<PAGE>
As filed with the Securities and Exchange Commission on July 29, 1999
Registration No. 333-77105
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 4
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 59-3582217
(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)
Mark K. Shull
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>
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- -------------------------------------------------------------------------------
<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... 11,500,000 $16.00 $184,000,000 $51,152
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</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 JULY 29, 1999
PRELIMINARY PROSPECTUS
10,000,000 Shares
[LOGO FOR DIGEX]
Class A Common Stock
--------------
This is an initial public offering of 10,000,000 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 1,500,000 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 $14.00 and $16.00 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 7 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>
--------------
Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette
--------------
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 services to a diverse customer base of over 500 customers
ranging from Fortune 50 companies to small and medium size businesses that rely
heavily on the Internet. 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 from $875 million in 1998 to approximately $14.6 billion
in 2003. In addition to the overall expansion and increasing pervasiveness of
the Internet, we believe one of the key drivers of growth in the Web site
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.
1
<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 Communications Inc. 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.
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.
2
<PAGE>
The Offering
Class A Common Stock offered by
Digex.......................... 10,000,000 shares (1)
Common Stock to be outstanding
after the offering............. 10,000,000 shares of Class A Common Stock (1)
50,000,000 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 1,500,000 shares to be sold by Digex if the underwriters' over-
allotment option is exercised in full, as described in "Underwriting." As
of July 12, 1999 we have committed to grant on the effective date of this
prospectus options to purchase 2,055,000 shares of our Class A Common Stock
at a weighted average exercise price of $9.66 per share. None of these
options will be exercisable on the effective date.
(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.
3
<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 by Intermedia of the Web site
hosting unit (the "Predecessor") , which was then part of Business Internet, 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, and giving effect to the 50,000-for-one stock split of our Class B
Common Stock to be effected prior to the closing of this offering.
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 later in
this prospectus.
4
<PAGE>
<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 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.................. -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======== ======= =======
Diluted................ -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======== ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 50,000 50,000 50,000 50,000 50,000
======== ======== ======== ======= =======
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>
5
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 March 31, 1999
------------ --------------------------
Actual Actual As Adjusted (4)
------------ ----------- --------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (5).... $ -- $ -- $137,650
Working capital.................. 1,231 4,997 147,078
Property and equipment, net...... 39,059 67,488 67,488
Total assets..................... 77,739 107,393 245,236
Capital lease obligations,
including current maturities.... 2,089 1,833 --
Total owner's equity............. 70,845 102,287 240,204
</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 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. EBITDA before certain
charges should also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. 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. However, we believe that EBITDA before certain charges
is relevant and useful information which 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, as an additional
meaningful measure of performance and liquidity, and to provide additional
information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. 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
$4,010, $7,626, $64,085, $41,899, $5,078 and $40,037 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.
(4) As Adjusted as of March 31, 1999 gives effect to our recapitalization and
the offering as if it had occurred on March 31, 1999.
(5) 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.
6
<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 site
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;
7
<PAGE>
. the mix of services we sell;
. 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. Although certain industry analysts project
significant growth for this market, their projections may not be realized. 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 many of our current 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. Our current and
potential competitors in the market include Web hosting service providers,
Internet service providers, commonly known as 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.
Our competitors may be able to expand their network infrastructures and
service offerings more quickly. They may also bundle other telecommunications
services with their Web site hosting services, which could allow them to reduce
the relative prices of their Web site hosting services beyond levels that we
could compete with, and generally adopt more aggressive pricing policies. 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. We also believe the 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."
8
<PAGE>
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.
Our reputation for providing reliable service largely depends on the
performance and security of our data centers and equipment, and of the network
infrastructure of our connectivity providers. In addition, our customers often
maintain confidential information on our servers. However, our data centers and
equipment, the networks we use, and our customers' information are subject to
damage and unauthorized access from human error and tampering, breaches of
security, natural disasters, power loss, capacity limitations, software
defects, telecommunications failures, intentional acts of vandalism, including
computer viruses, and other factors that have caused, and will continue to
cause, interruptions in service or reduced capacity for our customers, and
could potentially jeopardize the security of our customers' confidential
information such as credit card and bank account numbers. Despite precautions
we have taken and plan to take, the occurrence of a security breach, a natural
disaster, interruption in service or other unanticipated problems could
seriously damage our business and reputation and cause us to lose customers.
Additionally, the time and expense required to eliminate computer viruses and
alleviate other security problems could be significant and could impair our
service quality. 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. 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. We
have entered into several two-year network services agreements with Intermedia
to provide us with certain network transit capacity which we believe to be
adequate for our capacity requirements. However, if our future network capacity
requirements exceed the capacity Intermedia has committed to provide to us, we
may have to pay higher prices for such additional network capacity or such
capacity might not be available at all. 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.
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 agreements 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.
9
<PAGE>
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. Our
customers are required to sign server order forms which incorporate our
standard terms and conditions. Although these terms disclaim our liability for
any such damages, a customer could still 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.
There can be no assurance a court would enforce any limitations on our
liability, and the outcome of any lawsuit would depend on the specific facts of
the case and legal and policy considerations. We also believe we would have
meritorious defenses to any such claims, 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 50,000,000 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 98% 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 which are significantly restricted.
See "Use of Proceeds" and "Certain Relationships and Related Transactions--Sale
of Telecommunications Related Assets to Intermedia" for a description of
certain arrangements we made with Intermedia relating to our use of a portion
of the proceeds of this offering.
Intermedia is and will continue to be highly leveraged. 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. 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, among other things, increase our vulnerability
to general adverse economic and industry conditions, limit our ability to fund
future working capital, operating losses, capital expenditures, acquisitions
and other requirements, and limit our flexibility in reacting to changes in our
business and industry. We strongly urge you to read "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
10
<PAGE>
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%.
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
11
<PAGE>
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 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;
. 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 could be harmed if our management team, which has worked together
for only a brief time, is unable to work together effectively, or if we are
unable to retain and attract key personnel.
We have recently hired key employees and officers, including our President
and Chief Executive Officer, our Chief Financial Officer and our President,
Product Management, Engineering and Marketing Group, who joined us in the
beginning of July 1999, and our President, Sales and Service Delivery Group,
who joined us in December 1998. As a result, our management team has worked
together for only a brief time. Our success in significant part depends on the
continued services of our senior management personnel, as well as of our key
technical and sales personnel.
12
<PAGE>
We believe our short and long-term success also 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 and information
management services. 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 and
Internet service providers for information disseminated through their systems
remains largely unsettled. It may also take years to determine whether and how
existing laws, such as those governing 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 require us to expend substantial resources to comply with such laws or
discontinue certain service offerings. Increased attention to liability issues
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, which could increase our costs
and harm our business. See "Business--Government Regulation."
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.
13
<PAGE>
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.
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.
Before the end of this year, many currently installed computer systems and
software products may need to be upgraded in order for 20th century dates to be
distinguished from 21st century dates. Systems that do not comply with these
"Year 2000" requirements may cause miscalculations which will interfere with
business activities or simply fail to work. Although we have implemented a Year
2000 program intended to ensure our computer systems and applications will
function properly beyond 1999 and requested assurances from our suppliers that
their products are Year 2000 compliant, we cannot be sure that we will be able
to promptly or correctly address all relevant Year 2000 issues, especially
where third-party customers or suppliers are involved. 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 were not Year 2000 compliant on July 1, 1999, thus far no
customers have terminated their contracts for this reason and 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.
To the extent that a customer's site is not functioning correctly, it may,
potentially, affect other customers' sites or our networks. It may also not be
possible to determine that the malfunctioning is caused by the customer's
software, and the customer may request service credits or we might otherwise
have a difficult time realizing the expected revenues from such a customer. 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."
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<PAGE>
There has been no prior market for our Class A Common Stock and the market
price of the shares will fluctuate.
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, are likely to be highly volatile
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. 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.
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 which may not 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, 10,000,000 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 180 days after the date of this prospectus without the written
consent of Bear, Stearns & Co. Inc. Additionally, shares of 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 5,000,000 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
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<PAGE>
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;
. statements regarding the Year 2000 issue; 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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<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from the sale of the 10,000,000 shares of Class
A Common Stock we are offering will be approximately $137.7 million, at an
assumed initial public offering price of $15.00 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 $158.6 million.
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 $95.1
million 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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<PAGE>
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 our
recapitalization and the sale of the 10,000,000 shares of Class A Common Stock
we are offering, at an assumed initial public offering price of $15.00 per
share and after deducting the estimated underwriting discounts and commissions
and estimated offering expenses that we will pay. 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
------------------------------
(Unaudited)
Actual Pro Forma As Adjusted
-------- --------- -----------
(In thousands, except share
data)
<S> <C> <C> <C>
Cash and cash equivalents (1)................... $ -- $ -- $137,650
======== ======== ========
Capital lease obligations, including current ma-
turities....................................... $ 1,833 $ -- $ --
Stockholder's equity:
Class A Common Stock, $.01 par value;
100,000,000 authorized;
10,000,000 assumed issued and outstanding.... -- -- 100
Class B Common Stock, $.01 par value;
50,000,000 authorized;
50,000,000 assumed issued and outstanding.... -- 500 500
Owner's net investment........................ 102,287 -- --
Additional paid-in capital.................... -- 102,054 239,604
Accumulated deficit........................... -- -- --
-------- -------- --------
Total stockholder's equity ................... 102,287 102,554 240,204
-------- -------- --------
Total capitalization............................ $104,120 $102,554 $240,204
======== ======== ========
</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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<PAGE>
DILUTION
Our net tangible book value on a pro forma basis assuming the
recapitalization as of March 31, 1999 and giving effect to the 50,000-for-one
stock split of our Class B Common Stock to be effected prior to the closing of
this offering was approximately $72.3 million, or $1.45 per share of the
combined 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 combined number of shares of Class A
Common Stock and Class B Common Stock outstanding as of March 31, 1999. After
giving effect to the issuance and sale of the 10,000,000 shares of Class A
Common Stock offered hereby at an assumed initial public offering price of
$15.00 per share and after deducting estimated underwriting discounts and
commissions and estimated offering expenses, our pro forma net tangible book
value as of March 31, 1999 would be $210.0 million, or $3.50 per share of the
combined Class A and Class B Common Stock. This represents an immediate
increase in pro forma net tangible book value of $2.05 per share to existing
stockholders and an immediate dilution of $11.50 per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share of Class A Common
Stock............................................................ $15.00
Pro forma net tangible book value per common share at March 31,
1999 before the offering....................................... $1.45
Increase in pro forma net tangible book value per common share
attributable to new investors.................................. 2.05
-----
Pro forma net tangible book value per common share after offer-
ing.............................................................. 3.50
------
Dilution per share of Class A Common Stock to new investors....... $11.50
======
</TABLE>
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<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 by Intermedia of the
Predecessor, 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, and giving effect to the 50,000-for-one stock split of our Class B
Common Stock to be effected prior to the closing of this offering.
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.
20
<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 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.................. -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======== ======= =======
Diluted................ -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======== ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 50,000 50,000 50,000 50,000 50,000
======== ======== ======== ======= =======
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>
21
<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. EBITDA before certain
charges should also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. 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. However, we believe that EBITDA before certain charges
is relevant and useful information which 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, as an additional
meaningful measure of performance and liquidity, and to provide additional
information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. 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
$4,010, $7,626, $64,085, $41,899, $5,078 and $40,037 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.
22
<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,
consultants' fees and other miscellaneous expenses. We expect
23
<PAGE>
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.
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 141.0%. 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 $887,000 for the three months ended
March 31, 1998. The $765,000 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
24
<PAGE>
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.
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 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. Our 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. As a percentage of revenue,
expenses decreased to 85.9% for the three month period ended March 31, 1999
from 94.0% for the three month period ended March 31, 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. Our 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
25
<PAGE>
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.
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
314.3%. 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. Our 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
26
<PAGE>
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.
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 increased 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 $4.0 million, $24.5
million, $41.9 million and $40.0 million in 1996, 1997 (pro forma), 1998, and
the first quarter of 1999, respectively.
Net cash used in operating activities in 1996, 1997 (pro forma), 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 (pro forma), 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. 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 our management believes the net
proceeds of this offering will be sufficient to fund our capital needs into the
second half of 2000. We intend to seek funding from external sources to meet
our cash needs subsequent to that date. There can be no
27
<PAGE>
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.
In addition, Intermedia is and 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 a total of approximately $875
million of obligations with respect to four outstanding series of preferred
stock. 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.
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 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 June 30, 1999:
<TABLE>
<CAPTION>
Date of Date of
Phase 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 100% 6/1/99 100% 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
28
<PAGE>
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 June 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 June 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 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
June 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
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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, our ability to 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;
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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.
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.
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 were not Year 2000 compliant on July 1, 1999, thus far no
customers have terminated their contracts for this reason and 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 customers' 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.
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,
Sales and Service Delivery Group, 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.
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."
Quantitative and Qualitative Disclosure About Market Risk
Digex believes that it is not sensitive to market risk related to changes 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, 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. 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, 44% of the 50 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 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
Microsystems. 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, 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 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 electronic 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.
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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 July 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>
American
Century
Investments BBC America Dole Food Company American Eagle Outfitters
Ernst & Young
LLP The Economist Kraft Foods Authentic Fitness
Northwestern
Mutual Life
Insurance Forbes Liz Claiborne Campmor
Progressive
Insurance
Companies Edmund's Nike J. Crew
Thomson
Financial
Services Inc. Online Nissan Oakley
LendingTree Miller Freeman Sara Lee Corporation WW Grainger
Universal Studios
<CAPTION>
Technology and
Government Communications Healthcare Travel & Hospitality
------------- ----------------- -------------------- -------------------------
<S> <C> <C> <C>
U.S. Marine
Corps Celarix Bally Total Fitness Budget Rent-A-Car
U.S.
Department
of
Agriculture Compaq Claimsnet The Travel Company
JAVU Technologies
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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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 develop 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.
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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 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-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;
. relationships with marketing partners and vendors;
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. 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
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<PAGE>
are subject to an acceptable use policy which prohibits them from posting,
transmitting or storing material on 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 420 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. During the third quarter of 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.
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MANAGEMENT
The following sets forth 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
Mark K. Shull (1)....... 43 Director, President and Chief Executive Officer
Nancy G. Faigen......... 42 President, Sales and Service Delivery Group
Rebecca Ward............ 35 President, Product Management, Engineering and Marketing Group
Bryan T. Gernert........ 32 Senior Vice President, Sales, Distribution and Client Services
Bradley E. Sparks....... 52 Chief Financial Officer
Marthe S. Lattinville-
Pace................... 46 Vice President, Human Resources
Robert B. Patrick....... 27 Vice President, Marketing
John C. Baker........... 49 Director
Philip A. Campbell...... 62 Director
George F. Knapp......... 67 Director
Pierce J. Roberts,
Jr. ................... 52 Director
Richard A. Jalkut....... 55 Director
Jack E. Reich........... 48 Director
</TABLE>
- --------
(1) Mr. Shull will become a Director upon the closing of this offering.
Executive Officers and Directors
David C. Ruberg has served as Director and Chairman of the Board of Digex
since April 1999. 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.
Mark K. Shull has served as President and Chief Executive Officer of Digex
since July 1999. From January 1997 to June 1999, he served as Vice President
and General Manager of the Web hosting and electronic commerce business unit of
GTE Internetworking. From March 1995 to January 1997, prior to GTE
Internetworking's acquisition of BBN Planet Corporation, he served as Vice
President and General Manager of BBN Planet Corporation's Internet Business
Solutions Group. From June 1994 to March 1995, he served as a Senior Consultant
at EDS Management Consulting. Mr. Shull received his B.A. in public and
international affairs from Princeton University, and holds a J.D. from Stanford
Law School.
Nancy G. Faigen has served as President of the Sales and Service Delivery
Group of Digex since July 1999, and she served as President and Chief Executive
Officer from December 1998 to June 1999. 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 November 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, including Executive
Assistant to the CEO and Director of Strategy and Business Unit Director of the
Sales and Services Division. Ms. Faigen holds a B.A. in drama and fine arts
from Dartmouth College.
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Rebecca Ward has served as President of the Product Management, Engineering
and Marketing Group of Digex since July 1999. From March 1991 to June 1999, she
held various management positions at GTE Internetworking and BBN Planet
Corporation, prior to its acquisition by GTE Internetworking, including most
recently Vice President of Product Management and Engineering of the Web
hosting and electronic commerce business unit of GTE Internetworking. Ms. Ward
holds a B.S. in computer technology from Northeastern University and an M.S. in
computer science from Boston University.
Bryan T. Gernert has served as Senior Vice President of Sales, Distribution
and Client Services of Digex since July 1999. From April 1995 to June 1999, he
held various other management positions at Digex, including Vice President of
Sales, Consulting and Client Services, Vice President of Sales and
Distribution, Sales Account Manager and Director of Sales. 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.
Bradley E. Sparks has served as Chief Financial Officer of Digex since July
1999. From September 1998 to July 1999, he served as Executive Vice President
and Chief Financial Officer of WAM!NET, a global provider of digital network
services. From 1995 to September 1998, he served as Chief Financial Officer of
OmniPoint Corporation. From 1993 to 1995, Mr. Sparks served as Vice President
and Controller of MCI Communications Corporation, which is now MCI WorldCom.
Mr. Sparks earned his B.S. from West Point, and his M.S. in management from the
Sloan School at Massachusetts Institute of Technology. Mr. Sparks is also a
certified public accountant.
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 an M.B.A. 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 B. Patrick has served as Vice President of Marketing of Digex since
July 1999. From September 1998 to June 1999 he served as Vice President of
Marketing and Product Development of Digex. He served as 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.
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 Resources Bancshares Mortgage Group, Inc., a
publicly traded corporation.
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
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.
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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.
Richard A. Jalkut has served as Director of Digex since July 1999. He has
served as President, Chief Executive Officer and Director of Pathnet, Inc.
since August 1997. From 1995 to August 1997, Mr. Jalkut served as President and
Group Executive of NYNEX Telecommunications Group. From 1991 to 1995, he served
as President and Chief Executive Officer of New York Telephone Co. Inc., the
predecessor company to NYNEX Telecommunications Group. Mr. Jalkut is currently
a Director of HSBC Bank USA, formerly Marine Midland Bank, a commercial bank, a
Director and Chairman of the Board of Ikon Office Solutions, Inc., a company
engaged in wholesale and retail office equipment, and a Director of Home
Wireless Networks, a company developing a wireless product for home and
business premises.
Jack E. Reich has served as Director of Digex since July 1999. From November
1998 to the present, he has served as President of KJE Inc., a management and
investment consulting firm. From December 1996 to November 1998 he served as
President and Chief Executive Officer of e.spire Communications, Inc. Mr. Reich
was also appointed Director during his tenure with e.spire Communications, Inc.
From April 1994 to October 1996 he served as President, Customer Business
Solutions, of Ameritech. From April 1986 to April 1994, he served in a number
of management positions for MCI Communications Corporation, including
President, Multinational Accounts. Prior to MCI, Mr. Reich held various
management positions with Rolm Corporation and AT&T. Mr. Reich is currently a
Director of LISN, Inc.
No family relationship exists between any of the directors and executive
officers of Digex.
Committees of the Board of Directors
The board of directors has an audit committee and a compensation committee.
Among other functions, the audit committee:
.makes recommendations to the board of directors regarding the selection of
independent auditors;
.reviews the results and scope of the audit and other services provided by
our independent auditors;
.reviews our financial statements; and
.reviews and evaluates our internal control functions.
The audit committee is composed of Philip A. Campbell, George F. Knapp and
Richard A. Jalkut. The chairman of the audit committee is Mr. Campbell.
The compensation committee administers our Long-Term Incentive Plan and makes
recommendations to the board of directors regarding the executive compensation
and salaries and incentive compensation for our employees and consultants. The
compensation committee is composed of David C. Ruberg, Pierce J. Roberts, Jr.
and Jack E. Reich. The chairman of the compensation committee is Mr. Ruberg.
Employment Agreements
Mark K. Shull. Mr. Shull's employment letter agreement provides for an
initial annual base salary of $250,000, which will be reviewed on January 1,
2000, and an annual bonus opportunity of 60% of his initial annual base salary
that will be based on the achievement of certain corporate and individual
objectives. The agreement also provides Mr. Shull with stock options to
purchase 100,000 shares of Intermedia common stock at an exercise price of
$30.94, subject to the terms and conditions of the Intermedia 1996 Long-Term
Incentive Plan, to vest in equal installments over the 60-month period
commencing on his date of employment. On the effective date of this prospectus,
Mr. Shull will be granted options to purchase 500,000 shares of our Class A
Common Stock. 250,000 of these options will be exercisable at $5.00 per share
and the balance will be exercisable at the initial public offering price.
Options covering 25% of the 500,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. Following a change of control
of Digex or Intermedia, one-half of Mr. Shull's then unvested Digex options
will vest immediately, and the remainder will vest on the first
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anniversary of the change of control if Mr. Shull continues to be employed by
Digex at that date, or upon termination by Digex of Mr. Shull's employment
(other than for cause), if earlier. Following a change of control of
Intermedia, one-half of Mr. Shull's then unvested Intermedia options will vest
immediately, and the remainder will vest on the first anniversary of the change
of control if Mr. Shull continues to be employed by Digex or Intermedia or any
of its subsidiaries at that date, or upon termination by Digex and, if
applicable, Intermedia of Mr. Shull's employment (other than for cause), if
earlier.
If Mr. Shull is terminated by Intermedia or us for any reason other than for
cause, we or Intermedia will pay his base salary as in effect at the time of
termination through the later of July 1, 2001, or the first anniversary of the
date of termination. Mr. Shull's entitlement to receive payments shall
terminate if he directly or indirectly knowingly hires, within six months
following his date of termination, any employee of director-level or above who
was employed by Intermedia or Digex on the date of his termination.
The letter agreement also provides Mr. Shull with a relocation allowance of
up to $100,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.
Nancy G. Faigen. Ms. Faigen's employment letter agreement provides for an
initial annual base salary of $225,000, and an annual bonus opportunity of 50%
of her initial annual base salary that will be based on the achievement of
certain corporate and individual objectives. The agreement provides Ms. Faigen
with a $125,000 unrestricted signing bonus in two installments: $50,000 on
January 2, 1999 and $75,000 on August 1, 1999. The agreement provides Ms.
Faigen with a second signing bonus of $150,000 in two installments: $50,000 on
the date she accepted the offer of employment and $100,000 on April 1, 1999.
The agreement also provides Ms. Faigen with a stock option to purchase
100,000 shares of Intermedia common stock at an exercise price of $15.00,
subject to the terms and conditions of the Intermedia 1996 Long-Term Incentive
Plan, to vest in equal installments over the 60-month period commencing on her
date of employment. On the effective date of this prospectus, Ms. Faigen will
be granted options to purchase 300,000 shares of our Class A Common Stock.
150,000 of these options will be exercisable at $5.00 per share and the balance
will be exercisable at the initial public offering price. Options covering 25%
of the 300,000 shares of our Class A Common Stock will vest one year following
the date of grant and the balance will vest in equal quarterly installments
over the next three years. Following a change of control of Digex or
Intermedia, all of Ms. Faigen's unvested Digex options will vest on the first
anniversary of the change of control if Ms. Faigen continues to be employed by
Digex at that date, or upon termination by Digex of Ms. Faigen's employment
(other than for cause), if earlier. Following a change of control of
Intermedia, all of Ms. Faigen's Intermedia options will vest on the first
anniversary of the change of control if Ms. Faigen continues to be employed by
Digex or Intermedia or any of its subsidiaries at that date, or upon
termination of Ms. Faigen's employment (other than for cause), if earlier.
The letter agreement also provides Ms. Faigen with a relocation allowance of
up to $125,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.
Rebecca Ward. Ms. Ward's employment letter agreement provides for an initial
annual base salary of $200,000, and an annual bonus opportunity of 50% of her
initial annual base salary that will be based on the achievement of certain
corporate objectives. The agreement provides Ms. Ward with a bonus of $100,000,
payable in two equal installments: upon commencement of employment with us, and
after six months of employment. The agreement also provides Ms. Ward with a
stock option to purchase 50,000 shares of Intermedia common stock at an
exercise price of $30.00, subject to the terms and conditions of the Intermedia
1996 Long-Term Incentive Plan, to vest in equal installments over the 60-month
period commencing with the day the option grant was approved. On the effective
date of this prospectus, Ms. Ward will be granted stock options to purchase
250,000 shares of our Class A Common Stock. 125,000 of these options will be
exercisable at $5.00 per share and the balance will be exercisable at the
initial public offering price. Options covering 25% of the 250,000 shares of
our Class A Common Stock will vest one year following the date of grant and the
balance will vest in equal quarterly installments over the next three years.
Following a change of control of
48
<PAGE>
Digex or Intermedia, all of Ms. Ward's unvested Digex options will vest on the
first anniversary of the change of control if Ms. Ward continues to be employed
by Digex at that date, or upon termination by Digex of Ms. Ward's employment
(other than for cause), if earlier. Following a change of control of
Intermedia, all of Ms. Ward's Intermedia options will vest on the first
anniversary of the change of control if Ms. Ward continues to be employed by
Digex or Intermedia or any of its subsidiaries at that date, or upon
termination by Digex of Ms. Ward's employment (other than for cause), if
earlier.
If Ms. Ward is terminated by Digex for any reason other than for cause, we
will pay her base salary as in effect at the time of termination through the
later of January 1, 2002, or the first anniversary of the date of termination.
Bryan Gernert. Mr. Gernert's employment letter agreement provides for an
initial annual base salary of $200,000 and an annual bonus opportunity of 60%
of his annual base salary that will be based on the achievement of certain
corporate objectives.
On the effective date of this prospectus, Mr. Gernert will be granted options
to purchase 400,000 shares of our Class A Common Stock. 300,000 of these
options will be exercisable at $5.00 per share and the balance will be
exercisable at the initial public offering price. Options covering 25% of the
400,000 shares of our Class A Common Stock will vest one year following the
date of grant and the balance will vest in equal quarterly installments over
the next three years. In the event his employment is terminated by Digex for
any reason other than for cause prior to July 9, 2001, his options covering an
aggregate of 200,000 shares (including any installments previously vested) will
vest immediately on the date of termination, of which 150,000 will be those
exercisable at $5.00 and 50,000 exercisable at the initial public offering
price. Following a change of control of Digex or Intermedia, all of Mr.
Gernert's unvested options will vest on the first anniversary of the change of
control if Mr. Gernert continues to be employed by Digex at that date, or upon
termination by Digex of Mr. Gernert's employment (other than for cause), if
earlier.
Bradley E. Sparks. Mr. Sparks' employment letter agreement provides for an
initial annual base salary of $200,000, and an annual bonus opportunity of 50%
of his initial annual base salary that will be based on the achievement of
certain corporate objectives.
On the effective date of this prospectus, Mr. Sparks will be granted options
to purchase 200,000 shares of our Class A Common Stock. 100,000 of these
options will be exercisable at $5.00 per share and the balance will be
exercisable at the initial public offering price. Options covering 25% of the
200,000 shares of our Class A Common Stock will vest one year following the
date of grant and the balance will vest in equal quarterly installments over
the next three years. Following a change of control of Digex or Intermedia, all
of Mr. Sparks' unvested options will vest on the first anniversary of the
change of control if Mr. Sparks' continues to be employed by Digex at that
date, or upon termination by Digex of Mr. Sparks' employment (other than for
cause), if earlier.
The letter agreement also provides Mr. Sparks with a relocation allowance of
up to $85,000 in the form which will be forgiven in equal monthly installments
over a 12-month period commencing on the date of the last relocation
reimbursement.
Robert B. Patrick. Mr. Patrick's employment letter agreement provides for an
annual base salary of $150,000, and an annual bonus opportunity of 40% of his
annual base salary that will be based on the achievement of certain corporate
objectives.
On the effective date of this prospectus, Mr. Patrick will be granted options
to purchase 100,000 shares of our Class A Common Stock. 50,000 of these options
will be exercisable at $5.00 per share and the balance will be exercisable at
the initial public offering price. Options covering 25% of the 100,000 shares
of our Class A Common Stock will vest one year following the date of grant and
the balance will vest in equal quarterly installments over the next three
years. In the event his employment is terminated by Digex for any reason other
than for cause prior to July 9, 2000, his options covering an aggregate of
25,000 shares (including any installments previously vested) will vest
immediately on the date of termination. Following a change of control of Digex
or Intermedia, all of Mr. Patrick's unvested options will vest on the first
anniversary of the change of control if Mr. Patrick continues to be employed by
Digex at that date, or upon termination by Digex of Mr. Patrick's employment
(other than for cause), if earlier.
49
<PAGE>
Summary Compensation Table
The following table sets forth the total compensation of our Chief Executive
Officer, each of our most highly compensated executive officers whose total
salary and bonus for 1998 exceeded $100,000, and two additional executive
officers for whom disclosure would have been required but for the fact that
they were not serving as executive officers of Digex at the end of 1998 (each a
named executive officer, and collectively, the named executive officers).
Securities underlying the options listed in the "Long-Term Compensation
Awards" column are shares of common stock of Intermedia awarded under
Intermedia's long-term incentive plans. On July 23, 1999, we adopted the Digex
Long-Term Incentive Plan pursuant to which options to purchase shares of our
Class A Common Stock will be issued on the effective date of this prospectus.
Prior awards under Intermedia's long-term incentive plans will not be affected
by the adoption of the Digex Long-Term Incentive Plan.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------------------------- ------------
Other Securities
Fiscal Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options (#)
- --------------------------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Mark K. Shull............ 1998 -- (2) -- -- -- (10)
President and Chief Ex-
ecutive Officer 1997 -- -- -- --
1996 -- -- -- --
Nancy G. Faigen.......... 1998 11,105(3) 50,000(8) -- -- (11)
President, Sales and 1997
Service -- -- -- --
Delivery Group (1) 1996 -- -- -- --
Rebecca Ward............. 1998 -- (4) -- -- -- (12)
President, Product
Management, Engineering 1997 -- -- -- --
and Marketing Group 1996 -- -- -- --
Bryan T. Gernert......... 1998 95,000(5) -- 166,108(9) -- (13)
Senior Vice President,
Sales, Distribution and 1997 75,000 -- 126,016(9) 33,552
Client Services 1996 75,000 -- 31,520(9) 13,422
Bradley E. Sparks........ 1998 -- (6) -- -- -- (14)
Chief Financial Officer 1997 -- -- -- --
1996 -- -- -- --
Robert B. Patrick........ 1998 92,500(7) 5,000 -- 5,000(15)
Vice President, 1997 65,000 7,500 -- 9,586
Marketing
1996 20,000 10,833 -- 3,836
</TABLE>
- --------
(1) Ms. Faigen served as President and Chief Executive Officer from December
1998 to June 1999.
(2) Mr. Shull commenced employment with Digex in July 1999. Mr. Shull's
current annual base salary is $250,000. He has a target annual bonus
opportunity equal to 60% of his base salary.
(3) Ms. Faigen commenced employment with Digex in December 1998. Ms. Faigen's
current annual base salary is $225,000. She has a target annual bonus
opportunity equal to 50% of her base salary.
(4) Ms. Ward commenced employment with Digex in July 1999. Ms. Ward's current
annual base salary is $200,000. She has a target annual bonus opportunity
equal to 50% of her base salary. Ms. Ward also received a bonus of
$100,000, 50% of which was paid upon starting and 50% of which will be
paid six months after employment.
(5) Mr. Gernert's current annual base salary is $200,000. He has a target
annual bonus opportunity equal to 60% of his base salary.
(6) Mr. Sparks commenced employment with Digex in July 1999. Mr. Sparks'
current annual base salary is $200,000. He has a target annual bonus
opportunity equal to 50% of his base salary.
(7) Mr. Patrick commenced employment with Digex in September 1996. Mr.
Patrick's current annual base salary is $150,000. He has a target annual
bonus opportunity equal to 40% of his base salary.
(8) In connection with the commencement of her employment with Digex, Ms.
Faigen received bonuses totalling $275,000, of which $50,000 was paid on
the date of her acceptance of employment, $50,000 on January 2, 1999,
$100,000 on April 1, 1999, and $75,000 is payable on August 1, 1999.
(9) These amounts represent commission payments.
50
<PAGE>
(10) In connection with the commencement of his employment with Digex, Mr.
Shull was granted options to purchase 100,000 shares of Common Stock of
Intermedia at an exercise price equal to $30.94 per share. On the
effective date of this prospectus, Mr. Shull will be granted options to
purchase 500,000 shares of Digex Class A Common Stock, 250,000 of which
will be at an exercise price equal to $5.00 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, Ms. Faigen will be granted
options to purchase 300,000 shares of Class A Common Stock, 150,000 of
which will be at an exercise price equal to $5.00 per share and the
balance of which will be at an exercise price equal to the public offering
price.
(12) In connection with the commencement of her employment with Digex, Ms. Ward
was granted options to purchase 50,000 shares of Intermedia common stock
at an exercise price equal to $30.00 per share. On the effective date of
this prospectus, Ms. Ward will be granted options to purchase 250,000
shares of Class A Common Stock, 125,000 of which will be at an exercise
price equal to $5.00 per share and the balance of which will be at an
exercise price equal to the public offering price.
(13) On the effective date of this prospectus, Mr. Gernert will be granted
options to purchase 400,000 shares of Class A Common Stock, 300,000 of
which will be at an exercise price equal to $5.00 per share and the
balance of which will be at an exercise price equal to the public offering
price.
(14) On the effective date of this prospectus, Mr. Sparks will be granted
options to purchase 200,000 shares of Class A Common Stock, 100,000 of
which will be at an exercise price equal to $5.00 per share and the
balance of which will be at an exercise price equal to the public offering
price.
(15) On the effective date of this prospectus, Mr. Patrick will be granted
options to purchase 100,000 shares of Class A Common Stock, 50,000 of
which will be at an exercise price equal to $5.00 and the balance of which
will be at an exercise price equal to the public offering price.
Options to be Granted on the Effective Date of this Prospectus
The following table sets forth certain information regarding options to
purchase our Class A Common Stock to be granted to our named executive officers
on the effective date of this prospectus under the Digex Long-Term Incentive
Plan.
The expiration date of all options set forth below will be ten years from the
date of grant. The percent of total options to be granted to employees on the
effective date was calculated based on all option grants that have been
determined and of which recipients have been notified as of the date of this
prospectus. We anticipate granting additional options to other employees on the
effective date. The potential realizable value at assumed annual rates of price
appreciation for all options set forth below was calculated using an assumed
public offering price of $15.00 as the market price on the date of grant.
<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 to be
Underlying Granted to Exercise Assumed
Options Employees on the Price Market
Granted (#) Effective Date (%) Per Share Price 0% 5% 10%
----------- ------------------ --------- ------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 250,000 12.17 $5.00 $15.00 $2,500,000 $4,857,500 $ 8,477,500
250,000 12.17 (1) 15.00 0 2,357,500 5,977,500
Nancy G. Faigen......... 150,000 7.30 5.00 15.00 1,500,000 2,914,500 5,086,500
150,000 7.30 (1) 15.00 0 1,414,500 3,586,500
Rebecca Ward............ 125,000 6.08 5.00 15.00 1,250,000 2,428,750 4,238,750
125,000 6.08 (1) 15.00 0 1,178,750 2,988,750
Bryan T. Gernert........ 300,000 14.60 5.00 15.00 3,000,000 5,829,000 10,173,000
100,000 4.87 (1) 15.00 0 943,000 2,391,000
Bradley E. Sparks....... 100,000 4.87 5.00 15.00 1,000,000 1,943,000 3,391,000
100,000 4.87 (1) 15.00 0 943,000 2,391,000
Robert B. Patrick....... 50,000 2.43 5.00 15.00 500,000 971,500 1,695,500
50,000 2.43 (1) 15.00 0 471,500 1,195,500
</TABLE>
- --------
(1) The exercise price will equal the public offering price.
51
<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 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. 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
Individual Grants For Option Terms
------------------------------------------------ --------------------
Number of
Securities Percent of Total
Underlying Options
Options Granted to Exercise
Granted Employees in Price Expiration
(#) Fiscal Year (%) Per Share Date 5% 10%
---------- ---------------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Robert B. Patrick....... 5,000 0.2% $26.88 9/29/08 $84,500 $214,200
</TABLE>
Aggregate Option Exercises in 1998 and Last Fiscal Year-End Option Values
The following table shows 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 for the only named executive officer who had
any stock options in 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 long-term incentive
plans.
<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>
Bryan T. Gernert........ 4,544 $303,290 24,208 14,140 $222,400 $116,461
Robert B. Patrick....... -0- -0- 3,009 9,135 $ 20,680 $ 37,332
</TABLE>
52
<PAGE>
Long-Term Incentive Plan
The Digex Long-Term Incentive Plan, adopted on July 23, 1999, permits 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 Digex Long-Term Incentive Plan, also known as the "Plan," is administered
by the compensation committee of our board of directors, the members of which
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. The compensation committee has
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 are authorized but unissued shares of
our Class A Common Stock or treasury stock. No more than 9,000,000 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 9,000,000 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.
53
<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: stock options to acquire 25,000 shares of Class A Common
Stock shall be granted on the effective date of this prospectus or, with
respect to non-employee directors not serving in such capacity on the foregoing
date, 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 8,334 of the shares on the January 1 following
the date the stock option is granted and as to an additional 8,333 shares on
January 1 of each of the two years thereafter. 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 which would have been
exercisable on the next following January 1.
Non-employee directors shall also be granted a stock option to acquire 5,000
shares of Class A Common Stock on the effective date of this prospectus or,
with respect to non-employee directors not serving in such capacity on the
foregoing date, on the date the director is elected to the board of directors,
and on each anniversary thereof which options shall be immediately exercisable
upon grant.
Upon a change of control of Digex or Intermedia, options granted to all non-
employee directors shall become fully vested and immediately exercisable and
will continue to be exercisable through the expiration date of the grant. 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"or voluntarily by
the participant without the consent of Digex, Intermedia or one of our
subsidiaries, and the participant is thereafter not employed by us or does not
then have a relationship with 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 1,000,000. 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 amendment to
the Plan increasing the number of shares of Class A Common Stock covered by 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 terminate on the tenth anniversary of the effective date of
this prospectus.
54
<PAGE>
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;
. 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 participate in Intermedia's directors' and officers' insurance
providing $40 million in indemnification coverage for our directors, officers
and certain employees for certain liabilities. The coverage under that policy
is being increased to $50 million.
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.
55
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We have entered into the General and Administrative Services Agreement and
several network services agreements with Intermedia. These agreements are
described below. The General and Administrative Services Agreement and certain
parts of the network services agreements are 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, collections and accounts
receivable services, financial planning and analysis, investor relations
and corporate development;
. human resources services;
. legal services;
. information management services; and
. insurance coverage and related services.
The General and Administrative Services Agreement provides for a two-year
initial term. We may terminate the agreement on 90-days 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 fees totaling
$16,500,000 for the services provided. Thereafter, the fee payable by us will
be decreased monthly based on an assessment of the cost of personnel hired by
us during the preceding month to perform certain of the functions internally.
Material amendments and modifications to the General and Administrative
Services Agreement and any extensions of its term are required to be approved
by a majority of our directors who are not officers or directors of Intermedia.
Intermedia has advised us that the fees payable by Digex to Intermedia under
the General and Administrative Services Agreement are intended to approximate
Intermedia's estimated costs of providing the covered services to Digex.
Because it is not practical to obtain quotes for all of these services from
third parties, we cannot determine whether, and there can be no assurance that,
the terms of the General and Administrative Services Agreement are as favorable
to us as would result from an arm's length negotiation with an unrelated third
party.
Network Services Agreements
We have entered into the following agreements with Intermedia, through its
wholly-owned subsidiary Business Internet, for a variety of Internet access,
network and firewall installation and management services: two Internet transit
services agreements and a managed firewall reseller agreement.
The two Internet transit service agreements provide, among other things,
that:
. we will purchase and Intermedia will provide to us a certain data transit
capacity;
. 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;
. the agreements will have an initial term of two years which will be
automatically renewed for successive one year periods unless either we or
Intermedia elects not to renew by giving 30-days prior notice;
56
<PAGE>
. Intermedia has made certain service level commitments to us covering both
network availability and performance; and
. if we do not renew the agreements for at least one renewal term, we will
be liable to Intermedia for any termination charges assessed against
Intermedia by local access providers for the early termination of local
access circuits purchased by Intermedia for the provision of services to
us.
We expect to pay Intermedia a total of approximately $7.4 million for
Internet transit services during the first year of these agreements.
The managed firewall reseller agreement provides, among other things, for:
. certain service level commitments covering both service availability and
performance; and
. continuous access by Intermedia to any equipment owned by Intermedia
deployed at any of our facilities.
Under this agreement, we will pay over to Intermedia all amounts we receive
from our customers for these services.
We believe the terms of the network services agreements are at least as
favorable to us as they would be under similar arrangements between Digex and
an unrelated third party.
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 be able to 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 managing underwriter of
this offering for Digex. Pierce J. Roberts, Jr., who is currently serving as a
Director of Digex, was an employee of Bear, Stearns & Co. Inc. until August
1998. Immediately prior to his departure from Bear, Stearns & Co. Inc., Mr.
Roberts served as a Senior Managing Director and head of the Global
Telecommunications Group.
Bear, Stearns & Co. Inc. 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 & Co. Inc. has been an initial purchaser for
numerous issuances of securities by Intermedia.
57
<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 July 12, 1999;
. beneficial ownership of our common stock by each of our directors and
named executive officers, as of July 12, 1999; and
. beneficial ownership of our common stock by all of our directors and
executive officers as a group, as of July 12, 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 Class B
Communications Inc. Common Stock
3625 Queen Palm Drive 50,000,000(1) 100.0% 100.0% 100.0% 98%
Tampa, Florida 33619
Directors and Executive
Officers:
David C. Ruberg None -- -- -- -- --
Mark K. Shull None -- -- -- -- --
Nancy G. Faigen None -- -- -- -- --
Rebecca Ward None -- -- -- -- --
Bryan T. Gernert None -- -- -- -- --
Bradley E. Sparks None -- -- -- -- --
Robert B. Patrick 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>
- --------
(1) Gives effect to the 50,000-for-one stock split of our Class B Common Stock
to be effected prior to the closing of this offering. These shares are
owned by Intermedia through its wholly-owned subsidiary, Business Internet,
Inc.
58
<PAGE>
The following table provides information regarding:
. those persons or groups known to us to be the beneficial owners of more
than five percent of the common stock of our parent, Intermedia;
. beneficial ownership of common stock of our parent, Intermedia, by each
of our directors and named executive officers, as of July 12, 1999; and
. beneficial ownership of common stock of our parent, Intermedia, by all of
our directors and executive officers as a group, as of July 12, 1999.
The percentage of Intermedia common stock beneficially owned was calculated
based on 50,212,682 shares outstanding on July 12, 1999.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Beneficially
Number of Owned
Shares -----------------
Beneficially Before After
Beneficial Owner Securities Owned Owned Offering Offering
- ---------------- ----------------------- ------------ -------- --------
<S> <C> <C> <C> <C>
Putnam Investments, Inc. Intermedia common stock 5,457,330(1) 10.9% 10.9%
One Post Office Square
Boston, MA 02109
Massachusetts Financial Services Corp. Intermedia common stock 5,038,416(2) 10.0% 10.0%
500 Boylston Street
Boston, MA 02116
FMR Corp. Intermedia common stock 3,614,382(3) 7.2% 7.2%
82 Devonshire Street
Boston, MA 02109
Wellington Management Co. LLP Intermedia common stock 3,539,023(4) 7.0% 7.0%
75 State Street
Boston, MA 02109
Franklin Resources Inc. Intermedia common stock 2,694,280(5) 5.4% 5.4%
777 Mariners Island Blvd.
San Mateo, CA 94404
American Express Co. Intermedia common stock 2,502,648(6) 5.0% 5.0%
200 Vesey Street
New York, NY 10285
T. Rowe Price and Associates, Inc. Intermedia common stock 2,457,379(7) 4.9% 4.9%
100 E. Pratt St.
Baltimore, MD 21202
Directors and Executive Officers:
David C. Ruberg Intermedia common stock 1,018,169(8) 2.0% 2.0%
Mark K. Shull Intermedia common stock 3,334(9) * *
Nancy G. Faigen Intermedia common stock 13,333(10) * *
Rebecca Ward Intermedia common stock 1,667(11) * *
Bryan T. Gernert Intermedia common stock 29,960(12) * *
Bradley E. Sparks None -- -- --
Robert B. Patrick Intermedia common stock 5,663(13) * *
John C. Baker Intermedia common stock 79,820(14) * *
Philip A. Campbell Intermedia common stock 26,000(15) * *
George F. Knapp Intermedia common stock 55,100(16) * *
Pierce J. Roberts, Jr. Intermedia common stock 47,108(17) * *
All directors and executive officers
as a group (12 persons) Intermedia common stock 1,281,087(18) 2.6% 2.6%
</TABLE>
- --------
*Less than 1%
(1) Based upon information set forth in a Schedule 13G filed with the
Securities and Exchange Commission (the "Commission") on February 18,
1999.
(2)Based upon information set forth in a Schedule 13G filed with the
Commission on February 11, 1999.
(3)Based upon information set forth in a Schedule 13G filed with the
Commission on February 1, 1999.
59
<PAGE>
(4) Based upon information set forth in a Schedule 13G filed with the
Commission on February 8, 1999.
(5) Based upon information set forth in a Schedule 13G filed with the
Commission on January 27, 1999.
(6) Based upon information set forth in a Schedule 13G filed with the
Commission on January 29, 1999. In such Schedule 13G, American Express
reported that it beneficially owned 5.2% of outstanding shares of
Intermedia common stock.
(7) Based upon information set forth in a Schedule 13G filed with the
Commission on February 12, 1999. In such Schedule 13G, T. Rowe Price
reported that it beneficially owned 5.0% of outstanding shares of
Intermedia common stock.
(8) Includes 139,951 shares of common stock, 204,049 shares subject to certain
vesting requirements and 674,169 shares subject to options exercisable as
of July 12, 1999 or within 60 days thereafter. Excludes 415,831 shares
subject to options that are not exercisable within 60 days of July 12,
1999.
(9) Includes 3,334 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter. Excludes 96,666 shares subject to options
that are not exercisable within 60 days of July 12, 1999.
(10) Includes 13,333 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter. Excludes 86,667 shares subject to options
that are not exercisable within 60 days of July 12, 1999.
(11) Includes 1,667 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter. Excludes 48,333 shares subject to options
that are not exercisable within 60 days of July 12, 1999.
(12) Includes 29,960 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter. Excludes 8,388 shares subject to options
that are not exercisable within 60 days of July 12, 1999.
(13) Includes 5,663 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter. Excludes 6,481 shares subject to options
that are not exercisable within 60 days of July 12, 1999.
(14) Includes 52,190 shares of common stock and 27,630 shares subject to
options exercisable as of July 12, 1999 or within 60 days thereafter.
Excludes 408 shares subject to options that are not exercisable within 60
days of July 12, 1999.
(15) Includes 26,000 shares subject to options exercisable as of July 12, 1999
or within 60 days thereafter.
(16) Includes 9,570 shares of common stock and 45,530 shares subject to options
exercisable as of July 12, 1999 or within 60 days thereafter. Excludes 408
shares subject to options that are not exercisable within 60 days of July
12, 1999.
(17) Includes 5,000 shares of common stock and 42,108 shares subject to options
exercisable as of July 12, 1999 or within 60 days thereafter. Excludes
179,892 shares subject to options that are not exercisable within 60 days
of July 12, 1999.
(18 ) Includes 206,711 shares of common stock, 204,049 shares subject to
certain vesting requirements and 870,327 shares subject to options
exercisable as of July 12, 1999 or within 60 days thereafter. Excludes
856,141 shares subject to options that are not exercisable within 60 days
of July 12, 1999.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of 100,000,000 shares of Class A Common Stock, $.01 par
value per share, and 50,000,000 shares of Class B Common Stock, $.01 par value
per share. At such time, all authorized shares of our Class B Common Stock will
be outstanding and owned by Intermedia through Business Internet, its wholly-
owned subsidiary.
The following summary is qualified by our certificate of incorporation and
bylaws, as they will be amended prior to the closing of this offering and 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 5,000,000 shares of 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:
61
<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."
62
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
10,000,000 shares of our Class A Common Stock, assuming no exercise of the
underwriters' over-allotment option, and 50,000,000 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 50,000,000 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. Some of our shares are also subject to
contractual restrictions described below. Sales of restricted securities in the
public market, or the availability of such shares for sale, could adversely
affect the price of our Class A Common Stock.
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 Bear, Stearns & Co. Inc.
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 100,000 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.
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.
63
<PAGE>
Stock Options
The Digex Long Term Incentive Plan was adopted on July 23, 1999. We intend to
file a registration statement under the Securities Act covering 9,000,000
shares of Class A Common Stock that will be reserved for issuance under this
Plan. Such registration statement is expected to be filed and become effective
on the effective date of this prospectus. 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.
64
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Donaldson, Lufkin & Jenrette Securities Corporation, CIBC
World Markets Corp., Legg Mason Wood Walker, Incorporated and DLJdirect Inc.,
the underwriters have severally agreed to purchase from us 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............................
DLJdirect Inc...................................................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of 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 Class A
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 30 days from
the date of the underwriting agreement, to purchase up to 1,500,000 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>
At our request, the underwriters have reserved for sale at the initial public
offering price up to 300,000 shares of our Class A Common Stock to be sold in
this offering for sale to certain persons designated by us. The number of
shares available for sale to the general public will be reduced to the extent
that any reserved shares are purchased. Any reserved shares not so purchased
will be offered by the underwriters on the same basis as the other shares
offered hereby.
65
<PAGE>
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a managing underwriter, is making a prospectus in electronic
format available on its Internet Web site. The underwriters have agreed to
allocate a limited number of shares to DLJdirect for sale to its qualified
brokerage account holders. Other than the prospectus in electronic format, the
information on such Web site is not part of this prospectus or the registration
statement of which this prospectus forms a part, has not been approved and/or
endorsed by us or any underwriter in such capacity and should not be relied on
by prospective investors.
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.
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 Class A
Common Stock. Consequently, the initial public offering price for our Class A
Common Stock will be determined by negotiation among us 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,
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 & Co. Inc. 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 98% 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.
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<PAGE>
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 from 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.
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 Commission at 1-800-SEC-0330 for further
information 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. Our registration
statement and the exhibits and schedules we filed electronically with the
Commission are available on this site.
67
<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 1,266
------- ------- -------- --------
Total current assets................... 2,399 7,017 9,235 9,428
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 $107,586
======= ======= ======== ========
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 -- -- 5,032
------- ------- -------- --------
Total liabilities...................... 4,166 6,894 5,106 5,032
Owner's equity (see Note 1):
Class A common stock, $.01 par value;
100,000 shares
assumed authorized; none assumed
issued and outstanding for pro forma
purposes............................ -- -- -- --
Class B common stock, $.01 par value;
50,000 shares
assumed authorized; 50,000 shares
assumed issued and outstanding for
pro forma purposes.................. -- -- -- 500
Additional paid-in capital........... -- -- -- 102,054
Accumulated deficit.................. -- -- -- --
Owner's net investment............... 45,527 70,845 102,287 --
------- ------- -------- --------
Total owner's equity................... 45,527 70,845 102,287 102,554
------- ------- -------- --------
Total liabilities and owner's equity... $49,693 $77,739 $107,393 $107,586
======= ======= ======== ========
</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................. $ (0.37) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======= =======
Diluted............... $ (0.37) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======= =======
Shares used in computing
pro forma basic and
diluted net loss per
share.................. 50,000 50,000 50,000 50,000
======== ======== ======= =======
</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........ -- -- 50,000 500 102,054 -- (102,287) 267
---- ----- ------ ----- -------- ----- -------- ---------
Pro forma balance at
March 31, 1999
(unaudited)............ -- $ -- 50,000 $ 500 $102,054 $ -- $ -- $ 102,554
==== ===== ====== ===== ======== ===== ======== =========
</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 as adjusted for
a 50,000-for-one stock split of Class B Common Stock to be effected prior to
the closing of the proposed public offering described in Note 12. These shares
are presumed outstanding for all periods of the Company 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
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............ -- -- $ (0.37) $ (0.34)
</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>
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 --
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 and 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 and 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>
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>
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>
Period from Three months
July 1, 1997 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)...................... 50,000 50,000 50,000 50,000
======== ======== ======= =======
Loss per share:
Basic........................... $ (0.37) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======= =======
Diluted......................... $ (0.37) $ (0.33) $ (0.08) $ (0.17)
======== ======== ======= =======
</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 $(0.46), 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 shares of $.01 par value common stock, of which 6 will be
classified Class A and 3 Class B, and 0.1 shares of Preferred Stock. It is the
Company's intent to amend its certificate of incorporation to increase the
number of authorized shares of common stock to 150,000 including 100,000 Class
A shares and 50,000 Class B shares and to increase the number of authorized
shares of Preferred Stock to 5,000 shares. 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. The unaudited pro forma
balance sheet at March 31, 1999 reflect the pro forma effect of this
recapitalization.
Network Services Agreements
Pursuant to several network services agreements, 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. These Agreements have an initial term of two years.
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
.Finance, accounting and administration
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
.Accounting and back office support services
.Investor relations
.Information management services
The General and Administrative Services Agreement has an initial term of two
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....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 32
Management............................................................... 45
Certain Relationships and Related Transactions........................... 56
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 63
Underwriting............................................................. 65
Legal Matters............................................................ 66
Experts.................................................................. 67
Where You Can Find Additional Information................................ 67
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these securities, 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.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[LOGO OF DIGEX]
10,000,000 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, as amended, (estimated except for the SEC filing,
NASD and Nasdaq fees), all of which will be borne by Digex, Incorporated:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee.................... $ 51,152
NASD filing fee.................................................. 18,900
Nasdaq National Market listing fee............................... 78,875
Blue Sky fees and expenses....................................... 7,500
Legal fees and expenses.......................................... 350,000
Trustees' and Transfer Agents' fees.............................. 20,000
Accountants' fees and expenses................................... 850,000
Printing costs................................................... 425,000
Miscellaneous.................................................... 48,573
----------
Total.......................................................... $1,850,000
==========
</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 July 23, 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.**
3.2 Bylaws of Digex.**
3.3 Form of 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 Intentionally Omitted.
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.*****
10.9 Consulting Letter Agreement by and between Digex, Intermedia and
Andersen Consulting LLP, dated as of April 1, 1999.*****
10.10 Internet Transit Services Agreement (East Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*****
10.11 Internet Transit Services Agreement (West Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*****
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999.(1)*****
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.*****
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- --------
(1) Certain provisions of this exhibit have been filed separately with the
Commission pursuant to an application for confidential treatment.
* To be filed by Amendment to this Registration Statement.
** Filed as an exhibit to Digex's registration statement on Form S-1 filed
with the Commission on April 27, 1999.
*** Filed as an exhibit to Amendment No. 1 to Digex's registration statement
on Form S-1, filed with the Commission on June 15, 1999.
**** Filed as an exhibit to Amendment No. 2 to Digex's registration statement
on Form S-1, filed with the Commission on July 12, 1999.
***** Filed as an exhibit to Amendment No. 3 to Digex's registration statement
on Form S-1, filed with the Commission on July 26, 1999.
(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.
II-3
<PAGE>
(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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Digex has duly caused
this Amendment No. 4 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 29 day of July, 1999.
Digex, Incorporated
/s/ Mark K. Shull
By: _________________________________
Mark K. Shull
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Amendment No. 4 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/ Mark K. Shull President and Chief July 29, 1999
______________________________________ Executive Officer
Mark K. Shull
Principal Financial and Accounting Officers:
* Chief Financial Officer July 29, 1999
______________________________________
Bradley E. Sparks
* Acting Controller July 29, 1999
______________________________________
Jeanne Walters
/s/ David C. Ruberg Chairman of the Board July 29, 1999
______________________________________
David C. Ruberg
* Director July 29, 1999
______________________________________
John C. Baker
* Director July 29, 1999
______________________________________
Philip A. Campbell
* Director July 29, 1999
______________________________________
George F. Knapp
* Director July 29, 1999
______________________________________
Pierce J. Roberts, Jr.
/s/ David C. Ruberg
*By: _________________________________
David C. Ruberg
as attorney-in-fact
</TABLE>
II-5
<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.**
3.2 Bylaws of Digex.**
3.3 Form of 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 Intentionally Omitted.
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.*****
10.9 Consulting Letter Agreement by and between Digex, Intermedia
and Andersen Consulting LLP, dated as April 1, 1999.*****
10.10 Internet Transit Services Agreement (East Coast) between Digex
and Business Internet, Inc., dated as of April 30,
1999.(1)*****
10.11 Internet Transit Services Agreement (West Coast) between Digex
and Business Internet, Inc., dated as of April 30, 1999.
(1)*****
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999. (1)*****
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.****
</TABLE>
<PAGE>
<TABLE>
<C> <S> <C>
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.*****
27.1 Financial Data Schedule (for SEC use only).
</TABLE>
- --------
(1) Certain provisions of this exhibit have been filed separately with the
Commission pursuant to an application for confidential treatment.
* 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.
*** Filed as an exhibit to Amendment No. 1 to Digex's registration statement
on Form S-1 filed with the Commission on June 15, 1999.
**** Filed as an exhibit to Amendment No. 2 to Digex's registration statement
on Form S-1 filed with the Commission on July 12, 1999.
***** Filed as an exhibit to Amendment No. 3 to Digex's registration statement
on Form S-1 filed with the Commission on July 26, 1999.
<PAGE>
EXHIBIT 1.1
DIGEX, INCORPORATED
__________ Shares of Common Stock
UNDERWRITING AGREEMENT
July ___, 1999
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
CIBC WORLD MARKETS CORP.
LEGG MASON WOOD WALKER, INCORPORATED
DLJDIRECT INC.
<PAGE>
__________ Shares of Common Stock
DIGEX, INCORPORATED
UNDERWRITING AGREEMENT
----------------------
July ___, 1999
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
CIBC World Markets Corp.
Legg Mason Wood Walker, Incorporated
DLJDirect Inc.
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Ladies and Gentlemen:
Digex, Incorporated, a corporation organized and existing under the
laws of Delaware (the "Company"), proposes, subject to the terms and conditions
-------
stated herein, to issue and sell to the several underwriters named in Schedule 1
hereto (collectively, the "Underwriters") an aggregate of __________ shares (the
------------
"Firm Shares") of its Class A common stock, par value $0.01 per share (the
-----------
"Common Stock") and, for the sole purpose of covering over-allotments in
- -------------
connection with the sale of the Firm Shares, at the option of the Underwriters,
up to an additional __________ shares (the "Additional Shares") of Common Stock.
-----------------
The Firm Shares and any Additional Shares purchased by the Underwriters are
referred to herein as the "Shares". The Shares are more fully described in the
------
Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
---------------------------------------------
represents and warrants to, and agrees with, each of the Underwriters that:
(a) The Company has filed with the Securities and Exchange Commission
(the "Commission") a registration statement on Form S-1 (No. 333-77105), and
----------
any amendments thereto, and related preliminary prospectuses for the
registration under the Securities Act of 1933 (the "Securities Act") of
--------------
shares of common stock, which registration statement, as so amended, has been
declared effective by the Commission and copies of which have heretofore been
delivered to the Underwriters. The registration statement, as amended at the
time it became effective, including the exhibits and information (if any)
deemed to be part of the registration statement at the time of effectiveness
pursuant to Rule 430A under the Act, is hereinafter referred to as the
"Registration Statement". If the Company has filed or is required pursuant
-----------------------
to the terms hereof to file a registration statement pursuant to Rule 462(b)
under the Act registering additional shares of Common Stock (a "Rule 462(b)
-----------
Registration Statement"), then, unless otherwise specified, any
----------------------
<PAGE>
reference herein to the term "Registration Statement" shall be deemed to
include such Rule 462(b) Registration Statement. Other than a Rule 462(b)
Registration Statement, which became effective upon filing, no other document
with respect to the Registration Statement has heretofore been filed with the
Commission (other than prospectuses filed pursuant to Rule 424(b) of the
rules and regulations of the Commission under the Securities Act (the
"Securities Act Regulations"), each in the form heretofore delivered to the
--------------------------
Underwriters). No stop order suspending the effectiveness of either the
Registration Statement or the Rule 462(b) Registration Statement, if any, has
been issued and no proceeding for that purpose has been initiated or, to the
Company's knowledge, threatened by the Commission. The Company, if required
by the Securities Act Regulations, proposes to file the Prospectus with the
Commission pursuant to Rule 424(b) of the Securities Act Regulations. The
Prospectus, in the form in which it is to be filed with the Commission
pursuant to Rule 424(b) of the Securities Act Regulations, is hereinafter
referred to as the "Prospectus", except that if any revised prospectus or
----------
prospectus supplement shall be provided to the Underwriters by the Company
for use in connection with the offering and sale of the Shares (the
"Offering") which differs from the Prospectus (whether or not such revised
--------
prospectus or prospectus supplement is required to be filed by the Company
pursuant to Rule 424(b) of the Securities Act Regulations), the term
"Prospectus" shall refer to such revised prospectus or prospectus supplement,
as the case may be, from and after the time it is first provided to the
Underwriters for such use; and, provided, further, that the term "Prospectus"
shall be deemed to include any wrapper or supplement thereto prepared in
connection with the distribution of any Reserved Shares (as defined in
Section 2(f), below). Any preliminary prospectus or prospectus subject to
completion included in the Registration Statement or filed with the
Commission pursuant to Rule 424 under the Securities Act is hereafter called
a "Preliminary Prospectus". All references in this Agreement to the
----------------------
Registration Statement, the Rule 462(b) Registration Statement, a Preliminary
Prospectus and the Prospectus, or any amendments or supplements to any of the
foregoing, shall be deemed to include any copy thereof filed with the
Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval
System ("EDGAR").
-----
(b) The Registration Statement and the Prospectus, at the time the
Registration Statement became effective and as of the Closing Date referred
to in Section 2 hereof, complied and comply in all material respects with the
requirements of the Securities Act and the Securities Act Regulations, and
did not and as of the Closing Date do not contain any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. The
Prospectus, as of the date hereof (unless the term "Prospectus" refers to a
prospectus which has been provided to the Underwriters by the Company for use
in connection with the offering of the Shares which differs from the
Prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, in which case at the time it is first provided to
the Underwriters for such use) and on the Closing Date, does not and will not
include any untrue statement of a material fact or omit to state a material
fact necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that the representations and warranties in this Section (1)(b) shall not
apply to statements in or omissions from the Registration Statement or
Prospectus made in reliance upon and in conformity with information relating
to any Underwriter furnished to the Company in writing by any Underwriter
expressly for use in the Registration Statement or the Prospectus. Each
Preliminary Prospectus and Prospectus filed as part of the Registration
Statement, as part of any amendment thereto or pursuant to Rule 424 under the
Securities Act Regulations, if filed by electronic transmission pursuant to
Regulation S-T
2
<PAGE>
under the Securities Act, was identical to the copy thereof delivered to the
Underwriters for use in connection with the offer and sales of the Shares
(except as may be permitted by Regulation S-T under the Securities Act).
There are no contracts or other documents required to be described in the
Prospectus or to be filed as exhibits to the Registration Statement under the
Securities Act that have not been described or filed therein as required, and
there are no business relationships or related-party transactions involving
the Company or any of its subsidiaries or any other person required to be
described in the Prospectus that have not been described therein as required.
(c) Each of the Company and its subsidiaries (i) has been duly
organized and is validly existing as a corporation in good standing under the
laws of its respective jurisdiction of incorporation, (ii) has all requisite
corporate power and authority to carry on its business as it is currently
being conducted and as described in the Prospectus and to own, lease and
operate its properties, and (iii) is duly qualified and in good standing as a
foreign corporation authorized to do business in each jurisdiction in which
the nature of its business or its ownership or leasing of property requires
such qualification except, with respect to clauses (i) (as it relates to good
standing) and (iii), where the failure to be so qualified or in good standing
does not and could not reasonably be expected to (x) individually or in the
aggregate, result in a material adverse effect on the properties, business,
results of operations, condition (financial or otherwise), affairs or
prospects of the Company and its subsidiaries, taken as a whole, (y)
interfere with or adversely affect the issuance or marketability of the
Shares pursuant hereto or (z) in any manner draw into question the validity
of this Agreement or any other Operative Document or the transactions
described in the Prospectus under the caption "Use of Proceeds" (any of the
events set forth in clauses (x), (y) or (z), a "Material Adverse Effect").
-----------------------
(d) All of the outstanding shares of capital stock of the Company
have been duly authorized, validly issued, and are fully paid and
nonassessable and were not issued in violation of any preemptive or similar
rights. The Shares, when issued, delivered and sold in accordance with this
Agreement, will be duly authorized and validly issued, fully paid and
nonassessable, and will not have been issued in violation of or subject to
any preemptive or similar rights. At March 31, 1999, after giving effect to
the issuance and sale of the Shares pursuant hereto and the application of
the net proceeds from the sale thereof, the Company had the pro forma
consolidated capitalization as set forth in the Prospectus under the caption
"Capitalization".
(e) All of the outstanding capital stock of, or other ownership
interests in, the Company's subsidiaries is owned by the Company, free and
clear of any security interest, claim, lien, limitation on voting rights or
encumbrance; and all such securities have been duly authorized, validly
issued, and are fully paid and nonassessable and were not issued in violation
of any preemptive or similar rights.
(f) Except as disclosed in the Prospectus there are not currently,
and will not be as a result of the Offering, any outstanding subscriptions,
rights, warrants, calls, commitments of sale or options to acquire or
instruments convertible into or exchangeable for, any capital stock or other
equity interest of the Company or any of its subsidiaries (other than options
issued pursuant to the Company's stock option plans).
(g) The Common Stock (including the Shares) is registered pursuant to
Section 12(g) of the Securities Exchange Act of 1934 (the "Exchange Act") and
------------
is listed for quotation on the Nasdaq National Market System ("Nasdaq"), and
------
the Company has taken no action designed to, or likely to have the effect of,
terminating the registration of the Common Stock under the Exchange Act or
delisting the Common Stock from Nasdaq, nor has the Company
3
<PAGE>
received any notification that the Commission or Nasdaq is contemplating
terminating such registration or listing.
(h) The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under this Agreement and to
consummate the transactions contemplated hereby, including, without
limitation, the corporate power and authority to issue, sell and deliver the
Shares as provided herein and the power to effect the Use of Proceeds as
described in the Prospectus.
(i) This Agreement has been duly and validly authorized, executed and
delivered by the Company and is the legal, valid and binding agreement of the
Company, enforceable against the Company in accordance with its terms, except
insofar as indemnification and contribution provisions may be limited by
applicable law or equitable principles and subject to applicable bankruptcy,
insolvency, fraudulent conveyance, reorganization or similar laws affecting
the rights of creditors generally and subject to general principles of
equity.
(j) Neither the Company nor any of its subsidiaries is, nor after
giving effect to the Offering will be, (i) in violation of its charter or
bylaws, (ii) in default in the performance of any bond, debenture, note,
indenture, mortgage, deed of trust or other agreement or instrument to which
it is a party or by which it is bound or to which any of its properties is
subject, or (iii) in violation of any local, state or federal law, statute,
ordinance, rule, regulation, requirement, judgment or court decree applicable
to the Company or any of its subsidiaries or any of their assets or
properties (whether owned or leased) other than, in the case of clauses (ii)
and (iii), any default or violation that (A) could not reasonably be expected
to have a Material Adverse Effect or (B) which is disclosed in the
Prospectus. There exists no condition that, with notice, the passage of time
or otherwise, would constitute a default under any such document or
instrument, except as disclosed in the Prospectus.
(k) None of (i) the execution, delivery or performance by the Company
of this Agreement, (ii) the issuance and sale of the Shares and (iii)
consummation by the Company of the transactions contemplated hereby and in
the Prospectus violate, conflict with or constitute a breach of any of the
terms or provisions of, or a default under (or an event that with notice or
the lapse of time, or both, would constitute a default), or require consent
under, or result in the imposition of a lien on any properties of the Company
or any of its subsidiaries, or an acceleration of any indebtedness of the
Company or any of its subsidiaries pursuant to, (A) the charter or bylaws of
the Company or any of its subsidiaries, (B) any bond, debenture, note,
indenture, mortgage, deed of trust, contract or other agreement or instrument
to which the Company or any of its subsidiaries is a party or by which the
Company or its subsidiaries or their properties is or may be bound, (C) any
statute, rule or regulation applicable to the Company or any of its
subsidiaries or any of their assets or properties or (D) any judgment, order
or decree of any court or governmental agency or authority having
jurisdiction over the Company or any of its subsidiaries or any of their
assets or properties, except in the case of clauses (B), (C) and (D) for such
violations, conflicts, breaches, defaults, consents, impositions of liens or
accelerations that (x) would not singly, or in the aggregate, have a Material
Adverse Effect or (y) which are disclosed in the Prospectus. Other than as
described in the Prospectus, no consent, approval, authorization or order of,
or filing, registration, qualification, license or permit of or with, (i) any
court or governmental agency, body or administrative agency or (ii) any other
person is required for (A) the execution, delivery and performance by the
Company of this Agreement, (B) the issuance and sale of the Shares and the
transactions contemplated hereby and thereby, except (x) such as have been
obtained and made
4
<PAGE>
under the Securities Act and state securities or Blue Sky laws and
regulations or such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD") or (y) where the failure to obtain any
----
such consent, approval, authorization or order of, or filing registration,
qualification, license or permit would not reasonably be expected to result
in a Material Adverse Effect.
(l) None of (i) the execution, delivery or performance by the Company
of this Agreement, (ii) the issuance and sale of the Shares and (iii)
consummation by the Company and Intermedia Communications, Inc.
("Intermedia") of the transactions contemplated hereby and in the Prospectus
violate, conflict with or constitute a breach of any of the terms or
provisions of, or a default under (or an event that with notice or the lapse
of time, or both, would constitute a default), or require consent under, or
result in the imposition of a lien on any properties of Intermedia or any of
its subsidiaries, or an acceleration of any indebtedness of Intermedia or any
of its subsidiaries pursuant to, (A) the charter or bylaws of Intermedia or
any of its subsidiaries, (B) any bond, debenture, note, indenture, mortgage,
deed of trust, contract or other agreement or instrument to which Intermedia
or any of its subsidiaries is a party or by which Intermedia or its
subsidiaries or their properties is or may be bound, (C) any statute, rule or
regulation applicable to Intermedia or any of its subsidiaries or any of
their assets or properties or (D) any judgment, order or decree of any court
or governmental agency or authority having jurisdiction over Intermedia or
any of its subsidiaries or any of their assets or properties, except in the
case of clauses (B), (C) and (D) for such violations, conflicts, breaches,
defaults, consents, impositions of liens or accelerations that (x) would not
singly, or in the aggregate, have a Material Adverse Effect or (y) which are
disclosed in the Prospectus.
(m) There is (i) no action, suit or proceeding before or by any
court, arbitrator or governmental agency, body or official, domestic or
foreign, now pending or, to the best knowledge of the Company or any of its
subsidiaries, threatened or contemplated to which the Company or any of its
subsidiaries is a party or to which the business or property of the Company
or any of its subsidiaries is subject, (ii) no statute, rule, regulation or
order that has been enacted, adopted or issued by any governmental agency or
that has been proposed by any governmental body or (iii) no injunction,
restraining order or order of any nature by a federal or state court or
foreign court of competent jurisdiction to which the Company or any of its
subsidiaries is or may be subject or to which the business, assets, or
property of the Company or any of its subsidiaries are or may be subject,
that, in the case of clauses (i), (ii) and (iii) above, (w) is required to be
disclosed in the Prospectus and that is not so disclosed, or (x) could
reasonably be expected to, individually or in the aggregate, result in a
Material Adverse Effect.
(n) No action has been taken and no statute, rule, regulation or
order has been enacted, adopted or issued by any governmental agency that
prevents the issuance of the Shares or prevents or suspends the use of the
Prospectus; no injunction, restraining order or order of any kind by a
federal or state court of competent jurisdiction has been issued that
prevents the issuance of the Shares, prevents or suspends the sale of the
Shares in any jurisdiction referred to in Section 1(c) hereof or that could
adversely affect the consummation of the transactions contemplated by this
Agreement or the Prospectus; and every request of any securities authority or
agency of any jurisdiction for additional information has been complied with
in all material respects.
(o) Except as set forth in the Prospectus, there is (i) no
significant unfair labor practice complaint pending against the Company or
any of its subsidiaries nor, to the best
5
<PAGE>
knowledge of the Company, threatened against any of them, before the National
Labor Relations Board, any state or local labor relations board or any
foreign labor relations board, and no significant grievance or significant
arbitration proceeding arising out of or under any collective bargaining
agreement is so pending against the Company or any of its subsidiaries nor,
to the best knowledge of the Company, threatened against any of them, (ii) no
significant strike, labor dispute, slowdown or stoppage pending against the
Company or any of its subsidiaries nor, to the best knowledge of the Company,
threatened against the Company or any of its subsidiaries and (iii) to the
best knowledge of the Company, no union representation question existing with
respect to the employees of the Company or any of its subsidiaries that, in
the case of clauses (i), (ii) or (iii) above, could reasonably be expected to
result in a Material Adverse Effect. To the best knowledge of the Company, no
collective bargaining organizing activities are taking place with respect to
the Company or any of its subsidiaries. None of the Company or any of its
subsidiaries has violated (A) any federal, state or local law or foreign law
relating to discrimination in hiring, promotion or pay of employees, (B) any
applicable wage or hour laws or (C) any provision of the Employee Retirement
Income Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA"), which in the case of
-----
clause (A), (B) or (C) above could reasonably be expected to result in a
Material Adverse Effect.
(p) None of the Company or any of its subsidiaries has violated any
environmental, safety or similar law or regulation applicable to it or its
business or property relating to the protection of human health and safety,
the environment or hazardous or toxic substances or wastes, pollutants or
contaminants ("Environmental Laws"), lacks any permit, license or other
------------------
approval required of it under applicable Environmental Laws or is violating
any term or condition of such permit, license or approval, which could
reasonably be expected to, either individually or in the aggregate, have a
Material Adverse Effect.
(q) Each of the Company and its subsidiaries has (i) good and
marketable title to all of the properties and assets described in the
Prospectus as owned by it, free and clear of all liens, charges, encumbrances
and restrictions, except such as are described in the Prospectus or as would
not have a Material Adverse Effect, (ii) peaceful and undisturbed possession
of its properties under all material leases to which it is a party as lessee,
(iii) all licenses, certificates, permits, authorizations, approvals,
franchises and other rights from, and has made all declarations and filings
with, all federal, state and local authorities, all self-regulatory
authorities and all courts and other tribunals (each an "Authorization")
-------------
necessary to engage in the business conducted by it in the manner described
in the Prospectus, except as described in the Prospectus or where failure to
hold such Authorizations would not, individually or in the aggregate, have a
Material Adverse Effect and (iv) no reason to believe that any governmental
body or agency is considering limiting, suspending or revoking any such
Authorization. Except where the failure to be in full force and effect would
not have a Material Adverse Effect, all such Authorizations are valid and in
full force and effect, and each of the Company and its subsidiaries is in
compliance in all material respects with the terms and conditions of all such
Authorizations and with the rules and regulations of the regulatory
authorities having jurisdiction with respect thereto. All material leases to
which the Company or any of its subsidiaries is a party are valid and
binding, and no default by the Company or any subsidiary has occurred and is
continuing thereunder and, to the best knowledge of the Company and its
subsidiaries, no material defaults by the landlord are existing under any
such lease that could reasonably be expected to result in a Material Adverse
Effect.
(r) Each of the Company and its subsidiaries owns, possesses or has
the right to employ all patents, patent rights, licenses, inventions,
copyrights, know-how (including
6
<PAGE>
trade secrets and other unpatented and/or unpatentable proprietary or
confidential information, software, systems or procedures), trademarks,
service marks and trade names, inventions, computer programs, technical data
and information (collectively, the "Intellectual Property") presently
---------------------
employed by it in connection with the businesses now operated by it or which
are proposed to be operated by it or its subsidiaries free and clear of and
without violating any right, claimed right, charge, encumbrance, pledge,
security interest, restriction or lien of any kind of any other person and
none of the Company or any of its subsidiaries has received any notice of
infringement of or conflict with asserted rights of others with respect to
any of the foregoing, except as could not reasonably be expected to have a
Material Adverse Effect. The use of the Intellectual Property in connection
with the business and operations of the Company and its subsidiaries does not
infringe on the rights of any person, except as could not reasonably be
expected to have a Material Adverse Effect.
(s) None of the Company or any of its subsidiaries or, to the best
knowledge of the Company, any of their respective officers, directors,
partners, employees, agents or affiliates or any other person acting on
behalf of the Company or any of its subsidiaries has, directly or indirectly,
given or agreed to give any money, gift or similar benefit (other than legal
price concessions to customers in the ordinary course of business) to any
customer, supplier, employee or agent of a customer or supplier, official or
employee of any governmental agency (domestic or foreign), instrumentality of
any government (domestic or foreign) or any political party or candidate for
office (domestic or foreign) or other person who was, is or may be in a
position to help or hinder the business of the Company or any of its
subsidiaries (or assist the Company or any of its subsidiaries in connection
with any actual or proposed transaction), which (i) might subject the Company
or any of its subsidiaries, or any other individual or entity, to any damage
or penalty in any civil, criminal or governmental litigation or proceeding
(domestic or foreign), (ii) if not given in the past, might have had a
material adverse effect on the assets, business or operations of the Company
or any of its subsidiaries or (iii) if not continued in the future, might
have a Material Adverse Effect.
(t) All material tax returns required to be filed by the Company and
each of its subsidiaries in all jurisdictions have been so filed. All taxes,
including withholding taxes, penalties and interest, assessments, fees and
other charges due or claimed to be due from such entities or that are due and
payable have been paid, other than those being contested in good faith and
for which adequate reserves have been provided or those currently payable
without penalty or interest. To the knowledge of the Company, there are no
material proposed additional tax assessments against the Company, the assets
or property of the Company or any of its subsidiaries. The Company has made
adequate charges, accruals and reserves in the applicable financial
statements included in the Prospectus in respect of all federal, state and
foreign income and franchise taxes for all periods as to which the tax
liability of the Company or any of its consolidated subsidiaries has not been
finally determined.
(u) None of the Company or any of its subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as amended (the
"Investment Company Act"), or (ii) a "holding company" or a "subsidiary
-----------------------
company" or an "affiliate" of a holding company within the meaning of the
Public Utility Holding Company Act of 1935, as amended.
(v) Except as disclosed in the Prospectus, there are no holders of
securities of the Company or any of its subsidiaries who, by reason of the
execution by the Company of this
7
<PAGE>
Agreement to which it is a party or the consummation by the Company or any of
its subsidiaries of the transactions contemplated hereby, have the right to
request or demand that the Company or any of its subsidiaries register under
the Securities Act or analogous foreign laws and regulations securities held
by them, other than such that have been duly waived.
(w) Each of the Company and its subsidiaries maintains a system of
internal accounting controls sufficient to provide reasonable assurance that:
(i) transactions are executed in accordance with management's general or
specific authorizations; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences thereto.
(x) Each of the Company and its subsidiaries maintains insurance
covering its properties, operations, personnel and businesses. Such
insurance insures against such losses and risks as are adequate in accordance
with customary industry practice to protect the Company and its subsidiaries
and their respective businesses. None of the Company or any of its
subsidiaries has received notice from any insurer or agent of such insurer
that substantial capital improvements or other expenditures will have to be
made in order to continue such insurance. All such insurance is outstanding
and duly in force on the date hereof, subject only to changes made in the
ordinary course of business, consistent with past practice, which do not,
singly or in the aggregate, materially alter the coverage thereunder or the
risks covered thereby. The Company has no reason to believe that it or any
subsidiary will not be able (a) to renew its existing insurance coverage as
and when such policies expire or (b) to obtain comparable coverage from
similar institutions as may be necessary or appropriate to conduct its
business as now conducted or as presently contemplated and at a cost that
would not result in a Material Adverse Effect.
(y) The Company has not (a) taken, directly or indirectly, any action
designed to, or that might reasonably be expected to, cause or result in
stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or (b) since the date of the
Preliminary Prospectus (1) sold, bid for, purchased or paid any person any
compensation for soliciting purchases of, the Shares or (2) paid or agreed to
pay to any person any compensation for soliciting another to purchase any
other securities of the Company.
(z) The Company and its subsidiaries and any "employee benefit plan"
(as defined under ERISA) established or maintained by the Company, its
-----
subsidiaries or their "ERISA Affiliates" (as defined below) are in compliance
in all material respects with ERISA. "ERISA Affiliate" means, with respect
---------------
to the Company or a subsidiary, any member of any group of organizations
described in Sections 414(b), (c), (m) or (o) of the Internal Revenue Code of
1986, as amended, and the regulations and published interpretations
thereunder (the "Code") of which the Company or such subsidiary is a member.
----
No "reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company, its subsidiaries or any of their ERISA Affiliates.
No "employee benefit plan" established or maintained by the Company, its
subsidiaries or any of their ERISA Affiliates, if such "employee benefit
8
<PAGE>
plan" were terminated, would have any "amount of unfunded benefit
liabilities" (as defined under ERISA). Neither the Company, its subsidiaries
nor any of their ERISA Affiliates has incurred or reasonably expects to incur
any liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained
by the Company, its subsidiaries or any of their ERISA Affiliates that is
intended to be qualified under Section 401(a) of the Code is so qualified and
nothing has occurred, whether by action or failure to act, which would cause
the loss of such qualification.
(aa) Subsequent to the respective dates as of which information is
given in the Prospectus and up to the Closing Date, except as set forth in
the Prospectus, (i) none of the Company or any of its subsidiaries has
incurred any liabilities or obligations, direct or contingent, that are
material, individually or in the aggregate, to the Company and its
subsidiaries taken as a whole, nor entered into any transaction not in the
ordinary course of business, (ii) none of the Company or any of its
subsidiaries has incurred any liabilities or obligations, direct or
contingent, that will be material to the Company and its subsidiaries taken
as a whole, (iii) there has not been, singly or in the aggregate, any change
or development that could reasonably be expected to result in a Material
Adverse Effect; (iv) there has been no dividend or distribution of any kind
declared, paid or made by the Company or any of its subsidiaries on any class
of its capital stock; (v) there has been no change in accounting methods or
practices (including any change in depreciation or amortization policies or
rates) by the Company or any of its subsidiaries; (vi) there has been no
revaluation by the Company or any of its subsidiaries of any of their assets;
(vii) there has been no increase in the salary or other compensation payable
or to become payable by the Company or any of its subsidiaries to any of
their officers, directors, employees or advisors, nor any declaration,
payment or commitment or obligation of any kind for the payment by the
Company or any of its subsidiaries of a bonus or other additional salary or
compensation to any such person; (viii) there has been no amendment or
termination of any material contract, agreement or license to which the
Company or any subsidiary is a party or by which it is bound; (ix) there has
been no waiver or release of any material right or claim of the Company or
any subsidiary, including any write-off or other compromise of any material
account receivable of the Company or any subsidiary; and (x) there has been
no material change in pricing or royalties set or charged by the Company or
any subsidiary to their respective customers or licensees or in pricing or
royalties set or charged by persons who have licensed Intellectual Property
Rights to the Company or any of its subsidiaries.
(bb) Ernst & Young LLP, who have expressed their opinion with respect
to the financial statements (which term as used in this Agreement includes
the related notes thereto) and supporting schedules included in the
Prospectus, are independent public or certified public accountants within the
meaning of Regulation S-X under the Securities Act and the Exchange Act.
(cc) The financial statements, together with the related notes,
included in the Prospectus present fairly in all material respects the
consolidated financial position of the Company and its subsidiaries as of and
at the dates indicated and the results of their operations and cash flows for
the periods specified. Such financial statements have been prepared in
conformity with generally accepted accounting principles applied on a
consistent basis throughout the periods involved, except as may be expressly
stated in the related notes thereto. The financial data set forth in the
Prospectus under the captions "Prospectus Summary--Summary Financial Data",
"Selected Financial Data" and "Capitalization" fairly present the information
set forth therein on a basis consistent with that of the audited financial
statements contained in the Prospectus.
(dd) Except pursuant to this Agreement, there are no contracts,
agreements or understandings between the Company and any other person that
would give rise to a valid claim against the Company or any of the
Underwriters for a brokerage commission, finder's fee or like payment in
connection with the issuance, purchase and sale of the Shares.
9
<PAGE>
(ee) The statements (including the assumptions described therein)
included in the Prospectus (i) are within the coverage of Rule 175(b) under
the Securities Act to the extent such data constitute forward looking
statements as defined in Rule 175(c) and (ii) were made by the Company with a
reasonable basis and reflect the Company's good faith estimate of the matters
described therein.
(ff) Each of the Company and its subsidiaries has implemented Year
2000 compliance programs designed to ensure that its computer systems and
applications will function properly beyond 1999. The Company believes that
adequate resources have been allocated for this purpose and expects the
Company's and its subsidiaries' Year 2000 date conversion programs to be
completed on a timely basis.
(gg) Each certificate signed by any officer of the Company and
delivered to the Underwriters or counsel for the Underwriters pursuant to
this Agreement shall be deemed to be a representation and warranty by the
Company to the Underwriters as to the matters covered thereby.
The Company acknowledges that each of the Underwriters and, for
purposes of the opinions to be delivered to the Underwriters pursuant to Section
6 hereof, counsel to the Company and counsel to the Underwriters, will rely upon
the accuracy and truth of the foregoing representations and hereby consents to
such reliance.
2. Purchase, Sale and Delivery of the Shares.
-----------------------------------------
(a) On the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions herein
set forth, the Company agrees to sell to the Underwriters and the
Underwriters, severally and not jointly, agree to purchase from the Company,
at a purchase price per share of $__, the number of Firm Shares set forth
opposite the respective names of the Underwriters in Schedule I hereto plus
any additional number of Shares which such Underwriter may become obligated
to purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of certificates
for, the Firm Shares shall be made at the office of Latham & Watkins, 885
Third Avenue, Suite 1000, New York, New York, 10022, or at such other place
as shall be agreed upon by the Underwriters and the Company, at 10:00 A.M. on
July ___, 1999 (unless postponed in accordance with the provisions of Section
9 hereof) after the determination of the public offering price of the Firm
Shares, or such other time not later than ten business days after such date
as shall be agreed upon by the Underwriters and the Company (such time and
date of payment and delivery being herein called the "Closing Date").
------------
Payment shall be made to the Company by wire transfer in same day funds,
against delivery to the Underwriters of certificates for the Shares to be
purchased by them. Certificates for the Firm Shares shall be registered in
such name or names and in such authorized denominations as the Underwriters
may request in writing at least two full business days hours prior to the
Closing Date. The Company will permit the Underwriters to examine and
package such certificates for delivery at least one full business day prior
to the Closing Date.
(c) In addition, the Company hereby grants to the Underwriters the
option to purchase up to __________ Additional Shares at the same purchase
price per share to be paid
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<PAGE>
by the Underwriters to the Company for the Firm Shares as set forth in this
Section 2, for the sole purpose of covering over-allotments in the sale of
Firm Shares by the Underwriters. This option may be exercised at any time, in
whole or in part, on or before the thirtieth day following the date of the
Prospectus, by written notice by the Underwriters to the Company. Such notice
shall set forth the aggregate number of Additional Shares as to which the
option is being exercised and the date and time, as reasonably determined by
the Underwriters, when the Additional Shares are to be delivered (such date
and time being herein sometimes referred to as the "Additional Closing
------------------
Date"); provided, however, that the Additional Closing Date shall not be
----
earlier than the Closing Date or earlier than the second full business day
after the date on which the option shall have been exercised nor later than
the eighth full business day after the date on which the option shall have
been exercised (unless such time and date are postponed in accordance with
the provisions of Section 9 hereof). Certificates for the Additional Shares
shall be registered in such name or names and in such authorized
denominations as the Underwriters may request in writing at least two full
business days prior to the Additional Closing Date. The Company will permit
the Underwriters to examine and package such certificates for delivery at
least one full business day prior to the Additional Closing Date.
(d) The number of Additional Shares to be sold to each Underwriter
shall be the number which bears the same ratio to the aggregate number of
Additional Shares being purchased as the number of Firm Shares set forth
opposite the name of such Underwriter in Schedule I hereto (or such number
increased as set forth in Section 9 hereof) bears to the total number of Firm
Shares being purchased from the Company, subject, however, to such
adjustments to eliminate any fractional shares as the Underwriters in their
sole discretion shall make.
(e) Payment for the Additional Shares shall be made by wire
transfer in same day funds each payable to the order of the Company at the
office of Latham & Watkins, 885 Third Avenue, Suite 1000, New York, New York,
10022, or such other location as may be mutually acceptable, upon delivery of
the certificates for the Additional Shares to the Underwriters.
(f) The Company and the Underwriters agree that up to _______ of
the Firm Shares to be purchased by the Underwriters (the "Reserved Shares")
---------------
shall be reserved for sale by the Underwriters to certain individuals and
entities having business relationships with the Company, as part of the
distribution of the Shares by the Underwriters, subject to the terms of this
Agreement, the NASD and all other applicable laws, rules and regulations. To
the extent that such Reserved Shares are not orally confirmed for purchase by
such individuals and entities having business relationships with the Company
by the end of the first business day after the date of this Agreement, such
Reserved Shares may be offered to the public as part of the public offering
contemplated hereby.
3. Offering. Upon the Underwriters' authorization of the release of
--------
the Firm Shares, the Underwriters propose to offer the Shares for sale to the
public upon the terms set forth in the Prospectus.
4. Covenants of the Company. The Company covenants and agrees with
------------------------
each of the Underwriters that:
(a) The Company will notify the Underwriters immediately (and, if
requested by the Underwriters, will confirm such notice in writing) (i) when
any post-effective
11
<PAGE>
amendment to the Registration Statement becomes effective, (ii) of any
request by the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for any additional information,
(iii) of the mailing or the delivery to the Commission for filing of the
Prospectus or any amendment of or supplement to the Registration Statement or
the Prospectus or any document to be filed pursuant to the Exchange Act
during any period when the Prospectus is required to be delivered under the
Securities Act, (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or any post-
effective amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments or inquiries from
the Commission, and (vi) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for that
purpose. If the Commission shall propose or enter a stop order at any time,
the Company will make every reasonable effort to prevent the issuance of any
such stop order and, if issued, to obtain the lifting of such order as soon
as possible. The Company will not file any post-effective amendment to the
Registration Statement or any amendment of or supplement to the Prospectus
(including any revised prospectus which the Company proposes for use by the
Underwriters in connection with the offering of the Shares which differs from
the prospectus filed with the Commission pursuant to Rule 424(b) of the
Securities Act Regulations, whether or not such revised prospectus is
required to be filed pursuant to Rule 424(b) of the Securities Act
Regulations) to which the Underwriters or Underwriters' Counsel (as
hereinafter defined) shall reasonably object, will furnish the Underwriters
with copies of any such amendment or supplement a reasonable amount of time
prior to such proposed filing or use, as the case may be, and will not file
any such amendment or supplement or use any such prospectus to which the
Underwriters or counsel for the Underwriters shall reasonably object.
(b) If any event shall occur as a result of which the Prospectus
would, in the judgment of the Underwriters or the Company, include an untrue
statement of a material fact or omit to state any material fact required to
be stated therein or necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading, or if it
shall be necessary at any time to amend or supplement the Prospectus or the
Registration Statement to comply with the Securities Act or the Securities
Act Regulations, the Company will notify the Underwriters promptly and
prepare and file with the Commission an appropriate amendment or supplement
(in form and substance satisfactory to the Underwriters) which will correct
such statement or omission or which will effect such compliance.
(c) The Company has delivered to the Underwriters five signed
copies of the Registration Statement as originally filed, including exhibits,
and all amendments thereto, and the Company will promptly deliver to each of
the Underwriters, from time to time during the period that the Prospectus is
required to be delivered under the Securities Act, such number of copies of
the Prospectus and the Registration Statement, and all amendments of and
supplements to such documents, if any, as the Underwriters may reasonably
request.
(d) The Company will endeavor in good faith, in cooperation with
the Underwriters, to qualify the Shares for offering and sale under the
securities laws relating to the offering or sale of the Shares of such
jurisdictions as the Underwriters may designate and to maintain such
qualification in effect for so long as required for the distribution thereof;
except that in no event shall the Company be obligated in connection
therewith to qualify as a foreign corporation or to execute a general consent
to service of process.
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<PAGE>
(e) The Company will make generally available (within the meaning
of Section 11(a) of the Securities Act) to its security holders and to the
Underwriters as soon as practicable, but not later than 45 days after the end
of its fiscal quarter in which the first anniversary date of the effective
date of the Registration Statement occurs (or if such fiscal quarter is the
Company's fourth fiscal quarter, not later than 90 days after the end of such
quarter), an earnings statement (in form complying with the provisions of
Rule 158 of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration Statement (as
defined in Rule 158(c) under the Securities Act).
(f) During the period of 180 days from the date of the Prospectus,
the Company will not, directly or indirectly, without the prior written
consent of Bear, Stearns & Co. Inc. ("Bear Stearns"), offer, sell, contract
------------
to sell, grant any option to purchase, pledge or otherwise dispose (or
announce any offer, sale, contract to sell, grant of an option to purchase,
pledge or other disposition) of any shares of Common Stock of the Company or
any securities convertible into or exercisable or exchangeable for such
Common Stock, except that the Company may issue (i) [shares of Common Stock
and options to purchase Common Stock under its 1999 Stock Option Plan (as
such term is defined in the Prospectus)], (ii) shares of Common Stock in
connection with strategic relationships and acquisitions of businesses,
technologies and products complementary to those of the Company, so long as
the recipients of such shares agree to be bound by a lock-up agreement
substantially in the form of Exhibit B hereto (which shall provide that any
---------
transferees and assigns of such recipients shall be bound by the lock-up
agreement) for the remainder of the 180-day lock-up period.
(g) During a period of three years from the date of the Prospectus,
the Company will furnish to the Underwriters copies of (i) all reports to its
stockholders; and (ii) all reports, financial statements and proxy or
information statements filed by the Company with the Commission or any
national securities exchange.
(h) The Company will apply the proceeds from the sale of the Shares
as set forth under "Use of Proceeds" in the Prospectus.
(i) If the Company elects to rely upon Rule 462(b), the Rule 462(b)
Registration Statement shall have become effective by 10:00 P.M., New York
City time, on the date of this Agreement, no stop order suspending the
effectiveness of the Registration Statement or any part thereof shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the Commission, and all requests for additional information on
the part of the Commission shall have been complied with to the Underwriters'
reasonable satisfaction.
(j) The Company, during the period when the Prospectus is required
to be delivered under the Securities Act or the Exchange Act, will file all
documents required to be filed with the Commission pursuant to Sections 13,
14 or 15 of the Exchange Act within the time periods required by the Exchange
Act and the rules and regulations thereunder.
5. Payment of Expenses. Whether or not the transactions
-------------------
contemplated in this Agreement are consummated or this Agreement is terminated,
the Company hereby agrees to pay all costs and expenses incident to the
performance of the obligations of the Company hereunder, including those in
connection with (a) preparing, printing, duplicating, filing and distributing
the Registration Statement, as originally filed and all amendments thereto
(including all exhibits thereto), any Preliminary Prospectus, the Prospectus and
any amendments or supplements thereto (including, without limitation,
13
<PAGE>
fees and expenses of the Company's accountants and counsel), the underwriting
documents (including this Agreement, the Agreement Among Underwriters and the
Selling Agreement) and all other documents related to the public offering of the
Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (b) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes payable thereon, (c) the
qualification of the Shares under state or foreign securities or Blue Sky laws,
including the costs of printing and mailing a preliminary and final "Blue Sky
Memorandum" and the fees of counsel in connection therewith and such counsel's
disbursements in relation thereto, (d) listing of the Shares for quotation on
the Nasdaq, (e) filing fees of the Commission and the NASD, (f) the cost of
printing certificates representing the Shares, (g) the cost and charges of any
transfer agent or registrar and (h) all costs and expenses of the Underwriters,
including the fees and disbursements of counsel for the Underwriters, in
connection with matters related to the Reserved Shares.
6. Conditions of Underwriters' Obligations. The obligations of the
---------------------------------------
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company herein contained, as of the date hereof and as of the
Closing Date (for purposes of this Section 6, "Closing Date" shall refer to the
------------
Closing Date for the Firm Shares and any Additional Closing Date, if different,
for the Additional Shares), to the absence from any certificates, opinions,
written statements or letters furnished to the Underwriters or to Latham &
Watkins ("Underwriters' Counsel") pursuant to this Section 6 of any material
---------------------
misstatement or omission, to the performance by the Company of its obligations
hereunder, and to the following additional conditions:
(a) Prior to the Closing Date the Registration Statement shall have
become effective, and on the Closing Date, no stop order suspending the
effectiveness of the Registration Statement shall have been issued under the
Securities Act or proceedings therefor initiated or, to the Company's
knowledge, threatened by the Commission. The Prospectus shall have been
filed or transmitted for filing with the Commission pursuant to Rule 424(b)
of the Securities Act Regulations within the prescribed time period, and
prior to Closing Date the Company shall have provided evidence satisfactory
to the Underwriters of such timely filing or transmittal.
(b) All of the representations and warranties of the Company contained
in this Agreement shall be true and correct on the date hereof and on the
Closing Date with the same force and effect as if made on and as of the date
hereof and the Closing Date, respectively. The Company shall have performed
or complied with all of the agreements herein contained and required to be
performed or complied with by it at or prior to the Closing Date.
(c) The Prospectus shall have been printed and copies distributed to
the Underwriters not later than 10:00 a.m., New York City time, on the second
business day following the date of this Agreement or at such later date and
time as to which the Underwriters may agree, and no stop order suspending the
qualification or exemption from qualification of the Shares in any
jurisdiction referred to in Section 4(d) shall have been issued and no
proceeding for that purpose shall have been commenced or shall be pending or
threatened.
(d) No action shall have been taken and no statute, rule, regulation or
order shall have been enacted, adopted or issued by any governmental agency
which would, as of the Closing Date, prevent the issuance of the Shares; no
action, suit or proceeding shall have been commenced and be pending against
or affecting or, to the best knowledge of the Company, threatened against,
the Company or any of its subsidiaries before any court or arbitrator or any
14
<PAGE>
governmental body, agency or official that (i) could reasonably be expected
to result in a Material Adverse Effect or (ii) has not been disclosed in the
Prospectus.
(e) Since the dates as of which information is given in the Prospectus
and except as contemplated by the Prospectus, (i) there shall not have been
any material adverse change, or any development that is reasonably likely to
result in a material adverse change, in the capital stock or the long-term
debt, or material increase in the short-term debt, of the Company or any of
its subsidiaries from that set forth in the Prospectus, (ii) no dividend or
distribution of any kind shall have been declared, paid or made by the
Company or any of its subsidiaries on any class of its capital stock, (iii)
neither the Company nor any of its subsidiaries shall have incurred any
liabilities or obligations, direct or contingent, that are material,
individually or in the aggregate, to the Company and its subsidiaries, taken
as a whole, and that are required to be disclosed on a balance sheet or notes
thereto in accordance with generally accepted accounting principles and are
not disclosed on the latest balance sheet or notes thereto included in the
Prospectus. Since the date hereof and since the dates as of which
information is given in the Prospectus, there shall not have occurred any
Material Adverse Effect.
(f) The Underwriters shall have received a certificate, dated the
Closing Date, signed on behalf of the Company by each of the Company's Chief
Executive Officer and Chief Financial Officer in form and substance
reasonably satisfactory to the Underwriters, confirming, as of the Closing
Date, the matters set forth in paragraphs (a) through (e) of this Section 6
and that, as of the Closing Date, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed in all
material respects.
(g) The Underwriters shall have received on the Closing Date an
opinion, dated the Closing Date, in form and substance satisfactory to the
Underwriters and counsel to the Underwriters, of Kronish, Lieb, Weiner &
Hellman LLP, counsel for the Company, to the effect set forth in Exhibit A
---------
hereto.
(h) The Underwriters shall have received an opinion, dated the Closing
Date, in form and substance reasonably satisfactory to the Underwriters, of
Latham & Watkins, counsel to the Underwriters, covering such matters as are
customarily covered in such opinions.
(i) Latham & Watkins shall have been furnished with such documents, in
addition to those set forth above, as they may reasonably require for the
purpose of enabling them to review or pass upon the matters referred to in
this Section 6 and in order to evidence the accuracy, completeness or
satisfaction in all material respects of any of the representations,
warranties or conditions herein contained.
(j) At the time this Agreement is executed and at the Closing Date the
Underwriters shall have received from Ernst & Young LLP, independent public
accountants for the Company and its subsidiaries, dated as of the date of
this Agreement and as of the Closing Date, customary comfort letters
addressed to the Underwriters and in form and substance satisfactory to the
Underwriters and counsel to the Underwriters with respect to the financial
statements and certain financial information of the Company and its
subsidiaries contained in the Prospectus.
(k) At the time this Agreement is executed, the Underwriters shall
have received a "lock-up" agreement, substantially in the form attached as
Exhibit B hereto, from each of the officers, directors and stockholders of
---------
the Company identified on Exhibit C hereto.
---------
15
<PAGE>
(l) At the Closing Date, the Shares shall have been approved for
quotation on the Nasdaq.
(m) At the time this Agreement is executed and at the Closing Time,
the NASD shall not have withdrawn, or given notice of an intention to
withdraw, its approval of the fairness of the underwriting terms and
arrangements of the offering of the Shares by the Underwriters.
(n) Each of the General Administrative and Services Agreement, Master
Network Services Agreement, Public Internet Access Services Agreement, and
Customer Network and Application Services Agreement shall be in full force
and effect, and no party to any such agreement shall have given any notice of
termination or amendment of any material provision thereof, or of any
intention to terminate or amend any material provision thereof, to any other
party, and no event shall have occurred which would prevent either party from
substantially performing its obligations under such agreements.
(o) All opinions, certificates, letters and other documents required
by this Section 6 to be delivered by the Company will be in compliance with
the provisions hereof only if they are reasonably satisfactory in form and
substance to the Underwriters. The Company will furnish the Underwriters
with such conformed copies of such opinions, certificates, letters and other
documents as Bear Stearns shall reasonably request. Prior to the Closing
Date, the Company shall have furnished to the Underwriters such further
information, certificates and documents as the Underwriters may reasonably
request.
If any of the conditions specified in this Section 6 shall not have been
fulfilled when and as required by this Agreement, or if any of the certificates,
opinions, written statements or letters furnished to the Underwriters or to
Underwriters' Counsel pursuant to this Section 6 shall not be in all material
respects reasonably satisfactory in form and substance to the Underwriters and
to Underwriters' Counsel, all obligations of the Underwriters hereunder may be
canceled by the Underwriters at, or at any time prior to, the Closing Date and
the obligations of the Underwriters to purchase the Additional Shares may be
canceled by the Underwriters at, or at any time prior to, the Additional Closing
Date. Notice of such cancellation shall be given to the Company in writing, or
by telephone, telecopy, telex or telegraph, confirmed in writing.
7. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter within the
meaning of Section 15 of the Securities Act or Section 20(a) of the Exchange
Act against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees and any
and all expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim whatsoever, and
any and all amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the Securities
Act, the Exchange Act or otherwise, insofar as such losses, liabilities,
claims, damages or expenses (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, as originally filed or any
amendment thereof, or any related Preliminary Prospectus or the Prospectus,
or in any supplement thereto or amendment thereof, or arise out of or are
based upon the omission or alleged omission to state therein
16
<PAGE>
a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that the Company will
not be liable in any such case (i) to the extent but only to the extent that
any such loss, liability, claim, damage or expense arises out of or is based
upon any such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter
expressly for use therein and (ii) with respect to any preliminary prospectus
or preliminary prospectus supplement to the extent that any such loss, claim,
damage or liability results from the fact that an Underwriter sold Shares to
a person as to whom it shall be established that there was not sent or given,
at or prior to written confirmation of such sale, a copy of the prospectus or
prospectus supplement as then amended or supplemented in any case where such
delivery is required by the Securities Act if the Company has previously
furnished copies thereof in sufficient quantity to such Underwriter and with
sufficient time to effect a recirculation pursuant to Rule 461 under the
Securities Act and the loss, claim, damage or liability of the Underwriters
results from an untrue statement or omission of a material fact contained in
the preliminary prospectus or preliminary prospectus supplement which was
identified in writing prior to the effective date of the registration
statement to such underwriter and corrected in the prospectus or prospectus
supplement as then amended, and such correction would have cured the defect
giving rise to such loss, claim, damage or liability. This indemnity
agreement will be in addition to any liability which the Company may
otherwise have including under this Agreement.
(b) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company and each other person, if any, who
controls the Company within the meaning of Section 15 of the Securities Act
or Section 20(a) of the Exchange Act, against any and all losses,
liabilities, claims, damages and expenses whatsoever as incurred (including
but not limited to attorneys' fees and any and all expenses whatsoever
incurred in investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all amounts
paid in settlement of any claim or litigation), joint or several, to which
they or any of them may become subject under the Securities Act, the Exchange
Act or otherwise, insofar as such losses, liabilities, claims, damages or
expenses (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement, as originally filed or any amendment thereof, or
any related preliminary prospectus, preliminary prospectus supplement or
prospectus, or in any amendment thereof or supplement thereto, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent, but only to
the extent, that any such loss, liability, claim, damage or expense arises
out of or is based upon any such untrue statement or alleged untrue statement
or omission or alleged omission made therein in reliance upon and in
conformity with written information furnished to the Company by or on behalf
of any Underwriter expressly for use therein; provided, however, that in no
case shall any Underwriter be liable or responsible for any amount in excess
of the underwriting discount applicable to the Shares purchased by such
Underwriter hereunder. This indemnity will be in addition to any liability
which any Underwriter may otherwise have, including under this Agreement.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such
indemnified party shall, if a claim in respect thereof is to be made against
the indemnifying party under such subsection, notify each party against whom
indemnification is to be sought in writing of the commencement thereof (but
the failure so to notify an indemnifying party shall not relieve it from any
liability which it may have under this Section 7 except to the extent that it
has been prejudiced in any material respect by
17
<PAGE>
such failure or from any liability which it may otherwise have). In case any
such action is brought against any indemnified party, and it notifies an
indemnifying party of the commencement thereof, the indemnifying party will
be entitled to participate therein, and to the extent it may elect by written
notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof
with counsel reasonably satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall have
the right to employ its or their own counsel in any such case, but the fees
and expenses of such counsel shall be at the expense of such indemnified
party or parties unless (i) the employment of such counsel shall have been
authorized in writing by the indemnifying parties in connection with the
defense of such action, (ii) the indemnifying parties shall not have employed
counsel to take charge of the defense of such action within a reasonable time
after notice of commencement of the action, or (iii) such indemnified party
or parties shall have reasonably concluded that there may be defenses
available to it or them which are different from or additional to those
available to one or all of the indemnifying parties (in which case the
indemnifying party or parties shall not have the right to direct the defense
of such action on behalf of the indemnified party or parties), in any of
which events such fees and expenses of counsel shall be borne by the
indemnifying parties; provided, however, that the indemnifying party under
subsection (a) or (b) above, shall only be liable for the legal expenses of
one counsel (in addition to any local counsel) for all indemnified parties in
each jurisdiction in which any claim or action is brought. Anything in this
subsection to the contrary notwithstanding, an indemnifying party shall not
be liable for any settlement of any claim or action effected without its
prior written consent; provided, however, that such consent was not
unreasonably withheld.
8. Contribution. In order to provide for contribution in
------------
circumstances in which the indemnification provided for in Section 7 hereof is
for any reason held to be unavailable from any indemnifying party or is
insufficient to hold harmless a party indemnified thereunder, the Company and
the Underwriters shall contribute to the aggregate losses, claims, damages,
liabilities and expenses of the nature contemplated by such indemnification
provision (including any investigation, legal and other expenses incurred in
connection with, and any amount paid in settlement of, any action, suit or
proceeding or any claims asserted, but after deducting in the case of losses,
claims, damages, liabilities and expenses suffered by the Company any
contribution received by the Company from persons, other than the Underwriters,
who may also be liable for contribution, including persons who control the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, officers of the Company who signed the Registration
Statement and directors of the Company) as incurred to which the Company and one
or more of the Underwriters may be subject, in such proportions as is
appropriate to reflect the relative benefits received by the Company and the
Underwriters from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Underwriters in connection with the statements or omissions which resulted in
such losses, claims, damages, liabilities or expenses, as well as any other
relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other hand shall be deemed
to be in the same proportion as (x) the total proceeds from the offering (net of
underwriting discounts and commissions but before deducting expenses) received
by the Company and (y) the underwriting discounts and commissions received by
the Underwriters, respectively, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault of the Company and the
Underwriters shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Underwriters and the parties' relative
18
<PAGE>
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and the Underwriters agree that it would
not be just and equitable if contribution pursuant to this Section 8 were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above. Notwithstanding
the provisions of this Section 8, (i) in no case shall any Underwriter be liable
or responsible for any amount in excess of the underwriting discount applicable
to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty
of fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. Notwithstanding the provisions of
this Section 8 and the preceding sentence, no Underwriter shall be required to
contribute any amount in excess of the amount by which the total price at which
the Shares underwritten by it and distributed to the public were offered to the
public exceeds the amount of any damages that such Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. For purposes of this Section 8, each person, if
any, who controls an Underwriter within the meaning of Section 15 of the
Securities Act or Section 20(a) of the Exchange Act shall have the same rights
to contribution as such Underwriter, and each person, if any, who controls the
Company within the meaning of Section 15 of the Securities Act or Section 20(a)
of the Exchange Act, each officer of the Company who shall have signed the
Registration Statement and each director of the Company shall have the same
rights to contribution as the Company, subject in each case to clauses (i) and
(ii) of this Section 8. Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties, notify each party or parties from whom contribution may be
sought, but the omission to so notify such party or parties shall not relieve
the party or parties from whom contribution may be sought from any obligation it
or they may have under this Section 8 or otherwise. No party shall be liable for
contribution with respect to any action or claim settled without its consent;
provided, however, that such consent was not unreasonably withheld.
9. Default by an Underwriter.
-------------------------
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares hereunder, and
if the Firm Shares or Additional Shares with respect to which such default
relates do not (after giving effect to arrangements, if any, made by the
Underwriters pursuant to Subsection (b) below) exceed in the aggregate 10% of
the number of Firm Shares or Additional Shares, the Firm Shares or Additional
Shares which such defaulting Underwriter or Underwriters agreed but failed or
refused to purchase shall be purchased by the non-defaulting Underwriters in
proportion to the respective proportions which the numbers of Firm Shares set
forth opposite their respective names in Schedule I hereto bear to the
aggregate number of Firm Shares set forth opposite the names of the non-
defaulting Underwriters.
(b) In the event that such default relates to more than 10% of the
Firm Shares or Additional Shares, as the case may be, the Underwriters may in
their discretion arrange for themselves or for another party or parties
(including any non-defaulting Underwriter or Underwriters who so agree) to
purchase such Firm Shares or Additional Shares, as the case may be, to which
such default relates on the terms contained herein. In the event that within
five calendar days after such a default the Underwriters do not arrange for
the purchase of the Firm Shares or Additional Shares, as the case may be, to
which such default relates as provided in this Section 9, this Agreement, or
in the case of a default with respect to the Additional Shares, the
obligations of the Underwriters to purchase and of the Company to sell the
Additional Shares, shall
19
<PAGE>
thereupon terminate, without liability on the part of the Company with
respect thereto (except in each case as provided in Section 5, 7(a) and 8
hereof) or the Underwriters, but nothing in this Agreement shall relieve a
defaulting Underwriter or Underwriters of its or their liability, if any, to
the other Underwriters and the Company for damages occasioned by its or their
default hereunder.
(c) In the event that the Firm Shares or Additional Shares to which
the default relates are to be purchased by the non-defaulting Underwriters,
or are to be purchased by another party or parties as aforesaid, the
Underwriters or the Company shall have the right to postpone the Closing Date
or Additional Closing Date, as the case may be, for a period not exceeding
five business days, in order to effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any other
documents and arrangements, and the Company agrees to file promptly any
amendment or supplement to the Registration Statement or the Prospectus
which, in the opinion of Underwriters' Counsel, may thereby be made necessary
or advisable. The term "Underwriter" as used in this Agreement shall include
any party substituted under this Section 9 with like effect as if it had
originally been a party to this Agreement with respect to such Firm Shares or
Additional Shares.
10. Survival of Representations and Agreements. All representations
------------------------------------------
and warranties, covenants and agreements of the Underwriters and the Company
contained in this Agreement, including the agreements contained in Section 5,
the indemnity agreements contained in Section 7 and the contribution agreements
contained in Section 8, shall remain operative and in full force and effect
regardless of any investigation made by or on behalf of any Underwriter or any
controlling person thereof or by or on behalf of the Company, any of its
officers and directors, or any controlling person of the Company, and shall
survive delivery of and payment for the Shares to and by the Underwriters. The
representations contained in Section 1 and the agreements contained in Sections
5, 7, 8, 11(d) and 12 hereof shall survive the termination of this Agreement,
including termination pursuant to Section 9 or 11 hereof.
11. Effective Date of Agreement; Termination.
----------------------------------------
(a) This Agreement shall become effective upon the execution and
delivery of a counterpart hereof by each of the parties hereto.
(b) The Underwriters shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of the
Underwriters to purchase the Additional Shares at any time prior to the
Additional Closing Date, as the case may be, if on or prior to such date, (i)
the Company shall have failed, refused or been unable to perform in any
material respect any agreement on its part to be performed hereunder, (ii)
any other condition to the obligations of the Underwriters hereunder as
provided in Section 6 is not fulfilled when and as required in any material
respect, (iii) in the judgment of the Underwriters any changes of
circumstance shall have occurred since the respective dates as of which
information is given in the Prospectus which could have a Material Adverse
Effect, other than as set forth in the Prospectus, or (iv) (A) any domestic
or international event or act or occurrence has materially adversely
effected, or in the opinion of the Underwriters will in the immediate future
materially adversely effect, the market for the Company's securities or for
securities in general; or (B) trading in securities generally on the New York
Stock Exchange ("NYSE") or quotations on the Nasdaq shall have been suspended
----
or materially limited, or minimum or maximum prices for trading shall have
been established, or maximum ranges for prices for securities shall have been
required, on such exchange, or by such exchange or other regulatory body or
governmental authority having jurisdiction; or (C) a banking
20
<PAGE>
moratorium shall have been declared by federal or state authorities, or a
moratorium in foreign exchange trading by major international banks or
persons shall have been declared; or (D) there is an outbreak or escalation
of armed hostilities involving the United States on or after the date hereof,
or if there has been a declaration by the United States of a national
emergency or war, the effect of which shall be, in the Underwriters'
judgment, to make it inadvisable or impracticable to proceed with the
offering, sale and delivery of the Firm Shares or the Additional Shares, as
the case may be, on the terms and in the manner contemplated by the
Prospectus; or (E) there shall have been such a material adverse change in
general economic, political or financial conditions or if the effect of
international conditions on the financial markets in the United States shall
be such as, in the Underwriters' judgment, makes it inadvisable or
impracticable to proceed with the offering, sale and delivery of the Firm
Shares or the Additional Shares, as the case may be, on the terms and in the
manner contemplated by the Prospectus.
(c) Any notice of termination pursuant to this Section 11 shall be
by telephone, telecopy, telex, or telegraph, confirmed in writing by letter.
(d) If this Agreement shall be terminated pursuant to any of the
provisions hereof (other than pursuant to Section 9(b) or 11(b) hereof), or
if the sale of the Shares provided for herein is not consummated because any
condition to the obligations of the Underwriters set forth herein is not
satisfied or because of any refusal, inability or failure on the part of the
Company to perform any agreement herein or comply with any provision hereof,
the Company will, subject to demand by the Underwriters, reimburse the
Underwriters for all out-of-pocket expenses (including the reasonable fees
and expenses of their counsel), incurred by the Underwriters in connection
herewith.
12. Underwriters' Information. The Company and the Underwriters
-------------------------
severally acknowledge that the statements set forth in (i) the last paragraph of
the outside front cover of the Prospectus concerning the delivery of the shares
of Common Stock to the Underwriters and the offering of such shares by the
Underwriters; (ii) the __________ paragraph under the caption "Underwriting" in
the Prospectus concerning the proposed public offering price, discount and
concession; and (iii) the __________ and __________ paragraphs under the caption
"Underwriting" in the Prospectus concerning transactions that stabilize,
maintain, or otherwise affect the price of the Common Stock, constitute the only
information furnished in writing by or on behalf of any Underwriter expressly
for use in the Registration Statement, as originally filed or in any amendment
thereof, any related Preliminary Prospectus or preliminary prospectus supplement
or the Prospectus or in any amendment thereof or supplement thereto, as the case
may be.
13. Notices. All communications hereunder, except as may be otherwise
-------
specifically provided herein, shall be in writing and, if sent to the
Underwriters shall be mailed, delivered, telegraphed or telecopied and confirmed
in writing to the Underwriters, c/o Bear, Stearns & Co. Inc., 245 Park Avenue,
New York, New York 10167, Attention: Corporate Finance Department, telecopy
number: (212) 272-3092, and if sent to the Company, shall be mailed, delivered
or telexed, telegraphed or telecopied and confirmed in writing to Digex,
Incorporated, One Digex Plaza, Beltsville, Maryland 20705, Attention: Chief
Financial Officer, telecopy number: (301) _______, with a copy to Kronish, Lieb,
Weiner & Hellman LLP, 1114 Avenue of the Americas, 46th Floor, New York, New
York 10036, Attention: Ralph J. Sutcliffe; provided, however, that any notice
pursuant to Sections 7 or 8 shall be mailed, delivered, telegraphed or
telecopied and confirmed in writing
21
<PAGE>
14. Parties. This Agreement shall inure solely to the benefit of,
-------
and shall be binding upon, the Underwriters, the Company and the controlling
persons, directors, officers, employees and agents referred to in Section 7 and
8, and their respective successors and assigns, and no other person shall have
or be construed to have any legal or equitable right, remedy or claim under or
in respect of or by virtue of this Agreement or any provision herein contained.
The term "successors and assigns" shall not include a purchaser, in its capacity
as such, of Shares from any of the Underwriters.
15. Construction. This Agreement shall be construed in accordance
------------
with the internal laws of the State of New York applicable to agreements made
and to be performed within New York, without giving any effect to any provisions
thereof relating to conflicts of law. TIME IS OF THE ESSENCE IN THIS AGREEMENT.
16. Captions. The captions included in this Agreement are included
--------
solely for convenience of reference and are not to be considered a part of this
Agreement.
17. Counterparts. This Agreement may be executed in various
------------
counterparts which together shall constitute one and the same instrument.
22
<PAGE>
If the foregoing correctly sets forth the understanding among the
Underwriters and the Company, please so indicate in the space provided below for
that purpose, whereupon this letter shall constitute a binding agreement among
us.
Very truly yours,
DIGEX, INCORPORATED
By: ________________________________
Name: _____________________________
Title: ____________________________
Accepted as of the date first above written
BEAR, STEARNS & CO. INC.
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
CIBC WORLD MARKETS CORP.
LEGG MASON WOOD WALKER, INCORPORATED
DLJDIRECT INC.
Acting severally on behalf of themselves and the
several Underwriters named in Schedule I hereto
BEAR, STEARNS & CO. INC.
By:
-----------------------
Name:
Title:
DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION
By:
-----------------------
Name:
Title:
<PAGE>
SCHEDULE I
Number of Firm
Name of Underwriter Shares to be Purchased
- ------------------- ----------------------
Bear, Stearns & Co. Inc.......................................................
Donaldson, Lufkin & Jenrette Securities Corporation...........................
CIBC World Markets Corp.......................................................
Legg Mason Wood Walker, Incorporated..........................................
DLJDirect Inc.................................................................
..............................................................................
[others]......................................................................
..............................................................................
..............................................................................
Total.........................................................................
<PAGE>
Exhibit A
Form of Opinion of Kronish, Lieb, Weiner & Hellman LLP
1. Each of the Company and its subsidiaries is duly organized and
validly existing as a corporation in good standing under the laws of its
jurisdiction of incorporation, and has all requisite corporate power and
authority to carry on its business as it is being conducted and as described in
the Prospectus and to own, lease and operate its properties, and is duly
qualified and in good standing as a foreign corporation authorized to do
business in each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification, except where the
failure to be so qualified or in good standing would not, singly or in the
aggregate, have a Material Adverse Effect.
2. All of the outstanding shares of capital stock of the Company
have been duly authorized, validly issued, and are fully paid and nonassessable
and were not issued in violation of any preemptive or similar rights under the
Delaware General Corporation Law. The authorized, issued and outstanding
capital stock of the Company conforms in all respects to the description thereof
set forth in the Prospectus.
3. All of the issued and outstanding capital stock of, or other
ownership interests in, the Company's subsidiaries have been duly authorized and
validly issued, are fully paid and non-assessable and were not issued in
violation of or subject to any preemptive or similar rights under the Delaware
General Corporation Law or known to us, after reasonable inquiry, and, are owned
by the Company of record and, to our knowledge, after reasonable inquiry, free
and clear of any security interest, claim, lien, limitation on voting rights or
encumbrance. There are not, to our knowledge, currently, and will not be
following the Offering, any outstanding subscriptions, rights, warrants, calls,
commitments of sale or options to acquire or instruments convertible into or
exchangeable for, any capital stock or other equity interest of the Company or
any of its subsidiaries (other than options issued pursuant to the Company's
stock option plan).
4. The Company has all requisite corporate power and authority to
execute, deliver and perform its obligations under the Underwriting Agreement
and to consummate the transactions contemplated thereby and in the Prospectus,
including, without limitation, the corporate power and authority to issue, sell
and deliver the Shares as provided herein and therein.
5. The Underwriting Agreement has been duly and validly authorized,
executed and delivered by the Company and, assuming due execution by the other
parties hereto, is the legally valid and binding agreement of the Company.
6. The Registration Statement, Preliminary Prospectus and Prospectus
comply as to form in all material respects with the requirements for
registration statements on Form S-1 under the Securities Act and the Securities
Act Regulations; it being understood, however, that such counsel need not
express an opinion with respect to the financial statements, schedules and other
financial data included in the Registration Statement, Preliminary Prospectus or
Prospectus. To such counsel's knowledge, there are no contracts, indentures,
mortgages, loan agreements, notes, leases or other instruments required to be
described or referred to in the Registration Statement or to be filed as
exhibits thereto other than those described or referred to therein, and, to such
counsel's knowledge, the descriptions thereof or references thereto are correct
in all material respects.
<PAGE>
7. None of (A) the execution, delivery or performance by the Company
of the Underwriting Agreement, (B) the issuance and sale of the Shares or (C)
the consummation by the Company of the transactions described in the Prospectus
under the caption "Use of Proceeds" violates, conflicts with or constitutes a
breach of any of the terms or provisions of, or a default under (or an event
that with notice or the lapse of time, or both, would constitute a default), or
requires consent under, or will result in the imposition of a lien or
encumbrance on any properties of the Company or any of its subsidiaries, or an
acceleration of any indebtedness of the Company or any of its subsidiaries
pursuant to, (i) the charter or bylaws of the Company or any of its
subsidiaries, (ii) any bond, debenture, note, indenture, mortgage, deed of
trust, contract or other agreement or instrument to which the Company or any of
its subsidiaries is a party or by which any of them or their property is or may
be bound identified to such counsel as material (assuming all of such agreements
are governed by New York law), (iii) any judgment, order or decree of any court
or governmental agency or authority having jurisdiction over the Company or any
of its subsidiaries or any of their assets or properties known to such counsel,
and except in the case of clauses (ii) and (iii) for such violations, conflicts,
breaches, defaults, consents, impositions of liens or accelerations that (x)
would not, singly or in the aggregate, have a Material Adverse Effect or (y) are
disclosed in the Prospectus. No consent, approval, authorization or order of,
or filing, registration, qualification, license or permit of or with, any court
or governmental agency, body or administrative agency is required for (1) the
execution, delivery and performance by the Company of the Underwriting
Agreement, (2) the issuance and sale of the Shares or (3) consummation by the
Company of the transactions described in the Prospectus except (i) such as have
been obtained and made or have been disclosed in the Prospectus or (ii) where
the failure to obtain such consents or waivers would not, singly or in the
aggregate, have a Material Adverse Effect. To the best of such counsel's
knowledge, after reasonable inquiry, no consents or waivers from any other
person are required for the execution, delivery and performance by the Company
of the Underwriting Agreement, the issuance and sale of the Shares , other than
such consents and waivers as have been obtained or are being applied for.
8. None of (A) the execution, delivery or performance by the Company
of the Underwriting Agreement and the transactions contemplated thereby, (B) the
issuance and sale of the Shares or (C) the consummation by the Company and
Intermedia Communications, Inc. ("Intermedia") of the transactions described in
----------
the Prospectus under the caption "Use of Proceeds" violates, conflicts with or
constitutes a breach of any of the terms or provisions of, or a default under
(or an event that with notice or the lapse of time, or both, would constitute a
default), or requires consent under, or will result in the imposition of a lien
or encumbrance on any properties of Intermedia or any of its subsidiaries, or an
acceleration of any indebtedness of Intermedia or any of its subsidiaries
pursuant to, (i) the charter or bylaws of Intermedia or any of its subsidiaries,
(ii) any bond, debenture, note, indenture, mortgage, deed of trust, contract or
other agreement or instrument to which Intermedia or any of its subsidiaries is
a party or by which any of them or their property is or may be bound identified
to such counsel as material (assuming all of such agreements are governed by New
York law), (iii) any judgment, order or decree of any court or governmental
agency or authority having jurisdiction over Intermedia or any of its
subsidiaries or any of their assets or properties known to such counsel, and
except in the case of clauses (ii) and (iii) for such violations, conflicts,
breaches, defaults, consents, impositions of liens or accelerations that (x)
would not, singly or in the aggregate, have a Material Adverse Effect or (y) are
disclosed in the Prospectus.
9. None of the Company or any of its subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment company" within
the meaning of the Investment Company Act of 1940, as amended, or (ii) a
"holding company" or a "subsidiary company" or an "affiliate" of a holding
company within the meaning of the Public Utility Holding Company Act of 1935, as
amended.
ii
<PAGE>
10. Except as set forth in the Underwriting Agreement or in the
Prospectus, to such counsel's knowledge, after reasonable inquiry there are no
holders of any securities of the Company who, by reason of the execution by the
Company of the Underwriting Agreement or the consummation by the Company of the
transactions contemplated thereby, have the right to request or demand that the
Company register under the Act securities held by them.
11. To the knowledge of such counsel, after reasonable inquiry, no
search of courts having been made, there is (i) no action, suit, investigation
or proceeding before or by any court, arbitrator or governmental agency, body or
official, domestic or foreign, now pending, or threatened or contemplated to
which any of the Company or any of its subsidiaries is or may be a party or to
which the business or property of any of the Company or any of its subsidiaries
is or may be subject, (ii) no statute, rule, regulation or order that has been
enacted, adopted or issued by any governmental agency or that has been proposed
by any governmental body, or (iii) no injunction, restraining order or order of
any nature by a federal or state court of competent jurisdiction to which any of
the Company or any of its subsidiaries is or may be subject has been issued
that, in the case of clauses (i), (ii) and (iii) above, (w) is required to be
disclosed in the Prospectus and that is not so disclosed or, (x) could
reasonably be expected to have, either individually or in the aggregate, a
Material Adverse Effect, except as disclosed in the Prospectus; or (y) might
interfere with, adversely affect or in any manner question the validity of the
issuance and sale of the Shares or any of the other transactions contemplated by
the Underwriting Agreement.
12. The statements contained in the Prospectus under the captions
"Management--Indemnification of Directors and Executive Officers and Limitation
of Liability", "Management--[stock option plan]", "Certain Relationships and
Related Transactions", "Principal Stockholders", "Description of Capital Stock"
and "Shares Eligible for Future Sale", in each case, insofar as such statements
constitute summaries of the legal matters, documents or proceedings referred to
therein, fairly present the information required with respect to such legal
matters, documents and proceedings and fairly summarize the matters referred to
therein in all material respects.
We have participated in conferences with officers and other
representatives of the Company, representatives of the independent certified
public accountants of the Company and the Underwriters and their representatives
at which the contents of the Registration Statement, Preliminary Prospectus and
Prospectus and related matters were discussed and, although we have not
undertaken to investigate or verify independently, and do not assume any
responsibility for, the accuracy, completeness or fairness of the statements
contained in the Registration Statement, Preliminary Prospectus or Prospectus
(except as indicated above), on the basis of the foregoing, no facts have come
to our attention which led us to believe that the Registration Statement,
Preliminary Prospectus and Prospectus, as of its date or the Closing Date,
contained an untrue statement of a material fact or omitted to state any fact
required to be stated therein or necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading
(except as to financial statements and related notes, the financial statement
schedules and other financial and statistical data included therein).
iii
<PAGE>
Exhibit B
Lock-Up Agreement
Digex Corporation
One Digex Plaza
Beltsville, Maryland
Bear, Stearns & Co. Inc.
245 Park Avenue
New York, New York 10167
Dear Sirs:
The undersigned understands that Bear, Stearns & Co. Inc., as
representative of the several underwriters (the "Underwriters"), proposes to
------------
enter into an Underwriting Agreement with Digex Incorporated, a Delaware
corporation (the "Company"), providing for the initial public offering of the
-------
Company's common stock, par value $.01 per share (the "Common Stock"), pursuant
------------
to a Registration Statement on Form S-1 (File No. 333-77105). The undersigned
wishes to facilitate the Offering and recognizes that the Offering will be of
benefit to the undersigned.
In consideration of the foregoing and in order to induce you to act as
Underwriter in connection with the Offering, the undersigned hereby agrees, for
the benefit of the Company and the Underwriters, that during the period
beginning from the date hereof and continuing to and including the date 180 days
after the date of the final prospectus relating to the Offering, the undersigned
will not, directly or indirectly, without the prior written consent of Bear,
Stearns & Co. Inc., offer, sell, contract to sell, swap, make any short sale,
pledge, establish an open "put equivalent position" within the meaning of Rule
16a-1(h) under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), grant any option to purchase or otherwise dispose (or publicly announce
- ---
the undersigned's intention to do any of the foregoing) of, directly or
indirectly, any shares of Common Stock or other capital stock of the Company, or
any securities convertible into, or exerciseable or exchangeable for, any shares
of Common Stock or other capital stock of the Company that the undersigned
currently beneficially owns (within the meaning of Rule 13d-3 under the Exchange
Act), directly or indirectly, or may beneficially own, directly or indirectly,
in the future.
The undersigned confirms that the undersigned understands that the
Underwriters and the Company will rely upon the representations set forth in
this Agreement in proceeding with the Offering. The undersigned further
confirms that the agreements of the undersigned are irrevocable and shall be
binding upon the undersigned's heirs, legal representatives, successors and
assigns. The undersigned agrees and consents to the entry of stop transfer
instructions with the Company's transfer agent against the transfer of
securities of the Company held by the undersigned except in compliance with this
Agreement.
Very truly yours,
By:
------------------------
Name:
Title:
Dated: July ___, 1999
<PAGE>
Exhibit C
Individuals Delivering a Lock-Up Agreement Pursuant to Section 6(k)
John C. Baker
Philip A. Campbell
Nancy G. Faigen
Bryan T. Gernert
George F. Knapp
Marthe S. Lattinville-Pace
Robert E. London
Robert B. Patrick
Mike P. Renner
Pierce J. Roberts, Jr.
David C. Ruberg
John F. Scott
[others]
<PAGE>
Exhibit 3.3
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
DIGEX, INCORPORATED
(Pursuant to Section 242 of the General Corporation Law of Delaware)
The undersigned, being the Chief Executive Officer of Digex, Incorporated,
does hereby certify and set forth:
FIRST: The name of the corporation is Digex, Incorporated
-----
(hereinafter referred to as the "Corporation").
SECOND: The Certificate of Incorporation was filed with the
------
Office of the Secretary of the State of Delaware on April 26, 1999.
THIRD: The Certificate of Incorporation of the Corporation is
-----
hereby amended to change the number of shares of stock which the
Corporation shall have authority to issue so that Article FOURTH of the
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"FOURTH: The total number of shares of stock which the
------
Corporation shall have authority to issue is 155,000,000 shares divided
into the following classes:
(i) 100,000,000 shares of Class A Common Stock, par value $.01
per share (hereinafter referred to as "Class A Common Stock");
(ii) 50,000,000 shares of Class B Common Stock, par value $.01
per share (hereinafter referred to as "Class B Common Stock"); and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per
share (hereinafter referred to as "Preferred Stock").
The Corporation's Class A Common Stock and Class B Common Stock
are referred to hereinafter, collectively, as the "Common Stock."
A. Powers and Rights of Holders of Common Stock.
- --------------------------------------------
<PAGE>
1. Except as stated in paragraphs 3, 4, 5 and 9 of this
Subpart A of Article FOURTH, the Class A Common Stock and Class B
Common Stock shall be identical in all respects and shall have equal
powers, preferences, rights and privileges.
2. Except as may be otherwise required by law, and subject
to the provisions of any series of Preferred Stock at the time
outstanding, the holders of Class A Common Stock and Class B Common
Stock issued and outstanding shall have and possess the exclusive
voting rights and powers, whether at a meeting of stockholders or in
connection with any action taken by written consent.
3. Each holder of Class A Common Stock issued and
outstanding shall be entitled to one vote for each share of Class A
Common Stock registered in such holder's name on the books of the
Corporation, and each holder of Class B Common Stock issued and
outstanding shall be entitled to ten votes for each share of Class B
Common Stock registered in such holder's name on the books of the
Corporation. Except as may be otherwise required by law, the holders
of the Class A Common Stock and Class B Common Stock shall vote
together as a single class.
4. Any direct or indirect transfer of issued and
outstanding shares of Class B Common Stock other than to a Permitted
Holder (as defined herein) or any event or circumstance as a result of
which a holder of Class B Common Stock ceases to be a Permitted Holder
shall result in the automatic conversion of the shares of Class B
Common Stock being transferred to or held by such non-Permitted Holder
into a like number of shares of Class A Common Stock. No purported
transfer of shares of Class B Common Stock shall be effective unless
and until the transferor has surrendered to the Corporation, at its
office or agency maintained for that purpose, the certificates
representing the shares of Class B Common Stock to be transferred,
which certificates shall be duly endorsed or accompanied by executed
stock powers, with the signatures appropriately guaranteed. All such
certificates shall be accompanied by written notice of the holder's
intention to transfer the shares, including a statement of the number
of shares of Class B Common Stock to be transferred and, if
applicable, converted and the name or names and address or addresses
in which the certificate or certificates for shares of Class B Common
Stock or Class A Common Stock, as the case may be, issuable upon such
conversion shall be issued and, if required, funds for the payment of
any applicable transfer taxes. The Corporation, as soon as practicable
thereafter, will deliver at said office to the transferee of converted
shares of Class B Common Stock, or to any nominee or designee of such
transferee, a certificate or certificates for the number of full
shares of Class A Common Stock issuable upon such conversion and, in
the event
2
<PAGE>
that the transferor is transferring less than the aggregate number of
shares represented by the certificates surrendered, a certificate or
certificates for the number of full shares of Class B Common Stock not
being transferred. Shares of Class B Common Stock shall be deemed to
have been converted as of the date of the surrender of the shares for
transfer to a non-Permitted Holder and conversion as hereinbefore
provided, or the date on which a holder of Class B Common Stock ceases
to be a Permitted Holder, as the case may be, and the person or
persons in whose name Class A Common Stock is issuable upon such
conversion shall be treated for all purposes as the record holder or
holders of such Class A Common Stock on such date.
Shares of Class B Common Stock so converted shall be
returned to the status of authorized and unissued shares of Class B
Common Stock. The Corporation shall at all times reserve for issuance
a number of shares of Class A Common Stock (which may include Class A
Common Stock held by the Corporation as treasury stock) which shall be
sufficient for issuance upon conversion of all of the then outstanding
Class B Common Stock pursuant to this Section 4 or otherwise. The
Corporation as a condition to the transfer or the registration of
transfer of shares of Class B Common Stock to a purported Permitted
Holder, may require the furnishing of such affidavits or other proof
as it reasonably deems necessary to establish that such transferee is
a Permitted Holder. For purposes hereof, (a) "Permitted Holder" means
Intermedia Communications Inc. or any of its Affiliates, (b)
"Affiliate" means, with respect to any Person, another Person directly
or indirectly controlling, controlled by, or under direct or indirect
common control with, such person, provided, however, that no employee
of the Corporation or any of its subsidiaries shall be deemed to be an
Affiliate solely by reason of his or her capacity as an employee, or
by reason of any employment agreement, and (c) "Person" means and
includes an individual, a partnership, a limited liability company, a
joint venture, a corporation, a trust, an unincorporated organization
and a government or any department or agency thereof. All
certificates evidencing shares of Class B Common Stock shall be
endorsed with a legend making appropriate reference to the foregoing
provisions regarding automatic conversion.
5. Each holder of Class B Common Stock issued and
outstanding shall be entitled, at such holder's option, to convert
shares of Class B Common Stock registered on the books of the
Corporation in such holder's name into a like number of shares of
Class A Common Stock. If Intermedia Communications Inc. and its
Affiliates shall at any time elect to convert all of the shares of
Class B Common Stock then issued and outstanding and held by them into
shares of Class A Common Stock, whether by transfer pursuant to
Section 4 or by conversion pursuant to this Section 5, all of the
other shares of Class B Common Stock issued and outstanding as of the
date of such conversion shall be automatically
3
<PAGE>
converted into shares of Class A Common Stock on a share for share
basis and shall otherwise cease to be outstanding, effective as of the
date of such transfer and/or conversion by Intermedia Communications
Inc. and its Affiliates. All Persons registered as holders of shares
of Class B Common Stock on the date of such conversion shall be
treated for all purposes as the record holders of an equal number of
shares of Class A Common Stock on such date. The Corporation, as soon
as practicable thereafter, will deliver to each of the holders of the
shares of Class B Common Stock converted into shares of Class A Common
Stock a certificate or certificates for the Class A Common Stock
against receipt from such holder of the certificate theretofore
representing an equal number of shares of Class B Common Stock.
Pending delivery of certificates for shares of Class A Common Stock
after such conversion, certificates for shares of Class B Common Stock
so converted shall be deemed to be certificates for an equal number of
shares of Class A Common Stock.
6. Dividends may be paid to the holders of the Class A
Common Stock and Class B Common Stock, as and when declared by the
Board of Directors, out of any funds of the Corporation legally
available for the payment of such dividends. If and when dividends on
the Class A Common Stock and Class B Common Stock are declared from
time to time by the Board of Directors, whether payable in cash, in
property or in shares of stock of the Corporation, the holders of the
Class A Common Stock and Class B Common Stock shall be entitled to
share equally, on a per share basis, in such dividends. If shares of
Class B Common Stock are paid as dividends on Class B Common Stock and
shares of Class A Common Stock are paid as dividends on Class A Common
Stock, in an equal amount per share of Class B Common Stock and Class
A Common Stock in proportionate amounts, such payment will be deemed
to be a like dividend or other distribution.
7. Subject to the provisions of any series of Preferred
Stock at the time outstanding, upon liquidation, dissolution or
winding up of the Corporation, whether voluntary or involuntary, the
net assets of the Corporation shall be distributed to the holders of
the Class A Common Stock and Class B Common Stock, on a pro rata
basis, based on the number of shares held by each such holder, without
regard to class.
8. If the Corporation shall in any manner split, subdivide,
combine or reclassify any outstanding shares of a class of Common
Stock, the outstanding shares of the other class of Common Stock shall
be proportionately split, subdivided, combined or reclassified in the
same manner and on the same basis as the outstanding shares of the
class of Common Stock that have been split, subdivided, combined or
reclassified, unless a different basis has been consented to by the
holders of a majority
4
<PAGE>
of the outstanding shares of the class of Common Stock adversely
affected.
9. In the event of any corporate merger, consolidation,
purchase or acquisition of property or stock or other reorganization
in which any consideration is to be received by the holders of Class B
Common Stock and the holders of Class A Common Stock, if the
consideration shall consist in any part of voting securities (or of
options or warrants to purchase voting securities, or of securities
convertible into or exchangeable for voting securities), the holders
of Class B Common Stock shall receive, on a per share basis, voting
securities with ten times the number of votes per share as those
voting securities to be received by the holders of Class A Common
Stock (or options or warrants to purchase, or securities convertible
into or exchangeable for voting securities with ten times the number
of votes per share as those voting securities upon the exercise of the
options or warrants, or into which the convertible or exchangeable
securities may be converted or exchanged, received by the holder of
Class A Common Stock).
B. Preferred Stock.
- ---------------
The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of authorized shares
of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the approval of a
majority of the votes entitled to be cast by the holders of the Common
Stock, without a vote of the holders of the Preferred Stock, or of any
series thereof, unless a vote of any such holders is required pursuant
to the certificate or certificates establishing the series of
Preferred Stock."
FOURTH: This Amendment to the Certificate of Incorporation of the
------
Corporation was authorized by the directors of the Corporation and the sole
stockholder of the Corporation.
5
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed by its Chief Executive Officer as of this ____day of ________, 1999.
By:__________________________________
Chief Executive Officer
<PAGE>
Exhibit 5.1
July 29, 1999
Digex, Incorporated
One Digex Plaza
Beltsville, Maryland 20705
Ladies and Gentlemen:
We have acted as counsel to Digex, Incorporated., a Delaware
corporation (the "Company"), in connection with its Registration Statement on
Form S-1 (File No. 333-77105), filed pursuant to the Securities Act of 1933, as
amended, related to the proposed underwritten public offering (the "Offering")
of up to $184,000,000.00 aggregate value of shares of its Class A Common Stock,
par value $.01 per share (the "Shares"), to be offered to the public (including
Shares that may be so offered pursuant to an over-allotment option granted to
the underwriters).
In that connection, we have reviewed the Certificate of Incorporation
of the Company, filed as Exhibit 3.1 to the Registration Statement, the Form of
Certificate of Amendment to the Certificate of Incorporation of the Company,
filed as Exhibit 3.3 to Registration Statement, the Bylaws of the Company, filed
as Exhibit 3.2 to the Registration Statement, resolutions of the Company's Board
of Directors and such other documents and records as we have deemed appropriate.
On the basis of such review, and having regard to legal considerations
that we deem relevant, it is our opinion that:
The Shares to be offered by the Company pursuant to the Offering, when
issued and delivered upon payment therefor in accordance with the terms set
forth in the Registration Statement, will be duly authorized, validly
issued, fully paid and nonassessable.
We are opining only as to matters involving the corporate laws of
the State of Delaware and the federal laws of the United States.
We hereby consent to the use of our name under the caption "Legal
Matters" in the prospectus included in the Registration Statement and to the use
of this opinion as an exhibit to the Registration Statement.
Very truly yours,
/s/ Kronish Lieb Weiner & Hellman LLP
