<PAGE>
As filed with the Securities and Exchange Commission on , 1999
Registration No. 333-
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DIGEX, INCORPORATED
(Exact name of registrant as specified in its charter)
----------------
Delaware 4813
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
One Digex Plaza
Beltsville, MD 20705
(301) 847-5000
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Nancy G. Faigen
President and Chief Executive Officer
Digex, Incorporated
One Digex Plaza
Beltsville, MD 20705
(301) 847-5000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies to:
Ralph J. Sutcliffe, Esq. Raymond Y. Lin, Esq.
Kronish Lieb Weiner & Hellman LLP Latham & Watkins
1114 Avenue of the Americas 885 Third Avenue
New York, New York 10036-7798 New York, New York 10022-4802
(212) 479-6000 (212) 906-1200
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Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed Maximum
Number of Maximum Aggregate
Title of Securities Shares to be Offering Price Offering Amount of
to be Registered Registered Per Share Price (1) Registration Fee
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<S> <C> <C> <C> <C>
Class A Common
Stock, par value
$.01 per share... $ $100,000,000 $27,800
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- -------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act or until this Registration Statement shall become effective
on such date as the Securities and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission becomes effective. This +
+preliminary prospectus is not an offer to sell these securities nor a +
+solicitation of an offer to buy these securities in any jurisdiction where +
+the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED , 1999
PROSPECTUS
Shares
[DIGEX logo]
Class A Common Stock
--------------
This is an initial public offering of shares of the Class A Common Stock of
Digex, Incorporated. We are selling all of the shares of Class A Common Stock
offered under this prospectus.
There is currently no public market for our shares. It is currently estimated
that the initial public offering price will be between $ and $ per share.
We have applied to have our Class A Common Stock approved for listing on the
Nasdaq National Market under the symbol "DIGX."
Immediately following this offering, we will have outstanding two classes of
common stock, the Class A Common Stock we are offering, and Class B Common
Stock. The holders of Class A Common Stock are entitled to one vote for each
share, whereas the holders of Class B Common Stock are entitled to 10 votes for
each share. The rights of holders of Class A Common Stock and Class B Common
Stock are substantially the same in all other respects.
See "Risk Factors" beginning on page about the risks you should consider
before buying shares of our Class A Common Stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
--------------
<TABLE>
<CAPTION>
Per
Share Total
------ -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds, before expenses, to us................................ $ $
</TABLE>
--------------
The underwriters may, under certain circumstances, purchase up to an
additional shares of Class A Common Stock from us at the initial public
offering price less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in New York, New York
on , 1999.
--------------
Joint Lead Managers
Bear, Stearns & Co. Inc. Donaldson, Lufkin & Jenrette
Book Running
Manager
--------------
CIBC World Markets Legg Mason Wood Walker
Incorporated
The date of this prospectus is , 1999
<PAGE>
Prospective investors may rely only on the information contained in this
prospectus. Neither Digex, Incorporated nor any underwriter has authorized
anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where such offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or any sale of these securities.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................. 3
Risk Factors........................ 9
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial Data............. 24
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 26
Business............................ 34
Management.......................... 47
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Certain Relationships and Related
Transactions...................... 53
Principal Stockholders............. 56
Description of Capital Stock....... 57
Shares Eligible for Future Sale.... 59
Underwriting....................... 61
Legal Matters...................... 62
Experts............................ 62
Where You Can Find Additional
Information....................... 63
Index to Financial Statements...... F-1
</TABLE>
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Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade these shares of Class A Common Stock, whether or not
participating in this offering, may be required to deliver a prospectus. This
is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.
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<PAGE>
PROSPECTUS SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements. We will refer
to Digex, Incorporated and our predecessors as "Digex," "we," "us" and "our."
We will refer to our parent company, Intermedia Communications Inc., and its
subsidiaries, as "Intermedia."
Digex
Our Company
Digex is a leading provider of Internet hosting services to businesses and
institutions implementing complex, interactive Web sites and Web-based
applications. Our offerings include Web site and application hosting,
enterprise and consulting services. From major corporations to Internet start-
ups, our customers leverage our services to rapidly and cost-effectively deploy
secure and reliable business solutions including on-line banking, on-line
procurement and electronic retailing. We provide the computer hardware,
software, network technology, and systems management necessary to offer our
customers comprehensive outsourced Web site hosting solutions.
We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently provides hosting services to over 550 customers, including
American Century Investments, Budget Rent-A-Car, Forbes, J. Crew, Kraft,
Universal Studios and Nike. We operate two state-of-the-art data centers
strategically positioned on the east and west coasts of the United States. In
these data centers, we house over 1,300 Windows NT and UNIX-based servers which
we own and manage. Our revenues have grown at a compounded annual growth rate
of 184% over the past two years from $2.8 million in 1996 to $22.6 million in
1998. Our revenue for the three months ended March 31, 1999 was $9.4 million.
The following are among the key factors that we believe will continue to drive
our growth:
. a highly scalable operating platform which was designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web
site hosting initiatives;
. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and
. a network of over 120 business partnership alliances which provide
complementary design, development and integration services for our
customers and which represent a significant source of new customer
referrals for Digex.
Our Market Opportunity
According to Forrester Research, Inc., the Web site hosting market is
projected to increase to over $10.5 billion by 2002, of which $8.0 billion is
expected to be complex Web site management services. In addition to the overall
expansion and ever-increasing ubiquity of the Internet, we believe one of the
key drivers of growth in the Web hosting industry is the increasing number of
businesses that have elected to outsource the management of their Web sites and
related operations. Web sites are mission-critical for virtually all Web-
centric companies and are becoming increasingly strategic for many mainstream
enterprises. At the same time, these operations and applications are becoming
more complex and challenging to operate. We offer
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customers a comprehensive outsourcing solution designed to reduce costs, speed
implementation, reduce technology risks and provide guaranteed operating
performance. Key advantages we offer our customers include:
. a comprehensive suite of Web site and application hosting services;
. high-performance Internet and private network connectivity;
. responsive, 24-hour a day customer care and technical support;
. secure, state-of-the-art, fault-tolerant data centers; and
. predictable monthly fees.
Our Services
We offer a full range of services to meet the rapidly evolving requirements
of complex Web sites, including:
. Web site management services which provide operations support for
Windows NT and UNIX dedicated servers, server collocation, and network
connectivity;
. integrated business solutions, which involve the hosting of leading Web-
enabled business software applications such as electronic commerce,
sales force automation and customer care;
. enterprise services such as firewall management, stress testing and
customized Web site activity reporting; and
. consulting services including capacity planning, disaster recovery
planning, migration planning and database optimization.
Our Strategy
Our objective is to shape and lead the global market for Web site and
application hosting solutions. We intend to achieve this goal through a
strategy focused on the following:
. Expanding Our Premier Web Site Hosting Capabilities. We believe our
scalable, open architecture will enable us to expand our operations
while simultaneously maintaining the highest service levels. In
addition, we believe our architecture will allow us to attain higher
revenues, lower marginal unit costs and increase operating margins. In
conjunction with this expansion, we plan to add additional data center
capacity both domestically and internationally as appropriate to meet
anticipated customer demand.
. Addressing Industry-Specific Customer Needs. Our marketing and operating
strategy is designed to be market-driven. We intend to continue to focus
on addressing the unique needs of our targeted customer base. We focus
on specific industries which we believe have the highest propensity to
outsource the management of complex, mission-critical Web sites.
. Developing Next Generation Service Offerings. As the underlying
technology and functionality of the Internet evolves, we believe
customers will continuously demand new and increasingly more robust
services. Capitalizing on our strong technical skills and delivery
platforms, we intend to be a leading provider of next generation Web-
based service offerings.
. Expanding Capabilities Through Selective Strategic Partnering and
Acquisitions. We intend to expand our network of strategic partnerships
and to opportunistically acquire related businesses in order to cost-
effectively augment our existing services, technologies, infrastructure,
geographic presence or customer base.
Our History
Our business started in 1996, as the Web site hosting unit (the
"Predecessor") of Business Internet, Inc. (previously known as DIGEX,
Incorporated), a company that was principally an Internet access and Web site
hosting services provider. Business Internet (at the time known as DIGEX,
Incorporated) went public in
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October 1996, and was acquired by Intermedia in July 1997. In contemplation of
this offering, we were incorporated as Digex, Incorporated on April 27, 1999.
On that date, Business Internet contributed our assets to the newly formed
Digex, Incorporated in order to effect a recapitalization of our business. As
of the date of this prospectus, Business Internet, a wholly-owned subsidiary of
Intermedia, owns 100% of our outstanding common stock.
Our Address and Telephone Number
The address of our principal executive offices is One Digex Plaza,
Beltsville, Maryland 20705 and our telephone number is (301) 847-5000.
----------------
The information on any of our Web sites, such as www.digex.net or
www.digex.com, is not a part of this prospectus.
Digex and the Digex logo are two of our service marks. This prospectus also
contains trademarks and trade names of other companies.
5
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The Offering
Class A Common Stock offered by
Digex.......................... shares (1)
Common Stock to be outstanding
after the offering............. shares of Class A Common Stock
shares of Class B Common Stock (2)
Use of proceeds................. We intend to use the net proceeds from this
offering to purchase or construct
Telecommunications Related Assets. (3)
Proposed Nasdaq National Market
symbol......................... DIGX
- --------
(1) Excludes shares to be sold by Digex if the underwriters' over-allotment
option is exercised in full, as described in "Underwriting."
(2) The Class B Common Stock is fully convertible into Class A Common Stock, on
a one-for-one basis, at any time at the option of the holder or upon the
transfer of the Class B Common Stock to any person or entity not affiliated
with Intermedia.
(3) Due to certain restrictions in the bond indentures of Intermedia, our
indirect parent, we will be required to use all of the net proceeds of this
offering to purchase or construct Telecommunications Related Assets. The
term "Telecommunications Related Assets" is defined under "Risk Factors--
Digex is controlled by Intermedia," and would include data centers and
related capital expenditures. In addition, prior to the closing of this
offering, we will make arrangements for Intermedia to purchase from us some
of the Telecommunications Related Assets purchased with the net proceeds of
this offering. We expect to be able to use the proceeds of such sales to
Intermedia for working capital purposes and to fund operating losses. This
arrangement is explained under "Use of Proceeds."
----------------
Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
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Summary Financial Data
The following table sets forth summary financial information of Digex for the
period from July 7, 1997 (date of acquisition) to December 31, 1997 and the
year ended December 31, 1998, and of the Predecessor for the year ended
December 31, 1996 and the period from January 1, 1997 to July 6, 1997. The
selected historical financial information has been derived from Digex's and the
Predecessor's financial statements which have been audited by Ernst & Young LLP
and are included elsewhere in this prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of Business Internet as if such
acquisition had occurred on January 1, 1997, but only includes financial
information for the Predecessor. The presentation of pro forma financial
information is made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
You should read the summary financial and other data below in conjunction
with our audited financial statements and the related notes and the
Predecessor's audited financial statements included elsewhere in this
prospectus. You should also read the Selected Financial Data and the
accompanying "Management's Discussion and Analysis of Financial Condition and
Results of Operations," also contained in this prospectus.
<TABLE>
<CAPTION>
Predecessor Digex
---------------------------- --------------------------------------------
Historical
---------------
Historical Period from Pro Forma Historical
---------------------------- July 7, 1997 ------------ ------------
(date of Year ended
Year ended Period from acquisition) to December 31, Year ended
December 31, January 1, 1997 December 31, 1997 December 31,
1996 to July 6, 1997 1997 (unaudited) 1998
------------ --------------- --------------- ------------ ------------
(In thousands, except pro forma share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635
Costs and expenses:
Cost of operations..... 2,002 4,149 1,739 2,808 6,710
Cost of services....... 684 1,817 1,611 3,428 7,044
Selling, general and
administrative........ 3,194 7,001 6,087 13,088 17,512
Depreciation and
amortization.......... 591 519 2,753 4,850 8,109
Charge off of purchased
in-process research
and development....... -- -- 15,000 (1) 15,000 (1) --
------- ------- -------- -------- --------
Total costs and
expenses............... 6,471 13,486 27,190 39,174 39,375
------- ------- -------- -------- --------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (27,562) (16,740)
Income tax benefit...... -- -- 1,440 4,710 159
------- ------- -------- -------- --------
Net loss................ $(3,668) $(9,066) $(18,558) $(22,852) $(16,581)
======= ======= ======== ======== ========
Pro forma net loss
per common share (2):
Basic................. -- -- $ (18.56) $ (22.85) $ (16.58)
======== ======== ========
Diluted............... -- -- $ (18.56) $ (22.85) $ (16.58)
======== ======== ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 1,000 1,000 1,000
======== ======== ========
Other Financial Data:
EBITDA before certain
charges (3)............ $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631)
Capital expenditures.... 1,445 1,004 8,016 9,020 30,969
</TABLE>
7
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<TABLE>
<CAPTION>
December 31, 1998
-----------------------
Actual As Adjusted (4)
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(In thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (5)......................... $ --
Working capital....................................... 1,231
Property and equipment, net........................... 39,059
Total assets.......................................... 77,739
Capital lease obligations, including current maturi-
ties................................................. 2,089
Total owner's equity.................................. 70,845
</TABLE>
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(1) This amount represents a one-time charge to operations for the charge off
of purchased in-process research and development related to the Predecessor
in connection with Intermedia's purchase of Business Internet on July 7,
1997.
(2) Pro forma basic and diluted net loss per share have been calculated
assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented.
(3) EBITDA, before certain charges, consists of earnings (loss) before tax
benefit, depreciation and amortization and the charge off of purchased in-
process research and development. EBITDA, before certain charges, does not
represent funds available for management's discretionary use and is not
intended to represent cash flow from operations. EBITDA, before certain
charges, should be considered only as an alternative to net loss as an
indication of operating performance or cash flows as a measure of
liquidity.
(4) As Adjusted gives effect to the offering as if it had occurred on December
31, 1998.
(5) We have historically participated in a centralized cash management system
of Intermedia and, as a result, have not carried cash balances on our
financial statements. With the closing of this offering, we will be
maintaining and reporting cash balances in our financial statements.
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RISK FACTORS
Investing in our Class A Common Stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below before
you purchase any of our Class A Common Stock. These risks and uncertainties are
not the only ones we face. Unknown additional risks and uncertainties, or ones
that we currently consider immaterial, may also impair our business operations.
If any of these risks or uncertainties actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Class A Common Stock could
decline, and you could lose all or part of your investment.
We have a limited operating history and our business model is still evolving.
We were established in January 1996 to provide Web site hosting services for
businesses deploying complex, mission-critical Web sites, which remains our
primary focus. Our range of service offerings has changed since 1996 and our
business model is still new and developing. For example, we recently began
offering integrated business solutions and enterprise services. Because some of
our services are new, we cannot be sure that businesses will buy them. As a
result, the revenue and income potential of our business is unproven. Our
limited operating history makes predicting future results difficult. Our
prospects must be considered in light of the risks, expenses and difficulties
encountered by companies in the new and rapidly evolving market for Web hosting
services. To address these risks, among other things, we must:
. provide reliable, technologically current and cost-effective services;
. continue to upgrade and expand our infrastructure;
. market our brand name and services effectively;
. maintain and develop our business partnership alliances; and
. retain and attract qualified personnel.
We have a history of significant losses and expect these losses to continue in
the foreseeable future.
We have experienced operating losses and negative cash flows from operations
in each annual period from inception. As of December 31, 1998, our accumulated
losses since January 1, 1996 have amounted to approximately $47.9 million. We
had a net loss of $16.6 million for the year ended December 31, 1998. While our
revenues have grown in recent periods, we cannot assure you that this growth
will continue. In connection with our expansion plans, we anticipate making
significant investments in sales, marketing, technical and customer support
personnel, as well as in our data center infrastructure. As a result of our
expansion plans, we expect our net losses and negative cash flows from
operations to continue for the foreseeable future. We cannot assure you that we
will ever become or remain profitable or that we will generate positive cash
flows from operations.
Our quarterly and annual results may fluctuate resulting in fluctuations in the
price of our Class A Common Stock.
Our results of operations fluctuate on a quarterly and annual basis. We
expect to continue experiencing significant fluctuations in our future
quarterly and annual results of operations due to a variety of factors, many of
which are outside our control, including:
. demand for and market acceptance of our services;
. introductions of new services by us and our competitors;
. capacity utilization of our data centers;
. timing of customer installations;
. the mix of services we sell;
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. customer retention;
. the timing and magnitude of our capital expenditures, including
construction costs related to the expansion of our operations;
. changes in our pricing policies and those of our competitors;
. fluctuations in bandwidth used by customers;
. our retention of key personnel; and
. other general economic factors.
For these and other reasons, in some future quarters, our results of
operations may fall below the expectations of securities analysts or investors,
which could negatively affect the market price of our Class A Common Stock.
We operate in a relatively new and evolving market with uncertain prospects for
growth.
The market for Web site hosting and related services has only recently begun
to develop and is evolving rapidly. We cannot guarantee that this market will
ultimately prove viable. Our future growth, if any, will depend on the
continued trend of businesses to outsource their Web site hosting and
management systems, and our ability to market our services effectively. There
can be no assurance that the market for our services will develop, that our
services will be adopted, or that businesses, organizations or consumers will
use these Internet-based services in the degree or manner that we expect. It is
possible that at some point businesses may find it cheaper, more secure or
otherwise preferable to host their Web sites internally and decide not to
outsource the management of their Web sites. If we are unable to react quickly
to changes in the market, if the market fails to develop, or develops more
slowly than expected, or if our services do not achieve market acceptance, then
we are unlikely to become or remain profitable.
We operate in a highly competitive market with limited barriers to entry.
The market for hosting Web sites is highly competitive. There are few
substantial barriers to entry and we expect intense competition from existing
and future competitors. The principal competitive factors in this market
include:
. quality of services and scalability of infrastructure;
. network capacity, reliability, security and adaptability to new
technologies;
. Internet system engineering expertise;
. quality of customer service and support;
. relationships with marketing partners and vendors;
. variety of services offered;
. price;
. product innovation;
. financial resources; and
. brand name recognition.
Our current and potential competitors in the market include:
. Web hosting service providers;
. local, regional, national and international Internet service providers
("ISPs");
. local, regional, national and international telecommunications
companies; and
. large information technology outsourcing firms.
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Our competitors may operate in one or more of these areas and include
companies such as AboveNet Communications, AT&T, Cable & Wireless, Concentric
Network, EDS, Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM,
Intel, Level 3 Communications, MCI WorldCom, PSINet, Qwest Communications
International, and USinternetworking.
Many of our competitors have substantially greater financial, technical and
marketing resources, larger customer bases, longer operating histories, greater
name recognition and more established relationships in the industry than we
possess. As a result, some of our competitors may be able to develop and expand
their network infrastructures and service offerings more quickly, adapt to new
or emerging technologies and changes in customer requirements more quickly,
take advantage of acquisition and other opportunities more readily, devote
greater resources to the marketing and sale of their products and adopt more
aggressive pricing policies than we can. In addition, some competitors have
entered and will likely continue to enter into joint ventures or alliances to
provide additional services which may be competitive with those we provide.
Some of our competitors may be able to bundle other telecommunications
services in connection with their Web site hosting services, which could allow
them to reduce the relative prices of their Web site hosting services. We may
not be able to overcome the effects of any such price reductions. In addition,
we believe the Web hosting market is likely to experience consolidation in the
near future, which could result in increased price and other competition that
would make it more difficult for us to compete. See "Business--Competition."
Our data centers and equipment, and the networks we rely on, are sensitive to
harm from human actions and natural disasters. Any resulting disruption could
significantly damage our business and reputation.
We believe our reputation for providing reliable service to our customers is
critical to our future success. Our ability to maintain and enhance our
reputation will depend on the integrity, performance and security of our data
centers and equipment, and of the network infrastructure of our connectivity
providers, including our principal provider, Intermedia. Our data centers and
equipment, and the networks we use, however, are subject to damage from human
error and tampering, natural disasters, power loss, capacity limitations,
software defects, breaches of security, physical break-ins, telecommunications
failures, intentional acts of vandalism and other factors that have caused, and
will continue to cause, interruptions in service or reduced capacity for our
customers. Despite precautions we have taken and plan to take, the occurrence
of a natural disaster or other unanticipated problems could result in
interruptions in the services we provide to our customers. Such an occurrence
could have a materially negative impact on our business and reputation.
Our customers often maintain confidential information on the servers hosted
in our data centers. We strive to protect this information and our network from
unauthorized access, computer viruses and other security threats by using
encryption, authentication technology, biometric identifiers and security
guards. However, such measures have been circumvented in the past and could be
circumvented in the future. Our customer information and network may be
vulnerable to the accidental or intentional actions of Internet users, current
and former employees or others. Such acts could potentially jeopardize the
security of confidential information such as credit card and bank account
numbers stored in our system and our customers' computer systems. This could
result in liability to us and in our loss of existing or potential customers.
Additionally, the expense required to eliminate computer viruses and alleviate
other security problems could be significant and result in delays or
interruption of service to our customers. Any interruptions in service,
capacity limitations or security breaches could seriously harm our reputation
for reliable service. If our customers become dissatisfied with our level of
service, they may choose to discontinue their relationship with us.
We provide our customers with service level agreements. Our customer
contracts provide that if we do not meet the required service levels, we may
have to provide credits to our customers. Additionally, in the event of any
harm to customers resulting from disruption of our service, security breaches,
damage to equipment or other circumstances, we could be held liable for
damages. Awards for such damages might exceed our liability insurance by an
unknown but significant amount and could harm our business.
11
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We may be unable to secure sufficient network capacity to meet our future needs
on reasonable terms or at all.
As the number of users and the amount of information they wish to transport
increases and the customers' requirements continue to change, we must continue
to expand and adapt our network arrangements. We may not be able to secure
additional network capacity as quickly and cheaply as we may need to meet
customer demand. Under our anticipated network services arrangement with
Intermedia, we will be required to purchase 70% of our non-peered network
capacity requirements from Intermedia. We cannot be sure that Intermedia will
be able to continue to meet our network capacity requirements. Under our
arrangement, Intermedia has 30 days to notify us if it is unable to meet our
network capacity requirements before we can contract with third-party suppliers
and then we can make relatively short-term arrangements with third-party
suppliers only to obtain the additional capacity which Intermedia is unable to
provide. This could delay our obtaining additional capacity and result in our
having to pay higher prices for such additional network capacity. Also, there
can be no assurance that additional network capacity will be available from
third-party suppliers as it is needed. As a result, we cannot assure you that
we will have access to sufficient network capacity. Our failure to achieve or
maintain high capacity data transmission could negatively impact service levels
to our existing customers and limit our ability to attract new customers, which
would harm our business.
Our business, in large part, depends on network services we receive from
Intermedia. Any disruption of these services or Intermedia's inability to
maintain its peering relationships could be costly and harmful to our business.
We currently rely exclusively on Intermedia for network services. Prior to
the closing of this offering, we expect to enter into a two-year network
services agreement with Intermedia. For the term of this agreement, we will be
required to purchase, and Intermedia will be required to provide, at least 70%
of our non-peered network capacity requirements. If this agreement were to be
terminated, we would need to rapidly secure an alternative provider of these
services. Accordingly, we could incur transition costs and our monthly costs of
operations could increase. In addition, such a transition could have a
detrimental effect on our customer service levels.
The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering relationships
are a competitive factor that allow some Web hosting companies to provide
faster data transmission than others. Intermedia's tier-one status and numerous
peering relationships enable it to provide us faster data transmission than
many other ISPs provide. Although Intermedia meets the industry's current
standards for peering, there can be no guarantee that other national ISPs will
maintain peering relationships with Intermedia. In addition, the requirements
associated with maintaining peering relationships with the major national ISPs
may change. We cannot assure you Intermedia will be able to expand or adapt its
network infrastructure to meet any new requirements on a timely basis or at
all.
If we do not respond effectively and on a timely basis to rapid technological
change and evolving industry standards, our business could suffer.
Internet and networking technology is changing rapidly. Our future success
will depend largely on our ability to:
. offer services that incorporate leading technologies;
. address the increasingly sophisticated and varied needs of our current
and prospective customers;
. respond to technological advances and emerging industry standards on a
timely and cost-effective basis; and
. continue offering services that are compatible and interoperable with
products, services and architectures of other vendors.
Although we often work with various vendors in testing newly developed
products, there can be no assurance such products will be compatible with our
infrastructure or such products will adequately address
12
<PAGE>
changing customer needs. Although we currently intend to support emerging
standards, there can be no assurance industry standards will be established or,
if they become established, that we will be able to conform to these new
standards in a timely fashion and maintain a competitive position in the
market. Our failure to conform to the prevailing standards, or the failure of
common standards to emerge, could harm our business. In addition, products,
services or technologies developed by others may render our services no longer
competitive or obsolete.
The growth of our business depends on the growth and performance of the
Internet.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses, consumers, suppliers and partners has only
recently begun to develop. Our success will depend on the continued growth in
Internet usage. Demand and market acceptance of the Internet are subject to a
high level of uncertainty and depend on a number of factors, including the
growth in consumer and business use of new interactive technologies, the
development of technologies that facilitate interactive communication between
organizations and targeted audiences, security concerns and increases in data
transport capacity. If the Internet as a commercial medium fails to grow or
develops more slowly than expected, then our business is unlikely to grow.
The recent growth in the use of the Internet in general has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our services. The performance of our Web
site hosting services is ultimately limited by and relies on the speed and
reliability of the networks operated by third parties. Consequently, the
emergence and growth of the market for our services depends on improvements
being made to the entire Internet infrastructure to alleviate overloading and
congestion.
We may be unable to manage our anticipated growth effectively.
Our future success depends in large part on our ability to manage the
anticipated growth in our business. For us to manage this growth, we will need
to:
. expand and enhance our operating and financial procedures and controls;
. replace or upgrade our operational and financial management information
systems; and
. attract, train, manage and retain key employees.
These activities are expected to place a significant strain on our financial
and management resources. If we are unable to manage growth effectively, our
business could suffer.
Our growth depends on our ability to expand data center capacity to meet
anticipated demand.
Continuing to expand capacity is critical to achieving our business strategy.
This expansion is likely to include the need to add new hardware and software,
and may include the opening of additional data centers. We are currently
significantly expanding our data center capacity by constructing two new
facilities, one in Beltsville, Maryland, and another in San Jose, California to
augment our capacity in those regions. We intend to add data center capacity
over the next five years as justified by customer demand. Our ability to do so
successfully depends on:
. anticipating and planning for future demand levels;
. having access to sufficient capital; and
. locating and securing satisfactory data center sites and implementing
the build-out of these sites, all of which may require significant lead
time.
If we cannot expand capacity effectively, our growth will suffer and we may
not be able to adequately meet the demands of existing customers.
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We depend on our key personnel.
Our success also depends in significant part on the continued services of our
key technical, sales and senior management personnel, including our President
and Chief Executive Officer, Nancy G. Faigen. Losing one or more of our key
employees could harm our business. In addition, we have recently hired a number
of key employees and officers, including our President and Chief Executive
Officer, and as a result, our entire management team has worked together for
only a brief time. We also have plans to hire additional executive management
personnel in the near future.
We believe our short and long-term success depends largely on our ability to
attract and retain highly skilled technical, managerial and marketing
personnel, particularly additional management personnel in the areas of
application integration and technical support. Competition for such personnel
is intense. We may not be able to hire or retain the necessary personnel to
implement our business strategy, or we may need to pay higher compensation for
employees than we currently expect. Our inability to attract and retain such
personnel would limit our growth and harm our business.
Digex is controlled by Intermedia.
Intermedia controls a majority of our voting power, and Intermedia's
interests in us may conflict with your interests as a stockholder. Intermedia,
through its wholly-owned subsidiary, Business Internet, owns all of the issued
and outstanding shares of our Class B Common Stock. When this offering is
completed, Intermedia will own shares of Class B Common Stock. Each share
of Class B Common Stock is entitled to 10 votes, as compared to one vote for
each share of Class A Common Stock to be sold in this offering. Thus, after
this offering is completed, Intermedia will control approximately % of the
voting power of Digex, and will be able to control the management and affairs
of Digex, and all matters submitted to our stockholders for approval, including
the election and removal of directors, and any merger, consolidation or sale of
all or substantially all of our assets. As a result, the price of our Class A
Common Stock may be affected.
We may require additional funds to finance our business but our ability to
raise such funds is significantly limited by agreements that are binding on
Intermedia. Intermedia has issued debt securities to the public under seven
indentures. As a subsidiary of Intermedia, we are subject to a number of
restrictions under the Intermedia indentures. These restrictions will, among
other things, limit our ability to make certain restricted payments, incur
indebtedness and issue preferred stock, pay dividends or make other
distributions, engage in sale and leaseback transactions, create liens, sell
our assets, issue or sell our equity interests, or enter into certain mergers
and consolidations. As a result, our future financing sources will be
significantly limited and our use of any proceeds, including the net proceeds
of this offering, will be significantly restricted.
We will be required to use all of the net proceeds of this offering to
purchase Telecommunications Related Assets within 270 days of this offering.
Telecommunications Related Assets mean assets used in connection with the
business of: (1) transmitting, or providing services relating to the
transmission of, voice, video or data through owned or leased transmission
facilities; (2) creating, developing of marketing communications related
network equipment, software and other devices for use relating to (1); or (3)
evaluating, participating in or pursuing any other activity or opportunity that
is related to those identified in (1) or (2); all as determined in good faith
by the board of directors of Intermedia. We will not be able to use the
proceeds of this offering directly to fund operating losses, working capital or
other uses that are not purchases of Telecommunications Related Assets. Because
we anticipate incurring operating losses and a significant need for working
capital for the foreseeable future, we expect that we will have to obtain funds
for such purposes from Intermedia or other sources. However, we are
significantly restricted as to the sources of funding that are available to us.
Prior to the closing of this offering, we will make arrangements with
Intermedia pursuant to which Intermedia will purchase from us, at our cost,
some of the Telecommunications Related Assets purchased with the net proceeds
of this offering. We expect to be able to use the proceeds of such sales of
telecommunications equipment to Intermedia for working capital purposes and to
fund operating losses. We believe that the net proceeds of this
14
<PAGE>
offering should be sufficient to fund our capital needs into the second half of
2000. After that date, however, we will need to find sources of financing which
are likely to be significantly limited.
We depend on Intermedia to fund our working capital and operating losses, but
Intermedia's ability to fund these needs is limited by its own substantial
indebtedness. Intermedia is and, after the offering, will continue to be highly
leveraged. At December 31, 1998, Intermedia had outstanding approximately $2.6
billion of debt and other liabilities (including trade payables), and
approximately $862.3 million of obligations with respect to four outstanding
series of preferred stock. The extent to which Intermedia is leveraged could
have a number of important consequences to you as our stockholder. We are, and
expect to continue to be, dependent on Intermedia for capital to fund our
working capital and operating losses. Intermedia's level of debt will require
it to dedicate a substantial portion of its future cash flow from operations
for payment of principal and interest on its debt, and dividends on and the
redemption of its preferred stock. Historically, Intermedia has not generated
sufficient cash flow to cover its operating and investing expenses. For the
year ended December 31, 1998, Intermedia's earnings were insufficient to cover
combined fixed charges and dividends on preferred stock. In addition, because
of the restrictions in the Intermedia indentures, Intermedia has only a limited
amount of cash that may be used for working capital purposes and to fund
operating losses. Consequently, Intermedia may not be able to provide us with a
source of funds for our working capital or operating losses.
Our dependence on Intermedia and the degree to which Intermedia is leveraged
could have important consequences to our future operations, including but not
limited to:
. increasing our vulnerability to general adverse economic and industry
conditions;
. limiting our ability to obtain additional financing to fund future
working capital, operating losses, capital expenditures, acquisitions
and other general corporate requirements;
. limiting our flexibility in reacting to changes in our business and the
industry in which we compete; and
. placing us at a competitive disadvantage compared to better capitalized
competitors.
Our ability to issue additional capital stock is constrained by Intermedia's
ownership of the Class B Common Stock. In the future, Intermedia may elect to
sell shares of our Class B Common Stock that it controls to the public or to
distribute such shares to its own stockholders. If as a result of such sale or
distribution, Intermedia would no longer hold more than 50% of the total voting
power of our capital stock, the consent of the majority in principal amount of
the noteholders under the Intermedia indentures would be required for such a
sale or distribution. In addition, if we decide in the future to issue and sell
additional shares of our capital stock such that the voting power represented
by the Class B Common Stock held by Intermedia would no longer be greater than
50% of the total voting power of our capital stock, the consent of the majority
in principal amount of the noteholders under the Intermedia indentures would
also be required for such a sale. We would be free of the restrictions in the
Intermedia indentures only if Intermedia sold a sufficient number of its shares
of Digex to reduce its voting power below 50%.
Digex does not have legal representation independent from Intermedia. Kronish
Lieb Weiner & Hellman LLP, counsel to Digex, is also counsel to Intermedia.
Consequently, Digex does not have legal representation independent from
Intermedia.
We are dependent on Intermedia for our general and administrative services.
Intermedia has provided and is expected to continue to provide many of our
financial, administrative and operational services and related support
functions, including customer billing, legal, human resources, Year 2000
compliance and occasional network engineering. We have a General and
Administrative Services Agreement with Intermedia, as described under "Certain
Relationships--General and Administrative Services Agreement," to provide such
services over the next five years. Should Intermedia's provision of these
services no longer meet our needs or if Intermedia unexpectedly stops providing
these services for any reason, we could
15
<PAGE>
face significant challenges and costs in transitioning to our own or
alternative general and administrative functions. Such a transition and any
resulting impairment of our operations could harm our financial results.
Regulatory and legal uncertainties could have significant costs or otherwise
harm our business.
The law in the United States relating to the liability of on-line service
providers and ISPs for information carried on, disseminated through, or hosted
on their systems remains largely unsettled. Congress recently enacted the
"Digital Millennium Copyright Act," which became effective in October 1998. The
Digital Millennium Copyright Act includes a limitation on liability of on-line
service providers for copyright infringement for transmitting, routing, or
providing connections, transient storage, caching or storage at the direction
of a user. This limitation on liability applies if the service provider had no
actual knowledge or awareness that the transmitted or stored material was
infringing and if certain other conditions are met. See "Business--Government
Regulation." Since this law is new, we are unsure of how it will be applied to
limit any liability we may face in the future for any possible copyright
infringement or copyright-related issues. This new law also requires ISPs to
follow certain "notice and take-down" procedures in order to be able to take
advantage of the limitation on liability. We have not yet implemented such
procedures nor evaluated the cost of complying with them. Although our
customers are subject to an acceptable use policy which regulates their use of
our services, this policy and any enforcement of it may not be sufficient to
shield us from liability under the Digital Millenium Copyright Act or
otherwise.
In addition, this new law addresses only copyright infringement. It may take
years to determine whether and how existing laws such as those governing other
types of intellectual property (such as trademarks), privacy, libel and
taxation apply to the Internet. If liability for materials carried on or
disseminated through their systems is imposed on ISPs, we would likely
implement measures to reduce our exposure to such liability. Such measures
could require us to expend substantial resources or discontinue certain product
or service offerings. In addition, increased attention to liability issues, as
a result of lawsuits, legislation and legislative proposals, could divert
management attention, result in unanticipated expenses and harm our business.
The growth and development of the market for on-line commerce may prompt
calls for more stringent consumer protection laws, both in the United States
and abroad, that may impose additional burdens on companies conducting business
on-line. The adoption or modification of laws or regulations relating to the
Internet could adversely affect our business.
We are not currently subject to direct regulation by the Federal
Communications Commission ("FCC") or any other government agency, other than as
to regulations applicable to business in general. However, in the future we may
be subject to regulation by the FCC or other federal or state agencies. Our
costs could increase and our business could suffer depending on the extent to
which our activities might be regulated.
Our business plan contemplates future international operations but there are
numerous risks and uncertainties in offering services outside of the United
States.
We intend to expand into international markets and may build data centers
internationally. We cannot be sure that we will be able to successfully sell
our services or adequately maintain operations outside the United States. In
addition, there are certain risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. tariffs and other trade barriers;
. ability to secure and maintain the necessary physical and
telecommunications infrastructure;
. challenges in staffing and managing foreign operations;
. differing technology standards;
. employment laws and practices in foreign countries;
. political instability;
16
<PAGE>
. longer payment cycles and problems in collecting accounts receivable;
. fluctuations in currency exchange rates and imposition of currency
exchange controls; and
. potentially adverse tax consequences.
Any of these could adversely affect our international operations.
Furthermore, some foreign governments have enforced laws and regulations on
content distributed over the Internet that are more restrictive than those
currently in place in the United States. Any one or more of these factors could
adversely affect our contemplated future international operations and,
consequently, our business.
We may be unable to protect our intellectual property rights or to continue
using intellectual property that we license from others.
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain of
our proprietary rights. We have no patented technology that would bar
competitors from our market. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy or otherwise obtain and use
our data or technology, such as our customized Digex Centralized Nervous System
applications.
We also rely on certain technologies licensed from third parties. We cannot
be sure these licenses will remain available to us on commercially reasonable
terms or at all. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.
We could lose revenues and our reputation may be damaged if our systems or
those of our customers are not Year 2000 compliant.
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. These date code fields
will need to accept four-digit entries in order for 20th century dates to be
distinguished from 21st century dates. As a result, before the end of this
year, computer systems and software used by many companies may need to be
upgraded to comply with these "Year 2000" requirements. Non-compliant systems
may cause miscalculations which will interfere with business activities or
simply fail to work at all.
We have made arrangements with Intermedia for Year 2000 compliance services.
Under these arrangements, we have implemented a Year 2000 program intended to
ensure our computer systems and applications will function properly beyond
1999. We are continuing to study and resolve many of the Year 2000 issues which
could affect us. However, we cannot be sure that we will be able to promptly or
correctly address all the Year 2000 issues that could affect our systems,
especially where third parties are involved. Although we have requested
assurances from our suppliers that their products are Year 2000 compliant, not
every supplier has responded to our request. Despite the assurances we have
received, some of our suppliers' products and services could still fail and
affect our operations in unpredictable ways. If we cannot achieve Year 2000
compliance, our systems could be disrupted for a period of time. This would
cause a loss of revenues, including requests from customers for credits for
downtime. More importantly, any significant disruption would seriously damage
our business reputation. We might also face lawsuits for damages.
Additionally, we cannot evaluate our customers' Year 2000 readiness. We
believe that we are not responsible for the Year 2000 compliance of our
customers' Web sites and we intend to notify them in writing of this fact and
to urge them to ensure that their sites are Year 2000 compliant. Some of our
customers' sites may fail due to Year 2000 issues and, while we believe that
the failure of any one customer's site will not affect other customers' sites
or our network, we cannot guarantee that this will be the case. Also, to the
extent that a customer's site is not functioning correctly and it is not
possible to determine that the malfunctioning is caused by the customer's
software, the customer may request service credits or we might otherwise have a
difficult time realizing the expected revenues from such a customer.
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Our statements regarding the Year 2000 issue are forward-looking statements
subject to a significant number of risks and uncertainties. While we have
attempted to reasonably evaluate the Year 2000 risks that we face, these risks
include many factors which are beyond our control and we cannot be sure of the
type or extent of damages that we might experience. The worst-case scenario
related to the Year 2000 issue would be an overall failure of the national
Internet and telecommunications infrastructure and the electrical grid. If this
happened, we would be unable to serve our customers for a period of time. Any
national disruption to these systems would have unpredictable and potentially
severe impacts on our business and financial condition.
We strongly urge you to read about our Year 2000 efforts in this prospectus
under the heading "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Impact of Year 2000."
There has been no prior market for our Class A Common Stock and the market
price of the shares will fluctuate.
There has not been a public market for the Class A Common Stock. We cannot be
sure that an active public market for the Class A Common Stock will develop or
continue after this offering. Prices for the Class A Common Stock will be
determined in the marketplace and may be influenced by many factors, including
variations in our financial results, changes in earnings estimates by industry
research analysts, investors' perceptions of us and general economic, industry
and market conditions. The initial public offering price per share of the Class
A Common Stock has been determined by negotiations among us and the
representatives of the underwriters. Investors may not be able to sell their
Class A Common Stock at or above the initial public offering price.
We believe there are relatively few comparable companies that have publicly
traded equity securities. This may also affect the trading price of the Class A
Common Stock after this offering and make it more difficult for you to evaluate
the value of the Class A Common Stock.
The market price of the shares of Class A Common Stock is likely to be highly
volatile and could be subject to wide fluctuations in response to, among other
things, the following factors:
. actual or anticipated variations in our results of operations;
. announcements of technological innovations;
. new products or services introduced by us or our competitors;
. changes in financial estimates by securities analysts;
. conditions and trends in the Internet;
. acquisitions or strategic alliances involving us, our competitors, our
suppliers or our customers; and
. general market conditions and other factors.
Further, the stock markets, and in particular the Nasdaq National Market,
have experienced extreme price and volume fluctuations that have particularly
affected the market prices of equity securities of many technology companies
and that often have been unrelated or disproportionate to the operating
performance of such companies. The trading prices of many technology companies'
stocks are at or near historical highs and reflect price to earnings ratios
substantially above historical levels. There can be no assurance these trading
prices and price to earnings ratios will be sustained. These broad market
factors may adversely affect the market price of our Class A Common Stock.
These market fluctuations, as well as general economic, political and market
conditions such as recessions, interest rates or international currency
fluctuations, may adversely affect the market price of the Class A Common
Stock. In the past, following periods of volatility in the market price of a
company's securities, securities class action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources,
which could harm our business.
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Future sales of our common stock could adversely affect the price of the Class
A Common Stock.
After this offering is completed, shares of Class A Common Stock will be
issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the shares of Class A Common Stock sold in this
offering will be freely tradable under the Securities Act unless purchased by
our "affiliates," as that term is defined in the Securities Act. In connection
with this offering, our officers and directors and some of our stockholders
will be required to refrain from selling any shares of Common Stock for a
period of days after the date of this prospectus without the written
consent of . We cannot be sure what effect, if any, future sales of shares
or the availability of shares for future sale will have on the market price of
the Class A Common Stock. The market price of our Class A Common Stock could
drop due to sales of a large number of shares of our Class A Common Stock in
the market after this offering or the perception that such sales could occur.
These factors could also make it more difficult to raise funds through future
offerings of Common Stock.
You will suffer immediate and substantial dilution.
Purchasers of the Class A Common Stock being offered will experience
immediate and substantial dilution in the net tangible book value of their
Class A Common Stock. See "Dilution."
Some provisions of the Delaware Anti-Takeover Law and of our certificate of
incorporation and bylaws could discourage a takeover of Digex and adversely
affect the price of the Class A Common Stock.
Upon completion of this offering, our board of directors will have the
authority to issue up to shares of preferred stock and to determine the
price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of any of our common stock will be subject to, and
may be adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. The issuance of preferred stock, while
providing flexibility in connection with possible acquisitions and other
corporate purposes, could have the effect of making it more difficult for a
third party to acquire a majority of our outstanding voting stock. We have no
current plans to issue shares of preferred stock. We are also subject to
certain provisions of Delaware law which could have the effect of delaying,
deterring or preventing a change in control of Digex, including Section 203 of
the Delaware General Corporation Law, which prohibits a Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years from the date the person became an interested stockholder
unless certain conditions are met. In addition, our certificate of
incorporation and bylaws contain certain provisions that, together with
Intermedia's ownership of Class B Common Stock, which is entitled to 10 votes
per share, could discourage potential takeover attempts and make attempts by
stockholders to change management more difficult, which could adversely affect
the market price of our Class A Common Stock.
This prospectus includes forward-looking statements which could differ from
actual future results.
Some of the statements in this prospectus that are not historical facts are
"forward-looking statements." Forward-looking statements can be identified by
the use of words such as "estimates," "plans," "anticipates," "expects,"
"intends," "believes" or the negative thereof or other variations thereon or by
discussions of strategy that involve risks and uncertainties. Examples of
forward-looking statements include discussions relating to:
. plans to expand our existing Web site hosting services and applications
for enterprises doing business on the Internet;
. introductions of new products and services;
. proposals to build new data centers in various geographic areas;
. estimates of market sizes and addressable markets for our services and
products;
. anticipated revenues from designated markets during 1999 and later
years; and
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. statements regarding the future course of our relationship with
Intermedia.
We wish to caution you that all the forward-looking statements contained in
this prospectus are only estimates and predictions. Our actual results could
differ materially from those anticipated in the forward-looking statements due
to risks, uncertainties or actual events differing from the assumptions
underlying these statements. Such risks, uncertainties and assumptions include,
but are not limited to, those discussed in this prospectus.
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USE OF PROCEEDS
We estimate the net proceeds from the sale of the shares of Class A
Common Stock we are offering will be approximately $ million, at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses. If the underwriters' over-allotment option is exercised in full, we
estimate such net proceeds will be approximately $ million. The principal
purposes of this offering are to obtain additional capital, create a public
market for our Class A Common Stock and facilitate our future access to the
public capital markets.
Under the terms of Intermedia's indentures, described under "Risk Factors--
Digex is controlled by Intermedia," we will be required to use all of the net
proceeds of this offering to purchase Telecommunications Related Assets. We
intend to use approximately $ of the net proceeds to continue to expand and
enhance our data center infrastructure. We expect that some of the remaining
Telecommunications Related Assets, which we will be required to purchase, will
be sold to Intermedia at our costs. We expect to be able to use the proceeds of
such sales to Intermedia for working capital purposes and to fund our operating
losses. The amounts actually expended for such capital expenditures and working
capital purposes may vary significantly, depending on a number of factors,
including our future revenues and Intermedia's availability of funds.
A portion of the net proceeds may also be used to acquire or invest in
complementary businesses, technologies, product lines or products. We have no
current plans, agreements or commitments with respect to any such acquisition,
and we are not currently engaged in any negotiations with respect to any such
transaction. Pending use of the net proceeds of this offering, we intend to
invest the net proceeds in short-term, interest-bearing, investment grade
securities.
DIVIDEND POLICY
We do not anticipate paying any dividends on any of our common stock in the
foreseeable future. Moreover, because we are subject to restrictions under the
Intermedia indentures, we are effectively prohibited from paying dividends. We
may also incur indebtedness in the future which may prohibit or effectively
restrict the payment of dividends.
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CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 (1)
on an actual basis, (2) on a pro forma basis as if our recapitalization had
been effected on December 31, 1998, and (3) as adjusted to give effect to the
sale of the shares of Class A Common Stock we are offering, at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses that we will pay and the application of the estimated net proceeds
from this offering. This table should be read in conjunction with the financial
statements and the notes relating to those statements included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
December 31, 1998
-------------------------------
Pro Forma
Actual (unaudited) As Adjusted
------- ----------- -----------
(In thousands)
<S> <C> <C> <C>
Cash and cash equivalents...................... $ -- $ -- $--
======= ======= ====
Capital lease obligations, including current
maturities.................................... $ 2,089 $ --
Stockholder's equity:
Class A Common Stock, $.01 par value; 6,000
authorized;
non-issued and outstanding.................. -- --
Class B Common Stock, $.01 par value; 3,000
authorized;
1,000 assumed issued and outstanding on a
pro forma basis............................. -- --
Owner's net investment....................... 70,845 --
Additional paid-in capital................... -- 77,739
Accumulated deficit.......................... -- --
------- ------- ----
Total stockholder's equity .................. 70,845 77,739
------- ------- ----
Total capitalization........................... $72,934 $77,739 $
======= ======= ====
</TABLE>
22
<PAGE>
DILUTION
Our net tangible book value as of , 1999 was approximately $ million,
or $ per share of Class A and Class B Common Stock. Pro forma net tangible
book value per share represents the amount of total tangible assets less total
liabilities, divided by the pro forma number of shares of Class A Common Stock
and Class B Common Stock outstanding as of , 1999. After giving effect to
the issuance and sale of the shares of Class A Common Stock offered hereby
at an assumed initial public offering price of $ per share and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses, our pro forma net tangible book value as of , 1999 would
be $ million, or $ per share. This represents an immediate increase in
pro forma net tangible book value of $ per share to existing stockholders
and an immediate dilution of $ per share to new investors. The following
table illustrates this per share dilution:
<TABLE>
<S> <C>
Assumed initial public offering price per share......................... $
------
Net tangible book value per share at , 1999........................ $
Increase in pro forma net tangible book value per share attributable
to new investors..................................................... $
------
Pro forma net tangible book value per share after offering.............. $
------
Dilution per share to new investors..................................... $
======
</TABLE>
The following table summarizes, on a pro forma basis as of , 1999, the
differences between the number of shares of Common Stock purchased from Digex,
the aggregate cash consideration paid and the average price per share paid by
existing stockholders and new investors purchasing shares of Class A Common
Stock in this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------- ---------------------- Price
Number Percent Amount Percent Per Share
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..
New investors..........
-------- -------- --------- --------- ---
Total................
======== ======== ========= =========
</TABLE>
23
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial information of
Digex for the period from July 7, 1997 (date of acquisition) to December 31,
1997 and the year ended December 31, 1998, and of the Predecessor for the year
ended December 31, 1996 and the period from January 1, 1997 to July 6, 1997.
The selected historical financial information has been derived from Digex's and
the Predecessor's financial statements which have been audited by Ernst & Young
LLP and are included elsewhere in this prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of Business Internet as if such
acquisition had occurred on January 1, 1997, but only includes financial
information for the Predecessor. The presentation of pro forma financial
information was made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
You should read the selected financial data below in conjunction with our
audited financial statements and the related notes and the Predecessor's
audited financial statements included elsewhere in this prospectus. You should
also read the accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations," also contained later in this prospectus.
<TABLE>
<CAPTION>
Predecessor Digex
---------------------------- ---------------------------------------------
Historical
---------------
Historical Period from Pro Forma Historical
---------------------------- July 7, 1997 ------------ ------------
(date of Year ended
Year ended Period from acquisition) to December 31, Year ended
December 31, January 1, 1997 December 31, 1997 December 31,
1996 to July 6, 1997 1997 (unaudited) 1998
------------ --------------- --------------- ------------ ------------
(In thousands, except pro forma share and per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635
Costs and expenses:
Cost of operations..... 2,002 4,149 1,739 2,808 6,710
Cost of services....... 684 1,817 1,611 3,428 7,044
Selling, general and
administrative........ 3,194 7,001 6,087 13,088 17,512
Depreciation and
amortization.......... 591 519 2,753 4,850 8,109
Charge off of purchased
in-process research
and development....... -- -- 15,000 (1) 15,000 (1) --
------- -------- --------- --------- --------
Total costs and
expenses............... 6,471 13,486 27,190 39,174 39,375
------- -------- --------- --------- --------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (27,562) (16,740)
Income tax benefit...... -- -- 1,440 4,710 159
------- -------- --------- --------- --------
Net loss................ $(3,668) $ (9,066) $ (18,558) $ (22,852) $(16,581)
======= ======== ========= ========= ========
Pro forma net loss per
common share (2):
Basic................. -- -- $ (18.56) $ (22.85) $ (16.58)
========= ========= ========
Diluted............... -- -- $ (18.56) $ (22.85) $ (16.58)
========= ========= ========
Shares used in computing
pro forma basic and
diluted net loss per
share.................. -- -- 1,000 1,000 1,000
========= ========= ========
Other Data:
EBITDA before certain
charges (3)............ $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631)
Net cash used in
operating activities... (2,565) (7,172) (6,079) (13,251) (10,930)
Net cash used in
investing activities... (1,445) (1,004) (55,237) (56,241) (30,969)
Net cash provided by
financing
activities (4)......... 4,010 8,176 61,316 69,492 41,899
Capital expenditures.... 1,445 1,004 8,016 9,020 30,969
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
----------------- -----------------------------------
December 31, 1996 December 31, 1997 December 31, 1998
----------------- ----------------- -----------------
(In thousands) (In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Working capital (defi-
ciency)................ $(1,237) $ (351) $ 1,231
Property and equipment,
net.................... 2,599 12,930 39,059
Total assets............ 3,173 49,693 77,739
Capital lease obliga-
tions.................. 1,745 1,980 2,089
Total owner's equity.... 342 45,527 70,845
</TABLE>
- --------
(1) This amount represents a one-time charge to operations for charge off of
purchased in-process research and development related to the Predecessor in
connection with Intermedia's purchase of Business Internet on July 7, 1997.
(2) Pro forma basic and diluted net loss per share has been calculated assuming
that the common shares issued in connection with our recapitalization in
April 1999 were outstanding for all periods of Digex presented.
(3) EBITDA before certain charges consists of earnings (loss) before tax
benefit, depreciation and amortization and the charge off of purchased in-
process research and development. EBITDA, before certain charges, does not
represent funds available for management's discretionary use and is not
intended to represent cash flow for operations. EBITDA before certain
charges should be considered only as an alternative to net loss as an
indication of operating performance or cash flows as a measure of
liquidity.
(4) Net cash provided by financing activities includes capital contributions of
$7,626, $64,085 and $41,899 for the period from January 1, 1997 to July 6,
1997, the period for July 7, 1997 to December 31, 1997 and the year ended
December 31, 1998, respectively.
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes relating to those statements appearing elsewhere in this
prospectus.
Overview
Digex is a leading provider of Internet hosting services to businesses and
institutions implementing complex, interactive Web sites and Web-based
applications. Our offerings include Web site and application hosting,
enterprise and consulting services. From major corporations to Internet start-
ups, our clients leverage our services to rapidly and cost-effectively deploy
secure and reliable business solutions including on-line banking, on-line
procurement and electronic retailing. We provide the computer hardware,
software, network technology, and systems management necessary to offer our
customers comprehensive outsourced Web site hosting solutions.
We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently provides hosting services to over 550 customers, including
American Century Investments, Budget Rent-A-Car, Forbes, J. Crew, Kraft,
Universal Studios and Nike. We operate two state-of-the-art data centers
strategically positioned on the east and west coasts of the United States. In
these data centers, we house over 1,300 Windows NT and UNIX-based servers which
we own and manage. Our revenues have grown at a compounded annual growth rate
of 184% over the past two years from $2.8 million in 1996 to $22.6 million in
1998. The following are among the key factors that we believe will continue to
drive our growth:
. a highly scalable operating platform which was designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web
site hosting initiatives;
. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and
. a network of over 120 business partnership alliances which provide
complementary design, development and integration services for our
customers and which represent a significant source of new customer
referrals for Digex.
We offer a full range of complementary value-added services designed to
handle the rapidly evolving requirements of complex Web sites. Our services
include the following:
. Web site management services;
. integrated business solutions;
. enterprise services; and
. consulting services.
Our business started in 1996, as the Web site hosting unit (the
"Predecessor") of Business Internet Inc. (previously known as DIGEX,
Incorporated), a company that was principally an Internet access and Web site
hosting services provider. Business Internet (at the time known as DIGEX,
Incorporated) went public in October 1996, and was acquired by Intermedia in
July 1997. In contemplation of this offering, we were incorporated as Digex,
Incorporated on April 27, 1999. On that date, Business Internet contributed our
assets to the newly formed Digex, Incorporated in order to effect a
recapitalization of our business. As of the date of this prospectus, Business
Internet, a wholly-owned subsidiary of Intermedia, owns 100% of our common
stock.
26
<PAGE>
Revenue. Our revenues consist primarily of monthly fees from sales of our Web
site hosting and other related services. Contracts for these services are
typically between one and three years in length. In addition to Web hosting, we
have also recently begun to offer integrated business solutions, enterprise
services and consulting services and believe that we will begin to derive
increasing amounts of revenues from the sale of these services in the future.
Cost and Expenses. Cost and expenses include:
.cost of operations;
.cost of services;
.selling, general and administrative expenses; and
.depreciation and amortization expense.
Cost of operations consist primarily of the costs for our network
connectivity. We expect our network connectivity requirements to grow in
conjunction with the growth of our overall business and accordingly expect
these costs to increase in the future.
Cost of services consist principally of salaries and benefits for our
technical operations and customer service personnel and facilities
administration, including rent, maintenance and utilities to support our data
centers. We expect our cost of services to increase in dollar amount but to
decline as a percentage of revenue due to economies of scale and expected
improvements in technology and productivity.
Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultant's fees and other miscellaneous expenses including travel and
entertainment expenses. We expect selling, general and administrative expenses
in the future to increase in dollar amount but to decline as a percentage of
revenue.
Depreciation and amortization expense consists primarily of depreciation of
our data center equipment and related assets and amortization of our intangible
assets. We expect these expenses to increase due to our plans to invest
significant capital to expand our data center capacity.
27
<PAGE>
Results of Operations
The following table presents certain information derived from the audited
financial statements for the years ended December 31, 1996 and 1998 expressed
as a percentage of revenue. For the purposes of the following discussion and
analysis, the results of operations of the Predecessor for the period from
January 1, 1997 to July 6, 1997, have been adjusted to reflect the acquisition
of Business Internet by Intermedia as if the acquisition had occurred at the
beginning of 1997 and have been combined with the results of our operations for
the period from July 7, 1997 (date of acquisition) to December 31, 1997. This
computation was done to permit useful, complete year comparisons between the
results for 1996, 1997 and 1998. However, this pro forma information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997.
<TABLE>
<CAPTION>
Predecessor Digex
----------------- -----------------------------------
Historical Pro forma Historical
----------------- ----------------- -----------------
Year ended
Year ended December 31, 1997 Year ended
December 31, 1996 (Unaudited) December 31, 1998
----------------- ----------------- -----------------
(As a percentage of revenues)
<S> <C> <C> <C>
Revenues................. 100.0% 100.0% 100.0%
Costs of expenses:
Cost of operations..... 71.4 24.2 29.6
Cost of services....... 24.4 29.5 31.1
Selling, general and
administrative........ 114.0 112.7 77.5
Depreciation and
amortization.......... 21.1 41.8 35.8
Charge off of purchased
in-process research
and development....... 0.0 129.2 0.0
------ ------ -----
Total costs and ex-
penses.................. 230.9 337.4 174.0
------ ------ -----
Loss before income tax-
es...................... (130.9) (237.4) (74.0)
Income tax benefit....... 0.0 40.6 0.7
------ ------ -----
Net loss............... (130.9)% (196.8)% (73.3)%
====== ====== =====
</TABLE>
Year Ended December 31, 1998 Compared to Pro Forma Year Ended December 31, 1997
Revenue. Revenues were $22.6 million for the year ended December 31, 1998
compared to $11.6 million for the year ended December 31, 1997, an increase of
94.9%. The $11.0 million increase in revenue was a result of our increased
marketing efforts, and market acceptance of our new products, resulting in
growth in our number of customers. We also experienced increases in revenue
from existing customers through upgrades and value added services. This
translated into higher average revenues per server. Additionally, during 1998
we increased the number of quota-bearing sales representatives.
Cost of Operations. Our cost of operations was $6.7 million for the year
ended December 31, 1998, compared to $2.8 million for the year ended December
31, 1997. The $3.9 million increase was due to increased network capacity
requirements necessary to support our growing business. In addition, we also
experienced an increase in the average network bandwidth per server. As a
percentage of revenue, the cost of operations increased to 29.6% in 1998 from
24.2% in 1997 primarily as a result of our purchasing added capacity per server
in 1998 as compared to 1997 to improve customer Web site performance.
Cost of Services. Our cost of services was $7.0 million for the year ended
December 31,1998, compared to $3.4 million for the year ended December 31,
1997. The $3.6 million increase was due primarily to the hiring of additional
engineering and operations staff to support our expanded customer base. As a
percentage of revenue, the cost of services increased to 31.1% in 1998 from
29.5% in 1997.
Selling, General and Administrative. Expenses increased to $17.5 million for
the year ended December 31, 1998, compared to $13.1 million for the year ended
December 31, 1997. The $4.4 million increase was due
28
<PAGE>
to higher commission expenses associated with our increased sales levels as
well as increases in our administrative headcount. As a percentage of revenue,
the expenses decreased to 77.5% in 1998 from 112.7% in 1997 due to economies of
scale.
Depreciation and Amortization. Depreciation and amortization increased to
$8.1 million for the year ended December 31, 1998, compared to $4.9 million for
the year ended December 31, 1997. The $3.2 million increase was largely due to
increased capital expenditures for servers and other data center related
equipment.
Income Tax Benefit. Our income tax benefit decreased to $159,000 for the year
ended December 31, 1998, compared to $4.7 million for the year ended December
31, 1997. The 1998 income tax benefit represents the recognition of a portion
of the benefits associated with 1998 tax net operating loss carryforwards.
Benefits were recognized in 1998 to the extent of unused deferred tax credits
originating in previous periods.
Net Loss. Net losses decreased to $(16.6) million for the year ended December
31, 1998, compared to $(22.9) million for the year ended December 31, 1997.
Pro Forma Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996
Revenue. Revenues were $11.6 million for the year ended December 31, 1997,
compared to $2.8 million for the year ended December 31, 1996, an increase of
314%. The $8.8 million increase in revenue was due primarily to our increased
marketing and sales efforts and the increased market acceptance of dedicated
Web site hosting as a viable outsourcing solution.
Cost of Operations. Our cost of operations was $2.8 million for the year
ended December 31, 1997, compared to $2.0 million for the year ended December
31, 1996. The $806,000 increase was due to increased network connectivity
expenses in connection with the growth in the number of managed servers. This
increase in our cost of operations was partially offset by the more favorable
network connectivity pricing we received subsequent to Intermedia's acquisition
of Business Internet in July 1997. As a percentage of revenue, the cost of
operations declined to 24.2% in 1997 from 71.4% in 1996 primarily as a result
of the favorable pricing from Intermedia.
Cost of Services. Our cost of services was $3.4 million for the year ended
December 31, 1997, compared to $684,000 for the year ended December 31, 1996.
The $2.7 million increase was due primarily to headcount increases in customer
service and operations during 1997. As a percentage of revenue, the cost of
services increased to 29.5% in 1997 from 24.4% in 1996, primarily due to the
additional customer service and operations employees who were hired in
conjunction with the expansion of our marketing efforts to support the
anticipated growth in our business.
Selling, General and Administrative. Expenses increased to $13.1 million for
the year ended December 31, 1997, compared to $3.2 million for the year ended
December 31, 1996. The $9.9 million increase was due to significant increases
in headcount in our sales, marketing, management information, and
administration departments, as well as one time expenditures for employee
recruitment, relocation, and training. As a percentage of revenue, the expenses
decreased to 112.7% in 1997 from 114.0% in 1996.
Depreciation and Amortization. Depreciation and amortization increased to
$4.9 million for the year ended December 31, 1997, compared to $591,000 for the
year ended December 31, 1996. The $4.3 million increase was due to the
amortization of intangible assets in connection with the purchase of Business
Internet as allocated to us. This increase was also due to increased capital
expenditures for servers and other data center related equipment connected with
the continued expansion of our business.
Charge off of Purchased In-Process Research and Development. The charge for
purchased in-process research and development of $15.0 million in 1997
represents the amount of purchased in-process research and development
associated with the purchase of Business Internet by Intermedia. In connection
with this
29
<PAGE>
acquisition, Intermedia allocated $15.0 million of the purchase price to in-
process research and development projects that relate directly to us. This
allocation represents the estimated fair value based on risk-adjusted cash
flows related to the incomplete products. At the date of acquisition, the
development of these projects had not yet reached technological feasibility and
the in-process research and development had no alternative future uses.
Accordingly, these costs were expensed as a one-time charge to earnings in
1997.
Income Tax Benefit. Our income tax benefit increased to $4.7 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The income tax benefit in 1997 results from our ability to recognize the
benefits of our 1997 net tax operating loss carryforward to the extent of
available and unused tax credits that arose in connection with Intermedia's
purchase of Business Internet. Such tax credits relate to the purchase
accounting differences between bases in our identifiable intangible assets.
Net Loss. Net losses decreased to $(22.9) million for the year ended December
31, 1997, compared to $(3.7) million for the year ended December 31, 1996.
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods since inception. These cash usages have been funded by permanent
contributions to capital. Such contributions amounted to $24.5 million and
$41.9 million in 1997 and 1998, respectively.
Net cash used in operating activities in 1996, 1997 and 1998 was $2.6
million, $13.3 million and $10.9 million, respectively. Net cash used for
operating activities in each of these periods was primarily the result of
operating losses, offset in part by increases in accounts payable and accrued
expenses.
Net cash used for investing activities in 1996, 1997 and 1998 was $1.4
million, $56.2 million and $30.9 million, respectively. Net cash used for
investing activities in each of these periods was primarily the result of
capital expenditures for data center infrastructure, as well as leasehold
improvements, furniture and fixtures and computers and other equipment.
Additionally, in July of 1997, goodwill and other intangible assets were
allocated to us for separate reporting purposes, and shown as a use of cash.
Although we have plans to invest significantly in property and equipment, we
have no material commitments for such items at this time.
Our operating activities are expected to result in uses of cash for several
years, as we expand our data center capacity, increase our headcount in support
of such operations and invest in our marketing organization. In addition, we
expect to invest significantly in the purchase of property and equipment. Our
management believes that the proceeds of this offering will be sufficient to
meet our projected cash needs into the second half of 2000. We intend to seek
funding from external sources to meet our cash needs subsequent to that date.
There can be no assurance that such funding will be available on terms
satisfactory to us. Alternatively, Intermedia could advance funds to us to meet
our requirements after that date, but it has no obligation to do so.
Impact of Year 2000
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, computer
programs that have time-sensitive software may recognize a date ending in "00"
as the year 1900 rather than the year 2000. This could result in system failure
or miscalculations causing disruptions of operations including, among other
things, a temporary inability to process transactions, send invoices, or engage
in similar normal business activities. To ensure that our computer systems and
applications will function properly beyond 1999, through Intermedia, we have
implemented a Year 2000 program.
30
<PAGE>
Project and State of Readiness
We have developed a five-phase plan that is designed to assess the impact of
the Year 2000 issue on its information technology ("IT") and non-information
technology ("Non-IT"). This table represents management's best estimates of our
progress as of March 31, 1999 and expected dates of completion with respect to
our mission-critical and non-mission-critical systems:
<TABLE>
<CAPTION>
Date of Date of
Phase Completion IT Completion Non-IT Completion
---------------- ---- ---------- ------ ----------
<C> <S> <C> <C> <C> <C>
I. Preliminary Activity 100% 12/31/97 100% 12/31/97
II. Problem Determination 100% 9/30/98 100% 3/31/99
III. Plan Complete & Resources 90% 5/31/99 80% 5/31/99
Committed
IV. Operational Sustainability 50% 9/30/99 50% 9/30/99
V. Fully Compliant 50% 9/30/99 50% 9/30/99
</TABLE>
Because it is not always necessary to complete one phase prior to completing
the next, some projects within a given phase have been started, while there may
be outstanding tasks associated with prior phases. Priority is always placed on
mission critical systems.
Phase I Preliminary Activity
This phase is a phase of awareness and education. The outcome of this phase
was our understanding of the criticality, risks, size and scope of the Year
2000 problem.
Phase II Problem Determination
In this phase we performed an inventory and assessment to determine which
portions of our hardware and software would have to be replaced or modified in
order for our networks, office equipment and information management systems to
function properly after December 31, 1999. Such determinations were based in
part on representations made by hardware and software vendors as to the Year
2000 compliance of the systems we use. However, there can be no assurances that
any vendor representations received by us were accurate or complete. We also
conducted a risk assessment to identify those systems whose failure would be
expected to result in the greatest risk to our business. As of March 31, 1998,
Phase II of the plan was 100% complete with respect to IT and 100% complete
with respect to Non-IT. However, there can be no assurances that mission
critical equipment has not been overlooked.
Phase III Plan Complete & Resources Committed
During Phase III, we designed a plan to make the necessary modifications to
and/or replace the impacted software and hardware and committed the resources
towards the completion of such a plan. While we believe we have almost
completed our plan for achieving Year 2000 compliance, the discovery of
additional IT or Non-IT systems requiring remediation could adversely impact
the current plan and the resources required to implement the plan.
Phase IV Operational Sustainability
We are actively engaged in Phase IV, using both internal and external
resources to reprogram, or replace, and test certain components of our networks
and information processing systems for Year 2000 compliance and scheduling the
installation of other necessary hardware and software upgrades. Although we
intend to conduct tests to ensure the equipment is Year 2000 compliant, we will
focus primarily on those systems whose failure would pose the greatest risks to
our operations. There can be no assurance that we have not overlooked mission
critical IT or Non-IT systems. We will not likely test all of our equipment and
will rely upon vendor
31
<PAGE>
representations, if received, where tests are not conducted. There can be no
assurance that any vendor representation will be accurate or complete. As of
March 31, 1999, Phase IV of the plan was 50% complete for IT and 50% for Non-
IT. We expect to complete Phase IV by September 30, 1999.
Phase V Fully Compliant
We plan to be fully compliant on mission-critical components no later than
September 30, 1999, which is prior to any anticipated impact on our operating
systems. Though the majority of the work will be completed by early third
quarter 1999, there are elements that will not be completed (Phase V) until
late in the third quarter of 1999 primarily due to limited availability of
compliant software and hardware and prioritization of mission critical systems.
As of March 31, 1999, we estimate that our remediation efforts are
approximately 50% complete overall.
We believe that we have allocated adequate resources for this purpose and
expect our Year 2000 date conversion program to be successfully completed on a
timely basis. However, there can be no assurance that it will successfully
implement all of the necessary upgrades in a timely manner. We presently
believe that with modifications to existing software and conversions to new
software and hardware, the Year 2000 issue will not pose significant
operational programs for our systems or have any adverse impact on our
customers or business units. However, if such modifications and conversions are
not made, or are not completed in a timely fashion, the Year 2000 problem could
harm our reputation and business.
Costs
We have tracked Year 2000 costs on a company-wide basis by segregating our
internal and external costs and hardware and software costs. The internal costs
are comprised of employee hours, and external costs are comprised of outside
consultant costs.
The cost estimates presented below do not include system upgrades that would
otherwise result as part of our capital expenditure program. The estimated
costs of the project and the date which we have established to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing numerous assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those anticipated.
Specific factors that might cause such material differences include, but are
not limited to, the availability and cost of personnel trained in this area,
the ability to locate and correct all relevant computer codes, unanticipated
mergers and acquisitions, and similar uncertainties.
A summary of historical and estimated costs for the Year 2000 project are
listed below:
<TABLE>
<CAPTION>
External Internal
-------- --------
<S> <C> <C>
Historical through March 31, 1999...................... $379,746 $ 87,600
Estimated additional expenditures for 1999............. 126,800 41,600
-------- --------
Total................................................ $506,546 $129,200
</TABLE>
<TABLE>
<CAPTION>
Software/Hardware
-----------------
<S> <C>
Historical through March 31, 1999....................... $834,000
Estimated additional expenditures for 1999.............. 386,000
----------
Total................................................. $1,220,000
</TABLE>
Risks and Contingency Plan
While we are working to test our own mission-critical systems for Year 2000
compliance, we do not control the systems of our suppliers. We are currently
seeking assurance from our suppliers and strategic business partners regarding
the Year 2000 readiness of their systems. We are currently planning
interoperability tests to ensure that our suppliers' and business partners'
systems will accurately interact with our systems into and beyond the Year
2000. Importantly, we are relying on Intermedia's Year 2000 compliance efforts
to ensure
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that our connectivity with Intermedia is available after December 31, 1999.
Notwithstanding any measures we may take, there is some risk that the
interaction of our systems and those of our suppliers or business partners may
be impacted by the Year 2000 date change. In addition, in light of the vast
interconnection and interoperability of telecommunications networks and the
Internet worldwide, to provide services to our customers is dependent in large
part on the networks and systems of other carriers. To the extent the networks
and systems of those carriers are adversely impacted by Year 2000 problems, our
ability to service our customers may be adversely impacted as well. Any such
impact could have a material adverse effect on our operations.
The failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the company's
results of operations, liquidity and financial condition. Due to the general
uncertainty inherent in the Year 2000 problem, resulting in part from the
uncertainty of the Year 2000 readiness of third-party suppliers and customers,
we are unable to determine at this time whether the consequences of Year 2000
failures will have a material impact on our results of operations, liquidity or
financial condition. The Year 2000 project is expected to significantly reduce
our level of uncertainty about the Year 2000 problem and, in particular, about
the Year 2000 compliance and readiness of our material suppliers and business
partners. We believe that, with the implementation of new business systems and
completion of the Year 2000 project as scheduled, the possibility of
significant interruptions of normal operations should be reduced.
In a recent Securities and Exchange Commission release regarding Year 2000
disclosure, the Securities and Exchange Commission stated that public companies
must disclose the most reasonably likely worst case Year 2000 scenario.
Although it is not possible to assess the likelihood of any of the following
events, each must be included in a consideration of worst case scenarios:
widespread failure of electrical, gas, and similar supplies serving us,
widespread disruption of the services provided by common communications
carriers; similar disruption to the means and modes of transportation for us
and our employees, contractors, suppliers and customers; significant disruption
to our ability to gain access to, and remain working in, office buildings and
other facilities; the failure of substantial numbers of our critical computer
hardware and software systems, including both internal business systems and
systems controlling operational facilities such as electrical generation,
transmission and distribution systems; and the failure of outside entities'
systems, including systems related to banking and finance. We urge you to read
"Risk Factors--We could lose revenues and our reputation may be damaged if our
systems or those of our customers are not Year 2000 compliant."
If we cannot operate effectively after December 31, 1999, we could, among
other things, face substantial claims by customers or loss of revenue due to
service interruptions, inability to fulfill contractural obligations or bill
customers accurately and on a timely basis, and increased expenses associated
with litigation, stabilization of operations following critical system failures
and the execution of contingency plans. We could also experience an inability
by customers and others to pay, on a timely basis or at all, obligations owed
to us. Under these circumstances, the adverse effects, although not
quantifiable at this time, would be material.
We believe that our critical systems will be Year 2000 compliant before
January 1, 2000. Intermedia's Year 2000 Executive Steering Committee convened
in first quarter 1999 and is scheduled to meet regularly throughout the year.
This committee includes members of Intermedia's management and our President,
Nancy G. Faigen. The committee is working to oversee and allocate additional
resources, if required, for the final plans for Year 2000 readiness. Having
identified our mission-critical systems and those of our key suppliers, and the
associated risks of failure to ensure that those systems are Year 2000 ready,
we are in the process of devising contingency plans which will be implemented
in the event any such systems are not Year 2000 compliant in a timely manner.
Business continuity plans are under development by us and will be ready for
implementation by the fourth quarter of 1999.
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BUSINESS
Overview
Digex is a leading provider of hosting services to businesses and
institutions implementing complex, interactive Web sites and Web-based
applications. Our offerings include Web site and application hosting,
enterprise and consulting services. From major corporations to Internet start-
ups, our clients leverage our services to rapidly and cost-effectively deploy
secure and reliable business solutions including on-line banking, on-line
procurement and electronic retailing. We provide the computer hardware,
software, network technology, and systems management necessary to provide our
customers comprehensive outsourced Web site hosting solutions.
We believe our singular focus on delivering mission-critical Web site and
application hosting solutions has been the major contributor to our growth.
Digex currently provides hosting services to over 550 customers, including
American Century Investments, Budget Rent-A-Car, Forbes, J. Crew, Kraft,
Universal Studios and Nike. We operate two state-of-the-art data centers
strategically positioned on the east and west coasts of the United States. In
these data centers, we house over 1,300 Windows NT and UNIX-based servers which
we own and manage. Our revenues have grown at a compounded annual growth rate
of 184% over the past two years from $2.8 million in 1996 to $22.6 million in
1998. The following are among the key factors that we believe will continue to
drive our growth:
. a highly scalable operating platform which was designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web
site hosting initiatives;
. an experienced management team and technical experts, who in the
aggregate hold over 200 technical certifications from leading companies
such as Cisco Systems, Microsoft and Sun Microsystems;
. a highly skilled research and development organization dedicated to
identifying the best available tools, technologies and processes;
. a growing, geographically distributed direct sales force; and
. a network of over 120 business partnership alliances which provide
complementary design, development and integration services for our
customers and which represent a significant source of new customer
referrals for Digex.
We believe we have established a reputation for reliable service, prompt Web
site deployment and quality customer service. To meet our customers' evolving
requirements, we continuously seek to identify, test and utilize the best
available technologies and processes. Scalability is a central element of our
operating strategy. Our architecture was specifically designed to facilitate
the rapid, cost-efficient implementation and expansion of customers' Web site
hosting initiatives. We believe our singular focus of providing mission-
critical Web site hosting services, technical expertise and high quality
facilities has made us a leading provider of Web site hosting services.
Industry Background
Introduction
Use of the Internet, including intranets and extranets, has grown rapidly in
recent years. This growth has been driven by a number of factors, including the
large and growing installed base of personal computers, improvements in network
architectures, increasing numbers of network-enabled applications, the
emergence of compelling content and commerce-enabling technologies, and easier,
faster and cheaper Internet access. As a result of this growing use, the
Internet has become an important new global communications and commerce medium.
The Internet represents an opportunity for enterprises to interact in new and
different ways with a large number of customers, employees, suppliers and
partners. Enterprises are responding to this opportunity by rapidly increasing
their investment in Internet sites and services.
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Over the last several years, enterprises that focus solely on distributing
products and services over the Internet have emerged and, more recently,
mainstream businesses have begun to implement Web sites to complement
traditional business models and applications. Among the various factors which
continue to attract these businesses to the Internet is the transformation of
Web sites from being primarily text-based and informational to becoming
interactive, multimedia-enabled and transaction oriented. New technologies and
development tools have also led to the Web-enabling of traditional business
functions and applications such as customer service, procurement, human
resource management and sales force automation. Internet operations and
applications are mission-critical for virtually all Web-centric companies and
are becoming increasingly mission-critical for many mainstream enterprises. At
the same time, these operations and applications are becoming more complex and
challenging to operate. Ensuring the quality, reliability, and availability of
these Internet operations typically requires substantial investments in
developing Internet expertise and infrastructures. However, such a continuing
significant investment of resources is often an inefficient use of an
enterprise's limited resources. As a result, businesses are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation of their Internet solutions, and reduce Internet
operating expenses.
According to Forrester Research, approximately half of the Fortune 1000 firms
they surveyed have outsourced the management of their Web sites. Forrester
reports that companies outsource Web site management primarily for the
following reasons:
. scarcity of technical skills;
. performance;
. speed of implementation; and
. security.
We believe additional benefits of outsourcing the management of a complex Web
site include lower total costs, higher service level guarantees and reduced
risk of technology obsolescence.
Emergence of Web Hosting Service Providers
In order to establish a high quality, reliable Web site or to run a Web-based
application on the Internet, businesses must, among other things, procure and
integrate sophisticated hardware and software, develop application specific
technical skills, and have access to a secure, fault tolerant physical location
and redundant Internet connectivity. While it is possible for a business to
provide all of these elements in-house, many companies elect to outsource all
or a portion of their Web-site operations to companies offering Web hosting
services. Web hosting companies, in general, provide various infrastructure-
related services, including secure, monitored data centers, uninterrupted power
supply and high-speed network connectivity. We categorize the market for
outsourced Web hosting services into the following:
. Shared Hosting: customers share server hardware and bandwidth with other
customers. Shared hosting provides a price competitive entry point for
individuals and businesses desiring a simple Web site.
. Collocation Hosting: customers own their hardware, software and network
equipment which is housed at the Web site hosting company's facilities.
The customers retain responsibility for the installation, management,
scalability and security of their Web sites. While collocation requires
the customer to assume the majority of the responsibilities for the
operation of its Web site, collocation has been and remains an
attractive option for Web-centric companies with advanced in-house
Internet expertise.
. Dedicated Hosting: customers are provided a complete Web site hosting
solution. Unlike collocation, the service provider supplies the
hardware, software, network equipment and support necessary to run the
Web site. As Web sites have become more complex, even large and
technically astute businesses have found Internet technologies and
solutions a challenge to manage. For such
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companies, including many Fortune 2000 companies, dedicated Web site
hosting has become a preferred alternative.
. Application Hosting: customers are provided the services of dedicated
Web site hosting along with the management of Web-enabled business
applications supporting such common business processes as customer
service, procurement, human resource management and sales force
automation. The service provider implements and configures such business
applications to meet the specific needs of its customers. For large and
small businesses alike, business process hosting offers numerous
benefits, including faster time-to-market, access to advanced
application skills and significantly lower costs of operation.
A variety of companies, such as ISPs and large systems integrators, offer
products and services that attempt to address enterprises' Internet outsourcing
needs. However, we believe the solutions offered by these companies fail to
address certain elements required to ensure that customers' mission-critical
Internet operations are reliable, scalable and responsive. ISPs have
traditionally focused on providing Internet access and many have not developed
the technical expertise and physical resources to support mission-critical Web
sites. In addition, many large systems integrators focus primarily on large
enterprises and traditional information technologies. These firms often lack
the network and Internet expertise required to provide mission-critical
solutions. As a result, we believe a significant opportunity exists for a
highly-focused company to provide a combination of complex Web site hosting,
outsourced applications management and professional consulting services that
enable businesses to implement reliable, high performance and cost effective
mission-critical Internet solutions.
The Digex Solution
We focus primarily on providing dedicated Web site and application hosting
services. Our core competency is developing and managing mission-critical Web
solutions for Fortune 2000 companies and Web-centric businesses. We believe we
are uniquely positioned to assist such businesses in optimizing the potential
of the Internet and their Internet-related applications by providing our
customers with the following key advantages:
A Comprehensive Suite of Web Site and Application Hosting Services. We
provide a suite of services that enable companies to conduct business on the
Internet. Using a large, multi-specialized technical staff of certified
engineers, and through the security and reliability of our state-of-the-art
data centers, we provide the services and expertise to ensure secure, scalable,
high-performance operation of mission-critical Web sites 24 hours a day. These
services include:
. Web site management services such as operating and supporting Windows NT
and UNIX-based dedicated servers, providing server collocation, and
private network connectivity;
. integrated business solutions, which involve the hosting of leading Web-
enabled business software applications such as electronic commerce,
sales force automation and customer care;
. enterprise services such as firewall management, stress testing and
customized Web site activity reporting; and
. consulting services including capacity planning, disaster recovery
planning, migration planning and database optimization.
As part of our services, we provide the installation and maintenance of
industry-leading hardware and software, core technical expertise, high-volume
backup and recovery systems and 24 hours a day monitoring by our Server
Operations Center ("SOC").
High-Performance Internet and Private Network Connectivity. We provide high
performance network connectivity services for our customers' Web sites as well
as direct private networking options for secure "back-end" network connections
to private corporate networks and information systems. Through our network
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services agreement with Intermedia, we offer superior Internet connectivity
that provides the following direct benefits to customers:
. connectivity to a diversely, redundant high-speed national network via
Intermedia, a tier-one ISP;
. use of all of Intermedia's public and private peering relationships
permitting direct exchange of traffic with a significantly large number
of carriers and ISPs;
. use of all of Intermedia's regional direct connections to major ISPs,
dial-up carriers, and content service providers; and
. service level agreements guaranteeing high availability and performance.
Digex also intends to provide diversified connectivity options to other major
backbones in addition to Intermedia, offering customers an additional service
enhancement. We also intend to establish and maintain our own public and
private peering arrangements.
Responsive Customer Care and Technical Support. We strive to provide superior
customer service. This includes 24-hour a day direct access to a large staff of
customer care and technical support personnel and a variety of proactive
monitoring services from our state-of-the-art SOC. We believe this level of
customer support significantly differentiates Digex in the marketplace.
At our SOC, we monitor and report on the health of servers, networks, and
security devices managed by Digex. The SOC uses a variety of technologies and
tools to monitor specific network devices, such as routers, switches and load
balancing equipment. The SOC oversees a large number of server resources, such
as CPU, system processes, log files, TCP ports, disk space and others, and
security devices, such as firewalls.
Secure, Fault-Tolerant Data Centers. Our data centers have been engineered to
meet the highest expectations of our most demanding customers across our target
markets, including the particularly stringent requirements of the financial
industry.
Our data centers contain multiple, free-standing computer rooms to provide
containment and isolation. Separate mechanical rooms adjacent to each computer
room house cooling and mechanical equipment, eliminating the possible
introduction of liquid into the computer room from equipment leakage. We use
redundant uninterruptable power supply systems and redundant generators to
ensure that the power system is capable of maintaining power to the data center
in the event of any component failure. State-of-the-art physical security has
been implemented through tightly controlled security zones requiring both card
and biometric identification. Over 100 surveillance cameras record all movement
through the data centers and security guards provide real-time visibility.
Cooling and environmental controls for each data center are designed to monitor
and ensure proper temperature and humidity levels. Finally, all
telecommunications connections enter the data centers through multiple points
from diverse service arrangements to ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.
Predictable Monthly Fees. We provide our services for predictable monthly
fees, enabling our customers to accurately budget costs for Web site hosting
services. These fees are typically contracted as part of one, two or three-year
agreements. These agreements provide service level guarantees and permit
technology upgrades at any time during the life of a contract.
Digex Strategy
Our objective is to maintain our leadership position in the industry and
continue to shape and lead the global market for hosting complex Web sites. We
intend to accomplish this by delivering secure, scalable, high-performance Web
site hosting solutions. Our business strategy focuses on the following:
Expand Our Premier Web Hosting Capabilities. We are currently expanding the
capacity of our east and west coast data centers. We intend to continue to add
data center capacity over the next five years as justified
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by customer demand. We believe our ability to readily grow and scale our
operations while simultaneously maintaining the highest service levels will
allow us to continue to attain higher revenues, lower marginal unit costs and
higher operating margins. The following are among the key initiatives we have
instituted to maintain the quality and scalability of our operations:
. Our Distributed Internet Server Array ("DISA") architecture is
specifically designed to facilitate Web site operating scalability. DISA
unifies interrelated layers of hardware and software around industry
standard solutions. Our customers are strongly encouraged to adopt the
DISA architecture in implementing their Web initiatives. The consistency
and reliability afforded by our DISA architecture facilitates rapid and
cost-efficient implementation of our customers' Web hosting initiatives.
Other Web hosting companies typically have opted not to standardize
their operating architectures. The resulting multiple architectures
significantly complicate and limit the flexibility of their operations.
. We believe our technical staff is among the most highly skilled and
trained in the Web hosting industry. We believe our technical staff
affords us a unique competitive advantage and has been instrumental in
attracting many of our Fortune 2000 customers. In addition, we believe
the depth and scope of our staff's technical skill base is essential to
our ability to maintain our high quality service levels. To attract and
retain these individuals, we offer competitive financial incentives, in-
house and external training programs, and the opportunity to work with
cutting-edge technology.
. The Digex Central Nervous System (DCNS) is our end-to-end integrated
customer relationship management system. Currently, DCNS provides
support for key customer care functions like sales management, contract
management, order entry, product fulfillment, problem management, and
billing. It serves as a repository for information about the customer
and a customer's Web site. Future enhancements include Web-enabling
DCNS. This will allow customers to access and view the status of their
account on-line. We believe this functionality will increase customer
satisfaction while reducing customer service costs.
Address Industry-Specific Customer Needs. Our marketing and operating
strategy is designed to exploit our expertise in addressing the unique,
industry-specific needs of our targeted customer base. This targeted customer
base is comprised of companies and agencies in the following industries:
financial services and insurance, media and entertainment, manufacturing,
travel and hospitality, retail and distribution, technology and communications,
healthcare, and government. We have chosen to focus on these specific
industries because we believe they have the highest propensity to outsource
complex, mission-critical Web sites. We believe this strategy provides a number
of benefits including:
. the ability to realize cost efficiencies by developing industry-specific
Web solutions that form the basis for serving other customers in the
same or similar industries;
. the ability to develop industry expertise which will enable us to
proactively address the needs of our customers, thereby differentiating
Digex from the competition; and
. development of a referenceable customer base that validates our
industry-specific Web solutions and expertise.
In conjunction with this strategy, we have designated teams consisting of
individuals from our sales, technical and customer support divisions to focus
exclusively on those specific industries which comprise our target market.
Develop Next Generation Service Offerings. As the underlying technology and
functionality of Web-based products evolve, we believe customers will
continuously demand new service offerings. We believe the depth of our Web site
management skills positions Digex to be a leading provider of next generation
Web-based service offerings. The following are among the new service
initiatives we are currently pursuing:
. Web-Enabled Business Applications. We believe Web hosting will become a
vehicle and platform for operating and supporting leading packaged
software applications that can be used for such common business
processes as e-commerce, sales force automation, customer support and
human
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resource management. We intend to continue partnering with various
software developers, systems integrators and information technology
firms that own and develop these business applications by providing the
Web hosting platform to deliver their applications over the Web. To
date, we focus on providing applications which address the following
areas:
. electronic commerce solutions, such as on-line storefronts, including
electronic catalogs and shopping carts;
. business intelligence solutions, such as analytic applications to
mine corporate data warehouses;
. relationship management solutions, such as customer acquisition,
self-service, and self-sales applications;
. human resources solutions, such as recruiting, training and on-line
benefits applications;
. finance and accounting solutions, such as billing and time-tracking
applications; and
. supply chain management solutions, such as procurement, trading and
other intercompany applications.
. Value-added, Recurring Services. We have developed various value-added
services, which we believe significantly enhance the availability and
effectiveness of our customers' Web sites. Examples of these services
are testing, security, database, reporting and intranet service
offerings. We intend to continue developing services that improve the
effectiveness of Web sites and optimize their performance.
. Proactive Customer Service Management. We believe our hardware and
software monitoring capabilities uniquely position us to anticipate the
Web site hosting needs of our existing customers. We are developing new
tools which will both facilitate the identification of problems with a
customer's existing Web site hosting platform and alert client managers
to the Digex services that can be used to address these issues and
optimize Web site performance.
Expand Capabilities Through Selective Strategic Partnering and
Acquisitions. We currently have partnership alliances with over 120 Web design
and development companies and interactive media agencies. These businesses
typically partner with Digex because our high quality services support and
augment, rather than compete with, their own product and service offerings.
Together with our business partners, we can provide our customers with end-to-
end Web site solutions. In 1998, we created the Digex e-Link Partner
Program(TM), which continues to attract leading interactive media and Web
development companies such as Proxicom, Sapient, Studio Archetype and
Agency.com. In addition, during the second quarter of 1999, we are planning to
launch the Digex app-Link Partner Program(TM) in order to expand our
partnership alliances to include systems integrators, value-added resellers
and consultants. Our partnership programs provide a valuable, cost-effective
channel for our services as well as a highly productive customer referral
source.
In addition, we may seek to opportunistically acquire companies which we
believe will enable us to cost-effectively augment our existing products and
services, technology, infrastructure, skill set, geographic presence or
customer base.
Digex Services
We offer a full range of complementary value-added services designed to
handle the rapidly evolving requirements of complex Web sites. Our services
include the following:
. Web site management services;
. integrated business solutions;
. enterprise services; and
. consulting services.
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Web Site Management (WSM) Services
Dedicated Web Hosting Services. We offer dedicated web hosting services
designed to enable reliable, scalable, mission-critical Web sites, based on
industry-leading technologies and offering high service level guarantees. We
operate both Windows NT and UNIX-based servers exclusively using hardware from
Compaq and Sun. By standardizing around the hardware produced by these two
vendors, we are able to quickly, easily and cost-effectively upgrade, configure
and implement the new hardware necessary to accommodate our customers' growing
needs for higher computing speeds and capacity. We offer a number of services
to dedicated WSM customers to ensure ease of implementation, security,
performance and scalability. Specifically, we provide:
. installation and maintenance of Web sites on Digex server hardware;
. installation and maintenance of Microsoft Windows NT and/or UNIX
operating systems tested and configured by Digex to ensure optimal
Internet performance;
. unlimited help desk support available 24 hours a day with access to
certified technical professionals;
. substantial inventory of parts on-site for rapid upgrading and
maintenance of hardware and software;
. industry and vendor security alerts and maintenance;
. backup and recovery of system information, user information and customer
content to ensure protection against data loss from disaster, hardware
failure, or administration errors; and
. secure remote administration capabilities for easy and ubiquitous remote
management.
Server Collocation Service. Digex's server collocation services provide our
customers with a cost-effective means to collocate customer-owned hardware
within a Digex data center and to benefit from Digex's secured facilities and
network connectivity. Customers also receive 24 hour-a-day physical and remote
access to their equipment.
Data-Center within a Data-Center. The Data-Center within a Data-Center
("DC/DC") product will provide a physically separated, monitored and secured
space within our data centers. DC/DC offers the following specialized features:
. dedicated glass-encased raised floor space with separate logged palm-
scan DC/DC entry;
. dedicated environmental control and monitoring;
. dedicated network bandwidth options;
. dedicated security options;
. standard rack equipment; and
. special rates on Digex services.
Intelligent Networking. We offer a variety of intelligent networking services
to customers with multiple servers, including load balancing and geographical
distribution of network traffic. We expect demand for this product to increase
as more customers move to multiple server solutions.
Private Networking. Our private networking services are primarily used to
securely connect a customer's Web site at Digex to their private corporate
network or information system.
Integrated Business Solutions (IBS)
Our Integrated Business Solutions provide customers with Web site hosting
services designed specifically to operate and support leading packaged software
applications. We partner closely with the business applications vendors to
build valuable skills around their applications with an emphasis on the
operation of the application on the Internet.
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Our IBS services specifically target six distinct functional solution areas:
electronic commerce, business intelligence, relationship management, human
resources, finance and accounting solutions and supply chain management. We
provide application rental, application hosting services and compelling service
level guarantees to our customers. The key benefits of these solutions include:
. installation and maintenance of pre-configured and pre-tested bundles of
the solution on a hardware configuration that handles predicted user
capacity;
. application software rental and upgrades;
. dedicated support personnel;
. advanced data recovery and storage options for the specific application
and database; and
. special rates on other Digex products and services.
Our IBS services are detailed as follows:
Electronic Commerce Solutions. Our electronic commerce solutions enable
businesses to directly sell products and services over the Internet to create
an on-line storefront, including electronic catalogs and shopping carts. These
solutions include options for order processing, fulfillment, invoicing, and
payment. Digex's private networking products permit businesses to connect their
commerce Web sites to various payment processing centers and private corporate
information systems ensuring customers secure routing of payment information
and transaction processing.
The Pandesic e-Business Solution(TM) is our first electronic commerce
solution offering. Pandesic is a joint venture between SAP and Intel, offering
end-to-end commerce functionality for businesses. Today, Digex manages over 45
customers using the Pandesic solution, representing over 100 servers.
Business Intelligence Solutions. Our business intelligence solutions will
provide customers fast and easy access to corporate information using analytic
applications to mine corporate data warehouses. By leveraging the Internet and
Digex's business intelligence solutions, businesses empower executives,
employees, shareholders, partners, and others with access to up-to-date
information. We believe these applications facilitate sophisticated analysis
and real-time monitoring of important indicators to assist companies in their
decision making processes.
Relationship Management Solutions. Our relationship management solutions will
provide customers with the ability to extend critical business information to
sales personnel and customers. These solutions include customer acquisition,
self-service and self-sales applications.
Human Resources Solutions. Our human resources solutions will provide
customers with the ability to take advantage of the Internet to extend human
resource functionality to employees anywhere, anytime. Companies will be able
to improve their ability to manage open positions, performing activities such
as recruiting and training and to allow employees to access on-line and modify
benefits and other personal information.
Finance and Accounting Solutions. Our finance and accounting solutions will
provide customers with support for accounting, billing, compensation, time
tracking, and other financial management functions. For example, Digex can
manage a company's time and expense reporting application to provide global
access for employees to enter time sheets and expense reports.
Supply Chain Management Solutions. Our supply chain management solutions will
provide customers with application solutions that help businesses improve the
effectiveness and reliability of a company's supply chain system. Using the
Internet as the vehicle, these solutions can extend a company's supply chain
management system to otherwise cost-prohibitive partners, improving performance
and lowering costs.
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Enterprise Services
Our enterprise services help companies deploy and maintain effective Web
sites. We believe these value-added, repeatable services will become
increasingly important to our customers as they look to ensure a higher level
of Web site availability, security and reporting. Our enterprise services
include the following:
Testing Services. Our testing services aim to identify problems that could
degrade the expected performance and availability of a customer's Web site. For
example, our stress testing services simulate users accessing a Web site to
provide information for isolating problems, optimizing performance and
accelerating the deployment of Web sites.
Reporting Services. Our reporting services are designed to provide timely,
reliable information about user activity on a customer's Web site. Businesses
can use these reports to assess the effectiveness of their Web sites and to
increase their knowledge of the preferences, habits and demographic
characteristics of their Web site visitors.
Security Services. Our security services are designed to ensure the security
of a customer's Web site. These services include firewalls, encryption and
authentication devices.
Database Services. Our database services provide the installation,
configuration, maintenance and support of leading databases.
Consulting Services
Our consulting services provide customized assistance to customers with
unique architecture, deployment or maintenance requirements. These services
include high-availability design, performance tuning, site architecture
assessment, migration planning, capacity planning, disaster recovery planning
and database optimization. Our consulting services typically assist customers
with limited resources or who lack Internet and technical expertise. Our
consulting engagements typically range from a few hours to a few weeks
depending on the complexity and volume of the services needed. We believe our
consulting services will play an increasingly important role in supporting the
implementation and maintenance of complex Web sites as customers continue to
rapidly adopt emerging technologies.
Customers
We have a large and diverse customer base ranging from Fortune 50 companies
to small and medium size businesses that rely heavily on the Internet. Our
customers are primarily located within the United States. As of April 1, 1999,
we were serving over 550 customers, covering most major industries. Our
customer contracts typically range in duration from one to three years. The
majority of our customers operate in industries which fall within our key
targeted industry segments and include the following:
<TABLE>
<CAPTION>
Financial
Services and Media and
Insurance Entertainment Manufacturing Retail and Distribution
- ------------ ----------------- ----------------------- -------------------------
<S> <C> <C> <C>
Allstate
Insurance BBC America ALCOA American Eagle Outfitters
American
Century
Investments The Economist Dole Food Company Authentic Fitness
Ernst &
Young LLP Forbes E&J Gallo Winery Campmor
Northwestern
Mutual Life
Insurance Edmund's Kraft Foods J. Crew
Progressive
Insurance
Companies Inc. Online Liz Claiborne Oakley
Thomson
Financial
Services Miller Freeman Nike WW Grainger
LendingTree Universal Studios Nissan
Sara Lee Corporation
<CAPTION>
Technology and
Government Communications Healthcare Travel & Hospitality
- ------------ ----------------- ----------------------- -------------------------
<S> <C> <C> <C>
U.S. Postal
Service Celarix American Health Network Budget Rent-A-Car
U.S. Marine
Corps Compaq Bally Total Fitness The Travel Company
U.S.
Department
of
Agriculture JAVU Technologies Claimsnet
Microsoft
</TABLE>
In the past few years, Digex's growth has come from new clients, as well as
existing clients whose Web sites have evolved to become increasingly more
strategic to their overall business goals and objectives.
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Sales, Marketing and Service Delivery
Our sales objective is to achieve broad market penetration by focusing on
market segments which, we believe, have both a high propensity to outsource and
to deploy complex, mission-critical Web sites. We sell our services directly
through a highly-skilled professional sales force and receive referrals through
an extensive network of business partners.
Direct Sales. As of April 1, 1999, our direct sales force consisted of over
60 experienced, quota-bearing sales representatives. We have organized the
sales force into three units: major accounts, mid-market/Web-centric, and
alternate channel. The major accounts unit focuses on Fortune 2000 companies
and is aligned by industry. The mid-market/Web-centric unit addresses the large
and growing number of referrals coming from our regionally based business
partners, and is organized into three geographic regions: eastern, central and
western United States. Our alternate channel sales group works closely with our
business alliance solutions partners, such as Pandesic. Supporting each of
these units is a site engineering team that provides pre-sales technical
support, including requirements gathering, configuration support, site
architecture, and project management.
Strategic Partners--The Digex e-Link Partner ProgramTM. In 1998, we created
the Digex e-Link Partner Program(TM), which, we believe, has attracted some of
the leading interactive media and Web site development companies to partner
with Digex. To date, our business partners include such companies as Proxicom,
Agency.com, Xerox Connect and T3 Media. We currently have over 120 business
partnership alliances that are a significant source of sales leads and
opportunities. These business partners include Web site developers, Web site
designers, interactive and new media agencies, and systems integrators. We
collaborate, instead of compete, with our partners and complement each other's
skills in an effort to bring the best overall solution to our customers.
Typically, in these collaborative relationships, we focus on Web site hosting,
while our strategic partners concentrate on Web site design, development and
systems integration.
The success of this program has encouraged us to introduce the Digex app-
Link Partner Program(TM). The Digex app-Link Partner Program(TM) will target
consultants and systems integrators, value-added hardware resellers and
application solution providers. Our partnership programs provide incentives to
refer business to us, and we often work together with our partners directly
with the client. Our strategy is to continue leveraging our partners as a
referral channel and a source for identifying market trends and emerging
customer requirements.
Marketing. We intend to continue our transformation into a highly focused,
market driven company. Our marketing organization is responsible for building
Digex's brand awareness, identifying key target markets and developing
innovative services to meet the evolving demands of the marketplace. Another
objective of our marketing effort is to stimulate the demand for Digex services
through a broad range of marketing communications and public relations
activities. Our primary communication vehicles include advertising, trade
shows, direct response programs, event sponsorship and the Digex Web sites.
Data Center Infrastructure
We presently operate two highly secure, fault-tolerant data centers
specifically designed for the 24-hour a day hosting of Web sites and Web-based
applications. Our east coast data center is strategically located near major
network access points (NAPs) in the Washington, D.C. metropolitan area. Our
west coast data center is situated near the western NAPs and the headquarters
of many of our strategic technology providers. We are expanding our total data
center capacity to over 225,000 square feet in 1999, and expect to add
additional data center capacity over the next five years as appropriate to meet
anticipated customer and market demand.
Our data centers combine the predictability and control of traditional
mainframe-based data centers with the network access and capacity required for
today's Internet-based computing. Our data centers are designed to provide
consistently high service levels while permitting customers to rapidly deploy
new and strategic applications without substantially increasing cost or
incurring risk.
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<PAGE>
The physical infrastructure and security controls of our data centers have
been designed to support rigorous requirements for secure data storage and
processing. Specifically, our data centers offer the following major physical
benefits to our customers:
.state-of-the-art physical security;
.multi-redundant mechanics, utilities and environmental controls;
.high-performance multi-network points of presence (WebPOPs); and
.fully-integrated customer work-areas.
State-of-the-art physical security. Our data centers include multiple
separate computer rooms offering customers a high degree of containment and
isolation from accidents or disasters occurring within or outside of each data
center. Physical security has been implemented through tightly controlled
security zones requiring both access card and biometric identification. Each
data center has five security zones that require separate access levels to gain
entry. Our highest security zones include computer rooms physically constructed
as a building-within-a-building, with fire suppression and other controls
separate from the remainder of the data center. Fencing above the ceiling and
below the raised floor isolate each security zone. Over 100 surveillance
cameras record all movement through the data centers and security guards
provide real-time visibility. Our cooling towers are surrounded by security
fences and monitored by cameras. Our dual 20,000 gallon diesel fuel tanks are
safely buried underground.
Multi-redundant mechanics, utilities and environmental controls. Within each
data center, separate mechanical rooms exist adjacent to each computer room.
These mechanical rooms house all cooling and mechanical equipment, eliminating
the possible introduction of liquid into the computer rooms from equipment
leakage. We use redundant uninterruptable power supply systems and redundant
generators, to ensure the power system is capable of maintaining power to the
data center in the event of any component failure. Cooling and environmental
controls for each data center are designed to monitor and ensure proper
temperature and humidity.
High-performance WebPOPs. Our data centers include physically separated
WebPOPs, which are network points of presence within our data centers. These
WebPOPs provide high-performance, reliable networking connectivity to multiple
national Internet backbone carriers for our customers. Telecommunications
circuits enter the data centers through multiple points from diverse service
providers. Multiple points of presence ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.
Fully-integrated customer work areas. Our data centers include separate,
private customer work areas. These work areas are isolated from the security
zones that house our servers permitting customers to work on on-site as
necessary. These work areas provide computing and personal resources, such as
customer breakrooms and wash areas.
Competition
The market served by Digex is highly competitive. There are few substantial
barriers to entry, and we expect to face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include Internet system engineering expertise, customer
care, network capability and quality of service.
Our current and potential competitors in the market include:
. Web hosting service providers;
. local, regional, national and international ISPs;
. local, regional, national and international telecommunications
companies; and
. large information technology outsourcing firms.
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<PAGE>
Our competitors may operate in one or more of these areas and include
companies such as AboveNet Communications, AT&T, Cable & Wireless, Concentric
Network, EDS, Exodus Communications, Frontier/GlobalCenter, Globix, GTE, Intel,
Level 3 Communications, MCI WorldCom, PSINet, IBM, Qwest Communications
International, and USinternetworking.
We believe our experience and reputation for delivering high quality, complex
Web site hosting services differentiate us from our key competitors. We focus
on our core competency of Web site and application hosting as opposed to
offering hosting as a complement to a wide range of communication services. We
believe we have defined and offer the industry's most complete set of functions
required to configure, engineer, implement and maintain complex, transactional
Web sites. We believe our DISA architecture, data centers, and technical team
distinguish us from our competition and enable us to provide among the highest
quality end-to-end complex Web site hosting solutions.
Intellectual Property Rights
We rely on a combination of copyright, trademark, service mark and trade
secret laws and contractual restrictions to establish and protect certain
proprietary rights in our data, applications and services. We have no patented
technology that would bar competitors from our market. We also rely on certain
technologies we license from third parties, such as Microsoft, Netscape and
Micromuse. There can be no assurance these third-party technology licenses will
continue to be available to us on commercially reasonable terms. The loss of
such technology could require us to obtain substitute technology of lower
quality or performance standards or at greater cost, which could harm our
business. However, other than our trademarks and service marks, we do not
believe that the loss of any particular one of our intellectual property rights
would harm our business.
Government Regulation
We are not currently subject to direct federal, state or local government
regulation, other than regulations applicable to businesses generally. There is
currently only a small body of laws and regulations directly applicable to
access to or commerce on the Internet.
Congress recently enacted the "Digital Millennium Copyright Act," which
became effective in October 1998. The Digital Millennium Copyright Act includes
a limitation on liability of on-line service providers for copyright
infringement for transmitting, routing, or providing connections, transient
storage, caching or storage at the direction of a user. This limitation on
liability applies if the service provider had no actual knowledge or awareness
that the transmitted or stored material was infringing and if certain other
conditions are met. Since this law is new, we are unsure of how it will be
applied to limit any liability we may face in the future for any possible
copyright infringement or copyright-related issues. This new law also requires
ISPs to follow certain "notice and take-down" procedures in order to be able to
take advantage of the limitation on liability. We have not yet implemented such
procedures nor evaluated the cost of complying with them. However, our
customers are subject to an acceptable use policy which prohibits them from
posting, transmitting or storing material on or through any of our services
which, in our sole judgment is (1) in violation of any local, state, federal or
foreign law or regulation, (2) threatening, obscene, indecent or defamatory or
that otherwise could adversely affect any individual, group or entity or (3) in
violation of the intellectual property rights or other rights of any person.
Although this policy is designed to promote the security, reliability and
privacy of our systems and network, there is no assurance that our policy will
accomplish this goal or shield us from liability under the Digital Millennium
Copyright Act.
Despite enactment of the Digital Millenium Copyright Act, the law relating to
the liability of on-line services companies and Internet access providers for
information carried on or disseminated through their networks remains largely
unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials
45
<PAGE>
disseminated through their networks. Several private lawsuits seeking to impose
such liability upon on-line services companies and Internet access providers
are currently pending.
Although sections of the Communications Decency Act of 1996 that proposed to
impose criminal penalties on anyone distributing indecent material to minors
over the Internet were held to be unconstitutional by the U.S. Supreme Court,
similar laws may be proposed, adopted and upheld. The nature of future
legislation and the manner in which it may be interpreted and enforced cannot
be fully determined and, therefore, legislation similar to the Communications
Decency Act could subject us and/or our customers to potential liability, which
in turn could have a material adverse effect on our business. The adoption of
any of these types of laws or regulations might decrease the growth of the
Internet, which in turn could decrease the demand for our services or increase
our cost of doing business or in some other manner have a material adverse
effect on our business.
Due to the increasing popularity and use of the Internet, it is likely a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business or
in some other manner have a material adverse effect on our business, results of
operations or financial condition. In addition, applicability to the Internet
of existing laws governing issues such as property ownership, copyrights and
other intellectual property issues, taxation, libel, obscenity and personal
privacy is uncertain. The vast majority of such laws were adopted prior to the
advent of the Internet and related technologies and, as a result, do not
contemplate or address the unique issues of the Internet and related
technologies.
Employees
As of April 1, 1999, we employed approximately 436 full-time employees. None
of our employees are covered by a collective bargaining agreement. We believe
that our employee relations are good.
Properties
We currently share leased space with Intermedia totaling approximately 80,000
square feet in two buildings in Beltsville, Maryland. These facilities house
our east coast data center, our executive and administrative offices, and our
regional sales office. At the end of June 1999, we expect to relocate to two
different leased buildings in Beltsville, Maryland occupying a total of
approximately 122,000 square feet. We also lease a total of approximately
76,000 square feet in two other buildings--one in Cupertino, California, and
one in San Jose, California. These house our west coast data facilities and
regional sales office. We believe that our properties are adequate and suitable
for their intended purposes.
Legal Proceedings
We do not believe that there are any pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.
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MANAGEMENT
The following sets forth as of April 27, 1999 the name, age and position
within Digex of our current directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
David C. Ruberg......... 53 Chairman of the Board
Nancy G. Faigen......... 42 Director; President and Chief Executive Officer
Bryan T. Gernert........ 32 Vice President, Sales, Consulting and Client Services
Marthe S. Lattinville-
Pace................... 45 Vice President, Human Resources
Robert E. London........ 37 Vice President, Marketing Communications
Robert B. Patrick....... 27 Vice President, Marketing and Product Development
Mike P. Renner.......... 36 Vice President, Technical Operations
John F. Scott........... 29 Vice President, Finance
John C. Baker........... 49 Director
Philip A. Campbell...... 62 Director
George F. Knapp......... 67 Director
Pierce J. Roberts,
Jr. ................... 52 Director
</TABLE>
Executive Officers and Directors
David C. Ruberg has served as Director of Digex since April 1999. From
February 1998 to December 1998, he served as President and Chief Executive
Officer of Digex. Mr. Ruberg has served as President, Chief Executive Officer
and a director of Intermedia since May 1993, and as Chairman of the Board of
Intermedia since March 1994. From September 1991 to May 1993, he was an
independent consultant to the computer and telecommunications industries. From
1989 to September 1991, Mr. Ruberg served as Vice President and General Manager
of the Telecommunications Division and then of the Personal Computer/Systems
Integration Division of Data General Corporation, a computer manufacturer. From
1984 to 1989, Mr. Ruberg served as a Vice President of TIE Communications,
Inc., a manufacturer of telecommunications equipment. Mr. Ruberg received his
B.A. in mathematics from Middlebury College and his M.S. in computer science
from the University of Michigan.
Nancy G. Faigen has served as Director of Digex since April 1999 and as
President and Chief Executive Officer since December 1998. From January 1998 to
November 1998, she served as Vice President of IBM e-business solutions, a
business unit of IBM. From October 1996 to January 1998, she served as Vice
President of Global Web Solutions of IBM. From November 1991 to October 1996,
Ms. Faigen served in various managerial and executive positions at IBM, most
recently as Executive Assistant to the CEO, and with the Sales and Services
Division, as Director of Strategy and Business Unit Director. Ms. Faigen holds
a B.A. in Drama and Fine Arts from Dartmouth College.
Bryan T. Gernert has served as Vice President of Sales, Consulting and Client
Services of Digex since October 1998. From September 1996 to September 1998, he
served as Vice President of Sales and Distribution of Digex. Mr. Gernert joined
Digex in April 1995 as Sales Account Manager and was promoted to Director of
Sales in March 1996. From January 1993 to April 1995, he served as National
Sales Manager of Evergreen Information Technologies, Inc. From June 1989 to
January 1993, he was Director of Acquisitions for RCI, Inc. Mr. Gernert holds a
B.S in Business Administration with a concentration in Finance from the
University of Delaware.
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Marthe S. Lattinville-Pace has served as Vice President of Human Resources of
Digex since April 1999. From January 1999 to March 1999 she served as Vice
President, Human Resources of ManorCare Realty. From April 1994 to March 1999,
she served as Director Human Resources, Europe, India & the Middle East for
Waters Corporation. She also served as Director Human Resources & Building
Administration of NYNEX Mobile Communications, from 1992 to 1994. Mrs.
Lattinville-Pace holds a Master in Business Administration from the Haute
Etudes Commerciales of the University of Montreal, a Bachelor in Industrial
Relations from University of Montreal and a Psychology Diploma from Old
Montreal College.
Robert E. London has served as Vice President of Marketing Communications of
Digex since December 1997, and Vice President of Marketing from April 1997 to
December 1997. From January 1995 to April 1997, he served as President of
London, Ink, a marketing communications and consulting firm in Washington, D.C.
From April 1988 to December 1994, he served as Senior Manager of Marketing of
MCI Communications. Mr. London holds a B.S. in Marketing from the University of
Maryland.
Robert B. Patrick has served as Vice President of Marketing and Product
Development of Digex since September 1998. Previously, he was Director of
Business Development for Digex from July 1997 through September 1998. He joined
Digex in September 1996, as Manager of Technical Operations. From June 1993 to
June 1996, he served as a Senior Consultant for Andersen Consulting. From
October 1988 to June 1993, he served as a Senior Computer Specialist for the
Federal Bureau of Investigation. Mr. Patrick holds a B.S. in Management
Information Systems from George Mason University.
Mike P. Renner has served as Vice President of Technical Operations of Digex
since February 1999. From September 1998 to February 1999, he served as Vice
President of Professional Services of Windward Consulting Group, directing
their core technology management consulting services. From July 1998 to
September 1998, he was an independent consultant specializing in high-level
technology management. From August 1997 to July 1998, he served as Director of
Information Technology Solutions of Edgemark Systems, focusing on transitioning
the company from a VAR technical support system to an information technology
solutions delivery organization. From July 1997 to August 1997, he was an
independent technology consultant. From June 1993 to July 1997, he served as
Director of Technical Operations of three companies of Thomson Corporation: CDA
Investment Technologies, Thomson Technology Services Group and Thomson
Electronic Information Resources. Mr. Renner holds a B.S. in Management
Information Systems from James Madison University.
John F. Scott has served as Vice President of Finance of Digex since November
1998. Previously, he was the Director of Strategic Planning from July 1997
through September 1998. From August 1995 to July 1997, he served as a
telecommunications industry consultant with Andersen Consulting, Washington,
D.C. From May 1993 to August 1995, he served as a Senior Financial Officer of
Polysonics Corp. Mr. Scott holds a B.S. in Finance and a B.A. in International
Business from Georgetown University.
John C. Baker has served as Director of Digex since April 1999. He has served
as Director of Intermedia since February 1988. Mr. Baker has been a Principal
of Baker Capital Corp., a multi-national venture capital firm, since October
1995. He served as Senior Vice President of Patricof & Co. Ventures, Inc., a
multi-national venture capital firm from 1988 until September 1995. Mr. Baker
is currently a Director of FORE Systems, Inc., FWT, Inc. and Resources
Bancshares Mortgage Group, Inc., all of which are publicly traded corporations.
Philip A. Campbell has served as Director of Digex since April 1999. He has
served as Director of Intermedia since September 1996. Mr. Campbell retired
from Bell Atlantic as Director, Vice Chairman and Chief Financial Officer in
1991. Previously, he served as President of New Jersey Bell, Indiana Bell and
Bell Atlantic Network Services.
George F. Knapp has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. He has been a Principal
of Communications Investment Group, an investment banking firm, since June
1990. From January 1988 until June 1989, Mr. Knapp was an associate at MBW
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Management, Inc., a venture capital firm. Prior to that time, he held various
executive positions at ITT Corporation and its subsidiaries, most recently as
Corporate Vice President of ITT Corporation. Mr. Knapp is currently a member of
the Manhattan College Board of Trustees and Chairman of its Finance Committee.
Pierce J. Roberts, Jr. has served as Director of Digex since April 1999.
Since December 1998, Mr. Roberts has served as Director of Intermedia. From
April 1993 to August 1998, Mr. Roberts held various positions at Bear, Stearns
& Co. Inc. and most recently was a Senior Managing Director and head of its
Global Telecommunications Group. From December 1990 to April 1993, Mr. Roberts
was a Managing Director at The Blackstone Group. Prior to that, Mr. Roberts
held various positions at BellSouth.
No family relationship exists between any of the directors and executive
officers of Digex.
Committees of the Board of Directors
Prior to the closing of this offering it is expected that our board of
directors will have standing audit and finance and compensation committees.
Among other functions, the audit and finance committee will:
.make recommendations to the board of directors regarding the selection of
independent auditors;
.review the results and scope of the audit and other services provided by
our independent auditors;
.review our financial statements; and
.review and evaluate our internal control functions.
The compensation committee will make recommendations to the board of
directors regarding the administration of our stock option and stock purchase
plans and with regard to executive compensation and salaries and incentive
compensation for our employees and consultants.
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<PAGE>
Summary Compensation Table
The following table sets forth the total compensation for 1998 of our Chief
Executive Officer and each of our other four most highly compensated executive
officers whose total salary and bonus for 1998 exceeded $100,000 (each a named
executive officer, and collectively, the named executive officers):
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
------------------------------------ ------------
Other Securities
Fiscal Annual Underlying
Name and Principal Position Year Salary($) Bonus($) Compensation($) Options (#)
- --------------------------- ------ --------- -------- --------------- ------------
<S> <C> <C> <C> <C> <C>
Nancy G. Faigen......... 1998 9,375(1)
President and Chief
Executive Officer 1997 --
1996 --
Bryan T. Gernert........ 1998 95,000 166,108(5)
Vice President, Sales,
Consulting and 1997 75,000 117,140(5) 33,552(6)
Client Support 1996 75,000 31,520(5) 13,422(6)
Robert E. London 1998 104,000 26,000
Vice President,
Marketing
Communications 1997 83,333(2) 17,000 19,172(6)
1996
Robert B. Patrick....... 1998 83,250 16,750 5,000(6)
Vice President,
Marketing and 1997 75,000 15,000 9,586(6)
Product Development 1996 21,667(3) 3,250 3,836(6)
John F. Scott........... 1998 78,750 22,500 7,000(6)
Vice President, Finance 1997 38,725(4) 6,041
1996
</TABLE>
- --------
(1) Ms. Faigen commenced employment with Digex in December 1998.
(2) Mr. London commenced employment with Digex in April 1997.
(3) Mr. Patrick commenced employment with Digex in September 1996.
(4) Mr. Scott commenced employment with Digex in July 1997.
(5) These amounts represent commission payments.
(6) Securities underlying these options are shares of common stock of
Intermedia awarded under Intermedia's 1996 Long-Term Incentive Plan. We
expect that, prior to the closing of this offering, we will adopt a long-
term incentive compensation plan and that these options will be exchanged,
contingent on the closing of this offering, for options to purchase shares
of our Class A Common Stock at a conversion rate that will be determined at
the time of adoption of our plan.
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Option Grants In Fiscal Year
The following table sets forth certain information regarding stock options
granted to our Vice President of Marketing and Product Development, and Vice
President of Finance during the year ended December 31, 1998.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation For
Individual Grants Option Terms
------------------------------------------------- ----------------------
Number of Percent of Total
Securities Options
Underlying Granted to Exercise
Options Employees in Price Expiration
Granted(#) Fiscal Year(%)(2) Per Share Date 5% 10%
---------- ----------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Robert B. Patrick....... 5,000(1) 0.2% $26.88 9/29/08 84,500 214,200
John F. Scott........... 3,500(1) 0.14% 34.63 7/28/08 76,230 193,165
2,500(1) 0.1% 26.88 9/29/08 42,250 107,100
1,000(1) 0.04% 18.19 11/23/08 11,440 28,990
</TABLE>
- --------
(1) Securities underlying these options are shares of common stock of
Intermedia awarded under Intermedia's 1996 Long-Term Incentive Plan. We
expect that, prior to the closing of this offering, we will adopt a long-
term incentive compensation plan and that these options will be exchanged,
contingent on the closing of this offering, for options to purchase shares
of our Class A Common Stock at a conversion rate that will be determined at
the time of adoption of our plan.
(2) These percentages represent the percent of total options granted to
Intermedia employees in fiscal year 1998.
Aggregate Option Exercises in 1998 and Last Fiscal Year-End Option Values
The following table shows for each of the named executive officers the number
of shares acquired upon exercise of stock options during 1998, the aggregate
value realized from those exercises, the number of shares covered by both
exercisable and unexercisable options as of December 31, 1998 and the year-end
value of exercisable and unexercisable options as of December 31, 1998.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised
Options at In-the-Money Options
December 31, 1998(2) at December 31, 1998(2)
------------------------- -------------------------
# Shares
Acquired $ Value
Name On Exercise(1) Realized Exercisable Unexercisable Exercisable Unexercisable
---- -------------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Nancy G. Faigen......... -0- -0- -0- -0- -0- -0-
Bryan T. Gernert........ 4,544 $303,290 24,208 14,140 $222,400 $116,461
Robert E. London........ 6,390 $187,080 6,391 6,391 $ 61,492 $ 61,492
Robert B. Patrick....... -0- -0- 3,009 9,135 $ 20,680 $ 37,332
John F. Scott........... -0- -0- 782 6,218 -0- -0-
</TABLE>
- --------
(1) All shares acquired were shares of Intermedia common stock. As of the date
of this prospectus, Digex does not have any long-term compensation or stock
option plan.
(2) Securities underlying these options are shares of common stock of
Intermedia awarded under Intermedia's 1996 Long-Term Incentive Plan. We
expect that, prior to the closing of this offering, we will adopt a long-
term incentive compensation plan and that these options will be exchanged,
contingent on the closing of this offering, for options to purchase shares
of our Class A common stock at a conversion rate that will be determined at
the time of adoption of our plan.
Indemnifications of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
.for any breach of the director's duty of loyalty to us or our
stockholders;
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. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by Delaware law, subject to certain very
limited exceptions; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions.
We intend to obtain directors' and officers' insurance providing
indemnification for our directors, officers and certain employees for certain
liabilities.
The limitation of liability and indemnification provisions in our certificate
of incorporation and bylaws may discourage stockholders from bringing a lawsuit
against directors for breach of their fiduciary duty. They may also have the
effect of reducing the likelihood or derivative litigation against directors
and officers, even though such an action, if successful, might otherwise
benefit us and our stockholders. Furthermore, a stockholder's investment may be
adversely affected to the extent we pay the costs of settlement and damage
awards against directors and officers pursuant to these indemnification
provisions.
There is no pending litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Digex pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
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<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Prior to the closing of this offering, we will enter into the following
agreements with Intermedia: General and Administrative Services Agreement,
Master Network Services Agreement, Public Internet Access Services Agreement,
and Customer Network and Application Services Agreement. These agreements are
described below. The General and Administrative Services Agreement is included
as an exhibit to the registration statement of which this prospectus forms a
part.
General and Administrative Services Agreement
Under the General and Administrative Services Agreement, Intermedia will
provide us with a variety of general and administrative services, including:
. finance, accounting and administration services, such as cash management,
corporate banking, risk management, liability insurance, debt management,
filing of state and federal tax returns, assistance in evaluating and
structuring potential acquisitions, coordination of required public
filings, fixed asset reporting, accounts payable, accounts receivable and
collection, general ledger, and purchasing management;
. human resources services, such as employee and labor relations, employee
and management training;
. legal services in the areas of labor, employment and litigation
management;
. Year 2000 compliance services; and
. network engineering services, as we may request from time to time.
The General and Administrative Services Agreement will provide for a five-
year initial term. Thereafter, the term will be automatically renewed for a
two-year term, unless at least six months prior to the termination of the
initial term either we or Intermedia notifies the other that it does not wish
to renew the term. In addition, we may terminate any of the services provided
to us on 90-day prior notice at any time after the 60th day after the
completion of this offering, except that we may not:
. terminate, other than for cause or after a change of control of Digex,
the tax and treasury management services during the initial term; or
. give notice of termination of any of the finance, accounting,
administration and Year 2000 compliance services during the period
between October 1, 1999 and February 28, 2000.
Master Network Services Agreement, Public Internet Access Services Agreement,
and Customer Network and Application Services Agreement
We expect that Intermedia directly or through Business Internet will be our
preferred provider of a variety of Internet access, network and related value-
added services in the following two categories:
. public internet access services for the transit of data from our data
centers to the Internet, and assisting in the design, implementation and
management of Internet points of presence for the routing of our data
traffic to Intermedia's and other network service providers' networks
("Internet Access Services"); and
. customer products and services for resale by us to our customers under
the Digex and/or Intermedia brand ("Customer Services").
Prior to the closing of this offering, we will enter into a Master Network
Services Agreement (the "Master Agreement"), Public Internet Access Services
Agreement (the "Access Agreement"), and Customer Network and Application
Services Agreement with Intermedia (the "Customer Services Agreement") for the
provision of these services to us by Intermedia.
The Master Agreement contains the general terms and conditions under which
Intermedia will provide to us the Internet Access Services and the Customer
Services. The Master Agreement has an initial term of two
53
<PAGE>
years, which is automatically renewable for successive one-year periods. Either
we or Intermedia may elect not to renew the term by giving the other party
notice at least six months before the scheduled expiration of the initial term
or the then current renewal term.
The Access Agreement contains specific provisions that apply to Internet
Access Services. The Customer Services Agreement applies specifically to
Customer Services. The Access Agreement and the Customer Services Agreement,
together, are referred to as the "Services Agreements." Specific service orders
will be issued under each of the Services Agreements to specify the details for
the particular services to be provided.
The Master Agreement provides, among other things, that:
. we will be treated as a most favored customer entitled to rates and fees
as low as those granted by Intermedia to any other customer purchasing
substantially similar services, provided that we purchase 70% of our non-
peered requirements from Intermedia;
. we may request and receive from Intermedia additional services or feature
enhancements to the services described above;
. we and Intermedia will share with each other customer information and may
market products and services to each others' customers; and
. during the term of this agreement and for six months after its
termination, neither party is allowed to compete with the "core" business
of the other. Our core business is defined to include the dedicated Web
hosting business as currently conducted by us. Intermedia's core business
is defined to include the services described in the related Service
Agreements as conducted by Intermedia.
The Master Agreement limits Intermedia's aggregate liability to us to the
average monthly recurring charges paid by us for the particular service to
which our claim may pertain, and also excludes any consequential or other
special damages. Other than specific service level commitments set out in the
Services Agreements, Intermedia's services under the Master Agreement are
provided on an "as is" and "as available" basis without any express or implied
warranties.
Internet Access Services. Under the Access Agreement, we will be required to
purchase from Intermedia, and Intermedia will provide us through its own
network and its peering arrangements, 70% of our requirements for non-peered
network transit services. The Access Agreement contemplates that we will
provide quarterly forecasts of our network capacity requirements to Intermedia.
If Intermedia does not have the capacity to, or otherwise elects not to,
fulfill any portion of this 70% requirement, we may purchase this portion of
the 70% requirement from other network providers. We may purchase the remaining
non-peered network transit services (up to 30% of our requirements) from other
network service providers, provided that Intermedia may take over these
arrangements and succeed to us as provider of record for this transit if
Intermedia determines that doing so will not endanger its tier-one status as a
network service provider and ISP and otherwise comply with law and industry
standards. We believe that this arrangement will enable us to provide customer
diversity and network balancing, and to meet specific customer and
international requirements. Because of our commitment to obtain at least 70% of
our non-peered network service requirements from Intermedia, we will receive
certain discounts on monthly recurring charges based on the volume of our
traffic.
Intermedia has made certain service level commitments to us for its network
transit services. These commitments cover both network availability and
performance (packet delivery and latency). In addition, we will be one of
Intermedia's major customers and will receive dedicated support under
Intermedia's Major Customer Program.
Under the Access Agreement, Intermedia will also assist us in the design,
implementation and management of Internet points of presence for the routing of
data traffic from each of our data centers to Intermedia's and other network
service providers' networks.
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<PAGE>
Customer Services. Customer Services that Intermedia will provide to us, and
which we will be able to market and sell to our customers under the Digex
and/or Intermedia name, include:
. Internet access services offered by Intermedia to its customers;
. wide area network services, such as frame relay and ATM;
. managed connectivity services;
. value-added services, such as worldwide remote dial access to the
Internet, firewall installation and other security solutions, e-mail
relay back-up services, messenger mail services, fax over IP services
that provide Web-to-fax and fax-to-Web capability, and news services
enabling customers to have access to USENET news groups and to operate
news servers; and
. private line point-to-point services such as 56k, T1 and DSL.
Restructuring Transactions
In conjunction with this offering, Business Internet has contributed to us
the Web hosting business described in this prospectus in exchange for all the
shares of our Class B Common Stock.
Relationship with Bear, Stearns & Co. Inc.
Bear, Stearns & Co. Inc. is serving as joint lead underwriting manager of
this offering for Digex. Pierce J. Roberts, Jr., who is currently serving as a
director of Digex, was an employee of Bear Stearns until August 1998.
Immediately prior to his departure from Bear Stearns, Mr. Roberts served as a
Senior Managing Director and head of the Global Telecommunications Group.
Bear Stearns or its affiliates have provided and may in the future provide
investment banking or other financial services to Intermedia, the parent
company of Digex, and its affiliates in the ordinary course of business, for
which it has received and is expected to receive customary fees and expenses.
Bear Stearns has been an initial purchaser for numerous issuances of securities
by Intermedia.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table provides information regarding:
. beneficial ownership of our Common Stock by each person or entity known
to us to be a beneficial owner of more than 5% of the outstanding shares
of our Common Stock, as of April 27, 1999;
. beneficial ownership of common stock of our parent, Intermedia, by each
of our directors, our President and Chief Executive Officer, and our four
most highly compensated executive officers during 1998, as of March 31,
1999; and
. beneficial ownership of common stock of our parent Intermedia, by all of
our directors and executive officers as a group, as of March 31, 1999.
<TABLE>
<CAPTION>
Percentage of
Class
Beneficially
Number of Owned
Shares -----------------
Beneficial Beneficially Before After
Owner Securities Owned Owned Offering Offering
- ---------- ------------------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Principal
Stockholders:
Intermedia Our Class B Common Stock
Communications
Inc. 1,000 100.0%
Directors and
Executive
Officers:
David C. Ruberg Intermedia common stock 955,168(1)(2) 1.9% 1.9%
Nancy G. Faigen Intermedia common stock 6,666(1)(3)(4) * *
Bryan T. Intermedia common stock
Gernert 24,208(1)(4)(5) * *
Robert E. Intermedia common stock
London 6,391(1)(4)(6) * *
Robert B. Intermedia common stock
Patrick 3,009(1)(4)(7) * *
John F. Scott Intermedia common stock 782(1)(4)(8) * *
John C. Baker Intermedia common stock 79,086(1)(9) * *
Philip A. Intermedia common stock
Campbell 26,000(1)(10) * *
George F. Knapp Intermedia common stock 54,365(1)(11) * *
Pierce J. Intermedia common stock
Roberts, Jr. 13,668(1)(12) * *
All directors and executive officers as
a group (12 persons)................... 1,169,343(1)
</TABLE>
- --------
*Less than 1%
(1) Securities underlying these options are shares of Intermedia common stock.
(2) Includes 206,664 shares subject to certain vesting requirements and 611,168
shares subject to options exercisable as of March 31, 1999 or within 60
days thereafter. Excludes 278,832 shares subject to options that are not
exercisable within 60 days of March 31, 1999.
(3) Includes 6,666 shares subject to options exercisable as of March 31, 1999.
Excludes 93,334 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(4) We expect that, prior to the closing of this offering, we will adopt a
long-term incentive compensation plan and that these options will be
exchanged, contingent on the closing of this offering, for options to
purchase shares of our Class A Common Stock at a conversion rate that will
be determined at the time of adoption of our plan.
(5) Includes 24, 208 shares subject to options exercisable as of March 31,
1999. Excludes 14,140 shares subject to options that are not exercisable
within 60 days of March 31, 1999.
(6) Includes 6,391 shares subject to options exercisable as of March 31, 1999.
Excludes 6,391 shares subject to options that are not exercisable within 60
days of March 31, 1999.
(7) Includes 3,009 shares subject to options exercisable as of March 31, 1999.
Excludes 11,135 shares subject to options that are not exercisable within
60 days of March 31, 1999.
(8) Excludes 6,218 shares subject to options that are not exercisable within 60
days of March 31, 1999.
(9) Includes 50,558 shares of Common Stock and 28,528 shares subject to options
exercisable as of March 31, 1999 or within 60 days thereafter. Excludes
1,142 shares subject to options that are not exercisable within 60 days of
March 31, 1999.
(10) Includes 26,000 shares subject to options exercisable as of March 31, 1999
or within 60 days thereafter.
(11) Includes 7,938 shares of Common Stock and 46,427 shares subject to options
exercisable as of March 31, 1999 or within 60 days thereafter. Excludes
1,143 shares subject to options that are not exercisable within 60 days of
March 31, 1999.
(12) Includes 5,000 shares of Common Stock and 8,668 shares subject to options
exercisable as of March 31, 1999 or within 60 days thereafter. Excludes
213,332 shares subject to options that are not exercisable within 60 days
of March 31, 1999.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
Immediately following the closing of this offering, our authorized capital
stock will consist of shares of Class A Common Stock, $.01 par value per
share, and shares of Class B Common Stock, $.01 par value per share. As of
, 1999, there were outstanding shares of Class B Common Stock, all of
which were owned by Intermedia through Business Internet, its wholly-owned
subsidiary.
The following summary is qualified by our certificate of incorporation and
bylaws, which are included as exhibits to the registration statement of which
this prospectus forms a part.
Common Stock
Shares of Class A Common Stock and Class B Common Stock are substantially
identical in all respects except that: (1) the holders of Class B Common Stock
are entitled to 10 votes per share, and the holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of
shareholders; and (2) each share of Class B Common Stock is convertible into
one share of Class A Common Stock at the option of the holder and automatically
upon the occurrence of a Conversion Event. A "Conversion Event" is defined as a
direct or indirect transfer of beneficial ownership of Class B Common Stock to
any person or entity that does not control, is not controlled by and is not
under common control with Intermedia.
Subject to preferences that may be applicable to any preferred stock
outstanding at the time, the holders of our outstanding shares of Common Stock
are entitled to receive dividends out of legally available assets at such times
and in such amounts as the board of directors from time to time may determine.
Cumulative voting for the election of directors is not authorized by our
certificate of incorporation, which means that the holders of a majority of the
votes can elect all of the directors then standing for election. The Common
Stock is not entitled to preemptive rights and, except as described in the
preceding paragraph with respect to Class B Common Stock, is not subject to
conversion or redemption. Upon liquidation, dissolution or winding-up, the
assets legally available for distribution to stockholders are distributable
ratably among the holders of the Common Stock after payment of liquidation
preferences, if any, on any outstanding preferred stock and payment of other
claims of creditors. Each outstanding share of Common Stock, and all Common
Stock paid for after this offering, is duly and validly issued, and fully paid
and nonassessable.
Preferred Stock
The board of directors is authorized, subject to any limitations prescribed
by Delaware law, to issue preferred stock in one or more series. The board of
directors can fix the rights, preferences and privileges of the shares of each
series and any qualifications, limitations or restrictions thereon.
The board of directors may authorize the issuance of preferred stock with
voting or conversion rights that could adversely affect the voting power or
other rights of the holders of Common Stock. The issuance of preferred stock,
while providing flexibility in connection with possible acquisitions and other
corporate purposes could, among other things, under certain circumstances, have
the effect of delaying, deferring or preventing a change in control of Digex.
We have no current plan to issue any shares of preferred stock.
Delaware Anti-Takeover Law
We are subject to the provisions of Section 203 of the Delaware General
Corporation Law concerning corporate takeovers. This section prevents certain
Delaware corporations from engaging, under certain circumstances, in a
"business combination," which includes a merger or sale of more than 10% of the
corporation's assets, with any "interested stockholder," or a stockholder who
owns 15% or more of the corporation's outstanding voting stock, as well as
affiliates and associates of any such persons, for three years following the
date that such stockholder became an "interested stockholder" unless:
57
<PAGE>
. the transaction in which such stockholder became an "interested
stockholder" is approved by the board of directors prior to the date the
"interested stockholder" attained such status;
. upon consummation of the transaction that resulted in the stockholder's
becoming an "interested stockholder," the "interested stockholder" owned
at least 85% of the voting stock of the corporation outstanding at the
time the transaction commenced, excluding those shares owned by persons
who are directors and also officers; or
. on or subsequent to such date the "business combination" is approved by
the board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least two-thirds of the
outstanding voting stock that is not owned by the "interested
stockholder."
This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to Digex and, accordingly, may discourage
attempts to acquire us.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our Class A Common Stock is , located
at , with a telephone number of .
Listing
We have applied to list our Class A Common Stock on the Nasdaq National
Market under the trading symbol "DIGX."
58
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
shares of our Common Stock, assuming no exercise of the underwriters'
over-allotment option, and shares of Class B Common Stock. All shares of
Class B Common Stock are convertible into shares of our Class A Common Stock,
on a one-for-one basis, at any time at the option of the holder or upon a
direct or indirect transfer to any person or entity not affiliated with
Intermedia. All of the shares sold in this offering will be freely tradable
without restriction or further registration under the Securities Act, unless
such shares are purchased by "affiliates" as that term is defined in Rule 144
under the Securities Act. The shares of Class B Common Stock, and the
shares of Class A Common Stock into which they are convertible, held by
Intermedia are "restricted securities" as that term is defined in Rule 144
under the Securities Act. Restricted securities may be sold in the public
market only if registered or if they qualify for an exemption from registration
under Rule 144 or 701 promulgated under the Securities Act, which rules are
summarized below.
As a result of the contractual restrictions described below and the
provisions of Rule 144 and 701, the restricted securities will be available for
sale in the public market on the date which is one year from the date of the
effectiveness of the reorganization, subject to the volume limitations and
other conditions of Rule 144. The shares could be available for resale
immediately upon the expiration of such -day period in the event of a
favorable interpretation by the Securities and Exchange Commission of certain
provisions of Rule 144.
Lock-Up Agreements
All of our officers, directors and stockholders have signed lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for shares of Common Stock, for a period of 180
days after the date of this prospectus. Transfers or dispositions can be made
sooner with the prior written consent of or as provided in the
stockholders' agreement.
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
Class A Common Stock for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of Class A Common Stock then outstanding,
which will equal approximately shares immediately after this
offering; or
. the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
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<PAGE>
Therefore, unless otherwise restricted, "144(k) shares" may be sold immediately
upon the completion of this offering.
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect, any
of our employees, consultants or advisors who purchases shares from us in
connection with a compensatory stock or option plan or other written agreement
is eligible to resell such shares 90 days after the effective date of this
offering in reliance on Rule 144, but without compliance with certain
restrictions, including the holding period, contained in Rule 144.
Stock Options
Prior to this offering, we intend to adopt an equity incentive compensation
plan. Immediately after this offering, we intend to file a registration
statement under the Securities Act covering shares of Class A Common
Stock that will be reserved for issuance under our equity incentive plan and
the directors' stock option plan and the shares reserved for issuance upon
exercise of outstanding non-plan options. Such registration statement is
expected to be filed and become effective as soon as practicable after the
effective date of this offering. Accordingly, shares registered under such
registration statement will, subject to vesting provisions and Rule 144 volume
limitations applicable to our affiliates, be available for sale in the open
market immediately after the 180-day lock-up agreements expire.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions of the underwriting agreement dated ,
1999, the underwriters named below, who are represented by Bear, Stearns & Co.
Inc., Donaldson, Lufkin & Jenrette Securities Corporation, CIBC World Markets
Corp. and Legg Mason Wood Walker, Incorporated, have severally agreed to
purchase from Digex the following respective numbers of shares of Class A
Common Stock at the public offering price less the underwriting discounts and
commissions set forth on the cover page of this prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C>
Bear, Stearns & Co. Inc. .......................................
Donaldson, Lufkin & Jenrette Securities Corporation.............
CIBC World Markets Corp. .......................................
Legg Mason Wood Walker, Incorporated............................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a "comfort letter" from our accountants, the listing of the common
stock on the Nasdaq National Market and no occurrence of an event that would
have a material adverse effect on our business. The underwriters are obligated
to purchase and accept delivery of all the shares, other than those covered by
the over-allotment option described below, if they purchase any of the shares.
We have granted to the underwriters an option, exercisable for days from
the date of the underwriting agreement, to purchase up to additional shares
at the public offering price less the underwriting fees. The underwriters may
exercise such option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
such option, each underwriter will become obligated, subject to conditions, to
purchase a number of additional shares approximately proportionate to such
underwriter's initial purchase commitment.
The underwriters propose to initially offer some of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus and some of the shares to dealers at the public offering price less
a concession not in excess of $ per share. The underwriters may allow, and
such dealers may re-allow, a concession not in excess of $ per share on
sales to other dealers. After the initial offering of the shares to the public,
the representatives of the underwriters may change the public offering price
and such concessions. The underwriters do not intend to confirm sales to any
accounts over which they exercise discretionary authority.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of the Class A Common Stock.
<TABLE>
<CAPTION>
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share....................................... $ $
Total........................................... $ $
</TABLE>
61
<PAGE>
In order to facilitate the offering of the Class A Common Stock, the
underwriters may engage in transactions that stabilize, maintain or otherwise
affect the market price of the Class A Common Stock. Specifically, the
underwriters may over-allot shares of the Class A Common Stock in connection
with this offering, thereby creating a short position in the Class A Common
Stock for their own account. Additionally, to cover such over-allotments or to
stabilize the market price of the Class A Common Stock, the underwriters may
bid for, and purchase, shares of the Class A Common Stock in the open market.
Finally, the representatives, on behalf of the underwriters, also may reclaim
selling concessions allowed to an underwriter or dealer if the underwriting
syndicate repurchases shares distributed by that underwriter or dealer. Any of
these activities may maintain the market price of our Class A Common Stock at a
level above that which might otherwise prevail in the open market. The
underwriters are not required to engage in these activities and, if commenced,
may end any of these activities at any time.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act.
The representatives of the underwriters have advised us that the underwriters
do not intend to confirm sales to any account over which they exercise
discretionary authority.
We have applied to list our Class A Common Stock on the NASDAQ National
Market under the symbol "DIGX".
Prior to this offering, there has been no public market for our Common Stock.
Consequently, the initial public offering price for our Common Stock will be
determined by negotiation among the Company and the representatives of the
underwriters. Among the factors to be considered in determining the public
offering price will be:
. prevailing market conditions;
. our results of operations in recent periods;
. the present stage of our development;
. the market capitalizations and stages of development of generally
comparable companies; and
. estimates of our business potential.
Bear, Stearns & Co. Inc. or its affiliates have provided and may in the
future provide investment banking or other financial services to Intermedia
Communications, Inc., the parent company of Digex, and its affiliates in the
ordinary course of business, for which it has received and is expected to
receive customary fees and expenses. To date, Bear, Stearns has been an initial
purchaser for numerous issuances of securities by Intermedia.
LEGAL MATTERS
The validity of the shares of Class A Common Stock offered hereby will be
passed upon for us by Kronish Lieb Weiner & Hellman LLP, New York, New York.
Ralph J. Sutcliffe, a partner of Kronish Lieb Weiner & Hellman LLP,
beneficially owns 11,490 shares of common stock of Intermedia and owns a
warrant to purchase 200,000 shares of such common stock at an exercise price of
$20.75 per share. Intermedia is Digex's parent entity and will own
approximately % of our outstanding voting stock when this offering is
completed. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1997 and 1998, and for the year ended
December 31, 1996, the period January 1, 1997 to July 6, 1997, the period from
July 7, 1997 (date of acquisition) to December 31, 1997 and the year ended
December 31, 1998, as set forth in their report. We have included our financial
statements (and schedule) in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
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<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
This prospectus is part of a registration statement on Form S-1 under the
Securities Act that we filed with the Securities and Exchange Commission with
respect to the shares of Class A Common Stock offered by this prospectus. This
prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedule filed therewith. For
further information about us and the Class A Common Stock offered by this
prospectus, reference is made to the registration statement and the exhibits
and schedule filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document to which reference is made
are not necessarily complete, and, in each instance, reference is made to the
copy of such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. A copy of the registration statement and the exhibits and schedule
filed therewith may be inspected without charge at the public reference
facilities maintained by the Commission in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices located at the
Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661 and Seven World Trade Center, 13th Floor, New York, New York
10048, and copies of all or any part of the registration statement may be
obtained from such offices upon the payment of the fees prescribed by the
Commission. Please call the SEC at 1-800-SEC-0330 for further informaiton about
its public reference room. The Commission maintains a World Wide Web site that
contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission. The address
of the site is http://www.sec.gov.
63
<PAGE>
Index to Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors--The Company............................... F-2
Report of Independent Auditors--Predecessor............................... F-3
Balance Sheets as of December 31, 1997 and 1998........................... F-4
Statements of Operations for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998........................................................ F-5
Statements of Changes in Owner's Equity (Deficit) for the Year Ended
December 31, 1996, and the Period from January 1, 1997 to July 6, 1997,
and the Period from July 7, 1997 (Date of Acquisition) to December 31,
1997, and the Year Ended December 31, 1998............................... F-6
Statements of Cash Flows for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997 and the Year Ended
December 31, 1998........................................................ F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Digex, Incorporated
We have audited the accompanying balance sheets of Digex, Incorporated
(formerly the Web site hosting unit of Business Internet, Inc.) as of December
31, 1997 and 1998, and the related statements of operations, changes in owner's
equity and cash flows for the period from July 7, 1997 (date of acquisition) to
December 31, 1997, and the year ended December 31, 1998. Our audits included
the financial statement schedule listed in the index at Item 16(b). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Digex, Incorporated at
December 31, 1997 and 1998, and the results of its operations and its cash
flows for the period from July 7, 1997 (date of acquisition) to December 31,
1997 and the year ended December 31, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
April 23, 1999
F-2
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Digex, Incorporated
We have audited the accompanying statements of operations, changes in owner's
equity, and cash flows of the Web site hosting unit of Business Internet, Inc.
for the year ended December 31, 1996 and the period from January 1, 1997 to
July 6, 1997. Our audits included the financial statement schedule listed in
the index at Item 16(b). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of the Web site
hosting unit of Business Internet, Inc. for the year ended December 31, 1996
and the period from January 1, 1997 to July 6, 1997, in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Tampa, Florida
April 23, 1999
F-3
<PAGE>
DIGEX, INCORPORATED
BALANCE SHEETS
(Amounts in thousands)
<TABLE>
<CAPTION>
December 31,
December 31, 1998
--------------- Pro Forma
1997 1998 (Note 10)
------- ------- ------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Accounts receivable, net of allowances of $369
in
1997 and $719 in 1998.......................... $ 2,059 $ 6,127 $ 6,127
Prepaid expenses and other current assets....... 340 890 890
------- ------- -------
Total current assets.............................. 2,399 7,017 7,017
Property and equipment, net....................... 12,930 39,059 39,059
Intangible assets, net............................ 34,364 31,204 31,204
Other assets...................................... -- 459 459
------- ------- -------
Total assets...................................... $49,693 $77,739 $77,739
======= ======= =======
Liabilities and owner's equity (deficit)
Current liabilities:
Accounts payable................................ $ 486 $ 3,341 $ --
Accrued compensation and other.................. 920 843 --
Deferred revenue................................ 96 621 --
Accrued line costs.............................. 525 -- --
Current portion of capital lease obligations.... 723 981 --
------- ------- -------
Total current liabilities......................... 2,750 5,786 --
Capital lease obligations......................... 1,257 1,108 --
Deferred tax liability............................ 159 -- --
------- ------- -------
Total liabilities................................. 4,166 6,894 --
Owner's equity (see Note 1):
Class A common stock, $.01 par value; 6,000
shares
authorized; none issued and outstanding in
1998........................................... -- -- --
Class B common stock, $.01 par value; 3,000
shares
authorized; 1,000 assumed issued and
outstanding in 1998............................ -- -- --
Additional paid-in capital...................... -- -- 77,739
Accumulated deficit............................. -- -- --
Owner's net investment.......................... 45,527 70,845 --
------- ------- -------
Total owner's equity.............................. 45,527 70,845 77,739
------- ------- -------
Total liabilities and owner's equity.............. $49,693 $77,739 $77,739
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF OPERATIONS
(Amounts in thousands, except pro forma share data)
<TABLE>
<CAPTION>
Predecessor The Company
---------------------------- ----------------------------
Period from
July 7, 1997
(date of
Year ended Period from acquisition) to Year ended
December 31, January 1, 1997 December 31, December 31,
1996 to July 6, 1997 1997 1998
------------ --------------- --------------- ------------
<S> <C> <C> <C> <C>
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 22,635
Costs and expenses:
Cost of operations.... 2,002 4,149 1,739 6,710
Cost of services...... 684 1,817 1,611 7,044
Selling, general and
administrative....... 3,194 7,001 6,087 17,512
Depreciation and
amortization......... 591 519 2,753 8,109
Charge off of
purchased in-process
research and
development.......... -- -- 15,000 --
------- ------- -------- ---------
Total costs and
expenses............... 6,471 13,486 27,190 39,375
------- ------- -------- ---------
Loss before income
taxes.................. (3,668) (9,066) (19,998) (16,740)
Income tax benefit...... -- -- 1,440 159
------- ------- -------- ---------
Net loss................ $(3,668) $(9,066) $(18,558) $(16,581)
======= ======= ======== =========
Pro forma net loss per
common share:
Basic.............................................. $ (18.56) $ (16.58)
======== =========
Diluted............................................ $ (18.56) $ (16.58)
======== =========
Shares used in computing pro forma basic and diluted
net loss per share.................................. 1,000 1,000
======== =========
</TABLE>
See accompanying notes.
F-5
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CHANGES IN OWNER'S EQUITY (DEFICIT)
(Amounts in thousands)
<TABLE>
<CAPTION>
Common Stock
---------------------------
Owner's
Class A Class B Additional Retained Net
------------- ------------- Paid-In Earnings Investment
Shares Amount Shares Amount Capital (Deficit) (Deficit) Total
------ ------ ------ ------ ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 1,
1996................... -- $-- -- $-- $ -- $-- $ -- $ --
Net contribution from
Parent................. -- -- -- -- -- -- 4,010 4,010
Net loss................ -- -- -- -- -- -- (3,668) (3,668)
---- ---- ----- ---- ------- ---- -------- --------
Balance at December 31,
1996................... -- -- -- -- -- -- 342 342
Stock options
exercised.............. -- -- -- -- -- -- 550 550
Net contribution from
Parent................. -- -- -- -- -- -- 7,626 7,626
Net loss................ -- -- -- -- -- -- (9,066) (9,066)
---- ---- ----- ---- ------- ---- -------- --------
Balance at July 6,
1997................... -- $-- -- $-- $ -- $-- $ (548) $ (548)
==== ==== ===== ==== ======= ==== ======== ========
THE COMPANY
Balance at July 7,
1997................... -- $-- -- $-- $ -- $-- $ -- $ --
Contribution from Parent
for acquisition........ -- -- -- -- -- -- 47,221 47,221
Net contribution from
Parent................. -- -- -- -- -- -- 16,864 16,864
Net loss................ -- -- -- -- -- -- (18,558) (18,558)
---- ---- ----- ---- ------- ---- -------- --------
Balance at December 31,
1997................... -- -- -- -- -- -- 45,527 45,527
Net contribution from
Parent................. -- -- -- -- -- -- 41,899 41,899
Net loss................ -- -- -- -- -- -- (16,581) (16,581)
---- ---- ----- ---- ------- ---- -------- --------
Balance at December 31,
1998................... -- -- -- -- -- -- 70,845 70,845
Recapitalization........ -- -- 1,000 -- 77,739 -- (70,845) 6,894
---- ---- ----- ---- ------- ---- -------- --------
Pro forma balance at
December 31, 1998...... -- $-- 1,000 $-- $77,739 $-- $ -- $ 77,739
==== ==== ===== ==== ======= ==== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Predecessor The Company
---------------------------- ----------------------------
Period from
July 7, 1997
(date of
Year ended Period from acquisition) to Year ended
December 31, January 1, 1997 December 31, December 31,
1996 to July 6, 1997 1997 1998
------------ --------------- --------------- ------------
<S> <C> <C> <C> <C>
Operating activities
Net loss................... $(3,668) $(9,066) $(18,558) $(16,581)
Adjustments to reconcile
net loss to cash
flows used in operating
activities:
Deferred income taxes.... -- -- (1,440) (159)
Depreciation and
amortization............ 591 519 2,753 8,109
Provision for doubtful
accounts................ 41 352 498 1,491
Charge off of purchased
in-process research and
development ............ -- -- 15,000 --
Changes in operating
assets and liabilities
net of the effects of
the acquisition:
Accounts receivable.... (594) (890) (1,466) (5,559)
Prepaid expenses and
other current assets.. (21) (54) (265) (550)
Other assets........... -- -- -- (459)
Accounts payable and
accrued liabilities... 1,086 1,967 (2,601) 2,778
------- ------- -------- --------
Net cash used in operating
activities................ (2,565) (7,172) (6,079) (10,930)
Investing activities
Acquisition of business.... -- -- (47,221) --
Purchases of property and
equipment................. (1,445) (1,004) (8,016) (30,969)
------- ------- -------- --------
Net cash used in investing
activities................ (1,445) (1,004) (55,237) (30,969)
Financing activities
Payments on capital
leases.................... -- -- (2,769) --
Exercise of stock options.. -- 550 -- --
Net contributions from
Parent.................... 4,010 7,626 64,085 41,899
------- ------- -------- --------
Net cash provided by
financing activities...... 4,010 8,176 61,316 41,899
Cash at beginning of the
year...................... -- -- -- --
------- ------- -------- --------
Cash at end of year........ $ -- $ -- $ -- $ --
======= ======= ======== ========
Supplemental disclosure of
cash flows information:
Noncash investing and
financing activities:
Equipment acquired under
capital leases.......... $ 2,840 $ 829 $ 846 $ 958
======= ======= ======== ========
</TABLE>
See accompanying notes.
F-7
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
December 31, 1998
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digex, Incorporated (the "Company") was incorporated on April 27, 1999, under
the laws of the State of Delaware. The Company's business was operated as the
Web site hosting unit of Intermedia Communications Inc. ("Intermedia" or the
"Parent Company") since its acquisition by Intermedia on July 7, 1997. On that
date, Intermedia acquired Business Internet, Inc. (previously known as DIGEX,
Incorporated), of which the Web site hosting unit (the "Predecessor") was a
part, in a business combination accounted for as a purchase. The Web site
hosting unit presented in the accompanying financial statements had no legal
status or existence prior to the incorporation of the Company on April 27,
1999.
The Company commenced operations in January 1996 as a provider of complex Web
hosting services principally to Fortune 2000 companies. The Company's services
include implementing and maintaining secure, scaleable, high-performance Web
sites on the Internet 24 hours a day. In addition, the Company provides a
comprehensive suite of Web management services, including business process
solutions and value-added testing services directed toward improving its
customers' overall Internet performance.
Basis of Presentation
The accompanying financial statements of the Company reflect the carved-out
operations and financial position of the Web site hosting unit of Intermedia
for all periods since July 7, 1997. The accompanying financial statements of
the Predecessor reflect its operations and financial position from inception,
January 1, 1996, to July 6, 1997. As more fully discussed in Note 2, "Related
Party Transactions and Corporate Allocations," the financial statements for all
periods presented include allocations of network costs and corporate expenses.
In addition, for financial reporting purposes, the equity activity of the
Company, prior to its incorporation, and the Predecessor has been accumulated
into a single disclosure caption entitled "Owner's Net Investment."
The Company does not expect to generate positive cash flow from its
operations for several years. As a result, the Company intends to seek funding
from external sources. Management of the Company and of Intermedia believe that
the proceeds of the offering described in Note 12 will be sufficient to meet
the Company's projected cash needs into the second half of 2000. In the event
the contemplated offering does not close, Intermedia, as the Company's indirect
parent, will fund the Company's cash requirements for a period of at least one
year. If the proceeds from the contemplated offering are ultimately less than
currently anticipated, management believes the Company can curtail operating
and capital outlays at levels sufficient to support the Company's current
operations. Intermedia will continue to fund the operating and capital
requirements of the Company until consummation of the offering.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
F-8
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
(Continued)
Revenue Recognition and Accounts Receivable
Revenues principally consist of installation fees and monthly service fees
charged to customers under contracts having terms that typically range from one
to three years. Installation fees are recognized upon the customer-approved
completion of the Web Site installation. Monthly service fees are recognized in
the month the service is rendered over the contract period. Certain customer
payments for Web site management services received in advance of service
delivery are deferred until the service is performed. Additional services are
recognized in the month the services are performed.
The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk (SFAS 105). Accounts receivable are due from commercial entities to whom
credit is extended based on evaluation of the customer's financial condition,
and generally collateral is not required. Anticipated credit losses are
provided for in the financial statements and have been within management's
expectations for all periods presented.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally five years for equipment and up to fifteen years for leasehold
improvements. Equipment acquired under capital leases is amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life of the asset, generally five years. The cost of license agreements with
software vendors is amortized over five years.
Intangible Assets
Intangible assets include assets that arose in connection with the purchase
of Business Internet by Intermedia. Identifiable intangible assets arising from
the purchase are stated at cost and consist of trade name, customer lists,
acquired workforce, developed technology and goodwill. Amortization of these
assets is computed using the straight-line method over the estimated periods of
benefit, generally five years for developed technologies and ten years for all
other intangible assets.
Impairment of Long-Lived Assets
In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
(SFAS 121), the Company reviews its long-lived assets for impairment when
events or changes in circumstances indicate the carrying value of such assets
may not be recoverable. This review consists of a comparison of the carrying
value of the asset with the asset's expected future undiscounted cash flows
without interest costs. Estimates of expected future cash flows represent
management's best estimate based on reasonable and supportable assumptions and
projections. If the expected future cash flow exceeds the carrying value of the
asset, no impairment indicator is considered present. If the carrying value
exceeds the future cash flow, an impairment indicator is considered present.
Such impairment would be measured and recognized using a discounted cash flow
method.
Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.
F-9
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
(Continued)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
amounted to $515, $2,016, $2,076 and $2,544 for the year ended December 31,
1996, the period from January 1, 1997 to July 6, 1997, the period from July 7,
1997 to December 31, 1997, and the year ended December 31, 1998, respectively.
Stock-Based Compensation
Prior to the Company's incorporation, the Company's employees participated in
the stock option plans of Intermedia. The Company accounts for employee stock-
based compensation in accordance with Accounting Principles Board Opinion No.
25, Accounting for Stock Issued to Employees, and related Interpretations,
because the alternative fair value accounting model provided under Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123), is not required. Accordingly, in cases where exercise prices equal
or exceed fair market value of the underlying Intermedia common stock, the
Company recognizes no compensation expense. In cases where exercise prices are
less than the fair value, compensation is recognized over the period of
performance or vesting period.
Income Taxes
The operations of the Company and of the Predecessor were included in the
consolidated income tax returns of Intermedia and Business Internet,
respectively. For reporting purposes, the Company has used the asset and
liability method in accounting for income taxes, prescribed in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109),
except that the presentation reflects the parent companies as if they were the
taxing jurisdictions. Under this method, deferred tax assets and liabilities
are determined based on differences between financial reporting and tax bases
of assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
130, Reporting Comprehensive Income (SFAS 130). SFAS 130 requires that total
comprehensive income (loss) be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholder's equity exclusive of
transactions with owners, such as capital contributions and dividends. The
Company and the Predecessor adopted this Standard in 1998 and implemented the
Standard for all years presented herein. The Company's and Predecessor's
comprehensive losses were equal to net losses for all periods presented.
Segment Reporting
The Company and the Predecessor operated during all periods in a single
segment when applying the management approach defined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information (SFAS 131).
Pro Forma Earnings (Loss) Per Share
Pro forma basic and diluted net loss per share of the Company has been
calculated using the weighted average common shares and dilutive equivalent
shares issued in connection with the Company's recapitalization assumed
outstanding for all periods of Digex presented.
F-10
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
2. Related Party Transactions and Corporate Allocations
The Predecessor and the Company utilized the central cash management systems
of Business Internet and Intermedia, respectively. Cash requirements during
these periods were satisfied by cash transactions and transfers that were
accounted for through an intercompany account. In addition, the parent
companies charged the Company for identifiable corporate and operating
expenses, such as network cost and for corporate overhead. Intercompany account
balances for all periods presented have been treated as permanent contributions
and have been reflected as a component of owner's net investment in the
accompanying financial statements.
The following table summarizes corporate charges and allocations included in
the accompanying financial statements:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
July 7, 1997
(date of
January 1, acquisition)
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
Statement of Operations Caption 1996 1997 1997 1998
------------------------------------------------------------------------ ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Cost of operations...................................................... $1,947 $4,001 $5,625 $ 6,494
Cost of services........................................................ 189 344 447 1,320
Selling, general & administrative....................................... 1,041 1,760 2,731 2,204
------ ------ ------ -------
$3,177 $6,105 $8,803 $10,018
--------------------------------------------------
====== ====== ====== =======
</TABLE>
Explanations of the composition and the method of allocation for the above
captions are as follows:
Cost of Operations
Allocated costs within this caption were the costs of telecommunications
backbone circuits, employment costs for network engineering and support, and
certain other overhead. These costs were allocated to the Company based upon
the relative percentage of monthly recurring revenue of all operations that
require such costs.
Cost of Services
Allocated costs within this caption were the costs associated with two data
centers (rent, maintenance, utilities and support). These costs were allocated
based upon head count.
Selling, General and Administrative
Allocated costs within this caption were the costs of human resources,
information systems services, accounting and back office support, executive
salaries and other general and administrative. All costs except accounting were
allocated based upon head count. Accounting and back office support were
allocated based upon the relative percentage of monthly recurring revenues.
F-11
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31
----------------
1997 1998
------- -------
<S> <C> <C>
Electronics and computer equipment......................... $12,163 $36,245
Computer software.......................................... 1,594 8,153
Furniture and office equipment............................. 121 297
Leasehold improvements..................................... 227 488
------- -------
14,105 45,183
Less accumulated depreciation.............................. (1,175) (6,124)
------- -------
$12,930 $39,059
======= =======
</TABLE>
Property and equipment included electronics and computer equipment of $2,051
and $3,009 at December 31, 1997 and 1998, respectively, that were capitalized
pursuant to the terms of capital lease agreements. Amortization of these assets
is included in depreciation expense for the years ended December 31, 1997 and
1998.
Depreciation expense amounted to $591 for the year ended December 31, 1996,
$519 for the period from January 1, 1997 to July 6, 1997, $1,175 for the period
from July 7, 1997 to December 31, 1997, and $4,949 for the year ended December
31, 1998.
4. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
Goodwill................................................ $19,099 $19,099
Trade name.............................................. 9,750 9,750
Customer list........................................... 3,120 3,120
Developed technologies.................................. 2,720 2,720
Acquired workforce...................................... 1,253 1,253
------- -------
35,942 35,942
Less accumulated amortization........................... (1,578) (4,738)
------- -------
$34,364 $31,204
======= =======
</TABLE>
Amortization expense amounted to $1,578 for the period from July 7, 1997 to
December 31, 1997, and $3,160 for the year ended December 31, 1998. At the date
of acquisition, the trade name was valued at $11,000. The Company and another
operating unit of Intermedia shared the value of this trade name during the
period from July 7, 1997 through December 31, 1998. Amortization expense
allocated to the Company in the accompanying financial statements was based on
the relative percentage of historical revenues of the Company versus those of
another operating unit of Intermedia. Approximately 24% of the total
amortization during that period is reflected in the accompanying financial
statements.
F-12
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
5. Stock-Based Compensation Arrangements
Under the provisions of the Intermedia 1996 Long-Term Incentive Plan (1996
Plan), certain employees and directors of the Company have been granted options
to buy shares of Intermedia common stock, generally at market value with terms
of five to ten years. Under the provisions of the Business Internet Equity
Participation Plan, employees were awarded stock options, generally at market
value with terms of five years. Options in Business Internet that were held by
employees of the Predecessor were converted into 456,632 Intermedia options in
the 1996 Plan upon the purchase of Business Internet, applying the same terms
and conditions as existed under the Business Internet Equity Participation
Plan.
The following table summarizes the stock option activity related to the Web
hosting unit employees of the Predecessor and of Intermedia:
<TABLE>
<CAPTION>
Number
of Per Share
Shares Option Price
------- ------------
<S> <C> <C>
Outstanding Business Internet options at January 1,
1996............................................... -- $ --
Granted........................................... 483,535 0.13-5.19
Exercised......................................... -- --
Canceled.......................................... 1,102 0.13
-------
Outstanding Business Internet options at December
31, 1996........................................... 482,433 0.13-5.19
Granted........................................... 478,451 1.50-5.12
Exercised......................................... 4,778 0.13-5.00
Canceled.......................................... 3,326 0.13-5.00
------- ------------
Outstanding Business Internet options at July 6,
1997............................................... 952,780 0.13-5.19
======= ============
Outstanding Intermedia options at July 7, 1997...... 456,632 0.26-10.82
Granted........................................... -- --
Exercised......................................... 95,364 0.26-10.82
Canceled.......................................... 1,280 8.99-10.82
------- ------------
Outstanding Intermedia options at December 31,
1997............................................... 359,988 0.26-10.82
Granted........................................... 130,900 16.38-37.00
Exercised......................................... 87,521 0.26-10.82
Canceled.......................................... 183,187 0.26-37.00
------- ------------
Outstanding Intermedia options at December 31,
1998............................................... 220,180 $ 0.26-37.00
======= ============
</TABLE>
The above stock options are NOT convertible into common stock of the Company.
Pro forma net loss and net loss per share, assuming that the Predecessor and
Digex have applied the fair value model (Black-Scholes Pricing Model) required
by SFAS 123, is as follows:
<TABLE>
<CAPTION>
Predecessor Digex
----------------------- -------------------------
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................. $(4,395) $(9,645) $(18,558) $(16,828)
Net loss per share....... -- -- $ (18.56) $ (16.83)
</TABLE>
F-13
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
5. Stock-Based Compensation Arrangements (Continued)
The following table summarizes the significant assumptions used in developing
the pro forma information:
<TABLE>
<CAPTION>
Predecessor Digex
----------------------- -------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Risk-free interest
rate................... 6.1% 6.1% 6.1% 5.4%
Volatility factor....... 58.0% 58.0% 58.0% 53.0%
Dividend yield.......... -- -- -- --
Weighted average life... 5 years 5 Years 5 years 5 years
</TABLE>
The following table summarizes the weighted average exercise prices of option
activity:
<TABLE>
<CAPTION>
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of
period................. $0.13 $6.28 $5.83 $ 5.83
Granted............... 3.07 5.36 -- 26.69
Exercised............. -- 7.45 5.28 6.94
Canceled.............. 0.13 8.29 10.02 6.73
----- ----- ----- ------
Balance at end of
period................. $3.01 $5.83 $5.83 $20.60
===== ===== ===== ======
</TABLE>
As of December 31, 1998, the weighted average exercise price of exercisable
options was $10.20. Outstanding options as of December 31, 1998, which were not
convertible into shares of the Company, had a weighted average remaining
contractual life of 7.4 years. The per share weighted average fair value of
options granted during the year ended December 31, 1996, the period from
January 1, 1997 to July 6, 1997, the period from July 7, 1997 to December 31,
1997 and for the year ended December 31, 1998 were $1.72, $1.44, $0 and $14.84,
respectively.
6. Income Tax Information
The Company's income tax benefit for the period from July 7, 1997 to December
31, 1997 and the year ended December 31, 1998 are comprised of the following:
<TABLE>
<CAPTION>
Period from
July 7, 1997 Year
to ended
December 31, December
1997 31, 1998
------------ --------
<S> <C> <C>
Current............................................. $ -- $--
Deferred:
Federal........................................... 1,306 144
State............................................. 134 15
------ ----
$1,440 $159
====== ====
</TABLE>
F-14
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
6. Income Tax Information (Continued)
The following table reconciles the assumed statutory tax rate with the
effective rate of the Predecessor and the Company:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
Period
from Period from
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Tax benefit at statutory rate......................................... (34.0)% (34.0)% (34.0)% (34.0)%
Reconciling items:
State income taxes, net............................................. (3.5)% (3.5)% (0.7)% (3.1)%
Charge-off of purchased in-process research and development......... -- -- 25.5% --
Change in valuation allowance....................................... 37.0% 37.1% 0.0% 32.0%
Other items......................................................... 0.5% 0.4% 2.0% 4.1%
----- ----- ----- -----
Effective tax rate.................................................... -- % -- % (7.2)% (1.0)%
--------------------------------------------------
===== ===== ===== =====
</TABLE>
At December 31, 1997 and 1998, the Company had temporary differences between
the carrying amounts of assets and liabilities for financial reporting purposes
and such amounts as measured by tax laws. Significant components of the
Company's deferred tax assets and liabilities as of December 31, 1997 and 1998
were as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax liabilities:
Depreciation and amortization.............................. $(5,949) $(5,216)
------- -------
Total deferred tax liabilities........................... (5,949) (5,216)
Deferred tax assets:
Net operating loss carryforwards........................... 5,541 10,268
Allowance for bad debts.................................... 138 186
Stock-based compensation................................... 111 111
------- -------
Total deferred tax assets................................ 5,790 10,565
Less: valuation allowance................................ -- (5,349)
------- -------
Net deferred tax asset................................. 5,790 5,216
------- -------
Net deferred tax asset (liability)........................... $ (159) $ --
======= =======
</TABLE>
At December 31, 1998, the Company's net operating loss carryforward for
federal income tax purposes is approximately $27,400, with expiration periods
beginning in 2011 through 2018. As a result of the recapitalization of the
Company, the net operating loss carryforwards will be limited such that no
benefit will enure to the newly formed corporation.
F-15
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
7. Lease Commitments
The Company leases electronic and computer equipment under capital lease
arrangements. The Company also leases office space and office equipment under
operating leases. Future noncancelable lease payments under the Company's lease
commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Future minimum lease payments:
Year ended December 31:
1999................................................. $1,121 $ 881
2000................................................. 892 1,871
2001................................................. 324 1,774
2002................................................. -- 1,628
2003................................................. -- 10,417
------ -------
2,337 $16,571
=======
Less amount representing interest...................... (248)
------
Present value of lease payments........................ 2,089
Current portion of capital leases...................... (981)
------
Noncurrent portion of capital leases................... $1,108
======
</TABLE>
Rent expense amounted to $121 for the year ended December 31, 1996, $117 for
the period from January 1, 1997 to July 7, 1997, $170 for the period from July
7, 1997 to December 31, 1997, and $829 for the year ended December 31, 1998.
8. Pro Forma Earnings (Loss) Per Share (Unaudited)
The following table summarizes the calculation of pro forma loss per share
assuming that the capitalization of the Company in April 1999 was in effect for
all periods presented below:
<TABLE>
<CAPTION>
Period from
July 1, 1997
to Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Net loss, as reported................................. $(18,558) $(16,581)
======== ========
Weighted average common shares........................ 1,000 1,000
======== ========
Loss per share:
Basic............................................... $ (18.56) $ (16.58)
======== ========
Diluted............................................. $ (18.56) $ (16.58)
======== ========
</TABLE>
The above table reflects no adjustments for stock options, as the effect of
options was anti-dilutive.
F-16
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
9. Business Combination
On July 7, 1997, Intermedia purchased the outstanding common stock of
Business Internet, a nationwide Internet services provider and Web site
management company in a business combination accounted for as a purchase. The
purchase price was allocated to the fair values of assets acquired and
liabilities assumed, with the difference recorded as goodwill, which is being
amortized over ten years.
The following table summarizes the allocation of the purchase price to the
acquired assets and assumed net liabilities of the Company:
<TABLE>
<S> <C>
Estimated net fair values of operating assets and
liabilities................................................. $ (3,721)
Purchased intangible assets:
Trade name................................................. 9,750
Customer list.............................................. 3,120
Acquired workforce......................................... 1,253
Developed technologies..................................... 2,720
Goodwill................................................... 19,099
In-process research and development.......................... 15,000
--------
$ 47,221
========
</TABLE>
The amount allocated to in-process research and development ("R&D") $15,000
was recorded as a one-time charge to operations in 1997 because the technology
was not fully developed and had no future alternative use.
The purchased in-process research and development related to the Predecessor
related to next generation Web site management services that were valued
utilizing the Exclusion Methodology. Under the Exclusion Methodology, future
revenue streams associated with the incomplete portion of the projects are
excluded from the valuation model. On the date of the purchase, the Company
estimated that the overall state of completion of the projects was
approximately 75% and the expected future costs to complete the projects would
be approximately $100 in the remainder of 1997 and $400 in 1998.
The developed technologies acquired related to the group of servers hosting
customer Web sites located at the Company's Beltsville headquarters. This site
was inadequate to service the increasing number of sites under management by
the Company. The current software used in the Beltsville headquarters at the
time of the purchase had limited functionality and required the integration of
more sophisticated tools to handle complex network management activities. The
in-process research and development was considered to be a significant step
forward since it involved the development, construction, and integration of an
additional Web site management facility on the west coast. This technologically
advanced Web site management facility will incorporate the new software arising
from the Company's joint development efforts with Microsoft Corporation.
Additionally, the west coast facility will incorporate the next generation
routers. These advancements are expected to ultimately result in faster and
easier installation of customers' servers and efficient traffic management with
significantly less overhead.
F-17
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
9. Business Combination (Continued)
On an unaudited pro forma basis, assuming the purchase had occurred at the
beginning of the 1997 year, total revenues would have been $11,612, net loss
would have been $(22,852) and net loss per share (basic and diluted) would have
been $(22.85), assuming that the recapitalization discussed in Note 10 had been
in effect for that period. However, pro forma results do not purport to be
indicative of the results that would have occurred if the acquisition had
occurred at the beginning of year.
10. Recapitalization and Affiliate Agreements (Unaudited)
Recapitalization
On April 27, 1999, the Company filed its Certificate of Incorporation in the
state of Delaware. Pursuant to the Certificate, the Company is authorized to
issue up to 9,000 shares of $.01 par value common stock, of which 6,000 will be
classified Class A and 3,000 Class B, and 100 shares of Preferred Stock. The
Class A and Class B common stock will be identified in all respects except that
the Class A will be entitled to one vote for each share and the Class B will be
entitled to ten votes for each share. In addition, on that date, Business
Internet contributed the Company's assets to the newly formed corporation.
Liabilities of the Company were retained by Business Internet under this
recapitalization. The unaudited pro forma balance sheet at December 31, 1998
reflects the pro forma effect of this recapitalization.
Master Network Services Agreement
Pursuant to a Master Network Services Agreement, to be finalized before
consummation of the offering as described in Note 12, between Intermedia and
the Company, Intermedia will provide Internet network access, as well as
network-related services. The Master Network Agreement has an initial term of
two years, and requires the Company to purchase at least 70% of its non-peering
Internet and network access requirements from Intermedia. Rates charged to the
Company will generally be consistent with rates incurred during the periods
presented in the accompanying financial statements.
General and Administrative Services Agreement
Pursuant to a General and Administrative Services Agreement, entered into in
April, 1999, between Intermedia and the Company, Intermedia will provide the
back office and administrative services as listed below:
.Corporate Human Resources, including labor relations, payroll and training
.Treasury Management Services
.Tax services, including tax return preparation
.Facilities management services
.Accounting and back office support services
.Investor relations
.Network engineering services
F-18
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
December 31, 1998
(In thousands, except per share information)
10. Recapitalization and Affiliate Agreements (Unaudited)
The General and Administrative Services Agreement has an initial term of five
years. Rates charged to the Company for these services are believed to be
consistent with the allocations in the accompanying financial statements. Rates
for services not previously provided to the Company (e.g. investor relations)
are based upon Intermedia and the Company's best estimate of the fair value of
those services.
11. Segments
As a provider of Web site hosting service, the Company has one reportable
operating segment. The revenue of this single segment is derived from service
offerings as reported in the Company's statement of operations. Substantially
all of the Company's revenue is attributable to customers in the United States.
Additionally, all of the Company's assets are located within the United States.
12. Proposed Public Offering of Common Stock (Unaudited)
The Board of Directors of Intermedia has authorized management of the Company
to file a registration statement with the Securities and Exchange Commission
for the initial public offering of the Company's Class A Common Stock. The
Company contemplates using the proceeds from the proposed public offering to
finance its growth plans.
F-19
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this pro-
spectus. Neither Digex nor any underwriter has authorized anyone to provide
prospective investors with different or additional information. This prospec-
tus is not an offer to sell nor is it seeking an offer to buy these securities
in any jurisdiction where such offer or sale is not permitted. The information
contained in this prospectus is correct only as of the date of this prospec-
tus, regardless of the time of delivery of this prospectus or any sale of
these securities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 9
Use of Proceeds.......................................................... 21
Dividend Policy.......................................................... 21
Capitalization........................................................... 22
Dilution................................................................. 23
Selected Financial Data.................................................. 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 26
Business................................................................. 34
Management............................................................... 47
Certain Relationships and Related Transactions........................... 53
Principal Stockholders................................................... 56
Description of Capital Stock............................................. 57
Shares Eligible for Future Sale.......................................... 59
Underwriting............................................................. 61
Legal Matters............................................................ 62
Experts.................................................................. 62
Where You Can Find Additional Information................................ 63
Index to Financial Statements............................................ F-1
</TABLE>
----------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
buy, sell or trade these shares of common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This is in addition
to the dealers' obligation to deliver a prospectus when acting as underwriters
and with respect to their unsold allotments or subscriptions.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
[DIGEX logo]
Shares
Class A Common Stock
-------------
PROSPECTUS
-------------
Bear, Stearns & Co. Inc.
Donaldson, Lufkin & Jenrette
CIBC World Markets
Legg Mason Wood Walker
Incorporated
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following statement sets forth the expenses payable in connection with
this Registration Statement (estimated except for the registration fee and the
NASD fee), all of which will be borne by Digex, Incorporated:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $27,800
NASD filing fee..................................................... $10,500
Nasdaq National Market listing fee.................................. $
Blue Sky fees and expenses.......................................... $ 7,500
Legal fees and expenses............................................. $
Trustees' and Transfer Agents' fees................................. $
Accountants' fees and expenses...................................... $
Printing costs...................................................... $
Miscellaneous....................................................... $
-------
Total............................................................. $
=======
</TABLE>
Item 14. Indemnification of Directors and Officers.
Digex's Certificate of Incorporation provides that Digex shall, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
indemnify all persons whom it may indemnify pursuant thereto (i.e., directors
and officers) and shall advance expenses incurred in defending any proceeding
for which such right to indemnification is applicable, provided that, if the
DGCL so requires, the indemnitee provides Digex with an undertaking to repay
all amounts advanced if it is determined by a final judicial decision that such
person is not entitled to indemnification pursuant to this provision. Digex's
Certificate of Incorporation also contains a provision eliminating the personal
liability of Digex's directors for monetary damages for breach of any fiduciary
duty. By virtue of this provision, under the DGCL, a director of Digex will not
be personally liable for monetary damages for breach of his fiduciary duty as a
director, except for liability for (i) any breach of the director's duty of
loyalty to Digex or its stockholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
dividends or stock purchases or redemptions that are unlawful under the DGCL,
and (iv) any transaction from which a director derives an improper personal
benefit. However, this provision of Digex's Certificate of Incorporation
pertains only to breaches of duty by directors as directors and not in any
other corporate capacity such as officers, and limits liability only for
breaches of fiduciary duties under the DGCL and not for violations of other
laws, such as the federal securities laws. As a result of the inclusion of such
provision, stockholders may be unable to recover monetary damages against
directors for actions taken by them that constitute negligence or gross
negligence or that are in violation of their fiduciary duties, although it may
be possible to obtain injunctive or other equitable relief with respect to such
actions. The inclusion of this provision in Digex's Certificate of
Incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefited Digex and its stockholders.
Item 15. Recent Sales of Unregistered Securities.
As of April 27, 1999, there had been no sales of Digex's unregistered
securities.
II-1
<PAGE>
Item 16. Exhibits and Financial Data Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description
------- -----------
<C> <S>
1.1 Proposed Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Digex, Incorporated.
3.2 Bylaws of Digex, Incorporated.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP*
10.1 Material Contracts.*
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of attorney (included on page II-3).
</TABLE>
- --------
* To be filed by Amendment.
(b) Financial Statement Schedules.
The financial statements and financial statement schedules filed as part of
this Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page F-1 of
the Prospectus included in this Registration Statement.
2. Financial Statement Schedules.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by Digex pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this Registration
Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be an initial bona fide offering thereof.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreements, certificates in such denominations and registered
in such names as required by the underwriters to permit prompt delivery to
each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Digex
pursuant to the foregoing provisions, or otherwise, Digex has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Digex of expenses incurred or paid by a
director, officer or controlling person of Digex in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, Digex
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Digex has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Beltsville, State of Maryland, on
this day of , 1999.
Digex, Incorporated
/s/ Nancy G. Faigen
By: _________________________________
Nancy G. Faigen
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints DAVID C.
RUBERG and ROBERT M. MANNING and either of them (with full power in each to act
alone), his true and lawful attorneys-in-fact, with full power of substitution,
for him and in his name, place and stead, in any and all capacities, to sign
any and all amendments (including post-effective amendments) to this
registration statement, and to file the same, with all exhibits thereto, and
other documents in connection therewith including, without limitation, any
registration statements for the same offering that is to be effective upon
filing pursuant to Rule 462 (b) under the Securities Act with the Commission,
hereby ratifying and confirming all that said attorneys-in-fact, or their
substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
Principal Executive Officers:
/s/ Nancy G. Faigen President and Chief April 27, 1999
______________________________________ Executive Officer
Nancy G. Faigen
Principal Financial and Accounting Officers:
/s/ Robert M. Manning Acting Chief Financial April 27, 1999
______________________________________ Officer
Robert M. Manning
/s/ Jeanne Walters Acting Controller April 27, 1999
______________________________________
Jeanne Walters
/s/ David C. Ruberg Chairman of the Board April 27, 1999
______________________________________
David C. Ruberg
/s/ Nancy G. Faigen Director April 27, 1999
______________________________________
Nancy G. Faigen
/s/ John C. Baker Director April 27, 1999
______________________________________
John C. Baker
/s/ Philip A. Campbell Director April 27, 1999
______________________________________
Philip A. Campbell
/s/ George F. Knapp Director April 27, 1999
______________________________________
George F. Knapp
/s/ Pierce J. Roberts, Jr. Director April 27, 1999
______________________________________
Pierce J. Roberts, Jr.
</TABLE>
II-3
<PAGE>
DIGEX, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
(Amounts in thousands)
<TABLE>
<CAPTION>
Additions
-------------------
Balance at Charged to Charged Balance at
Beginning Costs and to Other Deductions -- End of
Description of Period Expenses Accounts Describe Period
- ----------- ---------- ---------- -------- ------------- -----------
<S> <C> <C> <C> <C> <C>
The Predecessor
For the year ended
December 31, 1996:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. $ -- $ 233 $-- $ -- $ 233
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- 1,358 -- -- 1,358
===== ====== ==== ===== ======
For the period from
January 1, 1997 to July
6, 1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 233 352 -- 278(1) 307
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... 1,358 3,359 -- -- 4,717
===== ====== ==== ===== ======
The Company
For the period from July
7, 1997 to December 31,
1997:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 307 498 -- 436(1) 369
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- -- -- -- --
===== ====== ==== ===== ======
For the year ended
December 31, 1998:
Deducted from asset
accounts:
Allowance for doubtful
accounts............. 369 1,491 -- 1,141(1) 719
===== ====== ==== ===== ======
Allowance for deferred
tax assets........... -- 5,349 -- -- 5,349
===== ====== ==== ===== ======
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
1.1 Proposed Form of Underwriting Agreement.*
3.1 Certificate of Incorporation of Digex, Incorporated.
3.2 Bylaws of Digex, Incorporated.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.*
10.1 Material Contracts.*
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of attorney.
</TABLE>
- --------
* To be filed by Amendment.
<PAGE>
EXHIBIT 3.1
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.
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<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
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<PAGE>
EXHIBIT 3.2
------------------------
BYLAWS
OF
DIGEX, INCORPORATED
------------------------
Adopted April 26, 1999
<PAGE>
BYLAWS
OF
DIGEX, INCORPORATED
(hereinafter called the "Corporation")
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office of the
--------- -----------------
Corporation shall be in the City of Wilmington, County of New Castle, State of
Delaware.
Section 2. Other Offices. The Corporation may also have offices at
--------- -------------
such other places both within and without the State of Delaware as the Board of
Directors may from time to time determine.
ARTICLE II
MEETING OF STOCKHOLDERS
-----------------------
Section 1. Place of Meetings. Meetings of the stockholders for the
--------- -----------------
election of directors or for any other purpose shall be held at such time and
place, either within or without the State of Delaware as shall be designated
from time to time by the Board of Directors. In the absence of any such
designation, stockholders' meetings shall be held at the principal executive
office of the Corporation.
<PAGE>
Section 2. Annual Meetings. The Annual Meetings of Stockholders
--------- ---------------
shall be held each year on such date and at such time as shall be designated
from time to time by the Board of Directors and stated in the notice of the
meeting. At such meetings the stockholders shall elect by a plurality vote a
Board of Directors, and transact such other business as may properly be brought
before the meeting.
Section 3. Special Meetings. Unless otherwise prescribed by law or
--------- ----------------
by the Certificate of Incorporation, Special Meetings of Stockholders, for any
purpose or purposes, may be called by either (i) the Chairman, if there be one,
or (ii) the President, (iii) any Executive Vice-President, if there be one (iv)
any Vice President, if there be one, (v) the Secretary, or (vi) any Assistant
Secretary, if there be one, and shall be called by any such officer at the
request in writing of a majority of the Board of Directors or at the request in
writing of stockholders owning a majority of the capital stock of the
Corporation issued and outstanding and entitled to vote.
Section 4. Notice of Meetings. Whenever stockholders are required or
--------- ------------------
permitted to take any action at a meeting, a written notice of the meeting shall
be given which notice shall state the place, date and hour of the meeting, and,
in the case
2
<PAGE>
of a Special Meeting, the purpose or purposes for which the meeting is called.
The written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting. If mailed, notice is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at this address as it appears
on the records of the Corporation. Business transacted at any meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 5. Quorum. Except as otherwise provided by law or by the
--------- ------
Certificate of Incorporation, a majority of the voting power of the stock issued
and outstanding and entitled to vote at any meeting of stockholders, the holders
of which are present in person or represented by proxy, shall constitute a
quorum at all meetings of the stockholders for the transaction of business. A
quorum, once established, shall not be broken by the withdrawal of enough votes
to leave less than a quorum and the votes present may continue to transact
business until adjournment. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time,
3
<PAGE>
without notice other than announcement at the meeting, until a quorum shall be
present or represented. At such adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally noticed. If the adjournment is for more
than thirty days, or if after the adjournment a new record date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be given to each
stockholder entitled to vote at the meeting.
Section 6. Voting. When a quorum is present at any meeting, unless
--------- ------
otherwise required by law, the Certificate of Incorporation or these Bylaws, any
question brought before any meeting of stockholders shall be decided by the vote
of the holders of a majority of the total voting power of the stock represented
and entitled to vote thereat. Each stockholder shall have the following number
of votes for each share of stock as designated in the Certificate of
Incorporation, registered in his or her name on the books of the Corporation on
the record date set by the Board of Directors as provided in Article Fourth,
Section A, thereof: Each Class A stockholder represented at a meeting of
shareholders shall be entitled to cast one vote for each share of the capital
stock entitled to vote thereat held by
4
<PAGE>
such stockholder; Each Class B stockholder represented at a meeting of
shareholders shall be entitled to cast ten votes per share of the capital stock
entitled to vote thereat held by such stockholder.
Section 7. Proxies. At each meeting of the stockholder, each
--------- -------
stockholder having the right to vote may vote in person or may authorize another
person or persons to act for him by proxy appointed by an instrument in writing
subscribed by such stockholder. No proxy shall be voted on or after three years
from its date, unless such proxy provides for a longer period. All proxies must
be filed with the Secretary of the Corporation at the beginning of each meeting
in order to be counted in any vote at the meeting. The Board of Directors, in
its discretion, or the officer of the Corporation presiding at a meeting of
stockholders, in his discretion, may require that any votes cast at such meeting
shall be cast by written ballot.
Section 8. Consent of Stockholders in Lieu of Meeting. Unless
--------- ------------------------------------------
otherwise provided in the Certificate of Incorporation, any action required or
permitted to be taken at any Annual or Special Meeting of Stockholders of the
Corporation, may be taken without a meeting, without prior notice and without a
vote, if a consent in writing, setting forth the action so taken, shall be
5
<PAGE>
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares entitled to vote thereon were present and voted.
Prompt notice of the taking of the corporate action without a meeting by less
than unanimous written consent shall be given to those stockholders who have not
consented in writing.
Section 9. List of Stockholders Entitled to Vote. The officer of the
--------- -------------------------------------
Corporation who has charge of the stock ledger of the Corporation shall prepare
and make, at least ten days before every meeting of stockholders, a complete
list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
and class of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder, for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole
6
<PAGE>
time thereof, and may be inspected by any stockholder of the Corporation who is
present.
Section 10. Stock Ledger. The stock ledger of the Corporation shall
---------- ------------
be the only evidence as to who are the stockholders entitled to examine the
stock ledger, the list required by Section 9 of this Article II or the books of
the Corporation, or to vote in person or by proxy at any meeting of
stockholders.
Section 11. Business Properly Brought Before An Annual Meeting. At
---------- --------------------------------------------------
any annual meeting of the stockholders, only such business shall be conducted as
shall have been properly brought before the meeting. To be properly brought
before an annual meeting, business must be specified in the notice of meeting
(or any supplement thereto) given by or at the direction of the board, or
otherwise properly brought before the meeting by a stockholder. In addition to
any other applicable requirements, for business to be properly brought before an
annual meeting by a stockholder, the stockholder must have given timely notice
thereof in writing to the Secretary of the Corporation. To be timely, a
stockholder's notice must be delivered to or mailed and received at the
principal executive offices of the Corporation, not less than 50 days nor more
than 60 days prior to the annual
7
<PAGE>
meeting; provided, however, that in the event that less than 50 days' notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10/th/ day following the day on which
such notice of the date of the annual meeting was mailed or such public
disclosure was made. A stockholder's notice to the Secretary shall set forth as
to each matter the stockholder proposes to bring before the annual meeting: (i)
a brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and record address of the stockholder of record proposing such
business, (iii) the class and number of shares of the Corporation which are
beneficially owned by the stockholder, and (iv) any material interest of the
stockholder in such business.
Notwithstanding anything in the Bylaws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this Section 11 of this Article II provided, however,
that nothing in this Section 11 of this Article II shall be deemed to preclude
discussion by
8
<PAGE>
any stockholder of any business properly brought before the annual meeting in
accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant,
determine and declare to the meeting that business was not properly brought
before the meeting in accordance with the provisions of this Section 11 of this
Article II, and if he should so determine, he shall so declare to the meeting
and any such business not properly brought before the meeting shall not be
transacted.
ARTICLE III
DIRECTORS
---------
Section 1. Nominations of Directors. Only persons who are nominated
--------- ------------------------
in accordance with the following procedures shall be eligible for election as
Directors. Nominations of persons for election to the Board of the Corporation
may be made at a meeting of stockholders by or at the direction of the Board of
Directors, by any nominating committee or person appointed by the Board of
Directors or by any stockholder of the corporation entitled to vote for the
election of Directors at the meeting who complies with the notice procedures set
forth in this Section 1 of this Article III. Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made
9
<PAGE>
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a stockholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than 50 days nor
more than 60 days prior to the meeting; provided, however, that in the event
that less than 50 days' notice or prior public disclosure of the date of the
meeting is given or made to stockholders, notice by the stockholder to be timely
must be so received not later than the close of business on the 10/th/ day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. Such stockholder's notice to the
Secretary shall set forth: (a) as to each person whom the stockholder proposes
to nominate for election or re-election as a Director, (i) the name, age,
business address and residence address of the person, (ii) the principal
occupation or employment of the person, (iii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the person,
(iv) any other information relating to the person that is required to be
disclosed in solicitations of proxies for election of Directors pursuant to
Regulation 14A under the Securities and Exchange Act of 1934, as amended, and
(v) any other information relating to the person that is required
10
<PAGE>
pursuant to any statute, or any rule or regulation of any governmental
authority; and (b) as to the stockholder giving the notice (i) the name and
record address of the stockholder, and (ii) the class and number of shares of
capital stock of the Corporation which are beneficially owned by the
stockholder. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a Director of the
Corporation. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and declare
to the meeting that a nomination was not made in accordance with the foregoing
procedures, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
Section 2. Number and Election of Directors. The Board of Directors
---------- --------------------------------
shall initially be fixed by the Incorporator and thereafter from time to time by
the Board of Directors. Except as provided in Section 3 of this Article,
directors shall be elected by a plurality of the votes cast at Annual Meetings
of Stockholders. The directors shall be classified, with respect to
11
<PAGE>
the time for which they severally hold office, into three classes, as nearly
equal in number as possible, as determined by the Board of Directors of the
Corporation, one class to be originally elected for a term expiring at the
annual meeting of stockholders to be held in the year 2000, another class to be
originally elected for a term expiring at the annual meeting of stockholders to
be held in 2001, and another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 2002, with each class to
hold office until its successor is elected and qualified. At each annual meeting
of the stockholders of the Corporation, the successors of the class of directors
whose term expires at that meeting shall be elected to hold office for a term
expiring at the annual meeting of stockholders held in the third year following
the year of their election. Any director may be removed from office, with or
without cause and only by the affirmative vote of the holders of at least 75% of
the voting power of all the shares of the Corporation entitled to vote generally
in the election of directors, voting together as a single class. Any director
may resign at any time upon notice to the Corporation. Directors need not be
stockholders.
12
<PAGE>
Section 3. Vacancies. Vacancies and newly created directorships
--------- ---------
resulting from any increase in the authorized number of directors may be filled
by the affirmative vote of a majority of the remaining directors then in office,
even though less than a quorum, or by a sole remaining director, and the
directors so chosen shall hold office for the remainder of the full term of the
class of directors in which the new directorship was created or the vacancy
occurred and until such director's successors shall have been duly elected and
qualified, or until their earlier resignation or removal. No decrease in the
number of directors constituting the board of directors shall shorten the term
of any incumbent director.
Section 4. Duties and Powers. The property and business of the
--------- -----------------
Corporation shall be managed by or under the direction of the Board of
Directors. In addition to the powers and authorities by these Bylaws expressly
conferred upon them, the Board may exercise all such powers of the Corporation
and do all such lawful acts and things as are not by statute or by the
Certificate of Incorporation or by these Bylaws directed or required to be
exercised or done by the stockholders.
Section 5. Meetings. The Board of Directors of the Corporation may
--------- --------
hold meetings, both regular and special, either
13
<PAGE>
within or without the State of Delaware. Regular meetings of the Board of
Directors may be held without notice at such time and at such place as may from
time to time be determined by the Board of Directors. Special meetings of the
Board of Directors may be called by the Chairman, if there be one, the
President, or any one (1) director. Notice thereof stating the place, date and
hour of the meetings shall be given to each director either by mail not less
than forty-eight (48) hours before the date of the meeting, by telephone or
telegram on twenty-four (24) hours notice, or on such shorter notice as the
person or persons calling such meeting may deem necessary or appropriate in the
circumstances.
Section 6. Quorum. Except as may be otherwise specifically provided
--------- ------
by law, the Certificate of Incorporation or these Bylaws, at all meetings of the
Board of Directors, a majority of the entire Board of Directors shall constitute
a quorum for the transaction of business and the act of a majority of the
directors present at any meeting at which there is a quorum shall be the act of
the Board of Directors. If a quorum shall not be present at any meeting of the
Board of Directors, the directors present thereat may adjourn the meeting from
time to time, without notice other than announcement at the meeting,
14
<PAGE>
until a quorum shall be present. If only one director is authorized, such sole
director shall constitute a quorum.
Section 7. Actions of Board. Unless otherwise provided by the
--------- ----------------
Certificate of Incorporation or these Bylaws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all the members of the Board of Directors or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board of Directors or
committee.
Section 8. Meetings by Means of Conference Telephone. Unless
--------- -----------------------------------------
otherwise provided by the Certificate of Incorporation or these Bylaws, members
of the Board of Directors of the Corporation, or any committee designated by the
Board of Directors, may participate in a meeting of the Board of Directors or
such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other, and such participation in a meeting pursuant to this Section 8 shall
constitute presence in person at such meeting.
Section 9. Committees. The Board of Directors may, by resolution
--------- ----------
passed by a majority of the entire Board of Directors,
15
<PAGE>
designate one or more committees, each such committee to consist of one or more
of the directors of the Corporation. The Board of Directors may designate one or
more directors as alternate members of any committee, who may replace any absent
or disqualified member at any meeting of any such committee. In the absence or
disqualification of a member of a committee, and in the absence of a designation
by the Board of Directors of an alternate member to replace the absent or
disqualified member, the member or members thereof present at any meeting and
not disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any absent or disqualified member. Any committee, to the
extent allowed by law and provided in the resolution establishing such
committee, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; but no such committee shall have the power or authority in
reference to amending the Certificate of Incorporation, adopting an agreement of
merger or consolidation, recommending to the stockholders the sale, lease or
exchange of all or substantially all of the Corporation's
16
<PAGE>
property and assets, recommending to the stockholders a dissolution of the
Corporation or a revocation of a dissolution, or amending the Bylaws of the
Corporation; and, unless the resolution or the Certificate of Incorporation
expressly so provides, no such committee shall have the power or authority to
declare a dividend or to authorize the issuance of stock. Each committee shall
keep regular minutes of its meetings and report the same to the Board of
Directors when required.
Section 10. Compensation. Unless otherwise restricted by the
---------- ------------
Certificate of Incorporation or these Bylaws, the Board of Directors shall have
the authority to fix the compensation of directors. The directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as director. No such payment shall preclude any
director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like reimbursement of expenses for attending committee meetings.
Section 11. Interested Directors. No contract or transaction between
---------- --------------------
the Corporation and one or more of its directors or officers, or between the
Corporation and any other
17
<PAGE>
corporation, partnership, association, or other organization in which one or
more of its directors or officers are directors or officers, or have a financial
interest, shall be void or voidable solely for this reason, or solely because
the director or officer is present at or participates in the meeting of the
Board of Directors or committee thereof which authorizes the contract or
transaction, or solely because his or their votes are counted for such purpose
if (i) the material facts as to his or their relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of Directors
or their committee, and the Board of Directors or committee in good faith
authorizes the contract or transaction by the affirmative votes of a majority of
the disinterested directors, even though the disinterested directors be less
than a quorum; or (ii) the material facts as to his or their relationship or
interest and as to the contract or transaction are disclosed or are known to the
shareholders entitled to vote thereon, and the contract or transaction is
specifically approved in good faith by vote of the shareholders; or (iii) the
contract or transaction is fair as to the Corporation as of the time it is
authorized, approved or ratified, by the Board of Directors, a committee thereof
or the shareholders. Common or interested directors may be counted in
18
<PAGE>
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
Section 12. Indemnification. (a) The Corporation shall indemnify
---------- ---------------
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of the Corporation) by reason of the fact that he is or was a director,
officer, employee or agent of the Corporation, or is or was 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
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interest of the
Corporation, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction, or upon a
plea of nolo contendere or its
19
<PAGE>
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith and in a manner which he reasonably believed to be in or not
opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
(b) The Corporation shall indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the Corporation to procure a judgment in
its favor by reason of the fact that he is or was a director, officer, employee
or agent of the Corporation, or is or was 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 expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interest of the Corporation and except that no such indemnification shall
be made in respect of any claim, issue or matter as to which such person shall
have been adjudged to be liable to the Corporation unless and only to the extent
20
<PAGE>
that the Court of Chancery of Delaware or the court in which such action or suit
was brought shall determine upon application that, despite the adjudication of
liability but in view of all the circumstances of the case, such person is
fairly and reasonably entitled to indemnity for such expenses which such Court
of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
Corporation shall be successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection herewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered
by a court) shall be made by the Corporation only as authorized in the specific
case upon a determination that indemnification of the director, officer,
employee or agent is proper in the circumstances because he has met the
applicable standard of conduct set forth in paragraphs (a) and (b). Such
determination shall be made (1) by the Board of Directors by a majority vote of
a quorum consisting of directors who were not parties to such action, suit or
proceeding, or (2) if such a
21
<PAGE>
quorum is not obtainable, or, even if obtainable a quorum of disinterested
directors so directs, by independent legal counsel in a written opinion, or (3)
by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil
or criminal action, suit or proceeding may be paid by the Corporation in advance
of the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the Corporation as authorized in this Section 12. Such expenses incurred by
other employees and agents may be so paid upon such terms and conditions, if
any, as the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or
granted pursuant to, the other paragraphs of this Section 12 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
22
<PAGE>
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the Corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was 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 and incurred by him in any such capacity, or arising out of his status as
such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Section 12.
(h) For the purposes of this Section 12, references to "the
Corporation" shall include, in addition to the resulting corporation, any
constituent corporation (including any constituent of a constituent) absorbed in
a consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall
23
<PAGE>
stand in the same position under the provisions of this Section with respect to
the resulting or surviving corporation as he would have with respect to such
constituent corporation if its separate existence had continued.
(i) For purposes of this Section, references to "other enterprises"
shall include employee benefit plans, references to "fines" shall include any
excise taxes assessed on a person with respect to any employee benefit plan; and
references to "serving at the request of the Corporation" shall include service
as a director, officer, employee or agent of the Corporation which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Section.
(j) The indemnification and advancement of expenses provided by, or
granted pursuant to, this Section 12 shall, unless otherwise provided when
authorized or ratified, continue as to a person who has ceased to be a director,
officer,
24
<PAGE>
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE IV
OFFICERS
--------
Section 1. General. The officers of the Corporation shall be chosen
--------- -------
by the Board of Directors and shall be a President, a Secretary and a Treasurer.
The Board of Directors, in its discretion, may also choose a Chairman of the
Board of Directors (who must be a director), a Chief Operating Officer, one or
more Vice-Presidents, one or more Assistant Secretaries and Assistant
Treasurers, and such other officers as may be appointed in accordance with the
provisions of Section 2 hereof. Any number of offices may be held by the same
person, unless otherwise prohibited by law, the Certificate of Incorporation or
these Bylaws. The officers of the Corporation need not be stockholders of the
Corporation nor, except in the case of the Chairman of the Board of Directors,
need such officers be directors of the Corporation.
Section 2. Election. The Board of Directors, at its first meeting
--------- --------
held after each Annual Meeting of stockholders shall elect the officers of the
Corporation who shall hold their offices for such terms and shall exercise such
powers and perform
25
<PAGE>
such duties as shall be determined from time to time by the Board of Directors;
and all officers of the Corporation shall hold office until their successors are
chosen and qualified, or until their earlier resignation or removal. Any officer
elected by the Board of Directors may be removed at any time by the affirmative
vote of a majority of the Board of Directors. Any vacancy occurring in any
office of the Corporation shall be filled by the Board of Directors. The
salaries of all officers of the Corporation shall be fixed by the Board of
Directors.
Section 3. Voting Securities Owned by the Corporation. Powers of
--------- ------------------------------------------
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the President or any Vice President and any
such officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and power incident to the ownership of such securities and which, as
the owner thereof, the Corporation might have exercised and possessed if
present. The
26
<PAGE>
Board of Directors may, by resolution, from time to time confer like powers upon
any other person or persons.
Section 4. Chairman of the Board of Directors. The Chairman of the
--------- ----------------------------------
Board of Directors, if there be one, shall preside at all meetings of the
stockholders and of the Board of Directors. He shall possess the same power as
the President to sign all contracts, certificates and other instruments of the
Corporation which may be authorized by the Board of Directors, except where by
law the signature of the President is required. During the absence or disability
of the President, the Chairman of the Board of Directors shall exercise all the
powers and discharge all the duties of the President. The Chairman of the Board
of Directors shall also perform such other duties and may exercise such other
powers as from time to time may be assigned to him by these Bylaws or by the
Board of Directors.
Section 5. President and Chief Executive Officer. The President
--------- -------------------------------------
shall, subject to the supervisory powers as may be given by the Board of
Directors and, if there be one, the Chairman of the Board of Directors, be the
Chief Executive Officer of the Corporation and shall, subject to the control of
the Board of Directors, have general supervision, direction and control of the
business and officers of the Corporation and shall
27
<PAGE>
see that all orders and resolutions of the Board of Directors are carried into
effect. He or she shall execute all bonds, mortgages, contracts and other
instruments of the Corporation requiring a seal, under the seal of the
Corporation, except where required or permitted by law to be otherwise signed
and executed and except that the other officers of the Corporation may sign and
execute documents when so authorized by these Bylaws, the Board of Directors or
the President. In the absence or disability of the Chairman of the Board of
Directors, or if there be none, the President shall preside at all meetings of
the stockholders and the Board of Directors. The President shall also perform
such other duties and may exercise such other powers as from time to time may be
assigned to him or her by these Bylaws or by the Board of Directors.
Section 6. Chief Operating Officer. The Chief Operating Officer
--------- -----------------------
shall have the day to day responsibility for the business operations of the
Corporation, reporting to the President and subject to the control of the Board
of Directors.
Section 7. Vice-Presidents and Executive Vice-Presidents. At the
--------- ---------------------------------------------
request of the President or in his absence or in the event of his inability or
refusal to act (and if there be no Chairman of the Board of Directors), the
Executive Vice-
28
<PAGE>
President or Executive Vice-Presidents or the Vice-President or the Vice-
Presidents if there is more than one (in the order designated by the Board of
Directors) shall perform the duties of the President, and when so acting, shall
have all the powers of and be subject to all the restrictions upon the
President. Each Executive Vice-President or Vice-President shall perform such
other duties and have such other powers as the Board of Directors from time to
time may prescribe. If there be no Chairman of the Board of Directors and no
Executive Vice-President or Vice-President, the Board of Directors shall
designate the officer of the Corporation who, in the absence of the President or
in the event of the inability or refusal of the President to act, shall perform
the duties of the President, and when so acting, shall have all the powers of
and be subject to all the restrictions upon the President.
Section 8. Secretary. The Secretary shall attend all meetings of the
--------- ---------
Board of Directors and all meetings of stockholders and record all the
proceedings thereat in a book or books to be kept for that purpose; the
Secretary shall also perform like duties for the standing committees when
required. The Secretary shall give, or cause to be given, notice of all meetings
of the stockholders and special meetings of the Board of
29
<PAGE>
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he shall be. If the Secretary
shall be unable or shall refuse to cause to be given notice of all meetings of
the stockholders and special meetings of the Board of Directors, and if there be
no Assistant Secretary, then either the Board of Directors or the President may
choose another officer to cause such notice to be given. The Secretary shall
have custody of the seal of the Corporation and the Secretary or any Assistant
Secretary, if there be one, shall have authority to affix the same to any
instrument requiring it and when so affixed, it may be attested by the signature
of the Secretary or by the signature of any such Assistant Secretary. The Board
of Directors may give general authority to any other officer to affix the seal
of the Corporation and to attest the affixing by his signature. The Secretary
shall see that all books, reports, statements, certificates and other documents
and records required by law to be kept or filed are properly kept or filed, as
the case may be.
Section 9. Treasurer. The Treasurer shall have the custody of the
--------- ---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and
30
<PAGE>
other valuable effects in the name and to the credit of the Corporation in such
depositories as may be designated by the Board of Directors. The Treasurer shall
disburse the funds of the Corporation as may be ordered by the Board of
Directors, taking proper vouchers for such disbursements, and shall render to
the President and the Board of Directors, at its regular meetings, or when the
Board of Directors so requires, an account of all his transactions as Treasurer
and of the financial condition of the Corporation. If required by the Board of
Directors, the Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
Section 10. Assistant Secretaries. Except as may be otherwise
---------- ---------------------
provided in these Bylaws, Assistant Secretaries, if there be any, shall perform
such duties and have such powers as from time to time may be assigned to them by
the Board of Directors, the President, any Vice-President, if there be one, or
31
<PAGE>
the Secretary, and in the absence of the Secretary or in the event of his
disability or refusal to act, shall perform the duties of the Secretary, and
when so acting, shall have all the powers of and be subject to all the
restrictions upon the Secretary.
Section 11. Assistant Treasurers. Assistant Treasurers, if there be
---------- --------------------
any, shall perform such duties and have such powers as from time to time may be
assigned to them by the Board of Directors, the President, any Vice-President,
if there be one, or the Treasurer, and in the absence of the Treasurer or in the
event of his disability or refusal to act, shall perform the duties of the
Treasurer, and when so acting, shall have all the powers of and be subject to
all the restrictions upon the Treasurer. If required by the Board of Directors,
an Assistant Treasurer shall give the Corporation a bond in such sum and with
such surety or sureties as shall be satisfactory to the Board of Directors for
the faithful performance of the duties of his office and for the restoration to
the Corporation, in case of his death, resignation, retirement or removal from
office, of all books, papers, vouchers, money and other property of whatever
kind in his possession or under his control belonging to the Corporation.
32
<PAGE>
Section 12. Other Officers. Such other officers as the Board of
---------- --------------
Directors may choose shall perform such duties and have such powers as from time
to time may be assigned to them by the Board of Directors. The Board of
Directors may delegate to any other officer of the Corporation the power to
choose such other officers and to prescribe their respective duties and powers.
ARTICLE V
STOCK
-----
Section 1. Form of Certificates. Every holder of stock in the
--------- --------------------
Corporation shall be entitled to have a certificate signed, in the name of the
Corporation (i) by the Chairman of the Board of Directors, the President or a
Vice-President and (ii) by the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the Corporation, certifying the number of
shares owned by him in the Corporation.
Section 2. Signatures. Where a certificate is countersigned by (i) a
--------- ----------
transfer agent other than the Corporation or its employee, or (ii) a registrar
other than the Corporation or its employee, any other signature on the
certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
33
<PAGE>
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
Section 3. Lost Certificates. The Board of Directors may direct a
--------- -----------------
new certificate to be issued in place of any certificate theretofore issued by
the Corporation alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the Board of Directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as the Board of Directors shall require and/or to give the Corporation a bond in
such sum as it may direct as indemnity against any claim that may be made
against the Corporation with respect to the certificate alleged to have been
lost, stolen or destroyed.
Section 4. Transfers. Stock of the Corporation shall be transferable
--------- ---------
in the manner prescribed by law and in these Bylaws. Transfers of stock shall
be made on the books of the Corporation only by the person named in the
certificate or by his
34
<PAGE>
attorney lawfully constituted in writing and upon the surrender of the
certificate therefor, which shall be canceled before a new certificate shall be
issued.
Section 5. Record Date. In order that the Corporation may determine
--------- -----------
the stockholders entitled to notice of or to vote at any meeting of stockholders
or any adjournment thereof, or entitled to express consent to corporate action
in writing without a meeting, or entitled to receive payment of any dividend or
other distribution or allotment of any rights, or entitled to exercise any
rights in respect of any change, conversion or exchange of stock, or for the
purpose of any other lawful action, the Board of Directors may fix, in advance,
a record date, which shall not be more than sixty days nor less than ten days
before the date of such meeting, nor more than sixty days prior to any other
action. A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 6. Beneficial Owners. The Corporation shall be entitled to
--------- -----------------
recognize the exclusive right of a person registered on its books as the owner
of shares to receive
35
<PAGE>
dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares of the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by law.
ARTICLE VI
NOTICES
-------
Section 1. Notices. Whenever written notice is required by law, the
--------- -------
Certificate of Incorporation or these Bylaws, to be given to any director,
member of a committee or stockholder, such notice may be given by mail,
addressed to such director, member of a committee or stockholder, at his address
as it appears on the records of the Corporation, with postage thereon prepaid,
and such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Written notice may also be given
personally or by telegram, telex or cable.
Section 2. Waivers of Notice. Whenever any notice is required by
--------- -----------------
law, the Certificate of Incorporation or these Bylaws, to be given to any
director, member of a committee or
36
<PAGE>
stockholder, a waiver thereof in writing, signed, by the person or persons
entitled to said notice, whether before or after the time stated therein, shall
be deemed equivalent thereto.
ARTICLE VII
GENERAL PROVISIONS
------------------
Section 1. Dividends. Dividends upon the capital stock of the
--------- ---------
Corporation, subject to the provisions of the Certificate of Incorporation, if
any, may be declared by the Board of Directors at any regular or special
meeting, and may be paid in cash, in property, or in shares of the capital
stock. Before payment of any dividend, there may be set aside out of any funds
of the Corporation available for dividends such sum or sums as the Board of
Directors from time to time, in its absolute discretion, deems proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for any proper
purpose, and the Board of Directors may modify or abolish any such reserve.
Section 2. Disbursements. All checks or demands for money and notes
--------- -------------
of the Corporation shall be signed by such officer or officers or such other
person or persons as the Board of Directors may from time to time designate.
37
<PAGE>
Section 3. Fiscal Year. The fiscal year of the Corporation shall be
--------- -----------
fixed by resolution of the Board of Directors.
Section 4. Corporate Seal. The corporate seal shall have inscribed
--------- --------------
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware." The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE VIII
AMENDMENTS
----------
Section 1. These Bylaws may be altered, amended or repealed, in whole
---------
or in part, or new Bylaws may be adopted by the stockholders or by the Board of
Directors, provided, however, that notice of such alteration, amendment, repeal
or adoption of new Bylaws be contained in the notice of such meeting of
stockholders or Board of Directors, as the case may be. All such amendments
must be approved by either the holders of a majority of the outstanding capital
stock entitled to vote thereon or by a majority of the entire Board of Directors
then in office.
Section 2. Entire Board of Directors. As used in this Article VIII
--------- -------------------------
and in these Bylaws generally, the term "entire
38
<PAGE>
Board of Directors" means the total number of directors which the Corporation
would have if there were no vacancies.
39
<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, the undersigned, do hereby certify:
That I am the duly elected and acting Secretary of Digex,
Incorporated, a Delaware corporation; and
That the foregoing Bylaws, comprising ____ pages, constitute the
Bylaws of said Corporation as duly approved and adopted by the Board of
Directors of said Corporation as of April __, 1999.
IN WITNESS WHEREOF, I have here unto subscribed my name this ____ day
of April, 1999.
/s/ Robert B. Patrick
---------------------------
Name:
Title: Secretary
40
<PAGE>
EXHIBIT 23.2
Consent of Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to
the use of our reports dated April 23, 1999 in the Registration Statement (Form
S-1) and related Prospectus of Digex, Incorporated for the registration of
shares of its Class A Common Stock.
/s/ Ernst & Young LLP
Tampa, Florida
April 23, 1999
