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 September 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)
(240) 264-2000
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 [X] No [ ]
As of November 5, 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
<TABLE>
<CAPTION>
Page
No.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements (Unaudited):
Condensed Statements of Operations--Three and nine months ended September 30, 1999 and 1998.............. 3
Condensed Balance Sheets--September 30, 1999 and December 31, 1998....................................... 4
Condensed Statements of Cash Flows--Nine months ended September 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
</TABLE>
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 Nine Months Ended
---------------------------------------- -----------------------------------------
September 30, 1999 September 30, 1998 September 30, 1999 September 30, 1998
------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Revenues $ 16,111 $ 6,242 $ 38,132 $ 14,863
Costs and expenses:
Cost of operations 2,698 1,741 7,044 4,119
Cost of services 6,331 1,738 13,761 4,412
Selling, general and administrative 20,628 4,306 47,355 12,582
Depreciation and amortization 8,146 2,027 18,112 6,081
-------------- ------------- --------- ----------
Total costs and expenses 37,803 9,812 86,272 27,194
-------------- ------------- --------- ----------
Loss from operations (21,692) (3,570) (48,140) (12,331)
Other income (expense)
Interest expense (373) - (612) -
Interest and other income 1,293 - 1,293 -
-------------- ------------- --------- ----------
Net loss before income tax benefit (20,772) (3,570) (47,459) (12,331)
Income tax benefit - - 4,839 -
-------------- ------------- --------- ----------
Net loss $ (20,772) $ (3,570) $ (42,620) $ (12,331)
============== ============= ========= ==========
Net loss per common share - basic and diluted $ (0.36) $ (0.07) $ (0.81) $ (0.25)
============== ============= ========= ==========
Shares used in computing basic and diluted
net loss per share 57,250,000 50,000,000 52,443,223 50,000,000
============== ============= ========= ==========
</TABLE>
See accompanying notes.
3
<PAGE>
DIGEX, INCORPORATED
CONDENSED BALANCE SHEETS
(Unaudited)
(In thousands, except share information)
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------ -------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 132,844 $ -
Accounts receivable, less allowance for
doubtful accounts of $4,461 in 1999 and $719 in 1998 14,325 6,127
Prepaid expenses and other current assets 1,229 890
---------------- ---------------
Total current assets 148,398 7,017
Property and equipment, net 165,055 39,059
Intangible assets, net 28,211 31,204
Other assets 478 459
---------------- ---------------
Total assets $ 342,142 $ 77,739
================ ===============
Liabilities and Stockholders'/Owner's Equity
Current liabilities:
Accounts payable $ 4,827 $ 3,341
Accrued expenses 3,401 843
Deferred revenue - 621
Due to Parent 947 -
Current portion of note payable 1,235 -
Current portion of capital lease obligations 966 981
---------------- ---------------
Total current liabilities 11,376 5,786
Note payable 2,477 -
Capital lease obligations 15,753 1,108
---------------- ---------------
Total liabilities 29,606 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; 11,500,000 shares issued and outstanding 115 -
Class B common stock, $.01 par value; 50,000,000 shares
authorized, issued and outstanding 500 -
Additional paid-in capital 354,011 -
Accumulated deficit (30,389) -
Deferred compensation (11,701) -
Owner's net investment - 70,845
---------------- ---------------
Total stockholders'/owner's equity 312,536 70,845
---------------- ---------------
Total liabilities and stockholders'/owner's equity $ 342,142 $ 77,739
================ ===============
</TABLE>
See accompanying notes.
4
<PAGE>
DIGEX, INCORPORATED
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months Ended
-------------------------------------------------------
September 30, 1999 September 30, 1998
---------------------- ----------------------
<S> <C> <C>
Operating activities
Net loss $ (42,620) $ (12,331)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 18,112 6,081
Deferred income taxes (4,839) -
Provision for doubtful accounts 3,918 823
Amortization of deferred compensation 509 -
Loss on sale of telecommunications equipment 94 -
Changes in operating assets and liabilities:
Accounts receivable (12,115) (2,650)
Prepaid expenses and other current assets (340) (163)
Other assets (19) -
Accounts payable, accrued expenses and deferred revenue 8,228 787
Due to Parent 947 -
---------- -----------
Net cash used in operating activities (28,125) (7,453)
Investing activities
Purchase of telecommunications equipment (119,426) (18,352)
Financing activities
Proceeds from issuance of common stock, net of issuance costs 179,244 -
Principal payments on long-term debt and capital lease obligations (1,273) -
Net contributions from Parent 102,424 25,805
---------- -----------
Net cash provided by financing activities 280,395 25,805
Cash at beginning of period - -
---------- -----------
Cash at end of period $ 132,844 $ -
========== ===========
Supplemental disclosures of cash flow information
Assets purchased under capital lease obligations $ 17,111 $ 658
Asset purchased by issuance of note payable 4,672 -
Interest paid 528 -
</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. The Company is a
majority-owned subsidiary of Intermedia Communications Inc. ("Intermedia" or
"the Parent"). Prior to its incorporation, the Company's business was operated
as the managed Web site and application hosting 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. As discussed more completely in Note 2, the Parent
contributed 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 its Class A
Common Stock in an initial public offering (also referred to as the "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 $179.2 million and can be used only to purchase telecommunications
related assets due to restrictions in Intermedia's debt instruments.
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 nine month
periods ended September 30, 1999 are not necessarily an indication of the
results that may be expected for the year ended 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 managed Web site and application
hosting unit of Intermedia. The Company's accumulated deficit of $30.4 million
arose after April 30, 1999. Accumulated losses and capital contributions from
the Parent were included in owner's net investment prior to April 30, 1999 and
were transferred to additional paid-in capital upon the capitalization of the
Company. The Parent contributed approximately $115.1 million in assets and
certain liabilities on April 30, 1999. The Parent also contributed additional
capital of $48.1 million to the Company beginning May 1 through the date of the
Offering, principally by way of contributions of telecommunications assets.
These contributions were accounted for at the Parent's underlying book values on
the date of contribution.
The following table reflects the combined assets and liabilities
contributed to the Company through the Offering date, August 4, 1999 (in
millions):
Amount
-----------
Current assets $ 10.3
Property and equipment 118.1
Intangibles and other assets 31.0
Liabilities (4.8)
Operating expenses 8.6
-----------
Total capital contribution $163.2
===========
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
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 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 Nine Months Ended
September 30, September 30,
----------------------------- ------------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Numerator for basic and diluted loss per
share - net loss $ (20,772) $ (3,570) $ (42,620) $ (12,331)
Denominator for basic and diluted loss per
share - weighted-average shares 57,250,000 50,000,000 52,443,223 50,000,000
=========== ========== ========== ==========
Net loss per share of common stock -
- basic and diluted $ (.36) $ (.07) $ (.81) $ (.25)
=========== ========== ========== ==========
</TABLE>
Unexercised options to purchase 5,477,750 shares of Class A Common
Stock as of September 30, 1999 were not included in the computations of diluted
loss per share because assumed exercise/conversion would be anti-dilutive.
As of September 30, 1999, unexercised options to purchase 1,036,900
shares of Class A Common Stock (included in the total number above) were granted
by the Company to employees of the Parent. 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 option grants. The final interpretation of APB
Opinion No. 25 has not been issued, and, therefore, the Company is unable to
discuss the potential impact 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 September 30, 1999 are as follows (in millions):
Three months ended December 31, 1999 $ 0.6
Twelve months ended December 31:
2000 2.4
2001 2.5
2002 2.6
2003 2.6
2004 2.7
Thereafter 11.6
---------
25.0
Less amount representing interest ( 8.3)
---------
Present value of future minimum lease payments $ 16.7
=========
7
<PAGE>
DIGEX, INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS -- (Continued)
(Unaudited)
Note 5. Deferred Compensation
In connection with the completion of the Offering, the Company granted
1,017,500 stock options to certain employees of the Company at an exercise price
below market value. The Company recorded approximately $12.2 million of deferred
compensation, a separate component of stockholders' equity, to be expensed over
a four-year vesting period commencing on the date of the Offering. Approximately
$0.5 million of the deferred compensation was amortized during the third quarter
of 1999 and was recorded as selling, general and administrative expenses.
Note 6. 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. Since the
date of the contribution, the Company experienced taxable losses and
non-deductible expenses that 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 7. 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 $4.5
million and $10.5 million for the three and nine months ended September 30,
1999, respectively.
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 Internet transit, Internet access and managed
firewall services. The charges for these services amounted to $2.6 million and
$5.3 million for the three and nine months ended September 30, 1999,
respectively. 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.
The Company entered into an agreement with the Parent to sell to the
Parent certain telecommunications related assets that are purchased by the
Company with the net proceeds of the Offering. The assets are sold to the Parent
at the Company's cost. The proceeds from the sale of telecommunications related
assets to the Parent were approximately $19.5 million during the three and nine
months ended September 30, 1999. These proceeds are considered unrestricted and
are used to fund the Company's operating expenses.
As of September 30, 1999, unexercised options to purchase 230,000
shares of its Class A Common Stock were granted by the Company to members of its
Board of Directors.
As discussed in Notes 2, 3 and 4, certain other transactions between
the Company and the Parent occurred during the three and nine months ended
September 30, 1999.
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, managed Web site hosting
and application outsourcing solutions. The Company also offers related
enterprise services such as firewall management, stress testing and consulting
services, including capacity and migration planning and database optimization
consulting. As of September 30, 1999, the Company managed 1,993 servers, Windows
NT and UNIX-based, in its 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 and application 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
services 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:
o Cost of operations;
o Cost of services;
o Selling, general and administrative expenses; and
o Depreciation and amortization expense.
Cost of operations 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 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 expenses consist primarily
of depreciation of the data centers, servers and related equipment and
amortization of the Company's intangible assets.
Plan of Operation
The Company plans to expand its Web hosting business by focusing on
large companies which are looking to develop a presence on the Internet by both
providing e-commerce business solutions to their customers and outsourcing the
management of their Web sites and related operations. The Company has
substantially completed the construction of two additional state-of-the-art data
centers on the East and West coasts, significantly expanding its existing
capacity. The Company anticipates that these new data centers, when operating at
full capacity, will support servers generating approximately $500 million in
annualized revenue. In addition, the Company believes that the new data centers
will place Digex in a stronger competitive position to successfully provide
outsourced solutions of scaleable Web hosting and integrated business solutions.
The new data centers are expected to be fully operational during the fourth
quarter of 1999. The Company recently began 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.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 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 16.7 27.9 18.4 27.7
Cost of services 39.3 27.8 36.1 29.7
Selling, general and administrative 128.0 69.0 124.2 84.7
Depreciation and amortization 50.6 32.5 47.5 40.9
---------------- --------------- ---------------- -----------------
Total costs and expenses 234.6 157.2 226.2 183.0
---------------- --------------- ---------------- -----------------
Loss from operations (134.6) (57.2) (126.2) (83.0)
Other income (expense):
Interest expense (2.3) - (1.6) -
Interest and other income 8.0 - 3.3 -
---------------- --------------- ---------------- -----------------
Net loss before income tax benefit (128.9) (57.2) (124.5) (83.0)
Income tax benefit - - 12.7 -
---------------- --------------- ---------------- -----------------
Net loss (128.9)% (57.2)% (111.8)% (83.0)%
================ =============== ================ =================
</TABLE>
Quarter Ended September 30, 1999 Compared to Quarter Ended September 30, 1998
Revenue
Total revenue increased 158.1% to $16.1 million for the third quarter
of 1999 compared to $6.2 million for the same period in 1998. The increase in
revenue is due to new customer growth and to a significant increase in the
number of servers per customer and revenue per server. The Company's installed
base of servers increased 115.7% to 1,993 at the end of the third quarter of
1999 from 924 at the end of the third quarter of 1998.
Costs and Expenses
Cost of operations increased 55.0% to $2.7 million for the third
quarter of 1999 compared to $1.7 million for the same period in 1998. The
increase is due to additional network costs resulting from the Company's
expanded customer base and increase in service offerings since October 1, 1998.
As a percentage of revenue, cost of operations decreased to 16.7% for the third
quarter of 1999 compared to 27.9% for the same period in 1998 as a result of
improved network utilization associated with the revenue improvement discussed
above.
Cost of services increased 264.3% to $6.3 million for the third quarter
of 1999 compared to $1.7 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 increased to
39.3% for the third quarter of 1999 compared to 27.8% for the same period in
1998. The Company expects that cost of services will increase during the
remainder of the year as a result of having two new operational data centers.
Selling, general and administrative expenses increased 379.1% to $20.6
million for the third quarter of 1999 compared to $4.3 million for the same
period in 1998. During the quarter ended September 30, 1998, the managed Web
site and
10
<PAGE>
application hosting business operated as part of a wholly owned subsidiary of
Intermedia. During the quarter ended September 30, 1999, as part of Digex's
growth strategy, the Company continued building up its infrastructure to operate
as a separate public company. As a percentage of revenue, total selling, general
and administrative expenses increased to 128.0% for the third quarter of 1999
compared to 69.0% for the same period in 1998. Increases in selling, general and
administrative expenses for the third quarter of 1999 include the costs
associated with an increased employee base, advertising campaigns, back office
support (including the G&A Agreement with Intermedia), an increased provision
for doubtful accounts receivable and the addition of key executive management to
support the growth of the business. Finally, in connection with completion of
the Offering on August 4, 1999, the Company also granted stock options to
certain employees at an exercise price below market value. As such, the Company
recorded approximately $12.2 million of deferred compensation in the third
quarter of 1999 to be expensed over a four-year vesting period. During the third
quarter of 1999, approximately $0.5 million of stock compensation expense was
recognized. The Company expects that its 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. In addition,
the Company will continue to build its personnel base to support its growth
strategy in the managed Web site and application hosting industry. As a result,
the Company believes that its selling, general and administrative expenses will
continue to increase in the future.
Depreciation and amortization expenses increased 301.9% to $8.1 million
for the third quarter of 1999 compared to $2.0 million for the same period in
1998. The increase is related to additional servers and other facilities and
equipment placed in service since October 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 fully
operational during the fourth quarter of 1999 and due to future increased server
installations.
Interest Expense
Interest expense of $0.4 million for the third quarter of 1999 resulted
from the capital leases assigned by Intermedia to the Company during the second
quarter of 1999 and a note payable issued by the Company during the third
quarter of 1999.
Interest and Other Income
Interest and other income of $1.3 million resulted principally from
interest earned by the Company on the cash proceeds from the Offering completed
in August 1999.
Net Loss
Net loss increased 481.8% to $20.8 million for the third quarter of
1999 compared to $3.6 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.
EBITDA
EBITDA, as defined below, decreased 777.9% to negative $13.5 million in
the third quarter of 1999 compared to negative $1.5 million for the same period
in 1998. The decrease is primarily attributable to costs associated with the
Company's growth strategy. The Company expects to generate negative EBITDA in
the fourth quarter 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 expects to
continue to experience rapid growth in marketing and selling expenses as new
customers are acquired.
EBITDA consists of earnings (net loss) before interest expense,
interest and other income, 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 managed Web site
and application 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
11
<PAGE>
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.
Nine Months Ended September 30, 1999 Compared to Nine Months Ended September 30,
1998
Revenue
Total revenue increased 156.6% to $38.1 million for the nine months
ended September 30, 1999 compared to $14.9 million for the same period in 1998.
The increase in revenue is due to new customer growth and to a significant
increase in the number of servers per customer and revenue per server. The
Company's installed based of servers increased 115.7% from 924 at September 30,
1998 to 1,993 at September 30, 1999.
Costs and Expenses
Cost of operations increased 71.0% to $7.0 million for the nine months
ended September 30, 1999 compared to $4.1 million for the same period in 1998.
The increase is due to additional network costs resulting from the Company's
expanded customer base and increase in service offerings since October 1, 1998.
In addition, the Company has more servers on line since October 1, 1998. As a
percentage of revenue, cost of operations decreased to 18.5% for the nine months
ended September 30, 1999 compared to 27.7% for the same period in 1998 as a
result of improved network utilization associated with the revenue improvement
discussed above.
Cost of services increased 211.9% to $13.8 million for the nine months
ended September 30, 1999 compared to $4.4 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 to 36.1% for the
nine months ended September 30, 1999 compared to 29.7% for the same period in
1998.
Selling, general and administrative expenses increased 276.4% to $47.4
million for the nine months ended September 30, 1999 compared to $12.6 million
for the same period in 1998. During the nine months ended September 30, 1998,
the managed Web site and application hosting business operated as part of a
wholly owned subsidiary of Intermedia. During 1999, as part of Digex's growth
strategy, the Company continued building up its infrastructure to operate as a
separate public company. As a percentage of revenue, total selling, general and
administrative expenses increased to 124.2% for the nine months ended September
30, 1999 compared to 84.7% for the same period in 1998 due primarily to the
significant administrative requirements to support the Company's growth
strategy. Increases in selling, general and administrative expenses for 1999
include the costs associated with an increased employee base, advertising
campaigns, back office support (including the G&A Agreement with Intermedia), an
increased provision for doubtful accounts receivable, and the addition of key
executive management to support the growth of the business. In connection with
completion of the Offering on August 4, 1999, the Company also granted stock
options to certain employees at an exercise price below market value. As such,
the Company recorded approximately $12.2 million of deferred compensation in the
third quarter of 1999 to be expensed over a four-year vesting period. During the
third quarter of 1999, approximately $0.5 million of stock compensation expense
was recognized. The Company expects that its 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. In addition,
the Company will continue to build its personnel base to support its growth
strategy in the managed Web site and application hosting industry. As a result,
the Company believes that its selling, general and administrative expenses will
continue to increase in the future.
Depreciation and amortization expenses increased 197.8% to $18.1
million for the nine months ended September 30, 1999 compared to $6.1 million
for the same period in 1998. The increase is related to additional servers and
other facilities and equipment placed in service since October 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 fully operational during the fourth quarter of 1999 and due to
future increased server installations.
12
<PAGE>
Interest Expense
Interest expense of $0.6 million for the nine months ended September
30, 1999 resulted from the capital leases assigned by Intermedia to the Company
during the second quarter of 1999 and a note payable issued by the Company
during the third quarter of 1999.
Interest and Other Income
Interest and other income of $1.3 million resulted principally from
interest earned by the Company on the cash proceeds from the Offering completed
in August 1999.
Net Loss Before Income Tax Benefit
Net loss before income tax benefit increased 284.9% to $47.5 million
for the nine months ended September 30, 1999 compared to $12.3 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.
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. Since the date of the contribution, the Company experienced
taxable losses and non-deductible expenses that 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 380.4% to negative $30.0 million
for the nine months ended September 30, 1999 compared to negative $6.3 million
for the same period in 1998. The decrease is primarily attributable to costs
associated with the Company's growth strategy. The Company expects to generate
negative EBITDA for year ended December 31, 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
expects to continue to experience rapid growth in marketing and selling expenses
as new customers are acquired.
EBITDA consists of earnings (net loss) before interest expense,
interest and other income, 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 managed Web site
and application 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 anticipates that its growth strategy will continue to
require substantial cash to support planned capital expenditures and fund
operating expenses. As a result, the Company expects its trend of operating
losses to continue for the next several years to support its growth strategy.
Prior to the date of the Offering, the Company's capital expenditures
and operating expenses were principally funded by Intermedia. On August 4, 1999,
the Company sold 11,500,000 shares of Class A Common Stock in an initial public
offering.
13
<PAGE>
The net proceeds from the offering were approximately $179.2 million, however,
such funds must be used to purchase telecommunications related assets due to
restrictions in Intermedia's debt instruments. Therefore, to provide for the
funding of the Company's operating expenses, the Company entered into an
agreement with the Parent to sell to the Parent certain telecommunications
related assets that are purchased by the Company with the net proceeds of the
Offering. The assets are sold to the Parent for cash at the Company's cost.
Since the offering date, the Company has received approximately $19.5 million
from the Parent related to the sale of telecommunications related assets. These
proceeds were unrestricted and were used to fund the Company's operating
expenses during the period.
Cash payments for capital assets for the nine months ended September
30, 1999 were approximately $119.4 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, beginning May 1,
1999 and through the date of the Offering, Intermedia contributed additional
capital of $48.1 million to the Company, principally by way of contributions of
telecommunications assets by Intermedia to the Company. Finally, Intermedia
assigned two capital leases for data centers with a value of $17.1 million to
the Company in the second quarter of 1999.
The Company used cash in its operating and investing activities of
$147.6 million and $25.8 million during the nine months ended September 30, 1999
and 1998, respectively. Net cash used for operating activities in each of these
periods was primarily the result of losses incurred by the Company and increases
in working capital associated with the Company's growth. Net cash used for
investing activities in each of these periods was primarily for data center
infrastructure and server additions. These cash usages were funded by permanent
contributions of capital by Intermedia through the date of the Offering and by
the use of the proceeds from the Offering and the sale of telecommunications
related assets to the Parent for cash subsequent to the Offering date. Capital
contributions amounted to $102.4 million and $25.8 million during the nine
months ended September 30, 1999 and 1998, respectively. 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 Class A or
Class B Common Stock in the foreseeable future. The Company believes that it has
sufficient capital to sustain its operations and capital expenditure plans over
the near term. 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 September
30, 1999, Intermedia had outstanding approximately $3.1 billion of debt and
other liabilities including trade payables, and a total of approximately $901.8
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.
14
<PAGE>
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. The table below represents management's best estimates
of the status of each phase of the Year 2000 program with respect to the
Company's mission-critical and non-mission-critical IT and Non-IT systems as
outlined below. The percentages indicate management's best estimate of
completion as of September 30, 1999.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
Phase Completion IT Completion Non-IT Completion
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
I. Preliminary Activity 100% 12/31/97 100% 12/31/97
--------------------------------------------------------------------------------------------------------
II. Problem Determination 100% 9/30/98 100% 3/31/99
--------------------------------------------------------------------------------------------------------
III. Plan Complete & Resources 100% 6/1/99 100% 6/1/99
Committed
--------------------------------------------------------------------------------------------------------
IV. Operational Sustainability 70% 11/30/99 70% 11/30/99
--------------------------------------------------------------------------------------------------------
V. Fully Compliant 70% 11/30/99 70% 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 September 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
September 30, 1999, Phase IV of the plan was 70% complete for both IT and
Non-IT. The Company expects to complete Phase IV for its IT and Non-IT by
November 30, 1999.
15
<PAGE>
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 was completed as of September
30, 1999, there are elements that will not be completed (Phase V) until the
fourth quarter of 1999 primarily due to limited availability of compliant
software and hardware and prioritization of mission-critical systems. As of
September 30, 1999, the Company estimates that its compliance efforts are
approximately 70% complete for both 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 and reputation 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 September 30, 1999 $1.0 $0.5
Estimated for remainder of 1999 1.4 0.8
--------------------- -------------------
Total $2.4 $1.3
Software/Hardware
-----------------------
Historical through September 30, 1999 $0.1
Estimated for remainder of 1999 0.5
-----------------------
Total $0.6
</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 assurances 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.
16
<PAGE>
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
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.
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
customers' Year 2000 readiness. The Company believes it is not responsible for
the Year 2000 compliance of its customers' Web sites and the Company is
notifying 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 customers' sites or the Company's network,
the Company cannot guarantee that this will be the case. Also, to the extent
that a customer's site is not functioning correctly and it is not possible to
determine that the malfunctioning is caused by the customers' 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 ("ESC") 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 Chief Executive Officer. The ESC meets
17
<PAGE>
semi-monthly to review the status of the Year 2000 program, facilitate issue
resolution and provide direction to the Company. The committee is working to
oversee and allocate additional resources, if required, for the final plans for
Year 2000 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 during 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
including, but not limited to, the demand for the Company's services and the
ability of the Company to successfully implement its strategies, each of which
may be impacted, among other things, by economic, competitive or technological
conditions and the ability of the Company to successfully complete its Year 2000
remediation project. 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. Readers are cautioned not to place undue reliance on any
forward-looking statements contained in this report. The Company undertakes no
obligation to publish the results of any adjustments to these forward-looking
statements that may be made to reflect events on or after the date of this
report or to reflect the occurrence of unexpected events.
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 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. The Company commenced an initial public
offering of its shares of Class A Common Stock (the "Offering") on July 30, 1999
and completed the Offering on August 4, 1999. The expenses incurred by the
Company in connection with the issuance and distribution of the Class A Common
Stock were $16.3 million, which included $13.7 million of indirect payments of
underwriting discounts and commissions and $2.6 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 were approximately
$179.2 million. At September 30, 1999, the end of the period covered by this
report, the Company used $49.4 million of the net proceeds of the Offering to
purchase telecommunications related assets. The use of proceeds included $29.9
million for continued expansion and enhancement of the Company's data center
infrastructure and $19.5 million for purchases of telecommunications related
assets sold to the Parent.
ITEM 3. Defaults Upon Senior Securities
None.
18
<PAGE>
ITEM 4. Submission of Matters to a Vote of Security Holders
On July 1, 1999, Intermedia, as the then ultimate sole shareholder of
the Company, acting in lieu of meeting, approved the removal of Nancy G. Faigen
as a director of the Company and appointed Mark K. Shull to serve as director of
the Company beginning on the effective date of the Offering. Thereafter, David
C. Ruberg, John C. Baker, Philip A. Campbell, George F. Knapp and Pierce J.
Roberts, Jr. each continued to serve as director of the Company.
On July 21, 1999, Intermedia, as the then ultimate sole shareholder of
the Company, acting in lieu of meeting, approved the appointment of Jack E.
Reich and Richard A. Jalkut as directors of the Company effective immediately.
Thereafter, in addition to Mr. Reich and Mr. Jalkut, David C. Ruberg, John C.
Baker, Philip A. Campbell, George F. Knapp and Pierce J. Roberts, Jr. each
continued to serve as director of the Company.
On July 23, 1999, Intermedia, as the then ultimate sole shareholder of
the Company, acting in lieu of meeting, authorized and approved the Company's
initial public offering of its Class A Common Stock and approved and adopted the
Company's long-term incentive plan. In addition, Intermedia approved and adopted
an amendment to the Company's certificate of incorporation which increased the
total number of shares of stock the Company had the authority to issue. As of
this date, 100,000,000 shares of Class A Common Stock, 50,000,000 shares of
Class B Common Stock and 5,000,000 shares of Preferred Stock could be issued by
the Company.
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. Incorporated
herein by reference to Digex's Form 10-Q (File No. 000-26873)
filed with the Commission on September 13, 1999.
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
The following report on Form 8-K of the Company was filed during the third
quarter of 1999:
The Company filed a Current Report on Form 8-K, dated August 5, 1999,
reporting under Item 5 the issuance of a press release discussing the second
quarter results. The Company also reported under Item 7 the filing of the press
release as an exhibit to the Form 8-K.
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: November 12, 1999
DIGEX, INCORPORATED
(Registrant)
/s/ Bradley E. Sparks
-----------------------
Bradley E. Sparks
Chief Financial Officer
/s/ T. Scott Zimmerman
-----------------------
T. Scott Zimmerman
Vice President and Controller
20
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 132,844
<SECURITIES> 0
<RECEIVABLES> 18,786
<ALLOWANCES> 4,461
<INVENTORY> 0
<CURRENT-ASSETS> 148,398
<PP&E> 186,477
<DEPRECIATION> 21,422
<TOTAL-ASSETS> 342,142
<CURRENT-LIABILITIES> 11,376
<BONDS> 20,431
0
0
<COMMON> 615
<OTHER-SE> 311,921
<TOTAL-LIABILITY-AND-EQUITY> 342,142
<SALES> 0
<TOTAL-REVENUES> 38,132
<CGS> 0
<TOTAL-COSTS> 20,805
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 3,918
<INTEREST-EXPENSE> 612
<INCOME-PRETAX> (47,459)
<INCOME-TAX> 4,839
<INCOME-CONTINUING> (42,620)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (42,620)
<EPS-BASIC> (0.81)
<EPS-DILUTED> (0.81)
</TABLE>
