Lessor, which may be given or withheld in
Lessor's sole arbitrary judgment. Except as noted above, the use, presence,
disposal, storage, generation, leakage, treatment, manufacture, import,
handling, processing, release or threatened release of Hazardous Materials by
Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns, are sometimes hereinafter individually or
collectively referred to as "Hazardous Use."
(c) Hazardous Materials Report; When Required. In the event that
-----------------------------------------
Lessor consents in writing to Lessee's Hazardous Use in the Leased Premises,
Lessee shall submit to Lessor a written report with respect to Hazardous
Materials ("Report") in the form prescribed in subparagraph (d) below on the
following date:
(i) Within ten (10) business days prior to the commencement of
any Hazardous Use;
(ii) Within ten (10) business days after each anniversary of any
Hazardous Use;
(iii) At any time within ten (10) business days after written
request by Lessor, and
(iv) At any time when there has been or is planned any condition
which constitutes or would constitute a change in the information submitted in
the most recent Report, including any notice of violation as referred to in
subparagraph (d)(vii) below.
(d) Hazardous Materials Report; Contents. The Report shall
------------------------------------
contain, without limitation, the following information:
(i) Whether on the date of the Report and (if applicable) during
the period since the last Report there has been any Hazardous Use on, from or
under the Leased Premises.
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(ii) If there was such Hazardous Use, the exact identity of the
Hazardous Materials, the dates upon which such materials were brought upon the
Leased Premises, the dates upon which the Hazardous Materials were removed
therefrom, and the quantity, location, use and purpose thereof.
(iii) If there was such Hazardous Use, any governmental permits
maintained by Lessee with respect to such Hazardous Materials, the issuing
agency, original date of issue, renewal dates (if any) and expiration date.
Copies of any such permits and applications therefor shall be attached.
(iv) If there was such Hazardous Use, any governmental
reporting or inspection requirements with respect to such Hazardous Materials,
the governmental agency to which reports are made and/or which conducts
inspections, and the dates of all such reports and/or inspections (if
applicable) since the last Report. Copies of any such Reports shall be attached.
(v) If there was such Hazardous Use, identification of any
operation or business plan prepared for any government agency with respect to
Hazardous Use.
(vi) Any liability insurance carried by Lessee with respect to
Hazardous Materials, the insurer, policy number, date of issue, coverage
amounts, and date of expiration. Copies of any such policies or certificates of
coverage shall be attached.
(vii) Any notices of violation of Environmental Laws, written or
oral, received by Lessee from any governmental agency since the last Report, the
date, name of agency, and description of violation. Copies of any such written
notices shall be attached.
(viii) Any knowledge, information or communication which Lessee
has acquired or received relating to (x) any enforcement, cleanup, removal or
other governmental or regulatory action threatened or commenced against Lessee
or with respect to the Leased Premises pursuant to any Environmental Laws; (y)
any claim made or threatened by any person or entity against Lessee or the
Leased Premises on account of any alleged loss or injury claimed to result from
any alleged Hazardous Use on or about the Leased Premises; or (z) any report,
notice or complaint made to or filed with any governmental agency concerning any
Hazardous Use on or about the Leased Premises. The Report shall be accompanied
by copies of any such claim, report, complaint, notice, warning or other
communication that is in the possession of or is available to Lessee.
(ix) Such other pertinent information or documents and are
requested by Lessor in writing.
(e) Release of Hazardous Materials; Notification and Cleanup. If at
--------------------------------------------------------
any time during the Term Lessee knows or believes that (i) any Hazardous
Materials have been or may be released onto the Leased Premises or the Complex
by Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns, or (ii) any Hazardous Materials brought onto the
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Leased Premises or the Complex by or for the benefit of Lessee, its employees,
agents, representatives, contractors, invitees, subtenants and/or assigns have
been or may be released onto the Leased Premises or the Complex by any party
whatsoever, then Lessee shall immediately, either prior to the release or
following the discovery thereof by Lessee, give verbal and follow-up written
notice of that condition to Lessor. Lessee covenants to investigate, clean up
and otherwise remediate any such release of Hazardous Materials at Lessee's cost
and expense; such investigation, clean-up and remediation shall be performed
only after Lessee has obtained Lessor's written consent, which shall not be
unreasonably withheld; provided, however, that Lessee shall be entitled to
respond immediately to an emergency without first obtaining Lessor's written
consent. All clean-up and remediation shall be done in compliance with
Environmental Laws and to the reasonable satisfaction of Lessor. It is the
express intention of the parties hereto that Lessee shall be liable under this
Section 17.3(e) for any and all conditions covered hereby which were caused or
created by any Hazardous Materials brought onto the Leased Premises or the
Complex by or for the benefit of Lessee, its employees, agents, representatives,
contractors, invitees, subtenants and/or assigns. Lessee shall not enter into
any settlement agreement, consent decree or other compromise with respect to any
claims relating to any (1) any Hazardous Materials brought onto the Leased
Premises or the Complex by or for the benefit of Lessee, its employees, agents,
representatives, contractors, invitees, subtenants and/or assigns, or (2) any
Hazardous Materials released onto the Leased Premises or the Complex by Lessee,
its employees, agents, representatives, contractors, invites, subtenants and/or
assigns, without first (A) notifying Lessor of Lessee's intention to do so and
affording Lessor the opportunity to participate in any such proceedings, and (B)
obtaining Lessor's written consent.
(f) Inspection and Testing by Lessor. Lessor shall have the right at
--------------------------------
all times during the Term to (i) inspect the Leased Premises, as well as
Lessee's books and records relating solely to Hazardous Materials brought onto
the Leased Premises or the Complex by or for the benefit of Lessee, its
employees, agents, representatives, contractors, invites, subtenants and/or
assigns, and to (ii) conduct tests and investigations to determine whether
Lessee is in compliance with the provisions of this Section. Except in case of
emergency, Lessor shall give reasonable notice to Lessee before conducting any
inspections, tests, or investigations. The cost of all such inspections, tests
and investigations shall be borne by Lessor and not included in Common Area
Costs unless the release of Hazardous Materials is discovered. Neither any
action nor inaction on the part of Lessor pursuant to this Section 17.3(f) shall
be deemed in any way to release Lessee from, or in any way modify or alter,
Lessee's responsibilities, obligations, and/or liabilities incurred pursuant to
Section 17.3 hereof.
17.4 Intentionally omitted
17.5 Indemnity.
Lessee shall indemnify, hold harmless, and, at Lessor's option (with such
attorneys as Lessor may approve in advance and in writing), defend Lessor and
Lessor's officers, directors, shareholders, trustees, partners, employees,
contractors, agents and mortgagees or other lien holders, from and against any
and all claims, demands, expenses, actions, judgments, damages (whether
consequential, direct or indirect, known or unknown, foreseen or unforeseen),
penalties, fines, liabilities, losses of
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every kind and nature (including, without limitation, property damage,
diminution in value of Lessor's interest in the Leased Premises or the Complex,
damages for the loss or restriction on use of any space or amenity within the
Leased Premises or the Complex, damages arising from any adverse impact on
marketing space in the Complex, sums paid in settlement of claims and any costs
and expenses associated with injury, illness or death to or of any person),
suits, administrative proceedings, costs and fees, including, but not limited
to, reasonable attorneys' and consultants' fees and expenses, and the costs of
cleanup, remediation, removal and restoration (all of the foregoing being
hereinafter sometimes collectively referred to as "Losses"), arising from or
related to (i) any violation of any of the requirements, ordinances, statutes,
regulations or other laws referred to in this Article by Lessee, its employees,
agents, representatives, contractors, invitees, subtenants and/or assigns,
including, without limitation, Environmental Laws, or (ii) any breach of the
provisions of this Article by Lessee, its employees, agents, representatives,
contractors, invitees, subtenants and/or assigns, or (iii) any Hazardous Use on,
about or from the leased Premises by Lessee, its employees, agents,
representatives, contractors, invitees, subtenants and/or assigns, or (iv) any
release of Hazardous Materials brought onto the Leased Premises or the Complex
by or for the benefit of Lessee, its employees, agents, representatives,
contractors, invitees, subtenants and/or assigns, whether released by Lessee or
by third parties unrelated to Lessee. Lessee warrants that it is leasing the
Leased Premises "as-is, where-is," that it has thoroughly inspected the Leased
Premises prior to execution of this Lease, and that it intends to act as an
insurer with respect to any Hazardous Use on, under or about the Leased Premises
by Lessee, its employees, agents, representatives, contractors, invitees,
subtenants and/or assigns.
Lessor represents that it has received no notice of violation of
Environmental Laws with respect to the Leased Premises. Lessor further agrees to
indemnify and hold Lessee harmless from and against all cost, loss or expense
resulting from any environmental condition existing on, in or under the Leased
Premises prior to the Commencement Date.
17.6 Release and Assumption of Risk.
(a) Lessee, for itself, and its officers, directors, shareholders,
partners, agents, contractors, attorneys, brokers, servants, employees,
sublessees, lessees, invitees, concessionaires, licensees and representatives
(hereinafter referred to as "Lessee's Releasors"), hereby waives, releases,
acquits and forever discharges Lessor and its officers, directors, shareholders,
trustees, partners, agents, contractors, attorneys, brokers, servants,
employees, lessees, invitees, licensees and representatives (hereinafter
referred to as "Lessor's Releasees") of and from and all Losses, which are in
any way connected with, based upon, related to or arising out of (i) any
Hazardous Materials brought onto the Leased Premises or the Complex by or for
the benefit of Lessee, its employees, agents, representatives, contractors,
invitees, subtenants and/or assigns, (ii) any violation by or relating to the
Leased Premises or the Complex (or the ownership, use, condition, occupancy or
operation thereof except for the structural elements of the foundations, roof
and exterior walls of the Building), or by the Lessee's Releasors or any other
persons or entities, of any Environmental Laws affecting the Leased Premises or
the Complex, or (iii) any investigation, inquiry, order, hearing, action or
other proceeding by or before any governmental agency or any court in connection
with any of the matters
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referred to in clauses (i) or (ii) above (collectively, the "Lessee's Released
Matters"), except to the extent caused by the negligence or willful misconduct
of the Lessor's Releasees. Lessee's Releasors hereby expressly assume any and
all risk of Losses based on or arising out of or pertaining to the Lessee's
Released Matters.
(b) Lessee agrees, represents and warrants that the Released Matters
are not limited to matters which are known, disclosed or foreseeable, and Lessee
waives any and all rights and benefits which are conferred upon Lessee by virtue
of the provisions of Section 1542 of the California Civil Code, which provides:
LESSEE AGREES, REPRESENTS AND WARRANTS THAT LESSEE IS
FAMILIAR WITH, HAS READ, UNDERSTANDS, AND HAS CONSULTED
LEGAL COUNSEL OF ITS CHOOSING WITH RESPECT TO CALIFORNIA
CIVIL CODE SECTION 1542 AND LESSEE REALIZES AND ACKNOWLEDGES
THAT FACTUAL MATTERS NOW UNKNOWN TO IT MAY HAVE GIVEN, OR
MAY HEREINAFTER GIVE, RISE TO LOSSES WHICH ARE PRESENTLY
UNKNOWN, UNANTICIPATED AND UNSUSPECTED. LESSEE FURTHER
AGREES, REPRESENTS AND WARRANTS THAT THE PROVISIONS OF THIS
SECTION 179.6 HAVE BEEN NEGOTIATED AND AGREED UPON IN LIGHT
OF THAT REALIZATION AND THAT LESSEE NEVERTHELESS HEREBY INTENDS
TO RELEASE, DISCHARGE AND ACQUIT THE RELEASEES FROM ANY SUCH
UNKNOWN LOSSES WHICH ARE IN ANY WAY RELATED TO THE COMPLEX.
17.7 HVAC Maintenance
Lessee shall, at Lessee's sole cost and expense, at all times during the
Term maintain, operate and repair the HVAC system servicing the Leased Premises
(to the extent that Lessee is otherwise obligated to perform such maintenance,
operation and repair pursuant to this Lease) in a manner consistent with
similarly situated buildings in the local market.
18. UTILITIES
18.1 Payment by Lessee.
Lessee, from the commencement of the Term and thereafter throughout the
Term, shall pay all charges including "hook-up" or connection fees for water,
gas, heat, sewer, power, telephone services and any other utility supplied to or
consumed in or on the Leased Premises. Lessee shall not allow refuse, garbage or
trash to accumulate outside of the Leased Premises except on the day of
scheduled scavenger pick-up services, and then only in areas designated for that
purpose by Lessor.
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Unless caused by its gross negligence or willful misconduct, Lessor shall not be
responsible or liable for any interruption in utility services, nor shall such
interruption affect the continuation or validity of this Lease. Lessor does not
warrant that any of the utilities supplied to the Leased Premises will be free
of interruption or that any of the utility systems serving the Complex will be
free from the need for maintenance, repairs and/or replacements. Lessee
acknowledges that any one or more such services may be suspended or reduced by
reason of repairs, alterations or improvements necessary to be made, by strikes
or accidents, by any cause beyond the reasonable control of Lessor, or by orders
or regulations of any federal, state, county or municipal authority. In
addition, Lessor shall have no liability for damages arising from, and Lessor
does not warrant that Lessee's use of any Lines will be free from, (a) any
eavesdropping or wire-tapping by unauthorized parties, (b) any failure of Lines
to satisfy Lessee's requirements, or (c) any shortages, failures, variations,
interruptions, disconnections, loss or damage caused by installation,
maintenance, replacement, use or removal of Lines by or for other occupants of
the Complex, by any failure of the environmental conditions or the power supply
for the Building to conform to any requirements for the Lines or any associated
equipment or any other problems associated with any Lines by any other cause.
If any utility services are not separately metered to Lessee, Lessee shall
pay a proportion to be determined by Lessor of all charges jointly metered with
other leased premises or occupants in the Complex. All payments to Lessor in
respect thereof shall be due within ten (10) days after receipt of the billing
by Lessee.
19. ALTERATIONS
19.1 Consent of Lessor; Ownership.
Except with respect to the Tenant Improvements to be construed by Lessee
pursuant to Exhibit C hereto, Lessee shall not make, or suffer to be made, any
alterations exceeding ten thousand dollars ($10,000.00) in value or which affect
the structural integrity of the Building to the Leased Premises, the Building,
or the Complex, and/or systems, and/or Lines and facilities therein, or any part
thereof, without the written consent of Lessor. Said consent shall not be
unreasonably withheld. Any additions to or alterations of the Leased Premises,
the Building, or the Complex, and/or systems, and/or Lines and facilities
therein (except trade fixtures) shall, immediately upon being made, constitute a
part of the realty and lessor's property, and shall, at the expiration or
earlier termination of this Lease, remain upon the Leased Premises without
compensation to Lessee unless Lessor's expressly conditions approval of such
additions or alterations on their removal at the expiration or earlier
termination of this Lease. Except as otherwise provided in this Lease, Lessee
shall have the right to remove its trade fixtures placed upon the Leased
Premises provided that Lessee restores the Leased Premises as indicated below.
Some items that have been predetermined as trade fixtures are: diesel
generators, HVAC condensers and other related HVAC equipment that Lessee shall
install specific to its needs, and roof mounted antennas. Any and all costs
incurred by Lessor, whether in complying with laws, governmental requirements or
otherwise, as a result of any alterations (as hereinafter defined), or as a
result of request by Lessee for increased telephone or other utility capacity
above that presently existing (or, in the event the Building is to be
constructed or
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substantially altered by Lessor prior to the delivery date, above that which is
planned by Lessor for the Building) shall be paid by Lessee within ten (10)
business days after demand therefor by Lessor.
Notwithstanding the foregoing, Lessee shall have the right to install,
operate and maintain in, on the roof of, or near the building on a site approved
by Lessor and in, on the roof of, or near the building on a site approved by
Lessor and in conformity with the CC&'s and City ordinances (i) antennas; (ii)
diesel generators; and (iii) HVAC condensers and related equipment.
19.2 Requirements.
Any alterations, additions or installations exceeding $50,000 in the
aggregate performed by Lessee (hereinafter collectively "alterations") shall be
subject to strict conformity with the following requirements:
(a) All alterations shall be at the sole cost and expense of Lessee;
(b) Prior to commencement of any work of alteration, Lessee shall
submit detailed plans and specifications, including working drawings
(hereinafter referred to as "Plans"), of the proposed alterations, which shall
be subject to the consent of Lessor in accordance with the terms of Section 19.1
above;
(c) Following approval of the Plans by Lessor, Lessee shall give
Lessor at least ten (10) days' prior written notice of commencement of work in
the Leased Premises so that Lessor may post notices of non-responsibility in or
upon the Leased Premises as provided by law;
(d) No alterations shall be commenced without Lessee having
previously obtained all appropriate permits and approvals required by and of
governmental agencies;
(e) All alterations shall be performed in a skillful and workmanlike
manner, consistent with the best practices and standards of the construction
industry, and pursued with diligence in accordance with the Plans previously
approved by Lessor and in full accord with all applicable laws and ordinances.
All material, equipment, and articles incorporated in the alterations are to be
new, and of recent manufacture, and of the most suitable grade for the purpose
intended;
(f) Lessee must obtain the prior written approval from Lessor for
Lessee's contractor prior to commencement of the work. Lessor may require that
Lessee use subcontractors designated by Lessor as to specified portions of the
work. Lessee's contractor shall maintain all of the insurance reasonably
required by Lessor, including, without limitation, commercial general liability,
workers' compensation, builder's risk and course of construction insurance. The
limits of such insurance shall be the same as those specified in Article 11; and
(g) The alterations must be performed in a manner such that they will
not interfere with the quiet enjoyment of the other lessees in the Complex
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19.3 Liens.
Lessee shall keep the Leased Premises and the Complex in which the Leased
Premises are situated free from any liens arising out of any work performed,
materials furnished or obligations incurred by Lessee. In the event a
mechanic's or other lien is filed against the Leased Premises or the Complex of
which the Leased Premises forms a part as a result of a claim arising through
Lessee, Lessor may demand that Lessee furnish to Lessor a surety bond
satisfactory to Lessor in an amount equal to at least one hundred percent (100%)
of the amount of the contested lien claim or demand, indemnifying Lessor against
liability for the same and holding the Leased Premises free from the effect of
such lien or claim. Such bond must be posted within ten (10) business days
following notice from Lessor. In addition, Lessor may require Lessee to pay
Lessor's attorneys' fees and costs in participating in any action to foreclose
such lien if Lessor shall decide it is to its best interest to do so. Lessor
may pay the claim prior to the enforcement thereof, in which event Lessee shall
reimburse Lessor in full, including reasonable attorneys' fees, for any such
expense, as additional rent, with the next due rental.
19.4 Restoration.
Lessee shall return the Leased Premises to Lessor at the expiration or
earlier termination of this Lease in good and sanitary order, condition and
repair, free of rubble and debris, broom clean, reasonable wear and tear
expected. All damage to the leased premises caused by the removal of Lessee's
trade fixtures and other personal property that Lessee is permitted to remove
under the terms of this Lease and/or such restoration shall be repaired by
Lessee at its sole cost and expense prior to termination. Within six (6) months
prior to the expiration or early termination of this Lease, Lessor shall notify
Lessee in writing what restoration Lessee needs to complete at Lessee's sole
cost as outlined below. Inclusive in said restoration, Lessor shall have the
right to have Lessee remove any improvements that Lessee has installed within
the Leased Premises. In addition, Lessor shall have the right to require Lessee
to deliver the Leased Premises back to Landlord, with all operating functions
(electrical, mechanical, plumbing, etc.) in place, functional and appropriate
for a normal office/R&D use for the North San Jose commercial real estate market
place. The electrical service to the main house panel shall be a minimum of
2,000 Amps, 277/480 Volt, 3 Phase, with existing (at time of vacating)
electrical distribution to remain in place, unless Lessor requires it to be
removed. Mechanical distribution will include HVAC tonnage and distribution for
a typical office/R&D use. All ceiling tiles shall be at the same height (ten
feet), continuous and uninterrupted, except for those areas that are affected by
walls that Lessor has approved to remain after restoration.
20. MAINTENANCE AND REPAIRS
20.1 Obligations of Lessor and Lessee.
Lessee shall, at its sole cost and expense, keep and maintain the Leased
premises and appurtenances, and every part thereof (except for the structural
elements of the foundations, roof and exterior walls of the Building) in good,
clean and sanitary order, condition and repair including all
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necessary replacements, and shall maintain the appearance of the Leased Premises
in a manner consistent with the character, use and appearance of the Complex.
Subject to the obligations of Lessee pursuant to this Article and pursuant to
Article 17 above, Lessor shall perform all necessary repairs, maintenance and
replacement of the foundation, roof and structural parts of the Building. All
such amounts shall be due within ten (10) business days after Lessee's receipt
of billing. Lessee shall, at its sole cost, keep and maintain all utilities,
fixtures and mechanical equipment used by Lessee in good order, condition and
repair, including equipment installed by lessor for Lessee, or installed by
Lessee and being or to become the property of Lessor, such as heating,
ventilating and air conditioning equipment, or other mechanical equipment.
20.2 Intentionally omitted.
20.3 Condition of Premises.
Lessor represents that as of the date hereof (i) there are no existing or
latent construction defects in the building or Leased Premises; (ii) all
existing equipment, machinery and facilities, including without limitation HVAC,
plumbing and electrical systems used in connection with the operation of the
building and the Premises are, and will be as of the Commencement Date, in good
working condition; and (iii) Lessor has received no notice of violation of any
applicable law, ordinance and regulation regarding the Premises.
Lessee shall accept the Leased Premises in "as is" condition as of the date
of execution of this Lease by Lessee, and Lessee acknowledges that the Leased
Premises in such condition are in good and sanitary order, condition and repair.
21. CONDEMNATION
21.1 Definitions.
(a) "Condemnation" means (i) the exercise of any governmental power,
whether by legal proceedings or otherwise, by a condemnor and/or (ii) a
voluntary sale or transfer by Lessor to any condemnor, either under threat of
condemnation or while legal proceedings for condemnation are pending.
(b) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(c) "Award" means all compensation, sums or anything of value
awarded, paid or received on a total or partial condemnation.
(d) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of condemnation.
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21.2 Total Taking.
If the Leased Premises are totally taken by condemnation, this Lease shall
terminate on the date of taking.
21.3 Partial Taking; Common Areas.
(a) If any portion of the Leased Premises is taken by condemnation,
this lease shall remain in effect, except that Lessee can elect to terminate
this Lease if 33-1/3% or more of the total number of square feet in the Leased
premises is taken.
(b) If any part of the Common Areas of the Complex are taken by
condemnation, this Lease shall remain in full force and effect so long as there
is no material interference with the access to the Leased Premises, except that
if thirty percent (30%) or more of the Common Area is taken by condemnation,
either party shall have the election to terminate this Lease pursuant to this
Section.
(c) If fifty percent (50%) or more of the Building in which the
Leased Premises are located is taken, Lessor shall have the election to
terminate this Lease in the manner prescribed herein.
21.4 Termination or Abatement.
If either party elects to terminate this Lease under the provisions of
Section 21.3 (such party is hereinafter referred to as the "Terminating Party"),
it must terminate by giving notice to the other party (the "Nonterminating
Party") within thirty (30) days after the nature and extent of the taking have
been finally determined (the "Decision Period"). The Terminating Party shall
notify the Nonterminating Party of the date of termination, which date shall not
be earlier than sixty (60) days after the Terminating Party has notified the
Nonterminating Party of its election to terminate nor later than the date of
taking. If Notice of Termination is not given with the Decision Period, the
Lease shall continue in full force and effect except that Minimum Rent shall be
reduced by subtracting therefrom an amount calculated by multiplying the Minimum
Rent in effect prior to the taking by a fraction the numerator of which is the
number of square feet taken from the Leased Premises and the denominator of
which is the number of square feet in the Leased Premises prior to the taking.
21.5 Restoration.
If there is a partial taking of the Leased Premises and this Lease remains
in full force and effect pursuant to this Article, Lessor, at its cost, shall
accomplish all necessary restoration so that the Leased Premises is returned as
near as practical to its condition immediately prior to the date of the taking,
but in no event shall Lessor be obligated to expend more for such restoration
than the extent of funds actually paid to Lessor by the condemnor.
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21.6 Award.
Any award arising from the condemnation or the settlement thereof shall
belong to and be paid to Lessor except that Lessee shall receive from the award
compensation for the following if specified in the award by the condemning
authority, so long as it does not reduce Lessor's award in respect of the real
property: Lessee's trade fixtures, tangible personal property, loss of
business and relocation expenses (including the cost of replacement tenant
improvements). At all events, Lessor shall be solely entitled to all awards in
respect of the real property, including the bonus value of the leasehold.
Lessee shall not be entitled to any award until Lessor has received the above
sum in full.
22. ABANDONMENT
22.1 Lessee to Occupy.
Lessee shall not abandon the Leased Premises at any time during the Term,
nor permit the Leased Premises to remain unoccupied for a period longer than ten
(10) consecutive days during the Term, and if Lessee shall abandon, vacate or
surrender the Leased Premises, or be dispossessed by process of law, or
otherwise, any personal property belonging to Lessee and remaining on the Leased
Premises after such ten (10) day period shall, at the option of Lessor, be
deemed abandoned. For purposes of this Section 22.1, the Leased Premises shall
be deemed occupied provided that a security guard is present during normal
business hours.
23. ENTRY BY LESSOR
23.1 Rights of Lessor.
Lessee shall permit Lessor and Lessor's agents to enter the Leased Premises
at all reasonable times, upon twenty-four (24) hours notice, for the purpose of
inspecting the same or for the purpose of maintaining the Building, the Complex,
and the Lines, systems and facilities therein, or for the purpose of making
repairs, replacements, alterations or additions to any portion of the Building,
the Complex, and the Lines, systems and facilities therein, including the
erection and maintenance of such scaffolding, canopies, fences and props as may
be required, or for the purpose of posting notices of non-responsibility for
alterations, additions or repairs, or for the purpose of placing upon the
Building any usual or ordinary "for sale" signs, without any rebate of Rent and
without any liability to Lessee for any loss of occupation or quiet enjoyment of
the Leased Premises thereby occasioned, unless due to Lessor's gross negligence
or willful misconduct, and shall permit Lessor, at any time within one hundred
eighty (180) days prior to the expiration of this Lease, to place upon the
Leased Premises any usual or ordinary "to let" or "to lease" signs. This
Section in no way affects the maintenance obligations of the parties hereto.
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24. SIGNS
24.1 Approval, Installation and Maintenance.
Lessee shall be permitted to display its name and or corporate logo on a
monument at the entrance to the Complex and/or on the Building, in conformity
with the CC&R's and local City ordinances. Lessee shall not place on the Leased
Premises or on the Complex, any other exterior signs or advertisements nor any
interior signs or advertisements that are visible from the exterior of the
Leased Premises, without Lessor's prior written consent, which Lessor reserves
the right to withhold for any aesthetic reason in its reasonable judgment. The
cost of installation and regular maintenance of any such signs approved by
Lessor shall be at the sole expense of Lessee. At the termination of this
Lease, or any extension thereof, Lessee shall remove all his signs, and all
damage caused by such removal shall be repassed at Lessee's expense.
25. DEFAULT
25.1 Definition.
The occurrence of any of the following shall constitute a material default
and breach of this Lease by Lessee:
(a) Any failure by Lessee to pay the rental or to make any other
payment required to be made by Lessee hereunder after five (5) business days
written notice or any two failures to pay the rental or to make any other
payment required to be made by Lessee hereunder when due within a twelve (12)
month period;
(b) The abandonment of the Leased Premises by Lessee in violation of
Section 22.1 hereof;
(c) A failure by Lessee to observe and perform any other provision of
this Lease to be observed or performed by Lessee, where such failure continues
for thirty (30) days after written notice thereof by Lessor to Lessee;
provided, however, that if the nature of the default is such that the same
cannot reasonably be cured within the thirty (30) day period allowed, Lessee
shall not be deemed to be in default if Lessee shall, within such thirty (30)
day period, commence to cure and thereafter diligently prosecute the same to
completion;
(d) Either (1) the appointment of a receiver (except a receiver
appointed at the instance or request of Lessor) to take possession of all or
substantially all of the assets of Lessee, or (2) a general assignment by Lessee
for the benefit of creditors, or (3) any action taken or suffered by Lessee
under any insolvency or bankruptcy act shall constitute a breach of this Lease
by Lessee. In such event, Lessor may, at its option, declare this Lease
terminated and forfeited by Lessee, and Lessor shall be entitled to immediate
possession of the Leased Premises. Upon such notice of termination, this Lease
shall terminate immediately and automatically by its own limitation.
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Notwithstanding the foregoing, any involuntary bankruptcy filing shall not
constitute a breach of this Lease provided such proceeding is discharged within
thirty (30) days of filing; and
(e) Any two (2) failures by Lessee to observe and perform any
monetary provision of this Lease during any twelve (12) month period of the
Term, as such may be extended, shall constitute, at the option of Lessor, a
separate and nondurable default.
26. REMEDIES UPON DEFAULT
26.1 Termination and Damages.
In the event of any default by Lessee, then in addition to any other
remedies available to Lessor herein or at law or in equity, Lessor shall have
the immediate option to terminate this Lease and all rights of Lessee hereunder
by giving written notice of such intention to terminate. In the event that
Lessor shall elect to so terminate this Lease, then Lessor may recover from
Lessee:
(a) The worth at the time of award of any unpaid rent which had been
earned at the time of such termination; plus
(b) The worth at the time of award of the amount by which the unpaid
rent which would have been earned after termination until the tune of award
exceeds the amount of such rental loss that could have been reasonably avoided;
plus
(c) The worth at the time of award of the amount by which the unpaid
rent for the balance of the Tenn after the time of award exceeds the amount of
such rental loss that could be reasonably avoided; and
(d) Intentionally omitted
(e) At Lessor's election, such other amounts in addition to or in
lieu of the foregoing as may be permitted from time to time by the applicable
law in the state in which the Leased Premises are located.
26.2 Definitions.
(a) The terms "Grant" or "rental," as used in this Lease, shall be deemed
to be and to mean the Minimum Rent and all other sums required to be paid by
Lessee pursuant to the terms of this Lease.
(b) As used in subsections 26.1(a) and (b) above, the "worth at the time
of award" is computed by allowing interest at the rate of ten percent (10%) per
annum. As used in subsection 26. 1(c) above, the "worth at the time of award" is
computed by discounting such amount at the discount
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rate of the Federal Reserve Bank for the region in which the Complex is located
at the time of award plus one percent (1%).
26.3 Personal Property.
(a) In the event of any default by Lessee, Lessor shall also have the
right, judicial process, to reenter the Leased Premises and remove all persons
and property from the Leased Premises; such property may be removed and stored
in a public warehouse or elsewhere at the cost of and for the account of Lessee.
26.4 No Waiver.
Efforts by Lessor to mitigate the damages caused by Lessee's default in
this Lease shall not constitute a waiver of Lessor's right to recover damages
hereunder, nor shall Lessor have any obligation to mitigate damages hereunder.
26.5 Curing Defaults.
Should Lessee fail to repair, maintain, keep clean, and/or service the
Leased Premises, or any part or contents thereof at any time or times, or
perform any other obligations imposed by this Lease or otherwise, then after
having given Lessee reasonable notice of the failure or failures and a
reasonable opportunity, which in no case shall exceed thirty (30) days, to
remedy the failure, Lessor may enter upon the Leased Premises and perform or
contract for the performance of the repair, maintenance, or other Lessee
obligation, and Lessee shall pay Lessor for all direct and indirect costs
incurred in connection therewith within (30) days of receiving a bill therefor
from Lessor.
26.6 Cumulative Remedies.
The various rights, options, election powers, and remedies of Lessor
contained in this Article and elsewhere in this Lease shall be construed as
cumulative and no one of them exclusive of any others or of any legal or
equitable remedy which Lessor might otherwise have in the event of breach or
default, and the exercise of one right or remedy by Lessor shall not in any way
impair its right to any other right or remedy.
27. FORFEITURE OF PROPERTY AND LESSOR'S LIEN
27.1 Removal of Personal Property.
Lessee agrees that as at the date of termination of this Lease or
repossession of the Leased Premises by Lessor, by way of default or otherwise,
it shall remove all personal property to which it has the right to ownership
pursuant to the terms of this Lease. Any and all such property of Lessee not
removed by such date shall, at the option of Lessor, be removed by Lessor and
stored at the expense and for the account of Lessee. Lessee acknowledges
Lessor's need to relet the Leased
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Premises upon termination of this Lease or repossession of the Leased Premises
and understands that the forfeitures and waivers provided herein are necessary
to aid said reletting, and to prevent Lessor incurring a loss for inability to
deliver the Leased Premises to a prospective lessee.
28. SURRENDER OF LEASE
28.1 No Merger.
The voluntary or other surrender of this Lease by Lessee, or a mutual
cancellation thereof, shall not work as a merger, and shall, at the option of
Lessor, terminate all or any existing subleases or subtenancies, or may, at the
option of Lessor, operate as an assignment to it of any or all such subleases or
subtenancies.
29. LESSOR'S EXCULPATION
29.1 Limited Liability.
In the event of default, breach, or violation by Lessor (which term
includes Lessor's partners, co-venturers, co-tenants, officers, directors,
employees, agents, or representatives) of any of Lessor's obligations under this
Lease, Lessor's liability to Lessee shall be limited to its ownership interest
in the Leased Premises (or its interest in the Building, if applicable) or the
proceeds of a public sale of such interest pursuant to foreclosure of a judgment
against Lessor.
29.2 No Recourse.
Lessor (as defined in Section 29.1) shall not be personally liable for any
deficiency beyond its interest in the Leased Premises. All personal liability
of all trustees, their employees, agents or representatives is expressly waived
by Lessee.
30. ATTORNEYS' FEES
30.1 Actions, Proceedings, etc.
Lessee hereby agrees to pay, as additional rent, all reasonable attorneys'
fees and disbursements, and all other court costs or expenses of legal
proceedings or other legal services which Lessor may incur or pay out by reason
of, or in connection with:
(a) any action or proceeding brought by Lessor wherein Lessor
obtains a final judgment or award against Lessee (including arbitration) on
account of any default by Lessee in the observance or performance of any
obligation under this Lease including, but not limited to, matters involving
payment of rent and additional rent, alterations or other Lessee's work and
subletting or assignment;
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(b) any action or proceeding brought by Lessee against Lessor (or any
officer, partner, or employee of Lessor) in which Lessee fails to secure a final
judgment against Lessor;
(c) any other appearance by Lessor (or any officer, partner, or
employee of Lessor) as a witness or otherwise in any action or proceeding
whatsoever involving or affecting Lessee or this Lease;
(d) any assignment, sublease, or leasehold mortgage proposed or
granted by Lessee (whether or not permitted under this Lease), and all
negotiations with respect thereto; and
(e) any alteration of the Leased Premises by Lessee, and all
negotiations with respect thereto.
Lessor hereby agrees to pay, within ten (10) days of Lessee's demand, all
reasonable attorneys' fees and disbursements, and all other court costs or
expenses of legal proceedings or other legal services which Lessee may incur or
pay out by reason of, or in connection with:
(a) any action or proceeding brought by Lessee wherein Lessee obtains
a final judgment or award against Lessor (including arbitration) on account of
any default by Lessor in the observance or performance of any obligation under
this Lease;
(b) any action or proceeding brought by Lessor against Lessee (or any
officer, partner, or employee of Lessor) in which Lessor fails to secure a final
judgment against Lessee; and
(c) any other appearance by Lessee (or any officer, partner, or
employee of Lessee) as a witness or otherwise in any action or proceeding
whatsoever involving or affecting Lessor or this Lease.
30.2 Survival.
Lessee's and Lessor's obligations under this Section shall survive the
expiration or any other termination of this Lease. This Section is intended to
supplement (and not to limit) other provisions of this Lease pertaining to
indemnities and/or attorneys' fees.
30.3 Counsel Fees.
Should it be necessary for Lessor to employ legal counsel to enforce any of
the provisions of this Lease, Lessee agrees to pay, as additional rent, all
reasonable attorneys' fees and court costs reasonably incurred thereby, whether
or not Lessor commences any legal action or proceeding.
Should it be necessary for Lessee to employ legal counsel to enforce any of
the provisions of this Lease, Lessor agrees to pay, all reasonable attorneys'
fees and court costs reasonably incurred thereby, whether or not Lessee
commences any legal action or proceeding.
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31. NOTICES
31.1 Writing.
All notices, demands and requests required or permitted to be given or made
under any provision of this Lease, shall be in writing and shall be: (i) given
or made by personal service, or (ii) by mailing same by registered or certified
mail, return receipt requested, postage prepaid, or (iii) by reputable overnight
courier service which provides written evidence of delivery, addressed to the
respective party at the address set forth in Section 1.2 of this Lease or at
such other address as the party may from tune to tlme designate, by a written
notice, sent to the other in the manner aforesaid.
31.2 Effective Date.
Any such notice, demand or request ("notice") shall be deemed given or made
on the third day after the date so mailed. Notwithstanding the foregoing,
notice given by personal delivery to the party at its address as aforesaid shall
be deemed given on the day on which delivery is made. Notice given by a
reputable courier service which provides written evidence of delivery shall be
deemed given on the business day immediately following deposit with the courier
service.
31.3 Authorization to Receive.
Each person and/or entity whose signature is affixed to this Lease as
Lessee or as guarantor of Lessee's obligations ("obligor") designates such other
obligor its agent for the purpose of receiving any notice pertaining to this
Lease or service of process in the event of any litigation or dispute arising
from any obligation imposed by this Lease.
32. SUBORDINATION
32.1 Priority of Encumbrances.
This Lease, at Lessor's option, shall be subordinate to any ground lease,
mortgage, deed of trust, or any other hypothecation for security now or
hereafter placed upon the real property of which the Leased Premises are a part
and to any and all advances made on the security thereof and to all renewals,
modifications, consolidations, replacements and extensions thereof.
Notwithstanding such subordination, Lessee's right to quiet possession of the
Leased Premises shall not be disturbed if Lessee is not in default and so long
as Lessee shall pay the rent and observe and perform all the provisions of this
Lease, unless this Lease is otherwise terminated pursuant to its terms. If any
mortgagee, trustee or ground lessor shall elect to have this Lease prior to the
lien of its mortgage, deed of trust or ground lease, and shall give written
notice thereof to Lessee, this Lease shall be deemed prior to such mortgage,
deed of trust or ground lease, whether this Lease is dated prior or subsequent
to the date of said mortgage, deed of trust or ground lease or the date of
recording thereof.
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32.2 Execution of Documents.
Lessee agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any mortgage, deed of
trust or ground lease, as the case may be within ten (10) business days after
written demand. It is understood by all parties that Lessee's failure to
execute the subordination documents referred to above may cause Lessor serious
financial damage by causing the failure of a financing or sale transaction.
32.3 Attornment.
Lessee shall attorn to any purchaser at any foreclosure sale, or to any
grantee or transferee designated in any Deed given in lieu of foreclosure.
33. ESTOPPEL CERTIFICATES
33.1 Execution by Lessee.
Within ten (10) business days of request therefor by Lessor, Lessee shall
execute a written statement acknowledging the commencement and termination dates
of this Lease, that it is in full force and effect, has not been modified (or if
it has, stating such modifications), and providing any other pertinent
information as Lessor or its agent might reasonably request. Failure to comply
with this Article shall give Lessor a right to damages caused by the loss of a
loan or sale which may result from such failure by Lessee.
33.2 Financing, Sale or Transfer.
If Lessor desires to finance, refinance, sell, ground lease or otherwise
transfer the Leased Premises, or any part thereof, or the Building, Lessee
hereby agrees, within ten (10) business days of request therefor by Lessor, to
deliver to any lender or to any prospective buyer, ground lessor or other
transferee designated by Lessor such financial statements of Lessee, its
Guarantor and its parent company, if any, as may be reasonably required by such
party. Such statements shall include the past three (3) years' financial
statements of Lessee. All such financial statements shall be received by Lessor
in confidence and shall be used only for the purposes herein set forth.
34. WAIVER
34.1 Effect of Waiver.
The waiver by Lessor of any breach of any Lease provision shall not be
deemed to be a waiver of such Lease provision or any subsequent breach of the
same or any other term, covenant or condition therein contained. The subsequent
acceptance of rent hereunder by Lessor shall not be deemed to be a waiver of any
preceding breach by lessee of any provision of this Lease, other than
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the failure of Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
35. HOLDING OVER
35.1 Month-to-Month Tenancy on Acceptance.
If Lessee should remain in possession of the Leased Premises after the
expiration of the Term and without executing a new Lease, then, upon acceptance
of rent by Lessor, such holding over shall be construed as a tenancy from month
to month, subject to all the conditions, provisions and obligations of this
Lease as existed during the last month of the Term hereof, so far as applicable
to a month to month tenancy, except that the Minimum Rent shall be equal to 150%
of the Minimum Rent payable immediately prior to the expiration or sooner
termination of the Lease.
36. SUCCESSORS AND ASSIGNS
36.1 Binding Effect.
The covenants and conditions herein contained shall, subject to the
provisions as to assignment, apply to and bind the heirs, successors, executors,
administrators and assigns of all of the parties hereto; and all of the parties
hereto shall be jointly and severally liable hereunder.
37. TIME
37.1 Time of the Essence.
Time is of the essence of this Lease with respect to each and every
article, section and subsection hereof.
38. EFFECT OF LESSOR'S CONVEYANCE
38.1 Release of Lessor.
If, during the Term, Lessor shall sell its interest in the Building or
Complex of which the Leased Premises forms a part, or the Leased Premises, then
from and after the effective date of the sale or conveyance, Lessor shall be
released and discharged from any and all obligations and responsibilities under
this Lease, except those already accrued.
39. TRANSFER OF SECURITY
39.1 Transfer to Purchaser.
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If any security be given by Lessee to secure the faithful performance of
all or any of the covenants of this Lease on the part of Lessee, Lessor may
transfer and/or deliver the security, as such, to the purchaser of the
reversion, in the event that the reversion be sold, and thereupon Lessor shall
be discharged from any further liability in reference thereto.
40. CORPORATE AUTHORITY
40.1 Authorization to Execute.
If Lessee is a corporation, each individual executing this Lease on behalf
of said corporation represents and warrants that he is duly authorized to
execute and deliver this Lease on behalf of said corporation.
41. WAIVER OF CALIFORNIA CODE SECTIONS
41.1 Waiver by Lessee.
In this Lease, numerous provisions have been negotiated by the parties,
some of which provisions are covered by statute. Whenever a provision of this
Lease and a provision of any statute or other law cover the same matter, the
provisions of this Lease shall control. Therefore, Lessee waives (for itself
and all persons claiming under Lessee) the provisions of Civil Code Sections
1932(2) and 1933(4) with respect to the destruction of the Leased Premises;
Civil Code Sections 1941 and 1942 with respect to Lessor's repair duties and
Lessee's right to repair; Civil Code Section 1995.310, granting to a tenant all
remedies provided by law for breach of contract (including, without limitation,
the right to contract damages and the right to terminate the lease) in the event
that the landlord unreasonably withholds consent to a transfer in violation of
the tenant's rights under the lease; Code of Civil Procedure Section 1265.130,
allowing either party to petition the Superior Court to terminate this Lease in
the event of a partial taking of the Leased Premises by condemnation as herein
defined; and any right of redemption or reinstatement of Lessee under any
present or future case law or statutory provision (including Code of Civil
Procedure Sections 473 and 1179 and Civil Code Section 3275) in the event Lessee
is dispossessed from the Leased Premises for any reason. This waiver applies to
future statutes enacted in addition to or in substitution for the statutes
specified herein.
42. WASTE
42.1 Waste or Nuisance.
Lessee shall not commit, or suffer to be committed, any waste upon the
Leased Premises, or any nuisance, or other act or thing which may disturb the
quiet enjoyment of any other tenant or occupant of the Complex in which the
Leased Premises are located.
43. BANKRUPTCY
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43.1 Bankruptcy Events.
If at any time during the Term there shall be filed by or against Lessee in
any court pursuant to any statute either of the United States or of any State a
petition in bankruptcy or insolvency or for reorganization or for the
appointment of a receiver or trustee of all or a portion of lessee's property,
or if a receiver or trustee takes possession of any of the assets of Lessee, or
if the leasehold interest herein passes to a receiver, or if Lessee makes an
assignment for the benefit of creditors or petitions for or enters into an
arrangement (any of which are referred to herein as a "bankruptcy event"), then
the following provisions shall apply:
(a) At all events any receiver or trustee in bankruptcy or Lessee as
debtor in possession ("debtor") shall either expressly assume or reject this
Lease within sixty (60) days following the entry of an "Order for Relief."
(b) In the event of an assumption of the Lease by a debtor, receiver,
or trustee, such debtor, receiver, or trustee shall immediately after such
assumption (1) cure any default or provide adequate assurances that defaults
will be promptly cured; and (2) compensate Lessor for actual pecuniary loss or
provide adequate assurances that compensation will be made for actual pecuniary
loss; and (3) provide adequate assurance of future performance.
For the purposes of this paragraph 43.1(b), adequate assurance of future
performance of all obligations under this Lease shall include, but is not
limited to:
(i) written assurance that rent and any other consideration due
under the Lease shall first be paid before any other of Lessee's costs of
operation of its business in the Leased Premises are paid;
(ii) written agreement that assumption of this Lease will not
cause a breach of any provision hereof including, but not limited to, any
provision relating to use or exclusivity in this or any other Lease, or
agreement relating to the Leased Premises, or if such a breach is caused, the
debtor, receiver or trustee will indemnify Lessor against such loss (including
costs of suit and attorneys' fees), occasioned by such breach;
(c) Where a default exists under the Lease, the party assuming the
Lease may not require Lessor to provide services or supplies incidental to the
Lease before its assumption by such trustee or debtor, unless Lessor is
compensated under the terms of the Lease for such services and supplies provided
before the assumption of such Lease.
(d) The debtor, receiver, or trustee may only assign this Lease in
accordance with the terms of Article 30 and if adequate assurance of future
performance by the assignee is provided, whether or not there has been a default
under the Lease. For the purpose hereof, adequate assurance of future
performance means written agreement that assignment of this Lease will not cause
a breach of any provision hereof including, but not limited to, any provision
relating to use or exclusivity in
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this or any other Lease or agreement relating to the Leased Premises, and that
if such a breach is caused, the debtor, receiver or trustee will indemnify
Lessor against such loss (including costs of suit and attorney's fees),
occasioned by such breach. Any consideration paid by any assignee in excess of
the rental reserved in the Lease shall be the sole property of, and paid to,
Lessor. Upon assignment by the debtor or trustee, the obligations of the Lease
shall be deemed to have been assumed and the assignee shall execute an
assumption agreement on request of Lessor.
(e) Lessor shall be entitled to the fair market value for the Leased
Premises and the services provided by Lessor (but in no event less than the
rental reserved in the Lease) subsequent to the commencement of a bankruptcy
event.
(f) Lessor specifically reserves any and all remedies available to
Lessor in Article 26 hereof or at law or in equity in respect of a bankruptcy
event by Lessee to the extent such remedies are permitted by law.
44. LATE CHARGES
44.1 Late Payment by Lessee.
Lessee acknowledges that late payment by Lessee to Lessor of rent or any
other payment due hereunder will cause Lessor to incur costs not contemplated by
this Lease, the exact amount of such costs being extremely difficult and
impractical to fix. Such costs include, without limitation, processing and
accounting charges, and late charges that may be imposed on Lessor by the terms
of any encumbrance and note secured by any encumbrance covering the Leased
Premises. Therefore, if any installment of rent, or any other payment due
hereunder from Lessee is not received by Lessor when due, Lessee shall pay to
Lessor an additional sum of ten percent (10%) of such rent or other charge as a
late charge. The parties agree that this late charge represents a fair and
reasonable estimate of the cost that Lessor will incur by reason of late payment
by Lessee. Acceptance of any late charge shall not constitute a waiver of
Lessee default with respect to the overdue amount, or prevent Lessor from
exercising any other rights or remedies available to Lessor.
45. MORTGAGEE PROTECTION
45.1 Notice and Right to Cure Default.
Lessee agrees to give any mortgagee(s) and/or trust deed holders,
concurrently with delivery to Lessor, by registered mail, a copy of any notice
of default served upon Lessor, provided that prior to such notice Lessee has
been notified, in writing (by way of Notice of Assignment of Rents and Leases,
or otherwise), of the address of such mortgagees and/or trust deed holders.
Lessee further agrees that if Lessor shall have failed to cure such default
within the time provided for in this Lease, then the mortgagees and/or trust
deed holders shall have an additional thirty (30) days within which to cure such
default or, if such default cannot be cured within that time, then such
additional time as may be necessary if within such thirty (30) days, any
mortgage and/or trust deed holder has
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commenced and is diligently pursuing the remedies necessary to cure such default
(including but not limited to commencement of foreclosure proceedings, if
necessary to effect such cure), in which event this Lease shall not be
terminated while such remedies are being so diligently pursued.
46. MISCELLANEOUS PROVISIONS
46.1 Captions.
The captions of this Lease are for convenience only and are not a part of
this Lease and do not in any way limit or amplify the terms and provisions of
this Lease.
46.2 Number and Gender.
Whenever the singular number is used in this Lease and when required by the
context, the same shall include the plural, the plural shall include the
singular, and the masculine gender shall include the feminine and neuter
genders, and the word "person" shall include corporation, firm or association.
If there be more than one Lessee, the obligations imposed under this Lease upon
Lessee shall be joint and several.
46.3 Modifications.
This instrument contains all of the agreements, conditions and
representations made between the parties to this Lease and may not be modified
orally or in any other manner than by an agreement in writing signed by all of
the parties to this Lease.
46.4 Payments.
Except as otherwise expressly stated, each payment required to be made by
Lessee shall be in addition to and not in substitution for other payments to be
made by Lessee.
46.5 Severability.
The invalidity of any provision of this Lease, as determined by a court of
competent jurisdiction, shall in no way affect the validity of any other
provision hereof.
46.6 No Offer.
The preparation and submission of a draft of this Lease by either party to
the other shall not constitute an offer, nor shall either party be bound to any
terms of this Lease or the entirety of the Lease itself until both parties have
fully executed a final document and an original signature document has been
received by both parties. Until time as described in the previous sentence,
either party is free to terminate negotiations with no obligation to the other.
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46.7 Disputed Sums.
Under the terms of this Lease numerous charges are and may be due from
Lessee to Lessor including, without limitation, Common Area charges, real estate
taxes, insurance reimbursement and other items of a similar nature including
advances made by Lessor in respect of Lessee's default at Lessor's option. In
the event that at any time during the Term there is a bona fide dispute between
the parties as to the amount due for any of such charges claimed by Lessor to be
due, the amount demanded by Lessor shall be paid by Lessee until the resolution
of the dispute between the parties or by litigation. Failure by Lessee to pay
the disputed sums until resolution shall constitute a default under the terms of
the Lease.
46.8 Lessee's Option to Renew.
Lessee shall have the right to extend the Term of the Lease for two (2)
additional periods of five (5) years (the "Options to Extend") upon the same
terms and conditions as the Lease, except for Minimum Rent. Such extension of
the Term is herein referred to as the "Extended Term(s)." Lessee must exercise
its Option(s) to Extend, if at all, by written notification (the "Notice of
Exercise") to Lessor not less than on hundred eighty (180) days prior to the
expiration of the Term (or preceding Extended Term); provided, however, that in
the event that Lessee is in default of any of the provisions of this Lease at
the time the Notice of Exercise is sent, or at the commencement of the Extended
Term(s), Lessor at its option, may elect to declare the Option(s) to Extend null
and void and of no further force and effect, in which event Lessee shall have no
right to extend the Term of the Lease. Lessor grants the Option to Extend to
Lessee in consideration of Lessee's strict compliance with the provisions
hereof, including, without limitation, the manner of exercise of the Option(s)
to Extend.
If Lessee timely and properly exercises the Option(s) to Extend, then the
Minimum Rent for the Extended Term(s) shall be adjusted to equal the Fair
Market Rental for the Leased Premises as of the date of the commencement of the
Extended Term(s), pursuant to the procedures hereinafter set forth. The term
"Fair Market Rental" means the Minimum Rent chargeable for the Leased Premises
based upon the following factors applicable to the Leased Premises or any
comparable premises:
(a) Rental rates being charged for comparable premises in the same
geographical location.
(b) The relative locations of comparable premises.
(c) Improvements, or allowances provided for improvements, or to be
provided.
(d) Rental adjustments, if any, or rental concessions.
(e) Services and utilities provided or to be provided.
(f) Use limitation or restrictions.
(g) Any other relevant Lease terms or conditions.
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The Fair Market Rental evaluation shall include provision for further rent
adjustment during the Extended Term, if such adjustments are commonly required
in the market place for similar types of leases.
Upon Lessee's exercise of the Option(s) to Extend, and included within the
Notice of Exercise, Lessee shall notify Lessor of its opinion of Fair Market
Rental as above defined for the Extended Term. If the parties are unable to
agree upon a Minimum Rent for the Extended Term within thirty (30) days
following Lessor's receipt of the Notice of Exercise, within ten (10) business
days thereafter either party may, at its sole cost and expense and by giving
written notice to the other party, appoint a real estate appraiser who is a
member of the Appraisal Institute, or the Society of Real Estate Appraisers, or
an equivalent professional organization, with at least five (5) years'
experience appraising properties devoted to the same general type of use (e.g.
retail, office) as the Leased Premises in the county in which the Leased
Premises are located ("Qualified Appraiser"), to set the Fair Market Rental for
the Extended Term(s). If a party does not appoint a Qualified Appraiser within
ten (10) business days after the first party has given written notice of the
name of its Qualified Appraiser, the single Qualified Appraiser appointed shall
be the sole appraiser and shall set the Fair Market Rental for the Extended
Term. If two Qualified Appraisers are appointed by the parties, they shall meet
promptly, on five (5) business days notice to the parties, to take such evidence
and other information as the parties may deem reasonable to submit to the
Qualified Appraisers. Within thirty (30) days after the selection of the last
of the two Qualified Appraisers to be appointed by the parties, the Qualified
Appraisers shall render their opinions of the Fair Market Rental of the Leased
Premises as above qualified. If the two valuations are within ten percent (10%)
of one another, they shall be averaged and the average of the two shall be the
Minimum Rent for the Extended Term. If only one appraisal is timely submitted
that appraisal shall constitute the Minimum Rent for the Extended Term. If the
two valuations are separated by more than ten percent (10%), then the two
Qualified Appraisers shall, within ten (10) business days following the last
date for submission of the two appraisals of Fair Market Rental, appoint a third
Qualified Appraiser, who shall decide the Fair Market Rental for the Extended
Term as specified below. If the two Qualified Appraisers are unable to agree
upon a third Qualified Appraiser within such ten (10) day period, they shall
notify the parties hereto in writing of their inability to appoint a third
Qualified Appraiser, and within ten (10) business days following receipt of such
notice either of the parties to this Lease, by giving five (5) business days'
notice to the other party, may demand "Arbitration," as specified below. If
neither party applies for Arbitration within the ten (10) day period herein
specified, the two appraisals of Fair Market Rental shall be averaged as stated
above and such average shall be the Minimum Rent for the Extended Term.
In the event the parties are unable to mutually agree upon a Minimum Rent
for the Extended Term(s), and in such event proceed to "Appraisal" or
"Arbitration" proceedings as specified below both parties shall be bound to
submit the matter for such determination. The procedures specified herein for
appointment of Qualified Appraisers, delivery of appraisals, appointment of an
Arbitrator, and determination of Fair Market Rental thereby, is herein
collectively referred to as "Arbitration." The Arbitration shall be conducted
and determined in the county where the Leased Premises are situated. If the
Arbitration is not concluded before the commencement of the Extended Term,
Lessee
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shall pay Minimum Rent to Lessor in an amount equal to the Fair Market Rental
set forth in the appraisal by Lessor's Qualified Appraiser until the Fair Market
Rental as determined by Arbitration differs from that stated by Lessor's
Qualified Appraiser, then any adjustment shall be made by payment by the
appropriate party within thirty (30) days after the determination of Fair Market
Rental by Arbitration has been concluded, as provided herein. During the entire
Extended Term, Lessee shall be obligated to make payment of the Minimum Rent
determined in accordance with the Arbitration procedure hereunder.
A party demanding Arbitration hereunder shall make its demand in writing
("Demand Notice") within ten (10) business days after receipt of notice from the
Qualified Appraisers that they have failed to appoint a third Qualified
Appraiser as specified above. A copy of the demand Notice shall be sent to the
President of the Real Estate Board for the county in which the Leased Premises
are located. If there is no Real Estate Board or Board President in said county
then a copy of the Demand Notice shall be sent to the Presiding Judge of the
highest trial court in such county for the state in which the Leased Premises
are situated. The Board President or Presiding Judge, whichever is applicable,
is hereinafter referred to as the "Appointer." The Appointer, acting in his
personal, private capacity, shall appoint within ten (10) business days
thereafter a third Qualified Appraiser to be the "Arbitrator." The Arbitrator
shall be qualified to serve as an expert witness, over objection, to give
opinion testimony addressed to the issue in a court of competent jurisdiction.
As used herein, the term "Arbitrator" refers to a third Qualified
Appraiser, selected by any of the methods heretofore set forth. The Arbitrator
shall, within sixty (60) days after his appointment, state in writing his
determination as to whether the Fair Market Rental state by Lessor's Qualified
Appraiser or the Fair Market Rental stated by Lessee's Qualified Appraiser most
closely approximates his own. The Arbitrator shall have the right to consult
experts and competent authorities with factual information or evidence
pertaining to the determination of Fair Market Rental, but any such consultation
shall be made in the presence of both parties with full right to cross examine.
The Arbitrator shall not state his own opinion of Fair Market Rental, but shall
be strictly limited to the selection of one of the two appraisals submitted by
the other two Qualified Appraisers. The Arbitrator shall have no right to
propose a middle ground or any modification of either of the proposed
valuations, and shall have no power to modify the Lease. The valuation so
chosen as most closely approximating that of the Arbitrator shall constitute his
decision, shall be deemed the Minimum Rent for Extended Term and shall be final
and binding upon the parties absent fraud or gross error. The Arbitrator shall
render a decision and award in writing, with counterpart copies to each party.
Judgment may be entered thereon in any court of competent jurisdiction.
In the event of failure, refusal, or inability of the Arbitrator to act in
a timely manner, a successor shall be appointed in the same manner as such
Arbitrator was first chosen hereunder. The fees and expenses of the Arbitrator
and for the administrative hearing fee, if any, shall be borne by the party
whose Qualified Appraiser's opinion of Fair Market Rental was not endorsed by
the Arbitrator. Each party shall bear its own attorney's fees and other
expenses, including fees of witnesses in presenting evidence, and the fees and
cost of its own Qualified Appraiser.
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46.9 Light, Air and View.
No diminution of light, air, or view by any structure which may hereafter
be erected (whether or not by Lessor) shall entitle Lessee to any reduction of
Rent, result in any liability of Lessor to Lessee, or in any other way affect
this Lease or Lessee's obligations hereunder.
46.10 Public Transportation Information.
Lessee shall comply with all requirements of any local transportation
management ordinance.
46.11 Rules and Regulations.
Lessee agrees to comply with the rules and regulations set forth in Exhibit
E attached hereto.
46.12 Joint and Several Liability.
Should Lessee consist of more than one person or entity, they shall be
jointly and severally liable on this Lease.
46.13 Survival of Obligations.
All obligations of Lessee which may accrue or arise during the Term or as a
result of any act or omission of Lessee during said Term shall, to the extent
they have not been fully performed, satisfied or discharged, survive the
expiration or termination of this Lease.
46.14 Real Estate Brokers.
Lessor and Lessee each represents and warrants to the other party that it
has not authorized or employed, or acted by implication to authorize or employ,
any real estate broker or salesman to act for it in connection with this Lease,
other than Jeff Hoffman or Cornish and Carey Commercial representing Lessor and
William Obregon and Jay Phillips of CB/Richard Ellis representing Lessee. Lessor
and Lessee shall each indemnify, defend and hold the other party harmless from
and against any and all claims by any real estate broker or salesman whom the
indemnifying party authorized or employed, or acted by implication to authorize
or employ, to act for the indemnifying party in connection with this Lease,
other than the Broker(s) identified above.
46.15 Nonliability of Lessor for Approvals.
Except as may otherwise be expressly stated by a provision of this Lease,
and only to the extent so stated, the consent or approval, whether express or
implied, or the act, failure to act or failure to object, by Lessor in
connection with any plan, specification, drawing, proposal, request, act,
omission, notice or communication (collectively, "act") by or for, or prepared
by or for, Lessee, shall not create any responsibility or liability on the part
of Lessor, and shall not constitute a representation
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by Lessor, with respect to the completeness, sufficiency, efficacy, propriety,
quality or legality of such act.
46.16 Interest On Past Due Amounts.
If any sum due Lessor from Lessee is not received by Lessor within five (5)
business days after the date such sum is due and payable, such sum shall bear
interest from the due date until paid by Lessee at the rate of two percent (2%)
above the Prime Rate (as herein defined), not to exceed the maximum rate of
interest allowed by law in the state where the Leased Premises are located, and
such interest shall be deemed to be additional rent. "Prime Rate" means the
highest rate charged by Bank of America NT&SA, San Francisco Main Office, on
short-term unsecured loans to its most creditworthy corporate borrowers.
46.17 Conversion To A Limited Liability Entity.
(a) No Conversion Without Consent. Anything to the contrary in this
-----------------------------
Lease notwithstanding, if Lessee is currently a partnership (either general or
limited), joint venture, cotenancy, joint tenancy or an individual, Lessee may
not convert (the "Conversion") the Lessee entity or person into any type of
entity which possesses the characteristic of limited liability such as, by way
of example only, a corporation, a limited liability company, limited liability
partnership or limited liability limited partnership (singularly and
collectively, "Limited Entity"), without the consent of Lessor, which consent,
subject to fulfillment of the conditions below, shall not be unreasonably
withheld.
(b) Conditions to Lessor's Consent. The following are conditions
------------------------------
precedent to Lessor's obligation to act reasonably with respect to a Conversion
to a Limited Entity:
(i) The Limited Entity assumes all of Lessee's liabilities and is
assigned all of Lessee's assets as of the effective date of the Conversion;
(ii) As of the effective date of the Conversion, the Limited
Entity shall have a net worth ("Net Worth"), which is not less than the greater
of (i) Lessee's Net Worth on the date of execution of the Lease or (i) Lessee's
Net Worth as of the date Lessee request Lessor's consent to the Conversion;
(iii) Lessee has timely fulfilled all its obligations under any of
the terms, covenants or conditions of this Lease during the term of the Lease;
(iv) Lessee delivers to Lessor an agreement, in form and substance
satisfactory to lessor and executed by each equity interest holder of Lessee,
wherein each equity interest holder of Lessee agrees to remain personally liable
for all of the terms, covenants and conditions of the Lease that are to be
observed and performed by the Limited Entity; and
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(v) Lessee shall reimburse Lessor within ten (10) days following
Lessor's written demand therefor for any and all reasonable costs and expenses
that may be incurred by Lessor in connection with the Conversion including,
without limitation, reasonable attorney's fees.
(c) Nothing in this Section 46.17 shall modify or reduce the obligations
of Lessee under this Lease.
IN WITNESS WHEREOF, Lessor and Lessee have executed this Lease as of the
day and year first written above.
LESSOR: LESSEE:
By:________________________________ By:__________________________________
Its:_______________________________ Its:_________________________________
Dated:_____________________________ Dated:_______________________________
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EXHIBIT A
LEGAL DESCRIPTION OF THE COMPLEX
All that certain Real Property in the City of San Jose, County of Santa Clara,
State of California, described as follows:
All of Lot 8 as shown upon that certain Map entitled, "Tract No. 7340", which
Map was filed for record into the Office of the Recorder of the County of Santa
Clara, on May 26, 1982 in Book 500 of Maps, Pages 45, 47 and 48.
Excepting therefrom that portion thereof lying below a depth of 500 feet,
measured vertically, from the contour of the surface of said property; without
right for any purpose whatsoever to enter upon, into or through the surface of
said property or any part thereof lying between said surface and 500 feet below
the surface.
<PAGE>
EXHIBIT C
LESSEES TENANT IMPROVEMENTS
Attached detailed description of initial improvements to be constructed by
Lessee and at Lessee's expense.
<PAGE>
EXHIBIT D
ACKNOWLEDGMENT OF COMMENCEMENT
This Acknowledgment of Commencement is made as of ______,1998, with reference to
that certain Lease Agreement (hereinafter referred to as the "Lease") dated
November 10, 1998, by and between Intel Corporation, as "Lessor" therein, and
Indignity Communications, as "Lessee", for the Leased Premises situated at 2950
Zanier Road, San Jose, CA.
The undersigned hereby confirms the following:
1. That the Lessee accepted possession of the Leased Premise on
_________, 199_ and acknowledges that the Leased Premises are as represented by
Lessor and in good order, condition and repair, and that the improvements, if
any, required to be constructed for Lessee by Lessor under the Lease have been
so constructed and are satisfactorily completed in all respects.
2. That all conditions of said Lease to be performed by Lessor prerequisite
to the full effectiveness of said Lease have been satisfied and that the Lessor
has fulfilled all of its duties of an inducement nature.
3. That in accordance with the provisions of said Lease the commencement
date of the term is __________ and that, unless sooner terminated, the
original term thereof expires on _________________.
4. That said Lease is in full force and effect and that the same represents
the entire agreement between Lessor and Lessee concerning said Lease.
5. That there are no existing defenses which Lessee has against the
enforcement of said Lease by Lessor, and no offsets or credits against rentals.
6. That the minimum rental obligation of said Lease is presently in effect
and that all rentals, charges and other obligations on the part of Lessee under
said Lease commenced to accrue on _______________.
7. That the undersigned has not made any prior assignment, hypothecation or
pledge of said Lease or of the rents hereunder.
LESSEE:
___________________,
a__________________
By:________________
Its:_______________
Date:______________
<PAGE>
EXHIBIT E
RULES AND REGULATIONS
1. No sign, placard, picture, advertisement, name or notice shall be inscribed,
displayed or printed or affixed on the Building or to any part thereof, or which
is visible from the outside of the Building, without the prior written consent
of Lessor.
2. Intentionally omitted
3. The sidewalks, passages, exits, entrances, and stairways in and around the
Building shall not be obstructed by Lessee or used by it for any purpose other
than ingress and egress from the Leased Premises. The passages, exits,
entrances, stairways, and roof are not for the use of the general public and
Lessor shall in all cases retain the right to control and prevent access thereto
by all persons whose presence in the judgment of Lessor shall be prejudicial to
the safety, character, reputation and interests of the Building and its Lessees,
provided that nothing herein contained shall be construed to prevent such access
to persons with whom Lessee normally deals in the ordinary course of Lessee's
business unless such persons are engaged in illegal activities.. Lessee shall
restrict roof access to employees and services providers with a reasonable need
for roof access.
4. Lessee shall provide Lessor with two copies of keys for all external locks.
5. The toilets, urinals and other plumbing fixtures shall not be used for any
purpose other than those for which they were constructed, and no rubbish,
newspapers, rags or other substances shall be thrown into them. Wastes and
excessive or unusual use of water shall not be allowed. Lessee shall be
responsible for any breakage, stoppage or damage resulting from the violation
of this rule by Lessee or its employees or invitees.
6. Lessee shall not overload the floor of the Leased Premises or mark, drive
nails, screw or drill into the partitions, woodwork or plaster or in any way
deface the Leased Premises or any part thereof.
7. Lessee shall not use, keep or permit to be used or kept any foul or noxious
gas or substance in the Leased Premises, or permit or suffer the Leased Premises
to be occupied or used in a manner offensive or objectionable to Lessor or other
occupants of the Building by reason of noise, odors and/or vibrations, or
interfere in any way with other Lessees or those having business therein.
8. The Leased Premises shall not be used for washing clothes, for lodging, or
for any improper, objectionable, immoral or illegal purposes.
9. Lessee shall not use or keep in the Leased Premises or the Building any
kerosene, gasoline, or inflammable or combustible fluid or material, or use any
method of heating or air conditioning other than that supplied by Lessor.
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10. Lessor will direct electricians as to the manner and location in which
telephone and telegraph wires are to be introduced. No boring or cutting for
wires will be allowed without the consent of Lessor. The location of telephones,
call boxes, and other office equipment affixed to the Leased Premises shall be
subject to the approval of Lessor.
11. Intentionally omitted.
12. Lessor reserves the right to exclude or expel from the Building any person
who, in the judgment of Lessor, is intoxicated or under the influence of liquor
or drugs, or who shall in any manner do any act in violation of any of the rules
and regulations of the Building.
13. Intentionally omitted.
14. Without the written consent of Lessor, Lessee shall not use the name of
the Building in connection with or in promoting or advertising the business of
Lessee except as Lessee's address.
15. Lessee shall not permit any contractor or other person making any
alterations, additions or installations within the Leased Premises to use the
hallways, lobby, or corridors as storage or work areas without the prior consent
of Lessor. Lessee shall be liable for and shall pay the expense of any
additional cleaning or other maintenance required to be performed by Lessor as a
result of the transportation or storage of materials or work performed within
the Building by or for Lessee.
16. Intentionally omitted.
17. Intentionally omitted.
18. Lessor is not responsible for the violation of any rule contained herein
by any other Lessees.
19. Lessor may waive any one or more of these rules for the benefit of any
particular Lessee, but no such waiver shall be construed as a waiver of Lessees
right to enforce these rules against any or all Lessee's occupying the Building.
20. Lessee is responsible for purchasing and installing a security system if
required by law or ordinance. The cost of purchasing and installation of any
such system is the sole cost and expense of the Lessee.
21. The display, carrying, and use of pistols, rifles, shotguns and other
firearms is prohibited in and about the Building, the parking lots and other
common areas, except for authorized municipal, state and federal law enforcement
personnel. Lessee and its employees, agents and invitees shall not display,
carry or use any firearms within the Building, parking lots or other common
areas.
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EXHIBIT F
CONDITION OF THE LEASED PREMISES
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Exhibit 10.3
THIS LEASE AGREEMENT made this 15th day of April, 1998, by and between
Ammendale Commerce Center Limited Partnership (hereinafter referred to as
"Landlord") and Intermedial Communications, Inc., (hereinafter referred to as
"Tenant").
WITNESSETH:
1. Leased Premises.
Landlord hereby leases to Tenant and Tenant hereby leases from Landlord for
the term, at the rental and upon the conditions set forth herein, all that
certain approximate 62,390 square feet of office and warehouse space in a
building known as 6435 Virginia Manor Road, Beltsville, Maryland, as shown and
described on the plan attached hereto as Exhibit A (hereinafter referred to as
the "Initial Premises"). Upon vacation of the adjacent space by the current
tenant (Scientific & Commercial Systems Corp.), Landlord shall tender to Tenant
and Tenant shall lease from Landlord, 11,857 square feet of contiguous space
("Additional Premises") for a total of 74,247 square feet. At any time during
the Lease Term, Tenant may also lease 1,500 rentable square feet of mezzanine
located in the Additional Premises ("Optional Premises") if requested in writing
by Tenant. Hereafter, the term "Premises" includes the Initial Premises and the
Additional Premises and the Optional Premises. Additionally, Landlord grants to
Tenant during the term the non-exclusive use, in common with others, of all non-
allocated parking areas within the property owned by Landlord of which the
Premises is a part for the accommodation and parking of automobiles as required
by Tenant in conducting normal business activities of Tenant, its officers,
agents, employees and visitors. Landlord reserves the right, however, to
designate certain portions of the parking areas for parking of trucks, vans and
other vehicles, and to designate for the specific account of Tenant specific
parking areas or spaces constructed around, within or under the buildings on
Landlord's property. All parking areas and facilities which may be furnished by
Landlord in or near the Premises, including employee parking areas, truckway or
ways, loading docks, pedestrian sidewalks and ramps, landscaped areas, and other
areas and improvements which may be provided by Landlord for the general use, in
common with other tenants, their officers, agents, employees and visitors, shall
at all times be subject to the exclusive control and management of Landlord, and
Landlord shall have the right, from time to time, to establish, modify and
enforce reasonable rules and regulations with respect to all facilities and
areas mentioned in this Paragraph. Landlord shall have the right to police the
same, to change from time to time the areas, location and arrangement of parking
areas and other facilities referred to in this Paragraph; to change truck routes
to such extent as landlord may desire, provided that the Premises are adequately
served by the new route; to restrict parking by Tenant, its officers, agents and
employees to employee parking areas; to establish and from time to time to
change the level of parking surfaces; to close all or any portion of said areas
or facilities to such extent as may, in the opinion of Landlord's counsel, be
legally sufficient to prevent a dedication thereof or the accrual of any rights
to any person or to the public therein; to close temporarily all or any portion
of the parking areas or facilities; to discourage non-tenant parking; and to do
and perform such other acts in and to said areas and improvements, as in the use
of good business judgment, Landlord shall determine to be advisable with a view
to the improvement of the
<PAGE>
convenience and use thereof by tenants, their officers, agents, employees and
visitors. Tenant agrees that it will cause its officers, agents and employees to
park their automobiles only in such areas as Landlord may from time to time
designate as employee parking areas, and that it will not use any part of the
parking area, nor permit the use thereof, in any manner which will obstruct the
driveways or thruways serving parking areas or any area exclusively allocated
for the use of others. During the term of this Lease, Tenant shall have the
right to a minimum of two hundred four (204) parking spaces.
2. Term and Possession.
2.1 Term. The term of this Lease for the Initial Premises shall commence
----
on the date the Initial Premises is tendered to Tenant by Landlord, (the
"Initial Lease Commencement Date"), and shall end on the thirty first (31st) day
of July, 2000 unless terminated sooner pursuant to any provision hereof. The
term of this Lease for the Additional Premises shall commence on the date the
Additional Premises is tendered to Tenant by Landlord (the "Additional Lease
Commencement Date"), but in no event earlier than May 1, 1998, and shall end on
July 31, 2000 unless terminated sooner pursuant to any provision hereof.
2.2 Possession. If Landlord should be unable to give possession of the
----------
Premises on the Initial or Additional Lease Commencement Date because the
Premises are located in a building or Premises being constructed and which has
not been sufficiently completed to make the Premises ready for occupancy, or if
Landlord is unable to give possession of the Premises on the Initial or
Additional Lease Commencement Date hereof, by reason of holding over or
retention of possession of any tenant or occupant, or if repairs, improvements
or decoration of the Premises or the building of which the Premises form a part
are not completed, or for any other reason, Landlord shall not be subject to any
liability for failure to give possession on said date. Under such circumstances,
the rent reserved and covenanted to be paid herein, shall not commence until the
possession of the Premises is tendered by Landlord with Landlord's notice to
Tenant that the same is ready for occupancy. Should tender of possession of the
Premises be later or earlier than the beginning date named, then, and in that
event, the beginning and ending date of this Lease shall be adjusted by letter
from Landlord to Tenant, to conform to the date of such tender of possession,
such as if the same had been originally named as the beginning date, and this
Lease shall run for the full term from the date of such tender of possession,
provided that no such failure to give possession on the Lease Commencement Dates
shall in any other respect affect the validity of this Lease or the obligations
of Tenant hereunder. If permission is given to Tenant to enter into possession
of the Premises, or to occupy space other than the Premises prior to the date
specified as the Lease Commencement Dates, Tenant covenants and agrees that such
occupancy shall be deemed to be under all the terms, covenants and conditions of
the provisions of this Lease. Tenant's acceptance of possession of the Premises
shall be conclusive evidence that the Premises are in good order and
satisfactory condition at the time of possession thereof.
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3. Rent.
3.1 Rent. Tenant shall pay to Landlord as rent for the Initial Premises
----
the initial annual sum of Five Hundred Fifty Two Thousand One Hundred Fifty One
and 50/100 Dollars ($552,151.50) (the "Base Rent") in monthly payments of Forty
Six Thousand Twelve and 62/100 Dollars ($46,012.62) (subject to proration for
partial months as hereinafter provided) in advance on the first day of each
calender month during the term hereof, the first installment payable on the
Initial Lease Commencement Date and the remaining installments payable, in
advance, on the first day of each month during the said term to and at the
office of Polinger Shannon & Luchs Company, 530 Wisconsin Avenue, #1000, Chevy
Chase, Maryland 20815, or at such other place as Landlord may from time to time
designate to Tenant in writing. Each monthly installment shall hereinafter be
referred to as the "basic monthly rental". Rent checks shall be made payable to
Landlord c/o Polinger Shannon & Luchs Company unless Tenant is otherwise
directed by Landlord in writing. Should the term of this Lease commence on a day
other than the first day of a calendar month, the parties agree that the rental
for the first and last month of the term shall be prorated and rent for the
remaining months shall be due and payable on the first of the month as provided
above. Tenant shall pay to Landlord as rent for the Additional Premises the
initial annual sum of One Hundred Four Thousand Nine Hundred Thirty Four and
45/100 Dollars ($104,934.45) ("Base Rent") in monthly payments of Eight Thousand
Seven Hundred Forty Four and 54/100 Dollars ($8,744.54) payable in all respects
as set forth in this paragraph 3.1. Rent for the Additional Premises shall
commence on the Additional Lease Commencement Date. Rent for the Optional
Premises shall commence upon use of the Optional Premises by Tenant at the
square foot rate then being paid for the Additional Premises.
3.2 Late Charge. Tenant hereby recognizes and acknowledges that if rental
-----------
payments are not received when due, Landlord will suffer damages and additional
expense thereby and Tenant therefore agrees that a late charge equal to five
percent (5.00%) of the basic monthly rental (including additional rent as
hereinafter provided), may be assessed by Landlord or its Agent as additional
rental. Furthermore, Landlord or its Agent shall have the right to require that
rental payments be made by certified or cashier's check.
3.3 Rental Escalation. Commencing on the first anniversary of the Initial
-----------------
and Additional Lease Commencement Date, the respective Base Rent shall be
increased by three percent (3%). Such increased Base Rent shall thereafter be
known as the Annual Rent. On each subsequent anniversary of the respective
Lease Commencement Date during the term of the Lease, Annual Rent in effect
shall be increased by three percent (3%).
3.4 Additional Rent. In addition to the basic monthly rental, Tenant
---------------
shall pay Tenant's pro rated share of Operating Costs defined to be all expenses
relating to the Premises including, but not limited to, real estate taxes,
sales, franchise, business, corporation or any other taxes (except income taxes)
based on rents, utilities not separately metered to individual tenants,
maintenance (except where otherwise provided), repairs, operating supplies,
building services, litter removal,
3
<PAGE>
management fees not exceeding four percent (4%), labor for on-site management
and maintenance, and Landlord's insurance (as set forth in Paragraph 11),
operating supplies, snow removal, landscaping, litter removal from the entire
project, tools, materials, resurfacing, repainting, and restriping of parking
areas, car stops, and security, professional fees, and cost of capital
improvements, which in landlord's reasonable judgement will result in operating
cost savings. Tenant's pro rata share of Operating Costs shall be a fraction,
the numerator of which shall be the square footage of the Premises, and the
denominator of which shall be the total square footage in the Project. Said
fraction shall then be multiplied by the entire amount of Operating Costs to
determine the amount of such Operating Costs payable by Tenant. In order to
provide for payment by Tenant of Tenant's pro rata share of Operating Costs,
Landlord shall furnish to Tenant, prior to the Lease Commencement Date, or as
soon thereafter as is practicable, a written statement setting forth Landlord's
estimate of the operating expenses for the calendar year in which the Lease
Commencement Date occurs; thereafter, Landlord shall furnish to Tenant, on an
annual basis, a written statement setting forth Landlord's estimate of the
operating expenses for each succeeding calendar year. Tenant shall pay to
Landlord on or before the first day of each month of the term hereof, together
with its basic monthly rental, an amount equal to one-twelfth (1/12th) of
Landlord's estimated operating expenses in the calendar year in which this lease
commences and for each calendar year thereafter.
3.5 For the purposes of calculating additional rental as set forth in
Paragraph 3.4, at the close of each calendar year Landlord shall compute the
actual cost of operating the Project during the previous twelve (12) month
period. Landlord shall deliver to Tenant notice of such cost and the amount due,
if any, from Tenant no later than March 30th of the year immediately subsequent
to the year to which cost relates. Tenant shall reimburse Landlord within ten
(10) business days after notice of any deficiency between estimated Operating
Costs and the actual costs incurred. In the event there are overpayments by
Tenant, Landlord shall apply the excess to the next successive installment of
basic monthly rental and additional rental due under this Lease, unless there
are no further such payments due from Tenant, in which case Landlord shall pay
such excess to Tenant within thirty (30) days of notice to Tenant as set forth
above.
4. Security Deposit. [Intentionally Omitted]
5. Uses.
5.1 Tenant agrees continuously to use and occupy the Premises for office
use including uses ancillary thereto relating to the operation, installation,
maintenance, repair and replacement or telecommunications equipment in
compliance with all governmental laws and regulations relating thereto, and for
no other purpose. Tenant covenants to comply with the provisions of all recorded
covenants, conditions and restrictions, all building, zoning, fire and other
governmental laws, ordinances, regulations or rules applicable to the Premises,
and all requirements of the carriers of insurance covering the project. Tenant
shall not do or permit anything to be done in or about the Premises, or bring or
keep anything in the Premises that may increase the fire and extended coverage
4
<PAGE>
insurance premium upon the Project, injure the Project, constitute water, or be
a nuisance, public or private, or menace to tenants of adjoining premises or to
anyone else.
5.2 Tenant agrees that it has determined to Tenant's satisfaction that the
Premises can be used for the purpose for which they are leased and waives any
right to terminate this Lease in the event the Premises cannot be used for such
purposes, or for any reason may not be used for such purposes during the Lease
Term.
6. Utilities.
Tenant agrees to pay all utility charges incurred by it in connection with
its use and occupancy of the Premises, including, but not limited to,
electricity, fuel, gas, water, sewer and telephone (including equipment and
installation charges), to pay said charges as the same become due, and to
immediately transfer all utility accounts into its own name at the Lease
Commencement Date (or whenever Tenant occupies the Premises, if such occupancy
is prior to the Lease Commencement Date). Landlord shall have no liability
whatsoever due to interruption of service or failure of any utility service to
Tenant.
7. Condition of Premises.
Tenant accepts the Premises in their "as-is" condition upon the Initial
Lease Commencement Date or Additional Lease Commencement Date as the case may
be.
8. Maintenance and Repairs.
8.1 Structural Maintenance. Landlord shall be solely responsible for and
----------------------
shall maintain in good condition and repair roof, foundation, exterior walls, as
well as the underground pipes and conduits located beyond the boundaries of the
Premises, and the sprinkler system; and Landlord shall make all repairs which
become necessary by reason of any structural defect in the Premises. Landlord
shall not be required to make any repairs necessitated by reason of any act or
omission by Tenant, its employees, agents, licensees, invitees or anyone
entering the Premises by force, but if Landlord does make any such repairs,
Tenant agrees to promptly, upon demand, reimburse Landlord for the full costs
thereof. No liability shall be imposed on Landlord:
(1) because of any injury or damage to personal property;
(2) or because of any interference with the services and facilities listed
above;
caused by accidents or repairs, riots, strikes, or any other reason beyond the
control of Landlord; and Landlord shall be under no duty to restore any of such
services and facilities or to make any of the repairs for which Landlord is
obligated, except after receipt of written notice from Tenant of a need
5
<PAGE>
therefor, and there shall be a reasonable period of time within which Landlord
may make such repairs.
8.2 Other Maintenance and Repairs. Tenant shall, at its own expense,
-----------------------------
during the full term of this Lease, keep the Premises in good order and
condition, and make all repairs and do all acts of maintenance which become
necessary in or upon the Premises, including specifically but not limited to,
the doors and door jambs, both inside and outside, loading docks, windows, and
window casings and sills, inside, plate or other glass windows and doors, and to
make, at Tenant's expense, all repairs and to do all acts or maintenance which
become necessary during the term of this Lease, and to replace all worn out and
broken parts of: the heating; plumbing; electrical systems and equipment; air
conditioning and sprinkler systems and equipment; and elevators, if any. Tenant
shall enter into service contracts at its own expense for the maintenance of the
heating system, as well as the air conditioning system, and elevators, if any.
If any such service contract should not be obtainable, Tenant agrees to have the
system or equipment not so covered inspected at least once each year by a
qualified serviceman.
8.3 Common Area Maintenance. At the sole expense of Tenant, and to be
-----------------------
included as Operating Costs as described in Paragraph 3.4, Landlord shall be
responsible for and shall maintain in good condition and repair the parking lot,
paving, landscaping and other common areas of the building, and Landlord shall
be responsible for snow and ice removal from the parking lot, paving and
sidewalks. Landlord shall not be required to make any repairs necessitated by
reason of any act or omission by Tenant, its employees, agents, licensees or
invitees, all of whom shall be included in the term "Tenant" for purposes of
this subsection. If any repairs necessitated by reason of any act or omission by
Tenant are required then, if Landlord chooses to do so, Landlord may make
repairs and Tenant agrees promptly upon demand to reimburse Landlord for the
full costs thereof, or, at its option, Landlord may notify Tenant of the
necessity for such repairs, and Tenant shall repair or commence the repairs
within fifteen (15) days of receipt of such notice at Tenant's expense to
Landlord's reasonable satisfaction. No liability shall be imposed on Landlord
because of any damage to personal property or any injury, or because of any
interference with the services and facilities listed above, caused by accidents
or repairs, riots, strikes or any other reason beyond the control of Landlord.
Landlord shall be under no duty to restore any of such services and facilities
or to make any of the repairs for which Landlord is obligated, except after
receipt of written notice from Tenant of a need therefor. Landlord shall have a
reasonable period of time within which to commence such work.
8.4 Roof.
----
(a) Tenant agrees that it will not permit, nor cause it agents, employees
or invitees to place anything on the roof or in the gutters and downspouts of
the building of which the Premises constitute a part, or to cut, drive nails
into or otherwise penetrate or mutilate the roof without Landlord's prior
written consent. Tenant will also be responsible for damage to the roof caused
by its employees or contractors. Tenant shall indemnify Landlord and hold
Landlord harmless against
6
<PAGE>
expenses incurred to permanently correct any damage to the roof resulting from
Tenant's violation of this Paragraph, as well as any consequential damages to
Landlord or any of the other tenants of the building of which the Premises are a
part. Landlord shall repair damage to the roof caused by Tenant's negligent acts
as defined in this paragraph and Tenant shall reimburse Landlord for all costs
and expenses incurred in making such repairs. Landlord or its agents may enter
the Premises at all reasonable hours to make said roof repairs. If Landlord
makes any expenditures, or incurs any obligation for the payment of money in
connection therewith, including, but not limited to, attorneys' fees for
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligations incurred, with interest at the rate of twelve percent (12.00%)
per annum and costs, shall be deemed to be additional rent hereunder and shall
be paid by Tenant to Landlord within give (5) days or rendition of any bill or
statements to Tenant therefor. All rights given to Landlord in this Paragraph
shall be in addition to any other right or remedy of Landlord herein contained.
(b) Tenant shall not place mechanical or other equipment on the roof
without Landlord's prior written consent, which shall be conditioned in part
upon Landlord's approval of Tenant's plans and specifications for such
installations. The costs of any roof improvements made pursuant hereto shall be
at Tenant's sole cost and expense and shall result in no liens being placed
against the Premises or the building by which they are a part.
8.5 Assignment of All Warranties. Landlord agrees to assign to Tenant any
----------------------------
and all warranties which are extended to Landlord resulting from the
construction of the demised premises and the tenant improvements installed
within those premises. Landlord agrees to aid Tenant in applying said
warranties in connection with the maintenance requirements under this Lease.
9. Alterations.
9.1 Installation. Tenant shall not make any alterations, additions,
------------
modifications or improvements to the Premises without the prior written consent
of Landlord, which consent will not be unreasonably withheld, conditioned or
delayed. If Tenant desires to make any such alterations, etc., plans for same
shall first be submitted to and approved by Landlord, and same shall be done by
Tenant, at its own expense. All alterations and additions to the Premises would
be performed by Tenant using Landlord approved contractors unless Landlord shall
otherwise agree in writing. As a condition of Landlord's consent to the use of
Tenant's contractor, Tenant or Tenant's contractor must evidence insurance
coverage to include: (a) Worker's Compensation Coverage and (b) Public Liability
and Property Damage Insurance in the amount of not less than One Million Dollars
in the aggregate. Tenant agrees that all such work shall be done in a good and
workmanlike manner, that the structural integrity of the building shall not be
impaired, that no liens shall attach to the Premises by reason thereof, and that
Tenant will secure all necessary permits pertaining to the aforementioned
alterations, modifications or improvements.
9.2 Ownership and Removal. The alterations, additions, modifications and
---------------------
improvements referred to in Paragraph 9.1, and consented to in writing by
Landlord, shall become part of the real
7
<PAGE>
property as soon as they are affixed thereto; however, Landlord may, at
Landlord's option, require that Tenant remove all or any part of said
alterations prior to the expiration of the Lease Term in a written notice to
Tenant at the time of the consent. If Landlord so requires, Tenant agrees, at
its own expense, to remove same and to restore the Premises to their original
condition, reasonable wear and tear excepted.
9.3 Diesel Generator. Tenant shall have the right to install, operate and
----------------
maintain a diesel generator, at its expense, on a site approved by the Landlord.
The equipment will remain property of the Tenant and Tenant shall have the right
to remove said equipment at lease expiration.
10. Environmental.
(a) Tenant shall conduct all activity in compliance with federal, state
and local laws, statutes, ordinances, rules, regulations, orders and
requirements of common law concerning protection of the environment or human
health ("Environmental Laws"). Tenant shall also cause its subtenants (if
subtenants are permitted by this Lease or are hereafter approved by Landlord),
licensees, invitees, agents, contractors, subcontractors and employees to comply
with all Environmental Laws. Tenant and its permitted subtenants, licensees,
invitees, agents, contractors, and subcontractors shall obtain, maintain, and
comply with all necessary environmental permits, approvals, registrations and
licenses.
In addition to and not in limitation of the foregoing, Tenant, its
permitted subtenants, licenses, invitees, agents, contractors, subcontractors
and employees shall not generate, refine, produce, transfer, process or
transport Hazardous Material on, above, beneath or near the Premises, the
Building or the Land. As used herein, the term "Hazardous Materials" shall
include, without limitation, all of the following: (1) hazardous substances, as
such term is defined in the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA", 42 U.S.C. Section 9601 (14)), as amended by the
Superfund Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499, 100
Stat. 1613 (Oct. 17, 1986) ("SARA"); (2) regulated substances, within the
meaning of Title I of the Resource Conservation and Recovery Act, 42 U.S.C.
Sections 669-6991 (i), as amended by SARA; (3) any element, compound or material
which can pose a threat to the public health or the environment when released
into the environment; (4) hazardous substances and controlled hazardous
substances as defined in the Maryland Environmental Code Ann., Title 7, Subtitle
2, and "oil" as defined in Section 4-401 (c) of the Maryland Environment Code
Ann.; (5) petroleum and petroleum byproducts; (6) an object or material which is
contaminated with any of the foregoing; (7) any other substance designated by
any of the Environmental Laws of a federal, state or local agency as detrimental
to the public health, safety and the environment.
(b) Tenant shall protect, indemnify and save Landlord harmless from and
against any and all liability, loss, damage, cost or expense (including
reasonable attorneys' fees) that Landlord may suffer or incur as a result of any
claims, demands, damages, losses, liabilities, costs, charges, suits, orders,
judgments or adjudications asserted, assessed, filed, or entered against
Landlord or any of
8
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the Building or the Land, by any third party, including without limitation, any
governmental authority, arising from Tenant's breach of Environmental Laws or
otherwise arising from Tenant's generation, refining, production, storage,
handling, use, transfer, processing, transportation, release spillage, pumping,
pouring, emission, emptying, dumping, discharge or escape of Hazardous Materials
on, from or affecting the Premises, the Building or the Land, including, without
limitation, liability for costs and expenses of abatement, correction, clean-up
or other remedy, fines, damages, response (including death) and property damage.
(c) Tenant, its permitted subtenants, licensees, invitees, agents,
contractors, subcontractor and employees shall not release, spill, pump, pour,
emit, empty, dump or otherwise discharge or allow to escape Hazardous Materials
onto the Land or Building, and Tenant shall take all action necessary to remedy
the results of any such release, spillage, pumping, pouring, emission, emptying,
dumping discharge, or escape.
(d) Tenant shall within forty eight (48) hours of receipt deliver to
Landlord copies of any written communication relating to the Building or the
Land between Tenant and any governmental agency or instrumentality concerning or
relating to Environmental Laws.
(e) Tenant's obligations under this Section shall survive the termination
or other expiration of this Lease.
11. Insurance.
11.1 Fire Insurance. Tenant agrees, in addition to the provisions of
--------------
Paragraph 10, that it will not do anything that will cause Landlord's insurance
against loss by fire or other hazards, as well as public liability insurance, to
be canceled or that will prevent Landlord from procuring same from acceptable
companies and at standard rates. Tenant shall do everything reasonably possible
and consistent with the conduct of Tenant's business to obtain the lowest
possible rates for insurance on the Premises. If, however, the cost to Landlord
of obtaining insurance on the Premises (or the building in which the Premises
are located) is increased due to Tenant's occupancy thereof, Tenant agrees to
pay, promptly upon demand, as additional rental, any such increase.
11.2 Liability Insurance and Indemnification of Landlord. Landlord shall
---------------------------------------------------
not be liable to Tenant for any injury, loss or damages to Tenant or to any
other person or property occurring upon the Premises or the approaches thereto
or the parking facilities in or adjacent thereto from any cause whatsoever.
Tenant agrees to indemnify and save Landlord harmless against and from any and
all liabilities, damages, expenses, including reasonable attorneys' fees, claims
and demands of every kind, that may be brought against it, for or on account of
any damage, loss or injury to persons or property in or about the Premises
during the term of this Lease, or during any occupancy by Tenant prior to the
Lease Commencement Date. Tenant further agrees to carry, at its own expense, at
all times during the term hereof:
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(a) Tenant's Insurance. Tenant shall carry and keep in full force and
effect at all times during this Lease, for the protection of Landlord and
Tenant, and any mortgagee of Landlord, and naming Landlord as additional
insured; Public Liability Insurance (Comprehensive General Liability or
Commercial General Liability) including Contractual Liability Insurance for
limits of not less than TWO MILLION DOLLARS ($2,000,000.00) each occurrence and
at least FIVE MILLION DOLLARS ($5,000,000.00) aggregate. Coverage can be
purchased through an individual policy or Umbrella policies, but the total shall
be not less than previously noted. Landlord shall be entitled to increase the
aforesaid limited amount during the term hereof (but not more than once in any
lease year) to commercially reasonable amounts of coverage.
(b) Plate Glass. Tenant shall carry full coverage plate glass insurance on
all plate glass in the premises, including the storefront. In the event of any
loss or damage to any of Tenant's plate glass, the proceeds shall be used by
Tenant towards the cost of replacing or repairing any property so damaged.
(c) Workers Compensation. Tenant shall carry Worker's Compensation
Insurance covering its employees in, on and about the demised premises as
required by any applicable law, regulation or statute in the jurisdiction where
the premises is located and Employers Liability coverage for limits not less
than $100,000.00/$500,000.00/$100,000.00.
(d) Insurance Policies. All insurance policies required to be obtained by
Tenant shall be issued by insurance companies acceptable to the Landlord with an
A.M. Best Policyholders Rating of not less than A and a Financial Rating of not
less than VIII licensed to do business in the jurisdiction where the premises is
located, and shall provide that such policies shall not be canceled, changed or
terminated without thirty (30) day's prior written notice to the Landlord.
Landlord shall be named as an additional insured on all such policies, with the
exception of the statutory Worker's Compensation coverage referred to
hereinabove. Tenant shall deliver to Landlord a Certificate of Insurance
evidencing such coverage prior to occupancy, and annually thereafter, and shall
upon demand deliver copies of such insurance policies to Landlord.
11.3 Tenant shall also obtain, at Tenant's expense, such increased amount
of existing insurance, and such other insurance coverage in such limits, as
Landlord from time to time may require and such other hazard insurance as the
nature and condition of the Premises may require in the reasonable judgment of
Landlord, to afford Landlord adequate protection for risks. If, on account of
the failure of Tenant to comply with the foregoing provisions, Landlord is
adjudged a coinsurer by its insurance carrier, then any loss or damage Landlord
shall sustain by reason thereof shall be borne by Tenant and shall be
immediately paid by Tenant upon receipt of a bill thereof and evidence of such
loss. Landlord makes no representation that the limits of liability specified to
be carried by Tenant under the terms of this Lease are adequate to protect
Tenant against Tenant's undertaking under this Paragraph, and in the event
Tenant believes that any insurance coverage called for under this Lease is
insufficient, Tenant shall provide at its own expense, such additional insurance
as Tenant deems adequate.
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12. Landlord's Liability.
Notwithstanding anything to the contrary contained in this Lease, Tenant
shall look only to Landlord's ownership in the Building for satisfaction of
Tenant's remedies for the collection of a judgment (or other judicial process)
requiring the payment of money by Landlord in the event of any default by
Landlord hereunder, and no other property or assets of the partners or
principals of Landlord, disclosed or undisclosed, shall be subject to levy,
execution or the enforcement procedure for the satisfaction of Tenant's remedies
under or with respect to this Lease, the relationship of Landlord and Tenant
hereunder or Tenant's use or occupancy of the Premises. If any provision of this
Lease either expressed or implied obligates Landlord not to unreasonably
withhold its consent or approval, an action for declaratory judgment or specific
performance will be Tenant's sole right and remedy in any dispute as to whether
Landlord has breached such obligation. Landlord and Tenant shall not be deemed
by virtue of this Lease to be partners or joint venturers, and their
relationship hereby established is deemed to be only that of lessor and lessee,
respectively.
13. Trash Storage.
Tenant hereby covenants to contain all trash and debris generated in
conjunction with its use of the Premises in containers approved by Landlord and
in locations approved by Landlord with such screening as may be required by
Landlord so as not to constitute a safety or fire hazard and to contract for its
removal on a no less than weekly basis. Should Tenant violate this covenant,
Landlord may take such corrective action as it shall deem necessary for the
storage and removal of such trash and debris and Tenant shall pay the costs and
expenses of such corrective action as additional rent immediately upon demand
therefor in accordance with the provisions of this Lease.
14. Signs.
Landlord shall provide all exterior signs at the cost and expense of
Tenant. Landlord shall provide Tenant with samples of the exterior signage
available for the Premises and Tenant shall specify from these samples the
design of its specific exterior sign, subject to the approval of Landlord. No
sign, advertisement or notice shall be inscribed, painted, affixed or otherwise
displayed on any part of the outside or the inside of the Premises or the
building of which the Premises are a part, unless Landlord shall have approved
the sign, advertisement or notice in writing prior to installation of the same,
specifying the location, number, size, color and style of the sign,
advertisement or notice. If any sign, advertisement or notice is exhibited by
Tenant without having first obtained Landlord's approval thereof, Landlord shall
have the right to remove the same and Tenant shall be liable for any and all
expense incurred by Landlord in said removal. Landlord shall have the right to
prohibit any advertisement of Tenant which in its opinion tends to impair the
reputation of the building of which the Premises are a part or its desirability
as a high-quality industrial building, and upon written notice from Landlord,
Tenant shall immediately refrain from and discontinue any such advertisement. No
signs made of paper and visible from outside of the Premises shall be allowed in
the Premises. No mobile sign, such as may be affixed to the side of a
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truck or a trailer or a mobile platform shall be permitted in the parking area.
The existing exterior signage is deemed to be "pre-approved" by the Landlord.
15. Tenant's Equipment.
Landlord shall have the right in a reasonable manner, to prescribe the
weight and position of inventory and of other heavy equipment or fixtures, which
shall, if considered necessary by Landlord, stand on plank strips to distribute
the weight. Any and all damage or injury to the Premises, due to Tenant's
equipment being on the Premises, shall be repaired by and at the sole cost of
Tenant. Tenant shall not install or operate any machinery whose installation or
operation may affect the structure of which the Premises are a part without
having obtained the prior written consent of Landlord. Further, Tenant shall not
install any other equipment of any kind or nature whatsoever which shall or may
necessitate any changes, replacements or additions to, or in the use of, the
water system, heating system, plumbing system, air-conditioning system or
electrical system of the Premises or the building of which the Premises are a
part without first obtaining the prior written consent of Landlord. Business
machines and mechanical equipment belonging to Tenant which cause noise or
vibration that may be transmitted to the structure of the building of which the
Premises are a part, or to any space therein, to such a degree as to be
objectionable to Landlord or to any tenant, shall be installed and maintained by
Tenant, at Tenant's expense, on vibration eliminators or other devices
sufficient to eliminate such noise and vibration. Tenant agrees to remove
promptly from the sidewalks and other areas adjacent to the building of which
the Premises are a part any of Tenant's furniture, equipment, inventory or other
material delivered or deposited there.
16. Permits - Compliance with Laws.
16.1 Permits. Tenant shall, at its own expense, promptly obtain from the
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appropriate governmental authorities any and all permits, licenses and the like
required to permit Tenant to occupy the Premises for the purposes herein stated.
This requirement shall not relieve Tenant of its liability for rent from the
Lease Commencement Date hereinabove set forth.
16.2 Compliance with Laws. Tenant shall thereafter promptly comply with
--------------------
all statutes, laws, ordinances, orders, rules, regulations and requirements of
the Federal, State and local governments and of the Board of Fire Underwriters
applicable to Tenant's use of the Premises, for the correction, prevention and
abatement of nuisances or violations in, upon or connected with the Premises
during the term of this Lease.
17. Assignments and Subletting.
Tenant agrees that it will not transfer, assign or sublet the Premises, in
whole or in part, without Landlord's prior written consent. Transfer of the
majority of the stock of a corporate Tenant, or all general partnership
interests in a partnership Tenant, shall be deemed an assignment of this
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Lease. Landlord agrees that it will not unreasonably withhold its consent, and
if such consent is given, Tenant shall not be relieved from any liability under
this Lease. Tenant further agrees that if it intends to assign or sublet the
entire Premises, or a portion of the Premises for the balance of the term of
this Lease, it will first notify Landlord in writing and Landlord, at its
option, may accept a surrender of the Premises, in which event, Landlord shall
release Tenant from any further liability under this Lease. Landlord shall
notify Tenant of its decision within fifteen (15) days of receipt of notice by
Tenant of its intent to assign or sublet. In all events, Landlord's rights to
assign this Lease are and shall remain unqualified, and following any assignment
hereof by Landlord, all obligations of the assigning Landlord to Tenant pursuant
hereto shall cease and terminate, and Tenant shall look solely to the assignee
for performance of Landlord's duties hereunder. Tenant shall have the right,
with notice to Landlord to assign this lease to any company controlling or
controlled by or under common control as the Tenant so long as Tenant remains
liable under the terms of this Lease.
18. Subordination.
Tenant accepts this Lease, and the tenancy created hereunder, subject and
subordinate to any ground or master leases, mortgages, deeds of trust, ground or
master leasehold mortgages or other security interests now or hereafter
constituting a lien upon, or affecting, the improvements of which the Premises
form a part, or the land, or any part thereof. Tenant shall, at any time
hereafter, on request, execute any instruments, leases or other documents that
may be required by any mortgage, mortgagee, deed of trust, trustee or underlying
owner or Landlord hereunder to subordinate Tenant's interest hereunder to the
lien of any such mortgage or mortgages, deed or deeds of trust or underlying
ground or master lease, and the failure of Tenant to execute any such
instruments, leases or documents shall constitute a default hereunder.
19. Attornment and Non-Disturbance.
Landlord will deliver to Tenant lender's standard non-disturbance
agreement. Tenant agrees that upon any assignment or termination of Landlord's
interest in the Premises whether by mortgage, sale, foreclosure or otherwise,
Tenant will, upon request, attorn to the person or organization then holding
title to the Premises (the "Successor") and to all subsequent successors, and
shall pay to the Successor all rents and other monies required to be paid by
Tenant hereunder and perform all of the other terms, covenants, conditions and
obligations contained in this Lease, provided, however, that Tenant shall not be
so obligated to attorn unless, if Tenant shall so request in writing, such
Successor will execute and deliver to Tenant an instrument wherein such
Successor agrees that so long as Tenant performs all of the terms, covenants and
conditions of this Lease, Tenant's possession under the provisions of this Lease
shall not be distributed by any such Successor. Following any sale by Landlord
of the property of which the Premises are a part, all future obligations of the
assigning Landlord to Tenant shall cease and terminate and Tenant shall look
solely to the Successor for the performance of Landlord's duties hereunder.
20. Property Loss or Damage.
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20.1 Tenant hereby expressly agrees that Landlord shall not be responsible
in any manner for any damage or injury to the person or property of Tenant or
any other person or business caused, directly or indirectly, by (i) dampness or
water, whether due to a break or leak in any part of the roof, heating, plumbing
or sprinkler system within the Premises, or in the building in which the
Premises are located or due to any other cause; (ii) theft; (iii) fire or other
casualty; (iv) any other cause whatsoever, including but not limited to
interruption in service or supply of utilities.
20.2 Subject to the provisions of Paragraph 20.1, Landlord shall not be
liable for damage or injury to person or property of Tenant or of any other
person or business unless notice in writing of any defect (a) which Landlord has
under the terms of this Lease the duty to correct and (b) which has caused such
damage or injury, shall have been given in sufficient time before the occurrence
of such damage or injury reasonably to have enabled Landlord to correct such
defect, and even then only if such damage or injury is due to Landlord's gross
negligence.
20.3 In any event, Tenant shall look only to Landlord's ownership in the
Building and the land on which it is located for satisfaction of Tenant's
remedies for the collection of a judgment (or other judicial process) requiring
the payment of money by Landlord in the event of any default by Landlord
hereunder, and no other property or assets of Landlord or its partners or
principals, disclosed or undisclosed, shall be subject to levy, execution or
other enforcement procedures for the satisfaction of Tenant's remedies under or
with respect to this Lease, the relationship of Landlord and Tenant hereunder or
Tenant's use or occupancy of the demised premises.
21. Tenant's Failure to Perform.
In the event that Tenant fails, after fifteen (15) days written notice from
Landlord, to keep the premises in good condition and repair, or to commence and
continuously make required repairs, or to do any act or make any payment or
perform any term or covenant on Tenant's part required under this Lease or
otherwise fails to comply herewith, Landlord may, at its option, immediately, or
at any time thereafter and without notice, perform the same for the account of
Tenant (including entering the Premises at all reasonable hours to make repairs
and do any act or make any payment which Tenant has failed to do), and if
Landlord makes any expenditures, or incurs any obligations for the payment of
money in connection therewith, including, but not limited to, attorneys' fees in
instituting, prosecuting or defending any action or proceeding, such sums paid
or obligations incurred, with interest at the rate of twelve percent (12%) per
annum, and costs, shall be deemed to be additional rent hereunder and shall be
paid by Tenant to Landlord within five (5) days of rendition of any bill or
statement to Tenant therefor. All rights given to Landlord in this section shall
be in addition to any other right or remedy of Landlord contained.
22. Landlord's Right to Enter and Show Premises.
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22.1 Landlord's Right to Inspect and Repair. Tenant agrees to permit
--------------------------------------
Landlord or Agent to enter the Premises at any reasonable time for the purpose
of determining the condition of the Premises and making repairs thereto, as
provided above in Paragraph 21.
22.2 Landlord's Right to Show Premises. Tenant agrees that Landlord may
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within the last four (4) months of the Lease Term, display a "For Lease" or "For
Sale" sign on the Premises and show prospects through the Premises at any
reasonable time.
23. Surrender at End of Term.
Except as otherwise provided in Paragraph 9.2, Tenant shall vacate the
Premises at the expiration or other termination of this Lease and shall remove
all goods and effects not belonging to Landlord and shall surrender possession
of the Premises in broom clean condition with all fixtures and systems thereof
in good repair, reasonable wear and tear and damage by fire or other unavoidable
casualty excepted. If Tenant shall fail to perform any of the foregoing
obligations, Landlord is hereby expressly authorized to do so on Tenant's behalf
and Landlord may sell such articles on the Premises as Landlord in its sole
discretion deems saleable, and may dispose of others in any manner which it
chooses. The proceeds of any such sale shall be applied toward the expenses thus
incurred and Tenant will receive net proceeds, if any, and agrees to pay any
remaining balance within five (5) days of Landlord's request therefor.
24. Holding Over.
If Tenant shall not immediately surrender possession of the Premises at the
termination of this Lease, Tenant shall become a month-to-month Tenant, at one
hundred fifty percent (150%) the basis monthly rental in effect during the month
prior to the termination of this Lease, said rental to be payable in advance.
Unless Landlord elects to accept such rental from Tenant, Landlord shall
continue to be entitled to re-take possession of the Premises without any prior
notice to Tenant. If Tenant shall fail to surrender possession of the Premises
immediately upon the expiration of the term hereof, Tenant hereby agrees that
all of the obligations of Tenant and all rights of Landlord applicable during
the term of this Lease shall be equally applicable during such period of
subsequent occupancy, whether or not a month-to-month tenancy shall have been
created as aforesaid. Tenant further agrees that it shall be liable for any
damages suffered by Landlord by reason of Tenant's failure to immediately
surrender the Premises.
25. Destruction - Fire or Other Casualty.
In case of partial damage to the Premises by fire or other casualty insured
against by Landlord, Tenant shall give immediate notice thereof to Landlord, and
Landlord, to the extent that insurance proceeds respecting such damage are
subject to and, in fact, are under the control and use of Landlord, shall
thereupon cause such damage to all property owned by Landlord to be repaired
with reasonable speed at the expense of Landlord, due allowance being made for
reasonable delay
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which may arise by reason of adjustment of loss under insurance policies on the
part of Landlord and/or Tenant, and for reasonable delay on account of strikes,
slowdowns or any other cause beyond Landlord's control. To the extent that the
Premises are rendered untenantable, the rent shall proportionately abate,
provided the partial damage occurred without any fault or neglect on the part of
Tenant, those employing or retaining the services of Tenant, Tenant's servants,
employees, agents, licensees, invitees or visitors. If such partial damage is
due to the fault or neglect of Tenant or any of the abovementioned persons, or
to the extent that insurance proceeds respecting such damage are not subject to,
or are not under the control and use of, Landlord, the damage shall be repaired
by Landlord at Tenant's expense and there shall be no apportionment or abatement
of rent. In the event the damage shall be so extensive as to render it
uneconomical, in Landlord's opinion, to restore the Premises for the use of
Tenant specified in Paragraph 5 hereof, or Landlord shall decide not to repair
or rebuild the Premises, this Lease, at the option of Landlord, shall be
terminated upon written notice to Tenant, the rent shall, in such event, be paid
to or adjusted as of the date of such damage, the terms of this Lease shall
expire by lapse of time upon the third day after such notice is mailed, and
Tenant shall thereupon vacate the Premises and surrender the same to Landlord.
No such termination shall release Tenant from any liability to Landlord arising
from such damage or from any breach of the obligations imposed on Tenant
hereunder.
26. Eminent Domain.
If the entire Premises shall be substantially taken (either temporarily or
permanently) for public purposes, or in the event Landlord shall convey or lease
the property to any public authority in settlement of a threat of condemnation
or taking, the rent shall be adjusted to the date of such taking or leasing or
conveyance, and this Lease shall thereupon terminate. If only a portion of the
Premises shall be so taken, leased or condemned, and as a result of such partial
taking, Tenant is reasonably able to use the remainder of the Premises for the
purposes intended hereunder, then this Lease shall not terminate, but, effective
as of the date of such taking, leasing or condemnation, the rent hereunder shall
be abated in an amount thereof proportionate to the area of the Premises so
taken, leased or condemned. If, following such partial taking, Tenant shall not
be substantially able to use the remainder of the Premises for the purposes
intended hereunder, then this Lease shall terminate as if the entire Premises
had been taken, leased or condemned. In the event of a taking, lease or
condemnation as described in this Paragraph, whether or not there is a
termination hereunder, Tenant shall have no claim against Landlord other than an
adjustment of rent, to the date of the taking, lease or condemnation, and Tenant
shall not be entitled to any portion of any amount that may be awarded as
damages or paid as a result of, or in settlement of, such proceedings or threat.
27. Defaults - Remedies.
The occurrence of any one or more of the following events shall constitute
a material default and breach of this Lease by Tenant:
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(a) The vacating or abandonment of the Premises by Tenant and a failure to
continue to pay rent;
(b) The failure by Tenant to make any payment of rent or any other payment
required to be made by Tenant hereunder as and when due;
(c) The failure by Tenant to observe or perform any of the covenants,
conditions or provisions of this Lease to be observed or performed by
Tenant other than those described in Paragraph (b) hereinabove, where
such failure shall continue for a period of five (5) business days
after written notice thereof from Landlord to Tenant; provided,
however, that if the nature of Tenant's default is such that more than
five (5) business days are reasonably required for its cure, then
Tenant shall not be deemed to be in default if Tenant commences such
cure within said five (5) business day period and thereafter,
diligently prosecutes such cure to completion;
(d) The making by Tenant of any general assignment or general arrangement
for the benefit of creditors, filing by or against Tenant of a
petition to have Tenant adjudged bankrupt or a petition for
reorganization or arrangement under any law relating to bankruptcy
(unless in the case of a petition filed against Tenant, the same is
dismissed within sixty [60] days), the appointment of a trustee or
receiver to take possession of substantially all of Tenant's assets
located in the Premises or Tenant's interest in this Lease where
possession is not restored to Tenant within thirty (30) days, or the
attachment, execution or other judicial seizure of substantially all
of Tenant's assets located at the Premises or Tenant's interest in
this Lease, where such seizure is not discharged within thirty (30)
days.
In the event of such material default or breach by Tenant, Landlord may, at
any time hereunder, with or without notice or demand, without limiting Landlord
in the exercise of any right or remedy which Landlord may have by reason of such
default or breach, proceed in the following manner:
(i) Terminate Tenant's right to possession of the Premises by any lawful
means, in which case Tenant's possession shall be terminated and
Tenant shall immediately surrender possession of the Premises to
Landlord. In such event, Landlord shall be entitled to recover from
Tenant all damages incurred by Landlord by reason of Tenant's default,
including, but not limited to, the cost of recovering possession of
the Premises; expenses of reletting, including necessary renovation or
alteration of the Premises; reasonable attorneys' fees; any real
estate commission actually paid; that portion of the Lease and
commission paid by Landlord pursuant to any agency agreement
applicable to the unexpired term of this Lease; and such other out-of-
pocket expenses as Landlord might incur. Unpaid installments of rent
or other sums shall bear interest from date due at the rate of twelve
percent (12.00%) per annum,
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after Tenant's right to possession has been terminated. No receipt of
money by Landlord from Tenant after the termination of this Lease,
the service of notice, the commencement of any suit or final judgment
or repossession shall automatically reinstate, continue or extend the
term of this Lease or affect any such notice, demand, suit or
judgment.
(ii) Maintain Tenant's right to possession in which case this Lease shall
continue in effect whether or not Tenant shall have abandoned the
Premises. In such event, Landlord shall be entitled to enforce all of
Landlord's rights and remedies under this Lease, including the right
to recover the rent as it becomes due hereunder, and reasonable
attorneys' fees.
(iii) Pursue any other remedy not or hereafter available to Landlord under
the laws or jurisdictional decisions of the state in which the
Premises are located.
All rights and remedies of Landlord herein enumerated shall be cumulative,
and none shall exclude any other right allowed by law. Landlord shall not be in
default unless Landlord fails to perform the obligations required of Landlord
within a reasonable time, but in no event sooner than thirty (30) days after
written notice by Tenant to Landlord specifying wherein Landlord has failed to
perform such obligations; provided, however, that if the nature of Landlord's
obligation is such that more than thirty (30) days is required for performance,
then Landlord shall not be in default if Landlord commences performance within
such thirty (30) days and thereafter diligently prosecutes the same to
completion.
28. Several Liability.
If Tenant shall be one or more individuals, corporations or other entities,
whether or not operating as a partnership or joint venture, then each such
individual corporation, entity, joint venture or partner shall be deemed to be
both jointly and severally liable for the payment of the entire rent and other
payments specified herein and all other duties and obligations hereunder.
29. Notices.
All notices, demands and requests required under this Lease shall be in
writing. All such notices shall be deemed to have been properly given if sent
by United States registered or certified mail, return receipt requested, postage
prepaid, addressed to Landlord at:
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LANDLORD TENANT
Ammendale Commerce Center Limited Partnership Intermedia Communications, Inc.
c/o Polinger Shannon & Luchs Company 3625 Queen Palm Drive
5530 Wisconsin Avenue Tampa, Florida 33619
Suite 1000 Attention: Legal Department
Chevy Chase, Maryland 20815
and to Tenant at the Premises. Either party may designate a change of address
by written notice to the other party.
Notices, demands and requests which shall be served by registered or
certified mail in the manner aforesaid shall be deemed sufficiently served or
given for all purposes hereunder at the time such notice, demand or request is
mailed by United States registered or certified mail as aforesaid in any post
office or branch post office regularly maintained by the United States
Government.
30. Estoppel Certificate.
Within ten (10) days after request therefor by Landlord, its agents,
successors or assigns, Tenant shall deliver, in recordable form, a certificate
to any proposed mortgagee or purchaser, or to Landlord, together with a true and
correct copy of this Lease, certifying (if such be the case): (i) that this
lease is in full force and effect without modification; (ii) the amount, if any,
of prepaid rent and security deposit paid by Tenant to Landlord; (iii) that
Landlord has performed all of its obligations due to be performed under this
Lease and that there are no defenses, counterclaims, deductions, offsets
outstanding or other excuses for Tenant's performance under this Lease; and (iv)
any other fact reasonably requested by Landlord or such proposed mortgagee or
purchaser, or stating those claimed by Tenant. It is intended that any such
statement delivered pursuant to this Paragraph 30 may be relied upon by any
other prospective purchaser or mortgagee, Landlord, or any respective successors
and assigns of the aforementioned parties. Tenant's failure to deliver the
above-described certificate within the time set forth above shall be conclusive
upon Tenant: (i) that this Lease is in full force and effect, without
modification except as may be represented by Landlord; (ii) that there are not
uncured defaults in Landlord's performance and Tenant has no right of offset,
counterclaim, defenses or deduction against basic monthly rental of additional
rent or Landlord hereunder; (iii) that no more than one period's basic monthly
rental has been paid in advance; and (iv) that the amount of the security
deposit held by Landlord is as represented by Landlord.
31. Severability.
The parties intend this Lease to be legally valid and enforceable in
accordance with all of its terms to the fullest extent permitted by law. If any
term hereof shall be finally held to be invalid or unenforceable, the parties
agree that such term shall be stricken from this Lease, the same as if it never
had been contained herein. Such invalidity or unforceability shall not extend
to or otherwise
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affect any other term of this Lease and the unaffected terms hereof shall remain
in full force and effect to the fullest extent permitted by law, the same as if
such stricken term never had been contained herein. The above notwithstanding,
if any provision of this Lease shall be finally held to be invalid or
unenforceable, and such term substantially and adversely affects the amount of
rent to be received by Landlord, or the nature of Landlord's obligations to
Tenant or otherwise affects the economic bargain agreed to by Landlord in this
Lease, Landlord shall have the option of terminating this Lease. Such option
shall be exercised, if at all, by delivering notice to Tenant within thirty (30)
days after any final judgment declaring a provision of this Lease invalid or
unenforceable, stating a date of termination no sooner than ninety (90) days
from such notice.
32. Non-Waiver Clause.
The waiver by Landlord of any breach of any covenant or obligation by
Tenant under this Lease shall not be construed to be a waiver by Landlord of any
subsequent breaches by Tenant of the same covenant or obligation.
33. Accord and Satisfaction.
No receipt and retention by Landlord of any payment tendered by Tenant in
connection with this Lease shall give rise to or support or constitute an accord
and satisfaction, notwithstanding any accompanying statement, instruction or
other assertion to the contrary (whether by notation on a check or in a
transmittal letter or otherwise), unless Landlord expressly agrees to an accord
and satisfaction in a separate writing duly executed by the appropriate persons.
Landlord may receive and retain, absolutely and for itself, any and all payments
so tendered, notwithstanding any accompanying instruction by Tenant to the
contrary. Landlord shall be entitled to treat any such payments as being
received on account of any item or items of Base Rent, interest, expense or
damage due in connection herewith, in such amounts and in such order as Landlord
may determine at its sole option.
34. Captions.
All headings in this Lease are intended for convenience of reference only
and are not to be deemed or taken as a summary of the provisions to which they
pertain or as a construction thereof.
35. Successors and Assigns.
The covenants, conditions and agreements contained in this Lease shall bind
and insure to the benefit of Landlord and Tenant, and their respective heirs,
distributees, executors, administrators, successors and except as otherwise
provided in this Lease, their assigns.
36. Governing Law.
20
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This Lease was made in the State of Maryland and shall be governed by and
constructed in all respects in accordance with the laws of the State of
Maryland.
37. Incorporation of Prior Agreements.
This Lease contains all agreements of the parties with respect to any
matters contained herein. No prior agreement or understanding pertaining to any
such matter shall be affected. This Lease may be modified only in writing and
signed by the parties in interest at the time of the modification.
38. Cumulative Remedy.
No remedy or election hereunder shall be deemed exclusive but shall,
wherever possible, be cumulative with all other remedies at law or in equity.
39. Agency.
Landlord, in appointing Polinger Shannon & Luchs Company its Agent, herein
does so for and in consideration of its services in securing Tenant herein and
the negotiation of this Lease, and agrees to pay said Agent herein and the
agreement under separate cover. Landlord and Tenant represent that there are no
other brokers involved in this transaction, and each party hereby agrees to
indemnify the other against any claims of any other broker other than CB
Commercial and Polinger Shannon & Luchs Company in violation of such
representation.
40. Miscellaneous.
(a) As used in this Lease, and where the context requires: (1) the
masculine shall be deemed to include feminine and neuter and vice-versa; and (2)
the singular shall be deemed to include the plural and vice-versa.
(b) Landlord and Tenant do hereby waive trial by jury in any action,
proceeding or counterclaim brought by either of the parties hereto against the
other on any matter whatsoever arising out of or in any way connected with this
Lease, the relationship of Landlord and Tenant, Tenant's use or occupancy of the
Premises, and/or any claim of injury or damage, or any statutory remedy.
(c) Tenant covenants and agrees that it shall not attach or place awnings,
antennas or other projections to the outside walls or any exterior portion of
the improvements of which the Premises are a part except as provided in
Paragraph 8.4(b) hereof. No curtains, blinds, shades or screens shall be
attached to or hung in, or used in connection with any window or door of the
Premises, without the prior written consent of Landlord.
21
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(d) Tenant, Tenant's servants, agents, invitees, employees and licensees
shall not park on, store on or otherwise utilize any parking or loading areas in
the Project except as provided in this Lease or by a separate writing from
Landlord.
(e) The Premises has a sprinkler system and Tenant agrees that it will, at
all times, maintain a minimum temperature of 50 degrees Fahrenheit to prevent
freezing of pipes.
(f) Tenant hereby acknowledges that Landlord reserves the right to subject
the Premises and the Project of which it is a part to a condominium regime
pursuant to the provision of the applicable Maryland statute and, that upon such
submission the leasehold estate created hereby shall be fully subject and
subordinated to such condominium regime; provided, however, that so long as
Tenant is not in default under the terms of this Lease or under the terms of the
applicable condominium documents (including, without limitation, declaration,
by-laws, and rules and regulations), Tenant's leasehold estate created hereby
shall not be disturbed by virtue of the creation of such condominium regime.
Without limiting the generalities of the rights of Landlord or its Agent to
enter the Premises as provided in this Lease, Landlord or its Agent shall be
entitled, upon reasonable notice given to Tenant, to enter the Premises for such
actions as may be necessary in order to effect the submissions of the Premises
to a condominium regime, including, without limitation, the performance of
inspections, measurements, renovations and such other acts as will not have a
material adverse effect on the rights of Tenant hereunder and Tenant agrees to
execute any documents reasonably necessary to submit the Premises to a
condominium regime.
41. Examination of Lease.
Submission of this Lease for examination or signature by Tenant shall not
constitute a reservation of or option for lease, and the same shall not be
effective as a lease or otherwise until execution and delivery hereof by
Landlord and Tenant.
42. Authority.
Landlord and Tenant hereby covenant that they have full right, power and
authority to enter into this Lease upon the terms and conditions herein set
forth.
43. Indemnification.
Tenant shall, to the extent permitted by law, indemnify and save Landlord
harmless against and from any and all claims, damages, costs and expenses,
including reasonable attorneys' fees, arising by reason of the conduct or
management of the business conducted by Tenant in the Premises, or from any
breach or default on the part of Tenant in the performance of any covenant,
condition or agreement on the part of Tenant to be performed pursuant hereto, or
from any act or negligence of Tenant, its Agent, contractors, servants,
employees, sublesses, concessionaires or licensees in or about the Premises.
22
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44. Renewal Option.
Provided Tenant has not been in default during the initial or renewal term
of this Lease, Tenant shall have the option, upon six (6) months written notice,
to renew the lease for the Premises for two (2) additional three (3) year terms.
All terms and conditions of the Lease shall remain in effect during the renewal
period except that the rental rate charged at the commencement of each renewal
period shall be the then current rental rate in the market for comparable space.
23
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45. ADA.
Landlord shall be responsible for compliance with the Americans with
Disabilities Act ("ADA") with regard to the parking lot, sidewalks and main
entry to the Premises; Tenant shall be responsible for compliance with ADA for
the Premises.
46. Tenant's Additional Responsibilities.
In addition to Tenant's obligations as set forth in this Lease, Tenant
shall also be responsible for the items set forth in Exhibit B to this Lease.
IN WITNESS WHEREOF, Landlord and Tenant have respectively signed and sealed
this lease as of the day and year first above written.
SIGNED at______________________________,this 15th day of April, 1998.
WITNESS: LANDLORD:
Ammendale Commerce Center
Limited Partnership
/s/ Patricia M. Shippey By: /s/ Elliot Schnitzer
- ------------------------- ---------------------
Patricia M. Shippey Elliot Schnitzer, General Partner
WITNESS: TENANT:
Intermedia Communications, Inc.
/s/ C.E. Duncan By:/s/ Robert A. Rouse
- --------------- -------------------
C.E. Duncan Robert A. Rouse
24
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EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the captions "Experts,"
"Summary Financial Data," and "Selected Financial Data" and to the use of our
reports dated April 23, 1999 in Amendment No. 1 to the Registration Statement
(Form S-1 No. 33-77105), and related Prospectus of Digex, Incorporated for the
registration of Class A Common Stock.
/s/ Ernst & Young LLP
Tampa, Florida
June 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF DIGEX, INCORPORATED FOR THE YEAR ENDED DECEMBER 31,
1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<PERIOD-START> JAN-01-1998 JAN-01-1999
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 0 0
<SECURITIES> 0 0
<RECEIVABLES> 6,846 8,902
<ALLOWANCES> 719 740
<INVENTORY> 415 415
<CURRENT-ASSETS> 7,017 9,235
<PP&E> 45,183 76,928
<DEPRECIATION> 6,124 9,440
<TOTAL-ASSETS> 77,739 107,393
<CURRENT-LIABILITIES> 5,786 4,238
<BONDS> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 70,845 102,287
<TOTAL-LIABILITY-AND-EQUITY> 77,739 107,393
<SALES> 0 0
<TOTAL-REVENUES> 22,635 9,392
<CGS> 216 116
<TOTAL-COSTS> 13,754 5,604
<OTHER-EXPENSES> 25,621 12,383
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 0 0
<INCOME-PRETAX> (16,740) (8,595)
<INCOME-TAX> 159 0
<INCOME-CONTINUING> (16,581) (8,595)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (16,581) (8,595)
<EPS-BASIC> (16,581.00) (8,595.00)
<EPS-DILUTED> (16,581.00) (8,595.00)
</TABLE>
