<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 000-26873
DIGEX, INCORPORATED
(Exact name of registrant as specified in its charter)
Delaware 59-3582217
----------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Digex Plaza
Beltsville, MD 20705
(Address of principal executive offices)
(301) 847-5000
Telephone Number
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days:
Yes [ ] No [X]
As of September 10, 1999, there were 11,500,000 and 50,000,000 shares of the
Registrant's Class A and Class B Common Stock outstanding, respectively.
<PAGE>
DIGEX, INCORPORATED
INDEX
Page
No.
---
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Statements of Operations--Three and six months
ended June 30, 1999 and 1998.................................... 3
Condensed Balance Sheets--June 30, 1999
and December 31, 1998........................................... 4
Condensed Statements of Cash Flows--Six months
ended June 30, 1999 and 1998.................................... 5
Notes to Condensed Financial Statements.......................... 6
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 9
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk....... 18
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings................................................ 18
ITEM 2. Changes in Securities and Use of Proceeds........................ 18
ITEM 3. Defaults Upon Senior Securities.................................. 18
ITEM 4. Submission of Matters to a Vote of Security Holders.............. 19
ITEM 5. Other Information................................................ 19
ITEM 6. Exhibits and Reports on Form 8-K................................. 19
SIGNATURES................................................................ 20
2
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
DIGEX, INCORPORATED
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except share and per share information)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
---------------------------------- ---------------------------------
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues $ 12,629 $ 4,752 $ 22,021 $ 8,621
Costs and expenses:
Cost of operations.............................. 2,694 1,491 4,346 2,378
Cost of services................................ 3,478 1,567 7,430 2,674
Selling, general and administrative............. 18,658 4,639 26,727 8,276
Depreciation and amortization................... 5,652 2,027 9,966 4,054
--------------- --------------- --------------- ---------------
Total costs and expenses............................. 30,482 9,724 48,469 17,382
--------------- --------------- --------------- ---------------
Loss from operations................................. (17,853) (4,972) (26,448) (8,761)
Interest expense..................................... (239) - (239) -
--------------- --------------- --------------- ---------------
Net loss before income tax benefit................... (18,092) (4,972) (26,687) (8,761)
Income tax benefit................................... 4,839 - 4,839
--------------- --------------- --------------- ---------------
Net loss............................................. $ (13,253) $ (4,972) $ (21,848) $ (8,761)
=============== =============== =============== ===============
Pro forma net loss per common share -
basic and diluted............................... $ (0.27) $ (0.10) $ (0.44) $ (0.18)
=============== =============== =============== ===============
Shares used in computing pro forma basic and
diluted net loss per share...................... 50,000,000 50,000,000 50,000,000 50,000,000
=============== =============== =============== ===============
</TABLE>
See accompanying notes.
3
<PAGE>
DIGEX, INCORPORATED
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share information)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for
doubtful accounts of $2,520 in 1999 and $719 in 1998.......................... $ 10,694 $ 6,127
Prepaid expenses and other current assets........................................ 2,879 890
------------- -----------------
Total current assets............................................................. 13,573 7,017
Property and equipment, net...................................................... 125,219 39,059
Intangible assets, net........................................................... 29,208 31,204
Other assets..................................................................... 476 459
------------- -----------------
Total assets..................................................................... $ 168,476 $ 77,739
============= =================
Liabilities and Stockholders'/Owner's Equity
Current liabilities:
Accounts payable................................................................. $ 3,004 $ 3,341
Accrued expenses................................................................. 1,597 843
Deferred revenue................................................................. - 621
Current portion of capital lease obligations..................................... 929 981
------------- -----------------
Total current liabilities........................................................ 5,530 5,786
Capital lease obligations........................................................ 16,007 1,108
Due to Parent.................................................................... 8,749 -
------------- -----------------
Total liabilities................................................................ 30,286 6,894
Stockholders'/owner's equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; no shares issued
Class A common stock, $.01 par value; 100,000,000 shares......................... - -
authorized; no shares issued................................................... - -
Class B common stock, $.01 par value; 50,000,000 shares
authorized; 50,000,000 shares issued and outstanding......................... 500 -
Additional paid-in capital....................................................... 147,307 -
Accumulated deficit.............................................................. (9,617) -
Owner's net investment........................................................... - 70,845
------------- -----------------
Total stockholders'/owner's equity............................................... 138,190 70,845
------------- -----------------
Total liabilities and stockholders'/owner's equity............................... $ 168,476 $ 77,739
============= =================
</TABLE>
See accompanying notes.
4
<PAGE>
DIGEX, INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------------
June 30, 1999 June 30, 1998
--------------- ---------------
<S> <C> <C>
Operating activities
Net loss............................................................ $ (21,848) $ (8,761)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................................... 9,966 4,054
Deferred income taxes........................................... (4,839) -
Provision for doubtful accounts................................. 2,045 475
Changes in operating assets and liabilities:
Accounts receivable....................................... (6,612) (808)
Prepaid expenses and other current assets................. (1,989) (238)
Other assets.............................................. (17) -
Accounts payable, accrued expenses and deferred revenue... 4,601 588
Due to Parent............................................. 8,749 -
--------------- ---------------
Net cash used in operating activities..................... (9,944) (4,690)
Investing activities
Purchase of property and equipment.................................. (77,332) (7,431)
--------------- ---------------
Net cash used in investing activities..................... (77,332) (7,431)
Financing activities
Principal payments on capital lease obligations..................... (96) -
Net contributions from Parent (see Note 2).......................... 87,372 12,121
--------------- ---------------
Net cash provided by financing activities................. 87,276 12,121
Cash at beginning of period.............................................. - -
--------------- ---------------
Cash at end of period.................................................... $ - $ -
=============== ===============
Supplemental disclosures of cash flow information
Interest paid............................................................ $ 155 $ -
Assets purchased under capital lease obligations......................... 17,032 174
</TABLE>
See accompanying notes.
5
<PAGE>
DIGEX, INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Organization
Digex, Incorporated ("Digex" or the "Company") was incorporated on
April 26, 1999, under the laws of the State of Delaware. As of June 30, 1999,
the Company was a wholly-owned subsidiary of Intermedia Communications Inc.
("Intermedia" or "the Parent"). Prior to its incorporation, the Company's
business was operated as the Web site hosting and applications outsourcing unit
of Intermedia. Pursuant to its Certificate of Incorporation, as amended on
August 3, 1999, the Company is authorized to issue up to 100,000,000 shares of
Class A Common Stock, $.01 par value, 50,000,000 shares of Class B Common Stock,
$.01 par value and 5,000,000 shares of preferred stock, $.01 par value. The
Class A Common Stock is entitled to one vote for each share, and the Class B
Common Stock is entitled to ten votes for each share. On April 30, 1999, the
Parent contributed approximately $115.1 million of assets and certain
liabilities to the Company in exchange for 50,000,000 shares of Class B Common
Stock. On August 4, 1999, the Company sold 11,500,000 shares of Class A Common
Stock in an initial public offering.
Note 2. Basis of Presentation
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) necessary to present fairly the information set
forth therein have been included. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily an indication of the results
that may be expected for the year ending December 31, 1999. The accompanying
condensed financial statements should be read in conjunction with the audited
financial statements and footnotes included in Amendment No. 4 to the Form S-1
of the Company, as filed with the Securities and Exchange Commission (the
"Commission") on July 29, 1999.
The financial statements for periods prior to April 30, 1999 represent
the carved-out operations of the Web site hosting unit of Intermedia. The
Company's accumulated deficit of $9.6 million arose after April 30, 1999. Prior
to that date, accumulated losses and capital contributions from the Parent were
included in owner's net investment. The contribution of assets and certain
liabilities on April 30, 1999 was accounted for at the Parent's underlying book
values on the date of contribution. In addition to the April 30, 1999 equity
capitalization, the Parent contributed additional capital of $32.7 million to
the Company during May and June 1999, principally by way of contributions of
telecommunications assets.
The following table reflects the assets and liabilities contributed to
the Company on April 30, 1999:
<TABLE>
<CAPTION>
$ Millions
----------
<S> <C>
Current assets $ 10.3
Property and equipment 78.6
Intangibles and other assets 31.0
Liabilities (4.8)
----------
Total capital contribution $115.1
==========
</TABLE>
6
<PAGE>
DIGEX, INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 3. Earnings Per Share
On April 30, 1999, the Company issued 1,000 shares of Class B Common
Stock to the Parent in connection with the contribution of assets to the
Company. On July 23, 1999, the Board of Directors authorized a 50,000-for-one
split of the Class B Common Stock, effective as of August 4, 1999 and paid in
the form of a stock dividend, for shares outstanding as of July 8, 1999. The pro
forma basic and diluted net loss per common share were calculated assuming that
the stock split was effective for all periods presented. All share information
presented in this report gives effect to the stock split. The 11,500,000 shares
of Class A Common Stock issued in connection with the initial public offering
are not included in the calculation of earnings per share, since these shares
were not outstanding until August 4, 1999.
The following table sets forth the computation of basic and diluted
loss per share of common stock (in thousands, except share and per share
amounts):
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------------------------ ------------------------------------
1999 1998 1999 1998
------------------ --------------- --------------- -----------------
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per
share - net loss $ (13,253) $ (4,972) $ (21,848) $ (8,761)
Denominator for basic and diluted loss per
share - pro forma weighted-average shares 50,000,000 50,000,000 50,000,000 50,000,000
================== =============== =============== =================
Pro forma diluted loss per share of
common stock - basic and diluted $ (.27) $ (.10) $ (.44) $ (.18)
================== =============== =============== =================
</TABLE>
Effective as of the date of the initial public offering, the Company
granted to employees of the Parent options to purchase 1,133,800 shares of the
Company's Class A Common Stock. The Financial Accounting Standards Board
recently issued an Exposure Draft, Accounting for Certain Transactions involving
Stock Compensation, an interpretation of APB Opinion No. 25, that addresses the
accounting for such options grants. The final interpretation of APB Opinion No.
25 has not been issued, and, therefore, the Company is unable to discuss its
potential impacts relative to these stock option grants.
Note 4. Commitment and Contingencies
During the second quarter of 1999, Intermedia assigned two capital
leases to the Company for property related to the Company's data centers. The
costs associated with the leased property were previously accounted for as an
allocation of costs in the carved-out financial statements. Future noncancelable
lease payments at June 30, 1999 are as follows (in thousands):
<TABLE>
<S> <C>
Six months ended December 31, 1999 $ 1,190
Twelve months ended December 31:
2000 2,436
2001 2,502
2002 2,569
2003 2,637
2004 2,708
Thereafter 11,606
-------
25,648
Less amount representing interest (8,712)
-------
Present value of future minimum lease payments $16,936
=======
</TABLE>
7
<PAGE>
DIGEX, INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 5. Income Tax Benefit
In connection with the Parent's contribution of assets on April 30,
1999, the Company recorded a deferred tax liability of $4.8 million. The
deferred tax liability was related to identifiable intangible assets. The
Company's taxable losses and non-deductible expenses experienced since the date
of the contribution resulted in recognition of deferred tax assets in excess of
the deferred tax liability. Accordingly, the Company recorded a $4.8 million
deferred tax benefit during the second quarter of 1999.
Note 6. Related Party Agreements
On April 30, 1999, the Company entered into a General and
Administrative Services Agreement (the "G&A Agreement") with Intermedia. Under
the terms of the G&A Agreement, Intermedia provides the Company with back office
and administrative services such as human resources, finance and accounting, tax
services, investor relations, and information management services. The initial
term of the agreement is two years, and the charge for these services was $6.0
million for the quarter ended June 30, 1999.
The Company also entered into four two year Network Services
Agreements with the Parent. Under the terms of these agreements, the Parent
provides the Company with East and West coast transit, access and managed
firewall services. The charges for these services amounted to $2.7 million for
the quarter ended June 30, 1999. Refer to the "Certain Relationships and Related
Transactions" section of the Amendment No. 4 to the Form S-1 of the Company as
filed with the Commission on July 29, 1999 for further discussion on these
agreements.
Note 7. Subsequent Event
On August 4, 1999, the Company sold 11,500,000 shares of its Class A
Common Stock in an initial public offering. The shares sold represent
approximately 18.7% of the aggregate number of shares of Class A and Class B
Common Stock outstanding. The Parent retains a 97.8% voting interest in the
Company. The net proceeds from the offering were approximately $180.0 million
and can be used only to purchase or construct telecommunications related assets
due to restrictions in Intermedia's debt instruments.
8
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with the
condensed financial statements and related notes herein, and with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited financial statements and related notes included in the
Amendment No. 4 to Form S-1 of the Company, as filed with the Commission on July
29, 1999.
Overview
Digex is a leading provider of managed Web site and application hosting
services to businesses and organizations operating mission-critical, multi-
functional Web sites and Web-based applications. The Company provides the
computer hardware, software, network technology, and systems management
necessary to provide its customers with comprehensive, outsourced managed Web
site hosting and application outsourcing solutions. The Company also offers
related enterprise services such as firewall management and stress testing, and
consulting services, including capacity and migration planning and database
optimization consulting. The Company currently provides such services to a
diversified customer base consisting of over 500 customers. As of June 30, 1999,
the Company owned and managed 1,525 servers, Windows NT and UNIX-based, in its
two state-of-the-art data centers, strategically positioned on the East and West
coasts of the United States.
Revenue. The Company's revenues consist primarily of monthly fees from
its managed Web site hosting services. Contracts for these services are
typically between one and three years in duration. In addition to Web hosting,
the Company also offers integrated business solutions, enterprise service and
consulting services and believes that it will begin to derive increasing amounts
of revenues from the sale of these services in the future.
Costs and Expenses. Costs and expenses include:
. Cost of operations;
. Cost of services;
. Selling, general and administrative expenses; and
. Depreciation and amortization expense.
Cost of operation consists primarily of the costs for network
connectivity and firewall services. Cost of services consists primarily of
facilities administration expenses including rent, maintenance and utilities to
support the data centers and of salaries and related benefits for the Company's
technical operations. Selling, general and administrative expenses consist of
salaries and benefits for marketing, sales, support personnel, advertising
costs, consultants' fees, provision for doubtful accounts and other
miscellaneous expenses. Depreciation and amortization consist primarily of
depreciation of the data center equipment and related assets and amortization of
intangible assets.
Plan of Operation
The Company plans to expand its managed Web hosting business by
focusing on large companies which are looking to develop a presence on the
Internet, eventually provide e-commerce business solutions to their customers
and outsource the management of their Web sites and related operations.
Currently, the Company is constructing two additional state-of-the-art data
centers on the East and West coasts to substantially expand its existing
capacity. The Company believes that the new data centers will place Digex in a
better competitive position to successfully provide outsourced solutions of
scaleable Web hosting and integrated business solutions. The Company has
recently begun to offer integrated business solutions (Web-enabled business
applications), enterprise services, such as stress testing, and consulting
services, and believes that it will derive increasing amounts of revenue from
these services in the future.
Results of Operations
The following table presents, for the periods indicated, certain
information derived from the Unaudited Condensed Statements of Operations of the
Company, expressed in percentages of revenue:
9
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
------------------------------------ --------------------------------------
1999 1998 1999 1998
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues: 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of operations 21.3 31.4 19.7 27.6
Cost of services 27.5 33.0 33.7 31.0
Selling, general and administrative 147.8 97.5 121.4 96.0
Depreciation and amortization 44.8 42.7 45.3 47.0
-----------------------------------------------------------------------------
Total costs and expenses 241.4 204.6 220.1 201.6
Loss from operations (141.4) (104.6) (120.1) (101.6)
Interest expense (1.9) - (1.1) -
-----------------------------------------------------------------------------
Net loss before income tax benefit (143.3) - (121.2) -
-----------------------------------------------------------------------------
Income tax benefit 38.4 - 22.0 -
-----------------------------------------------------------------------------
Net loss (104.9) (104.6) (99.2) (101.6)
=============================================================================
</TABLE>
Quarter Ended June 30, 1999 Compared to Quarter Ended June 30, 1998
Revenue
Total revenue increased 165.8% to $12.6 million for the second quarter
of 1999 compared to $4.8 million for the same period in 1998. The increase in
revenue is primarily due to a significant increase in the number of servers per
customer and revenue per server, as well as new customer additions as compared
to the same period in 1998. The Company's installed base of servers increased
94% from 788 at June 30, 1998 to 1,525 at June 30, 1999. In addition, the
Company experienced a 13.6 % increase in customers compared to June 30, 1998.
Costs and Expenses
Cost of operations increased 80.7% to $2.7 million for the second
quarter of 1999 compared to $1.5 million for the second quarter of 1998. The
increase was due to additional network costs resulting from the Company's
expanded customer base and increase in service offerings since July 1, 1998. As
a percentage of revenue, cost of operations decreased to 21.3% for the second
quarter of 1999 compared to 31.4% for the same period in 1998 as a result of
improved network utilization associated with the revenue improvement discussed
above.
Cost of services increased 122.0% to $3.5 million for the second
quarter of 1999 compared to $1.6 million for the same period in 1998. The
increase is primarily related to the increased level of operations and the
expansion of two new data centers including costs related to the hiring of
additional personnel in customer service, engineering, and facilities
administration supporting server growth. As a percentage of revenue, total cost
of services decreased to 27.5% for the second quarter of 1999 compared to 33.0%
for the same period in 1998 due primarily to economies of scale. The Company
expects that cost of services will increase during the remainder of the year as
a result of two new data centers becoming operational.
Selling, general and administrative expenses increased 302.2% to $18.7
million for the second quarter of 1999 compared to $4.6 million for the same
period in 1998. The increase is attributable to the cost of hiring additional
sales and marketing personnel, the cost associated with the G&A Agreement with
Intermedia and a provision for doubtful accounts. During the second quarter of
1999, the Company also added key executive management to support the growth of
the business. During the quarter ended June 30, 1998, the web hosting business
operated as a division within Intermedia. During the quarter ended June 30,
1999, as part of Digex's growth strategy, the Company began building up its
infrastructure to operate as a public company. As a percentage of revenue, total
selling, general and administrative expenses increased to 147.8% for the second
10
<PAGE>
quarter of 1999 compared to 97.5% for the same period in 1998. The Company's
growth strategy will continue to require significant sales and marketing
activities, including an expansion of its sales force and further development of
brand name recognition. The Company will continue to build its personnel base to
support its growth strategy. Finally, in connection with the completion of the
initial public offering on August 4, 1999, the Company granted stock options to
certain employees at an exercise price below market value. As such, the Company
will record approximately $12.2 million of deferred compensation to be expensed
over a four-year vesting period commencing in the third quarter of 1999.
Depreciation and amortization expenses increased 178.8% to $5.7
million for the second quarter of 1999 compared to $2.0 million for the same
period in 1998. The increase is related to additional servers installed and
other facilities and equipment placed in service since July 1, 1998. The Company
expects increases in depreciation charges for the remainder of 1999 due to the
continued expansion and construction of the new data centers that are expected
to be completed during the second half of 1999.
Interest Expense
Interest expense of $0.2 million for the second quarter of 1999
resulted from the capital leases assigned by Intermedia to the Company.
Net Loss Before Income Tax Benefit
Net loss before income tax benefit increased 263.8% to $18.1 million
for the second quarter of 1999 compared to $5.0 million for the same period in
1998. As more fully discussed above, the increased loss is attributable to the
Company's growth strategy costs in excess of current period revenues.
Income Tax Benefit
In connection with the Parent's contribution of assets on April 30,
1999, the Company recorded a deferred tax liability of $4.8 million. The
deferred tax liability was related to identifiable intangible assets. The
taxable losses and non-deductible expenses experienced since the date of the
contribution resulted in recognition of deferred tax assets in excess of the
deferred tax liability. Accordingly, the Company recorded a $4.8 million
deferred tax benefit during the second quarter of 1999.
EBITDA
EBITDA, as defined below, decreased 314.3% from negative $2.9 million
in the second quarter of 1998 to negative $12.2 million for the second quarter
of 1999. The decrease is primarily attributable to costs associated with the
Company's growth strategy. The Company expects to continue generating negative
EBITDA for the remainder of 1999. Costs associated with the administration and
maintenance of the new data centers and increased selling, general and
administrative costs will continue to represent a large portion of the Company's
expenses during its planned expansion. In addition, the Company is experiencing
rapid growth in marketing and selling expenses as new customers are acquired.
EBITDA consists of earnings (net loss) before interest, income taxes,
depreciation, and amortization. EBITDA does not represent funds available for
management's discretionary use and is not intended to represent cash flow from
operations. EBITDA 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 the results of operations and cash flows. In
addition, EBITDA is not a term defined by generally accepted accounting
principles and as a result EBITDA may not be comparable to similarly titled
measures used by other companies. However, the Company believes that EBITDA is
relevant and useful information that is often reported and widely used by
analysts, investors and other interested parties in the Web hosting industry.
Accordingly, the Company is disclosing this information to permit a more
comprehensive analysis of the Company's operating performance, as an additional
meaningful measure of performance and liquidity, and to provide additional
information with respect to the Company's ability to meet future debt service,
capital expenditures and working capital requirements.
11
<PAGE>
Six Months Ended June 30, 1999 Compared to Six Months Ended June 30, 1998
Revenue
Total revenue increased 155.4% to $22.0 million for the six months
ended June 30, 1999 compared to $8.6 million for the same period in 1998. The
increase in revenue is primarily due to a significant increase in the number of
servers per customer and revenue per server, as well as new customer additions
as compared to the same period in 1998. The Company's installed based of
servers increased 94% from 788 at June 30, 1998 to 1,525 at June 30, 1999. In
addition, the Company experienced a 13.6% increase in customers compared to June
30, 1998.
Costs and Expenses
Cost of operations increased 82.8% to $4.3 million for the six months
ended June 30, 1999 compared to $2.4 million for the same period in 1998. The
increase was due to additional network costs resulting from the Company's
expanded customer base and increase in service offerings since July 1, 1998. In
addition, the Company has more servers on line since July 1, 1998. As a
percentage of revenue, cost of operations decreased to 19.7% for the six months
ended June 30, 1999 compared to 27.6% for the same period in 1998 as a result of
improved network utilization associated with the revenue improvement discussed
above.
Cost of services increased 177.9% to $7.4 million for the six months
ended June 30, 1999 compared to $2.7 million for the same period in 1998. The
Company has incurred increased facilities and engineering costs to support its
growth and to support the expansion and construction of two new data centers. As
a percentage of revenue, cost of services increased slightly to 33.7% for the
six months ended June 30, 1999 compared to 31.0% for the same period in 1998.
Selling, general and administrative expenses increased 222.9% to $26.7
million for the six months ended June 30, 1999 compared to $8.3 million for the
same period in 1998. The increase is attributable to the cost of hiring
additional sales and marketing personnel over the same period in 1998, the cost
associated with the G&A Agreement with Intermedia and a provision for doubtful
accounts. The Company has experienced significant growth since last year,
requiring additional back office support costs. As a percentage of revenue,
total selling, general and administrative expenses increased to 121.4% for the
six months ended June 30, 1999 compared to 96.0% for the same period in 1998 due
primarily to the significant administrative requirements to support the
Company's growth strategy. The Company's growth strategy will continue to
require significant sales and marketing activities, including an expansion of
its sales force and further development of brand name recognition. The Company
will continue to build its personnel base to support its growth strategy.
Finally, in connection with the completion of the initial public offering on
August 4, 1999, the Company granted stock options to certain employees at an
exercise price below market value. As such, the Company will record
approximately $12.2 million of deferred compensation to be expensed over a four-
year vesting period commencing in the third quarter of 1999.
Depreciation and amortization expenses increased 145.8% to $10.0
million for the six months ended June 30, 1999 compared to $4.1 million for the
same period in 1998. The increase is related to additional servers installed and
other facilities and equipment placed in service since July 1, 1998. The Company
expects increases in depreciation charges for the remainder of the year due to
the continued expansion and construction of two new data centers that are
expected to be completed during the second half of 1999.
Interest Expense
Interest expense of $0.2 million for the six months ended June 30,
1999 resulted from the capital leases assigned by Intermedia to the Company.
Net Loss Before Income Tax Benefit
Net loss before income tax benefit increased 204.6% to $26.7 million
for the six months ended June 30, 1999 compared to $8.8 million for the same
period in 1998. As more fully discussed above, the increased loss is
attributable to growth strategy costs in excess of current period revenues.
12
<PAGE>
Income Tax Benefit
In connection with the Parent's contribution of assets on April 30,
1999, the Company recorded a deferred tax liability, net of deferred tax assets,
of $4.8 million. The deferred tax liability was related to certain identifiable
intangible assets. The taxable losses and non-deductible expenses experienced
since the date of the contribution resulted in recognition of deferred tax
assets in excess of the deferred tax liability. Accordingly, the Company
recorded a $4.8 million deferred tax benefit during the second quarter of 1999.
EBITDA
EBITDA, as defined below, decreased 250.2% from negative $4.7 million
for the six months ended June 30, 1998 to negative $16.5 million for the six
months ended June 30,1999. The decrease is primarily attributable to costs
associated with the Company's growth strategy. The Company expects to continue
generating negative EBITDA for the remainder of 1999. Costs associated with the
administration and maintenance of the new data centers and increased selling,
general and administrative costs will continue to represent a large portion of
the Company's expenses during its planned expansion. In addition, the Company is
experiencing rapid growth in marketing and selling expenses as new customers are
acquired.
EBITDA consists of earnings (net loss) before interest, income taxes,
depreciation, and amortization. EBITDA does not represent funds available for
management's discretionary use and is not intended to represent cash flow from
operations. EBITDA 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 the results of operations and cash flows. In
addition, EBITDA is not a term defined by generally accepted accounting
principals and, as a result, EBITDA may not be comparable to similarly titled
measures used by other companies. However, the Company believes that EBITDA is
relevant and useful information that is often reported and widely used by
analysts, investors and other interested parties in the Web hosting industry.
Accordingly, the Company is disclosing this information to permit a more
comprehensive analysis of the Company's operating performance, as an additional
meaningful measure of performance and liquidity, and to provide additional
information with respect to the Company's ability to meet future debt service,
capital expenditures and working capital requirements.
Liquidity and Capital Resources
The Company's growth strategy requires substantial cash to support
planned capital expenditures and fund operating expenses. Capital expenditures
and operating expenses to date have principally been funded by Intermedia. In
addition, the Company expects its trend of operating losses to continue for the
next several years to support its growth strategy. On August 4, 1999, the
Company sold 11,500,000 shares of Class A Common Stock in an initial public
offering. The net proceeds from the offering were approximately $180.0 million
and must be used to purchase or construct telecommunications related assets due
to restrictions in Intermedia's debt instruments.
To provide for the funding of the Company's operating expenses, the
Company has entered into an agreement with Intermedia pursuant to which
Intermedia will purchase from the Company certain telecommunications related
assets (at Digex's cost) that are purchased by the Company with the net proceeds
of the initial public offering. The proceeds the Company receives from the sale
of these assets to Intermedia are considered unrestricted and will be used to
fund the Company's operating expenses.
Capital expenditures for the six months ended June 30, 1999 were
approximately $77.3 million. As more fully discussed in the footnotes to the
financial statements, the Company was capitalized by Intermedia's contribution
of assets and certain liabilities amounting to approximately $115.1 million on
April 30, 1999. Additionally, during May and June of 1999, Intermedia
contributed additional capital of $32.7 million to Digex, principally by way of
contributions of telecommunications assets by Intermedia to Digex. Finally,
Intermedia assigned two capital leases for data centers with a value of $17.0
million to the Company in the second quarter of 1999.
13
<PAGE>
The Company has used cash in its operating and investing activities of
$87.3 million and $12.1 million during the six months ended June 30, 1999 and
1998, respectively. Net cash used for operating activities in each of these
periods was primarily the result of operating expenses and changes in working
capital. Net cash used for investing activities in each of these periods was
primarily for data center infrastructure including server installations. These
cash usages have been funded by permanent contributions of capital by
Intermedia. Such contributions amounted to $87.4 million and $12.1 million
during the six months ended June 30, 1999 and 1998, respectively. Although the
Company has plans to invest significantly in additional property and equipment
over the next twelve months, it has no material commitments for such items other
than the completion of two new data centers. The Company expects to continue
experiencing negative cash flow from operating and investing activities due to
its plans for expansion and growth of the business.
The Company does not plan to pay dividends on any of its common stock
in the foreseeable future. The Company believes that it has sufficient capital
to sustain its operations and capital expenditure plans into the second half of
2000. However, the Company may require additional funds to finance its planned
capital expenditures during this period and to support its working capital
requirements or for other uses. The Company intends to seek funding from
external sources to meet its cash needs in the future. There can be no assurance
that such funding will be available on terms satisfactory to the Company.
Alternatively, Intermedia may be able to advance funds to the Company to meet
its requirements, but it has no obligation to do so.
Intermedia is (and will continue to be) highly leveraged. At June 30,
1999 Intermedia had outstanding approximately $3.0 billion of debt and other
liabilities including trade payables, and a total of approximately $889.0
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 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
Intermedia's debt instruments, 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 the Company with a source of
funds for its working capital or operating expenses in the future.
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 its computer systems and
applications will function properly beyond 1999, the Company has implemented a
Year 2000 program.
Project and State of Readiness
The Company has developed a five-phase plan that is designed to assess
the impact of the Year 2000 issue on its 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
the mission-critical and non-mission-critical systems as outlined below. The
percentages indicate management's best estimate of completion as of June 30,
1999.
14
<PAGE>
<TABLE>
<CAPTION>
_________________________________________________________________________________________________________
Phase Completion IT Completion Non-IT Completion
---------------------------------------------------------------------------------------------------------
<S> <C> <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% 10/31/99
---------------------------------------------------------------------------------------------------------
V. Fully Compliant 50% 9/30/99 50% 11/30/99
---------------------------------------------------------------------------------------------------------
</TABLE>
Due to the fact that 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 is a phase of awareness and education. The outcome of this phase
was the Company's understanding of the criticality, risks, size and scope of its
Year 2000 problem.
Phase II Problem Determination
In this phase the Company performed an inventory and assessment to
determine which portions of its hardware and software would have to be replaced
or modified in order for its office equipment and information management systems
to function properly after December 31, 1999. Such determinations were based in
part on representations made by hardware and software vendors as to the Year
2000 compliance of systems utilized by the Company. However, there can be no
assurances that any vendor representations received by the Company were accurate
or complete. The Company also conducted a risk assessment to identify those
systems whose failure would be expected to result in the greatest risk to the
Company's business. As of June 30, 1999, Phase II of the plan was 100% complete
with respect to both IT and 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, the Company 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 the Company believes
it has substantially completed developing its 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
The Company is actively engaged in Phase IV, utilizing both internal
and external resources to reprogram, or replace, and test certain components of
its networks and information processing systems for Year 2000 compliance and
scheduling the installation of other necessary hardware and software upgrades.
Although the Company intends to conduct tests to ensure its equipment is Year
2000 compliant, it will focus primarily on those systems whose failure would
pose the greatest risks to the Company's operations. There can be no assurance
that the Company has identified all mission-critical IT or Non-IT systems. The
Company will likely not test all of its 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 Non-IT. The
Company expects to complete Phase IV for its IT by September 30, 1999 and its
Non-IT by October 31, 1999.
Phase V Fully Compliant
The Company plans to be fully compliant on mission-critical components no
later than November 30, 1999, which is prior to any anticipated impact on its
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
15
<PAGE>
limited availability of compliant software and hardware and prioritization of
mission critical systems. As of June 30, 1999, the Company estimates that its
remediation efforts are approximately 50% complete for IT and Non-IT.
The Company believes that it has allocated adequate resources for this
purpose and expects Phase V to be successfully completed on a timely basis.
However, there can be no assurance that it will successfully implement all of
the necessary upgrades or replacements in a timely manner. The Company presently
believes that with modifications to existing software and conversions to new
software and hardware, the Year 2000 issue will not pose significant operational
problems for its systems or have any significant adverse impact on the Company's
customers or business units. However, if such modifications and conversions are
not made, or are not completed in a timely fashion, the Year 2000 problems could
have a material impact on the operations of the Company.
Costs
The Company has tracked Year 2000 costs on an enterprise-wide basis,
segregating its 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 the Company's capital expenditure program. The
estimated costs of the project and the date which the Company has established to
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources, third party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved, and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, unanticipated mergers
and acquisitions, and similar uncertainties.
A summary of historical and estimated costs for the Year 2000 project
are listed below (in millions):
<TABLE>
<CAPTION>
External Internal
-------------------------------------------
<S> <C> <C>
Historical through June 30, 1999 $0.4 $0.2
Estimated for remainder of 1999 2.0 1.1
-------------------------------------------
Total $2.4 $1.3
Software/Hardware
---------------------
Historical through June 30, 1999 $0.5
Estimated for remainder of 1999 0.5
---------------------
Total $1.0
</TABLE>
Risks and Contingency Plan
While the Company is working to test its own mission-critical systems
for Year 2000 compliance, the Company does not control the systems of its
suppliers. The Company is currently seeking assurance from its suppliers and
strategic business partners regarding the Year 2000 readiness of their systems.
The Company is currently reviewing data provided by the Telco Year 2000 Forum to
ensure that its suppliers' and business partners' systems will accurately
interact with the Company's systems into and beyond the Year 2000. The Telco
Year 2000 Forum was formed by some of the largest U.S. telecommunications
companies to pool and share testing resources for common network components and
to perform network interoperability testing. Importantly, the Company is relying
on Intermedia's Year 2000 compliance efforts to ensure that its connectivity
with Intermedia is available after December 31, 1999. Notwithstanding these
measures there is some risk that the interaction of the Company's systems and
those of its 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
16
<PAGE>
Internet worldwide, the Company's ability to provide service to its 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, the ability of the Company to service its customers may be
adversely impacted as well. Any such impact could have a material adverse effect
on the Company's 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,
the Company is unable to determine at this time whether the consequences of Year
2000 failures will have a material impact on the Company's results of
operations, liquidity or financial condition. The Year 2000 Project is expected
to significantly reduce the Company's level of uncertainty about the Year 2000
problem and, in particular, about the Year 2000 compliance and readiness of its
material suppliers and business partners. The Company believes 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 Commission release regarding Year 2000 disclosure, the
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 the Company; widespread disruption of the services
provided by common communications carriers; similar disruption to the means and
modes of transportation for the Company and its employees, contractors,
suppliers, and customers; significant disruption to the Company's ability to
gain access to, and remain working in, office buildings and other facilities;
the failure of substantial numbers of the Company's 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 the Company cannot operate effectively after December 31, 1999, the
Company could, among other things, face substantial claims by customers or loss
of revenue due to service interruptions, inability to fulfill contractual
obligations or to 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. The Company
could also experience an inability by customers and others to pay, on a timely
basis or at all, obligations owed to the Company. 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, the Company cannot
predict whether such legislation will ultimately be enacted or whether it would
afford the Company and meaningful protection from any potential lawsuits.
In addition, some customers have an option to terminate their
agreements with the Company if its facilities are not Year 2000 compliant by
July 1, 1999. Even though the Company was not Year 2000 compliant on July 1,
1999, thus far no customers have terminated their contracts for this reason, and
the Company does not believe that any significant number of customers will
exercise their option to terminate their agreements. However, if most of the
customers who have the option to terminate were to exercise that option, the
Company's revenues could decline. Additionally, the Company cannot evaluate its
customer's Year 2000 readiness. The Company believes it is not responsible for
the Year 2000 compliance of its customer's Web sites and the Company will notify
the customers in writing of this fact to urge them to ensure that their sites
are Year 2000 compliant. Some customers sites may fail due to Year 2000 issues
and, while the Company believes that the failure of any one customer's site will
not affect other customer's sites or the Company's network, the Company cannot
guarantee that this will be 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 the Company might otherwise have a difficult time realizing
the expected revenue from such a customer.
The Company believes that its critical systems will be Year 2000
compliant before January 1, 2000. Intermedia's Year 2000 Executive Steering
Committee convened in first quarter 1999 and has met regularly throughout the
year. This committee includes members of Intermedia's management team and the
Company's President, Sales and Service Delivery Group, Nancy Faigen. The
committee is working to oversee and allocate additional resources, if required,
for the final plans for Year 2000
17
<PAGE>
readiness. Having identified its mission-critical systems and those of its
suppliers, and the associated risks of failure to ensure that those systems are
Year 2000 ready, the Company is in the process of devising contingency plans
that 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
the Company and will be ready for implementation by the fourth quarter of 1999.
Information Regarding Forward-Looking Statements
The information set forth above in "Management's Discussion and
Analysis of Financial Conditions and Results of Operations" includes forward-
looking statements that involve numerous risks and uncertainties. Forward-
looking statements can be identified by the use of forward-looking terminology
such as "estimates," "projects," "anticipates," "expects," "intends,"
"believes," or the negative thereof or other variations thereon or comparable
terminology or by discussions of strategy that involve risks and uncertainties.
The Company's actual results could differ materially from those anticipated in
such forward-looking statements as a result of certain factors, including those
set forth in the section entitled "Risk Factors" in the Amendment No. 4 to Form
S-1 of the Company as filed with the Commission on July 29, 1999.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
No changes.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The Company does not believe that there are any pending or threatened
legal proceedings that, if adversely determined, would have a material adverse
effect on it.
ITEM 2. Changes in Securities and Use of Proceeds
(d)
On April 30, 1999, Intermedia contributed approximately $115.1 million
of assets and certain liabilities to the Company in exchange for 50,000,000
shares of Class B Common Stock of the Company. On July 29, 1999, Amendment No. 4
to the Company's Registration Statement on Form S-1 (File No. 333-77105) (the
"Registration Statement") was declared effective by the Commission. Digex
commenced an initial public offering of its shares of Class A Common Stock (the
"Offering") on July 30, 1999 and consummated the Offering on August 4, 1999. The
managing underwriters of the Offering were Bear, Stearns & Co. Inc., Donaldson,
Lufkin & Jenrette, CIBC World Markets and Legg Mason Wood Walker, Incorporated.
Pursuant to the Registration Statement, the Company registered and sold in the
Offering 11,500,000 shares of its Class A Common Stock, $.01 par value. The
gross proceeds to the Company from the sale of the shares of the Class A Common
Stock registered under the Registration Statement was $195.5 million. The
expenses incurred by the Company in connection with the issuance and
distribution of the Class A Common Stock are estimated to be $15.5 million,
which includes $13.7 million of indirect payments of underwriting discounts and
commissions and $1.8 million of direct payments of other issuance and
distribution expenses, as disclosed in Part II of the Registration Statement.
The net proceeds of the Offering are estimated to be $180.0. At June 30, 1999,
the end of the period covered by this report, no proceeds from the Offering were
received or used by the Company.
ITEM 3. Defaults Upon Senior Securities
None.
18
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
On April 26, 1999, Intermedia, as the then ultimate sole stockholder
of the Company, approved the execution of an agreement whereby the Parent would
transfer certain of its assets to the Company, and the Company would issue
50,000,000 shares of its Class B Common Stock to the Parent and assume certain
liabilities of the Parent.
ITEM 5. Other Information
None.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Number Exhibit
- ------ -------
3.1 Certificate of Incorporation of Digex, as amended.
3.2 Bylaws of Digex. Incorporated herein by reference to Digex's
registration statement on Form S-1 (File No. 333-
77105) filed with the Commission on April 27, 1999.
27.1 Financial Data Schedule (For SEC Use Only)
(b) Reports on Form 8-K
None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: September 13, 1999
DIGEX, INCORPORATED
(Registrant)
/s/ Bradley E. Sparks
---------------------------
Bradley E. Sparks
Chief Financial Officer
20
<PAGE>
CERTIFICATE OF INCORPORATION
OF
DIGEX, INCORPORATED
FIRST: The name of the corporation is Digex, Incorporated (hereinafter
-----
referred to as the "Corporation").
SECOND: The address of the registered office of the Corporation in the
------
State of Delaware is 1013 Centre Road, Wilmington, Delaware 19805-1297 in the
County of New Castle. The name of its registered agent in the State of Delaware
is CSC United States Corporation Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
-----
activity for which a corporation may be organized under the General Corporation
Laws of the State of Delaware as set forth in Title 8 of the Delaware Code (the
"GCL").
FOURTH: The total number of shares of stock which the Corporation shall
------
have authority to issue is 9,100 shares divided into the following classes:
(i) 6,000 shares of Class A Common Stock, par value $.01 per
share (hereinafter referred to as "Class A Common Stock");
(ii) 3,000 shares of Class B Common Stock, par value $.01 per
share (hereinafter referred to as "Class B Common Stock"); and
(iii) 100 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.
-------------------------------------------------
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.
-1-
<PAGE>
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 (1) 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
(10) 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 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.
-2-
<PAGE>
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" shall be defined as Intermedia Communications Inc., or any of
its Affiliates, (b) "Affiliate" shall mean, 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
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.
-3-
<PAGE>
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 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).
-4-
<PAGE>
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 (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.
FIFTH: The following provisions are inserted for the management of the
-----
business and the conduct of the affairs of the Corporation, and for further
definition, limitation and regulation of the powers of the Corporation and of
its directors and stockholders:
A. The business and affairs of the Corporation shall be managed by
or under the direction of the Board of Directors. In addition to the powers and
authority expressly conferred upon them by the GCL or by this Certificate of
Incorporation or the Bylaws of the Corporation, the directors are hereby
empowered to exercise all such powers and do all such acts and things as may be
exercised or done by the Corporation.
B. The Board of Directors may adopt, amend or repeal the Bylaws of
the Corporation.
C. Election of directors need not be by written ballot.
SIXTH: The officers of the Corporation shall be chosen in such a manner,
-----
shall hold their offices for such terms and shall carry out such duties as are
determined solely by the Board of Directors, subject to the right of the Board
of Directors to remove any officer or officers at any time with or without
cause.
SEVENTH: No director of the Corporation shall be personally liable to the
-------
Corporation or its stockholders for monetary damages for any breach of fiduciary
duty by such a director as a director. Notwithstanding the foregoing sentence,
a director shall be liable to the extent provided by applicable law (i) for any
breach of the director's duty of loyalty to the Corporation or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) pursuant to Section 174 of the
GCL or (iv) for any transaction from which such director derived an improper
personal benefit. This Article SEVENTH is also
-5-
<PAGE>
contained in the Corporation's Bylaws. No amendment to or repeal of this
Article SEVENTH shall apply to or have an effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment or repeal. If the
GCL is amended hereafter to further eliminate or limit the personal liability of
directors, the liability of a director of the Corporation shall be limited or
eliminated to the fullest extent permitted by the GCL, as amended.
EIGHTH: A. Right to Indemnification. Each person who was or is made a
------- ----------------------------
party to or is threatened to be made a party to or is involuntarily involved in
any action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), by reason of the fact that he or she is or was a
director or officer of the Corporation, or is or was serving (during his or her
tenure as director and/or officer) at the request of the Corporation as a
director, officer, employee or agent of another corporation or of a partnership,
joint venture, trust or other enterprise, whether the basis of such Proceeding
is an alleged action or inaction in an official capacity as a director or
officer or in any other capacity while serving as a director or officer, shall
be indemnified and held harmless by the Corporation to the fullest extent
authorized by the GCL (or other applicable law), as the same exists or may
hereafter be amended, against all expense, liability and loss (including
attorneys' fees, judgments, fines, ERISA excise taxes or penalties and amounts
paid or to be paid in settlement) reasonably incurred or suffered by such person
in connection with such Proceeding. Such director or officer shall have the
right to be paid by the Corporation for expenses incurred in defending any such
Proceeding in advance of its final disposition; provided, however, if the GCL
(or other applicable law) requires, the payment of such expenses in advance of
the final disposition of any such Proceeding shall be made only upon receipt by
the Corporation of an undertaking by or on behalf of such director or officer to
repay all amounts so advanced if it should be determined ultimately that he or
she is not entitled to be indemnified under this Article EIGHTH or otherwise.
B. Non-Exclusivity of Rights. The rights conferred by this Article
-----------------------------
EIGHTH shall not be exclusive of any other right which any director, officer,
representative, employee or other agent may have or hereafter acquire under the
GCL or any other statute, or any provision contained in the Corporation's
Certificate of Incorporation or Bylaws, or any agreement, or pursuant to a vote
of stockholders or disinterested directors, or otherwise.
C. Insurance and Trust Fund. In furtherance and not in limitation of
----------------------------
the powers conferred by statute:
(1) the Corporation may purchase and maintain insurance on behalf
of any person who is or was a director, officer, employee or agent of the
Corporation, or is serving at the request of the Corporation as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise, against any liability asserted against him or her
-6-
<PAGE>
and incurred by him or her in any such capacity, or arising out of his or her
status as such, whether or not the Corporation would have the power to indemnify
him or her against such liability under the provisions of law; and
(2) the Corporation may create a trust fund, grant a security
interest and/or use other means (including, without limitation, letters of
credit, surety bonds and/or other similar arrangements), as well as enter into
contracts providing indemnification to the fullest extent permitted by law and
including as part thereof provisions with respect to any or all of the
foregoing, to ensure the payment of such amount as may become necessary to
effect indemnification as provided therein, or elsewhere.
D. Indemnification of Employees and Agents of the Corporation. The
-------------------------------------------------------------
Corporation may, to the extent authorized from time to time by the Board of
Directors, grant rights to indemnification, including the right to be paid by
the Corporation the expenses incurred in defending any Proceeding in advance of
its final disposition, to any employee or agent of the Corporation to the
fullest extent of the provisions of this Article or otherwise with respect to
the indemnification and advancement of expenses of directors and officers of the
Corporation.
E. Amendment. This Article EIGHTH is also contained in the
-------------
Corporation's Bylaws. Any repeal or modification of this Article EIGHTH shall
not change the rights of any officer or director to indemnification with respect
to any action or omission occurring prior to such repeal or modification.
NINTH: Whenever a compromise or arrangement is proposed between this
-----
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of the Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for the Corporation under the
provisions of Section 291 of the GCL or on the application of trustees in
dissolution or of any receiver or receivers appointed for the Corporation under
the provisions of Section 279 of the GCL, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of the
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of the Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of the Corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of the Corporation, as the case
may be, and also on the Corporation.
-7-
<PAGE>
TENTH: The Corporation reserves the right to amend, alter, change,
-----
rescind or repeal any provision contained in this Certificate of Incorporation,
in the manner now or hereafter prescribed by law, and all rights and powers
conferred upon stockholders, directors and officers are subject to this
reservation.
ELEVENTH: The name and mailing address of the Sole Incorporator is as
--------
follows:
Name Mailing Address
---- ---------------
Jill Simon-Reisman c/o Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas
New York, New York 10036
I, THE UNDERSIGNED, being the sole incorporator hereinbefore named,
for the purpose of forming a corporation pursuant to the GCL, do make this
Certificate, hereby declaring and certifying that this is my act and deed and
the facts herein stated are true, and accordingly have hereunto set my hand on
April 26,1999 .
/s/ Jill Simon-Reisman
---------------------------
Jill Simon-Reisman
-8-
<PAGE>
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 3rd day of August, 1999.
By: /s/ Mark K. Shull
-----------------------
Mark K. Shull
President and Chief Executive Officer
6
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 13,214
<ALLOWANCES> 2,520
<INVENTORY> 0
<CURRENT-ASSETS> 13,573
<PP&E> 139,795
<DEPRECIATION> 14,576
<TOTAL-ASSETS> 168,476
<CURRENT-LIABILITIES> 5,530
<BONDS> 16,936
0
0
<COMMON> 500
<OTHER-SE> 137,690
<TOTAL-LIABILITY-AND-EQUITY> 168,476
<SALES> 0
<TOTAL-REVENUES> 22,021
<CGS> 0
<TOTAL-COSTS> 11,776
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 2,045
<INTEREST-EXPENSE> 239
<INCOME-PRETAX> (26,687)
<INCOME-TAX> 4,839
<INCOME-CONTINUING> (21,848)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (21,848)
<EPS-BASIC> (0.44)
<EPS-DILUTED> (0.44)
</TABLE>
