<PAGE>
As filed with the Securities and Exchange Commission on January 18, 2000
Registration No. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
--------------
Digex, Incorporated
(Exact name of registrant as specified in its charter)
--------------
Delaware 4813 59-3582217
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
One Digex Plaza
Beltsville, MD 20705
(240) 264-2000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
--------------
Mark K. Shull
President and Chief Executive Officer
Digex, Incorporated
One Digex Plaza
Beltsville, MD 20705
(240) 264-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
--------------
Copies to:
Ralph J. Sutcliffe, Esq. Raymond Y. Lin, Esq.
Kronish Lieb Weiner & Hellman LLP Latham & Watkins
1114 Avenue of the Americas 885 Third Avenue
New York, New York 10036-7798 New York, New York 10022-4802
(212) 479-6000 (212) 906-1200
--------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
Proposed Proposed
Number of Maximum Maximum Amount of
Title of Securities Shares to be Offering Price Aggregate Registration
to be Registered Registered Per Share Offering Price(1) Fee
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
par value $.01 per
share................ 11,500,000 $63.97 $735,655,000 $194,212.92
- ----------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------
</TABLE>
(1) Based on the average high and low prices of the Class A Common Stock on
January 10, 2000 in accordance with Rule 457(c) 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 JANUARY 18, 2000
PRELIMINARY PROSPECTUS
10,000,000 Shares
Class A Common Stock
-----------
We are offering 2,000,000 shares of Class A Common Stock and one of our
stockholders, a subsidiary of Intermedia Communications Inc., is offering
8,000,000 shares of our Class A Common Stock. We will not receive any of the
proceeds from the sale of shares by the selling stockholder.
Our Class A Common Stock trades on the Nasdaq National Market under the symbol
"DIGX." On January 14, 2000, the last sale price of our Class A Common Stock as
reported on the Nasdaq National Market was $95.00 per share.
We have outstanding two classes of common stock. The holders of Class A Common
Stock are entitled to one vote for each share, whereas the holders of Class B
Common Stock are entitled to 10 votes for each share. The rights of holders of
our common stock are substantially the same in all other respects.
See "Risk Factors" beginning on page 7 about the risks you should consider
before buying shares of our Class A Common Stock.
Neither the Securities and Exchange Commission nor any other regulatory body
has approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a criminal
offense.
-----------
<TABLE>
<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public offering price............................................... $ $
Underwriting discount............................................... $ $
Proceeds, before expenses, to us.................................... $ $
Proceeds, before expenses, to the selling stockholder............... $ $
</TABLE>
-----------
The underwriters may also purchase up to an additional 1,500,000 shares of
Class A Common Stock from the selling stockholder at the public offering price
less the underwriting discount.
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares to purchasers on ,
2000.
-----------
Bear, Stearns & Co. Inc. Salomon Smith Barney
The date of this prospectus is , 2000
<PAGE>
Managed Hosting & Application Services
High-Performance Internet Connectivity
[LOGO/SM/]
Responsive Customer Care Keeping E-Business in Business
Secure, Fault-Tolerant Data Centers
[Photographs]
<PAGE>
PROSPECTUS SUMMARY
This summary highlights the key information contained in this prospectus.
Because it is a summary, it does not contain all of the information you should
consider before making an investment decision. You should read the entire
prospectus carefully, including the section titled "Risk Factors" and the
financial statements and the notes relating to those statements.
Digex
Our Company
Digex is a leading provider of managed Web hosting services to businesses
operating mission-critical, multi-functional Web sites. In addition, Digex
provides Web hosting services to the rapidly growing number of application
service providers, enabling them to more efficiently deliver their application
services to their customers over the Internet. We also offer related value-
added services, such as firewall management, stress testing and consulting
services, including capacity and migration planning and database optimization.
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. Our services include providing the computer hardware, software,
network technology, and systems management necessary to offer our customers
comprehensive outsourced Web site and application 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 services to over 550 customers, including American
Century Investments, Forbes, J. Crew, Kraft, Publishers Clearing House and
Universal Studios. We operate two state-of-the-art data centers strategically
positioned on the east and west coasts of the United States. We own and manage
approximately 2,000 Windows NT and UNIX-based servers in these data centers.
Our revenues grew at a compounded annual growth rate of 184% between 1996 and
1998 from $2.8 million in 1996 to $22.6 million in 1998. Our revenues for the
nine months ended September 30, 1999 grew to $38.1 million.
The following are among the key factors that we believe will continue to
drive our growth:
. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;
. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;
. strong alliances with Microsoft Corporation and Compaq Computer
Corporation, each of whom have recently invested in Digex;
. strong working relationships with other technology leaders, including
Sun Microsystems, Akamai, Netscape and Cisco Systems;
. 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 sales force; and
. a network of over 120 business alliances which provide complementary
design, development and integration services for our customers and which
represent a significant source of new customer referrals for Digex.
Strategic Investment by Microsoft and Compaq
We recently entered into strategic development agreements and joint
marketing arrangements with Microsoft and Compaq. Digex and Microsoft will work
together to advance Digex's capabilities to more
1
<PAGE>
rapidly install, manage and upgrade large numbers of Microsoft Windows-based
servers for Web site and application hosting. Digex and Compaq will work
jointly to streamline the order, delivery and installation of Compaq's server
hardware and storage devices. In connection with these agreements, Microsoft
and a subsidiary of Compaq made a $100.0 million equity investment in our
company of which $85.0 million was paid in cash and $15.0 million was paid in
the form of equipment credits from Compaq.
Our Market Opportunity
According to Forrester Research, Inc., the Web site hosting market is
projected to increase from $875 million in 1998 to approximately $14.6 billion
in 2003. In addition to the overall expansion and increasing pervasiveness of
the Internet, we believe one of the key drivers of growth in the Web site
hosting industry is the increasing number of businesses that have elected to
outsource the management of their Web sites and related operations. Web sites
are mission-critical for virtually all Web-centric companies and are becoming
increasingly strategic for many mainstream enterprises. At the same time, these
operations and applications are becoming more complex and challenging to
operate. We offer customers a comprehensive outsourcing solution designed to
reduce costs, speed implementation, reduce technology risks and provide
guaranteed operating performance.
Our Strategy
Our objective is to shape and lead the global market for Web site and
application hosting solutions. We intend to achieve this goal through a
strategy focused on:
. expanding our premier Web site and application hosting capabilities;
. developing next generation service offerings; and
. expanding our capabilities through selective strategic alliances and
acquisitions.
Our History
Our business started in 1996 as the Web site hosting unit of Business
Internet, Inc., previously known as DIGEX, Incorporated, a company that was
principally an Internet access and Web site hosting services provider. Business
Internet went public in October 1996 under the name DIGEX, Incorporated, and
was acquired by Intermedia Communications Inc. in July 1997. In contemplation
of our initial public offering, we were incorporated as Digex, Incorporated in
April 1999, and Business Internet contributed our assets to the newly formed
Digex, Incorporated in order to effect a recapitalization of our business. On
August 4, 1999, we sold 11,500,000 shares of Class A Common Stock in our
initial public offering. Subsequent to our initial public offering, Business
Internet contributed our Class B Common Stock to its wholly-owned subsidiary,
Intermedia Financial Company.
Our Address and Telephone Number
The address of our principal executive offices is One Digex Plaza,
Beltsville, Maryland 20705 and our telephone number is (240) 264-2000.
The information on any of our Web sites, such as www.digex.net or
www.digex.com, is not a part of this prospectus.
Digex and the Digex logo are two of our service marks. This prospectus also
contains trademarks and trade names of other companies.
2
<PAGE>
The Offering
<TABLE>
<C> <S>
Class A Common Stock offered by:
Digex........................................... 2,000,000 shares
The selling stockholder......................... 8,000,000 shares
21,500,000 shares of Class
Common Stock to be outstanding after the offering.. A Common Stock (1)
42,000,000 shares of Class
B Common Stock (1)(2)
Use of proceeds.................................... We intend to use the net
proceeds from this
offering to purchase or
construct
Telecommunications Related
Assets (3).
We will not receive any
proceeds from the shares
sold by the selling
stockholder.
Nasdaq National Market symbol...................... DIGX
</TABLE>
- --------
(1) Excludes:
. 1,500,000 shares to be sold by the selling stockholder if the
underwriters' over-allotment option is exercised in full, as described
in "Underwriting;"
. approximately 5,373,000 shares of our Class A Common Stock issuable upon
the exercise of stock options at a weighted average exercise price of
$15.91 per share;
. approximately 1,462,000 shares of our Class A Common Stock issuable upon
conversion of our outstanding Series A Preferred Stock at a conversion
price of $68.40 per share; and
. 1,065,000 shares of our Class A Common Stock issuable upon the exercise
of warrants with a weighted average exercise price of $57.00 per share.
(2) The Class B Common Stock to be sold by the selling stockholder
automatically converts to Class A Common Stock at the closing of the
offering. All purchasers in the offering will receive shares of Class A
Common Stock. The unsold Class B Common Stock is fully convertible into
Class A Common Stock, on a one-for-one basis, at any time at the option of
the holder or upon the transfer of the Class B Common Stock to any person
or entity not affiliated with Intermedia.
(3) Due to certain restrictions in the bond indentures of Intermedia, our
parent company, we will be required to use all of the net proceeds of this
offering to purchase or construct Telecommunications Related Assets. The
term "Telecommunications Related Assets" is defined under "Use of
Proceeds," and would include data centers and related capital expenditures.
In addition, we have made arrangements for Intermedia to purchase from us
some of the Telecommunications Related Assets purchased with the net
proceeds of this offering. We expect to be able to use the proceeds of such
sales to Intermedia to the extent necessary for working capital purposes
and to fund operating losses. This arrangement is explained under "Use of
Proceeds" and "Certain Relationships and Related Transactions--Sale of
Telecommunications Related Assets to Intermedia."
Except as otherwise indicated, the information in this prospectus assumes
that the underwriters' over-allotment option is not exercised.
3
<PAGE>
Summary Financial Data
The following table sets forth summary financial data of Digex for the
period from July 7, 1997, the date of acquisition by Intermedia of the Web site
hosting unit (the "Predecessor"), which was then part of Business Internet, to
December 31, 1997, the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999, and of the Predecessor for the year ended December
31, 1996 and the period from January 1, 1997 to July 6, 1997. The summary
historical financial data has been derived from Digex's and the Predecessor's
financial statements which have been audited by Ernst & Young LLP, with the
exception of the unaudited financial statements as of and for the nine months
ended September 30, 1998 and 1999, and are included elsewhere in this
prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of the Predecessor as if such acquisition
had occurred on January 1, 1997. The presentation of pro forma financial
information is made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
In the following table, basic and diluted net loss per share have been
calculated assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented, and giving effect to the 50,000-for-one stock split of our Class B
Common Stock effected prior to the closing of our initial public offering in
July 1999.
You should read the summary financial data below in conjunction with our
audited and unaudited interim financial statements and the related notes
included elsewhere in this prospectus. You should also read the accompanying
"Selected Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations," contained later in this
prospectus.
4
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
------------------------ --------------------------------------------------------------------
Historical Historical Pro Forma(1) Historical
------------------------ --------------- ------------ ------------------------------------
Nine months ended
September 30,
-----------------------
Period from
Period from July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Year ended
December 31, July 6, December 31, December 31, December 31,
1996 1997 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues................... $ 2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 14,863 $ 38,132
Costs and expenses:
Cost of operations........ 2,002 4,149 1,739 2,808 6,710 4,119 7,044
Cost of services.......... 684 1,817 1,611 3,428 7,044 4,412 13,761
Selling, general and
administrative........... 3,194 7,001 6,087 13,088 17,512 12,582 47,355
Depreciation and
amortization............. 591 519 2,753 4,850 8,109 6,081 18,112
Charge off of purchased
in-process research and
development.............. -- -- 15,000 (2) 15,000 (2) -- -- --
------- ------- -------- -------- -------- -------- ---------
Total costs and expenses... 6,471 13,486 27,190 39,174 39,375 27,194 86,272
------- ------- -------- -------- -------- -------- ---------
Loss from operations....... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (48,140)
Other income (expense):
Interest expense.......... -- -- -- -- -- -- (612)
Interest and other
income................... -- -- -- -- -- -- 1,293
------- ------- -------- -------- -------- -------- ---------
Net loss before income tax
benefit................... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (47,459)
Income tax benefit......... -- -- 1,440 4,710 159 -- 4,839
------- ------- -------- -------- -------- -------- ---------
Net loss................... $(3,668) $(9,066) $(18,558) $(22,852) $(16,581) $(12,331) $ (42,620)
======= ======= ======== ======== ======== ======== =========
Net loss per
common share:
Basic..................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Diluted................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted net loss
per share................. -- -- 50,000 50,000 50,000 50,000 52,443
======== ======== ======== ======== =========
Other Data:
EBITDA before certain
charges (3)............... $(3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (6,250) $ (30,028)
Net cash used in operating
activities................ (2,565) (7,172) (6,079) (13,251) (10,930) (7,453) (28,125)
Net cash used in investing
activities................ (1,445) (1,004) (55,237) (56,241) (30,969) (18,352) (119,426)
Net cash provided by
financing activities (4).. 4,010 8,176 61,316 69,492 41,899 25,805 280,395
Capital expenditures....... 1,445 1,004 8,016 9,020 30,969 18,352 119,426
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 September 30, 1999
------------ ---------------------------
Actual Actual As Adjusted (5)
------------ ----------- ---------------
(unaudited) (unaudited)
(In thousands)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents (6)..... $ -- $132,844 $401,944
Working capital................... 1,231 137,022 406,122
Property and equipment, net....... 39,059 165,055 165,055
Total assets...................... 77,739 342,142 626,242
Capital lease obligations,
including current maturities..... 2,089 16,719 16,719
Total stockholders'/owner's
equity........................... 70,845 312,536 596,636
</TABLE>
- --------
(1) The pro forma statement of operations data for the year ended December 31,
1997, represents the combining of the historical Predecessor statement of
operations data for the period from January 1, 1997 to July 6, 1997 and
the historical Digex statement of operations data for the period from July
7, 1997 to December 31, 1997, as adjusted for the following items:
. A decrease in cost of operations of $3,080 which represents reduced
network expenses.
. An increase in depreciation and amortization of $1,578 which represents
amortization of intangible assets arising from the acquisition.
. An increase in income tax benefit of $3,270 which represents the income
tax effect of purchase accounting adjustments.
(2) 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.
(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 also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. This caption excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA before certain charges is not a term defined by generally
accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled
measures used by other companies. However, we believe that EBITDA before
certain charges is relevant and useful information which is often reported
and widely used by analysts, investors and other interested parties in the
Web site and application hosting industry. Accordingly, we are disclosing
this information to permit a more comprehensive analysis of our operating
performance, as an additional meaningful measure of performance and
liquidity, and to provide additional information with respect to our
ability to meet future debt service, capital expenditure and working
capital requirements. See the financial statements and notes thereto
contained elsewhere in this prospectus for more detailed information.
(4) Net cash provided by financing activities includes capital contributions
of $4,010, $7,626, $64,085, $41,899, $25,805 and $102,424 for the year
ended December 31, 1996, the period from January 1, 1997 to July 6, 1997,
the period from July 7, 1997 to December 31, 1997, the year ended December
31, 1998, and the nine months ended September 30, 1998 and 1999,
respectively.
(5) As Adjusted as of September 30, 1999 summary balance sheet data reflects
the sale of 100,000 shares of Series A Preferred Stock and warrants to
purchase 1,065,000 shares of Class A Common Stock to Microsoft and a
subsidiary of Compaq and the sale of the shares of Class A Common Stock
offered by this prospectus at an estimated offering price of $95.00 per
share, after deducting the underwriting discount and the offering expenses
payable by us. For more information, see "Use of Proceeds."
(6) Prior to our initial public offering in July 1999, we historically
participated in Intermedia's centralized cash management system and, as a
result, did not carry cash balances on our financial statements for any
period prior to the initial public offering. Since that date, we have
maintained and reported cash balances on our financial statements.
6
<PAGE>
RISK FACTORS
Investing in our Class A Common Stock involves a high degree of risk. You
should carefully consider the risks and uncertainties described below before
you purchase any of our Class A Common Stock. These risks and uncertainties are
not the only ones we face. Unknown additional risks and uncertainties, or ones
that we currently consider immaterial, may also impair our business operations.
If any of these risks or uncertainties actually occur, our business,
financial condition or results of operations could be materially adversely
affected. In this event, the trading price of our Class A Common Stock could
decline, and you could lose all or part of your investment.
We have a limited operating history and our business model is still evolving,
which makes it more difficult for you to evaluate our company and its
prospects.
We were established in January 1996 to provide Web site hosting services for
businesses deploying complex, mission-critical Web sites, which remains our
primary focus. Our range of service offerings has changed since 1996 and our
business model is still new and developing. Because some of our services are
new, we cannot be sure that businesses will buy them. As a result, the revenue
and income potential of our business is unproven. Our limited operating history
makes predicting future results difficult. Our prospects must be considered in
light of the risks, expenses and difficulties encountered by companies in the
new and rapidly evolving market for Web site and application 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 and September 30,
1999, our accumulated losses since January 1, 1996 have amounted to
approximately $47.9 million and $90.5 million, respectively. We had net losses
of $16.6 million for the year ended December 31, 1998 and $42.6 million for the
nine months ended September 30, 1999. While our revenues have grown in recent
periods, we cannot assure you 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;
7
<PAGE>
. timing of customer installations;
. the mix of services we sell;
. customer retention;
. the timing and magnitude of our capital expenditures;
. 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 cannot predict the outcome of our joint development effort with Microsoft
and Compaq.
Working closely with Microsoft and Compaq, we expect to invest significant
resources to advance our ability to more rapidly install, manage and upgrade
large numbers of Microsoft Windows-based servers for Web site and application
hosting. While Microsoft and a subsidiary of Compaq have each made a $50.0
million equity investment in our company, neither has an obligation to
contribute additional equity, including if the costs associated with this
development project exceed our expectations. Our alliance agreements also do
not prevent Microsoft and/or Compaq from working with other service providers
to develop similar capabilities. In addition, because this alliance is for a
research and development project, we cannot assure you that any commercially
successful products will be developed as a result of our agreements with
Microsoft and Compaq. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
We operate in a relatively new and evolving market with uncertain prospects for
growth.
The market for Web site and application hosting and related services has
only recently begun to develop and is evolving rapidly. Although certain
industry analysts project significant growth for this market, their projections
may not be realized. Our future growth, if any, will depend on the continued
trend of businesses to outsource their Web site and application hosting, and
our ability to market our services effectively. There can be no assurance that
the market for our services will grow, that our services will be adopted, or
that businesses will use these Internet-based services in the degree or manner
that we expect. It is possible that at some point businesses may find it
cheaper, more secure or otherwise preferable to host their Web sites and
applications internally and decide not to outsource the management of their Web
sites and applications. If we are unable to react quickly to changes in the
market, if the market fails to develop, or develops more slowly than expected,
or if our services do not achieve market acceptance, then we are unlikely to
become or remain profitable.
We may be unable to achieve our operating and financial objectives due to
significant competition in the Web site and application hosting industry.
The market for hosting Web sites and applications is highly competitive.
There are few substantial barriers to entry and many of our current competitors
have substantially greater financial, technical and marketing resources, larger
customer bases, more data centers, longer operating histories, greater name
recognition and more established relationships in the industry than we possess.
Our current and potential competitors in the market include Web hosting service
providers, Internet service providers, commonly known as ISPs,
telecommunications companies and large information technology outsourcing
firms. Our competitors may operate in one or more of these areas and include
companies such as AT&T, Cable & Wireless, Concentric Network, Data Return, EDS,
Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM, Intel, Level 3
Communications, MCI WorldCom, Navisite, PSINet, Qwest Communications
International, and USinternetworking.
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Our competitors may be able to expand their network infrastructures and
service offerings more quickly. They may also bundle other services with their
Web site hosting or application hosting services, which could allow them to
reduce the relative prices of their Web site hosting and/or application hosting
services beyond levels that we could compete with, and generally adopt more
aggressive pricing policies. In addition, some competitors have entered and
will likely continue to enter into joint ventures or alliances to provide
additional services which may be competitive with those we provide. We also
believe the Web site hosting and application hosting market is likely to
experience consolidation in the near future, which could result in increased
price and other competition that would make it more difficult for us to
compete. See "Business--Competition."
Our data centers and the networks we rely on are sensitive to harm from human
actions and natural disasters. Any resulting disruption could significantly
damage our business and reputation.
Our reputation for providing reliable service largely depends on the
performance and security of our data centers and equipment, and of the network
infrastructure of our connectivity providers. In addition, our customers often
maintain confidential information on our servers. However, our data centers and
equipment, the networks we use, and our customers' information are subject to
damage and unauthorized access from human error and tampering, breaches of
security, natural disasters, power loss, capacity limitations, software
defects, telecommunications failures, intentional acts of vandalism, including
computer viruses, and other factors that have caused, and will continue to
cause, interruptions in service or reduced capacity for our customers, and
could potentially jeopardize the security of our customers' confidential
information such as credit card and bank account numbers. Despite precautions
we have taken and plan to take, the occurrence of a security breach, a natural
disaster, interruption in service or other unanticipated problems could
seriously damage our business and reputation and cause us to lose customers.
Additionally, the time and expense required to eliminate computer viruses and
alleviate other security problems could be significant and could impair our
service quality. We also often provide our customers with service level
agreements. If we do not meet the required service levels, we may have to
provide credits to our customers, which could significantly reduce our
revenues. Additionally, in the event of any resulting harm to customers, we
could be held liable for damages. Awards for such damages might exceed our
liability insurance by an unknown but significant amount and could seriously
harm our business.
We could not provide adequate service to our customers if we were unable to
secure sufficient network capacity to meet our future needs on reasonable terms
or at all.
We must continue to expand and adapt our network arrangements to accommodate
an increasing amount of data traffic and changing customers' requirements. We
have entered into several two-year network services agreements with Intermedia
to provide us with certain network transit capacity which we believe to be
adequate for our capacity requirements. However, if our future network capacity
requirements exceed the capacity Intermedia has committed to provide to us, we
may have to pay higher prices for such additional network capacity or such
capacity might not be available at all. Our failure to achieve or maintain high
capacity data transmission could negatively impact service levels to our
existing customers and limit our ability to attract new customers, which would
harm our business.
Our business, in large part, depends on network services we receive from
Intermedia. Any disruption of these services or Intermedia's inability to
maintain its peering relationships could be costly and harmful to our business.
We currently rely primarily on Intermedia for network services. Intermedia
operates its own coast-to-coast Internet Protocol network, which qualifies it
as a tier-one service provider of Internet connectivity services. If our
network services agreements with Intermedia were to be terminated, we would
need to rapidly secure an alternative provider of these services. As a result,
we could incur transition costs and our monthly costs of operations could
increase. In addition, such a transition could have a detrimental effect on our
customer service levels.
The Internet is composed of many ISPs that operate their own networks and
interconnect with other ISPs at various peering points. Peering relationships
are arrangements that permit ISPs to exchange traffic with one
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another without having to pay for the cost of transit services. Peering
relationships are a competitive factor that allow some Web hosting companies to
provide faster data transmission than others. We believe Intermedia's tier-one
status and numerous peering relationships enable it to provide us faster data
transmission than many other ISPs provide. If Intermedia fails to adapt its
network infrastructure to meet industry requirements for peering or loses its
peering relationships for any other reason, then our transmission rates could
be reduced, resulting in a decrease in service quality we provide to our
customers.
Providing services to customers with mission-critical Web sites and Web-based
applications could potentially expose us to lawsuits for customers' lost
profits or other damages.
Because our Web site and application hosting services are critical to many
of our customers' businesses, any significant interruption in our services
could result in lost profits or other indirect or consequential damages to our
customers. Our customers are required to sign server order forms which
incorporate our standard terms and conditions. Although these terms disclaim
our liability for any such damages, a customer could still bring a lawsuit
against us claiming lost profits or other consequential damages as the result
of a service interruption or other Web site or application problems that the
customer may ascribe to us. There can be no assurance a court would enforce any
limitations on our liability, and the outcome of any lawsuit would depend on
the specific facts of the case and legal and policy considerations. We also
believe we would have meritorious defenses to any such claims, but there can be
no assurance we would prevail. In such cases, we could be liable for
substantial damage awards. Such damage awards might exceed our liability
insurance by unknown but significant amounts, which would seriously harm our
business.
Digex is controlled by Intermedia, which could involve multiple risks for you
as a stockholder.
Intermedia controls a majority of our voting power, and Intermedia's
interests in us may conflict with your interests as a stockholder. Intermedia,
indirectly through its wholly-owned subsidiary, Intermedia Financial Company,
owns all of the issued and outstanding shares of our Class B Common Stock. When
this offering is completed, Intermedia will own 42,000,000 shares of Class B
Common Stock (40,500,000 shares if the underwriters' over-allotment option is
exercised). 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 95.1% of the voting power of Digex (94.6% if the underwriters'
over-allotment option is exercised), and will be able to control the management
and affairs of Digex, and all matters submitted to our stockholders for
approval, including the election and removal of directors, and any merger,
consolidation or sale of all or substantially all of our assets. As a result,
the price of our Class A Common Stock may be affected.
We depend on Intermedia to fund our working capital and operating losses,
but Intermedia's ability to fund these needs is limited by its own substantial
indebtedness. Because we are subject to the restrictions under Intermedia's
indentures, we will be required to use all of the net proceeds of this offering
to purchase Telecommunications Related Assets, as defined under "Use of
Proceeds," within 270 days of this offering. We will not be able to use the
proceeds of this offering directly to fund operating losses, working capital or
other uses that are not purchases of Telecommunications Related Assets. Because
we anticipate operating losses and a significant need for working capital for
the foreseeable future, we expect we will have to obtain funds for such
purposes from Intermedia or other sources which are significantly restricted.
See "Use of Proceeds" and "Certain Relationships and Related Transactions--Sale
of Telecommunications Related Assets to Intermedia" for a description of
certain arrangements we made with Intermedia relating to our use of a portion
of the proceeds of this offering.
Even though Intermedia has indicated that it may use a portion of the
proceeds from the shares it sells in this offering to reduce Intermedia's
indebtedness, Intermedia is and will continue to be highly leveraged and may
incur additional indebtedness in the future. Intermedia's level of debt will
require it to dedicate a substantial portion of its future cash flow from
operations for payment of principal and interest on its debt, as well as
dividends on and the redemption of its preferred stock. Historically,
Intermedia has not generated
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sufficient cash flow to cover its operating and investing expenses. In
addition, because of the restrictions in the Intermedia indentures, Intermedia
has only a limited amount of cash that may be used for working capital purposes
and to fund operating losses. Consequently, Intermedia may not be able to
provide us with a source of funds for our working capital or operating losses.
Our dependence on Intermedia and the degree to which Intermedia is leveraged
could, among other things, increase our vulnerability to general adverse
economic and industry conditions, limit our ability to fund future working
capital, operating losses, capital expenditures, acquisitions and other
requirements, and limit our flexibility in reacting to changes in our business
and industry. We strongly urge you to read "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
We may require additional funds to finance our business but our ability to
raise funds is significantly limited by agreements that are binding on
Intermedia. Intermedia has issued debt securities to the public under seven
indentures and has recently borrowed $50.0 million under a $100.0 million
credit facility. As a subsidiary of Intermedia, we are subject to a number of
restrictions under the Intermedia indentures and the credit facility. 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 have guaranteed Intermedia's obligations under its credit facility which
could make us more vulnerable to changes in Intermedia's financial condition
and make it more difficult for us to raise capital to expand our business. As
security for our guarantee, we have granted the banks a security interest in a
substantial portion of our assets. In addition, Intermedia recently announced
its intent to increase the size of its credit facility to $400.0 million. If
Intermedia were unable to meet its obligations under the credit facility we
could be obligated to repay the debt. In addition, the banks' liens on a
substantial portion of our assets could make it more difficult for us to obtain
additional financing.
Our ability to issue additional capital stock is constrained by Intermedia's
ownership of the Class B Common Stock, which could make it more difficult for
us to raise capital to expand our business. In the future, Intermedia may elect
to sell additional shares of our Class B Common Stock to the public or to
distribute these shares to its own stockholders. If as a result of a 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 the sale
or distribution. In addition, if we decide in the future to issue and sell
additional shares of our capital stock and, as a result, 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 be required for the sale. We would be free of the restrictions
in the Intermedia indentures only if Intermedia designated us as an
"unrestricted subsidiary," which would require a consent of a majority in
principal amount of the noteholders under the Intermedia indentures, or if
Intermedia sold a sufficient number of its shares of Digex to reduce its voting
power below 50%.
Digex and Intermedia have the same legal counsel, and therefore contractual
relationships between Digex and Intermedia might be less advantageous to Digex
than if Digex had separate legal representation. Kronish Lieb Weiner & Hellman
LLP, counsel to Digex, is also counsel to Intermedia. In addition, Ralph J.
Sutcliffe, a partner of Kronish Lieb Weiner & Hellman LLP, has recently been
appointed as a director of Intermedia. Consequently, Digex does not have legal
representation independent from Intermedia.
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If we do not respond effectively and on a timely basis to rapid technological
change and evolving industry standards, our business could suffer.
Internet and networking technology is changing rapidly. Our future success
will depend largely on our ability to:
. offer services that incorporate leading technologies;
. address the increasingly sophisticated and varied needs of our current
and prospective customers;
. respond to technological advances and emerging industry standards on a
timely and cost-effective basis; and
. continue offering services that are compatible with products and
services of other vendors.
Although we often work with various vendors in testing newly developed
products, there can be no assurance such products will be compatible with our
infrastructure or such products will adequately address changing customer
needs. Although we currently intend to support emerging standards, there can be
no assurance industry standards will be established or, if they become
established, that we will be able to conform to these new standards in a timely
fashion and maintain a competitive position in the market. Our failure to
conform to the prevailing standards, or the failure of common standards to
emerge, could harm our business. In addition, products, services or
technologies developed by others may render our services no longer competitive
or obsolete.
Our business will not grow unless Internet usage grows and Internet performance
remains adequate.
The increased use of the Internet for retrieving, sharing and transferring
information among businesses and consumers has only recently begun to develop.
Our success will depend on the continued growth in Internet usage. In addition,
our business plan anticipates extensive growth in the Web site hosting and
application hosting markets. The growth of the Internet, including the Web site
hosting and application hosting markets, is subject to a high level of
uncertainty and depends on a number of factors, including the growth in
consumer and business use of new interactive technologies, the development of
technologies that facilitate interactive communications, security concerns and
increases in data transport capacity. If the Internet as a commercial medium
fails to grow or develops more slowly than expected, then our business is
unlikely to grow.
The recent growth in the use of the Internet in general has caused frequent
periods of performance degradation, requiring the upgrade of routers and
switches, telecommunications links and other components forming the
infrastructure of the Internet by ISPs and other organizations with links to
the Internet. Any perceived degradation in the performance of the Internet as a
whole could undermine the benefits of our services. The performance of our Web
site and application hosting services is ultimately limited by and relies on
the speed and reliability of the networks operated by third parties.
Consequently, the growth of the market for our services depends on improvements
being made to the entire Internet infrastructure to alleviate overloading and
congestion.
We may be unable to achieve our operating and financial objectives if we cannot
manage our anticipated growth effectively.
Our business has grown rapidly, and our future success depends in large part
on our ability to manage the recent and anticipated growth in our business. For
us to manage this growth, we will need to:
. expand and enhance our operating and financial procedures and controls;
. replace or upgrade our operational and financial management information
systems; and
. attract, train, manage and retain key employees.
These activities are expected to place a significant strain on our financial
and management resources. If we are unable to manage growth effectively, our
business could suffer.
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We have had difficulty collecting a portion of our accounts receivable.
During the first three quarters of 1999, we encountered difficulties
establishing appropriate procedures to avoid billing errors and increasing our
financial staffing to accommodate our rapid growth. This resulted in disputes
and delayed payments on certain of our accounts receivable, as a consequence of
which our allowance for doubtful accounts was approximately 24% of our total
accounts receivable at September 30, 1999.
We believe we have remedied the deficiencies in our billing procedures and
staffing. Audit tests conducted by Intermedia's and Digex's internal audit
staff have confirmed the effectiveness of the remedial actions taken. We are in
the process of resolving with our customers existing disputes with respect to
outstanding accounts receivable. We expect our allowance for doubtful accounts
will be significantly reduced as a percentage of total accounts receivable over
time, commencing with the first quarter of 2000, as these disputes are
resolved, since customers typically withhold payment of the entire account
receivable even though the dispute ordinarily only relates to a modest portion
of that account receivable. There can be no assurance we will not encounter
billing problems in the future as our rapid growth continues.
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 both in the
United States and globally. We recently expanded the capacity of our east and
west coast data centers. We intend to add data center capacity over the next
five years as justified by customer demand. Our ability to do so successfully
depends on:
. anticipating and planning for future demand levels;
. having access to sufficient capital; and
. locating and securing satisfactory data center sites and implementing
the build-out of these sites, all of which may require significant lead
time.
If we cannot expand capacity effectively, our growth will suffer and we may
not be able to adequately meet the demands of existing customers.
Our business could be harmed if our management team, which has worked together
for only a brief time, is unable to work together effectively, or if we are
unable to retain and attract key personnel.
We have recently hired key employees and officers, including our President
and Chief Executive Officer and our President, Product Management, Engineering
and Marketing Group, who joined us in the beginning of July 1999, our
President, Sales and Service Delivery Group, who joined us in December 1998 and
our Chief Financial Officer who joined us in January 2000. As a result, our
management team has worked together for only a brief time. Our success in
significant part depends on the continued services of our senior management
personnel, as well as of our key technical and sales personnel.
We believe our short and long-term success also depends largely on our
ability to attract and retain highly skilled technical, managerial and
marketing personnel, particularly additional management personnel in the areas
of application integration and technical support. Competition for such
personnel is intense. We may not be able to hire or retain the necessary
personnel to implement our business strategy, or we may need to pay higher
compensation for employees than we currently expect. Our inability to attract
and retain such personnel would limit our growth and harm our business.
We could face additional costs and operational disruptions in the future if
Intermedia discontinues providing general and administrative services to us.
Intermedia has provided and is expected to continue to provide many of our
financial, administrative and operational services and related support
functions, including customer billing, treasury, legal, human resources and
information management services. We have a General and Administrative Services
Agreement with
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Intermedia, as described under "Certain Relationships and Related
Transactions--Service Agreements--General and Administrative Services
Agreement," to provide such services for at least the next 18 months. Should
Intermedia's provision of these services no longer meet our needs or if
Intermedia unexpectedly stops providing these services for any reason, we could
face significant challenges and costs in transitioning to our own or
alternative general and administrative functions. Such a transition and any
resulting impairment of our operations could harm our financial results.
Regulatory and legal uncertainties could have significant costs or otherwise
harm our business.
The law in the United States relating to the liability of on-line and
Internet service providers for information disseminated through their systems
remains largely unsettled. It may also take years to determine whether and how
existing laws, such as those governing intellectual property, privacy, libel
and taxation, apply to the Internet. The growth and development of the market
for on-line commerce may also prompt calls for more stringent consumer
protection laws that may impose additional burdens on companies conducting
business on-line. The application of existing laws or promulgation of new laws
could require us to expend substantial resources to comply with such laws or
discontinue certain service offerings. Increased attention to liability issues
could also divert management attention, result in unanticipated expenses and
harm our business. Regulation of the Internet may also harm our customers'
businesses, which could lead to reduced demand for our services. We are not
currently subject to direct regulation by the Federal Communications Commission
("FCC") or any other government agency, other than as to regulations applicable
to business in general. However, in the future we may be subject to regulation
by the FCC or other federal or state agencies, which could increase our costs
and harm our business. See "Business--Government Regulation."
Our business plan contemplates future international operations but there are
numerous risks and uncertainties in offering services outside of the United
States.
We intend to expand into international markets and may build data centers
internationally. We cannot be sure that we will be able to successfully sell
our services or adequately maintain operations outside the United States. In
addition, there are certain risks inherent in conducting business
internationally. These include:
. unexpected changes in regulatory requirements;
. ability to secure and maintain the necessary physical and
telecommunications infrastructure;
. challenges in staffing and managing foreign operations; and
. employment laws and practices in foreign countries.
Any of these could adversely affect our international operations.
Furthermore, some foreign governments have enforced laws and regulations on
content distributed over the Internet that are more restrictive than those
currently in place in the United States. Any one or more of these factors could
adversely affect our contemplated future international operations and,
consequently, our business.
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.
We also rely on certain technologies licensed from third parties. We cannot
be sure these licenses will remain available to us on commercially reasonable
terms or at all. The loss of such technology could require us to obtain
substitute technology of lower quality or performance standards or at greater
cost, which could harm our business.
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We did not obtain third party consents in connection with our restructuring,
which may allow certain third parties, including some of our customers, to
assert a breach of a contract.
In connection with our initial public offering, Business Internet, our
indirect parent company, contributed the Web hosting business to us. This
contribution included an assignment of all of the contracts that were part of
our business on the date of assignment, including our customer contracts. We
elected not to seek consents in connection with this assignment. While the
failure to obtain required third party consents could give a third party the
ability to assert a breach of the acquired contract, we believe this would be
unlikely in the case of the restructuring because all of the assigned contracts
were transferred as part of the entire Web hosting business. Nevertheless, we
cannot be sure that one or more third parties will not assert a breach of our
contracts with them because of our failure to seek or obtain their consents to
assignment.
We could lose revenues and our reputation may be damaged if our systems or
those of our customers or our suppliers are not Year 2000 compliant.
Many installed computer systems and software products required upgrades in
order for 21st century dates to be distinguished from 20th century dates.
Systems that do not comply with these "Year 2000" requirements may cause
miscalculations which will interfere with business activities or simply fail to
work. Although we implemented a Year 2000 program intended to ensure our
computer systems and applications function properly beyond 1999 and requested
assurances from our suppliers that their products are Year 2000 compliant and
have not experienced any significant Year 2000 issues to date, we cannot be
sure that we will be able to promptly or correctly address all relevant Year
2000 issues, especially where third-party customers or suppliers are involved.
If we cannot achieve Year 2000 compliance, our systems could be disrupted for a
period of time. This would cause a loss of revenues, including requests from
customers for credits for downtime. More importantly, any significant
disruption would seriously damage our business reputation. We might also face
lawsuits for damages. As of the date of this prospectus we have not experienced
any material Year 2000 problems, either in our systems or in the systems of our
suppliers or customers.
The market price of the shares will fluctuate.
Since our initial public offering the closing market price for our common
stock has been as high as $95.00 per share and as low as $14.625 per share. The
stock markets, and in particular the Nasdaq National Market, have experienced
extreme price and volume fluctuations that have particularly affected the
market prices of equity securities of many technology companies and that often
have been unrelated or disproportionate to the operating performance of such
companies. The trading prices of many technology companies' stocks are at or
near historical highs and reflect price to earnings ratios substantially above
historical levels which may not be sustained. These broad market factors may
adversely affect the market price of our Class A Common Stock. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been instituted against such
companies. Such litigation, if instituted, could result in substantial costs
and a diversion of management's attention and resources, which could harm our
business.
Future sales of our common stock could adversely affect the price of our Class
A Common Stock.
After this offering is completed, 21,500,000 shares of Class A Common Stock
will be issued and outstanding, assuming no exercise of the underwriters' over-
allotment option. All of the outstanding shares of Class A Common Stock will be
freely tradeable under the Securities Act unless held by our "affiliates," as
that term is defined in the Securities Act. In connection with this offering,
our executive officers and directors and the selling stockholder will be
required to refrain from selling any shares of Common Stock for a period of 90
days after the date of this prospectus without the written consent of Bear,
Stearns & Co. Inc. Additionally, shares of Class B Common Stock and Series A
Preferred Stock could be converted to, and the outstanding warrants could be
exercised for shares of Class A Common Stock and sold in the future. The market
price of our Class A Common Stock could drop due to sales of a large number of
shares of our Class A Common Stock
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in the market after this offering or the perception that such sales could
occur. Historically, market prices of start-up and Internet companies' stocks
have been particularly susceptible to such fluctuations. These factors could
also make it more difficult to raise funds through future offerings of common
stock.
You will suffer immediate and substantial dilution.
Purchasers of the Class A Common Stock being offered will experience
immediate and substantial dilution in the net tangible book value of their
Class A Common Stock. See "Dilution."
The greater voting power of our Class B Common Stock, as well as some
provisions of the Delaware Anti-Takeover Law and of our certificate of
incorporation and bylaws, could discourage a takeover of Digex and adversely
affect the price of the Class A Common Stock.
Upon completion of this offering, our board of directors will have the
authority to issue up to 4,900,000 shares of preferred stock and to determine
the price, rights, preferences, privileges and restrictions, including voting
rights, of those shares without any further vote or action by the stockholders.
The rights of the holders of any of our common stock may be adversely affected
by the rights of the holders of any preferred stock that may be issued in the
future. The issuance of preferred stock, while providing flexibility in
connection with possible acquisitions and other corporate purposes, could have
the effect of making it more difficult for a third party to acquire a majority
of our outstanding voting stock. We have no current plans to issue additional
shares of preferred stock and any issuance of preferred stock is subject to
restrictions under the Intermedia indentures. We are also subject to certain
provisions of Delaware law which could have the effect of delaying, deterring
or preventing a change in control of Digex, including Section 203 of the
Delaware General Corporation Law, which prohibits us from engaging in any
business combination with any interested stockholder for a period of three
years from the date the person became an interested stockholder unless certain
conditions are met. In addition, our certificate of incorporation and bylaws
contain certain provisions that, together with Intermedia's voting power and
ownership of Class B Common Stock, could discourage potential takeover attempts
and make attempts by stockholders to change management more difficult.
This prospectus includes forward-looking statements which could differ from
actual future results.
Some of the statements in this prospectus that are not historical facts are
"forward-looking statements." Forward-looking statements can be identified by
the use of words such as "estimates," "plans," "anticipates," "expects,"
"intends," "believes" or the negative thereof or other variations thereon or by
discussions of strategy that involve risks and uncertainties. Examples of
forward-looking statements include discussions relating to:
. plans to expand our existing Web site hosting services and application
hosting services;
. 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 2000 and later
years; and
. statements regarding the future course of our relationship with
Intermedia.
We wish to caution you that all the forward-looking statements contained in
this prospectus are only estimates and predictions. Our actual results could
differ materially from those anticipated in the forward-looking statements due
to risks, uncertainties or actual events differing from the assumptions
underlying these statements. Such risks, uncertainties and assumptions include,
but are not limited to, those discussed in this prospectus.
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USE OF PROCEEDS
We estimate our net proceeds from the sale of the 2,000,000 shares of Class
A Common Stock we are offering, after deducting the estimated underwriting
discounts and our share of the estimated offering expenses, will be
approximately $184.1 million, based on an assumed public offering price of
$95.00 per share, the closing price of our Class A Common Stock on the Nasdaq
National Market on January 14, 2000. We have agreed with the selling
stockholder to allocate and pay the expenses of this offering in proportion to
the number of shares of Class A Common Stock to be sold by us and the selling
stockholder.
We will not receive any proceeds from the sale of Class A Common Stock by
the selling stockholder. We have been advised that Intermedia, the selling
stockholder, intends to use a portion of the proceeds to reduce its outstanding
debt.
Under the terms of Intermedia's indentures, described under "Risk Factors--
Digex is controlled by Intermedia," we will be required to use all of the net
proceeds of this offering to purchase Telecommunications Related Assets.
Telecommunications Related Assets mean assets used in connection with the
business of: (1) transmitting, or providing services relating to the
transmission of, voice, video or data through owned or leased transmission
facilities; (2) creating, developing and marketing communications related
network equipment, software and other devices for use relating to (1); or (3)
evaluating, participating in or pursuing any other activity or opportunity that
is related to those identified in (1) or (2); all as determined in good faith
by the board of directors of Intermedia. We intend to use approximately $50.0
million of our net proceeds to continue to expand and enhance our data center
infrastructure. We have entered into a letter agreement with Intermedia
pursuant to which Intermedia will purchase from us, at our cost, some of the
Telecommunications Related Assets purchased with our net proceeds of this
offering. Intermedia is expected to pay us for these Telecommunications Related
Assets to the extent necessary with funds not subject to restrictions under the
Intermedia indentures that we will use for working capital purposes and to fund
operating losses. The amounts actually expended for such capital expenditures
and working capital purposes may vary significantly, depending on a number of
factors, including our future revenues and Intermedia's availability of funds.
A portion of our 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.
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.
PRICE RANGE OF CLASS A COMMON STOCK
The following table sets forth the high and low closing prices for the Class
A Common Stock as reported on the Nasdaq National Market for the period from
July 29, 1999, through January 14, 2000.
<TABLE>
<CAPTION>
High Low
-------- --------
<S> <C> <C>
1999:
Third quarter (from July 29, 1999)...................... $33.6250 $14.6250
Fourth quarter.......................................... $90.0000 $21.1880
2000:
First quarter (through January 14, 2000)................ $95.0000 $56.0625
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
(1) on an actual basis, (2) as adjusted for the sale of 100,000 shares of
Series A Preferred Stock and warrants to purchase 1,065,000 shares of Class A
Common Stock to Microsoft and a subsidiary of Compaq and (3) as further
adjusted, to give effect to the conversion of the 8,000,000 shares of Class B
Common Stock to be sold by the selling stockholder into Class A Common Stock
and the sale of the 2,000,000 shares of Class A Common Stock we are offering,
at an assumed public offering price of $95.00 per share and after deducting the
estimated underwriting discounts and estimated offering expenses that we will
pay. The as adjusted and as further adjusted columns on the table do not give
effect to the 1,500,000 shares to be sold by the selling stockholder if the
underwriters' overallotment option is exercised in full, the approximately
5,373,000 shares of our Class A Common Stock issuable upon the exercise of
stock options at a weighted average price of $15.91 per share, the
approximately 1,462,000 shares of our Class A Common Stock issuable upon
conversion of the outstanding Series A Preferred Stock and the 1,065,000 shares
of our Class A common stock issuable upon the exercise of warrants with an
exercise price of $57.00 per share. This table should be read in conjunction
with the financial statements and the related notes included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------
(Unaudited)
As Further
Actual As Adjusted Adjusted
----------- ------------- ------------
(In thousands, except share data)
<S> <C> <C> <C>
Cash and cash equivalents.......... $ 132,844 $ 217,844 $ 401,944
=========== =========== ===========
Note payable, including current
portion........................... $ 3,712 $ 3,712 $ 3,712
Capital lease obligations,
including current maturities...... 16,719 16,719 16,719
Stockholders' equity:
Preferred Stock, $.01 par value;
4,900,000 shares undesignated as
to series; no shares issued..... -- -- --
Series A Preferred Stock, $.01
par value; 100,000 shares
designated; no shares issued on
an actual basis and 100,000
shares issued on an as adjusted
and as further adjusted basis
authorized (liquidation value of
$100,000)....................... -- 83,900 83,900
Class A Common Stock, $.01 par
value; 100,000,000 authorized;
11,500,000 issued and
outstanding on an actual basis
and as adjusted basis, and
21,500,000 issued and
outstanding on an as further
adjusted basis.................. 115 115 215
Class B Common Stock, $.01 par
value; 50,000,000 authorized;
50,000,000 issued outstanding on
an actual basis and as adjusted
basis, and 42,000,000 issued and
outstanding on an as further
adjusted basis.................. 500 500 420
Additional paid-in capital....... 354,011 370,111 554,191
Accumulated deficit.............. (30,389) (30,389) (30,389)
Deferred compensation............ (11,701) (11,701) (11,701)
----------- ----------- -----------
Total stockholders' equity..... 312,536 412,536 596,636
----------- ----------- -----------
Total capitalization............... $ 332,967 $ 432,967 $ 617,067
=========== =========== ===========
</TABLE>
18
<PAGE>
DILUTION
Our net tangible book value per share on September 30, 1999, was $284.3
million, or $4.62 per share of the combined Class A and Class B Common Stock.
After giving effect to the sale of preferred stock and warrants to Microsoft
and a subsidiary of Compaq and to this offering, our net tangible book value
would have been $568.4 million, or $8.95 per share of the combined Class A and
Class B Common Stock. Purchasers of Class A Common Stock in this offering will
experience substantial and immediate dilution in net tangible book value per
share for financial accounting purposes, as illustrated in the following table
based on an assumed offering price of $95.00 per share:
<TABLE>
<S> <C>
Assumed public offering price per share of Class A Common Stock..... $95.00
Less net tangible book value per share after the offering(1)........ 8.95
------
Immediate dilution in net tangible book value per share of Class A
Common Stock to new investors...................................... $86.05
======
</TABLE>
- --------
(1) Determined by dividing the total number of Class A and Class B Common Stock
shares to be outstanding after the offering into our net tangible book
value, after giving effect to the sale of preferred stock and warrants to
Microsoft and a subsidiary of Compaq and to the application of the net
proceeds of this offering.
19
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected historical financial data of Digex
for the period from July 7, 1997, the date of acquisition by Intermedia of the
Predecessor, to December 31, 1997, the year ended December 31, 1998 and the
nine months ended September 30, 1998 and 1999, and of the Predecessor for the
year ended December 31, 1996 and the period from January 1, 1997 to July 6,
1997. The selected historical financial data has been derived from Digex's and
the Predecessor's financial statements which have been audited by Ernst & Young
LLP, with the exception of the unaudited financial statements for the nine
months ended September 30, 1998 and 1999, and are included elsewhere in this
prospectus.
The following table also sets forth our pro forma financial information for
the year ended December 31, 1997. The pro forma financial information gives
effect to the purchase by Intermedia of the Predecessor as if such acquisition
had occurred on January 1, 1997. The presentation of pro forma financial
information is made to permit useful comparison of results of operations
between periods presented. This pro forma financial information is not
necessarily indicative of the operating results we would have achieved if the
Predecessor had been acquired on January 1, 1997. The relationship between
Business Internet and the Predecessor is more fully described in note 1 to the
financial statements.
In the following table, basic and diluted net loss per share have been
calculated assuming that the common shares issued in connection with our
recapitalization in April 1999 were outstanding for all periods of Digex
presented, and giving effect to the 50,000-for-one stock split of our Class B
Common Stock effected prior to the closing of our initial public offering in
July 1999.
You should read the selected financial data below in conjunction with our
audited and unaudited interim financial statements and related notes included
elsewhere in this prospectus. You should also read the accompanying
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," contained later in this prospectus.
20
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
------------------------ --------------------------------------------------------------------
Historical Historical Pro Forma(1) Historical
------------------------ --------------- ------------ ------------------------------------
Nine months ended
September 30,
-----------------------
Period from
Period from July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Year ended
December 31, July 6, December 31, December 31, December 31,
1996 1997 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ------------ ----------- -----------
(unaudited) (unaudited) (unaudited)
(In thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues.................. $2,803 $ 4,420 $ 7,192 $ 11,612 $ 22,635 $ 14,863 $ 38,132
Costs and expenses:
Cost of operations....... 2,002 4,149 1,739 2,808 6,710 4,119 7,044
Cost of services......... 684 1,817 1,611 3,428 7,044 4,412 13,761
Selling, general and
administrative.......... 3,194 7,001 6,087 13,088 17,512 12,582 47,355
Depreciation and
amortization............ 591 519 2,753 4,850 8,109 6,081 18,112
Charge off of purchased
in-process research and
development............. -- -- 15,000 (2) 15,000 (2) -- -- --
-------- ------- -------- -------- -------- -------- ---------
Total costs and expenses.. 6,471 13,486 27,190 39,174 39,375 27,194 86,272
-------- ------- -------- -------- -------- -------- ---------
Loss from operations...... (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (48,140)
Other income (expense):
Interest expense......... -- -- -- -- -- -- (612)
Interest and other
income.................. -- -- -- -- -- -- 1,293
-------- ------- -------- -------- -------- -------- ---------
Net loss before income tax
benefit.................. (3,668) (9,066) (19,998) (27,562) (16,740) (12,331) (47,459)
Income tax benefit........ -- -- 1,440 4,710 159 -- 4,839
-------- ------- -------- -------- -------- -------- ---------
Net loss.................. $ (3,668) $(9,066) $(18,558) $(22,852) $(16,581) $(12,331) $ (42,620)
======== ======= ======== ======== ======== ======== =========
Net loss per common share:
Basic.................... -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Diluted.................. -- -- $ (0.37) $ (0.46) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ======== =========
Shares used in computing
basic and diluted net
loss per share........... -- -- 50,000 50,000 50,000 50,000 52,443
======== ======== ======== ======== =========
Other Data:
EBITDA before certain
charges(3)............... $ (3,077) $(8,547) $ (2,245) $ (7,712) $ (8,631) $ (6,250) $ (30,028)
Net cash used in operating
activities............... (2,565) (7,172) (6,079) (13,251) (10,930) (7,453) (28,125)
Net cash used in investing
activities............... (1,445) (1,004) (55,237) (56,241) (30,969) (18,352) (119,426)
Net cash provided by
financing activities(4).. 4,010 8,176 61,316 69,492 41,899 25,805 280,395
Capital expenditures...... 1,445 1,004 8,016 9,020 30,969 18,352 119,426
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
Predecessor Digex
------------ ---------------------------------------
December 31, December 31, December 31, September 30,
1996 1997 1998 1999
------------ ------------ ------------ -------------
(In thousands) (unaudited)
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents
(5)..................... $ -- $ -- $ -- $132,844
Working capital
(deficiency)............ (1,237) (351) 1,231 137,022
Property and equipment,
net..................... 2,599 12,930 39,059 165,055
Total assets............. 3,173 49,693 77,739 342,142
Capital lease
obligations............. 1,745 1,980 2,089 16,719
Total
stockholders'/owner's
equity.................. 342 45,527 70,845 312,536
</TABLE>
- --------
(1) The pro forma statement of operations data for the year ended December 31,
1997, represents the combining of the historical Predecessor statement of
operations data for the period from January 1, 1997 to July 6, 1997 and the
historical Digex statement of operations data for the period from July 7,
1997 to December 31, 1997, as adjusted for the following items:
. A decrease in cost of operations of $3,080 which represents reduced
network expenses.
. An increase in depreciation and amortization of $1,578 which represents
amortization of intangible assets arising from the acquisition.
. An increase in income tax benefit of $3,270 which represents the income
tax effect of purchase accounting adjustments.
(2) 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.
(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 also not be construed as a substitute for operating income
or a better measure of liquidity than cash flow from operating activities,
which are determined in accordance with generally accepted accounting
principles. This caption excludes components that are significant in
understanding and assessing our results of operations and cash flows. In
addition, EBITDA before certain charges is not a term defined by generally
accepted accounting principles and as a result our measure of EBITDA before
certain charges might not be comparable to similarly titled measures used
by other companies. However, we believe that EBITDA before certain charges
is relevant and useful information which is often reported and widely used
by analysts, investors and other interested parties in the Web site and
application hosting industry. Accordingly, we are disclosing this
information to permit a more comprehensive analysis of our operating
performance, as an additional meaningful measure of performance and
liquidity, and to provide additional information with respect to our
ability to meet future debt service, capital expenditure and working
capital requirements. See the financial statements and notes thereto
contained elsewhere in this prospectus for more detailed information.
(4) Net cash provided by financing activities includes capital contributions of
$4,010, $7,626, $64,085, $41,899, $25,805 and $102,424 for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the
period from July 7, 1997 to December 31, 1997, the year ended December 31,
1998, and the nine months ended September 30, 1998 and 1999, respectively.
(5) Prior to our initial public offering in July 1999, we historically
participated in Intermedia's and the Predecessor's centralized cash
management systems and, as a result, did not carry cash balances on our
financial statements for any period prior to the initial public offering.
Since that date, we have maintained and reported cash balances on our
financial statements.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes appearing elsewhere in this prospectus.
Overview
Digex is a leading provider of managed Web hosting services to businesses
operating mission-critical, multi-functional Web sites. In addition, Digex
provides Web hosting services to the rapidly growing number of application
service providers enabling them to more efficiently deliver their application
services to their customers over the Internet. We provide the computer
hardware, software, network technology, and systems management necessary to
provide our customers comprehensive, managed Web site hosting and application
hosting solutions. We also offer related value-added services such as firewall
management, stress testing and consulting services, including capacity and
migration planning and database optimization. We currently provide such
services to a diversified customer base consisting of over 550 customers. As of
September 30, 1999, we managed approximately 2,000 Windows NT and UNIX-based
servers in our state-of-the-art data centers which are strategically positioned
on the east and west coasts of the United States.
Our revenues grew at a compounded annual growth rate of 184% between 1996
and 1998, from $2.8 million in 1996 to $22.6 million in 1998. Our revenues for
the nine months ended September 30, 1999 grew to $38.1 million. We believe our
singular focus on delivering mission-critical Web site and application hosting
solutions has been the major contributor to our growth.
Revenue. Our revenues consist primarily of monthly fees from our managed Web
site and application hosting services. Contracts for these services are
typically between one and three years in length. In addition to Web site and
application hosting, we also offer 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 and firewall services. 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 primarily of facilities administration expenses
including rent, maintenance and utilities to support our data centers and
salaries and related benefits for our technical operations. We expect our cost
of services to increase in dollar amount but to decline as a percentage of
revenue due to economies of scale and expected improvements in technology and
productivity.
Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultants' fees, provision for doubtful accounts and other miscellaneous
expenses. We expect selling, general and administrative expenses in the future
to increase in dollar amount but to decline as a percentage of revenue.
Depreciation and amortization expense consists primarily of depreciation of
our data centers, servers and related equipment 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.
23
<PAGE>
Results of Operations
The following table presents certain information derived from our audited
financial statements for the years ended December 31, 1996, 1997 and 1998 and
the unaudited financial statements for the nine months ended September 30, 1998
and 1999 expressed as a percentage of revenue. For the purposes of the
following discussion and analysis, the results of operations of the Predecessor
for the period from January 1, 1997 to July 6, 1997, have been adjusted to
reflect the acquisition of Business Internet by Intermedia as if the
acquisition had occurred at the beginning of 1997 and have been combined with
the results of our operations for the period from July 7, 1997 (date of
acquisition) to December 31, 1997. This computation was done to permit useful,
complete year comparisons between the results for 1996, 1997 and 1998. However,
this pro forma information is not necessarily indicative of the operating
results we would have achieved if the Predecessor had been acquired on January
1, 1997.
<TABLE>
<CAPTION>
Digex
Predecessor ---------------------------------------------
Historical Pro Forma Historical
Year
Year Ended ended Nine months ended
Year Ended December December September 30,
December 31, 31, 31, -----------------------
1996 1997 1998 1998 1999
------------ ----------- -------- ----------- -----------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs of expenses:
Cost of operations.... 71.4 24.2 29.6 27.7 18.4
Cost of services...... 24.4 29.5 31.1 29.7 36.1
Selling, general and
administrative....... 114.0 112.7 77.5 84.7 124.2
Depreciation and
amortization......... 21.1 41.8 35.8 40.9 47.5
Charge off of
purchased in-process
research and
development.......... -- 129.2 -- -- --
Total costs and
expenses............... 230.9 337.4 174.0 183.0 226.2
------ ------ ----- ----- ------
Loss from operations.... (130.9) (237.4) (74.0) (83.0) (126.2)
Other income (expense):
Interest expense...... -- -- -- -- (1.6)
Interest and other
income............... -- -- -- -- 3.3
------ ------ ----- ----- ------
Net loss before income
tax benefit............ (130.9) (237.4) (74.0) (83.0) (124.5)
Income tax benefit...... -- 40.6 0.7 -- 12.7
------ ------ ----- ----- ------
Net loss.............. (130.9)% (196.8)% (73.3)% (83.0)% (111.8)%
====== ====== ===== ===== ======
</TABLE>
Nine Months Ended September 30, 1999 Compared to the Nine Months Ended
September 30, 1998
Revenue. Revenues were $38.1 million for the nine months ended September 30,
1999, compared to $14.9 million for the nine months ended September 30, 1998,
an increase of 156.6%. The $23.2 million increase in revenue was due primarily
to new customer growth and to a significant increase in the number of servers
per customer and revenue per server. Our installed base of servers increased
115.7% from 924 at September 30, 1998 to 1,993 at September 30, 1999.
Cost of Operations. Our cost of operations was $7.0 million for the nine
months ended September 30, 1999, compared to $4.1 million for the nine months
ended September 30, 1998. The $2.9 million increase was due primarily to
additional network costs resulting from our expanded customer base and increase
in service offerings since September 30, 1998. In addition, there were more
servers on line at September 30, 1999 than at September 30, 1998. As a
percentage of revenue, cost of operations decreased to 18.4% for the nine
months
24
<PAGE>
ended September 30, 1999 compared to 27.7% for the same period in 1998 as a
result of improved network utilization associated with the revenue improvement
discussed above.
Cost of Services. Our cost of services was $13.8 million for the nine months
ended September 30, 1999, compared to $4.4 million for the nine months ended
September 30, 1998. The $9.4 million increase was due primarily to increased
facilities and engineering costs to support our growth and the expansion of our
data centers. As a percentage of revenue, cost of services increased to 36.1%
for the nine months ended September 30, 1999 compared to 29.7% for the nine
months ended September 30, 1998.
Selling, General and Administrative. Our selling, general and administrative
expenses increased to $47.4 million for the nine months ended September 30,
1999, compared to $12.6 million for the nine months ended September 30, 1998.
The $34.8 million increase was due primarily to the significant administrative
requirements to support our growth strategy. During the nine months ended
September 30, 1998, the managed Web site and application hosting business
operated as part of a wholly owned subsidiary of Intermedia. During 1999, as
part of Digex's growth strategy, we continued building up our infrastructure to
operate as a separate public company. Increases in selling, general and
administrative expenses for 1999 include the costs associated with an increased
employee base, advertising campaigns, back office support (including the
General and Administrative Services Agreement with Intermedia), an increased
provision for doubtful accounts receivable, and the addition of key executive
management to support the growth of the business. In connection with the
completion of our initial public offering in August 1999, we also granted stock
options to certain employees at an exercise price below market value. As a
result, we recorded approximately $12.2 million of deferred compensation in the
third quarter of 1999 to be expensed over a four-year vesting period. During
the third quarter of 1999, approximately $0.5 million of stock compensation
expense was recognized. We expect that our growth strategy will continue to
require significant sales and marketing activities, including an expansion of
our sales force and further development of brand name recognition. In addition,
we will continue to build our personnel base to support our growth strategy in
the managed Web site and application hosting industry. As a result, we believe
that our selling, general and administrative expenses will continue to increase
in the future. As a percentage of revenue, total selling, general and
administrative expenses increased to 124.2% for the nine months ended September
30, 1999 from 84.7% for the nine months ended September 30, 1998.
Depreciation and Amortization. Depreciation and amortization increased to
$18.1 million for the nine months ended September 30, 1999, compared to $6.1
million for the nine months ended September 30, 1998. The $12.0 million
increase was principally due to additional servers and other facilities and
equipment placed in service since September 30, 1998. We expect increases in
depreciation charges for the remainder of the year due to the continued
expansion of our data centers and future server installations.
Interest Expense. Our interest expense of $0.6 million for the nine months
ended September 30, 1999 resulted from the capital leases assigned by
Intermedia to Digex during the second quarter of 1999 and a note payable issued
by Digex during the third quarter of 1999.
Interest and Other Income. Interest and other income of $1.3 million
resulted principally from interest earned by Digex on the cash proceeds from
the initial public offering completed in August 1999.
Net Loss Before Income Tax Benefit. Net loss before income tax increased to
$(47.5) million for the nine months ended September 30, 1999, compared to
$(12.3) million for the nine months ended September 30, 1998. As more fully
discussed above, the increased loss is attributable to growth strategy costs in
excess of current period revenues.
Income Tax Benefit. In connection with Intermedia's contribution of assets
on April 30, 1999, we recorded a deferred tax liability, net of deferred tax
assets, of $4.8 million. The deferred tax liability was related to certain
identifiable intangible assets. Since the date of the contribution, we
experienced taxable losses and non-deductible expenses that resulted in
recognition of deferred tax assets in excess of the deferred tax liability.
Accordingly, we recorded a $4.8 million deferred tax benefit during the second
quarter of 1999.
25
<PAGE>
EBITDA before certain charges. EBITDA before certain changes, as defined
below, decreased to $(30.0) million for the nine months ended September 30,
1999, compared to $(6.3) million for the nine months ended September 30, 1998.
The decrease is primarily attributable to costs associated with our growth
strategy. Costs associated with the administration and maintenance of our
expanded data centers and increased selling, general and administrative costs
will continue to represent a large portion of our expenses during our planned
expansion. In addition, we expect to continue to experience rapid growth in
marketing and selling expenses as new customers are acquired. EBITDA before
certain charges consists of earnings (loss) before tax benefit, depreciation
and amortization and the charge off of purchased in-process research and
development. EBITDA before certain charges does not represent funds available
for management's discretionary use and is not intended to represent cash flow
from operations. EBITDA before certain charges should also not be construed as
a substitute for operating income or a better measure of liquidity than cash
flow from operating activities, which are determined in accordance with
generally accepted accounting principles. This caption excludes components that
are significant in understanding and assessing our results of operations and
cash flows. In addition, EBITDA before certain charges is not a term defined by
generally accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled measures
used by other companies. However, we believe that EBITDA before certain charges
is relevant and useful information which is often reported and widely used by
analysts, investors and other interested parties in the Web site and
application hosting industry. Accordingly, we are disclosing this information
to permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the financial
statements and notes thereto contained elsewhere in this prospectus for more
detailed information.
Year Ended December 31, 1998 Compared to the Pro Forma Year Ended December 31,
1997
Revenue. Revenues were $22.6 million for the year ended December 31, 1998,
compared to $11.6 million for the year ended December 31, 1997, an increase of
94.9%. The $11.0 million increase in revenue was a result of our increased
marketing efforts, and market acceptance of our new products, resulting in
growth in our number of customers. We also experienced increases in revenue
from existing customers through upgrades and value added services. This
translated into higher average revenues per server. Additionally, during 1998
we increased the number of quota-bearing sales representatives.
Cost of Operations. Our cost of operations was $6.7 million for the year
ended December 31, 1998, compared to $2.8 million for the year ended December
31, 1997. The $3.9 million increase was due to increased network capacity
requirements necessary to support our growing business. In addition, we also
experienced an increase in the average network bandwidth per server. As a
percentage of revenue, the cost of operations increased to 29.6% in 1998 from
24.2% in 1997 primarily as a result of our purchasing added network capacity
per server in 1998 as compared to 1997 to improve customer Web site
performance.
Cost of Services. Our cost of services was $7.0 million for the year ended
December 31, 1998, compared to $3.4 million for the year ended December 31,
1997. The $3.6 million increase was due primarily to the hiring of additional
engineering and operations staff to support our expanded customer base. As a
percentage of revenue, the cost of services increased to 31.1% in 1998 from
29.5% in 1997.
Selling, General and Administrative. Our selling, general and administrative
expenses increased to $17.5 million for the year ended December 31, 1998,
compared to $13.1 million for the year ended December 31, 1997. The $4.4
million increase was due to higher commission expenses associated with our
increased sales 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.
26
<PAGE>
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. Benefits
were recognized in 1998 to the extent of unused deferred tax credits
originating in previous periods.
Net Loss. Net losses decreased to $(16.6) million for the year ended
December 31, 1998, compared to $(22.9) million for the year ended December 31,
1997.
Pro Forma Year Ended December 31, 1997 Compared to the Year Ended December 31,
1996
Revenue. Revenues were $11.6 million for the year ended December 31, 1997,
compared to $2.8 million for the year ended December 31, 1996, an increase of
314.3%. The $8.8 million increase in revenue was due primarily to our increased
marketing and sales efforts and the increased market acceptance of dedicated
Web site hosting as a viable outsourcing solution.
Cost of Operations. Our cost of operations was $2.8 million for the year
ended December 31, 1997, compared to $2.0 million for the year ended December
31, 1996. The $806,000 increase was due to increased network connectivity
expenses in connection with the growth in the number of managed servers. This
increase in our cost of operations was partially offset by the more favorable
network connectivity pricing we received subsequent to Intermedia's acquisition
of Business Internet in July 1997. As a percentage of revenue, the cost of
operations declined to 24.2% in 1997 from 71.4% in 1996, primarily as a result
of the favorable pricing from Intermedia.
Cost of Services. Our cost of services was $3.4 million for the year ended
December 31, 1997, compared to $684,000 for the year ended December 31, 1996.
The $2.7 million increase was due primarily to headcount increases in customer
service and operations during 1997. As a percentage of revenue, the cost of
services increased to 29.5% in 1997 from 24.4% in 1996, primarily due to the
additional customer service and operations employees who were hired in
conjunction with the expansion of our marketing efforts to support the
anticipated growth in our business.
Selling, General and Administrative. Our selling, general and administrative
expenses increased to $13.1 million for the year ended December 31, 1997,
compared to $3.2 million for the year ended December 31, 1996. The $9.9 million
increase was due to significant increases in headcount in our sales, marketing,
management information, and administration departments, as well as one-time
expenditures for employee recruitment, relocation, and training. As a
percentage of revenue, the expenses decreased to 112.7% in 1997 from 114.0% in
1996.
Depreciation and Amortization. Depreciation and amortization increased to
$4.9 million for the year ended December 31, 1997, compared to $591,000 for the
year ended December 31, 1996. The $4.3 million increase was due to the
amortization of intangible assets in connection with the purchase of Business
Internet as allocated to us. This increase was also due to increased capital
expenditures for servers and other data center related equipment connected with
the continued expansion of our business.
Charge off of Purchased In-Process Research and Development. The charge for
purchased in-process research and development of $15.0 million in 1997
represents the amount of purchased in-process research and development
associated with the purchase of Business Internet by Intermedia. In connection
with this acquisition, Intermedia allocated $15.0 million of the purchase price
to in-process research and development projects that relate directly to us.
This allocation represents the estimated fair value based on risk-adjusted cash
flows related of the incomplete projects. 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.
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The acquired projects involved development, engineering, and testing
activities associated with the completion of next generation Web site
management services. The primary effort involved the development of an
additional Web site management facility on the West Coast. The development of
technology related to this project was considered valuable as it was critical
to alleviating capacity constraints and adding significant new service
capabilities. Upon completion, the new Web site management facility was
expected to result in faster and easier installation of customers' servers as
well as efficient traffic management with significantly less overhead. Related
efforts involved the development and integration of next generation routers to
support greater transmission capacity, as well as a new software architecture
to assist in balancing traffic loads. Another valuable element involved the
development of site mirroring, the ability to create exact replicas of Web
sites at each of Digex's two data centers for greater service reliability. The
fair value assigned to these projects is $15.0 million.
These projects were completed during 1998. As such, there is no additional
future cost or risk expected with respect to these projects.
Income Tax Benefit. Our income tax benefit increased to $4.7 million for the
year ended December 31, 1997, compared to $0 for the year ended December 31,
1996. The income tax benefit in 1997 results from our ability to recognize the
benefits of our 1997 net tax operating loss carryforward to the extent of
available and unused tax credits that arose in connection with Intermedia's
purchase of Business Internet. Such tax credits relate to the purchase
accounting differences between bases in our identifiable intangible assets.
Net Loss. Net losses increased to $(22.9) million for the year ended
December 31, 1997, compared to $(3.7) million for the year ended December 31,
1996.
Liquidity and Capital Resources
We have used cash in our operating and investing activities during all
periods since inception. These cash usages have been funded by permanent
contributions to capital. Such contributions amounted to $4.0 million, $24.5
million, $41.9 million and $102.4 million in 1996, 1997 (pro forma), 1998, and
the nine months ended September 30, 1999, respectively.
Net cash used in operating activities in 1996, 1997 (pro forma), 1998 and
the nine months ended September 30, 1999 was $2.6 million, $13.3 million, $10.9
million and $28.1 million, respectively. Net cash used for operating activities
in each of these periods was primarily the result of operating losses and
changes in working capital.
Net cash used for investing activities in 1996, 1997 (pro forma), 1998 and
the nine months ended September 30, 1999 was $1.4 million, $56.2 million, $31.0
million and $119.4 million, respectively. Net cash used for investing
activities in each of these periods was primarily the result of capital
expenditures for data center infrastructure, as well as leasehold improvements,
furniture and fixtures and computers and other equipment. Additionally, in July
of 1997, goodwill and other intangible assets were allocated to us for separate
reporting purposes, and shown as a use of cash. Although we have plans to
invest significantly in property and equipment, we have no material commitments
for such items at this time.
We anticipate we will have significant cash requirements for several years
as we expand our data center capacity, increase our employee base to support
our expanding operations and invest in our marketing organization. In addition,
we expect to invest significantly in the purchase of property and equipment and
for research and development, including funding the expenses associated with
our research and development alliance with Microsoft and Compaq.
Prior to the date of our initial public offering, our capital expenditures
and operating expenses were principally funded by Intermedia. On August 4,
1999, we sold 11,500,000 shares of Class A Common Stock in our initial public
offering. The net proceeds from the offering were approximately $179.2 million.
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On January 12, 2000, we sold 100,000 shares of our Series A Preferred Stock
and warrants to purchase 1,065,000 shares of Class A Common Stock to Microsoft
and a subsidiary of Compaq for aggregate gross proceeds of $100.0 million, of
which $85.0 million was paid in cash and $15.0 million was paid in the form of
equipment credits from Compaq.
The net proceeds of the initial public offering, the cash proceeds of the
investments by Microsoft and Compaq and the net proceeds of this offering must
be used to purchase Telecommunications Related Assets due to restrictions in
Intermedia's debt instruments. Therefore, to provide for the funding of our
operating expenses, we have made arrangements with Intermedia to sell to
Intermedia certain Telecommunications Related Assets that are purchased by
Digex with the net proceeds of these offerings. The assets are sold to
Intermedia for cash at our cost. As of September 30, 1999, we had received
approximately $19.5 million from Intermedia related to the sale of
Telecommunications Related Assets. These proceeds were unrestricted and were
used to fund our operating expenses. See "Use of Proceeds" and "Certain
Relationships and Related Transactions--Sale of Telecommunications Related
Assets to Intermedia."
Cash payments for capital assets for the nine months ended September 30,
1999 were approximately $119.4 million. As more fully discussed in the
footnotes to the financial statements, Digex was capitalized by Intermedia's
contribution of assets and certain liabilities amounting to approximately
$115.1 million on April 30, 1999. Additionally, beginning May 1, 1999 and
through the date of the initial public offering, Intermedia contributed
additional capital of $48.1 million to Digex, principally by way of
contributions of telecommunications assets. Finally, Intermedia assigned two
capital leases for data centers with a value of $17.1 million to Digex in the
second quarter of 1999.
We expect to continue experiencing negative cash flow from operating and
investing activities due to our plans for expansion and the growth of our
business. Subject to the limitations discussed under the caption "Use of
Proceeds," we believe that with the proceeds from this offering we will have
sufficient capital to sustain our current operations and capital expenditure
plans into the first half of 2001. The proceeds from the investments by
Microsoft and a subsidiary of Compaq are committed to the development of a
platform for the delivery of high-performance application hosting services,
which will include capital expenditures and research and development
expenditures. We intend to continue to seek funding from external sources to
meet our cash needs subsequent to that date. There can be no assurance that
such funding will be available on terms satisfactory to us. Alternatively,
Intermedia may be able to advance funds to us to meet our requirements, but it
has no obligation to do so.
In addition, although Intermedia has advised us that it intends to use a
portion of the proceeds from its sale of shares in this offering to reduce its
outstanding debt, Intermedia is and will continue to be highly leveraged. At
September 30, 1999, Intermedia had outstanding approximately $3.1 billion of
debt and other liabilities including trade payables, and a total of
approximately $901.8 million of obligations with respect to four outstanding
series of preferred stock. In addition, Intermedia recently borrowed $50.0
million under its $100.0 million credit facility and announced its intent to
increase the size of its credit facility to $400.0 million. Intermedia's level
of debt will require it to dedicate a substantial portion of its future cash
flow from operations for payment of principal and interest on its debt, as well
as dividends on and the redemption of its preferred stock. Historically,
Intermedia has not generated sufficient cash flow to cover its operating and
investing expenses. For the year ended December 31, 1999, Intermedia's earnings
were insufficient to cover combined fixed charges and dividends on preferred
stock. Because of the restrictions in the Intermedia indentures, Intermedia has
only a limited amount of cash that may be used to fund working capital and
operating losses. Consequently, Intermedia may not be able to provide us with a
source of funds for our working capital or operating losses.
An affiliate of Kohlberg Kravis Roberts & Co. has recently agreed to make a
$200.0 million equity investment in Intermedia. However, the closing of this
transaction is subject to customary conditions including the expiration of the
waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976.
We can not assure you this transaction will be completed. If the equity
investment by the affiliate of Kohlberg Kravis
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Roberts & Co. is consummated, the proceeds of that equity investment may be
used by Intermedia, at its discretion, to fund our working capital and
operating losses. This offering is not contingent on the closing of the
investment in Intermedia by the affiliate of Kohlberg Kravis Roberts & Co.
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 function properly in 2000, through Intermedia, we have implemented
a Year 2000 program. To date, we have not experienced any significant Year 2000
problems.
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 to complete the project are based on management's best estimates.
A summary of historical and estimated costs for the Year 2000 project are
listed below:
<TABLE>
<CAPTION>
External Internal
-------- --------
<S> <C> <C>
Historical through September 30, 1999..................... $1.0 $0.5
Estimated additional expenditures for remainder of 1999... 1.8 0.8
---- ----
Total................................................... $2.8 $1.3
</TABLE>
<TABLE>
<CAPTION>
Software/Hardware
-----------------
<S> <C>
Historical through September 30, 1999............... $ 0.1
Estimated additional expenditures for remainder of
1999............................................... 0.5
---------
Total............................................. $ 0.6
</TABLE>
We urge you to read "Risk Factors--We could lose revenues and our reputation
may be damaged if our systems or those of our customers or our suppliers are
not Year 2000 compliant."
Quantitative and Qualitative Disclosure About Market Risk
While our long-term debt bears fixed interest rates, the fair market value
of our fixed rate long-term debt is sensitive to changes in interest rates. We
run the risk that market rates will decline and the required payments will
exceed those based on current market rates. Under our current risk management
policies, we do not use interest rate derivative instruments to manage our
exposure to interest rate changes.
30
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BUSINESS
Overview
Digex is a leading provider of managed Web hosting services to businesses
operating mission-critical, multi-functional Web sites. In addition, Digex
provides Web hosting services to the rapidly growing number of application
service providers, enabling them to more efficiently deliver their application
services to their customers over the Internet. We also offer related value-
added services, such as firewall management, stress testing and consulting
services, including capacity and migration planning and database optimization.
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. Our services include providing the computer hardware, software,
network technology, and systems management necessary to offer our customers
comprehensive outsourced Web site and application 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, Forbes, J. Crew, Kraft, Publishers Clearing House
and Universal Studios. We operate two state-of-the-art data centers
strategically positioned on the east and west coasts of the United States. We
own and manage approximately 2,000 Windows NT and UNIX-based servers in these
data centers. Our revenues grew at a compounded annual growth rate of 184%
between 1996 and 1998, from $2.8 million in 1996 to $22.6 million in 1998. Our
revenues for the nine months ended September 30, 1999 were $38.1 million.
The following are among the key factors that we believe will continue to
drive our growth:
. the ability to facilitate the rapid, cost-efficient implementation and
expansion of customers' Web site initiatives;
. an operating platform designed to allow us to scale our operations to
achieve higher revenues, lower marginal unit costs and increased
operating margins;
. strong alliances with Microsoft and Compaq, each of whom have recently
invested in Digex;
. strong working relationships with other technology leaders including Sun
Microsystems, Akamai, Netscape and Cisco Systems;
. 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 sales force; and
. a network of over 120 business 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
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
hosting initiatives.
In January 2000, Microsoft and a subsidiary of Compaq made a $100.0 million
equity investment in our company of which $85.0 million was paid in cash and
$15.0 million was paid in the form of equipment credits from Compaq. We also
entered into strategic development agreements and joint marketing arrangements
with both companies.
Digex and Microsoft will work together to advance Digex's capabilities to
more rapidly install, manage and upgrade large numbers of Microsoft Windows-
based servers for Web site and application hosting.
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Digex and Compaq will work jointly to streamline the order, delivery and
installation of Compaq's server hardware and storage devices. Digex has agreed
to use Compaq's server hardware and attached storage exclusively for a period
of 18-months for all customer implementations using a Microsoft platform,
provided the equipment meets agreed performance, cost and service delivery
requirements.
In addition, we work closely with Sun Microsystems to provide our customers
with expertise on the UNIX platform. In January 2000, we were one of the first
service providers to complete SunTone certification for our services,
demonstrating our continued leadership in the UNIX marketplace.
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 both existing and prospective customers, employees,
suppliers and partners. Enterprises are responding to this opportunity by
substantially increasing their investment in Internet sites and services.
Over the last few years, enterprises that focus solely on distributing
products and services over the Internet have emerged and, more recently,
mainstream businesses have begun to implement Web sites to complement
traditional business models and applications. Among the various factors which
continue to attract these businesses to the Internet is the transformation of
Web sites from being primarily text-based and informational to becoming
interactive, multimedia-enabled and transaction oriented. New technologies and
development tools have also led to the Web-enabling of traditional business
functions and applications such as customer service, procurement, human
resource management and sales force automation. Internet operations and
applications are mission-critical for virtually all Web-centric companies and
are becoming increasingly mission-critical for many mainstream enterprises. At
the same time, these operations and applications are becoming more complex and
challenging to operate. Ensuring the quality, reliability, and availability of
these Internet operations typically requires substantial investments in
developing Internet expertise and infrastructures. However, such a continuing
significant investment of resources is often an inefficient use of an
enterprise's limited resources. As a result, businesses are increasingly
seeking collaborative outsourcing arrangements that can increase performance,
provide continuous operation of their Internet solutions, and reduce Internet
operating expenses.
According to Forrester Research, 44% of the 50 Fortune 1000 firms they
surveyed have outsourced the management of their Web sites. Forrester reports
that companies outsource Web site management primarily for the following
reasons:
. scarcity of technical skills;
. performance;
. speed of implementation; and
. security.
We believe additional benefits of outsourcing the management of a complex
Web site include lower total costs, higher service level guarantees and reduced
risk of technology obsolescence.
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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, hire and retain an
operations support staff, 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 assemble 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, software 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,
upgrading 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 managed Web site
hosting solution. Unlike collocation, the service provider supplies the
hardware, software, network equipment and support necessary to run the
Web site. In addition, dedicated hosting often includes value-added
services such as firewall management, stress testing and consulting
services. As Web sites have become more complex, even large and
technically astute businesses have found Internet technologies and
solutions a challenge to manage. For such companies, including many
Fortune 2000 companies, dedicated Web site hosting has become a
preferred alternative.
. Application Hosting: Application service providers deliver Web-enabled
business applications to their end-users over the Internet, supporting
such common business processes as customer service, procurement, human
resource management and sales force automation. Often, an application
service provider partners with a dedicated hosting provider to bundle
the services of dedicated web hosting - known as "application hosting"
when targeted at this market - with their application services and
support. Through this partnership, the application service provider
typically experiences numerous benefits, including faster time-to-
market, access to advanced application skills and significantly lower
costs of operations.
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 and applications. 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, Web-
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centric businesses and application service providers. 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 and applications 24
hours a day. These services include:
. Management services such as operating and supporting Windows NT and
UNIX-based dedicated servers and intelligent networking services such as
load balancing and network caching;
. Enterprise services such as firewall management, stress testing,
customized Web site activity reporting, and enhanced security services;
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
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.
In addition to the Internet connectivity available through Intermedia's
backbone, we provide diversified connectivity from our data centers to other
major Internet backbones. We are also actively establishing and maintaining our
own public and private peering arrangements.
In addition, Digex offers a broad array of intelligent networking services
including products and services from Akamai and Cisco Systems.
Responsive Customer Care and Technical Support. We strive to provide
superior customer service. This includes providing customers with 24-hour a day
direct access to a staff of over 300 customer care and technical support
personnel and our use of a variety of proactive monitoring services from our
state-of-the-art SOC which allows us to anticipate potential problems or
rapidly identify and remedy service interruptions. 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, software,
networks, and security devices managed by us. The SOC uses a variety of
technologies and tools to monitor specific network devices, such as routers,
switches and load balancing equipment. The SOC oversees a large number of
server resources, such as CPU, system processes, log files, TCP ports and disk
space, and security devices, such as firewalls.
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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, freestanding 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 uninterruptible power supply systems and redundant diesel generators
to ensure that the power system is capable of maintaining power to the data
center in the event of any component failure. State-of-the-art physical
security has been implemented through tightly controlled security zones
requiring both card and biometric identification. Over 100 surveillance cameras
record movement through the data centers and security guards provide real-time
visibility. Cooling and environmental controls for each data center are
designed to monitor and ensure proper temperature and humidity levels. Finally,
all telecommunications connections enter the data centers through multiple
points from diverse service arrangements to ensure continued operation of
service without degradation in the unlikely event of a cable cut or local
carrier network outage.
Predictable Monthly Fees. We provide our services for predictable monthly
fees, enabling our customers to accurately budget costs for Web site hosting
services. These fees are typically contracted as part of one, two or three-year
agreements. These agreements often provide service level guarantees and permit
technology upgrades at any time during the life of a contract.
Digex Strategy
Our objective is to maintain our leadership position in the industry and
continue to shape and lead the global market for hosting complex Web sites and
applications. We intend to accomplish this by delivering secure, scalable,
high-performance Web site and application hosting solutions. Our business
strategy focuses on the following:
Expand Our Premier Web Hosting Capabilities. We have recently expanded the
capacity of our east and west coast data centers. In addition, we are actively
seeking international expansion opportunities. We intend to continue to add
data center capacity over the next five years as justified 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:
. We have formed alliances with leading technology companies. These
alliances help facilitate continuous innovation particularly in the
areas of Web solution scalability, serviceability and rapid deployment
speed. In January 2000, Microsoft and a subsidiary of Compaq invested
$100 million in Digex of which $85.0 million was paid in cash and $15.0
million was paid in the form of equipment credits from Compaq. We also
entered into strategic development agreements with both companies to
advance Digex's capabilities to more rapidly install, manage and upgrade
large numbers of Microsoft Windows-based servers and to streamline the
order, delivery and installation of Compaq hardware and storage devices.
In January 2000, we were one of the first service providers to receive
SunTone certification for our services, demonstrating our continued
leadership in the UNIX marketplace.
. We have designed an innovative architecture, called the Distributed
Internet Server Array ("DISA"), 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.
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. Our technical staff includes over 40 Microsoft certified engineers, as
well as technical experts certified by Cisco Systems and Sun
Microsystems. We believe this makes our technical staff among the most
highly skilled and trained in the Web hosting industry. Based on
comments by our customers, we believe our technical staff affords us a
competitive advantage and has been instrumental in attracting many of
our Fortune 2000 customers. In addition, we believe the depth and scope
of our staff's technical skill base is essential to our ability to
maintain our high quality service levels. To attract and retain these
individuals, we offer competitive financial incentives, including stock
options, in-house and external training programs, and the opportunity to
work with cutting-edge technology.
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 site and application hosting services. The following are among the new
service initiatives we are currently pursuing:
. Support for Leading Applications and Databases. We have developed
expertise in several of the leading software applications and databases
used by many of today's business oriented Web sites. Over the past six
months, Digex has begun to support the Lotus Domino and Oracle 8i
database. We intend to continue to add new Web site applications and
databases to the list of software that we support.
. 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. In 1999, Digex added expanded reporting and monthly security
scanning and analysis services. We intend to continue developing
services that improve the effectiveness of Web sites and optimize their
performance.
. Enable the Emerging Application Service Provider Market. We believe that
we are well positioned to capitalize on the growth of the application
hosting segment of the Web hosting market by leveraging our experience
and technical expertise in efficiently deploying, managing, and scaling
Web hosting solutions. Digex intends to develop new services,
complementary to its suite of existing Web site hosting services, which
will enable application service providers to rapidly and cost
effectively deliver business applications to their customers' desktops
over the Internet. While the early phase of this emerging application
hosting market has been dominated by traditional software applications,
we believe a substantial number of new business process software
products designed for the Internet environment, and consequently a large
number of new application service providers, will begin to emerge in
2000. Forrester research, for example, predicts that the market for
hosted business applications will increase to $11.3 billion in 2003. We
intend to work with the various software developers, systems
integrators, and information technology firms that are evolving into
application service providers by providing their managed hosting
services.
Expand Capabilities Through Selective Strategic Alliances and Acquisitions.
We currently have business 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 Agency.com, OrderTrust and US Interactive. In
addition, in December 1999, we launched the Digex app-Link Partner Program(TM)
in order to expand our partnership alliances to include systems integrators,
value-added resellers and consultants who offer application services to
customers over the Internet. Our partnership programs provide a valuable, cost-
effective channel for marketing 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.
36
<PAGE>
Digex Services
We offer a full range of complementary value-added services designed to
satisfy the rapidly evolving requirements of complex Web sites. Our services
include the following:
.Managed Hosting Services;
.Enterprise Services; and
.Consulting Services.
Managed Hosting Services
Dedicated Web Site and Application Hosting Services. We offer dedicated Web
site and application hosting services designed to enable reliable, scalable,
mission-critical Web solutions. We operate both Windows and UNIX-based servers
exclusively using hardware from Compaq and Sun Microsystems. By standardizing
around the hardware produced by these two vendors, we are able to quickly,
easily and cost-effectively upgrade, configure and implement the new hardware
necessary to accommodate our customers' growing needs for higher computing
speeds and capacity. We offer a number of services to dedicated Web site
management customers and application service providers to ensure ease of
implementation, security, performance and scalability. We offer a comprehensive
package featuring our core managed hosting services under the Digex
SmartServicesSM brand. Digex SmartServicesSM include:
. installation and maintenance of Web sites and applications on industry
leading server hardware and storage systems, from Compaq or Sun
Microsystems;
. installation and maintenance of Microsoft Windows NT or Microsoft Windows
2000 and/or the Sun Solaris UNIX operating system tested and configured
by Digex to ensure optimal Internet performance and security;
. unlimited help desk support available 24 hours a day with access to
certified technical professionals;
. continuous server and network monitoring services;
. 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 administrative errors; and
. secure remote administration capabilities for easy and ubiquitous remote
management.
Intelligent Networking. We offer a variety of intelligent networking
services to our customers. These services include load balancing and
geographical distribution of network traffic using Cisco Systems technology and
high-performance delivery of Internet content using the Akamai network and
technology. We expect demand for these products to increase as more customers
move to multiple server and higher bandwidth 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. Today, Digex offers a private IP connectivity
service and Intermedia's frame relay service.
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.
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<PAGE>
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. For example, we offer a custom Web
site usage reporting service to help improve Web server
performance for our customers by off-loading the usage reporting processing to
a powerful server designed specifically for reporting.
Security Services. Our security services are designed to ensure the security
of a customer's Web site or an application service provider's applications. In
December 1999 we introduced monthly security scanning and vulnerability
assessment services to provide our customers with a higher level of protection
and assurance. Other security services offered today include managed firewalls,
encryption software, and authentication devices.
Database Services. Our database services provide the installation,
configuration, maintenance and support of leading databases. Today, we provide
enhanced database services for Microsoft SQL Server and Oracle 8i database
technology.
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 and Web-based applications.
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. We serve over 550
customers, covering most major industries. Our customer contracts typically
range in duration from one to three years. Our customers include the following
well-known companies:
<TABLE>
<CAPTION>
Media and
Financial Services and Insurance Entertainment Manufacturing Retail and Distribution
- --------------------------------- -------------- ------------- -----------------------
<S> <C> <C> <C>
American Century BBC America Kraft Foods American Eagle Outfitters
Investments The Economist Liz Claiborne Authentic Fitness
Ernst & Young LLP Edmund's Nissan Campmor
LendingTree Forbes Sara Lee Corporation J. Crew
Northwestern Mutual Miller Freeman W.W. Grainger
Life Insuranc Publishers Clearing House
Progressive Insurance Universal Studios
Companiese
<CAPTION>
Technology and
Government Communications Healthcare Travel & Hospitality
- ----------- -------------- ---------- --------------------
<S> <C> <C> <C>
U.S. Department of Compaq Association of American Budget Rent-A-Car
Agriculture Microsoft Medical Colleges The Travel Company
Bally Total Fitness
Claimsnet
DuPont Pharmaceuticals
</TABLE>
In the past few years, our growth has come from new customers, as well as
existing customers whose Web sites have become increasingly more strategic to
their overall business goals and objectives.
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<PAGE>
In addition, an increasing number of our customers are application service
providers, commonly referred to as ASPs, who use our hosting services to
deliver their applications. Our application service provider clients include:
<TABLE>
<CAPTION>
ASP Client Hosted Application
---------- ------------------
<S> <C>
Encentris --customer relationship management application
Continuity --project management application
Celarix --global logistics management application
Pandesic --e-commerce application
</TABLE>
Sales and Marketing
Our sales objective is to achieve broad market penetration by focusing on
market segments that, 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 September 30, 1999, our direct sales force consisted of
over 65 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.
The mid-market/Web-centric unit addresses the large and growing number of mid-
size businesses requiring mission-critical hosting services. Our alternate
channel sales group works closely with our extensive network of business
alliance partners, which includes systems integrators, Web site developers and
application service providers. 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.
Business Alliance Partners--The Digex e-Link Partner Program(TM) and Digex
app-Link Partner Program(TM). 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 companies such as Agency.com, Order Trust and US
Interactive. 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.
In November 1999, we launched our second comprehensive partner program, the
Digex app-Link Partner Program(TM). The Digex app-Link Partner Program(TM)
targets Application Service Providers (ASPs), including consultants, systems
integrators and software developers. We currently host Web-based applications
for a variety of applications service providers who specialize in providing a
broad range of Web-based business solutions.
Marketing. Our marketing organization is responsible for building Digex's
brand awareness, identifying key target markets and developing innovative
programs to communicate Digex's products and services to the marketplace.
Another objective of our marketing efforts 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, the Digex Web sites and the
distribution channels of our technology vendors such as Microsoft, Compaq and
Sun Microsystems. Through our alliances with Microsoft and Compaq, we intend to
develop joint marketing activities promoting Windows-based solutions to Web
site and application service provider customers.
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<PAGE>
Data Center Infrastructure
We presently operate highly secure, fault-tolerant data centers specifically
designed for the non-stop 24-hour a day hosting of Web sites and Web-based
applications. Our east coast data center is strategically located near major
network access points in the Washington, D.C. metropolitan area. Our west coast
data center is situated near the western network access points and the
headquarters of many of our strategic technology providers. We recently
expanded our total data center capacity 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.
The physical infrastructure and security controls of our data centers have
been designed to support rigorous requirements for secure data storage and
processing. Specifically, our data centers offer the following major physical
benefits to our customers:
. state-of-the-art physical security;
. multi-redundant mechanics, utilities and environmental controls;
. high-performance multi-network points of presence (WebPOPs); and
. fully-integrated customer work areas.
State-of-the-art physical security. Our data centers include multiple
separate computer rooms offering customers a high degree of containment and
isolation from accidents or disasters occurring within or outside of each data
center. Physical security has been implemented through tightly controlled
security zones requiring both access card and biometric identification. Each
data center has five security zones that require separate access levels to gain
entry. Our highest security zones include computer rooms physically constructed
as a building-within-a-building, with fire suppression and other controls
separate from the remainder of the data center. Fencing above the ceiling and
below the raised floor isolate each security zone. Over 100 surveillance
cameras record movement through the data centers and security guards provide
real-time visibility. Our cooling towers are surrounded by security fences and
monitored by cameras. Our dual 20,000 gallon diesel fuel tanks are safely
buried underground.
Multi-redundant mechanics, utilities and environmental controls. Within each
data center, separate mechanical rooms exist adjacent to each computer room.
These mechanical rooms house all cooling and mechanical equipment, eliminating
the possible introduction of liquid into the computer rooms from equipment
leakage. We use redundant uninterruptible power supply systems and redundant
diesel generators, to ensure the power system is capable of maintaining power
to the data center in the event of any component failure. Cooling and
environmental controls for each data center are designed to monitor and ensure
proper temperature and humidity.
High-performance WebPOPs. Our data centers include physically separated
WebPOPs, which are network points of presence within our data centers. These
WebPOPs provide high-performance, reliable networking connectivity to multiple
national Internet backbone carriers for our customers. Telecommunications
circuits enter the data centers through multiple points from diverse service
providers. Multiple points of presence ensure continued operation of service
without degradation in the unlikely event of a cable cut or local carrier
network outage.
Fully integrated customer work areas. Our data centers include separate,
private customer work areas. These work areas are isolated from the security
zones that house our servers, permitting customers to work on-site as
necessary. These work areas provide computing and personal resources, such as
customer breakrooms and wash areas.
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<PAGE>
Competition
The market served by Digex is highly competitive. There are few substantial
barriers to entry, and we expect to face additional competition from existing
competitors and new market entrants in the future. The principal competitive
factors in this market include:
. quality of services and scalability of infrastructure;
. network capacity, reliability, security and adaptability to new
technologies;
. Internet system engineering expertise;
. quality of customer service and support;
. relationships with marketing partners and vendors;
. number and geographic presence of sales and technical support personnel;
. variety of services offered;
. price;
. product innovation;
. financial resources; and
. brand name.
Our current and potential competitors in the market include:
. Web hosting service providers;
. local, regional, national and international ISPs;
. local, regional, national and international telecommunications
companies; and
. large information technology outsourcing firms.
Our competitors may operate in one or more of these areas and include
companies such as AT&T, Cable & Wireless, Concentric Network, Data Return, EDS,
Exodus Communications, Frontier/GlobalCenter, Globix, GTE, IBM, Intel, Level 3
Communications, MCI WorldCom, Navisite, PSINet, Qwest Communications
International, and USinternetworking.
We believe our experience and reputation for delivering high quality,
complex Web site and application hosting services differentiates 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 and applications. 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 and application 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.
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<PAGE>
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 Millennium Copyright Act, the law relating
to the liability of on-line services companies and Internet access providers
for information carried on or disseminated through their networks remains
largely unsettled. It is possible claims could be made against on-line services
companies and Internet access providers under both United States and foreign
law for defamation, obscenity, negligence, copyright or trademark infringement,
or other theories based on the nature and content of the materials disseminated
through their networks. Several private lawsuits seeking to impose such
liability upon on-line services companies and Internet access providers are
currently pending.
Although the sections of the Communications Decency Act of 1996 that
proposed to impose criminal penalties on anyone distributing indecent material
to minors over the Internet were held to be unconstitutional by the U.S.
Supreme Court, similar laws may be proposed, adopted and upheld. The nature of
future legislation and the manner in which it may be interpreted and enforced
cannot be fully determined and, therefore, legislation similar to the
Communications Decency Act could subject us and/or our customers to potential
liability, which in turn could harm our business. The adoption of any of these
types of laws or regulations might decrease the growth of the Internet, which
in turn could decrease the demand for our services or increase our cost of
doing business or in some other manner harm our business.
Due to the increasing popularity and use of the Internet, it is likely a
number of additional laws and regulations may be adopted at the federal, state
and local levels with respect to the Internet, covering issues such as user
privacy, freedom of expression, pricing, characteristics and quality of
products and services, taxation, advertising, intellectual property rights,
information security and the convergence of traditional telecommunications
services with Internet communications. The adoption of any such laws or
regulations might decrease the growth of the Internet, which in turn could
decrease the demand for our services or increase the cost of doing business or
in some other manner harm our business. In addition, applicability to the
Internet of existing laws governing issues such as property ownership,
copyrights and other intellectual property issues, taxation, libel, obscenity
and personal privacy is uncertain. The vast majority of such laws were adopted
prior to the advent of the Internet and related technologies and, as a result,
do not contemplate or address the unique issues of the Internet and related
technologies.
Employees
As of January 1, 2000, we employed approximately 595 full-time employees.
None of our employees are covered by a collective bargaining agreement. We
believe that our employee relations are good.
42
<PAGE>
Properties
We currently lease office space from Intermedia for our corporate
headquarters in Beltsville, Maryland. We lease additional space in Beltsville
for our administrative offices and regional sales office. We recently expanded
our east coast data center in Beltsville and our west coast data center in
northern California.We believe that our properties are adequate and suitable
for their intended purposes.
Legal Proceedings
We do not believe there are any pending or threatened legal proceedings
that, if adversely determined, would have a material adverse effect on us.
43
<PAGE>
MANAGEMENT
The following sets forth the name, age and position within Digex of our
current directors and executive officers:
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
David C. Ruberg......... 53 Chairman of the Board
Mark K. Shull........... 43 Director, President and Chief Executive Officer
Nancy G. Faigen......... 42 President, Sales and Service Delivery Group
Rebecca Ward............ 35 President, Product Management, Engineering and Marketing Group
Bryan T. Gernert........ 32 Senior Vice President, Sales, Distribution and Client Services
Timothy M. Adams........ 40 Chief Financial Officer
Marthe S. Lattinville-
Pace................... 46 Vice President, Human Resources
Robert B. Patrick....... 27 Vice President, Marketing
John C. Baker........... 49 Director
Philip A. Campbell...... 62 Director
George F. Knapp......... 67 Director
Richard A. Jalkut....... 55 Director
Jack E. Reich........... 48 Director
</TABLE>
Executive Officers and Directors
David C. Ruberg has served as Director and Chairman of the Board of Digex
since April 1999. Mr. Ruberg has served as President, Chief Executive Officer
and a Director of Intermedia since May 1993, and as Chairman of the Board of
Intermedia since March 1994. From September 1991 to May 1993, he was an
independent consultant to the computer and telecommunications industries. From
1989 to September 1991, Mr. Ruberg served as Vice President and General Manager
of the Telecommunications Division and then of the Personal Computer/Systems
Integration Division of Data General Corporation, a computer manufacturer. From
1984 to 1989, Mr. Ruberg served as a Vice President of TIE Communications,
Inc., a manufacturer of telecommunications equipment. Mr. Ruberg received his
B.A. in mathematics from Middlebury College and his M.S. in computer science
from the University of Michigan.
Mark K. Shull has served as President and Chief Executive Officer of Digex
since July 1999. From January 1997 to June 1999, he served as Vice President
and General Manager of the Web hosting and electronic commerce business unit of
GTE Internetworking. From March 1995 to January 1997, prior to GTE
Internetworking's acquisition of BBN Planet Corporation, he served as Vice
President and General Manager of BBN Planet Corporation's Internet Business
Solutions Group. From June 1994 to March 1995, he served as a Senior Consultant
at EDS Management Consulting. Mr. Shull received his B.A. in public and
international affairs from Princeton University, and holds a J.D. from Stanford
Law School.
Nancy G. Faigen has served as President of the Sales and Service Delivery
Group of Digex since July 1999, and she served as President and Chief Executive
Officer from December 1998 to June 1999. From January 1998 to November 1998,
she served as Vice President of IBM e-business solutions, a business unit of
IBM. From October 1996 to November 1998, she served as Vice President of Global
Web Solutions of IBM. From November 1991 to October 1996, Ms. Faigen served in
various managerial and executive positions at IBM, including Executive
Assistant to the CEO and Director of Strategy and Business Unit Director of the
Sales and Services Division. Ms. Faigen holds a B.A. in drama and fine arts
from Dartmouth College.
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<PAGE>
Rebecca Ward has served as President of the Product Management, Engineering
and Marketing Group of Digex since July 1999. From March 1991 to June 1999, she
held various management positions at GTE Internetworking and BBN Planet
Corporation, prior to its acquisition by GTE Internetworking, including most
recently Vice President of Product Management and Engineering of the Web
hosting and electronic commerce business unit of GTE Internetworking. Ms. Ward
holds a B.S. in computer technology from Northeastern University and an M.S. in
computer science from Boston University.
Bryan T. Gernert has served as Senior Vice President of Sales, Distribution
and Client Services of Digex since July 1999. From April 1995 to June 1999, he
held various other management positions at Digex, including Vice President of
Sales, Consulting and Client Services, Vice President of Sales and
Distribution, Sales Account Manager and Director of Sales. From January 1993 to
April 1995, he served as National Sales Manager of Evergreen Information
Technologies, Inc. From June 1989 to January 1993, he was Director of
Acquisitions for RCI, Inc. Mr. Gernert holds a B.S. in business administration
with a concentration in finance from the University of Delaware.
Timothy M. Adams has served as Chief Financial Officer since January 2000.
From April 1997 to December 1999, he held various management positions at GTE
Internetworking and BBN Planet Corporation, prior to its acquisition by GTE
Internetworking, including Vice President of Operations, Circuits Management,
Vice President of Business Operations and Vice President of Finance. From May
1989 to April 1997, he held various financial positions with Trans National
Group Services, including Chief Financial Officer of Trans National
Communications from September 1995 to April 1997. Mr. Adams holds a B.S. in
accounting from Murray State University, Murray, Kentucky and an M.B.A. from
Boston University. Mr. Adams is also a certified public accountant. From June
1982 to May 1989 he held various positions in the audit and tax departments of
Price Waterhouse LLP, a predecessor of PricewaterhouseCoopers.
Marthe S. Lattinville-Pace has served as Vice President of Human Resources
of Digex since April 1999. From January 1999 to March 1999 she served as Vice
President, Human Resources of ManorCare Realty. From April 1994 to March 1999,
she served as Director Human Resources, Europe, India & the Middle East for
Waters Corporation. She also served as Director Human Resources & Building
Administration of NYNEX Mobile Communications, from 1992 to 1994. Mrs.
Lattinville-Pace holds an M.B.A. from the Haute Etudes Commerciales of the
University of Montreal, a Bachelor in industrial relations from University of
Montreal and a psychology diploma from Old Montreal College.
Robert B. Patrick has served as Vice President of Marketing of Digex since
July 1999. From September 1998 to June 1999 he served as Vice President of
Marketing and Product Development of Digex. He served as Director of Business
Development for Digex from July 1997 through September 1998. He joined Digex in
September 1996, as Manager of Technical Operations. From June 1993 to June
1996, he served as a Senior Consultant for Andersen Consulting. From October
1988 to June 1993, he served as a Senior Computer Specialist for the Federal
Bureau of Investigation. Mr. Patrick holds a B.S. in management information
systems from George Mason University.
John C. Baker has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. Mr. Baker has been the
President of Baker Capital Corp., a multi-national venture capital firm, since
October 1995. He served as Senior Vice President of Patricof & Co. Ventures,
Inc., a multi-national venture capital firm, from 1988 until September 1995.
Mr. Baker is currently a Director of Resources Bancshares Mortgage Group, Inc.,
a publicly traded corporation.
Philip A. Campbell has served as Director of Digex since April 1999. He has
served as Director of Intermedia since September 1996. Mr. Campbell retired
from Bell Atlantic as Director, Vice Chairman and Chief Financial Officer in
1991. Previously, he served as President of New Jersey Bell, Indiana Bell and
Bell Atlantic Network Services.
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<PAGE>
George F. Knapp has served as Director of Digex since April 1999. He has
served as Director of Intermedia since February 1988. He has been a Principal
of Communications Investment Group, an investment banking firm, since June
1990. From January 1988 until June 1989, Mr. Knapp was an associate at MBW
Management, Inc., a venture capital firm. Prior to that time, he held various
executive positions at ITT Corporation and its subsidiaries, most recently as
Corporate Vice President of ITT Corporation. Mr. Knapp is currently a member of
the Manhattan College Board of Trustees and Chairman of its Finance Committee.
Richard A. Jalkut has served as Director of Digex since July 1999. He has
served as President, Chief Executive Officer and Director of Pathnet, Inc.
since August 1997. From 1995 to August 1997, Mr. Jalkut served as President and
Group Executive of NYNEX Telecommunications Group. From 1991 to 1995, he served
as President and Chief Executive Officer of New York Telephone Co. Inc., the
predecessor company to NYNEX Telecommunications Group. Mr. Jalkut is currently
a Director of HSBC Bank USA, formerly Marine Midland Bank, a commercial bank, a
Director and Chairman of the Board of Ikon Office Solutions, Inc., a company
engaged in wholesale and retail office equipment sales, and a Director of Home
Wireless Networks, a company developing a wireless product for home and
business premises.
Jack E. Reich has served as Director of Digex since July 1999. From November
1998 to the present, he has served as President of KJE Inc., a management and
investment consulting firm. From December 1996 to November 1998 he served as
President and Chief Executive Officer of e.spire Communications, Inc. Mr. Reich
was also appointed Director during his tenure with e.spire Communications, Inc.
From April 1994 to October 1996 he served as President, Customer Business
Solutions, of Ameritech. From April 1986 to April 1994, he served in a number
of management positions for MCI Communications Corporation, including
President, Multinational Accounts. Prior to MCI, Mr. Reich held various
management positions with Rolm Corporation and AT&T. Mr. Reich is currently a
Director of LISN, Inc.
No family relationship exists between any of the directors and executive
officers of Digex.
Committees of the Board of Directors
The board of directors has an audit committee and a compensation committee.
Among other functions, the audit committee:
. makes recommendations to the board of directors regarding the selection
of independent auditors;
. reviews the results and scope of the audit and other services provided
by our independent auditors;
. reviews our financial statements; and
. reviews and evaluates our internal control functions.
The audit committee is composed of Philip A. Campbell, George F. Knapp and
Richard A. Jalkut. The chairman of the audit committee is Mr. Campbell.
The compensation committee administers our Long-Term Incentive Plan and
makes recommendations to the board of directors regarding the executive
compensation and salaries and incentive compensation for our employees and
consultants. The compensation committee is composed of David C. Ruberg, and
Jack E. Reich. The chairman of the compensation committee is Mr. Ruberg.
Employment Agreements
Mark K. Shull. Mr. Shull's employment letter agreement provides for an
initial annual base salary of $250,000, which will be reviewed in 2000, and an
annual bonus opportunity of 60% of his initial annual base salary that will be
based on the achievement of certain corporate and individual objectives. The
agreement also
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<PAGE>
provides Mr. Shull with stock options to purchase 100,000 shares of Intermedia
common stock at an exercise price of $30.94, subject to the terms and
conditions of the Intermedia 1996 Long-Term Incentive Plan, to vest in equal
installments over the 60-month period commencing on his date of employment. On
July 29, 1999, Mr. Shull was granted options to purchase 500,000 shares of our
Class A Common Stock. 250,000 of these options will be exercisable at $5.00 per
share and the balance will be exercisable at $17.00 per share. Options covering
25% of the 500,000 shares of our Class A Common Stock will vest one year
following the date of grant and the balance will vest in equal quarterly
installments over the next three years. Following a change of control of Digex
or Intermedia, one-half of Mr. Shull's then unvested Digex options will vest
immediately, and the remainder will vest on the first anniversary of the change
of control if Mr. Shull continues to be employed by Digex at that date, or upon
termination by Digex of Mr. Shull's employment (other than for cause), if
earlier. Following a change of control of Intermedia, one-half of Mr. Shull's
then unvested Intermedia options will vest immediately, and the remainder will
vest on the first anniversary of the change of control if Mr. Shull continues
to be employed by Digex or Intermedia or any of its subsidiaries at that date,
or upon termination by Digex and, if applicable, Intermedia of Mr. Shull's
employment (other than for cause), if earlier.
If Mr. Shull is terminated by Intermedia or us for any reason other than for
cause, we or Intermedia will pay his base salary as in effect at the time of
termination through the later of July 1, 2001, or the first anniversary of the
date of termination. Mr. Shull's entitlement to receive payments shall
terminate if he directly or indirectly knowingly hires, within six months
following his date of termination, any employee of director-level or above who
was employed by Intermedia or Digex on the date of his termination.
The letter agreement also provides Mr. Shull with a relocation allowance of
up to $100,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.
Nancy G. Faigen. Ms. Faigen's employment letter agreement provides for an
initial annual base salary of $225,000, and an annual bonus opportunity of 50%
of her initial annual base salary that will be based on the achievement of
certain corporate and individual objectives. Ms. Faigen also received a
$275,000 signing bonus.
The agreement also provides Ms. Faigen with a stock option to purchase
100,000 shares of Intermedia common stock at an exercise price of $15.00,
subject to the terms and conditions of the Intermedia 1996 Long-Term Incentive
Plan, to vest in equal installments over the 60-month period commencing on her
date of employment. On July 29, 1999, Ms. Faigen was granted options to
purchase 300,000 shares of our Class A Common Stock. 150,000 of these options
will be exercisable at $5.00 per share and the balance will be exercisable at
$17.00 per share. Options covering 25% of the 300,000 shares of our Class A
Common Stock will vest one year following the date of grant and the balance
will vest in equal quarterly installments over the next three years. Following
a change of control of Digex or Intermedia, all of Ms. Faigen's unvested Digex
options will vest on the first anniversary of the change of control if Ms.
Faigen continues to be employed by Digex at that date, or upon termination by
Digex of Ms. Faigen's employment (other than for cause), if earlier. Following
a change of control of Intermedia, all of Ms. Faigen's Intermedia options will
vest on the first anniversary of the change of control if Ms. Faigen continues
to be employed by Digex or Intermedia or any of its subsidiaries at that date,
or upon termination of Ms. Faigen's employment (other than for cause), if
earlier.
The letter agreement also provides Ms. Faigen with a relocation allowance of
up to $125,000 in the form of a loan which will be forgiven in equal monthly
installments over a 12-month period commencing on the date of the last
relocation reimbursement.
Rebecca Ward. Ms. Ward's employment letter agreement provides for an initial
annual base salary of $200,000, and an annual bonus opportunity of 50% of her
initial annual base salary that will be based on the achievement of certain
corporate objectives. The agreement provides Ms. Ward with a bonus of $100,000,
payable in two equal installments: upon commencement of employment with us, and
after six months of
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<PAGE>
employment. The agreement also provides Ms. Ward with a stock option to
purchase 50,000 shares of Intermedia common stock at an exercise price of
$30.00, subject to the terms and conditions of the Intermedia 1996 Long-Term
Incentive Plan, to vest in equal installments over the 60-month period
commencing with the day the option grant was approved. On July 29, 1999, Ms.
Ward was granted stock options to purchase 250,000 shares of our Class A Common
Stock. 125,000 of these options will be exercisable at $5.00 per share and the
balance will be exercisable at $17.00 per share. Options covering 25% of the
250,000 shares of our Class A Common Stock will vest one year following the
date of grant and the balance will vest in equal quarterly installments over
the next three years. Following a change of control of Digex or Intermedia, all
of Ms. Ward's unvested Digex options will vest on the first anniversary of the
change of control if Ms. Ward continues to be employed by Digex at that date,
or upon termination by Digex of Ms. Ward's employment (other than for cause),
if earlier. Following a change of control of Intermedia, all of Ms. Ward's
Intermedia options will vest on the first anniversary of the change of control
if Ms. Ward continues to be employed by Digex or Intermedia or any of its
subsidiaries at that date, or upon termination by Digex of Ms. Ward's
employment (other than for cause), if earlier.
If Ms. Ward is terminated by Digex for any reason other than for cause, we
will pay her base salary as in effect at the time of termination through the
later of January 1, 2002, or the first anniversary of the date of termination.
Bryan Gernert. Mr. Gernert's employment letter agreement provides for an
initial annual base salary of $200,000 and an annual bonus opportunity of 60%
of his annual base salary that will be based on the achievement of certain
corporate objectives.
On July 29, 1999, Mr. Gernert was granted options to purchase 400,000 shares
of our Class A Common Stock. 300,000 of these options will be exercisable at
$5.00 per share and the balance will be exercisable at $17.00 per share.
Options covering 25% of the 400,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. In the event his employment
is terminated by Digex for any reason other than for cause prior to July 9,
2001, his options covering an aggregate of 200,000 shares (including any
installments previously vested) will vest immediately on the date of
termination, of which 150,000 will be those exercisable at $5.00 and 50,000
exercisable at $17.00 per share. Following a change of control of Digex or
Intermedia, all of Mr. Gernert's unvested options will vest on the first
anniversary of the change of control if Mr. Gernert continues to be employed by
Digex at that date, or upon termination by Digex of Mr. Gernert's employment
(other than for cause), if earlier.
Timothy M. Adams. Mr. Adams' employment letter agreement provides for an
initial annual base salary of $210,000, and an annual bonus opportunity of 50%
of his initial annual base salary that will be based on the achievement of
certain corporate objectives. Mr. Adams is also entitled to receive a $75,000
signing bonus.
The agreement also provides Mr. Adams with a stock option to purchase 25,000
shares of Intermedia common stock at an exercise price of $43.56, subject to
the terms and conditions of the Intermedia 1996 Long-Term Incentive plan, to
vest in equal installments over the 60-month period commencing on his date of
employment. Mr. Adams was also granted options to purchase 250,000 shares of
our Class A Common Stock. 50,000 of these options will be exercisable at $10.00
per share and the balance will be exercisable at $34.00 per share. Options
covering 25% of the 250,000 shares of our Class A Common Stock will vest one
year following the date of grant and the balance will vest in equal quarterly
installments over the next three years. Following a change of control of Digex
or Intermedia, all of Mr. Adams' unvested Digex options will vest on the first
anniversary of the change of control if Mr. Adams continues to be employed by
Digex at that date, or upon termination by Digex of Mr. Adams' employment
(other than for cause), if earlier. Following a change of control of
Intermedia, all of Mr. Adams' Intermedia options will vest on the first
anniversary of the change of control if Mr. Adams continues to be employed by
Digex or Intermedia or any of its subsidiaries at that date, or upon
termination of Mr. Adams' employment (other than for cause), if earlier.
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<PAGE>
Robert B. Patrick. Mr. Patrick's employment letter agreement provides for an
annual base salary of $150,000, and an annual bonus opportunity of 40% of his
annual base salary that will be based on the achievement of certain corporate
objectives.
On July 29, 1999, Mr. Patrick was granted options to purchase 100,000 shares
of our Class A Common Stock. 50,000 of these options will be exercisable at
$5.00 per share and the balance will be exercisable at $17.00 per share.
Options covering 25% of the 100,000 shares of our Class A Common Stock will
vest one year following the date of grant and the balance will vest in equal
quarterly installments over the next three years. In the event his employment
is terminated by Digex for any reason other than for cause prior to July 9,
2000, his options covering an aggregate of 25,000 shares (including any
installments previously vested) will vest immediately on the date of
termination. Following a change of control of Digex or Intermedia, all of Mr.
Patrick's unvested options will vest on the first anniversary of the change of
control if Mr. Patrick continues to be employed by Digex at that date, or upon
termination by Digex of Mr. Patrick's employment (other than for cause), if
earlier.
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<PAGE>
Summary Compensation Table
The following table sets forth the total compensation of our Chief Executive
Officer and each of our four most highly compensated executive officers whose
total salary and bonus for 1999 exceeded $100,000 (each a named executive
officer, and collectively, the named executive officers).
<TABLE>
<CAPTION>
Annual Compensation Long-Term Compensation Awards
------------------------------------ -----------------------------
Securities Securities
Name and Principal Fiscal Other Annual Underlying Underlying
Position(1) Year Salary($) Bonus($) Compensation($) Options(#)(10) Options(#)(11)
------------------ ------ --------- -------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 1999 125,000(3) -- -- 500,000 100,000
President and Chief 1998 -- -- -- -- --
Executive Officer 1997 -- -- -- -- --
Nancy G. Faigen......... 1999 225,000(4) 225,000 -- 300,000 100,000
President, Sales and 1998 11,105 50,000 -- -- --
Service Delivery 1997 -- -- -- -- --
Group(2)
Rebecca Ward............ 1999 91,667(5) -- 15,810(8) 250,000 50,000
President, Product 1998 -- -- -- -- --
Management, 1997 -- -- -- -- --
Engineering and
Marketing Group
Bryan T. Gernert........ 1999 173,750(6) -- 140,587(9) 400,000 --
Senior Vice President, 1998 95,000 -- 166,108(9) -- --
Sales, Distribution 1997 75,000 -- 126,016(9) -- 33,552(12)
and Client Services
Robert B. Patrick....... 1999 137,500(7) 5,000 -- 100,000 --
Vice President, 1998 92,500 5,000 -- -- 5,000(12)
Marketing 1997 65,000 7,500 -- -- 9,586(12)
</TABLE>
- --------
(1) Effective January 14, 2000, Timothy M. Adams became our Chief Financial
Officer. Mr. Adams' current annual base salary is $210,000. For a
description of the terms of his employment, see "Management--Employment
Agreements."
(2) Ms. Faigen served as President and Chief Executive Officer from December
1998 to June 1999.
(3) Mr. Shull commenced employment with Digex in July 1999. Mr. Shull's
current annual base salary is $250,000. He has a target annual bonus
opportunity equal to 60% of his base salary.
(4) Ms. Faigen has a target annual bonus opportunity equal to 50% of her base
salary.
(5) Ms. Ward commenced employment with Digex in July 1999. Ms. Ward's current
annual base salary is $200,000. She has a target annual bonus opportunity
equal to 50% of her base salary.
(6) Mr. Gernert's current annual base salary is $200,000. He has a target
annual bonus opportunity equal to 60% of his base salary.
(7) Mr. Patrick's current annual base salary is $150,000. He has a target
annual bonus opportunity equal to 40% of his base salary.
(8) This amount represents relocation expense.
(9) These amounts represent commission payments.
(10) Represents the number of shares of Class A Common Stock of Digex
underlying options granted to the named executive officers.
(11) Represents the number of shares of common stock of Intermedia underlying
options granted to the named executive officers.
(12) Options issued when executive was an employee of Intermedia.
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<PAGE>
Options Granted During Fiscal Year 1999
The following table sets forth certain information regarding grants of stock
options to purchase our Class A Common Stock to our named executive officers
during fiscal year 1999. All options set forth below will expire on July 28,
2009. The vesting provisions of the options set forth below are described under
the caption "Employment Agreements." The potential realizable value at assumed
annual rates of price appreciation for all options set forth below were
calculated using the initial public offering price of $17.00 as the market
price on the date of grant.
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed Annual Rates of
Stock Price
Annual Compensation Appreciation for Option Term
----------------------- ---------------------------------
Market
Number of % of Total Price
Securities Options on
Underlying Granted to Exercise or Date
Options Employees in Base Price of
Name Granted Fiscal Year Per Share Grant 0% 5% 10%
- ---- ---------- ------------ ----------- ------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 250,000 5.07 $ 5.00 $17.00 $3,000,000 $5,672,500 $ 9,772,500
250,000 5.07 17.00 17.00 0 2,672,500 6,772,500
Nancy G. Faigen......... 150,000 3.04 5.00 17.00 1,800,000 3,403,500 5,863,500
150,000 3.04 17.00 17.00 0 1,603,500 4,063,500
Rebecca Ward............ 125,000 2.54 5.00 17.00 1,500,000 2,836,250 4,886,250
125,000 2.54 17.00 17.00 0 1,336,250 3,386,250
Bryan T. Gernert........ 300,000 6.09 5.00 17.00 3,600,000 6,807,000 11,727,000
100,000 2.03 17.00 17.00 0 1,069,000 2,709,000
Robert B. Patrick....... 50,000 1.01 5.00 17.00 600,000 1,134,500 1,954,500
50,000 1.01 17.00 17.00 0 534,500 1,354,500
</TABLE>
The following table sets forth certain information regarding grants of stock
options to purchase shares of Intermedia's common stock to our named executive
officers during fiscal 1999. The vesting provisions of the options set forth
below are described under the caption "Employment Agreements."
<TABLE>
<CAPTION>
Potential Realizable
Value at Assumed
Annual Rates of Stock
Price Appreciation for
Annual Compensation Option Term
----------------------- -----------------------
Number of % of Total
Securities Options
Underlying Granted to Exercise or
Options Employees in Base Price Expiration
Name Granted Fiscal Year Per Share Date 5% 10%
- ---- ---------- ------------ ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... 100,000 0.016 $30.94 7/20/2009 $ 2,183,050 $ 5,168,289
Nancy G. Faigen......... 100,000 0.016 15.00 1/15/2009 943,342 2,390,614
Rebecca Ward............ 50,000 0.008 30.00 7/20/2009 1,108,967 2,556,239
Bryan T. Gernert........ -- -- -- -- -- --
Robert B. Patrick....... -- -- -- -- -- --
</TABLE>
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<PAGE>
Aggregate Option Exercises in Fiscal 1999 and Fiscal Year-End Option Values
The following table shows the number of shares of our Class A Common Stock
covered by both exercisable and unexercisable options as of December 31, 1999
and the year-end value of exercisable and unexercisable options to purchase
shares of our Class A Common Stock as of December 31, 1999 for each named
executive officer. No options to purchase shares of our Class A Common Stock
were exercised in 1999.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
December 31, 1999 December 31, 1999
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Mark K. Shull............... -- 500,000 -- $28,875,000
Nancy G. Faigen............. -- 300,000 -- 17,325,000
Rebecca Ward................ -- 250,000 -- 14,437,500
Bryan T. Gernert............ -- 400,000 -- 24,300,000
Robert B. Patrick........... -- 100,000 -- 5,775,000
</TABLE>
The following table shows the number of shares of Intermedia common stock
acquired upon exercise of stock options during the last fiscal year, the
aggregate value realized from those exercises, the number of shares of
Intermedia common stock covered by both exercisable and unexercisable options
as of December 31, 1999 and the year-end value of exercisable and unexercisable
options to purchase shares of Intermedia common stock as of December 31, 1999
for each named executive officer.
<TABLE>
<CAPTION>
Number of Securities
Underlying Unexercised Value of Unexercised In-
Options at the-Money Options at
# Shares December 31, 1999 December 31, 1999
Acquired $ Value ------------------------- -------------------------
Name On Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Mark K. Shull........... -- -- 8,333 91,667 $ 65,602 $ 721,649
Nancy G. Faigen......... -- -- 20,000 80,000 476,250 1,905,000
Rebecca Ward............ -- -- 4,166 45,834 36,713 403,912
Bryan T. Gernert........ 6,000 137,640 26,756 5,592 820,123 171,406
Robert B. Patrick....... 5,000 69,287 6,796 5,348 263,770 207,569
</TABLE>
Long-Term Incentive Plan
The Digex Long-Term Incentive Plan, adopted on July 23, 1999, permits awards
of stock, stock options, stock appreciation rights, restricted stock and other
stock-based awards as incentives to our current and prospective employees,
officers, directors and consultants, and those of our subsidiaries or of any
person that owns over 50% of the voting power of our authorized and outstanding
voting shares. However, only our employees are eligible for grants of incentive
stock options.
The Digex Long-Term Incentive Plan, also known as the "Plan," is
administered by the compensation committee of our board of directors, the
members of which consist solely of two or more members of the board who are
"Non-Employee" directors under Rule 16b-3 of the Exchange Act and "outside
directors" under Rule 162(m) of the Internal Revenue Code. The compensation
committee has the authority to select those employees, officers, directors and
consultants whose performance it determines significantly promote our success
to receive discretionary awards under the Plan, grant the awards, interpret and
determine all questions of policy pertaining to the Plan, adopt rules,
regulations, agreements and instruments deemed necessary for its proper
administration and take any and all other actions deemed necessary or desirable
for the proper administration of the Plan and to effectuate its purposes. In
regards to options, the board has the authority to
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<PAGE>
determine who will receive options, the time at which options will be granted,
the number of shares subject to any option, the exercise price of an option,
the time or times at which the options will become vested and exercisable, and
the duration of the option.
The shares of Digex subject to the Plan are authorized but unissued shares
of our Class A Common Stock or treasury stock. No more than 9,000,000 shares of
our Class A Common Stock may be issued under the Plan.
Discretionary Awards:
Stock Options. Awards of stock options grant a right to buy a specified
number of shares of Class A Common Stock at a fixed exercise price during a
specified time, all as the compensation committee may determine.
Incentive Stock Options. Awards may be of incentive stock options, within
the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
any successor section. Subject to adjustment, the aggregate number of shares
which may be subject to incentive stock options awards under the Plan shall not
exceed 9,000,000 shares.
Stock Appreciation Rights. Awards of stock appreciation rights grant a
right, which may or may not be contained in the grant of a stock option or
incentive stock option, to receive in cash, or its equivalent value in Class A
Common Stock, the excess of the fair market value of a share of Class A Common
Stock on the date the right is surrendered over the option exercise price or
other price specified by agreement.
Restricted Shares. Restricted shares are shares of Class A Common Stock
granted to a participant of the Plan that are subject to forfeiture until
certain restrictions, terms and conditions as the compensation committee may
determine are fulfilled.
Dividend or Equivalent. An award of dividends grants a participant the right
to receive dividends or their equivalent in value in Class A Common Stock, cash
or a combination of both.
Stock Award. Class A Common Stock may be issued to a Plan participant. Such
awards can be granted on a contingent basis.
Other Stock-Based Awards. Other Class A Common Stock-based awards that serve
the same function as the foregoing awards may be granted.
Formula Awards:
Pursuant to the Plan, in addition to any discretionary awards granted to
non-employee directors, and subject to certain restrictions, additional grants
of non-incentive stock options shall be awarded to non-employee directors based
on the following formula: stock options to acquire 25,000 shares of Class A
Common Stock shall be granted on the date the director is elected to the board
of directors, exercisable, so long as the non-employee director continues to be
a member of the board of directors, as to 8,334 of the shares on the January 1
following the date the stock option is granted and as to an additional 8,333
shares on January 1 of each of the two years thereafter. Non-employee directors
serving on the board of directors on July 29, 1999 received this grant on July
29, 1999. If a non-employee director fails to attend 75% of the board meetings
in any calendar year, he or she will forfeit the right to exercise that portion
of the options which would have been exercisable on the next following January
1.
Non-employee directors shall also be granted a stock option to acquire 5,000
shares of Class A Common Stock on the date the director is elected to the board
of directors, and on each anniversary thereof which options shall be
immediately exercisable upon grant. Non-employee directors serving on the board
of directors on July 29, 1999 received the initial annual grant on July 29,
1999.
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<PAGE>
Upon a change of control of Digex or Intermedia, options granted to all non-
employee directors shall become fully vested and immediately exercisable and
will continue to be exercisable through the expiration date of the grant. All
stock options granted pursuant to either of the foregoing formulas shall be
granted at the fair market value of the Class A Common Stock on the date the
options are granted and shall expire on the earlier of the fifth anniversary of
the date the options were granted or on the first anniversary of the date the
non-employee director ceases to be a member of the board of directors.
General:
If a Plan participant's employment or other relationship with us is
terminated for any reason other than death or "for cause"or voluntarily by the
participant without the consent of Digex, Intermedia or one of our
subsidiaries, and the participant is thereafter not employed by us or does not
then have a relationship with us, any options granted to the participant under
the Plan may be exercised by the participant at any time within three months of
such termination, to the extent the participant was entitled to exercise the
options at the time of the termination.
A change in the control of Digex or Intermedia will accelerate the date upon
which the options will become exercisable to the extent and under the terms set
forth in the Plan.
The maximum number of shares of Class A Common Stock that may be granted to
a single participant in the Plan in any single year is 1,000,000. Additionally,
no award shall be assignable.
The Plan may be terminated, modified or amended by the affirmative vote of
the holders of a majority of the votes of our outstanding shares of capital
stock present or represented and entitled to vote at a duly held stockholders'
meeting. The board of directors may terminate the Plan or make modifications or
amendments, provided that the board of directors cannot make any amendment to
the Plan increasing the number of shares of Class A Common Stock covered by the
Plan without prior approval by the holders of common stock having a majority of
the voting power thereof present and entitled to vote at a meeting of
stockholders. No termination, modification or amendment of the Plan may
adversely affect the rights previously conferred by an award under the Plan
without the consent of the recipient.
The Plan will terminate on July 29, 2009.
Indemnifications of Directors and Executive Officers and Limitation of
Liability
Our certificate of incorporation includes a provision that eliminates the
personal liability of our directors for monetary damages for breach of
fiduciary duty as a director, except for liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or that involve intentional
misconduct or a knowing violation of law;
. under section 174 of the Delaware General Corporation Law regarding
unlawful dividends and stock purchases; or
. for any transaction from which the director derived an improper personal
benefit.
These provisions are permitted under Delaware law.
Our bylaws provide that:
. we must indemnify our directors, officers, employees and agents to the
fullest extent permitted by Delaware law, subject to certain very
limited exceptions; and
. we must advance expenses, as incurred, to our directors and executive
officers in connection with a legal proceeding to the fullest extent
permitted by Delaware Law, subject to certain very limited exceptions.
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<PAGE>
We have entered into indemnification agreements with each of our directors
and executive officers to give them additional contractual assurances regarding
the scope of the indemnification described above and to provide additional
procedural protections. Generally, pursuant to each indemnification agreement,
Digex will indemnify a director or officer who is or was a party to any legal
action by or against the indemnitee due to his or her position as a Digex
director or officer, known as the "indemnitee," against the expenses,
judgments, fines and amounts paid in settlement that were actually and
reasonably incurred by the indemnitee in connection with such legal action,
provided that such indemnitee acted in good faith and in a manner not opposed
to the best interests of Digex.
We also participate in Intermedia's directors' and officers' insurance
providing $50 million in indemnification coverage 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 of derivative litigation
against directors and officers, even though such an action, if successful,
might otherwise benefit us and our stockholders. Furthermore, a stockholder's
investment may be adversely affected to the extent we pay the costs of
settlement and damage awards against directors and officers pursuant to these
indemnification provisions.
There is no pending litigation or proceeding involving any of our directors,
officers or employees regarding which indemnification is sought, nor are we
aware of any threatened litigation that may result in claims for
indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling Digex pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
55
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Service Agreements
We have entered into the General and Administrative Services Agreement and
several network services agreements with Intermedia. These agreements are
described below. The General and Administrative Services Agreement and certain
parts of the network services agreements are included as exhibits to the
registration statement of which this prospectus forms a part.
General and Administrative Services Agreement
Under the General and Administrative Services Agreement, Intermedia provides
us with a variety of general and administrative services, including:
. finance, accounting and administration services, collections and
accounts receivable services, financial planning and analysis, investor
relations and corporate development;
. human resources services;
. legal services;
. information management services; and
. insurance coverage and related services.
The General and Administrative Services Agreement has a two-year initial
term which expires in July 2001. We may terminate the agreement on 90-days
prior notice at any time after Intermedia no longer owns more than 50% of the
voting power of our outstanding common stock.
We paid Intermedia approximately $10.5 million for services provided under
the General and Administrative Services Agreement during the six months ended
September 30, 1999. Because the level of services provided by Intermedia have
not been reduced from the levels provided in the second quarter of 1999 as
originally anticipated, this agreement was recently amended to reset the fee to
be paid to Intermedia for services during each of the fourth quarter of 1999
and the first quarter of 2000 to the same level as provided for in the second
quarter of 1999 or $6.0 million. Intermedia also agreed to work with us to
develop a transition plan designed to reduce our reliance on general and
administrative services provided by Intermedia. The fee payable by us after the
first quarter of 2000 will be negotiated during the first quarter of 2000.
We have also agreed to reimburse Intermedia for 50% of the 1999 bonus awards
payable to Intermedia's officers who supported our general and administrative
services. This reimbursement is estimated at approximately $1.0 million.
Material amendments and modifications to the General and Administrative
Services Agreement and any extensions of its term are required to be approved
by a majority of our directors who are not officers or directors of Intermedia.
Intermedia has advised us that the fees payable by Digex to Intermedia under
the General and Administrative Services Agreement are intended to approximate
Intermedia's estimated costs of providing the covered services to Digex.
Because it is not practical to obtain quotes for all of these services from
third parties, we cannot determine whether, and there can be no assurance that,
the terms of the General and Administrative Services Agreement are as favorable
to us as would result from an arm's length negotiation with an unrelated third
party.
Network Services Agreements
In April 1999, we entered into two Internet transit services agreements and
a managed firewall reseller agreement with Intermedia.
The two Internet transit service agreements provide, among other things,
that:
. we will purchase and Intermedia will provide us with certain data
transit capacity;
. we will be treated as a most favored customer entitled to rates and fees
as low as those granted by Intermedia to any other customer purchasing
substantially similar services;
56
<PAGE>
. the agreements will have an initial term of two years which will be
automatically renewed for successive one year periods unless either we
or Intermedia elects not to renew by giving 30-days prior notice;
. Intermedia has made certain service level commitments to us covering
both network availability and performance; and
. if we do not renew the agreements for at least one renewal term, we will
be liable to Intermedia for any termination charges assessed against
Intermedia by local access providers for the early termination of local
access circuits purchased by Intermedia for the provision of services to
us.
We expect to pay Intermedia a total of approximately $7.4 million for
Internet transit services during the first year of these agreements.
The managed firewall reseller agreement provides, among other things, for:
. certain service level commitments covering both service availability and
performance; and
. continuous access by Intermedia to any equipment owned by Intermedia
deployed at any of our facilities.
Under this agreement, we will pay over to Intermedia all amounts we receive
from our customers for these services.
We believe the terms of the network services agreements are at least as
favorable to us as they would be under similar arrangements between Digex and
an unrelated third party.
Sale of Telecommunications Related Assets to Intermedia
We are subject to certain restrictions under the Intermedia indentures, as
described under "Risk Factors--Digex is controlled by Intermedia, which could
involve some risks for you as a stockholder--We depend on Intermedia to fund
our working capital and operating losses, but Intermedia's ability to fund
these needs is limited by its own substantial indebtedness." Due to these
restrictions, we are required to use all of the net proceeds of our initial
public offering and will be required to use all of the net proceeds of this
offering to purchase Telecommunications Related Assets, in each case within 270
days of the offering. We have entered into letter agreements 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 the
offerings. Under the letter agreements, Intermedia is expected to pay us for
the Telecommunications Related Assets so purchased to the extent necessary out
of its funds that are not subject to restrictions under the indentures which we
will be able to use for working capital purposes and to fund operating losses.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
Restructuring Transactions
In conjunction with our initial public offering, Business Internet
contributed to us the Web hosting business described in this prospectus in
exchange for all the shares of our Class B Common Stock. Subsequent to our
initial public offering Business Internet contributed our Class B Common Stock
to its wholly-owned subsidiary, Intermedia Financial Company.
Expense Sharing and Indemnity Arrangements
We have agreed with Intermedia to allocate and pay the expenses of this
offering, including any amounts arising from any indemnification or
contribution obligations, in proportion to the number of shares of Class A
Common Stock to be sold by us and by Intermedia.
Software, Equipment and Services Purchases from Microsoft and Compaq
We have in the past purchased and expect to continue to purchase computer
hardware, software and certain consulting services from both Microsoft and
Compaq pursuant to arrangements negotiated prior to or in connection with the
investment by Microsoft and Compaq in our company. During the nine months ended
September 30, 1999, we paid $13.1 million and $1.1 million for products and
services provided by Compaq and Microsoft.
57
<PAGE>
PRINCIPAL AND SELLING 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 January 14, 2000;
. beneficial ownership of our common stock by each of our directors and
named executive officers, as of January 14, 2000; and
. beneficial ownership of our common stock by all of our directors and
executive officers as a group, as of January 14, 2000.
<TABLE>
<CAPTION>
Percentage of
Class Percentage
Beneficially of Voting Power
Number of Owned of Common Stock
Shares Shares ----------------- -----------------
Securities Beneficially Being Before After Before After
Beneficial Owner Owned Owned Offered Offering Offering Offering Offering
- ---------------- ------------ ------------ --------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Principal Stockholders:
Intermedia Communications Inc. .. Class B 50,000,000(1) 8,000,000 100.0% 100.0% 97.8% 95.1%
3625 Queen Palm Drive Common Stock
Tampa, Florida 33619
Microsoft Corporation............ Class A 1,263,494(2) -- 9.0% 5.3% 0.2% 0.3%
One Microsoft Way Common Stock
Redmond, Washington 98052
CPQ Holdings, Inc. .............. Class A 1,263,494(2) -- 9.0% 5.3% 0.2% 0.3%
20555 SH 249 Common Stock
Houston, Texas 77070
Directors and Executive Officers:
David C. Ruberg.................. None -- -- -- -- -- --
Mark K. Shull.................... None -- -- -- -- -- --
Nancy G. Faigen.................. None -- -- -- -- -- --
Rebecca Ward..................... None -- -- -- -- -- --
Bryan T. Gernert................. None -- -- -- -- -- --
Timothy M. Adams................. None -- -- -- -- -- --
Robert B. Patrick................ None -- -- -- -- -- --
John C. Baker.................... None -- -- -- -- -- --
Philip A. Campbell............... None -- -- -- -- -- --
George F. Knapp.................. None -- -- -- -- -- --
Richard A. Jalkut................ None -- -- -- -- -- --
Jack E. Reich.................... None -- -- -- -- -- --
All directors and executive
officers as a group
(12 persons).................... None -- -- -- -- -- --
</TABLE>
- --------
(1) These shares are owned by Intermedia through its indirect wholly-owned
subsidiary, Intermedia Financial Company. Intermedia is selling 8,000,000
shares of Class B Common Stock that will convert to Class A Common Stock on
the closing of this offering (or 9,500,000 shares if the underwriters
exercise their over-allotment option in full).
(2) Consists of 730,994 shares of Class A Common Stock issuable upon conversion
of shares of Series A Preferred Stock and 532,500 shares of Class A Common
Stock issuable upon exercise of presently exercisable warrants. CPQ
Holdings, Inc. is a wholly-owned subsidiary of Compaq Computer Corporation.
58
<PAGE>
The following table provides information regarding:
. those persons or groups known to us to be the beneficial owners of more
than five percent of the common stock of our parent, Intermedia;
. beneficial ownership of common stock of our parent, Intermedia, by each
of our directors and named executive officers, as of January 14, 2000;
and
. beneficial ownership of common stock of our parent, Intermedia, by all
of our directors and executive officers as a group, as of January 14,
2000.
The percentage of Intermedia common stock beneficially owned was calculated
based on 52,260,000 shares outstanding on January 14, 2000.
<TABLE>
<CAPTION>
Percentage of
Common Stock
Number of Beneficially Owned
Shares -----------------------
Beneficially Before After
Beneficial Owner Securities Owned Owned Offering Offering
- ---------------- ----------------------- ------------ --------- ---------
<S> <C> <C> <C> <C>
Putnam Investments, Inc. 2,620,131(1) 5.0% 5.0%
....................... Intermedia common stock
One Post Office Square
Boston, MA 02109
Massachusetts Financial 5,038,416(2) 9.6% 9.6%
Services Corp. ........ Intermedia common stock
500 Boylston Street
Boston, MA 02116
Wellington Management 3,539,023(3) 6.8% 6.8%
Co. LLP ............... Intermedia common stock
75 State Street
Boston, MA 02109
American Express Co. ... Intermedia common stock 2,502,648(4) 4.8% 4.8%
200 Vesey Street
New York, NY 10285
T. Rowe Price and 2,457,379(5) 4.7% 4.7%
Associates, Inc. ...... Intermedia common stock
100 E. Pratt St.
Baltimore, MD 21202
Directors and Executive
Officers of Digex:
David C. Ruberg......... Intermedia common stock 1,075,504(6) 2.1% 2.1%
Mark K. Shull........... Intermedia common stock 13,333(7) * *
Nancy G. Faigen......... Intermedia common stock 25,000(8) * *
Rebecca Ward............ Intermedia common stock 6,666(9) * *
Bryan T. Gernert........ Intermedia common stock 29,552(10) * *
Timothy M. Adams........ Intermedia common stock 833(11) * *
Robert B. Patrick....... Intermedia common stock 7,761(12) * *
John C. Baker........... Intermedia common stock 81,820(13) * *
Philip A. Campbell...... Intermedia common stock 28,000(14) * *
George F. Knapp......... Intermedia common stock 57,100(15) * *
Richard A. Jalkut....... None -- -- --
Jack E. Reich........... None -- -- --
All directors and
executive officers as a
group (12 persons)..... Intermedia common stock 1,325,569(16) 2.5% 2.5%
</TABLE>
59
<PAGE>
- --------
* Less than 1%
(1) Based upon information set forth in a Schedule 13G filed with the
Securities and Exchange Commission (the "Commission") on October 8, 1999.
(2) Based upon information set forth in a Schedule 13G filed with the
Commission on February 11, 1999.
(3) Based upon information set forth in a Schedule 13G filed with the
Commission on February 8, 1999.
(4) Based upon information set forth in a Schedule 13G filed with the
Commission on January 29, 1999. In such Schedule 13G, American Express
reported that it beneficially owned 5.2% of outstanding shares of
Intermedia common stock.
(5) Based upon information set forth in a Schedule 13G filed with the
Commission on February 12, 1999. In such Schedule 13G, T. Rowe Price
reported that it beneficially owned 5.0% of outstanding shares of
Intermedia common stock.
(6) Includes 110,183 shares of common stock, 198,817 shares subject to certain
vesting requirements and 766,504 shares subject to options exercisable as
of January 14, 2000 or within 60 days thereafter. Excludes 523,496 shares
subject to options that are not exercisable within 60 days of January 14,
2000.
(7) Includes 13,333 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 86,667 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(8) Includes 25,000 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 75,000 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(9) Includes 6,666 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 43,334 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(10) Includes 29,552 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 2,796 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(11) Includes 833 shares subject to options exercisable as of January 14, 2000
or within 60 days thereafter. Excludes 24,167 shares subject to options
that are not exercisable within 60 days of January 14, 2000.
(12) Includes 7,761 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter. Excludes 4,383 shares subject to
options that are not exercisable within 60 days of January 14, 2000.
(13) Includes 52,190 shares of common stock and 29,630 shares subject to
options exercisable as of January 14, 2000 or within 60 days thereafter.
Excludes 408 shares subject to options that are not exercisable within 60
days of January 14, 2000.
(14) Includes 28,000 shares subject to options exercisable as of January 14,
2000 or within 60 days thereafter.
(15) Includes 9,570 shares of common stock and 47,530 shares subject to options
exercisable as of January 14, 2000 or within 60 days thereafter. Excludes
408 shares subject to options that are not exercisable within 60 days of
January 14, 2000.
(16) Includes 171,943 shares of common stock, 198,817 shares subject to certain
vesting requirements and 954,809 shares subject to options exercisable as
of January 14, 2000 or within 60 days thereafter. Excludes 760,659 shares
subject to options that are not exercisable within 60 days of January 14,
2000.
60
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Our capital stock consists of 100,000,000 shares of Class A Common Stock,
$.01 par value per share, 50,000,000 shares of Class B Common Stock, $.01 par
value per share and 5,000,000 shares of preferred stock, $.01 par value per
share. As of January 14, 2000, 11,500,000 shares of Class A Common Stock were
outstanding and were held of record by approximately 40 holders. In addition,
on January 14, 2000, approximately 6,438,000 shares of Class A Common Stock
were subject to outstanding options and warrants and approximately 1,462,000
shares of Class A Common Stock were issuable upon conversion of the Series A
Preferred Stock. Of these, the approximately 1,462,000 shares of Class A Common
Stock issuable upon the conversion of the Series A Preferred Stock and the
1,065,000 shares of Class A Common Stock issuable upon the exercise of
outstanding warrants have been delivered to, and are being held in reserve by,
our transfer agent. As of January 14, 2000, 50,000,000 shares of Class B Common
Stock were outstanding and owned by Intermedia through Intermedia Financial
Company, its indirect 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 is duly and validly
issued, and fully paid and nonassessable.
Preferred Stock
The board of directors is authorized, subject to any limitations prescribed
by Delaware law, to issue 5,000,000 shares of preferred stock in one or more
series. The board of directors can fix the rights, preferences and privileges
of the shares of each series and any qualifications, limitations or
restrictions thereon. The board of directors has designated 100,000 shares of
preferred stock as Series A Preferred Stock with the preferences, privileges,
qualifications, limitations and restrictions described below.
The board of directors may authorize the issuance of additional series 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 additional
shares of preferred stock.
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<PAGE>
Series A Preferred Stock
The Series A Convertible Preferred Stock has the following rights and
preferences:
The holders of the Series A Preferred Stock are not entitled to receive
dividends.
The holders of shares of the Series A Preferred Stock do not have any voting
rights other than those required by law or described below. The holders of at
least a majority of the shares of the Series A Preferred Stock then outstanding
(other than shares held by us or any of our affiliates) must approve any action
to:
. authorize, create or issue:
(a) additional shares of Series A Preferred Stock;
(b) any other class or series of stock which ranks equal or senior to
the Series A Preferred Stock;
(c) any obligation or security evidencing the right to purchase shares
of Series A Preferred Stock or any class or series of stock which
ranks equal or senior to the Series A Preferred Stock; or
(d) any series of preferred stock which provides for the regular
accrual or payment of dividends; or
. amend or otherwise alter the terms of the Series A Preferred Stock in
any manner that would adversely affect the rights of the holders of the
Series A Preferred Stock;
. dispose of assets or merge, consolidate or sell our company to any
person unless:
(a) the entity resulting from the transaction is a corporation
organized or existing under the laws of the United States, a state
or the District of Columbia; and
(b) if, we are not the resulting entity, the Series A Preferred Stock
converts, exchanges or becomes shares of the resulting entity with
rights and preferences no less favorable than the rights and
preferences of the Series A Preferred Stock.
Without the consent of each holder of Series A Preferred Stock, we may not
alter the voting rights, reduce the number of shares, reduce the liquidation
preference, change the conversion terms or change the waiver rights of the
Series A Preferred Stock.
The Series A Preferred Stock ranks:
. senior to our Class A Common Stock and Class B Common Stock and all
other classes of capital stock or series of preferred stock issued in
the future unless their terms expressly provide they rank equal or
senior to the Series A Preferred Stock;
. equal to each class of capital stock or series of preferred stock issued
in the future whose terms expressly provide they rank equal to the
Series A Preferred Stock; and
. junior to each class of capital stock or series of preferred stock
issued in the future whose terms expressly provide they rank senior to
the Series A Preferred Stock.
Upon our liquidation, the holders of the Series A Preferred Stock are
entitled to receive their $1,000 per share liquidation preference before any
amount may be paid to the holders of our Class A Common Stock, Class B Common
Stock or other junior securities.
A holder of shares of Series A Preferred Stock may convert those shares into
shares of Class A Common Stock at any time. Initially, each share of Series A
Preferred Stock is convertible into the number of whole shares of our Class A
Common Stock equal to the liquidation preference of $1,000 divided by the
$68.40 per share conversion price. The conversion price and the number of
shares of Class A Common Stock into which each share of Series A Preferred
Stock can be converted may be adjusted as a result of stock splits, stock
dividends and other issuances of additional stock.
Unless earlier converted, on January 12, 2005, each share of Series A
Preferred Stock will automatically convert into the number of whole shares of
our common stock equal to $1,000 divided by the average of the closing prices
of the Class A Common Stock for the twenty consecutive trading days prior to
January 12, 2005.
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<PAGE>
Upon a "change of control" of our company (as defined in the certificate of
designation for the Series A Preferred Stock), we will offer to repurchase all
or any part of each holder's shares of Series A Preferred Stock at an offer
price equal to 100% of the aggregate liquidation preference (if the repurchase
is permitted under the terms of the agreements governing our indebtedness and
the indebtedness of Intermedia). If the repurchase is not permitted, at the
option of the holder, each share of Series A Preferred Stock may be converted
into the number of shares of our Class A Common Stock equal to the liquidation
preference of $1,000 divided by the average of the closing prices of the Class
A Common Stock for the twenty consecutive trading days prior to the "change of
control."
After January 12, 2004, the holders of Series A Preferred Stock have the
right to require us to redeem the Series A Preferred Stock at a price of $1,000
per share if the redemption is then permitted under the terms of the agreements
governing our indebtedness and the indebtedness of Intermedia, in each case as
those agreements existed on January 10, 2000. If the restrictions under these
agreements terminate at an earlier date, the holders may require us to redeem
the Series A Preferred Stock before entering into an agreement which would
restrict our ability to redeem the Series A Preferred Stock.
Outstanding Warrants
On January 12, 2000, we issued warrants to purchase a total of 1,065,000
shares of Class A Common Stock to Microsoft and a subsidiary of Compaq. The
warrants entitle the holders to purchase shares of Class A Common Stock at any
time on or before January 12, 2003 at a price of $57.00 per share.
Registration Rights of Security Holders
The holders of at least 25% of the shares of Class A Common Stock which may
be issued on conversion of our Series A Preferred Stock and exercise of our
warrants have the right, on at least two occasions, to demand that we register
with the SEC their Class A Common Stock. These demand registration rights may
not be exercised before January 12, 2001. In addition, after January 12, 2001,
the holders of the shares of Class A Common Stock which may be issued on
conversion of our Series A Preferred Stock and/or exercise of our warrants may
include their shares of Class A Common Stock in any registration statements
filed by us in connection with an underwritten offering of any class of common
stock. These demand and piggyback registration rights are subject to customary
blackout periods and cut back provisions.
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:
. 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."
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<PAGE>
This statute could prohibit or delay mergers or other takeover or change-in-
control attempts with respect to Digex and, accordingly, may discourage
attempts to acquire us.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our Class A Common Stock is Continental
Stock Transfer and Trust Company, located at Two Broadway, New York, New York
10004, with a telephone number of (212) 509-4000.
Listing
Our Class A Common Stock is listed on the Nasdaq National Market under the
trading symbol "DIGX."
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding an aggregate of
21,500,000 shares of our Class A Common Stock and 42,000,000 shares of Class B
Common Stock, assuming no exercise of the underwriters' over-allotment option.
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 outstanding shares of Class A Common Stock and the
approximately 5,373,000 shares which may be issued on the exercise of
outstanding options will be freely tradable without restriction or further
registration under the Securities Act, unless such shares are held 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
which may be issued on conversion of the Class B Common Stock, Series A
Preferred Stock and Warrants are "restricted securities" as that term is
defined in Rule 144 under the Securities Act. Restricted securities may be sold
in the public market only if registered or if they qualify for an exemption
from registration under Rule 144 or 701 promulgated under the Securities Act,
which rules are summarized below. Some of our shares are also subject to
contractual restrictions described below.
The holders of some of our securities may require us to register their
securities under the Securities Act as described under the caption "Description
of Capital Stock -- Registration Rights of Security Holders." Sales of
restricted securities in the public market, or the availability of such shares
for sale, could adversely affect the price of our Class A Common Stock.
Lock-Up Agreements
All of our officers and directors and the selling stockholder have signed
lock-up agreements under which they agreed not to transfer or dispose of,
directly or indirectly, any shares of our Class A Common Stock or any
securities convertible into or exercisable or exchangeable for shares of our
Class A Common Stock, until 90 days after the date of this prospectus.
Transfers or dispositions can be made sooner with the prior written consent of
Bear, Stearns & Co. Inc.
Rule 144
In general, under Rule 144 as currently in effect, 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 215,000 shares immediately after this
offering; or
. the average weekly trading volume of the Class A Common Stock on the
Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to the sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, "144(k) shares" may be sold at any time.
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<PAGE>
Stock Options
The Digex Long-Term Incentive Plan was adopted on July 23, 1999. On July 29,
1999, we filed a registration statement under the Securities Act covering
9,000,000 shares of Class A Common Stock that are reserved for issuance under
this Plan. Such registration statement became effective on that date.
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.
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<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an underwriting agreement
between us and the underwriters named below, who are represented by Bear,
Stearns & Co. Inc. and Salomon Smith Barney Inc., the underwriters have
severally agreed to purchase from us and the selling stockholder the following
respective numbers of shares of Class A Common Stock at the public offering
price less the underwriting discount set forth on the cover page of this
prospectus.
<TABLE>
<CAPTION>
Number of
Underwriter: Shares
------------ ---------
<S> <C> <C>
Bear, Stearns & Co. Inc........................................
Salomon Smith Barney Inc.......................................
---
Total........................................................
=== ===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of legal matters by their counsel and to
customary conditions, including the effectiveness of the registration
statement, the continuing correctness of our representations to them, the
receipt of a "comfort letter" from our accountants, the listing of the Class A
Common Stock to be sold 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.
The selling stockholder has granted to the underwriters an option,
exercisable for 30 days from the date of the underwriting agreement, to
purchase up to 1,500,000 additional shares at the public offering price less
the underwriting fees. The underwriters may exercise such option solely to
cover over-allotments, if any, made in connection with this offering. To the
extent that the underwriters exercise such option, each underwriter will become
obligated, subject to conditions, to purchase a number of additional shares
approximately proportionate to such underwriter's initial purchase commitment
from the selling stockholder.
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 following table shows the underwriting fees to be paid to the
underwriters by us and the selling stockholder 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>
Paid Paid by the
by Us Selling Stockholder
----- -------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C> <C>
Per share....................................... $ $ $
Total........................................... $ $ $
</TABLE>
The offering expenses, estimated to be approximately $1,000,000, will be
paid by us and the selling stockholder in proportion to the number of shares
sold by each of us and the selling stockholder.
67
<PAGE>
We have agreed that for a period of 90 days after the date of this
prospectus, we will not, directly or indirectly, without the prior written
consent of Bear, Stearns & Co. Inc., offer, sell, contract to sell, grant any
option to purchase, pledge or otherwise dispose (or announce any of the
foregoing) of any shares of our Class A Common Stock or any securities
convertible into or exercisable or exchangeable for our Class A Common Stock,
except for the shares offered by this prospectus, shares and options to
purchase shares under our 1999 Long-Term Incentive Plan, shares issuable upon
the exercise or conversion of outstanding warrants or convertible preferred
stock and shares issued in connection with strategic relationships and
acquisitions of businesses, technologies and products complementary to ours, so
long as recipients, including transferees and assigns, of these shares agree to
be bound by lock-up agreements to remain in effect until the 90th day from the
date of this prospectus.
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.
Our Class A Common Stock is listed on the NASDAQ National Market under the
symbol "DIGX".
Bear, Stearns & Co. Inc. or its affiliates have provided and may in the
future provide investment banking or other financial services to us and to
Intermedia, our indirect parent company, and its affiliates in the ordinary
course of business, for which it has received and is expected to receive
customary fees and expenses. To date, Bear, Stearns & Co. Inc. has been an
initial purchaser for numerous issuances of securities by Intermedia and was
the lead underwriter for our initial public offering.
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.
Partners of Kronish Lieb Weiner & Hellman LLP beneficially own 21,450 shares of
our Class A Common Stock. In addition, Ralph J. Sutcliffe, a partner of Kronish
Lieb Weiner & Hellman LLP, beneficially owns 11,490 shares of common stock of
Intermedia, a warrant to purchase 200,000 shares of common stock of Intermedia
at an exercise price of $20.75 per share and, subject to vesting, options to
purchase 22,000 shares of common stock of Intermedia at an exercise price of
$34.1875 per share. Intermedia is Digex's indirect parent entity and will own
approximately 95% of the voting power of our outstanding common stock when this
offering is completed. Certain legal matters in connection with this offering
will be passed upon for the underwriters by Latham & Watkins, New York, New
York.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements (and schedule) at December 31, 1997 and 1998, and for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the period
from July 7, 1997 (date of acquisition) to December 31, 1997 and the year ended
December 31, 1998, as set forth in their report. We have included our financial
statements (and schedule) in the prospectus and elsewhere in the registration
statement in reliance on Ernst & Young LLP's report, given on their authority
as experts in accounting and auditing.
68
<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 Commission at 1-800-SEC-0330 for further
information about its public reference room. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants, including us, that file electronically with
the Commission. The address of the site is http://www.sec.gov. Our registration
statement and the exhibits and schedules we filed electronically with the
Commission are available on this site.
69
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors--The Company............................... F-2
Report of Independent Auditors--Predecessor............................... F-3
Balance Sheets as of December 31, 1997 and 1998 and September 30, 1999.... F-4
Statements of Operations for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Nine Months Ended September 30, 1998 and
1999..................................................................... F-5
Statements of Changes in Owner's Equity (Deficit) for the Year Ended
December 31, 1996, and the Period from January 1, 1997 to July 6, 1997,
and the Period from July 7, 1997 (Date of Acquisition) to December 31,
1997, and the Year Ended December 31, 1998, and the Nine Months Ended
September 30, 1999....................................................... F-6
Statements of Cash Flows for the Year Ended December 31, 1996, and the
Period from January 1, 1997 to July 6, 1997, and the Period from July 7,
1997 (Date of Acquisition) to December 31, 1997, and the Year Ended
December 31, 1998, and the Nine Months Ended September 30, 1998 and
1999..................................................................... F-7
Notes to Financial Statements............................................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Digex, Incorporated
We have audited the accompanying balance sheets of Digex, Incorporated
(formerly the Web site hosting unit of Business Internet, Inc.) as of December
31, 1997 and 1998, and the related statements of operations, changes in owner's
equity and cash flows for the period from July 7, 1997 (date of acquisition) to
December 31, 1997, and the year ended December 31, 1998. Our audits included
the financial statement schedule listed in the index at Item 16(b). These
financial statements and this schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 accounting
principles generally accepted in the United States. 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 auditing standards generally
accepted in the United States. 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
accounting principles generally accepted in the United States. 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 except share information)
<TABLE>
<CAPTION>
December 31,
---------------
September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents...................... $ -- $ -- $132,844
Accounts receivable, net of allowances of $369
in 1997 and $719 in 1998 and $4,461 in 1999... 2,059 6,127 14,325
Prepaid expenses and other current assets...... 340 890 1,229
------- ------- --------
Total current assets............................. 2,399 7,017 148,398
Property and equipment, net...................... 12,930 39,059 165,055
Intangible assets, net........................... 34,364 31,204 28,211
Other assets..................................... -- 459 478
------- ------- --------
Total assets..................................... $49,693 $77,739 $342,142
======= ======= ========
Liabilities and stockholders'/owner's equity
Current liabilities:
Accounts payable............................... $ 486 $ 3,341 $ 4,827
Accrued compensation and other................. 920 843 3,401
Deferred revenue............................... 96 621 --
Due to parent.................................. -- -- 947
Current portion of note payable................ -- -- 1,235
Accrued line costs............................. 525 -- --
Current portion of capital lease obligations... 723 981 966
------- ------- --------
Total current liabilities........................ 2,750 5,786 11,376
Note payable..................................... -- -- 2,477
Capital lease obligations........................ 1,257 1,108 15,753
Deferred tax liability........................... 159 -- --
------- ------- --------
Total liabilities................................ 4,166 6,894 29,606
Stockholders'/Owner's equity (see Note 1):
Preferred stock, $.01 par value; 5,000,000
shares undesignated as to series; no shares
issued........................................ -- -- --
Class A common stock, $.01 par value;
100,000,000 shares authorized; 11,500,000
shares issued and outstanding................. -- -- 115
Class B common stock, $.01 par value;
50,000,000 shares authorized; issued and
outstanding................................... -- -- 500
Additional paid-in capital..................... -- -- 354,011
Accumulated deficit............................ -- -- (30,389)
Deferred compensation.......................... -- -- (11,701)
Owner's net investment......................... 45,527 70,845 --
------- ------- --------
Total stockholders'/owner's equity............... 45,527 70,845 312,536
------- ------- --------
Total liabilities and stockholders'/owner's
equity.......................................... $49,693 $77,739 $342,142
======= ======= ========
</TABLE>
See accompanying notes.
F-4
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF OPERATIONS
(Amounts in thousands, except share and per share information)
<TABLE>
<CAPTION>
Predecessor The Company
------------------------ ----------------------------------------------------
Period from
Period from July 7, 1997
January 1, (date of Nine months ended
Year ended 1997 to acquisition) to Year ended September 30,
December 31, July 6, December 31, December 31, -----------------------
1996 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ----------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ 2,803 $ 4,420 $ 7,192 $ 22,635 $ 14,863 $ 38,132
Costs and expenses:
Cost of operations.... 2,002 4,149 1,739 6,710 4,119 7,044
Cost of services...... 684 1,817 1,611 7,044 4,412 13,761
Selling, general and
administrative....... 3,194 7,001 6,087 17,512 12,582 47,355
Depreciation and
amortization......... 591 519 2,753 8,109 6,081 18,112
Charge off of
purchased in-process
research and
development.......... -- -- 15,000 -- -- --
------- ------- -------- -------- -------- --------
Total costs and
expenses............... 6,471 13,486 27,190 39,375 27,194 86,272
------- ------- -------- -------- -------- --------
Loss from operations.... (3,668) (9,066) (19,998) (16,740) (12,331) (48,140)
Other income (expense):
Interest expense...... -- -- -- -- -- (612)
Interest and other
income............... -- -- -- -- -- 1,293
------- ------- -------- -------- -------- --------
Net loss before income
taxes.................. (3,668) (9,066) (19,998) (16,740) (12,331) (47,459)
Income tax benefit...... -- -- 1,440 159 -- 4,839
------- ------- -------- -------- -------- --------
Net loss................ $(3,668) $(9,066) $(18,558) $(16,581) $(12,331) $(42,620)
======= ======= ======== ======== ======== ========
Net loss per common
share:
Basic................. $ (0.37) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ========
Diluted............... $ (0.37) $ (0.33) $ (0.25) $ (0.81)
======== ======== ======== ========
Shares used in computing
basic and diluted net
loss per share......... 50,000 50,000 50,000 52,443
======== ======== ======== ========
</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 Deferred Earnings Investment
Shares Amount Shares Amount Capital Comp (Deficit) (Deficit) Total
------ ------ ------ ------ ---------- -------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR
Balance at January 1,
1996................... -- $-- -- $-- $ -- $ -- $ -- $ -- $ --
Total allocated costs.. -- -- -- -- -- -- -- 3,177 3,177
Funding for working
capital............... -- -- -- -- -- -- -- (612) (612)
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 1,445 1,445
Net loss............... -- -- -- -- -- -- -- (3,668) (3,668)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1996................... -- -- -- -- -- -- -- 342 342
Stock options
exercised............. -- -- -- -- -- -- -- 550 550
Total allocated costs.. -- -- -- -- -- -- -- 6,105 6,105
Funding for working
capital............... -- -- -- -- -- -- -- 517 517
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 1,004 1,004
Net loss............... -- -- -- -- -- -- -- (9,066) (9,066)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at July 6,
1997................... -- $-- -- $-- $ -- $ -- $ -- $ (548) $ (548)
====== ==== ====== ==== ======== ======== ======== ======== ========
THE COMPANY
Balance at July 7,
1997.................. -- $-- -- $-- $ -- $ -- $ -- $ -- $ --
Contribution from
Parent for
Acquisition........... -- -- -- -- -- -- -- 47,221 47,221
Total allocated costs.. -- -- -- -- -- -- -- 2,698 2,698
Funding for working
capital............... -- -- -- -- -- -- -- 6,150 6,150
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 8,016 8,016
Net loss............... -- -- -- -- -- -- -- (18,558) (18,558)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1997................... -- -- -- -- -- -- -- 45,527 45,527
Total allocated costs.. -- -- -- -- -- -- -- 10,018 10,018
Funding for working
capital............... -- -- -- -- -- -- -- 912 912
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 30,969 30,969
Net loss............... -- -- -- -- -- -- -- (16,581) (16,581)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at December 31,
1998................... -- -- -- -- -- -- -- 70,845 70,845
Total allocated cost... -- -- -- -- -- -- -- 3,541 3,541
Funding for working
capital............... -- -- -- -- -- -- -- 11,443 11,443
Funding for purchases
of property, plant and
equipment............. -- -- -- -- -- -- -- 89,574 89,574
Recapitalization by
Parent................ -- -- 50,000 500 114,566 -- -- (115,066) --
Contributions from
Parent following
recapitalization...... -- -- -- -- 48,106 -- -- (48,106) --
Initial public offering
of common stock, net
of issuance cost...... 11,500 115 -- -- 179,129 -- -- -- 179,244
Issuance of stock
options under long-
term compensation
plan.................. -- -- -- -- 12,210 (12,210) -- -- --
Amortization of
deferred
compensation.......... -- -- -- -- -- 509 -- -- 509
Net loss............... -- -- -- -- -- -- (30,389) (12,231) (42,620)
------ ---- ------ ---- -------- -------- -------- -------- --------
Balance at September 30,
1999................... 11,500 $115 50,000 $500 $354,011 $(11,701) $(30,389) -- $312,536
====== ==== ====== ==== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes.
F-6
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CASH FLOWS
(Amounts in thousands)
<TABLE>
<CAPTION>
Predecessor The Company
------------------------ ----------------------------------------------------
Period from
Period from July 7, 1997
January 1, (date of Nine months ended
Year ended 1997 acquisition) to Year ended September 30,
December 31, to July 6, December 31, December 31, -----------------------
1996 1997 1997 1998 1998 1999
------------ ----------- --------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Operating activities
Net loss..................................... $ (3,668) $ (9,066) $ (18,558) $ (16,581) $ (12,331) $ (42,620)
Adjustments to reconcile net loss to cash
flows used in operating activities:
Deferred income taxes....................... -- -- (1,440) (159) -- (4,839)
Depreciation and amortization............... 591 519 2,753 8,109 6,081 18,112
Provision for doubtful accounts............. 41 352 498 1,491 823 3,918
Amortization of deferred compensation....... -- -- -- -- -- 509
Loss on sale of telecommunications
equipment.................................. -- -- -- -- -- 94
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) (2,650) (12,115)
Prepaid expenses and other current assets... (21) (54) (265) (550) (163) (340)
Other assets................................ -- -- -- (459) -- (19)
Due to parent............................... -- -- -- -- -- 947
Accounts payable and accrued liabilities.... 1,086 1,967 (2,601) 2,778 787 8,228
-------- -------- --------- --------- --------- ---------
Net cash used in operating activities........ (2,565) (7,172) (6,079) (10,930) (7,453) (28,125)
Investing activities
Acquisition of business...................... -- -- (47,221) -- -- --
Purchases of property and equipment.......... (1,445) (1,004) (8,016) (30,969) (18,352) (119,426)
-------- -------- --------- --------- --------- ---------
Net cash used in investing activities........ (1,445) (1,004) (55,237) (30,969) (18,352) (119,426)
Financing activities
Proceeds from issuance of common stock, net
of issuance costs........................... -- -- -- -- -- 179,244
Payments on capital leases................... -- -- (2,769) -- -- (1,273)
Exercise of stock options.................... -- 550 -- -- -- --
Net contributions from Parent................ 4,010 7,626 64,085 41,899 25,805 102,424
-------- -------- --------- --------- --------- ---------
Net cash provided by financing activities.... 4,010 8,176 61,316 41,899 25,805 280,395
Cash at beginning of the year................ -- -- -- -- -- --
-------- -------- --------- --------- --------- ---------
Cash at end of year.......................... $ -- $ -- $ -- $ -- $ -- $ 132,844
======== ======== ========= ========= ========= =========
Supplemental disclosure of cash flow
information
Noncash investing and financing activities:
Equipment acquired under capital leases..... $ 2,840 $ 829 $ 846 $ 958 $ 658 $ 17,111
======== ======== ========= ========= ========= =========
Asset purchased by issuance of note
payable.................................... -- -- -- -- -- $ 4,672
=========
Interest paid............................... -- -- -- -- -- $ 528
- --------------------------------------------------
=========
</TABLE>
See accompanying notes.
F-7
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
(In thousands, except per share information)
1. Organization, Basis of Presentation and Significant Accounting Policies
Organization
Digex, Incorporated (the "Company") was incorporated on April 26, 1999,
under the laws of the State of Delaware. The Company's business was operated as
the Web site hosting unit of Intermedia Communications Inc. ("Intermedia" or
the "Parent Company") since its acquisition by Intermedia on July 7, 1997. On
that date, Intermedia acquired Business Internet, Inc. (previously known as
DIGEX, Incorporated), including the Web site hosting unit (the "Predecessor"),
in a business combination accounted for as a purchase. The Web site hosting
unit presented in the accompanying financial statements had no legal status or
existence prior to the incorporation of the Company on April 26, 1999. The
financial statements of the legal Registrant have been omitted because the
Registrant did not commence operations until May 1, 1999. Prior to April 30,
1999, the Registrant had no assets or liabilities. See also Note 10, which
discloses the contribution of assets on April 30, 1999 by Business Internet,
Inc. to the Registrant.
The Company's operations began in January 1996 to provide complex Web
hosting services, principally to Fortune 2000 companies. The Company's services
include implementing and maintaining secure, scaleable, high-performance Web
sites on the Internet 24 hours a day. In addition, the Company provides a
comprehensive suite of Web management services, including business process
solutions and value-added testing services directed toward improving its
customers' overall Internet performance.
Basis of Presentation
The accompanying financial statements of the Company reflect the carved-out
operations and financial position of the Web site hosting unit of Intermedia
for all periods since July 7, 1997. The accompanying financial statements of
the Predecessor reflect its operations and financial position from inception,
January 1, 1996, to July 6, 1997. As more fully discussed in Note 2, "Related
Party Transactions and Corporate Allocations," the financial statements for all
periods presented include allocations of network costs and corporate expenses.
In addition, for financial reporting purposes, the equity activity of the
Company, prior to its incorporation, and the Predecessor has been accumulated
into a single disclosure caption entitled "Owner's Net Investment."
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.
Interim Financial Data
The financial statements for the nine months ended September 30, 1998 and
1999 and the related amounts in the Notes to Financial Statements are
unaudited, but in the opinion of management reflect all normal and recurring
adjustments necessary for a fair presentation of the results of those periods.
Operating results for the nine months ended September 30, 1999 are not
necessarily an indication of the results that may be expected for the year
ended December 31, 1999.
F-8
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
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 managed Web hosting solution. Monthly service fees are
recognized in the month the service is rendered over the contract period.
Certain customer payments for managed Web hosting services received in advance
of service delivery are deferred until the service is performed. Additional
services are recognized in the month the services are performed.
The Company's accounts receivable are financial instruments that expose the
Company to credit risk, as defined by Statement of Financial Accounting
Standards No. 105, Disclosure of Information About Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit
Risk. Accounts receivable are due from commercial entities to whom credit is
extended based on evaluation of the customer's financial condition, and
generally collateral is not required. Anticipated credit losses are provided
for in the financial statements and have been within management's expectations
for all periods presented.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed using the
straight-line method over estimated useful lives of the property and equipment,
generally five years for equipment and up to fifteen years for leasehold
improvements. Equipment acquired under capital leases is amortized using the
straight-line method over the lesser of the lease term or the estimated useful
life of the asset, generally five years. The cost of license agreements with
software vendors is amortized over five years.
Intangible Assets
Intangible assets include assets that arose in connection with the purchase
of Business Internet by Intermedia. Identifiable intangible assets arising from
the purchase are stated at cost and consist of trade name, customer lists,
acquired workforce, developed technology and goodwill. Amortization of these
assets is computed using the straight-line method over the estimated periods of
benefit, generally five years for developed technologies and ten years for all
other intangible assets.
Impairment of Long-Lived Assets
In accordance with Statement on Accounting Standards No. 121, Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of, the Company reviews its long-lived assets for impairment when events or
changes in circumstances indicate the carrying value of such assets may not be
recoverable. This review consists of a comparison of the carrying value of the
asset with the asset's expected future undiscounted cash flows without interest
costs. Estimates of expected future cash flows represent management's best
estimate based on reasonable and supportable assumptions and projections. If
the expected future cash flow exceeds the carrying value of the asset, no
impairment indicator is considered present. If the carrying value exceeds the
future cash flow, an impairment indicator is considered present. Such
impairment would be measured and recognized using a discounted cash flow
method.
Financial Instruments
The carrying amounts reported in the balance sheets for accounts receivable
and accounts payable approximate their fair values.
F-9
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
amounted to $515, $2,016, $2,076, $2,544, $2,403 and $4,849 for the year ended
December 31, 1996, the period from January 1, 1997 to July 6, 1997, the period
from July 7, 1997 to December 31, 1997, the year ended December 31, 1998 and
the nine months ended September 30, 1998 and 1999, respectively.
Stock-Based Compensation
The Company's employees participated in the stock option plans of Intermedia
prior to August 4, 1999 and subsequently in the Digex plan. 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 or Digex common stock, the Company recognizes no compensation
expense. In cases where exercise prices are less than the fair value,
compensation is recognized over the period of performance or vesting period.
Income Taxes
The operations of the Company and of the Predecessor were included in the
consolidated income tax returns of Intermedia and Business Internet,
respectively. For reporting purposes, the Company has used the asset and
liability method in accounting for income taxes, prescribed in Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, except
that the presentation reflects the parent companies as if they were the taxing
jurisdictions. Under this method, deferred tax assets and liabilities are
determined based on differences between financial reporting and tax bases of
assets and liabilities and are measured using the enacted tax rates and laws
that will be in effect when the differences are expected to reverse. The income
tax provision is calculated on a separate return basis.
Comprehensive Income
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, Reporting Comprehensive Income. This standard requires that total
comprehensive income (loss) be disclosed with equal prominence as net income.
Comprehensive income is defined as changes in stockholder's equity exclusive of
transactions with owners, such as capital contributions and dividends. The
Company and the Predecessor adopted this Standard in 1998 and implemented the
Standard for all years presented herein. The Company's and Predecessor's
comprehensive losses were equal to net losses for all periods presented.
Segment Reporting
The Company and the Predecessor operated during all periods in a single
segment when applying the management approach defined in Statement of Financial
Accounting Standards No. 131, Disclosures about Segments of an Enterprise and
Related Information.
Loss Per Share
The Company has applied the provisions of Statement of Financial Accounting
Standards No. 128, Earnings Per Share (SFAS 128), which establishes standards
for computing and presenting earnings per share. Basic earnings per share is
computed by dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period. The calculation of
diluted earnings per share includes the effect of dilutive common stock
equivalents. No dilutive common stock equivalents existed in any year
presented.
F-10
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
2. Related Party Transactions and Corporate Allocations
The Predecessor and the Company utilized the central cash management systems
of Business Internet and Intermedia, respectively. Cash requirements during
these periods were satisfied by cash transactions and transfers that were
accounted for through an intercompany account. In addition, the parent
companies charged the Company for identifiable corporate and operating
expenses, such as network cost and corporate overhead cost. Intercompany
account balances for all periods presented have been treated as permanent
contributions and have been reflected as a component of owner's net investment
in the accompanying financial statements.
The following table summarizes corporate charges and allocations included in
the accompanying financial statements:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- ----------------------------------------------------
July 7, 1997
January 1, (date of
Year ended 1997 to acquisition) to Year ended Nine months ended
December 31, July 6, December 31, December 31, September 30,
------------ ---------- --------------- ------------ -----------------------
1996 1997 1997 1998 1998 1999
------------ ---------- --------------- ------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C> <C>
Statement of
Operations Caption
Cost of operations............................ $ 1,947 $ 4,001 $ 1,624 $ 6,494 $4,067 $ 4,570
Cost of services.............................. 189 344 103 1,320 779 2,066
Selling, general and administrative........... 1,041 1,760 971 2,204 1,579 12,123
------- ------- ------- -------- ------ -------
$ 3,177 $ 6,105 $ 2,698 $ 10,018 $6,425 $18,759
- --------------------------------------------------
======= ======= ======= ======== ====== =======
</TABLE>
Management believes that the allocation methodology applied is reasonable.
However, it was not practicable to determine whether the allocated amounts
represent amounts that would have been incurred on a standalone basis.
Explanations of the composition and the method of allocation for the above
captions are as follows:
Cost of Operations
Allocated costs within this caption were the costs of telecommunications
backbone circuits. These costs were allocated to the Company based upon
estimated circuit usage and rate information.
Cost of Services
Allocated costs within this caption were the costs associated with two data
centers (maintenance, utilities and support and employment costs for network
engineering and support, and certain other overhead). These costs were
allocated based upon the employee base.
Selling, General and Administrative
Allocated costs within this caption were the costs of human resources,
information systems services, accounting and back office support, executive
salaries and other general and administrative costs, including rent. All costs
except accounting and back office support were allocated based upon the
employee base. Accounting and back office support were allocated based upon the
relative percentage of monthly recurring revenues.
F-11
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
3. Property and Equipment
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Buildings.................................... $ -- $ -- $17,344
Electronics and computer equipment........... 12,163 36,245 90,107
Computer software............................ 1,594 8,153 24,210
Furniture and office equipment............... 121 297 2,269
Leasehold improvements....................... 227 488 52,547
------- ------- --------
14,105 45,183 186,477
Less accumulated depreciation................ (1,175) (6,124) (21,422)
------- ------- --------
$12,930 $39,059 $165,055
======= ======= ========
</TABLE>
Property and equipment included electronics and computer equipment of
$2,051, $3,009 and $20,120 at December 31, 1997 and 1998, and September 30,
1999 respectively, that were capitalized pursuant to the terms of capital lease
agreements. Amortization of these assets is included in depreciation expense
for the years ended December 31, 1997 and 1998, and the nine months ended
September 30, 1998 and 1999.
Depreciation expense amounted to $591 for the year ended December 31, 1996,
$519 for the period from January 1, 1997 to July 6, 1997, $1,175 for the period
from July 7, 1997 to December 31, 1997, $4,949 for the year ended December 31,
1998, $3,712 for the nine months ended September 30, 1998, and $15,120 for the
nine months ended September 30, 1999.
4. Intangible Assets
Intangible assets consisted of the following:
<TABLE>
<CAPTION>
December 31,
---------------- September 30,
1997 1998 1999
------- ------- -------------
(unaudited)
<S> <C> <C> <C>
Goodwill..................................... $19,099 $19,099 $19,099
Trade name................................... 9,750 9,750 9,750
Customer list................................ 3,120 3,120 3,120
Developed technologies....................... 2,720 2,720 2,720
Acquired workforce........................... 1,253 1,253 1,253
------- ------- -------
35,942 35,942 35,942
Less accumulated amortization................ (1,578) (4,738) (7,731)
------- ------- -------
$34,364 $31,204 $28,211
======= ======= =======
</TABLE>
Amortization expense amounted to $1,578 for the period from July 7, 1997 to
December 31, 1997, $3,160 for the year ended December 31, 1998, $2,370 for the
nine months ended September 30, 1998, and $2,993 for the nine months ended
September 30, 1999. At the date of acquisition, the trade name was valued at
$11,000. The Company and another operating unit of Intermedia shared the value
of this trade name during the period from July 7, 1997 through December 31,
1998.
F-12
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
5. Stockholders' Equity
On August 4, 1999, the Company sold 11,500 shares of its Class A Common
Stock in an initial public offering (also referred to as the "Offering"). The
shares sold represent approximately 18.7% of the aggregate number of shares of
Class A and Class B Common Stock outstanding. Intermedia retains a 97.8% voting
interest in the Company. The net proceeds from the Offering were approximately
$179.2 million and can be used only to purchase telecommunications related
assets due to restrictions in Intermedia's debt instruments.
Under the provisions of the Intermedia 1996 Long-Term Incentive Plan (1996
Plan), certain employees and directors of the Company have been granted options
to buy shares of Intermedia common stock, generally at market value with terms
of five to ten years. Under the provisions of Business Internet's equity
participation plan, employees were awarded stock options, generally at market
value with terms of five years. Options in Business Internet that were held by
employees of the Predecessor were converted into 456,632 Intermedia options
upon the purchase of Business Internet, applying the same terms and conditions
as existed under the Business Internet Equity Participation Plan.
The following table summarizes the stock option activity related to
employees of the Predecessor and of the Company:
<TABLE>
<CAPTION>
Number Per Share
of 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
======= ============
Digex options granted on July 29, 1999.............. 5,533 $ 5.00-17.00
Exercised......................................... -- --
Canceled.......................................... (410) 17.00
------- ------------
Outstanding Digex options at September 30, 1999..... 5,123 $ 5.00-17.00
======= ============
</TABLE>
F-13
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
As of September 30, 1999, unexercised options to purchase 1,037 shares of
Class A Common Stock (included in the total number above) were granted by the
Company to employees of the Parent. The Financial Accounting Standards Board
recently issued an Exposure Draft, Accounting for Certain Transactions
involving Stock Compensation, an interpretation of APB Opinion No. 25, that
addresses the accounting for such option grants. The final interpretation of
APB Opinion No. 25 has not been issued, and therefore, the Company is unable
to discuss the potential impact relative to these stock option grants.
Pro forma net loss and net loss per share, assuming that the Predecessor
and Digex had applied the fair value model (Black-Scholes Pricing Model)
required by SFAS 123, is as follows:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7, 1997
Year ended 1997 to to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Net loss................... $ (4,395) $ (9,645) $ (18,558) $ (16,828)
Net loss per share......... -- -- $ (0.37) $ (0.34)
</TABLE>
The following table summarizes the significant assumptions used in
developing the pro forma information:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Risk-free interest
rate................... 6.1% 6.1% 6.1% 5.4%
Volatility factor....... 58.0% 58.0% 58.0% 53.0%
Dividend yield.......... -- -- -- --
Weighted average life... 5 years 5 years 5 years 5 years
</TABLE>
The following table summarizes the weighted average exercise prices of
option activity:
<TABLE>
<CAPTION>
Predecessor The Company
----------------------- -------------------------
January 1, July 7,
Year ended 1997 to 1997 to Year ended
December 31, July 6, December 31, December 31,
1996 1997 1997 1998
------------ ---------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at beginning of
period................. $ 0.13 $ 6.28 $ 5.83 $ 5.83
Granted................. 3.07 5.36 -- 26.69
Exercised............... -- 7.45 5.28 6.94
Canceled................ 0.13 8.29 10.02 6.73
------ ------ ------ -------
Balance at end of
period................. $ 3.01 $ 5.83 $ 5.83 $ 20.60
====== ====== ====== =======
</TABLE>
As of December 31, 1998, the weighted average exercise price of exercisable
options was $10.20. Outstanding options as of December 31, 1998 were not
convertible into shares of the Company and had a weighted average remaining
contractual life of 7.4 years. The per share weighted average fair value of
options granted during the year ended December 31, 1996, the period from
January 1, 1997 to July 6, 1997, the period from July 7, 1997 to December 31,
1997 and the year ended December 31, 1998 were $1.72, $1.44, $0 and $14.84.
F-14
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
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 to Year ended
December 31, December 31,
1997 1998
------------ ------------
<S> <C> <C>
Current............................................ $ -- $--
Deferred:
Federal.......................................... 1,306 144
State............................................ 134 15
------ ----
$1,440 $159
====== ====
</TABLE>
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>
F-15
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
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.
7. Lease Commitments
The Company leases electronic and computer equipment under capital lease
arrangements. The Company also leases office space and office equipment under
operating leases. Future noncancelable lease payments under the Company's lease
commitments at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Capital Operating
Leases Leases
------- ---------
<S> <C> <C>
Future minimum lease payments:
Year ended December 31:
1999.................................................... $1,121 $ 881
2000.................................................... 892 1,871
2001.................................................... 324 1,774
2002.................................................... -- 1,628
2003.................................................... -- 1,669
Thereafter.............................................. -- 8,748
------ -------
2,337 $16,571
=======
Less amount representing interest......................... (248)
------
Present value of lease payments........................... 2,089
Current portion of capital leases......................... (981)
------
Noncurrent portion of capital leases...................... $1,108
======
</TABLE>
F-16
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
Lease payments under operating leases include certain rent allocated to the
Company. In the future, rent charges will be included in the General and
Administrative Services Agreement. See Note 10, "Recapitalization and Affiliate
Agreements (Unaudited)."
Rent expense amounted to $121 for the year ended December 31, 1996, $117 for
the period from January 1, 1997 to July 7, 1997, $170 for the period from July
7, 1997 to December 31, 1997, $829 for the year ended December 31, 1998, $417
for the nine months ended September 30, 1998, and $1,079 for the nine months
ended September 30, 1999.
8. Loss Per Share (Unaudited)
On April 30, 1999, the Company issued 1,000 shares of Class B Common Stock
to the Parent in connection with the contribution of assets to the Company.
Loss per share is presented on a pro forma basis assuming that the common
shares issued in connection with our recapitalization on April 30, 1999 were
outstanding for all periods of Digex presented. On July 23, 1999, the Board of
Directors authorized a 50,000-for-one split of the Class B Common Stock,
effective as of August 4, 1999 and paid in the form of a stock dividend, for
shares outstanding as of July 8, 1999. The basic and diluted net loss per
common share were calculated assuming that the stock split was effective for
all periods presented. All share information presented gives effect to the
stock split.
The following table sets forth the computation of basic and diluted loss per
share of common stock (in thousands, except share and per share amounts):
<TABLE>
<CAPTION>
Period from
July 1, 1997 Nine months ended
to Year ended September 30,
December 31, December 31, ------------------
1997 1998 1998 1999
------------ ------------ -------- --------
<S> <C> <C> <C> <C>
Net loss, as reported........ $ (18,558) $ (16,581) $(12,331) $(42,620)
========= ========= ======== ========
Weighted average common
shares...................... 50,000 50,000 50,000 52,443
========= ========= ======== ========
Loss per share:
Basic...................... $ (0.37) $ (0.33) $ (0.25) $ (0.81)
========= ========= ======== ========
Diluted.................... $ (0.37) $ (0.33) $ (0.25) $ (0.81)
========= ========= ======== ========
</TABLE>
The above table reflects no adjustments for stock options, as the effect of
options was anti-dilutive.
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.
F-17
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
The following table summarizes the allocation of the purchase price to the
acquired assets and assumed net liabilities of the Company:
<TABLE>
<S> <C>
Estimated net fair values of operating assets and liabilities.... $ (3,721)
Purchased intangible assets:
Trade name..................................................... 9,750
Customer list.................................................. 3,120
Acquired workforce............................................. 1,253
Developed technologies......................................... 2,720
Goodwill....................................................... 19,099
In-process research and development.............................. 15,000
--------
$ 47,221
========
</TABLE>
The amount allocated to in-process research and development ("IPR&D") of
$15,000 was recorded as a one-time charge to operations in 1997 because the
technology was not fully developed and had no alternative future use.
Management is primarily responsible for estimating the fair value of the
purchased IPR&D.
The fair value of the IPR&D was estimated by management using an income
approach. The value allocated to IPR&D was determined by estimating the costs
to develop the purchased technology into commercially viable services,
estimating the resulting net cash flows, excluding the cash flows related to
the portion that was incomplete at the acquisition date, and discounting the
net cash flows to the present value. The forecast was based upon future
discounted cash flows, taking into account the stage of development of the
IPR&D, the costs to develop the IPR&D, the expected income stream, the life
cycle of the technology ultimately developed, and the associated risks. The
selection of the applicable discount rate was based on consideration of the
costs of capital of Digex and Intermedia, as well as other factors including
the useful life of the technology, profitability levels, the uncertainty of
technology advances that were known at the time, and the stage of completion
related to the technology.
The IPR&D involved development, engineering, and testing activities
associated with the completion of next generation Web site management services.
The primary effort involved the development of an additional Web site
management facility on the West Coast. The development of technology related to
this project was considered critical to alleviating capacity constraints and
adding significant new service capabilities. Upon completion, the new Web site
management facility was expected to result in faster and easier installation of
customers' servers as well as efficient traffic management with significantly
less overhead. Related efforts involved the development and integration of next
generation routers to support greater transmission capacity, as well as a new
software architecture to assist in balancing traffic loads. Another critical
element involved the development of site mirroring, the ability to create exact
replicas of Web sites at each of Digex's two sites for greater service
reliability.
At the valuation date, Digex had completed approximately 75% of the
development of its next generation Web site management services, and
substantial progress had been made in the areas of specification, design, and
implementation. In particular, engineers had made significant progress in the
areas of architecture development as well as the development of site mirroring
capabilities. The Company anticipated that the R&D would be completed in phases
by the end of 1998, after which the Company expected to begin generating
economic benefits from the value of the IPR&D. Total costs to complete were
expected to be $100 for the remainder of 1997 and $400 in 1998. Projected
future cash flows attributable to Digex's IPR&D, assuming successful
development of such technologies, were discounted to the present value using a
discount rate of 24%.
F-18
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
Intermedia management expected to continue development of the IPR&D efforts
at the valuation date, and believed there was a reasonable chance of
successfully completing such development. However, there was risk associated
with the completion of the IPR&D and there was no assurance that any of the
projects would meet with either technological or commercial success. Failure to
successfully develop and commercialize the IPR&D would result in the loss of
the expected economic return inherent in the fair value allocation.
As a result of the above, on an unaudited pro forma basis, assuming the
purchase had occurred at the beginning of the 1997 year, total revenues would
have been $11,612, net loss would have been $(22,852) and net loss per share
(basic and diluted) would have been $(0.46), assuming that the recapitalization
discussed in Note 10 had been in effect for that period. However, pro forma
results do not purport to be indicative of the results that would have occurred
if the acquisition had occurred at the beginning of year.
10. Recapitalization and Affiliate Agreements (Unaudited)
Recapitalization
In connection with the recapitalization, the Company filed a Certificate of
Incorporation and certain amendments in the state of Delaware. Pursuant to the
Certificate, as amended, the number of authorized shares of common stock is
150,000, including 100,000 Class A shares and 50,000 Class B shares and the
number of authorized shares of preferred stock is 5,000 shares. The Class A and
Class B common stock are identical in all respects except that the Class A is
entitled to one vote for each share and the Class B is entitled to ten votes
for each share. In addition, on April 30, 1999, Business Internet contributed
the Company's assets to the newly formed corporation.
Network Services Agreements
Pursuant to several network services agreements between Intermedia and the
Company, Intermedia will provide Internet network access, as well as network-
related services. These Agreements have an initial term of two years which
expires in July 2001. 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 listed below:
. Corporate Human Resources, including labor relations, payroll and
training
. Finance, accounting and administration
. Tax services, including tax return preparation
. Accounting and back office support services
. Investor relations
. Information management services
The General and Administrative Services Agreement has an initial term of two
years. Rates charged to the Company for these services are believed to be
consistent with the allocations in the accompanying financial
F-19
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except per share information)
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. Subsequent Events (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 secondary 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.
On January 12, 2000, the Company sold 100,000 shares of its preferred stock,
designated as Series A Convertible Preferred Stock (the "Preferred Stock"),
with detachable warrants to purchase 1,065,000 shares of its Class A Common
Stock (the "Warrants"), for an aggregate of $100 million, of which $15 million
was in the form of equipment purchase credits. The Preferred Stock has an
aggregate liquidation preference of $100 million, and is convertible into
approximately 1,462,000 shares of Class A Common Stock. The Warrants can be
exercised at any time over their three year term at a price of $57 per share
(the fair value of the Company's common stock on the transaction commitment
date.). The proceeds from the offering will be allocated between the Preferred
Stock and the Warrants based upon their relative fair values, which have not
yet been determined by the Company. Following the allocation, the Preferred
Stock will be accreted up to its liquidation preference through charges to
retained earnings.
On December 22, 1999, Intermedia entered into a $100 million credit facility
under which the Company is a guarantor.
F-20
<PAGE>
[Logo]
<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 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 se-
curities.
---------------------
TABLE OF CONTENTS
---------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Price Range of Class A Common Stock...................................... 17
Capitalization........................................................... 18
Dilution................................................................. 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 31
Management............................................................... 44
Certain Relationships and Related Transactions........................... 56
Principal and Selling Stockholders....................................... 58
Description of Capital Stock............................................. 61
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find Additional Information................................ 69
Index to Financial Statements............................................ F-1
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[LOGO OF DIGEX}
[LOGO OF DIGEX]
10,000,000 Shares
Class A Common Stock
--------------
PROSPECTUS
--------------
Bear, Stearns & Co. Inc.
Salomon Smith Barney
, 2000
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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 and Intermedia pro rata in
proportion to the number of shares to be sold by Digex and Intermedia:
<TABLE>
<S> <C>
Securities and Exchange Commission filing fee....................... $ 194,213
NASD filing fee..................................................... $ 30,500
Nasdaq National Market listing fee.................................. $ 17,500
Legal fees and expenses............................................. $ 150,000
Accountants' fees and expenses...................................... $ 150,000
Printing costs...................................................... $ 300,000
Miscellaneous....................................................... $ 157,787
----------
TOTAL............................................................. $1,000,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Digex's Certificate of Incorporation provides that Digex shall, to the
fullest extent permitted by the Delaware General Corporation Law (the "DGCL"),
indemnify all persons whom it may indemnify pursuant thereto (i.e., directors
and officers) and shall advance expenses incurred in defending any proceeding
for which such right to indemnification is applicable, provided that, if the
DGCL so requires, the indemnitee provides Digex with an undertaking to repay
all amounts advanced if it is determined by a final judicial decision that such
person is not entitled to indemnification pursuant to this provision. Digex's
Certificate of Incorporation also contains a provision eliminating the personal
liability of Digex's directors for monetary damages for breach of any fiduciary
duty. By virtue of this provision, under the DGCL, a director of Digex will not
be personally liable for monetary damages for breach of his fiduciary duty as a
director, except for liability for (i) any breach of the director's duty of
loyalty to Digex or its stockholders, (ii) acts or omissions not in good faith
or which involve intentional misconduct or a knowing violation of law, (iii)
dividends or stock purchases or redemptions that are unlawful under the DGCL,
and (iv) any transaction from which a director derives an improper personal
benefit. However, this provision of Digex's Certificate of Incorporation
pertains only to breaches of duty by directors as directors and not in any
other corporate capacity such as officers, and limits liability only for
breaches of fiduciary duties under the DGCL and not for violations of other
laws, such as the federal securities laws. 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.
On January 12, 2000, Digex issued 50,000 shares of Series A Preferred Stock
and warrants to purchase 532,500 shares of Class A Common Stock, with an
exercise price of $57.00 per share, to Microsoft Corporation for an aggregate
consideration of $50.0 million. On January 12, 2000, Digex also issued 50,000
shares of Series A Preferred Stock and warrants to purchase 532,500 shares of
Class A Common Stock, with an exercise price of $57.00 per share, to CPQ
Holdings, Inc., a subsidiary of Compaq Computer Corporation, for an aggregate
consideration of $50.0 million of which $35.0 million was paid in cash and
$15.0 million was paid in the form of equipment credits granted to Digex. The
100,000 shares of Series A Preferred Stock are convertible into an aggregate of
approximately 1,462,000 shares of Class A Common Stock. Based on
representations by the purchasers the issuances were made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act, as
a transaction by an issuer not involving a public offering.
II-1
<PAGE>
Item 16. Exhibits and Financial Data Schedules.
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
1.1 Proposed Form of Underwriting Agreement.**
2.1 Contribution Agreement by and between Digex and Business Internet,
Inc., dated as of April 30, 1999.*
2.2 Assignment and Assumption Agreement by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.*
2.3 Trademark Assignment by and between Digex and Business Internet, Inc.,
dated as of April 30, 1999.*
2.4 Bill of Sale to the Contribution Agreement, dated as of April 30,
1999.*
3.1 Certificate of Incorporation of Digex, as amended to date.
3.2 Bylaws of Digex.*
3.3 Certificate of Designation for the Series A Preferred Stock.
4.1 See the Certificate of Incorporation of Digex, as amended to date,
filed as Exhibit 3.1.
4.2 Warrant Agreement, dated as of January 12, 2000, among Digex,
Microsoft Corporation and CPQ Holdings, Inc.
4.3 Registration Rights Agreement, dated as of January 12, 2000, among
Digex, Microsoft Corporation and CPQ Holdings, Inc.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.**
10.1 Intentionally Omitted.
10.2 Lease by and between Intermedia and Intel Corporation, dated as of
November 10, 1998.*
10.3 Lease by and between Intermedia and Ammendale Commerce Center Limited
Partnership, dated as of April 15, 1998.*
10.4 Lease by and between Intermedia and 1111 19th Street Associates, dated
as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of February 19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W. Murray
Company, d/b/a The Murray Company, dated as of January 4, 1999.*
10.7 Software License and Services Agreement by and between Digex and
Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft Corporation.*
10.9 Consulting Letter Agreement by and between Digex, Intermedia and
Andersen Consulting LLP, dated as of April 1, 1999.*
10.10 Internet Transit Services Agreement (East Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*
10.11 Internet Transit Services Agreement (West Coast) between Digex and
Business Internet, Inc., dated as of April 30, 1999.(1)*
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999.(1)*
10.13 Employment Letter dated June 29, 1999 between Digex and Mark K. Shull,
and amendments thereto.
10.14 Employment Letter dated December 14, 1998 between Digex and Nancy G.
Faigen, and amendments thereto.
10.15 Employment Letter dated July 9, 1999 between Digex and Rebecca Ward,
and amendments thereto.
10.16 Employment Letter dated July 9, 1999 between Digex and Bryan T.
Gernet, and amendments thereto.
10.17 Employment Letter dated December 15, 1999 between Digex and Timothy M.
Adams, and amendments thereto.
10.18 Employment Letter dated September 11, 1996 between Digex and Robert B.
Patrick, and amendments thereto.
10.19 Digex Long-Term Incentive Plan.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Numbers Description
------- -----------
<C> <S>
10.20 Intermedia 1996 Long-Term Incentive Plan.
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included as part of the signature page).
</TABLE>
- --------
(1) Confidential treatment of certain provisions of this exhibit was requested
and granted by the Commission in connection with the filing of Digex's
registration statement on Form S-1 (Commission File #333-77105).
* Filed as an exhibit to Digex's registration statement on Form S-1 (Commission
File #333-77105) and incorporated herein by reference.
** To be filed by Amendment to this Registration Statement.
(b) Financial Statement Schedules.
The financial statements and financial statement schedules filed as part of
this Registration Statement are as follows:
1. Financial Statements. See Index to Financial Statements on page F-1 of
the Prospectus included in this Registration Statement.
2. Financial Statement Schedules.
Schedule II-Valuation and Qualifying Accounts
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Digex, Digex
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Digex of expenses incurred or paid by a
director, officer or controlling person of Digex in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, Digex
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, Digex has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Beltsville, State of Maryland, on
this 18th day of January, 2000.
Digex, Incorporated
/s/ Mark K. Shull
By: _________________________________
Mark K. Shull
President and Chief Executive
Officer
Each person whose signature appears below constitutes and appoints DAVID C.
RUBERG AND MARK K. SHULL 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 Officer:
/s/ Mark K. Shull Director, President and January 18, 2000
___________________________________________ Chief Executive Officer
Mark K. Shull
Principal Financial and Accounting
Officers:
/s/ Timothy M. Adams Chief Financial Officer January 18, 2000
___________________________________________
Timothy M. Adams
/s/ T. Scott Zimmerman Controller January 18, 2000
___________________________________________
T. Scott Zimmerman
Directors:
/s/ David C. Ruberg Chairman of the Board January 18, 2000
___________________________________________
David C. Ruberg
/s/ John C. Baker Director January 18, 2000
___________________________________________
John C. Baker
/s/ Philip A. Campbell Director January 18, 2000
___________________________________________
Philip A. Campbell
/s/ George F. Knapp Director January 18, 2000
___________________________________________
George F. Knapp
Director January 18, 2000
___________________________________________
Richard A. Jalkut
/s/ Jack E. Reich Director January 18, 2000
___________________________________________
Jack E. Reich
</TABLE>
II-4
<PAGE>
DIGEX, INCORPORATED
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions
-------------------
Balance at Charged to Charged Deductions Balance at
Beginning Costs and to Other -- End of
Description of Period Expenses Accounts Describe Period
----------- ---------- ---------- -------- ---------- ---------- --- ---
(Amounts in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
The Predecessor
For the year ended De-
cember 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 Jan-
uary 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 De-
cember 31, 1998:
Deducted from asset
accounts:
Allowance for
doubtful accounts.. 369 1,491 -- 1,141(1) 719
===== ====== ==== ===== ======
Allowance for
deferred tax
assets............. -- 5,349 -- -- 5,349
===== ====== ==== ===== ======
</TABLE>
- --------
(1) Uncollectible accounts written off, net of recoveries.
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
1.1 Proposed Form of Underwriting Agreement.**
2.1 Contribution Agreement by and between Digex and Business
Internet, Inc., dated as of
April 30, 1999.*
2.2 Assignment and Assumption Agreement by and between Digex and
Business Internet, Inc., dated as of April 30, 1999.*
2.3 Trademark Assignment by and between Digex and Business
Internet, Inc., dated as of April 30, 1999.*
2.4 Bill of Sale to the Contribution Agreement, dated as of April
30, 1999.*
3.1 Certificate of Incorporation of Digex, as amended to date.
3.2 Bylaws of Digex.*
3.3 Certificate of Designation for the Series A Preferred Stock.
4.1 See the Certificate of Incorporation of Digex, as amended to
date, filed as Exhibit 3.1.
4.2 Warrant Agreement, dated as of January 12, 2000, among Digex,
Microsoft Corporation and CPQ Holdings, Inc.
4.3 Registration Rights Agreement, dated as of January 12, 2000,
among Digex, Microsoft Corporation and CPQ Holdings, Inc.
5.1 Opinion of Kronish Lieb Weiner & Hellman LLP.**
10.1 Intentionally Omitted.
10.2 Lease by and between Intermedia and Intel Corporation, dated as
of November 10, 1998.*
10.3 Lease by and between Intermedia and Ammendale Commerce Center
Limited Partnership, dated as of April 15, 1998.*
10.4 Lease by and between Intermedia and 1111 19th Street
Associates, dated as of July 23, 1998.*
10.5 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a
The Murray Company, dated as of February 19, 1999.*
10.6 Contract for Construction by and between Intermedia and R.W.
Murray Company, d/b/a
The Murray Company, dated as of January 4, 1999.*
10.7 Software License and Services Agreement by and between Digex
and Oracle Corporation, dated as of May 27, 1999.*
10.8 License Agreement by and between Digex and Microsoft
Corporation.*
10.9 Consulting Letter Agreement by and between Digex, Intermedia
and Andersen Consulting LLP, dated as of April 1, 1999.*
10.10 Internet Transit Services Agreement (East Coast) between Digex
and Business Internet, Inc., dated as of April 30, 1999.(1)*
10.11 Internet Transit Services Agreement (West Coast) between Digex
and Business Internet, Inc., dated as of April 30, 1999.(1)*
10.12 Managed Firewall Services Agreement between Digex and Business
Internet, Inc., dated as of April 30, 1999.(1)*
10.13 Employment Letter dated June 29, 1999 between Digex and Mark K.
Shull, and amendments thereto.
10.14 Employment Letter dated December 14, 1998 between Digex and
Nancy G. Faigen, and amendments thereto.
10.15 Employment Letter dated July 9, 1999 between Digex and Rebecca
Ward, and amendments thereto.
10.16 Employment Letter dated July 9, 1999 between Digex and Bryan T.
Gernet, and amendments thereto.
10.17 Employment Letter dated December 15, 1999 between Digex and
Timothy M. Adams, and amendments thereto.
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Exhibit Page
------- ------- ----
<C> <S> <C>
10.18 Employment Letter dated September 11, 1996 between Digex and
Robert B. Patrick, and amendments thereto.
10.19 Digex Long-Term Incentive Plan.
10.20 Intermedia 1996 Long-Term Incentive Plan.
23.1 Consent of Kronish Lieb Weiner & Hellman LLP, included in
Exhibit 5.1.
23.2 Consent of Ernst & Young LLP.
24.1 Power of Attorney (included as part of the signature page).
</TABLE>
- --------
(1) Confidential treatment of certain provisions of this exhibit was requested
and granted by the Commission in connection with the filing of Digex's
registration statement on Form S-1 (Commission File #333-77105).
* Filed as an exhibit to Digex's registration statement on Form S-1 (Commission
File #333-77105) and incorporated herein by reference.
** To be filed by Amendment to this Registration Statement.
<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
"AGCL").
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-
<PAGE>
1. Except as stated in paragraphs 3, 4, 5 and 9 of this Subpart A of
Article FOURTH, the Class A Common Stock and Class B Common Stock shall be
identical in all respects and shall have equal powers, preferences, rights and
privileges.
-2-
<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.
-3-
<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.
-4-
<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).
-5-
<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
-6-
<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
-7-
<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.
-8-
<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
-9-
<PAGE>
CERTIFICATE OF AMENDMENT
TO THE
CERTIFICATE OF INCORPORATION
OF
DIGEX, INCORPORATED
(Pursuant to Section 242 of the General Corporation Law of Delaware)
The undersigned, being the Chief Executive Officer of Digex, Incorporated,
does hereby certify and set forth:
FIRST: The name of the corporation is Digex, Incorporated
-----
(hereinafter referred to as the "Corporation").
SECOND: The Certificate of Incorporation was filed with the
------
Office of the Secretary of the State of Delaware on April
26, 1999.
THIRD: The Certificate of Incorporation of the Corporation is
-----
hereby amended to change the number of shares of stock which the
Corporation shall have authority to issue so that Article FOURTH of the
Certificate of Incorporation is hereby amended to read in its entirety as
follows:
"FOURTH: The total number of shares of stock which the
------
Corporation shall have authority to issue is 155,000,000 shares divided
into the following classes:
(i) 100,000,000 shares of Class A Common Stock, par value $.01
per share (hereinafter referred to as "Class A Common Stock");
(ii) 50,000,000 shares of Class B Common Stock, par value $.01
per share (hereinafter referred to as "Class B Common Stock"); and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per
share (hereinafter referred to as "Preferred Stock").
The Corporation's Class A Common Stock and Class B Common Stock
-10-
<PAGE>
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.
2. Except as may be otherwise required by law, and subject
to the provisions of any series of Preferred Stock at the time
outstanding, the holders of Class A Common Stock and Class B Common
Stock issued and outstanding shall have and possess the exclusive
voting rights and powers, whether at a meeting of stockholders or in
connection with any action taken by written consent.
3. Each holder of Class A Common Stock issued and
outstanding shall be entitled to one vote for each share of Class A
Common Stock registered in such holder's name on the books of the
Corporation, and each holder of Class B Common Stock issued and
outstanding shall be entitled to ten votes for each share of Class B
Common Stock registered in such holder's name on the books of the
Corporation. Except as may be otherwise required by law, the holders
of the Class A Common Stock and Class B Common Stock shall vote
together as a single class.
4. Any direct or indirect transfer of issued and
outstanding shares of Class B Common Stock other than to a Permitted
Holder (as defined herein) or any event or circumstance as a result of
which a holder of Class B Common Stock ceases to be a Permitted Holder
shall result in the automatic conversion of the shares of Class B
Common Stock being transferred to or held by such non-Permitted Holder
into a like number of shares of Class A Common Stock. No purported
transfer of shares of Class B Common Stock shall be effective unless
and until the transferor has surrendered to the Corporation, at its
office or agency maintained for that purpose, the certificates
representing the shares of Class B Common Stock to be transferred,
which certificates shall be duly endorsed or accompanied by executed
stock powers, with the signatures appropriately guaranteed. All such
certificates shall be accompanied by written notice of the holder's
intention to transfer the shares, including a statement of the number
of shares of Class B Common Stock to be transferred and, if
applicable, converted and the name or names and address or addresses
in which the certificate or
-11-
<PAGE>
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.
Shares of Class B Common Stock so converted shall be
returned to the status of authorized and unissued shares of Class B
Common Stock. The Corporation shall at all times reserve for issuance
a number of shares of Class A Common Stock (which may include Class A
Common Stock held by the Corporation as treasury stock) which shall be
sufficient for issuance upon conversion of all of the then outstanding
Class B Common Stock pursuant to this Section 4 or otherwise. The
Corporation as a condition to the transfer or the registration of
transfer of shares of Class B Common Stock to a purported Permitted
Holder, may require the furnishing of such affidavits or other proof
as it reasonably deems necessary to establish that such transferee is
a Permitted Holder. For purposes hereof, (a) "Permitted Holder" means
Intermedia Communications Inc. or any of its Affiliates, (b)
"Affiliate" means, with respect to any Person, another Person directly
or indirectly controlling, controlled by, or under direct or indirect
common control with, such person, provided, however, that no employee
of the Corporation or any of its subsidiaries shall be deemed to be an
Affiliate solely by reason of his or her capacity as an employee, or
by reason of any employment agreement, and (c) "Person" means and
includes an individual, a partnership, a limited liability company, a
joint venture, a corporation, a trust, an unincorporated organization
and a government or any department or agency thereof. All
certificates evidencing shares of Class B Common Stock shall be
endorsed with a legend making appropriate reference to the foregoing
provisions regarding automatic conversion.
5. Each holder of Class B Common Stock issued and
outstanding
-12-
<PAGE>
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.
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
-13-
<PAGE>
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).
B. Preferred Stock.
- ---------------
The Board of Directors is authorized, subject to any
limitations prescribed by law, to provide for the issuance of the
shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the applicable law of the State of Delaware,
to establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences and
rights of the shares of each such series and any qualifications,
limitations or restrictions thereof. The number of authorized shares
of Preferred Stock may be increased or decreased (but not below the
number of shares thereof then outstanding) by the approval of a
majority of the votes entitled to be cast by the holders of the Common
Stock, without a vote of the holders of the Preferred Stock, or of any
series thereof, unless a vote of any such holders is required pursuant
to the certificate or certificates establishing the series of
Preferred Stock."
-14-
<PAGE>
FOURTH: This Amendment to the Certificate of Incorporation of the
------
Corporation was authorized by the directors of the Corporation and the sole
stockholder of the Corporation.
-15-
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed by its Chief Executive Officer as of this 3rd day of August, 1999.
By: /s/ Mark K. Shull
---------------------------------
Mark K. Shull
President and Chief Executive Officer
-16-
<PAGE>
EXHIBIT 3.3
CERTIFICATE OF DESIGNATION OF VOTING POWER,
DESIGNATION PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS
AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS
OF
SERIES A CONVERTIBLE PREFERRED STOCK
OF
DIGEX, INCORPORATED
_________________________
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
_________________________
Digex, Incorporated, a Delaware corporation (the "Company"), certifies
that pursuant to the authority contained in ARTICLE FOURTH of its Restated
Certificate of Incorporation, as amended (the "Certificate of Incorporation"),
and in accordance with the provisions of Section 151 of the General Corporation
Law of the State of Delaware, the Board of Directors of the Company (the
"Board") at a meeting duly called and held on December 23,1999, duly approved
and adopted the following resolution which resolution remains in full force and
effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Board by the
Certificate of Incorporation, the Board does hereby designate, create, authorize
and provide for the issue of a series of preferred stock having a par value of
$.01 per share, with a liquidation preference of $1,000 per share (the
"Liquidation Preference") which shall be designated as Series A Convertible
Preferred Stock (the "Preferred Stock") consisting of 100,000 shares (which
shares of preferred stock were authorized to be issued by the Company by
resolution of the Board of Directors of the Company dated as of July 23, 1999
and by resolution of the stockholders of the Company dated as of July 23, 1999),
having the following voting powers, preferences and relative, participating,
optional and other special rights, and qualifications, limitations and
restrictions thereof as follows:
1. Ranking. The Preferred Stock shall rank, with respect to dividend
-------
distributions and distributions upon the liquidation, winding-up and dissolution
of the Company, (i) senior to all classes of common stock of the Company and to
each other class of capital stock or series of preferred stock issued by the
Company after the Preferred Stock Issue Date, the terms of which do not
expressly provide that it ranks senior to or on a parity with the Preferred
Stock as to dividend distributions and distributions upon the liquidation,
winding-up and dissolution of the Company (collectively referred to with the
common stock of
<PAGE>
the Company as "Junior Securities"); (ii) on a parity with any shares of
Preferred Stock issued by the Company in the future and any other class of
capital stock or series of preferred stock issued by the Company after the
Preferred Stock Issue Date, the terms of which expressly provide that such class
or series will rank on a parity with the Preferred Stock as to dividend
distributions and distributions upon the liquidation, winding-up and dissolution
of the Company (collectively referred to as "Parity Securities"); and (iii)
junior to each class of capital stock or series of preferred stock issued by the
Company after the Preferred Stock Issue Date, the terms of which expressly
provide that such class or series will rank senior to the Preferred Stock as to
dividend distributions and distributions upon liquidation, winding-up and
dissolution of the Company (collectively referred to as "Senior Securities").
2. Dividends. The holders of shares of the Preferred Stock shall not be
---------
entitled to receive dividends.
3. Conversion.
----------
(i) (a) Subject to paragraph 3(i)(b) below, a holder of shares of Preferred
Stock may convert such shares into Common Stock at any time after the Preferred
Stock Issue Date, but only in lots of 100 shares of Preferred Stock or integral
multiples thereof if less than all the shares of Preferred Stock then held by
such holder are being converted. For the purposes of conversion, each share of
Preferred Stock shall be valued at the Liquidation Preference, which shall be
divided by the Conversion Price in effect on the Conversion Date to determine
the number of shares issuable upon conversion. Immediately following such
conversion, the rights of the holders of converted Preferred Stock shall cease
and the persons entitled to receive the Common Stock upon the conversion of
Preferred Stock shall be treated for all purposes as having become the owners of
such Common Stock.
(b) On the fifth anniversary of the Preferred Stock Issue Date (the
"Fifth Anniversary"), each issued and outstanding share of Preferred Stock shall
automatically convert, without any further action by the registered holders
thereof, the Transfer Agent or the Company, into such number of fully paid and
nonassessable shares of Common Stock equal to (x) the Liquidation Preference per
share of Preferred Stock, divided by (y) the average of the Closing Prices of
the Common Stock for the 20 consecutive Trading Days ending on the Trading Day
prior to the Fifth Anniversary. Immediately following such conversion, the
rights of the holders of converted Preferred Stock shall cease and the Persons
entitled to receive the Common Stock upon the conversion of Preferred Stock
shall be treated for all purposes as having become the owners of such Common
Stock.
(ii) To convert Preferred Stock pursuant to paragraph 3(i)(a) above, a
holder must (A) surrender the certificate or certificates evidencing the shares
of Preferred Stock to be converted, duly endorsed in a form satisfactory to the
Company and the Transfer Agent, to the Transfer Agent at the principal office of
the Transfer Agent, (B) notify the Transfer Agent at such office that he elects
to convert Preferred Stock and the number of shares he wishes to convert, (C)
state in writing the name or names in which he wishes the certificate or
certificates for shares of Common Stock to be issued, and (D) pay any transfer
or similar tax if required. In the event that a holder fails to notify the
Transfer Agent of the number of shares of Preferred Stock which he wishes to
convert, he shall be deemed to have elected to convert all shares represented by
the certificate or certificates surrendered for conversion. The date on which
the holder satisfies all those requirements is the "Conversion Date." As soon
as practical after the Conversion Date, the Transfer Agent shall deliver a
certificate for the number of full shares of Common Stock issuable upon the
conversion from the shares of Common Stock held by the Transfer Agent pursuant
to paragraph 3(v) below, and a new certificate representing the unconverted
portion, if any, of the shares of Preferred Stock represented by the
2
<PAGE>
certificate or certificates surrendered for conversion and will cancel the
surrendered Preferred Stock certificate(s). The person in whose name the Common
Stock certificate is registered shall be treated as the stockholder of record on
and after the Conversion Date. No payment or adjustment will be made for
dividends on any Common Stock issued upon such conversion. If a holder of
Preferred Stock converts more than one share at a time, the number of full
shares of Common Stock issuable upon conversion shall be based on the total
liquidation preference of all shares of Preferred Stock converted. If the last
day on which Preferred Stock may be converted is not a Business Day, Preferred
Stock may be surrendered for conversion on the next succeeding Business Day.
(iii) The Transfer Agent shall not issue any fractional shares of Common
Stock upon conversion of Preferred Stock. Instead the Transfer Agent shall
round the results of a conversion up to the nearest full share of Common Stock.
(iv) If a holder converts shares of Preferred Stock, the Company shall pay
any documentary, stamp or similar issue or transfer tax due on the issue of
shares of Common Stock upon the conversion. However, the holder shall pay any
such tax that is due because the shares are issued in a name other than the
holder's name.
(v) The Company has reserved and deposited in escrow with the Transfer
Agent enough shares of Common Stock to permit the conversion of the Preferred
Stock in full. From time to time, upon the occurrence of any adjustment in the
number of shares of Common Stock issuable upon the conversion of the Preferred
Stock, the Company will reserve and deposit in escrow with the Transfer Agent
that number of additional shares of Common Stock as shall be necessary to permit
the conversion of the Preferred Stock in full, as so adjusted. All such shares
of Common Stock held by the Transfer Agent in escrow shall not be deemed
outstanding until delivered by the Transfer Agent to a holder of Preferred Stock
pursuant to the terms hereof. All shares of Common Stock that may be issued to
a holder of Preferred Stock upon conversion of Preferred Stock shall be fully
paid and nonassessable. The Company shall endeavor to comply with all
securities laws regulating the offer and delivery of shares of Common Stock upon
conversion of Preferred Stock and shall endeavor to list such shares of Common
Stock on each national securities exchange or automated quotation system on
which the Common Stock is listed.
(vi) In case the Company shall pay or make a dividend or other distribution
on any class of capital stock of the Company in Common Stock, the Conversion
Price in effect at the opening of business on the day following the date fixed
for the determination of stockholders entitled to receive such dividend or other
distribution shall be reduced by multiplying such Conversion Price by a fraction
the numerator of which shall be the number of shares of Common Stock outstanding
at the close of business on the date fixed for such determination and the
denominator of which shall be the sum of such number of shares and the total
number of shares constituting such dividend or other distribution, such
reduction to become effective immediately after the opening of business on the
day following the date fixed for such determination of the holders entitled to
such dividends and distributions. For the purposes of this paragraph 3(vi), the
number of shares of Common Stock at any time outstanding shall not include
shares held in the treasury of the Company or shares held by the Transfer Agent
pursuant to paragraph 3(v) above. The Company will not pay any dividend or make
any distribution on shares of Common Stock held in the treasury of the Company
or shares of Common Stock held by the Transfer Agent pursuant to paragraph 3(v)
above.
(vii) In case the Company shall issue Common Stock, any security
convertible into or exercisable for Common Stock, rights, options or warrants to
subscribe for, purchase or acquire shares of Common Stock or other securities
convertible into or exercisable for Common Stock (excluding shares or other
securities
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issued (i) in any of the transactions described in paragraphs 3(vi), 3(viii) or
3(ix) of this Agreement, (ii) pursuant to the Company's employee incentive
plans, (iii) upon exercise of options and warrants of the Company outstanding as
of the date hereof, (iv) to shareholders of any corporation which merges into
the Company or a subsidiary of the Company in proportion to their stock holdings
of such corporation immediately prior to such merger, upon such merger, (v) upon
conversion or exchange of any preferred stock or convertible debt of the
Company, or (vi) in a bona fide offering (whether pursuant to a registered
offering or an offering pursuant to Rule 144A of the Securities Act) pursuant to
a firm commitment underwriting designed to achieve a broad distribution and in
which no person (or group of affiliated persons) has a prior arrangement to
acquire shares in the offering such that, after giving effect to the offering,
such person or group would beneficially own shares representing 5% or more of
the total shares outstanding), at a price per share (on an as converted or
exercised basis) less than the current market price per share (determined as
provided in paragraph 3(xi) below) of the Common Stock on the earliest of (x)
the date of the closing of any new issuance, (y) the date fixed for the
determination of stockholders entitled to receive such securities, and (z) the
date on which the Company becomes contractually obligated to issue such
securities, the Conversion Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by multiplying
such Conversion Price by a fraction the numerator of which shall be the number
of shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate offering price for the total number of shares of Common Stock so
offered for subscription, purchase or acquisition would purchase at such current
market price per share and the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock so offered for
subscription, purchase or acquisition, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination of the holders entitled to such rights, options or
warrants. However, upon the expiration of any right, option or warrant to
purchase Common Stock, the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this paragraph 3(vii), if any such right, option or
warrant shall expire and shall not have been exercised, the Conversion Price
shall be recomputed immediately upon such expiration and effective immediately
upon such expiration shall be increased to the price it would have been (but
reflecting any other adjustments to the Conversion Price made pursuant to the
provisions of this paragraph 3 after the issuance of such rights, options or
warrants) had the adjustment of the Conversion Price made upon the issuance of
such rights, options or warrants been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights, options or warrants. No further
adjustment shall be made upon exercise of any right, option or warrant if any
adjustment shall have been made upon the issuance of such security. For the
purposes of this paragraph 3(vii), the number of shares of Common Stock at any
time outstanding shall not include shares held in the treasury of the Company or
shares held by the Transfer Agent pursuant to paragraph 3(v) above. The Company
will not issue any rights, options or warrants in respect of shares of Common
Stock held in the treasury of the Company or shares of Common Stock held by the
Transfer Agent pursuant to paragraph 3(v) above.
(viii) In case the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Conversion Price in effect
at the opening of business on the day following the day upon which such
subdivision becomes effective shall be reduced, and, conversely, in case the
outstanding shares of Common Stock shall each be combined into a smaller number
of shares of Common Stock, the Conversion Price in effect at the opening of
business on the day following the day upon which such combination becomes
effective shall be increased to equal the product of (x) the Conversion Price in
effect on such date and (y) a fraction the numerator of which shall be the
number of shares of Common Stock outstanding immediately prior to such
subdivision
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or combination, as the case may be, and the denominator of which shall be the
number of shares of Common Stock outstanding immediately after such subdivision
or combination, as the case may be. Such reduction or increase, as the case may
be, shall become effective immediately after the opening of business on the day
following the day upon which such subdivision or combination becomes effective.
(ix) In case the Company shall, by dividend or otherwise, distribute to all
holders of its Common Stock (A) evidences of its indebtedness or (B) shares of
any class of capital stock, cash or other assets (including securities, but
excluding (x) any rights, options or warrants for which an adjustment has been
made under paragraph 3(vii) above, (y) any dividend or distribution for which an
adjustment has been made under paragraph 3(vi) or 3(viii) above, and (z) cash
dividends paid from the Company's retained earnings, unless the sum of (1) all
such cash dividends and distributions made within the preceding 12 months in
respect of which no adjustment has been made and (2) any cash and the fair
market value of other consideration paid in respect of any repurchases of Common
Stock by the Company or any of its subsidiaries within the preceding 12 months
in respect of which no adjustment has been made, exceeds 20% of the Company's
market capitalization (being the product of the then current market price per
share (determined as provided in paragraph 3(xi) below) of the Common Stock
times the aggregate number of shares of Common Stock then outstanding on the
record date for such distribution)), then in each case, the Conversion Price in
effect at the opening of business on the day following the date fixed for the
determination of holders of Common Stock entitled to receive such distribution
shall be adjusted by multiplying such Conversion Price by a fraction of which
the numerator shall be the current market price per share (determined as
provided in paragraph 3(xi) below) of the Common Stock on such date of
determination less the then fair market value as determined by the Board (whose
determination shall be conclusive and shall be described in a statement filed
with the Transfer Agent) of the portion of the capital stock, cash or other
assets or evidences of indebtedness so distributed (and for which an adjustment
to the Conversion Price has not previously been made pursuant to the terms of
this paragraph 3) applicable to one share of Common Stock, and the denominator
shall be such current market price per share of the Common Stock, such
adjustment to become effective immediately after the opening of business on the
day following such date of determination of the holders entitled to such
distribution. The following transactions shall be excluded from the foregoing
clauses (1) and (2): repurchases of Common Stock issued under the Company's
stock incentive programs in accordance with the provisions thereof.
(x) In the case of any reclassification or change of the capital stock of
the Company, upon consummation of such reclassification or change, each share of
Preferred Stock shall survive such reclassification or change and automatically
become convertible into the kind and amount of securities, cash or other
property receivable upon such reclassification or change by a holder of the
number of shares of Common Stock into which such shares of Preferred Stock might
have been converted immediately prior to such reclassification or change.
Appropriate adjustment (as determined by the Board) shall be made in the
application of the provisions set forth herein with respect to the rights and
interests thereafter of the holders of the Preferred Stock, to the end that the
provisions set forth herein (including the provisions with respect to changes in
and other adjustment of the Conversion Price) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
securities or property thereafter deliverable upon conversion of the Preferred
Stock.
(xi) For the purpose of any computation under paragraph 3(vii) or 3(ix)
above, the current market price per share of Common Stock on any day shall be
deemed to be the average of the Closing Prices of the Common Stock for the 20
consecutive Trading Days ending the day before the day in question; provided
that, in the case of paragraph 3(ix), if the period between the date of the
public announcement of the dividend or distribution and the date for the
determination of holders of Common Stock entitled to
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receive such dividend or distribution shall be less than 20 Trading Days, the
period shall be such lesser number of Trading Days but, in any event, not less
than five Trading Days.
(xii) No adjustment in the Conversion Price need be made until all
cumulative adjustments amount to 1% or more of the Conversion Price as last
adjusted. Any adjustments that are not made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this
paragraph 3 shall be made to the nearest 1/1,000th of a cent or to the nearest
1/1,000th of a share, as the case may be.
(xiii) For purposes of this paragraph 3, "Common Stock" includes any
stock of any class of the Company which has no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company and which is not subject
to redemption by the Company (including the Class A Common Stock, par value $.01
per share, and the Class B Common Stock, par value $.01 per share, of the
Company). However, subject to the provisions of paragraph 3(xviii) below,
shares issuable on conversion of shares of Preferred Stock shall include only
shares of the class designated as Class A Common Stock of the Company on the
Preferred Stock Issue Date or shares of any class or classes or other securities
or assets resulting from any reclassification thereof; provided that, if at any
time there shall be more than one such resulting class, the shares of each such
class then so issuable shall be substantially in the proportion which the total
number of shares of such class resulting from all such reclassifications bears
to the total number of shares of all such classes resulting from all such
reclassifications.
(xiv) No adjustment in the Conversion Price shall reduce the Conversion
Price below the then par value of the Common Stock. No adjustment in the
Conversion Price need be made under paragraphs 3(vi), 3(vii) and 3(ix) above if
the Company issues or distributes to each holder of Preferred Stock the shares
of Common Stock, evidences of indebtedness, assets, rights, options or warrants
referred to in those paragraphs which each holder would have been entitled to
receive had Preferred Stock been converted into Common Stock prior to the
happening of such event or the record date with respect thereto.
(xv) Whenever the Conversion Price is adjusted, the Company shall promptly
mail to holders of Preferred Stock, first class, postage prepaid, a notice of
the adjustment, together with a certificate from the Company's independent
public accountants briefly stating the facts requiring the adjustment and the
manner of computing it. The certificate shall be conclusive evidence that the
adjustment is correct.
(xvi) The Company from time to time may reduce the Conversion Price if it
considers such reductions to be advisable in order that any event treated for
federal income tax purposes as a dividend of stock or stock rights will not be
taxable to the holders of Common Stock by any amount, but in no event may the
Conversion Price be less than the par value of a share of Common Stock.
Whenever the Conversion Price is reduced pursuant to this paragraph 3(xvi), the
Company shall mail to holders of Preferred Stock a notice of the reduction. The
Company shall mail, first class, postage prepaid, the notice at least 5 days
before the date the reduced Conversion Price takes effect pursuant to this
paragraph 3(xvi). The notice shall state the reduced Conversion Price and the
period it will be in effect. A reduction of the Conversion Price does not
change or adjust the Conversion Price otherwise in effect for purposes of
paragraphs 3(vi), 3(vii), 3(viii) and 3(ix) above.
(xvii) If:
(A) the Company takes any action which would require an adjustment in
the Conversion Price pursuant to this Section 3;
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(B) a capital reorganization of the Company occurs or the Company
consolidates or merges with, or transfers all or substantially all of its assets
to, another corporation; or
(C) there is a dissolution or liquidation of the Company;
the Company shall mail to holders of the Preferred Stock, first class, postage
prepaid, a notice stating the proposed record or effective date, as the case may
be. The Company shall mail the notice at least 5 days prior to such proposed
record or effective date. However, failure to mail the notice or any defect in
it shall not affect the validity of any transaction referred to in clause (A),
(B) or (C) of this paragraph 3(xvii).
(xviii) In the case of any consolidation of the Company or merger of the
Company with any other entity or the sale or transfer of all or substantially
all the assets of the Company pursuant to which the Company's Common Stock is
converted into other securities, cash or assets, upon consummation of such
transaction, each share of Preferred Stock shall automatically become
convertible into the kind and amount of securities, cash or other assets
receivable upon the consolidation, merger, sale or transfer by a holder of the
number of shares of Common Stock into which such share of Preferred Stock might
have been converted immediately prior to such consolidation, merger, transfer or
sale (assuming such holder of Common Stock failed to exercise any rights of
election and received per share the kind and amount of consideration receivable
per share by a plurality of non-electing shares). Appropriate adjustment (as
determined by the Board) shall be made in the application of the provisions
herein set forth with respect to the rights and interests thereafter of the
holders of Preferred Stock, to the end that the provisions set forth herein
(including provisions with respect to changes in and other adjustment of the
Conversion Price) shall thereafter be applicable, as nearly as reasonably may
be, in relation to any shares of stock or other securities or property
thereafter deliverable upon the conversion of Preferred Stock. If this
paragraph 3(xviii) applies, paragraphs 3(vi), 3(viii) and 3(x) do not apply.
(xix) In any case in which this paragraph 3 shall require that an
adjustment as a result of any event become effective from and after a record
date, the Company may elect to defer until after the occurrence of such event
the issuance to the holder of any shares of Preferred Stock converted after such
record date and before the occurrence of such event of the additional shares of
Common Stock issuable upon such conversion over and above the shares issuable on
the basis of the Conversion Price in effect immediately prior to adjustment;
provided, however, that if such event shall not have occurred and authorization
of such event shall be rescinded by the Company, the Conversion Price shall be
recomputed immediately upon such rescission to the price that would have been in
effect had such event not been authorized, provided that such rescission is
permitted by and effective under applicable laws.
4. Liquidation Rights. Upon any voluntary or involuntary liquidation,
------------------
dissolution or winding-up of the Company, each holder of shares of the Preferred
Stock will be entitled to payment out of the assets of the Company available for
distribution of an amount equal to the Liquidation Preference per share of
Preferred Stock held by such holder, before any distribution is made on any
Junior Securities, including, without limitation, common stock of the Company.
After payment in full of the Liquidation Preference, the holders of Preferred
Stock will not be entitled to any further participation in any distribution of
assets of the Company. If, upon any voluntary or involuntary liquidation,
dissolution or winding-up of the Company, the amounts payable with respect to
the Preferred Stock and all other Parity Securities are not paid in full, the
holders of the Preferred Stock and the Parity Securities will share equally and
ratably in any distribution of assets of the Company in proportion to the full
liquidation preference to which each is entitled. However, neither the voluntary
sale, conveyance, exchange or transfer (for cash, shares of stock, securities or
other
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consideration) of all or substantially all of the property or assets of the
Company nor the consolidation or merger of the Company with or into one or more
Persons will be deemed to be a voluntary or involuntary liquidation, dissolution
or winding-up of the Company, unless such sale, conveyance, exchange or transfer
shall be in connection with a liquidation, dissolution or winding-up of the
business of the Company.
5. Redemption at the Option of the Holders. Subject to the legal
---------------------------------------
availability of funds therefor, on or after the Optional Redemption Date, the
registered holders of a majority of the then outstanding shares of Preferred
Stock can require the Company, by written notice (the "Redemption Notice"), to
redeem all of the outstanding shares of Preferred Stock within 30 days after the
receipt by the Company of the Redemption Notice at a price in cash equal to the
Liquidation Preference thereof; provided, that such redemption is permitted by
the terms of the agreements in place as of January 10, 2000 governing the
outstanding indebtedness of the Company and Intermedia. The Company shall not be
required to make sinking fund payments with respect to the Preferred Stock. The
Company shall give ten (10) days prior notice to all of the registered holders
of Preferred Stock of the occurrence of an Optional Redemption Date.
6 Change of Control.
-----------------
(i) If and to the extent permitted by the terms of the agreements governing
the outstanding indebtedness of the Company and Intermedia, upon the occurrence
of a Change of Control, the Company shall be required to make an offer (a
"Change of Control Offer") to each holder of shares of Preferred Stock to
repurchase all or any part of such holder's shares of Preferred Stock at an
offer price in cash equal to 100% of the aggregate Liquidation Preference
thereof (the "Change of Control Payment"). If a Change of Control Payment is
not permitted under the agreements governing the outstanding indebtedness of the
Company or Intermedia, upon the occurrence of a Change of Control, each share of
Preferred Stock may be converted at the election of the holder thereof (upon
notice delivered to the Company in writing within 30 business days after a
receipt of the notice of the Change of Control referred to in paragraph 6(ii))
into such number of fully paid and nonassessable shares of Common Stock equal to
(x) the Liquidation Preference per share of Preferred Stock, divided by (y) the
average of the Closing Prices of the Common Stock for the 20 consecutive Trading
Days ending on the Trading Day prior to the Change of Control.
(ii) Subject to paragraph 6(i) above, within 30 days following any Change
of Control, the Company shall (a) issue a press release regarding the occurrence
of the Change of Control, and (b) mail a notice to each holder of Preferred
Stock describing the transaction that constitutes the Change of Control,
together with such other information as may be required pursuant to the
securities laws, and stating: (A) that the Change of Control Offer is being made
pursuant to this Certificate of Designations and that, to the extent lawful, all
shares of Preferred Stock validly tendered will be accepted for payment; (B) the
purchase price and the purchase date, which shall be no earlier than 30 days nor
later than 60 days from the date such notice is mailed (the "Change of Control
Payment Date"); and (C) a description of the procedures to be followed by such
holder in order to have its shares of Preferred Stock repurchased.
(iii) Subject to paragraph 6(i) above, on the Change of Control Payment
Date, the Company shall, to the extent lawful, (A) accept for payment shares of
Preferred Stock validly tendered pursuant to the Change of Control Offer and (B)
promptly mail to each holder of shares of Preferred Stock so accepted payment in
an amount equal to the purchase price for such shares and (C) unless the Company
defaults in the payment for the shares of Preferred Stock tendered pursuant to
the Preferred Stock Change of Control Offer, all rights of holders of such
tendered shares will terminate, except for the right to receive payment
therefor, on the Change of Control Payment Date. The Company shall publicly
announce the results of the
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Preferred Stock Change of Control Offer on or as soon as practicable after the
Change of Control Payment Date.
(iv) The Company shall comply with any securities laws and regulations, to
the extent such laws and regulations are applicable to the repurchase of shares
of the Preferred Stock in connection with a Change of Control.
(v) Notwithstanding the foregoing, the Company shall not be required to
make a Change of Control Offer following a Change of Control if a third party
makes the Change of Control Offer in the manner, at the times and otherwise in
compliance with the requirements set forth in this Certificate of Designations
applicable to a Change of Control Offer made by the Company and purchases all of
the Preferred Stock validly tendered and not withdrawn under such Change of
Control Offer.
7. Voting Rights.
-------------
(i) The holders of record of shares of the Preferred Stock shall have no
voting rights, except as required by law and as hereinafter provided in this
Section 7.
(ii) The Company shall not, without the affirmative vote or consent of the
holders of at least a majority of the shares of Preferred Stock then outstanding
(with shares held by the Company or any of its Affiliates not being considered
to be outstanding for this purpose) voting or consenting as the case may be, as
one class:
(a) authorize, create (by way of reclassification or otherwise) or
issue any additional shares of Preferred Stock or any Senior Securities,
Parity Securities or any obligation or security convertible or exchangeable
into or evidencing the right to purchase, shares of Preferred Stock or any
shares of any class or series of Senior Securities or Parity Securities or
a series of preferred stock which provides for the regular accrual or
payment of dividends; or
(b) amend or otherwise alter the Company's Certificate of
Incorporation (including the provisions of Section 7 of this Certificate of
Designation) (whether by amendment to the Certificate of Incorporation,
merger or otherwise) in any manner that adversely affects the specified
rights, preferences, privileges or voting rights of holders of Preferred
Stock or convert or otherwise change (whether by amendment to the
Certificate of Incorporation, merger or otherwise) the Preferred Stock into
any other securities, rights, cash or other property.
(iii) Without the consent of each holder affected, an amendment or waiver
of the Company's Certificate of Incorporation or of this Certificate of
Designation may not (with respect to any shares of Preferred Stock held by a
non-consenting holder):
(a) alter the voting rights with respect to the Preferred Stock or
reduce the number of shares of Preferred Stock whose holders must consent
to an amendment, supplement or waiver (other than under Section 6 above);
(b) reduce the Liquidation Preference of the Preferred Stock;
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<PAGE>
(c) make any conversion of shares of Preferred Stock payable in any
form other than that stated in this Certificate of Designation;
(d) make any change in the provisions of this Certificate of
Designation relating to waivers of the rights of holders of Preferred Stock
to receive the Liquidation Preference; or
(e) make any change in the foregoing amendment and waiver provisions.
(viii) The Company in its sole discretion may without the vote or consent
of any holders of the Preferred Stock amend or supplement this Certificate of
Designation:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Preferred Stock in addition to or
in place of certificated Preferred Stock; or
(c) to make any change that would provide any additional rights or
benefits to the holders of the Preferred Stock or that does not adversely
affect the legal rights under this Certificate of Designation of any such
holder.
Except as set forth above, (x) the creation, authorization or issuance of any
shares of Junior Securities, Parity Securities or Senior Securities or (y) the
increase or decrease in the amount of authorized capital stock of any class,
including any preferred stock, shall not require the consent of the holders of
the Preferred Stock and shall not be deemed to affect adversely the rights,
preferences, privileges, special rights or voting rights of holders of shares of
Preferred Stock.
8. Merger, Consolidation and Sale of Assets. Without the vote or consent
----------------------------------------
of the holders of a majority of the then outstanding shares of Preferred Stock,
the Company may not consolidate or merge with or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its assets to, any
person unless (i) the entity formed by such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made (in any such case, the "resulting
entity") is a corporation organized and existing under the laws of the United
States or any State thereof or the District of Columbia; and (ii) if the Company
is not the resulting entity, the Preferred Stock is converted into or exchanged
for and becomes shares of such resulting entity, having in respect of such
resulting entity the same (or more favorable) powers, preferences and relative,
participating, optional or other special rights thereof that the Preferred Stock
had immediately prior to such transaction. The resulting entity of such
transaction shall thereafter be deemed to be the "Company" for all purposes of
this Certificate of Designations.
9. Reports. The Company shall file within 15 days after it files them
-------
with the Commission copies of the annual and quarterly reports and the
information, documents, and other reports that the Company is required to file
with the Commission pursuant to Section 13(a) or 15(d) of the Exchange Act ("SEC
Reports") with the Transfer Agent. In the event the Company is not required or
shall cease to be required to file SEC Reports, pursuant to the Exchange Act,
the Company shall nevertheless continue to file such reports with the Commission
(unless the Commission shall not accept such a filing) and the Transfer Agent.
Whether or not required by the Exchange Act to file SEC Reports with the
Commission, so long as any shares of Preferred Stock are outstanding, the
Company shall furnish copies of the SEC Reports to the
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holders of Preferred Stock at the time the Company is required to make such
information available to the Transfer Agent and any investors who request it in
writing.
10. Amendment. This Certificate of Designation shall not be amended,
---------
either directly or indirectly, or through merger or consolidation with another
entity, in any manner that would alter or change the powers, preferences or
special rights of the Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of a majority or more of the outstanding
Preferred Stock, voting separately as a class.
11. Exclusion of Other Rights. Except as may otherwise be required by
-------------------------
law, the shares of Preferred Stock shall not have any voting powers, preferences
and relative, participating, optional or other special rights, other than those
specifically set forth in this resolution (as such resolution may be amended
from time to time) and in the Certificate of Incorporation. The shares of
Preferred Stock shall have no preemptive or subscription rights.
12. Headings of Subdivisions. The headings of the various subdivisions
------------------------
hereof are for convenience of reference only and shall not affect the
interpretation of any of the provisions hereof.
13. Severability of Provisions. If any voting powers, preferences and
--------------------------
relative, participating, optional and other special rights of the Preferred
Stock and qualifications, limitations and restrictions thereof set forth in this
resolution (as such resolution may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other voting powers, preferences and relative, participating,
optional and other special rights of Preferred Stock and qualifications,
limitations and restrictions thereof set forth in this resolution (as so
amended) which can be given effect without the invalid, unlawful or
unenforceable voting powers, preferences and relative, participating, optional
and other special rights of Preferred Stock and qualifications, limitations and
restrictions thereof shall, nevertheless, remain in full force and effect, and
no voting powers, preferences and relative, participating, optional or other
special rights of Preferred Stock and qualifications, limitations and
restrictions thereof herein set forth shall be deemed dependent upon any other
such voting powers, preferences and relative, participating, optional or other
special rights of Preferred Stock and qualifications, limitations and
restrictions thereof unless so expressed herein.
14. Reissuance of Preferred Stock. Shares of Preferred Stock that have
-----------------------------
been issued and reacquired in any manner, including shares purchased or redeemed
or exchanged or converted, shall (upon compliance with any applicable provisions
of the laws of Delaware) have the status of authorized but unissued shares of
preferred stock of the Company undesignated as to series and may be designated
or redesignated and issued or reissued, as the case may be, as part of any
series of preferred stock of the Company, provided that any issuance of such
shares as Preferred Stock must be in compliance with the terms hereof.
15. Mutilated or Missing Preferred Stock Certificates. If any of the
-------------------------------------------------
Preferred Stock certificates shall be mutilated, lost, stolen or destroyed, the
Company shall issue, in exchange and in substitution for and upon cancellation
of the mutilated Preferred Stock certificate, or in lieu of and substitution for
the Preferred Stock certificate lost, stolen or destroyed, a new Preferred Stock
certificate of like tenor and representing an equivalent amount of shares of
Preferred Stock, but only upon receipt of evidence of such loss, theft or
destruction of such Preferred Stock certificate and indemnity, if requested,
satisfactory to the Company and the transfer agent (if other than the Company).
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16. Certain Definitions. As used in this Certificate of Designations,
-------------------
the following terms shall have the following meanings (with terms defined in the
singular having comparable meanings when used in the plural and vice versa),
unless the context otherwise requires:
"Business Day" means any day except a Saturday, a Sunday, or any day on
------------
which banking institutions in New York, New York are required or authorized by
law or other governmental action to be closed.
"Change of Control" means the occurrence of any of the following: (i) the
-----------------
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its subsidiaries, taken as a
whole, (ii) the adoption of a plan relating to the liquidation or dissolution of
the Company, (iii) the consummation of any transaction (including, without
limitation, any merger or consolidation) the result of which is that any
"person" or "group" (as such terms are used in Section 13(d)(3) of the Exchange
Act) becomes the "beneficial owner" (as such term is defined in Rule 13d-3 and
Rule 13d-5 under the Exchange Act), directly or indirectly through one or more
intermediaries, of 50% or more of the voting power of the outstanding voting
stock of the Company, unless (A) the Closing Price per share of Common Stock for
any five Trading Days within the period of ten consecutive Trading Days ending
immediately after the announcement of such Change of Control equals or exceeds
105% of the Conversion Price then in effect and (B) at least 90% of the
consideration in the transaction or transactions constituting a Change of
Control pursuant to clause (iii) consists of shares of common stock traded or to
be traded immediately following such Change of Control on a national securities
exchange or the Nasdaq National Market and, as a result of such transaction or
transactions, the Preferred Stock becomes convertible solely into such common
stock (and any rights attached thereto), (iv) a transaction by Intermedia as a
result of which Intermedia would be required to file a Schedule 13D or amend
Schedule 13G under the Exchange Act (other than by reason of a decrease in
beneficial ownership), or (v) the first day on which more than a majority of the
Board of Directors are not Continuing Directors; provided, however, that a
transaction in which the Company becomes a subsidiary of another entity (the
"Parent Entity") shall not constitute a Change of Control if (A) the
stockholders of the Company immediately prior to such transaction "beneficially
own" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange
Act), directly or indirectly through one or more intermediaries, at least a
majority of the voting power of the outstanding voting stock of the Parent
Entity immediately following the consummation of such transaction in the same
relative percentages as prior to such transaction and (B) immediately following
the consummation of such transaction, no "person" or "group" (as such terms are
defined above), other than such other entity (but including holders of equity
interests of such other entity), "beneficially owns" (as such term is defined
above), directly or indirectly through one or more intermediaries, more than 50%
of the voting power of the outstanding voting stock of the Parent Entity.
"Closing Price" means, for each Trading Day, the last reported sale price
-------------
regular way on the Nasdaq National Market or, if the Common Stock is not quoted
on the Nasdaq National Market, the average of the closing bid and asked prices
in the over-the-counter market as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose.
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means, except as otherwise provided in Section 3(xiii)
------------
hereof, the Class A Common Stock, par value $0.01 per share, of the Company.
12
<PAGE>
"Continuing Directors" means, as of any date of determination, any member
--------------------
of the Board of Directors of the Company who (a) was a member of the Board of
Directors on the date of original issuance of the Preferred Stock or (b) was
nominated for election to the Board of Directors with the approval of, or whose
election was ratified by, at least two-thirds of the Continuing Directors who
were members of the Board of Directors at the time of such nomination or
election.
"Conversion Price" shall initially mean $68.40 per share and thereafter
----------------
shall be subject to adjustment from time to time pursuant to the terms of
paragraph 3 hereof.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Intermedia" shall mean Intermedia Communications Inc., a Delaware
----------
Corporation.
"Optional Redemption Date" shall be the earlier to occur of (i) the fourth
------------------------
anniversary of the Preferred Stock Issue Date or (ii) if Intermedia and the
Company have terminated their restrictive obligations pursuant to debt
instruments existing as of January 1, 2000, the date that the Company and/or
Intermedia plan to close a transaction that would thereafter restrict their
ability to redeem the Preferred Stock.
"Person" means any individual, corporation, partnership, limited liability
------
company, joint venture, association, joint stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Preferred Stock Issue Date" means the date on which the Preferred Stock is
--------------------------
originally issued by the Company under this Certificate of Designation.
"Trading Day" means any day on which the Nasdaq National Market or other
-----------
applicable stock exchange or market is open for business.
"Transfer Agent" shall be Continental Stock Transfer & Trust Co. unless and
--------------
until a successor is selected by the Company.
13
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to be duly
executed by Mark K. Shull, Chief Executive Officer of the Company and attested
by Robert B. Patrick, Secretary of the Company, this 11th day of January , 2000.
DIGEX, INCORPORATED
By: /s/ MARK K. SHULL
-----------------
Name: Mark K. Shull
Title: Chief Executive Officer
ATTEST:
By: /s/ ROBERT B. PATRICK
---------------------
Name: Robert B. Patrick
Title: Secretary
14
<PAGE>
Exhibit 4.2
WARRANT AGREEMENT
Dated as of January 12, 2000
By and among
DIGEX, INCORPORATED,
MICROSOFT CORPORATION
and
CPQ HOLDINGS, INC.
<PAGE>
WARRANT AGREEMENT dated as of January 12, 2000 by and among DIGEX,
INCORPORATED, a Delaware corporation (the "Company"), Microsoft Corporation, a
Delaware corporation, and CPQ Holdings, Inc., a Delaware corporation (Microsoft
Corporation and CPQ Holdings, Inc. together, the "Initial Holders").
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Grant. The Company hereby grants to the Initial Holders, in the
-----
amounts set forth in Exhibit A opposite their names, warrants ("Warrants") which
---------
shall entitle the registered holder thereof to purchase from the Company, at any
time or from time to time hereafter until 5:00 P.M., New York time, on January
12, 2003 (the "Expiration Date"), up to 1,065,000 shares (the "Warrant Shares")
of Class A Common Stock, par value $.01 per share, of the Company ("Common
Stock"), subject to adjustment as provided in Section 6, at the exercise price
of $57.00 per share, subject to adjustment as provided in Section 6 (the
"Exercise Price"), all subject to the terms and upon the conditions set forth
herein. Each Warrant not exercised or deemed exercised on or prior to the
Expiration Date shall become invalid and all rights thereunder, and all rights
in respect thereof under this Agreement, shall cease as of that time.
2. Warrant Certificates. The Warrants shall be evidenced by
--------------------
certificates issued pursuant to this Agreement (the "Warrant Certificates") in
the form set forth in Exhibit B hereto, with such appropriate insertions,
---------
omissions, substitutions, and other variations as are required or permitted by
this Agreement.
3. Exercise of Warrant.
-------------------
(a) General. Subject to the provisions of this Agreement, upon
-------
surrender to Continental Transfer & Trust Company (the "Transfer Agent") at its
principal office of a Warrant Certificate with the annexed Form of Election to
Purchase duly executed, together with Payment (as defined below) of the Exercise
Price then in effect, the Transfer Agent shall issue and deliver promptly to the
registered holder of such Warrant Certificate, a certificate or certificates for
the Warrant Shares or other securities or property to which the registered
holder is entitled, registered in the name of such registered holder or, upon
the written order of such registered holder, in such name or names as such
registered holder may designate. Any certificate or certificates representing
Warrant Shares shall be deemed to have been issued and any person so designated
to be named therein shall be deemed to have become the holder of record of the
Warrant Shares as of the date of the surrender of such Warrant Certificate
(together with such duly executed Form of Election to Purchase) and Payment of
the Exercise Price.
(b) Payment. Payment of the Exercise Price shall not be made in
-------
cash. Each registered holder of the Warrants shall exercise its rights to
receive Warrant Shares on a net basis, such that without the exchange of any
funds, such holder receives that number of Warrant Shares that would otherwise
be issuable upon a cash exercise of such Warrants less that number of Warrant
Shares having a current market price equal to the aggregate cash Exercise Price
that
1
<PAGE>
would otherwise have been paid by such holder for the number of Warrant Shares
with respect to which such Warrant is being exercised. For purposes of this
Warrant Agreement, "Payment" of the Exercise Price shall be made pursuant to the
previous sentence.
For the purpose of any computation under this paragraph 3(b), the
current market price per share of Common Stock on any day shall be deemed to be
the average of the Closing Prices of the Common Stock for the 10 consecutive
trading days ending on the day before the day the Warrant Certificate (together
with a duly executed Form of Election to Purchase) is delivered to the Company.
The term "Closing Price" shall mean, for each trading day, the last reported
sale price on the Nasdaq National Market or, if the Common Stock is not quoted
on the Nasdaq National Market, the average of the closing bid and asked prices
in the over-the-counter market as furnished by any New York Stock Exchange
member firm selected from time to time by the Company for that purpose. If for
any reason the current market price per share cannot be determined pursuant to
the foregoing provisions of this paragraph, the current market price per share
shall be the fair market value thereof as determined in good faith by the Board
of Directors of the Company (the "Board").
(c) Exercise in Whole or in Part. The purchase rights evidenced by a
----------------------------
Warrant Certificate shall be exercisable, at the election of the registered
holder thereof, in whole or in part, but only for lots of 100 (as appropriately
adjusted for any reverse stock splits and similar transactions that result in
fewer Warrant Shares issuable upon exercise) Warrant Shares or integral
multiples thereof if less than all the Warrants then held by such registered
holder are being exercised. If less than all of the Warrant Shares purchasable
under any Warrant Certificate are purchased, the Transfer Agent shall cancel
such Warrant Certificate upon the surrender thereof and shall execute and
deliver a new Warrant Certificate of like tenor for the remaining number of
Warrant Shares purchasable thereunder.
(d) Fractional Shares. No fractional shares of Common Stock shall be
-----------------
issued upon exercise of any Warrants. Instead the Transfer Agent shall round the
results of an exercise up to the nearest full share of Common Stock.
(e) Reservation of Shares. The Company has reserved and deposited in
---------------------
escrow with the Transfer Agent enough shares of Common Stock to permit the
exercise of the Warrants in full. From time to time, upon any adjustment of the
Exercise Price and the number of Warrant Shares deliverable hereunder pursuant
to Section 6, the Company shall reserve and deposit in escrow with the Transfer
Agent enough additional shares of Common Stock to permit the exercise of the
Warrants in full, as so adjusted. All such shares of Common Stock held by the
Transfer Agent in escrow shall not be deemed outstanding until delivered by the
Transfer Agent to a registered holder of the Warrants pursuant to the terms
hereof. All shares of Common Stock that may be issued to a registered holder of
the Warrants upon exercise shall be fully paid and nonassessable and free of all
taxes, liens and charges in respect thereof other than those resulting from any
action taken by the registered holder or as provided in Section 8 hereof. The
2
<PAGE>
Company shall endeavor to comply with all securities laws regulating the offer
and delivery of shares of Common Stock upon exercise of the Warrants.
4. Restrictions on Transfer.
------------------------
(a) Warrant Register. The Transfer Agent shall maintain at its
----------------
principal office a Warrant Register for registration of the Warrants and Warrant
Certificates and transfers thereof. The Transfer Agent shall initially register
the outstanding Warrants in the name of the Initial Holders. The Transfer Agent
may deem and treat the registered holder(s) of the Warrant Certificates as the
absolute owner(s) thereof and of the Warrants represented thereby
(notwithstanding any notation of ownership or other writing on the Warrant
Certificates made by any person) for the purpose of any exercise thereof or any
distribution to the holder(s) thereof, and for all other purposes, and neither
the Company nor the Transfer Agent shall be affected by any notice to the
contrary.
(b) Warrants and Warrant Shares Not Registered. Each registered
------------------------------------------
holder of the Warrants, by acceptance thereof, represents and acknowledges that
the Warrants and the Warrant Shares which may be purchased upon exercise of a
Warrant are not registered under the Securities Act of 1933, as amended (the
"Securities Act"), that the issuance of the Warrants and the offering and sale
of such Warrant Shares are being made in reliance on the exemption from
registration under Section 4(2) of the Securities Act as not involving any
public offering and that the Company's reliance on such exemption is predicated
in part on the representations made by the Initial Holders of the Warrants to
and with the Company that each such holder (1) is acquiring the Warrants for
investment for its own account, with no present intention of reselling or
otherwise distributing the same, (2) is an "accredited investor" as defined in
Regulation D under the Securities Act, and (3) has such knowledge and experience
in financial and business matters that it is capable of evaluating the merits
and risks of the investments made or to be made in connection with the
acquisition and exercise of the Warrants. Neither the Warrants nor the related
Warrant Shares may be transferred except (i) pursuant to an effective
registration statement under the Securities Act, or (ii) if such transferee
makes the applicable representations set forth in the preceding sentence in
writing to the Company, with the delivery to the Company and the Transfer Agent
of an opinion of counsel, reasonably satisfactory to the Company, stating that
(A) no registration is required under the Securities Act, and (B) such
disposition will also be in compliance with applicable state securities law;
provided that no such opinion of counsel shall be required for a transfer of the
Warrants or the related Warrant Shares by an Initial Holder to any of its
affiliates, provided that such affiliate assumes all of such Initial Holder's
obligations hereunder.
(c) Notice and Registration of Transfer. Each registered holder
-----------------------------------
of the Warrants, by acceptance thereof, agrees that prior to any disposition by
such holder of the Warrants or of any Warrant Shares, such holder will give
written notice to the Transfer Agent expressing such holder's intention to
effect such disposition and describing briefly such holder's intention as to the
manner in which the Warrants or the Warrant Shares theretofore issued or
3
<PAGE>
thereafter issuable upon exercise hereof, are to be disposed of together with
the opinion, if any, required by paragraph 4(b) above, whereupon, but only if
such transfer is permitted pursuant to paragraph 4(b) above, such transferring
holder shall be entitled to dispose of the Warrants and/or the Warrant Shares
theretofore issued upon the exercise thereof, all in accordance with the terms
of the notice delivered by such holder to the Transfer Agent. In the event of
such transfer, the Transfer Agent shall register the transfer of any outstanding
Warrants in the Warrant Register upon surrender of the Warrant Certificate(s)
evidencing such Warrants to the Transfer Agent at its principal office,
accompanied by a written instrument of transfer in form satisfactory to it, duly
executed by the registered holder thereof. Upon any such registration or
transfer, new Warrant Certificate(s) evidencing such transferred Warrants shall
be issued to the transferee(s) and the surrendered Warrant Certificate(s) shall
be canceled.
5. Special Agreements of the Company. The Company covenants and
---------------------------------
agrees as follows:
(a) Listing on Securities Exchanges. If the Common Stock is listed on
-------------------------------
a stock exchange, the Company will use its reasonable best efforts to procure at
its sole expense the listing of all Warrant Shares (subject to issuance or
notice of issuance) on all stock exchanges on which the Common Stock is then
listed and maintain the listing of such shares and other securities after
issuance.
(b) Actions in Avoidance; Non-Dilution. The Company will not,
----------------------------------
by amendment of its Restated Certificate of Incorporation, as amended, or
through any reorganization, transfer of assets, consolidation, merger, issue or
sale of securities or otherwise, avoid or take any action which would have the
effect of avoiding the observance or performance of any of the terms to be
observed or performed hereunder by the Company but will at all times in good
faith assist in carrying out all of the provisions of the Warrants and in taking
all of such action as may be necessary or appropriate in order to protect the
rights of the registered holders of the Warrants against impairment.
6. Adjustment of Exercise Price and Number of Warrant Shares
---------------------------------------------------------
Issuable. The number and kind of shares purchasable upon the exercise of
- ---------
Warrants and the Exercise Price shall be subject to adjustment from time to time
as follows:
(a) In case the Company shall pay or make a dividend or other
distribution on any class of capital stock of the Company in Common Stock, the
Exercise Price in effect at the opening of business on the day following the
date fixed for the determination of stockholders entitled to receive such
dividend or other distribution shall be reduced by multiplying such Exercise
Price by a fraction the numerator of which shall be the number of shares of
Common Stock outstanding at the close of business on the date fixed for such
determination and the denominator of which shall be the sum of such number of
shares and the total number shares constituting such dividend or other
distribution, such reduction to become effective immediately after the opening
of business on the day following the date fixed for such determination of the
4
<PAGE>
holders entitled to such dividends and distributions. For the purposes of this
paragraph 6(a), the number of shares of Common Stock at any time outstanding
shall not include shares held in the treasury of the Company. The Company will
not pay any dividend or make any distribution on shares of Common Stock held in
the treasury of the Company.
(b) In case the Company shall issue Common Stock, any security
convertible into or exercisable for Common Stock, or rights, options or warrants
to subscribe for, purchase or acquire shares of Common Stock or other securities
convertible into or exercisable for Common Stock (excluding shares issued (i) in
any of the transactions described in paragraphs 6(a), 6(c) or 6(d) of this
Agreement, (ii) pursuant to the Company's employee incentive plans, (iii) upon
exercise of options and warrants of the Company outstanding as of the date
hereof, (iv) to shareholders of any corporation which merges into the Company or
a subsidiary of the Company in proportion to their stock holdings of such
corporation immediately prior to such merger, upon such merger, (v) upon
conversion or exchange of any preferred stock or convertible debt of the
Company, or (vi) in a bona fide offering (whether pursuant to a registered
offering or an offering pursuant to Rule 144A of the Securities Act) pursuant to
a firm commitment underwriting designed to achieve a broad distribution and in
which no person (or group of affiliated persons) has a prior arrangement to
acquire shares in the offering such that, after giving effect to the offering,
such person or group would beneficially own shares representing 5% or more of
the total shares outstanding), at a price per share (on an as converted or
exercised basis) less than the current market price per share (determined as
provided in paragraph 6(f) below) of the Common Stock on the earliest of (x)
the date of the closing of any new issuance, (y) the date fixed for the
determination of stockholders entitled to receive such securities, and (z) the
date on which the Company becomes contractually obligated to issue such
securities, the Exercise Price in effect at the opening of business on the day
following the date fixed for such determination shall be reduced by multiplying
such Exercise Price by a fraction the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock which the
aggregate offering price for the total number of shares of Common Stock so
offered for subscription, purchase or acquisition would purchase at such current
market price per share and the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the date fixed
for such determination plus the number of shares of Common Stock so offered for
subscription, purchase or acquisition, such reduction to become effective
immediately after the opening of business on the day following the date fixed
for such determination of the holders entitled to such rights, options or
warrants. However, upon the expiration of any right, option or warrant to
purchase Common Stock, the issuance of which resulted in an adjustment in the
Exercise Price pursuant to this paragraph 6(b), if any such right, option or
warrant shall expire and shall not have been exercised, the Exercise Price shall
be recomputed immediately upon such expiration and effective immediately upon
such expiration shall be increased to the price it would have been (but
reflecting any other adjustments to the Exercise Price made pursuant to the
provisions of this paragraph 6 after the issuance of such rights, options or
warrants) had the adjustment of the Exercise Price made upon the issuance of
such rights, options or warrants been made on the basis of offering for
subscription or purchase only that number of shares of
5
<PAGE>
Common Stock actually purchased upon the exercise of such rights, options or
warrants. No further adjustment shall be made upon exercise of any right, option
or warrant if any adjustment shall have been made upon the issuance of such
security. For the purposes of this paragraph 6(b), the number of shares of
Common Stock at any time outstanding shall not include shares held in the
treasury of the Company. The Company will not issue any rights, options or
warrants in respect of shares of Common Stock held in the treasury of the
Company.
(c) In case the outstanding shares of Common Stock shall be subdivided
into a greater number of shares of Common Stock, the Exercise Price in effect at
the opening of business on the day following the day upon which such subdivision
becomes effective shall be reduced, and, conversely, in case the outstanding
shares of Common Stock shall each be combined into a smaller number of shares of
Common Stock, the Exercise Price in effect at the opening of business on the day
following the day upon which such combination becomes effective shall be
increased to equal the product of (x) the Exercise Price in effect on such date
and (y) a fraction the numerator of which shall be the number of shares of
Common Stock outstanding immediately prior to such subdivision or combination,
as the case may be, and the denominator of which shall be the number of shares
of Common Stock outstanding immediately after such subdivision or combination,
as the case may be. Such reduction or increase, as the case may be, shall
become effective immediately after the opening of business on the day following
the day upon which such subdivision or combination becomes effective.
(d) In case the Company shall, by dividend or otherwise, distribute to
all holders of its Common Stock (A) evidences of its indebtedness or (B) shares
of any class of capital stock, cash or other assets (including securities, but
excluding (x) any rights, options or warrants for which an adjustment has been
made under paragraph 6(b) above, (y) any dividend or distribution for which an
adjustment has been made under paragraph 6(a) or 6(c) above, and (z) cash
dividends paid from the Company's retained earnings, unless the sum of (1) all
such cash dividends and distributions made within the preceding 12 months in
respect of which no adjustment has been made and (2) any cash and the fair
market value of other consideration paid in respect of any repurchases of Common
Stock by the Company or any of its subsidiaries within the preceding 12 months
in respect of which no adjustment has been made, exceeds 20% of the Company's
market capitalization (being the product of the then current market price per
share (determined as provided in paragraph 6(f) below) of the Common Stock times
the aggregate number of shares of Common Stock then outstanding on the record
date for such distribution)), then in each case, the Exercise Price in effect at
the opening of business on the day following the date fixed for the
determination of holders of Common Stock entitled to receive such distribution
shall be adjusted by multiplying such Exercise Price by a fraction of which the
numerator shall be the current market price per share (determined as provided in
paragraph 6(f) below) of the Common Stock on such date of determination less the
then fair market value as determined by the Board (whose determination shall be
conclusive) of the portion of the capital stock, cash or other assets or
evidences of indebtedness so distributed (and for which an adjustment to the
Exercise Price has not previously been made pursuant to the terms of this
paragraph 6) applicable to one share of Common Stock, and the denominator shall
be such current market price per share
6
<PAGE>
of the Common Stock, such adjustment to become effective immediately after the
opening of business on the day following such date of determination of the
holders entitled to such distribution. The following transactions shall be
excluded from the foregoing clauses (1) and (2): repurchases of Common Stock
issued under the Company's stock incentive programs in accordance with the
provisions thereof.
(e) In the case of any reclassification or change of the capital stock
of the Company, upon consummation of such reclassification or change, each
Warrant shall survive such reclassification or change and automatically become
exercisable into the kind and amount of securities, cash or other property
receivable upon such reclassification or change by a holder of the number of
shares of Common Stock into which such Warrant might have been exercised
immediately prior to such reclassification or change. Appropriate adjustment
(as determined by the Board) shall be made in the application of the provisions
set forth herein with respect to the rights and interests thereafter of the
holders of the Warrants, to the end that the provisions set forth herein
(including the provisions with respect to changes in and other adjustment of the
Exercise Price) shall thereafter be applicable, as nearly as reasonably may be,
in relation to any shares of stock or other securities or property thereafter
deliverable upon exercise of the Warrants.
(f) For the purpose of any computation under paragraph 6(b) or 6(d)
above, the current market price per share of Common Stock on any day shall be
deemed to be the average of the Closing Prices of the Common Stock for the 20
consecutive trading days ending the day before the day in question; provided
that, in the case of paragraph 6(d), if the period between the date of the
public announcement of the dividend or distribution and the date for the
determination of holders of Common Stock entitled to receive such dividend or
distribution shall be less than 20 trading days, the period shall be such lesser
number of trading days but, in any event, not less than five trading days.
(g) No adjustment in the Exercise Price need be made until all
cumulative adjustments amount to 1% or more of the Exercise Price as last
adjusted. Any adjustments that are not made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under this
paragraph 6 shall be made to the nearest 1/1,000th of a cent or to the nearest
1/1,000th of a share, as the case may be.
(h) For purposes of this paragraph 6, "Common Stock" includes any
stock of any class of the Company which has no preference in respect of
dividends or of amounts payable in the event of any voluntary or involuntary
liquidation, dissolution or winding-up of the Company and which is not subject
to redemption by the Company (including Class A Common Stock, par value $.01 per
share, and Class B Common Stock, par value $.01 per share, of the Company).
However, subject to the provisions of paragraph 6(l) below, shares issuable on
exercise of the Warrants shall include only shares of the class designated as
Class A Common Stock of the Company on the date hereof or shares of any class or
classes or other securities or assets resulting from any reclassification
thereof; provided that, if at any time there shall be more than one such
7
<PAGE>
resulting class, the shares of each such class then so issuable shall be
substantially in the proportion which the total number of shares of such class
resulting from all such reclassifications bears to the total number of shares of
all such classes resulting from all such reclassifications.
(i) No adjustment in the Exercise Price shall reduce the Exercise
Price below the then par value of the Common Stock. No adjustment in the
Exercise Price need be made under paragraphs 6(a), 6(b) and 6(d) above if the
Company issues or distributes to each registered holder of Warrants the shares
of Common Stock, evidences of indebtedness, assets, rights, options or warrants
referred to in those paragraphs which each registered holder would have been
entitled to receive had the Warrants been exercised prior to the happening of
such event or the record date with respect thereto.
(j) Whenever the Exercise Price is adjusted pursuant to paragraphs
6(a), 6(b), 6(c) or 6(d) above, (A) the number of Warrant Shares purchasable
upon exercise of any Warrant shall be adjusted by multiplying such number of
Warrant Shares by a fraction the numerator of which is the Exercise Price
immediately prior to such adjustment and the denominator of which is the
Exercise Price immediately after such adjustment and (B) the Company shall
promptly mail to registered holders of Warrants, first class, postage prepaid, a
notice of the adjustment together with a certificate from the Company's
independent public accountants briefly stating the facts requiring the
adjustment and the manner of computing it. The certificate shall be conclusive
evidence that the adjustment is correct.
(k) If:
(A) the Company takes any action which would require an adjustment in
the Exercise Price pursuant to this Section 6;
(B) a capital reorganization of the Company occurs or the Company
consolidates or merges with, or transfers all or substantially all of its assets
to, another corporation,; or
(C) there is a dissolution or liquidation of the Company;
the Company shall mail to registered holders of the Warrants, first class,
postage prepaid, a notice stating the proposed record or effective date, as the
case may be. The Company shall mail the notice at least 5 days before such
proposed record or effective date. However, failure to mail the notice or any
defect in it shall not affect the validity of any transaction referred to in
clause (A), (B) or (C) of this paragraph 6(k).
(l) In the case of any consolidation of the Company or merger of the
Company with any other entity or the sale or transfer of all or substantially
all the assets of the Company pursuant to which the Company's Common Stock is
converted into other securities, cash or assets, upon consummation of such
transaction, each Warrant shall survive such merger
8
<PAGE>
or sale and automatically become exercisable into the kind and amount of
securities, cash or other assets receivable upon the consolidation, merger, sale
or transfer by a holder of the number of shares of Common Stock into which such
Warrant might have been exercised immediately prior to such consolidation,
merger, transfer or sale (assuming such holder of Common Stock failed to
exercise any rights of election and received per share the kind and amount of
consideration receivable per share by a plurality of non-electing shares).
Appropriate adjustment (as determined by the Board) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of Warrants, to the end that the provisions
set forth herein (including provisions with respect to changes in and other
adjustment of the Exercise Price) shall thereafter be applicable, as nearly as
reasonably may be, in relation to any shares of stock or other securities or
property thereafter deliverable upon the exercise of Warrants. If this paragraph
6(l) applies, paragraphs 6(a), 6(c) and 6(e) do not apply.
(m) In any case in which this paragraph 6 shall require that an
adjustment as a result of any event become effective from and after a record
date, the Company may elect to defer until after the occurrence of such event
the issuance to the holder of any Warrants exercised after such record date and
before the occurrence of such event of the additional shares of Common Stock
issuable upon such exercise over and above the shares issuable on the basis of
the Exercise Price and number of Warrant Shares in effect immediately prior to
adjustment; provided, however, that if such event shall not have occurred and
authorization of such event shall be rescinded by the Company, the Exercise
Price and number of Warrant Shares shall be recomputed immediately upon such
rescission to the price that would have been in effect had such event not been
authorized, provided that such rescission is permitted by and effective under
applicable laws.
7. Exchange and Replacement of Warrant Certificates. Each Warrant
------------------------------------------------
Certificate is exchangeable without expense, upon the surrender thereof by the
registered holder thereof at the principal executive office of the Transfer
Agent, for a new Warrant Certificate of like tenor and date representing in the
aggregate the right to purchase the same number of Warrant Shares in such
denominations as shall be designated by the registered holder thereof at the
time of such surrender. Upon receipt by the Transfer Agent of evidence
reasonably satisfactory to it of the loss, theft, destruction or mutilation of
any Warrant Certificate, and, in case of loss, theft or destruction, of
indemnity or security reasonably satisfactory to it, and reimbursement to the
Company and/or the Transfer Agent of all reasonable expenses incidental thereto,
and upon surrender and cancellation of such Warrant Certificate, if mutilated,
the Transfer Agent will make and deliver a new Warrant Certificate of like
tenor, in lieu thereof.
8. Payment of Taxes. The Company will pay all documentary stamp
----------------
taxes attributable to the initial issuance of the Warrants and of the Warrant
Shares upon the exercise of Warrants; provided, however, that the Company shall
not be required to pay any tax or taxes which may be payable in respect of any
transfer involved in the issuance of any Warrant Certificates or any
certificates for Warrant Shares in a name other than that of the registered
holder of such Warrant Certificate, and the Company shall not be required to
issue or deliver
9
<PAGE>
such Warrant Certificates unless or until the person or persons requesting the
issuance thereof shall have paid to the Company the amount of such tax or shall
have established to the satisfaction of the Company that such tax has been paid.
9. Statement on Warrants. Irrespective of any adjustment in the
---------------------
number or kind of shares issuable upon the exercise of the Warrants or the
Exercise Price, Warrant Certificates theretofore or thereafter issued may
continue to express the same number and kind of shares and the same Exercise
Price as are stated in the Warrant Certificates initially issuable pursuant to
this Agreement.
10. Registration. The Company acknowledges that registered holders
------------
shall have the registration rights set forth in the Registration Rights
Agreement dated the date hereof between the Company and the Initial Holders.
11. Notices.
-------
All notices, requests, consents and other communications hereunder
shall be in writing and shall be deemed to have been duly made when delivered by
hand or sent by facsimile transmission (with receipt confirmed), or, if timely
delivered to an air courier guaranteeing overnight delivery service, on the next
business day, or five business days after being deposited in the mail, first
class, certified or registered, postage prepaid, return receipt requested, in
each case addressed as follows (or to such other place or places as either of
the parties shall designate by written notice to the other):
(i) if to registered holder, to the address set forth on the Warrant
Register maintained by the Transfer Agent; and
(ii) if to the Company, to:
Digex, Incorporated.
One Digex Plaza
Beltsville, Maryland 20705
Attention: Chief Financial Officer
Facsimile: (240) 264-2380
with a copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of Americas
New York, NY 10036-7798
Attention: Ralph J. Sutcliffe, Esq.
Facsimile: (212) 479-6275
10
<PAGE>
12. Amendment. The Company with the consent of the registered
---------
holders of the unexercised Warrants evidencing at least a majority of the
Warrant Shares underlying the unexercised Warrants may amend or supplement this
Agreement or waive compliance by the Company in a particular instance with any
provision of this Agreement; provided that without the consent of each
registered holder affected, no such amendment shall (with respect to Warrants
held by a non-consenting registered holder) increase the Exercise Price or
decrease the number of Warrant Shares issuable upon exercise of any Warrant .
13. Successors. Except as otherwise provided herein, all the
----------
covenants and provisions of this Agreement by or for the benefit of the Company
and the registered holders of the Warrants shall inure to the benefit of their
respective successors and assigns hereunder.
14. Governing Law. This Agreement and each Warrant Certificate
-------------
issued hereunder shall be deemed to be a contract made under the laws of the
State of Delaware and for all purposes shall be construed in accordance with the
laws of such State (without regard to the conflicts of law principles thereof).
15. Benefits of This Agreement. Nothing in this Agreement shall be
--------------------------
construed to give to any person other than the Company and the registered
holders of the unexercised Warrant Certificates any legal or equitable right,
remedy or claim under this Agreement; and this Agreement shall be for the sole
and exclusive benefit of the Company and such registered holders. Prior to the
exercise of the Warrants, no holder of a Warrant Certificate, as such, shall be
entitled to any rights of a stockholder of the Company, including, without
limitation, the right to receive dividends or subscription rights, the right to
vote, to consent, to exercise any preemptive right, to receive any notice of
meetings of stockholders for the election of directors of the Company or any
other matter or to receive any notice of any proceedings of the Company, except
as may be specifically provided for herein. The holders of the Warrants, as
such, are not entitled to share in the assets of the Company in the event of the
liquidation, dissolution or winding up of the Company's affairs.
16. Counterparts. This Agreement may be executed in any number of
------------
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and such counterparts shall together constitute one and the same
instrument.
17. Headings. The headings in this Agreement are intended solely for
--------
convenience of reference and shall be given no effect in the construction or
interpretation of this Agreement.
[Signature Page Follows]
11
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Warrant
Agreement to be duly executed as of the day and year first above written.
DIGEX, INCORPORATED
By: /s/ MARK K. SHULL
------------------
Name: Mark K. Shull
Title: Chief Executive Officer
MICROSOFT CORPORATION
By: /s/ ROBERT J. HERBOLD
------------------------
Name: Robert J. Herbold
Title: Chief Operating Officer
CPQ HOLDINGS, INC.
By: /s/ BEN K. WELLS
------------------------
Name: Ben K. Wells
Title: Vice President & Treasurer
12
<PAGE>
Exhibit A
Initial Holders Number of Warrants
- --------------- ------------------
Microsoft Corporation 532,500
CPQ Holdings, Inc. 532,500
-i-
<PAGE>
EXHIBIT B
[FORM OF WARRANT CERTIFICATE]
THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THE SECURITY
EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
THE TRANSFER OF THE WARRANTS REPRESENTED BY THIS CERTIFICATE IS RESTRICTED IN
ACCORDANCE WITH THE WARRANT AGREEMENT REFERRED TO HEREIN.
EXERCISABLE ON OR BEFORE
5:00 P.M., NEW YORK TIME, on
January __, 2003
No. W-
WARRANT CERTIFICATE
This Warrant Certificate certifies that, for value received,
_________________ having an address at ______________ ("Holder"), is the
registered holder of warrants (the "Warrants") to purchase, at any time and from
time to time after the date hereof until 5:00 P.M. New York time, on January
___, 2003, up to [ ] fully-paid and non-assessable shares (subject
to adjustment in certain events) of Class A Common Stock, par value $.01 per
share ("Common Stock"), of DIGEX, INCORPORATED, a Delaware corporation (the
"Company"), at the exercise price per share of $57.00, subject to adjustment in
certain events (the "Exercise Price"), upon surrender of this Warrant
Certificate, together with the attached Form of Election to Purchase duly
executed, and payment of the Exercise Price at the principal office of
Continental Stock Transfer & Trust Company (the "Transfer Agent"), but subject
to the terms and conditions set forth herein and in the Warrant Agreement dated
as of January ___, 2000 between the Company and the Initial Holders (the
"Warrant Agreement"). Payment of the
-ii-
<PAGE>
Exercise Price shall not be made in cash. Each registered holder of the Warrants
shall exercise its rights to receive shares of Common Stock on a net basis, such
that without the exchange of any funds, such holder receives that number of
shares of Common Stock that would otherwise be issuable upon a cash exercise of
such Warrants less that number of shares of Common Stock having a current market
price (as defined in Section 3(b) of the Warrant Agreement) equal to the
aggregate cash Exercise Price that would otherwise have been paid by such holder
for the number of shares of Common Stock with respect to which such Warrant is
being exercised.
This Warrant may be exercised at such times and in such amounts as are
provided for in the Warrant Agreement. Each Warrant not exercised on or prior
to January ___,2003 shall become invalid and all rights hereunder, and all
rights in respect thereof under the Warrant Agreement, shall cease as of that
time.
The Warrants evidenced by this Warrant Certificate are issued pursuant
to the Warrant Agreement, which Warrant Agreement is hereby incorporated by
reference in and made a part of this instrument and is hereby referred to for a
description of the rights, limitation of rights, obligations, duties and
immunities thereunder of the Company and the holders (the words "holders" or
"holder" meaning the registered holders or registered holder) of the Warrants.
A copy of the Warrant Agreement may be obtained by the holder(s) hereof upon
written request directed to the Company.
The Warrant Agreement provides that upon the occurrence of certain
events, the Exercise Price and the type and/or number of the Company's
securities issuable upon exercise of the Warrants may, subject to certain
conditions, be adjusted.
Upon due presentment for registration of transfer of this Warrant
Certificate at the principal office of the Transfer Agent, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided
herein and in the Warrant Agreement, without any charge except for any tax or
other governmental charge imposed in connection therewith.
Upon the exercise of less than all of the Warrants evidenced by this
Warrant Certificate, the Transfer Agent shall forthwith issue to the holder
hereof a new Warrant Certificate representing such number of unexercised
Warrants.
The Company and the Transfer Agent may deem and treat the registered
holder(s) hereof as the absolute owner(s) of this Warrant Certificate
(notwithstanding any notation of ownership or other writing hereon made by
anyone), for the purpose of any exercise hereof and of any distribution to the
holder(s) hereof and for all other purposes, and neither the Company nor the
Transfer Agent shall be affected by any notice to the contrary.
-iii-
<PAGE>
All terms used in this Warrant Certificate which are not defined
herein and are defined in the Warrant Agreement shall have the meanings assigned
to them in the Warrant Agreement.
IN WITNESS WHEREOF, the Company has caused this Warrant Certificate to
be duly executed under its corporate seal.
Dated: January ___, 2000
DIGEX, INCORPORATED
By:_____________________________
Name:
Title:
-iv-
<PAGE>
[FORM OF ASSIGNMENT]
(To be executed by the registered holder if such holder
desires to transfer the Warrant Certificate.)
FOR VALUE RECEIVED, ________________________ hereby sells, assigns
and transfers unto ________________________________, whose address is
__________________________, this Warrant Certificate, together with all right,
title and interest therein, and does hereby irrevocably constitute and appoint
___________________________, Attorney to transfer the within Warrant Certificate
on the books of the within-named Company, with full power of substitution.
Dated: Signature:____________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate. Signature must be guaranteed by a bank or
trust company having an office or correspondent in the
United States or a broker or dealer which is a member
of a registered securities exchange or the National
Association of Securities Dealers, Inc.)
_________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
[FORM OF ELECTION TO PURCHASE]
The undersigned hereby irrevocably elects to exercise the right,
represented by this Warrant Certificate, to purchase ________________ shares of
Common Stock , all in accordance with the terms of the Warrant Agreement, dated
January 12, 2000, by and among Digex, Incorporated and the initial holders of
the Warrants.
The undersigned requests that a certificate for such shares of Common
Stock be registered in the name of _________________________________________,
whose address is _____________________________________________ and that such
certificate be delivered to _______________________________________ whose
address is _____________________________________________.
Dated: Signature: ___________________
(Signature must conform in all respects to name of
holder as specified on the face of the Warrant
Certificate. Signature must be guaranteed by a bank or
trust company having an office or correspondent in the
United States or a broker or dealer which is a member
of a registered securities exchange or the National
Association of Securities Dealers, Inc.)
_________________________
(Insert Social Security or Other
Identifying Number of Holder)
<PAGE>
Exhibit 4.3
THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made and
---------
entered into as of January 12, 2000, between Digex, Incorporated, a Delaware
corporation (the "Company") and Microsoft Corporation, a Washington corporation
-------
("Microsoft"), and CPQ Holdings, Inc., a Delaware corporation ("Compaq") (each
--------- ------
of Microsoft and Compaq, a "Purchaser" and collectively, the "Purchasers").
--------- ----------
This Agreement is made pursuant to the Purchase Agreement, dated
January 11, 2000 (the "Purchase Agreement"), by and among the Company and the
------------------
Purchasers. In order to induce the Purchasers to purchase 100,000 shares of the
Company's Series A Convertible Preferred Stock, par value $0.01 per share (the
"Series A Preferred Stock") and warrants (the "Warrants") to purchase 1,065,000
- ------------------------- --------
shares of the Company=s Class A common stock, par value $.01 per share (the
"Common Stock"), the Company has agreed to provide the registration rights set
- -------------
forth in this Agreement. The execution and delivery of this Agreement is a
condition to the obligations of the Purchasers set forth in Section 4 of the
Purchase Agreement.
In consideration of the foregoing, the parties hereto agree as
follows:
SECTION 1. DEFINITIONS
As used in this Agreement, the following capitalized terms shall have
the following meanings:
"Act" means the Securities Act of 1933, as amended.
---
"Business Day" means any day except a Saturday, Sunday or other day in
------------
the City of New York on which banks are authorized to close.
"Conversion Shares" means the shares of Common Stock or other
-----------------
securities issued or issuable upon the conversion of the Series A Preferred
Stock.
"Exchange Act" means the Securities Exchange Act of 1934, as amended
------------
from time to time.
"Holder" means any Purchaser, for so long as such Purchaser own any
------
Series A Preferred Stock, any Warrants or any Registrable Securities, and their
successors, assigns and direct and indirect transferees who become registered
owners of Series A Preferred Stock, Warrants or Registrable Securities.
"NASD" means the National Association of Securities Dealers, Inc.
----
<PAGE>
"Person" means an individual, partnership, corporation, trust or
------
unincorporated organization, or a government or agency or political subdivision
thereof.
"Prospectus" means the prospectus included in a Registration Statement
----------
at the time such Registration Statement is declared effective, as amended or
supplemented by any prospectus supplement and by all other amendments thereto,
including post-effective amendments, and all material incorporated by reference
into such Prospectus.
"Registrable Securities" shall mean any of (a) the Conversion Shares,
----------------------
(b) the Warrant Shares and (c) any other securities issued or issuable in
respect of, or in exchange for, the Conversion Shares or Warrant Shares by way
of a stock dividend, stock split or distribution to stockholders, or in
connection with a combination of shares, recapitalization, reclassification,
change in capital structure, merger, consolidation, sale of assets, spin-off,
split-up, or partial or complete liquidation or other reorganization or
otherwise until such date as such security (i) is effectively registered under
the Act and disposed of in accordance with a registration statement, (ii) is
distributed to the public pursuant to Rule 144 under the Act or (iii) may be
sold or transferred without restriction pursuant to Rule 144(k) (or any similar
provision then in force) under the Act or otherwise.
"Registration Statement" shall mean any registration statement of the
----------------------
Company which covers any of the Registrable Securities pursuant to the
provisions of this Agreement and all amendments and supplements to any such
Registration Statement, including post-effective amendments, in each case
including the Prospectus contained therein, all exhibits thereto and all
material incorporated by reference therein.
"Rule 144" shall mean Rule 144 under the Act, as such Rule may be
--------
amended from time to time, or any similar rule (other than Rule 144A) or
regulation hereafter adopted by the SEC providing for offers and sales of
securities made in compliance therewith resulting in offers and sales by
subsequent holders that are not affiliates of an issuer of such securities being
free of the registration and prospectus delivery requirements of the Act.
"Rule 144A" shall mean Rule 144A under the Act as such Rule may be
---------
amended from time to time.
"SEC" shall mean the Securities and Exchange Commission.
---
"Warrant Shares" means the shares of Common Stock or other securities
--------------
issued or issuable upon the exercise of the Warrants.
SECTION 2. REGISTRATION RIGHTS.
(a) Demand Registration.
-------------------
2
<PAGE>
(i) Request for Registration. At any time on or after January 12,
------------------------
2001, the Holders of Series A Preferred Stock, Warrants, Conversion Shares
and/or Warrant Shares representing not less than 25% of the aggregate number of
Registrable Securities then outstanding may make up to two written requests for
registration under the Act of their Registrable Securities (a "Demand
------
Registration"); provided, however, that if Compaq or Microsoft (the "Non-
- ------------
Initiating Party") does not participate in the request for, and does not sell
any Registrable Securities in, the first Demand Registration, and the Non-
Initiating Party holds Series A Preferred Stock, Warrants, Conversion Shares
and/or Warrant Shares representing not less than 25% of the Registrable
Securities then outstanding, then the Non-Initiating Party shall have the
exclusive right to request the second Demand Registration. Any such request
will specify the number of Registrable Securities proposed to be sold and will
also specify the intended method of disposition thereof. Subject to the other
provisions of this Section 2(a), the Company shall give written notice of such
registration request within 10 days after the receipt thereof to all other
Holders. Within 30 days after receipt of such notice by any Holder, such Holder
may request in writing that its Registrable Securities be included in such
registration and the Company shall include in the Demand Registration the
Registrable Securities of any such Holder requested to be so included. Each
such request shall specify the number of Registrable Securities proposed to be
sold and the intended method of disposition thereof. Upon a demand, the Company
will (x) prepare, file and use its best efforts to cause to become effective
within 120 days of such demand a Registration Statement in respect of all the
Registrable Securities which Holders request for inclusion therein; provided
--------
that if such demand occurs during a Black Out Period (as defined below) or other
period (not to exceed 180 days) during which the Company is prohibited or
restricted from issuing or selling Common Stock pursuant to any underwriting or
purchase agreement relating to an underwritten Rule 144A offering or registered
public offering of Common Stock or securities convertible into or exchangeable
for Common Stock (a "Lock Up Period"), the Company shall not be required to
--------------
notify the Holders of such demand or file such Registration Statement prior to
the end of the Black Out Period or Lock Up Period, as the case may be, in which
event, the Company will use its best efforts to cause such Registration
Statement to become effective no later than the later of (A) 180 days after the
original demand and (B) 90 days after the end of the Black Out Period or Lock Up
Period, as the case may be, and (y) keep such Registration Statement
continuously effective for the shorter of (A) 270 days (the "Fixed Effectiveness
-------------------
Period"), (B) such period of time as all of the Registrable Securities included
- ------
in such Registration Statement have been sold thereunder, and (C) the time that
all of the Registrable Securities may be sold under Rule 144 during a single
three month period (the shorter of (A), (B) or (C), the "Effectiveness
-------------
Period"); provided that the Company may postpone the filing of any Registration
--------
Statement, suspend the effectiveness of any registration, suspend the use of any
Prospectus and shall not be required to amend or supplement the Registration
Statement, any related Prospectus or any document incorporated therein by
reference (other than an effective Registration Statement being used in an
underwritten offering) (A) for a period not to exceed an aggregate of 60 days (a
"Pending Event Suspension Period") in the event that (1) an event or
-------------------------------
circumstance occurs and is continuing as a result of which the Registration
Statement,
3
<PAGE>
any related Prospectus or any document incorporated therein by
reference as then amended or supplemented would, in the Company's good faith
judgment, contain an untrue statement of a material fact or omit to state a
material fact necessary in order to make the statements therein, in the light of
the circumstances under which they were made, not misleading, and (2)(x) the
Company determines in its good faith judgment that the disclosure of such event
at such time could reasonably be expected to have a material adverse effect on
the business, operations or prospects of the Company or (y) the disclosure
otherwise relates to a material business transaction which has not yet been
publicly disclosed or (B) in the event that the Company, for its own account,
proposes to register shares of Common Stock for sale in an underwritten public
offering on Form S-1, S-2 or S-3, their successor forms or any other form under
the Securities Act appropriate for a primary public offering by the Company
(other than for the purpose of making an acquisition or in connection with
option plans), for a period not to exceed 45 days commencing on the date of
pricing of such public offering and ending 60 days after the consummation of
such public offering (a "Pending Registration Suspension Period" and, together
--------------------------------------
with a Pending Event Suspension Period, a "Black Out Period"); provided, further
---------------- -------- -------
that the Fixed Effectiveness Period shall be extended by the number of days in
any Black Out Period occurring during the Effectiveness Period. Subject to
Section 2(a)(ii), the Company shall only be required to register Registrable
Securities pursuant to this Section 2(a) once.
In the event of the occurrence of any Black Out Period or Lock Up
Period during an Effectiveness Period, the Company will promptly notify the
Holders of Registrable Securities thereof in writing.
(ii) Effective Registration. Except as specifically provided herein,
----------------------
the Company is only required to effect two registrations as Demand Registrations
under this Agreement (whether or not all of the Holders of Registrable
Securities elect to participate in such Demand Registrations on the basis set
forth herein). A registration will not be deemed to have been effected as a
Demand Registration, and thereby satisfy the obligation of the Company
hereunder, unless it has been declared effective by the SEC and the Company has
complied in all material respects with its obligations under this Agreement with
respect thereto; provided that if, after it has become effective, the offering
--------
of Registrable Securities pursuant to such registration is or becomes the
subject of any stop order, injunction or other order or requirement of the SEC
or any other governmental or administrative agency, or if any court prevents or
otherwise limits the sale of Registrable Securities pursuant to the registration
(for any reason other than the act or omissions of the Holders) for the period
of time contemplated hereby, such registration will be deemed not to have been
effected. If (x) a registration requested pursuant to this Section 2(a) is
deemed not to have been effected or (y) a registration requested pursuant to
this Section 2(a) does not remain effective for the Effectiveness Period, then
the Company shall continue to be obligated to effect an additional registration
pursuant to this Section 2(a). The Holders of Registrable Securities shall be
permitted to withdraw all or any part of the Registrable Securities from a
Demand Registration at any time prior to the effective date of such Demand
Registration. If a Registration Statement is filed pursuant to a Demand
Registration, and subsequently a
4
<PAGE>
sufficient number of the Registrable Securities are withdrawn from the Demand
Registration so that such Registration Statement does not cover that number of
Registrable Securities at least equal to one-quarter of the Registrable
Securities, the Holders who have not withdrawn their Registrable Securities
shall have the opportunity to include an additional number of Registrable
Securities in the Demand Registration so that such Registration Statement covers
that number of Registrable Securities at least equal to one-quarter of the
Registrable Securities. If an additional number of Registrable Securities is not
so included, the Company may withdraw the Registration Statement. Such withdrawn
Registration Statement will not count as a Demand Registration and the Company
shall continue to be obligated to effect a registration pursuant to this Section
2(a).
(iii) Priority in Demand Registrations Pursuant to Section 2(a). If
----------------------------------------------------------
a Demand Registration pursuant to this Section 2(a) involves an underwritten
offering and the lead managing underwriter advises the Company in writing that,
in its view, the total number of Registrable Securities requested by the Holders
to be included in such registration, together with any other securities
permitted to be included in such registration, is such as to adversely affect
the success of such offering, including the price at which such securities can
be sold: first, the securities other than the Registrable Securities of the
-----
Holders included in such registration shall be reduced in their entirety before
any reduction of Registrable Securities; and second, to the extent the reduction
------
set forth in the immediately preceding clause is insufficient to reduce the
number of securities requested for inclusion in such registration to a number,
which, in the view of such lead managing underwriter, can be sold without
adversely affecting the success of the offering, including the price at which
such securities can be sold, the number of such Registrable Securities to be
included in such registration shall be allocated pro rata among all requesting
--- ----
Holders on the basis of the relative number of Registrable Securities then held
by each such Holder (provided that any Registrable Securities thereby allocated
to any such Holder that exceed such Holder's request shall be reallocated among
the remaining requesting Holders in like manner); provided, however, that if the
Demand Registration at issue is the second Demand Registration and either Compaq
or Microsoft was exclusively entitled pursuant to Section 2(a)(i) hereof to
request such Demand Registration (the Purchaser so entitled, the "Requesting
Party" and the other Purchaser, the "Non-Requesting Party"), then the
Registrable Securities held by the Non-Requesting Party shall be reduced in
their entirety before any reduction of Registrable Securities held by the
Requesting Party. In the event that the number of Registrable Securities
requested to be included in such registration is less than the number which, in
the view of the lead managing underwriter, can be sold without adversely
affecting the success of such offering, including the price at which such
securities can be sold, the Company may include in such registration securities
that the Company or any other Person proposes to sell up to the number of
securities that, in the view of the lead managing underwriter, can be sold
without adversely affecting the success of such offering, including the price at
which such securities can be sold.
(iv) Selection of Underwriter. If the Holders so elect, the offering
------------------------
of such Registrable Securities pursuant to such Demand Registration shall be in
the form of an underwritten offering. The investment banker or investment
bankers and manager or managers
5
<PAGE>
that will administer such underwritten offering will be selected by the Holders
of a majority in number of the Registrable Securities included in such offering;
provided, that such investment bankers and managers must be reasonably
satisfactory to the Company.
(b) Piggy-Back Registration.
-----------------------
(i) Notice of Registration. If and whenever at any time after
----------------------
January 12, 2001 the Company proposes to file a Registration Statement on Form
S-1, S-2 or S-3, their successor forms or any other form under the Act
appropriate for a primary public offering (other than for the purpose of making
an acquisition or in connection with option plans or to satisfy a Demand
Registration request) with respect to an underwritten offering of any class of
Common Stock by the Company for its own account or for the account of any of its
respective securityholders (a "Proposed Registration") then the Company shall
---------------------
give prompt written notice of such Proposed Registration to the Holders of
Registrable Securities (a "Company Notice") and such Company Notice shall offer
--------------
such Holders the opportunity to register such number of Registrable Securities
as each such Holder may request by written notice delivered to the Company
within 10 days of receipt of the Company Notice by such Holder (a "Piggy-Back
----------
Registration"). Any such request by a Holder shall specify the Registrable
- ------------
Securities intended to be disposed of by such Holder and the intended method of
distribution thereof. The Company shall use its best efforts to cause the
managing underwriter or underwriters of such Proposed Registration to permit the
Registrable Securities requested to be included in a Piggy-Back Registration to
be included on the same terms and conditions as any similar securities of the
Company or any other securityholder included therein and to permit the sale or
other disposition of such Registrable Securities in accordance with the intended
method of distribution thereof; provided, however, in no event shall the Company
-------- -------
be required to reduce the number of securities proposed to be sold by the
Company or alter the terms of the securities proposed to be sold by the Company
in order to induce the managing underwriter or underwriters to permit
Registrable Securities to be included. The Company may withdraw a Proposed
Registration at any time prior to the time it becomes effective; provided that
--------
the Company shall give prompt notice thereof to participating Holders.
No registration effected under this Section 2(b) shall relieve the
Company of its obligation to effect a registration upon the request of the
Holders pursuant to Section 2(a).
(ii) Reduction of Offering. If the lead managing underwriter of any
---------------------
Proposed Registration has informed, in writing, the Company and the Holders of
the Registrable Securities requesting inclusion in such offering that it is its
view that the total number of securities which the Company, the Holders and any
other Persons desiring to participate in such registration intend to include in
such offering is such as to adversely affect the success of such offering,
including the price at which such securities can be sold, then the number of
Registrable Securities to be offered for the account of such Holders and the
number of such securities to be offered for the account of all such other
Persons (other than the Company) participating in such
6
<PAGE>
registration shall be reduced or limited pro rata in proportion to the
--- ----
respective number of securities requested to be registered to the extent
necessary to reduce the total number of securities requested to be included in
such offering to the number of securities, if any, recommended by such lead
managing underwriter, unless such offering is being made pursuant to exercise of
a demand registration right granted by the Company to other Persons, in which
case the number of securities to be offered for the account of all Persons not
exercising demand registration rights (including the Holders) shall be
eliminated or reduced pro rata in proportion to the respective number of
securities requested to be registered by such Persons to reduce the total number
of securities requested to be included in such offering to the number of
securities, if any, recommended by such lead managing underwriter before any
reduction is made in securities requested to be registered by Persons exercising
a demand registration right. If the lead managing underwriter of any Proposed
Offering notifies the Holders requesting inclusion of Registrable Securities in
such offering, that the kind of securities that such Holders and any other
Persons desiring to participate in such registration intend to include in such
offering is such as to adversely affect the success of such offering, (x) the
Registrable Securities to be included in such offering shall be reduced as
described in the preceding sentence or (y) if a reduction in the Registrable
Securities pursuant to the preceding sentence would, in the judgment of the lead
managing underwriter, be insufficient to substantially eliminate the adverse
effect that inclusion of the Registrable Securities requested to be included
would have on such offering, such Registrable Securities will be excluded from
such offering.
(iii) Withdrawal Election. Any Holder may elect to withdraw its
-------------------
request to include Registrable Securities in any Proposed Registration by giving
written notice to the Company of its request to withdraw prior to the
effectiveness of the Registration Statement (a "Withdrawal Election"); provided
------------------- --------
that a Withdrawal Election shall be irrevocable and, after making a Withdrawal
Election, a Holder shall no longer have any right to include Registrable
Securities in the registration as to which such Withdrawal Election was made.
(c) Lock Up of Holders. If the Company has complied in all material
------------------
respects with its obligations with respect to a Demand Registration or a Piggy-
Back Registration that is a firm commitment underwritten public offering, all
Holders of Series A Preferred Stock, Warrants and Registrable Securities shall,
upon request of the lead managing underwriter with respect to such underwritten
public offering, agree not to sell or otherwise dispose of any Series A
Preferred Stock, Warrants or any Registrable Securities owned by them for a
period not to exceed 180 days from the consummation of such underwritten public
offering; provided that Registrable Securities which had been requested for
--------
inclusion in a Demand Registration or a Piggy-Back Registration but which were
not so included pursuant to Section 2(a)(iii) or Section 2(b)(ii) shall only be
subject to the restriction on sale and disposition in this Section 2(c) for a
period not to exceed 90 days from the consummation of such underwritten public
offering.
(d) Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities pursuant to this Section 2 may be
assigned or otherwise
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transferred (but only with all related obligations) to a transferee or assignee
in connection with the transfer of Registrable Securities, provided: (a) the
transferor provides the Company with written notice of the proposed transfer;
(b) such transferee or assignee agrees in writing to be bound by all obligations
under this Agreement; and (c) such assignment shall be effective only if
immediately following such transfer the further disposition of such securities
by the transferee or assignee is restricted under the Act.
SECTION 3. REGISTRATION PROCEDURES.
(a) General Provisions
------------------
In connection with the obligations of the Company with respect to any
Registration Statement to be filed pursuant to Sections 2(a) or 2(b) hereof, the
Company shall:
(i) A reasonable period of time prior to the effectiveness of a
Registration Statement or Prospectus and a reasonable period of time prior to
the filing of any amendment or supplement thereto, furnish to the Holders of the
Registrable Securities included in such Registration Statement, and the managing
underwriters, if any, copies of all such documents substantially in the form
filed or proposed to be filed, which documents will be subject to the review of
such Holders, and such underwriters, if any, and use best efforts to cause the
officers and directors of the Company, counsel to the Company and independent
certified public accountants to the Company to respond to such reasonable
inquiries as shall be necessary, in the opinion of respective counsel to such
Holders and such underwriters, to conduct a reasonable investigation within the
meaning of the Act. The Company shall not cause to become effective any such
Registration Statement or related Prospectus or any amendments or supplements
thereto to which the underwriters, if any, or the Holders of a majority of the
Registrable Securities included in such Registration Statement shall reasonably
object on a timely basis;
(ii) Other than during a Black Out Period: prepare and file with the
SEC such amendments, including post-effective amendments, to each Registration
Statement as may be necessary to keep such Registration Statement continuously
effective for the applicable time period required hereunder; cause the related
Prospectus to be supplemented by any required Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Act; and comply with the
provisions of the Act and the Exchange Act with respect to the disposition of
all securities covered by such Registration Statement during such period in
accordance with the intended methods of disposition by the sellers thereof set
forth in such Registration Statement as so amended or in such Prospectus as so
supplemented;
(iii) Notify the Holders of Registrable Securities to be sold and the
managing underwriters, if any, promptly, and (if requested by any such person),
confirm such notice in writing, (1)(A) when a Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and (B) with respect to a
Registration Statement or any post-effective amendment, when the same has become
effective, (2) of any request by the SEC or any other Federal or state
8
<PAGE>
governmental authority for amendments or supplements to a Registration Statement
or related Prospectus or for additional information, (3) of the issuance by the
SEC, any state securities commission, any other governmental agency or any court
of any stop order, order or injunction suspending or enjoining the use of a
Prospectus or the effectiveness of a Registration Statement or the initiation of
any proceedings for that purpose, (4) of the receipt by the Company of any
notification with respect to the suspension of the qualification or exemption
from qualification of any of the Registrable Securities for sale in any
jurisdiction, or the initiation or threatening of any proceeding for such
purpose, and (5) of the happening of any event or information becoming known
that makes any statement made in a Registration Statement or related Prospectus
untrue in any material respect or that requires the making of any changes in
such Registration Statement or Prospectus so that, in the case of a Registration
Statement, it will not contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and that in the case of a Prospectus, it will not contain
any untrue statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading;
(iv) Other than during a Black Out Period, use its best efforts to
avoid the issuance of or, if issued, obtain the withdrawal of any order
enjoining or suspending the use of a Prospectus or the effectiveness of a
Registration Statement or the lifting of any suspension of the qualification (or
exemption from qualification) of any of the Registrable Securities for sale in
any jurisdiction described in Section 3(a)(viii), at the earliest practicable
moment;
(v) If requested by the selling Holders or the managing underwriters,
if any, other than during a Black Out Period, (x) promptly incorporate in a
Prospectus supplement or post-effective amendment such information as the
selling Holders or the managing underwriters, if any, reasonably believe is
required to be included therein, and (y) make all required filings of such
Prospectus supplement or such post-effective amendment under the Act as soon as
practicable after the Company has received notification of the matters to be
incorporated in such Prospectus supplement or post-effective amendment;
(vi) Furnish to each Holder of Registrable Securities to be sold
pursuant to a Registration Statement and each managing underwriter, if any,
without charge, at least one conformed copy of such Registration Statement and
each amendment thereto, including financial statements and schedules and, to
the extent requested by such Holder of managing underwriter, all documents
incorporated or deemed to be incorporated therein by reference and all exhibits
thereto (including those previously furnished or incorporated by reference) as
soon as practicable after the filing of such documents with the SEC;
(vii) Deliver to each Holder of Registrable Securities to be sold
pursuant to a Registration Statement, and the underwriters, if any, without
charge, as many copies of the
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<PAGE>
Prospectus (including each form of prospectus) and each amendment or supplement
thereto as such persons reasonably request; and the Company hereby consents to
the use of such Prospectus and each amendment or supplement thereto by each of
the selling Holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
such Prospectus and any amendment or supplement thereto;
(viii) Prior to any public offering of Registrable Securities, use
its best efforts to register or qualify or cooperate with the Holders of
Registrable Securities to be sold, the underwriters, if any, and their
respective counsel in connection with the registration or qualification (or
exemption from such registration or qualification) of such Registrable
Securities for offer and sale under the securities or Blue Sky laws of such
jurisdictions as any such Holder or underwriter reasonably requests in writing;
keep each such registration or qualification (or exemption therefrom) effective
during the period such Registration Statement is required to be kept effective
hereunder and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Registrable Securities
covered by the applicable Registration Statement; provided, however, that the
-------- -------
Company shall not be required to (x) qualify generally to do business in any
jurisdiction where it is not then so qualified or (y) take any action which
would subject it to general service of process or to taxation in any
jurisdiction where it is not so subject;
(ix) In connection with any sale or transfer of Registrable
Securities that will result in such securities no longer being Registrable
Securities, cooperate with the Holders thereof and the managing underwriters, if
any, to facilitate the timely preparation and delivery of certificates
representing Registrable Securities to be sold, which certificates shall not
bear any restrictive legends and to enable such Registrable Securities to be in
such denominations and registered in such names as the managing underwriters, if
any, or such Holders may request at least two Business Days prior to any sale of
Registrable Securities;
(x) Other than during a Black Out Period, upon the occurrence of any
event contemplated by Section 3(a)(iii)(5), as promptly as practicable, prepare
a supplement or amendment, including, if appropriate, a post-effective
amendment, to each Registration Statement or a supplement to the related
Prospectus or any document incorporated or deemed to be incorporated therein by
reference, and file any other required document so that, as thereafter
delivered, such Prospectus will not contain an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading;
(xi) Enter into such agreements (including an underwriting agreement
in form, scope and substance as is customary in underwritten offerings) and take
all such other reasonable actions in connection therewith (including those
reasonably requested by the managing underwriters, if any) in order to expedite
or facilitate the disposition of such Registrable Securities, and, if the
registration is an underwritten registration or if otherwise requested by the
10
<PAGE>
selling Holders, (1) make such representations and warranties to the
underwriters, if any, and selling Holders with respect to the business of the
Company and its subsidiaries, the Registration Statement, Prospectus and
documents, if any, incorporated or deemed to be incorporated by reference
therein, in each case, in form, substance and scope as are customarily made by
issuers to underwriters in underwritten offerings, and confirm the same if and
when requested; (2) obtain opinions of counsel to the Company and updates
thereof (which counsel and opinions (in form, scope and substance) shall be
reasonably satisfactory to the managing underwriters if any, addressed to each
of the underwriters, if any, and selling Holders), covering the matters
customarily covered in opinions requested in underwritten offerings and such
other matters as may be reasonably requested by such underwriters or selling
Holders; (3) use their best efforts to obtain customary "cold comfort" letters
and updates thereof from the independent certified public accountants of the
Company addressed (where reasonably possible) to each of the underwriters, if
any, and selling Holders, such letters to be in customary form and covering
matters of the type customarily covered in "cold comfort" letters in connection
with underwritten offerings; and (4) deliver such documents and certificates as
may be reasonably requested by the managing underwriters, if any, to evidence
the continued validity of the representations and warranties made pursuant to
clause (1) above and to evidence compliance with any customary conditions
contained in the underwriting agreement or other agreement entered into by the
Company;
(xii) Make available for inspection by a representative of any
underwriter participating in any such disposition of Registrable Securities, and
any attorney, consultant or accountant retained by such selling Holders or
underwriter, at the offices where normally kept, during reasonable business
hours, all pertinent financial and other records, corporate documents and
properties of the Company and its subsidiaries (including with respect to
businesses and assets acquired or to be acquired to the extent that such
information is available to the Company), and cause the officers, directors,
agents and employees of the Company and its subsidiaries to supply all
information in each case reasonably requested by any such representative,
underwriter, attorney, consultant or accountant in connection with such
Registration Statement;
(xiii) Comply with all applicable rules and regulations of the SEC
and make generally available to their securityholders earnings statements
satisfying the provisions of Section 11(a) of the Act and Rule 158 under the
Act, no later than 45 days after the end of any 12-month period (or 90 days
after the end of any 12-month period if such period is a fiscal year) (x)
commencing at the end of any fiscal quarter in which Registrable Securities are
sold to underwriters in a firm commitment or reasonable efforts underwritten
offering and (y) if not sold to underwriters in such an offering, commencing on
the first day of the first fiscal quarter after the effective date of a
Registration Statement, which statement shall cover said period, consistent with
the requirements of Rule 158 under the Act;
(xiv) Cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar securities
issued by the Company are then
11
<PAGE>
listed if requested by the Holders of a majority of the Registrable Securities
covered by the Registration Statement or the managing underwriters, if any; and
(xv) Cooperate with each seller of Registrable Securities covered by
any Registration Statement and each underwriter, if any, participating in the
disposition of such Registrable Securities and their respective counsel in
connection with any filings required to be made with the NASD.
(b) Information to be Furnished by Holders.
--------------------------------------
The Company may require a Holder of Registrable Securities to be
included in a Registration Statement to furnish to the Company such information
regarding (w) the intended method of distribution of such Registrable Securities
(x) such Holder, (y) the Registrable Securities held by such Holder and (z) such
other matters as are required by law to be disclosed in such Registration
Statement and the Company may exclude from such Registration Statement the
Registrable Securities of any Holder who fails to furnish such information
within a reasonable time after receiving such request. The Company shall not be
required to provide indemnification to any underwriter or any other person
relating to information referred to in clauses (w), (x), (y) and (z) provided to
the Company in writing specifically for inclusion in such Registration
Statement.
(c) Restriction on Holders.
----------------------
Each Holder of Registrable Securities agrees by acquisition of such
Registrable Securities that, upon receipt of any notice from the Company of the
happening of any event of the kind described in Section 3(a)(iii)(2)-(5) hereof,
such Holder will forthwith discontinue disposition of such Registrable
Securities covered by such Registration Statement or Prospectus until such
Holder's receipt of the copies of the supplemented or amended Prospectus
contemplated by Section 3(a)(x) hereof, or until it is advised in writing (the
"Advice") by the Company that the use of the applicable Prospectus may be
- -------
resumed. If the Company shall give any such notice, the Fixed Effectiveness
Period shall be extended by the number of days during such period from and
including the date of the giving of such notice to and including the date when
each Holder of Registrable Securities covered by such Registration Statement
shall have received (x) the copies of the supplemented or amended Prospectus
contemplated by Section 3(a)(x) hereof or (y) the Advice.
SECTION 4. REGISTRATION EXPENSES
(a) All expenses incident to the Company's performance of or
compliance with this Agreement will be borne by the Company, regardless of
whether a Registration Statement becomes effective, including without
limitation: (i) all registration and filing fees and expenses;
12
<PAGE>
(ii) all fees and expenses of compliance with federal securities and state Blue
Sky or securities laws; (iii) all expenses of printing (including printing
certificates for the Conversion Shares, the Warrant Shares and printing of
Prospectuses), messenger and delivery services and telephone; (iv) all fees and
disbursements of counsel for the Company and, in accordance with Section 4(b)
below, the Holders of Registrable Securities; (v) all application and filing
fees in connection with listing the Conversion Shares and the Warrant Shares on
a national exchange or automated quotation system if required hereunder; and
(vi) all fees and disbursements of independent certified public accountants of
the Company (including the expenses of any special audit and comfort letters
required by or incident to such performance).
The Company will, in any event, bear its internal expenses (including,
without limitation, all salaries and expenses of its officers and employees
performing legal or accounting duties), the expenses of any annual audit and the
fees and expenses of any Person, including special experts, retained by the
Company.
Each Holder shall pay all underwriting discounts and commissions and
transfer taxes, if any, relating to the sale or disposition of such Holder's
Registrable Securities pursuant to a Registration Statement.
(b) In connection with any Registration Statement required by this
Agreement, the Company will reimburse the Holders of Registrable Securities
being registered pursuant to a Demand Registration or Piggy-Back Registration,
as applicable, for the reasonable fees and disbursements of not more than one
counsel chosen by the Holders of a majority of the Registrable Securities for
whose benefit such Registration Statement is being prepared.
SECTION 5. INDEMNIFICATION
(a) The Company agrees to indemnify and hold harmless each selling
Holder, each person, if any, who controls a selling Holder within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act and the respective
officers, directors, partners, employees, representatives and agents of any
selling Holder or any controlling person to the fullest extent lawful, from and
against any and all losses, liabilities, claims, damages and expenses whatsoever
(including but not limited to attorneys' fees and any and all expenses
whatsoever incurred in investigating, preparing or defending against any
investigation, litigation or other action, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any claim or
litigation)(collectively "Losses"), joint or several, to which they or any of
------
them may become subject under the Act, the Exchange Act or otherwise, insofar as
such Losses arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement or
the Prospectus, or in any supplement thereto or amendment thereof, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, or arise out of any
13
<PAGE>
violation or alleged violation by the Company of the Act, the Exchange Act, any
state securities law or a rule or regulation promulgated under the Act, the
Exchange Act or any state securities law; provided, however, that the Company
will not be liable in any such case to the extent, but only to the extent, that
(i) any such Losses arise out of or are based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the
Company by or on behalf of such party expressly for use therein and (ii) the
foregoing indemnity with respect to any untrue statement contained in or omitted
from a Registration Statement or the Prospectus shall not inure to the benefit
of any party (or any person controlling such party) from whom the person
asserting any such Losses purchased any of the Registrable Securities if it is
finally judicially determined that such Losses resulted solely from the fact
that such party sold Registrable Securities to a person to whom there was not
sent or given, at or prior to the written confirmation of such sale, a copy of
the Registration Statement or the Prospectus, as amended or supplemented, and
(x) the Company shall have previously and timely furnished sufficient copies of
the Registration Statement or Prospectus, as so amended or supplemented, to such
party in accordance with this Agreement and (y) the Registration Statement or
Prospectus, as so amended or supplemented, would have corrected such untrue
statement or omission of a material fact. This indemnity agreement will be in
addition to any liability which the Company may otherwise have, including, under
this Agreement.
(b) Each selling Holder, severally and not jointly, agrees to
indemnify and hold harmless the Company, the other selling Holders and each
person, if any, who controls any such party within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act, against any Losses, joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or otherwise, insofar as such Losses arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement or the Prospectus, or in any amendment thereof or
supplement thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading, in each case to the extent, but only
to the extent, that any such Losses arise out of or are based upon any untrue
statement or alleged untrue statement or omission or alleged omission made
therein in reliance upon and in conformity with written information furnished to
the Company by or on behalf of such Holder expressly for use therein. This
indemnity will be in addition to any liability which a Holder may otherwise
have, including under this Agreement. In no event, however, shall the liability
of any selling Holder hereunder be greater in amount than (x) the dollar amount
of the proceeds received by such Holder upon its sale of the Registrable
Securities giving rise to such indemnification obligation less (y) the dollar
amount paid by a Purchaser for the Series A Preferred Stock and/or Warrants
pursuant to which such Registrable Securities were issued.
(c) Promptly after receipt by an indemnified party under subsection
(a) or (b) above of notice of the commencement of any action, such indemnified
party shall, if a claim in
14
<PAGE>
respect thereof is to be made against the indemnifying party under such
subsection, notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may have
under this Section 5, except to the extent that it has been prejudiced in any
material respect by such failure, or from any liability which it may otherwise
have). In case any such action is brought against any indemnified party, and it
notifies an indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein, and to the extent it may elect by
written notice delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense thereof with
counsel reasonably satisfactory to such indemnified party. Notwithstanding the
foregoing, the indemnified party or parties shall have the right to employ its
or their own counsel in any such case, but the fees and expenses of such counsel
shall be at the expense of such indemnified party or parties unless (i) the
employment of such counsel shall have been authorized in writing by the
indemnifying parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to take charge of the
defense of such action within a reasonable time after notice of commencement of
the action, or (iii) such indemnified party or parties shall have reasonably
concluded that there may be defenses available to it or them which are different
from or additional to those available to one or all of the indemnifying parties
(in which case the indemnifying party or parties shall not have the right to
direct the defense of such action on behalf of the indemnified party or
parties), in any of which events such fees and expenses of counsel shall be
borne by the indemnifying parties; provided, however, that the indemnifying
party under subsection (a) or (b) above, shall only be liable for the legal
expenses of one counsel (in addition to any local counsel) for all indemnified
parties in each jurisdiction in which any claim or action is brought. Anything
in this subsection to the contrary notwithstanding, an indemnifying party shall
not be liable for any settlement of any claim or action effected without its
prior written consent, provided, however, that such consent was not unreasonably
withheld.
(d) In order to provide for contribution in circumstances in which
the indemnification provided for in this Section 5 is for any reason held to be
unavailable or is insufficient to hold harmless a party indemnified thereunder,
the Company and each selling Holder shall contribute to the aggregate Losses of
the nature contemplated by such indemnification provision in such proportion as
is appropriate to reflect the relative benefits received by the Company from the
issuance of the shares of Series A Preferred Stock and/or Warrants pursuant to
which the Registrable Securities sold by such Holder were issued and by any such
Holder from its sale of Registrable Securities or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in this Section 5,
in such proportion as is appropriate to reflect not only the relative benefits
referred to above but also the relative fault of the Company and the Holders in
connection with the statements or omissions which resulted in such Losses, as
well as any other relevant equitable considerations. The relative benefits
received by the Company and any Holder shall be deemed to be in the same
proportion as (x) the total proceeds received by the Company from the issuance
of the shares of Series A Preferred Stock and/or Warrants pursuant
15
<PAGE>
to which the Registrable Securities which would otherwise give rise to the
indemnification obligation were issued and (y) the total proceeds received by
such Holder upon its sale of the Registrable Securities less the amount paid by
a Purchaser for the Series A Preferred Stock and/or Warrants pursuant to which
such Registrable Securities were issued. The relative fault of the Company and
of the Holders shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material fact or the omission or
alleged omission to state a material fact relates to information supplied by the
Company or the Holders and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and each Holder agree that it would not be just and equitable if
contribution pursuant to this Section 5 were determined by pro rata allocation
or by any other method of allocation which does not take into account the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 5, (i) no Holder shall be required to contribute, in the aggregate,
any amount in excess of the amount by which the total received by such Holder
with respect to the sale of its Registrable Securities exceeds the sum of (A)
the amount paid by a Purchaser for the Series A Preferred Stock and/or Warrants
pursuant to which such Registrable Securities were issued plus (B) the amount of
any damages which such Holder has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission and (ii)
no person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 5, (A)
each person, if any, who controls a Holder within the meaning of Section 15 of
the Act or Section 20(a) of the Exchange Act and (B) the respective officers,
directors, partners, employees, representatives and agents of a Holder or any
controlling person shall have the same rights to contribution as such Holder,
and each person, if any, who controls the Company within the meaning of Section
15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to
contribution as the Company, subject in each case to clauses (i) and (ii) of
this Section 5(d). Any party entitled to contribution will, promptly after
receipt of notice of commencement of any action, suit or proceeding against such
party in respect of which a claim for contribution may be made against another
party or parties under this Section 5, notify such party or parties from whom
contribution may be sought, but the failure to so notify such party or parties
shall not relieve the party or parties from whom contribution may be sought from
any obligation it or they may have under this Section 5 or otherwise. No party
shall be liable for contribution with respect to any action or claim settled
without its prior written consent; provided, however, that such written consent
was not unreasonably withheld.
(e) The obligations of the Company and the Holders under this Section
5 shall survive the completion of any offering of Registrable Securities in a
Registration Statement hereunder, or otherwise.
SECTION 6. MISCELLANEOUS
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(a) Remedies. Each Holder, in addition to being entitled to exercise
--------
all rights provided herein, will be entitled to specific performance of its
rights under this Agreement. The Company agrees that monetary damages would not
be adequate compensation for any loss incurred by reason of a breach by it of
the provisions of this Agreement and hereby agrees to waive the defense in any
action for specific performance that a remedy at law would be adequate.
(b) No Inconsistent Agreements. The Company will not on or after the
--------------------------
date of this Agreement enter into any agreement with respect to its securities
that conflicts with the rights granted to the Holders in this Agreement or
otherwise conflicts with the provisions hereof. The rights granted to the
Holders hereunder do not in any way conflict with and are not inconsistent with
the rights granted to the holders of the Company's securities under any
agreement in effect on the date hereof, except where a waiver with respect
thereto has been obtained prior to the date of effectiveness of any registration
statement required under this Agreement.
(c) Amendments and Waivers. The provisions of this Agreement may not
----------------------
be amended, modified or supplemented, and waivers or consents to or departures
from the provisions hereof may not be given unless the Company has obtained the
written consent of Holders of a majority of the outstanding Registrable
Securities, and the consent of the Holders of a majority of the outstanding
Registrable Securities shall be binding on every Holder of Registrable
Securities.
(d) Notices. All notices and other communications provided for or
-------
permitted hereunder shall be made in writing by hand-delivery, first-class mail
(registered or certified, return receipt requested), telex, telecopier, or air
courier guaranteeing overnight delivery:
(i) if to a Holder, at the address set forth on the records of the
Company; and
(ii) if to the Company:
Digex, Incorporated
One Digex Plaza
Beltsville, Maryland 20705
Telecopier No.: (301) 847-6694
Attention: Chief Financial Officer
With a copy to:
Kronish Lieb Weiner & Hellman LLP
1114 Avenue of the Americas, 46th Floor
New York, New York 10036
Telecopier No.: (212) 479-6275
17
<PAGE>
Attention: Ralph J. Sutcliffe, Esq.
All such notices and communications shall be deemed to have been duly
given at the time delivered by hand, if personally delivered; five Business Days
after being deposited in the mail, postage prepaid, if mailed; when answered
back, if telexed; when receipt acknowledged, if telecopied; and on the next
Business Day, if timely delivered to an air courier guaranteeing overnight
delivery.
(e) Successors and Assigns. This Agreement shall inure to the
----------------------
benefit of and be binding upon the successors and assigns of each of the
parties, including without limitation and without the need for an express
assignment, subsequent Holders of Registrable Securities.
(f) Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(g) Headings. The headings in this Agreement are for convenience of
--------
reference only and shall not limit or otherwise affect the meaning hereof.
(h) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED
-------------
IN ACCORDANCE WITH THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO THE
CONFLICT OF LAW RULES THEREOF.
(i) Severability. In the event that any one or more of the
------------
provisions contained herein, or the application thereof in any circumstance, is
held invalid, illegal or unenforceable, the validity, legality and
enforceability of any such provision in every other respect and of the remaining
provisions contained herein shall not be affected or impaired thereby.
(j) Entire Agreement. This Agreement together with the other
----------------
Operative Documents (as defined in the Purchase Agreement) is intended by the
parties as a final expression of their agreement and intended to be a complete
and exclusive statement of the agreement and understanding of the parties hereto
in respect of the subject matter contained herein. There are no restrictions,
promises, warranties or undertakings, other than those set forth or referred to
herein with respect to the registration rights granted by the Company with
respect to the Registrable Securities. This Agreement supersedes all prior
agreements and understandings between the parties with respect to such subject
matter.
[SIGNATURE PAGE FOLLOWS]
18
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Registration Rights
Agreement as of the date first written above.
DIGEX, INCORPORATED
By: /s/ MARK K. SHULL
-----------------
Name: Mark K. Shull
Title: Chief Executive Officer
MICROSOFT CORPORATION
By: /s/ ROBERT J. HERBOLD
-----------------------
Name: Robert J. Herbold
Title: Chief Operating Officer
CPQ HOLDINGS, INC.
By: /s/ BEN K. WELLS
-----------------
Name: Ben K. Wells
Title: Vice President & Treasurer
19
<PAGE>
EXHIBIT 10.13
[LOGO] intermedia
COMMUNICATIONS
June 29, 1999
Mr. Mark Shull
1123 Lexington Place Ridge Drive
Lexington, MA 02173
Dear Mark:
It is with great pleasure that I offer you the position of Senior Vice
President, Intermedia Communications Inc. (the "Company"), and President and
CEO of DIGEX, Incorporated ("DIGEX"). We anticipate that you will accept this
offer and officially assume this position on or before July 1, 1999.
This is an important officer position within the company that reports directly
to David C. Ruberg, Chairman, President and CEO. Your annual base salary will be
$250,000 (based on 52 weeks service). This will be reviewed again on January 1,
2000.
This position has an annual management incentive compensation target
opportunity of 50% of base salary ($125,000). This bonus opportunity is
contingent upon the achievement of shared corporate objectives as well as the
achievement of two to five individual objectives that relate to your primary
responsibilities. You are expected to establish these individual objectives,
with my approval.
This offer also includes a stock option grant covering 200,000 shares of
Intermedia common stock, subject to approval by the Compensation Committee of
the Board of Directors. This grant will vest in equal installments over the 60-
month period commencing with the date of your employment by the Company, subject
to customary terms contained in the standard incentive stock options issued by
the Company under this Plan. For pricing purposes, the date of the grant will be
deemed to be the date upon which the options have been approved by the
Compensation Committee of the Board of Directors. Following the occurrence of a
change of control of the Company, all unvested installments of the options
will vest if your employment is terminated by the Company (other than for
cause as defined herein) or, if earlier, one year following the date of
occurrence of the change of control if you continue to be employed by the
Company at that date.
For the purposes of the preceding sentence and otherwise contained
herein, "Change of Control" means the sale, exchange or transfer of common stock
of the Company or of DIGEX, whether in one transaction or a series of related
transactions occurring within one year, which results in an accumulation of
50% or more of the outstanding shares of common stock (on fully diluted basis)
or of DIGEX in one holder or several affiliated holders (or any such
transaction(s) occurring within six months that result in an accumulation of
at least 35% of such shares of common stock (on a fully diluted basis)) or an
event involving the sale or merger of the Company or of DIGEX or their
respective assets which results in the holders of shares of common stock
immediately prior to the
<PAGE>
Mark Shull
Offer Letter
Page 2
occurrence of such sale or merger holding less than a majority of the
outstanding shares of common stock immediately thereafter.
As you know, DIGEX has filed a registration statement covering an initial public
offering of its common stock (the "DIGEX Common Stock"). If the public offering
occurs within one year of the date of your acceptance of this offer, you will
relinquish your title as a senior vice president of the Company and, to the
extent not previously vested, your Company stock options will be canceled and
will be replaced by options to purchase 400,000 shares of DIGEX Common Stock (or
that number of shares of DIGEX Common stock as shall equal 1% of DIGEX's total
outstanding shares of Common Stock immediately following the offering if more or
less than 40 million shares are outstanding at that date), 200,000 of which will
be exercisable at $5.00 per share and the balance of which will be exercisable
at the initial public offering price. Options covering 25% of the shares of
DIGEX Common Stock will vest one year following the date of grant and the
balance will vest in equal quarterly installments over the next three years. If
a change of control occurs, options covering one-half of the shares will vest
immediately and the balance will vest in accordance with the last sentence of
the preceding paragraph. You will also become a member of the Board of Directors
of DIGEX upon consummation of the initial public offering.
If your employment with the Company or DIGEX is terminated by the Company or
DIGEX for any reason other than for cause (described below), the Company or
DIGEX will pay your base salary as in effect at the time of termination through
the later of July 1, 2001, or for one year following the date of termination,
payable either on the same dates it would have been paid had your employment
continued through such later date or in a lump sum, as the Company or DIGEX
decides. If your termination occurred following the occurrence of a Change of
Control, you will be paid in a lump sum promptly following such termination.
Your entitlement to receive payments shall terminate and cease to be of any
force or effect in the event you, directly or indirectly (whether by an entity
of which you own greater than 10% of the outstanding equity interest or by which
you are employed in a senior executive capacity) knowingly hire within six
months following your date of termination, any employee of Director level or
above of the Company or DIGEX, who was employed by the Company or DIGEX on the
date of your termination. Cause means (i) any conduct or behavior by you that
would reasonably be expected to have a material adverse effect on the Company's
or DIGEX's business or reputation, (ii) commission by you of an act involving
moral turpitude or dishonesty, including fraud, (iii) your material failure to
reasonably perform your duties for DIGEX or (iv) your willful failure to perform
or abide by any lawful directions or instructions of DIGEX or the Company
consistent with your capacity as a senior executive of the DIGEX.
Notwithstanding anything in this letter to the contrary, if it shall be
determined that any payment or distribution by the Company or of DIGEX to or for
your benefit (whether paid or payable or distributed or distributable pursuant
to the terms of this letter or otherwise) (a "Payment") would constitute an
"excess purchase payment" within the meaning of Section 4999 of the internal
revenue code, that the Payments, in the aggregate, shall be reduced (in a manner
elected by you, or by the Company or DIGEX if you fail to make such an election)
to the greatest amount that could be paid to you so that no portion thereof
shall be subject to the excise taxes imposed by Section 4999 of the internal
revenue code.
<PAGE>
Mark Shull
Offer Letter
Page 3
As an employee of DIGEX, you will be entitled to all employee benefits: Medical
insurance, prescription drug card, dental insurance, long-term disability, life
insurance, 401(k) Plan, educational reimbursement, holidays, sick leave,
military leave, bereavement leave, voting time off and jury duty leave, and
supplemental executive life insurance. Assuming you start on or before July 1,
1999, your medical benefits will be effective July 1, 1999. You will be eligible
for 3 weeks of paid vacation per year, upon your first year of employment. This
will increase to 4 weeks on January 1 of the year following the 10th anniversary
from your date of hire.
This offer includes a relocation allowance of up to $100,000. Subject to this
limit, you will be reimbursed for relocation expenses (documented by receipts)
in accordance with the Company's Relocation Policy, a copy of which will be
provided to you. Reimbursable expenses include items such as transportation
of you and your family, movement of household goods, real estate commission for
the sale of the old home, closing costs associated with the purchase of the
new home, incidental expenses and house hunting trips. DIGEX will "gross up" the
taxable elements of this reimbursement. The "gross-up" is not considered part of
the relocation allowance.
In order that we demonstrate our sensitivity to individual needs during the
relocation period, you will note in the description of the relocation policy
that DIGEX may also provide temporary housing expenses for a period of up to six
months, separate from the relocation allowance itself. This is subject to
advance agreement with your supervisor and normally includes the provision of a
furnished apartment facility in Beltsville and reimbursement of up to two
trips per month during the relocation period between Beltsville and your former
residence.
This relocation assistance and temporary housing will be forgotten over a
12-month period at a rate of 1/12 per month, commencing on the date of your
last relocation reimbursement. If you voluntarily terminate your employment with
DIGEX prior to the end of this 12-month period, the relocation balance that
exceeds the forgiven amount must be repaid to DIGEX.
We sincerely believe that Intermedia and DIGEX have an exciting future, filled
with substantial opportunity for business growth and success. We also feel that
you are a very talented person with significant potential to help us grow and
succeed. We are excited about the prospect of you joining the Intermedia team.
Sincerely,
/s/ David C. Ruberg
David C. Ruberg
Chairman, President and CEO
By signing below I accept this offer.
/s/ Mark Shull 6/29/99
- -------------------------------- -------
Signature Date:
<PAGE>
Intermedia
COMMUNICATIONS
July 9, 1999
Mr. Mark Shull
One Digex Plaza
Beltsville, Maryland 20705
Dear Mark:
This will confirm the changes we have agreed upon in your employment
arrangement with Digex as follows:
(a) One-half of the then unvested portion of each of your Intermedia
options and Digex options will vest immediately upon the occurrence of a change
of control.
(b) Your Intermedia stock option has been reduced to cover 100,000 shares
of Intermedia common stock and will continue in full force and effect following
consummation of the Digex initial public offering.
(c) Your bonus opportunity is 60% of your base salary.
(d) Your title is President and Chief Executive Officer.
(e) If an adjustment is required to be made to the shares covered by your
Digex options to equal 1% of the outstanding shares, the adjustment will be made
based upon the number of shares of common stock of Digex outstanding immediately
prior to consummation of the initial public offering. For example, if the number
of the outstanding shares will equal 50 million, then the options will equal
500,000 shares.
Except as amended hereby, the terms of your original offer letter continue
in full force and effect. If the foregoing is acceptable to you, please sign in
the space provided below and return to me one fully executed copy of this
letter. Nothing in this letter will be deemed to affect the at will status of
your continued employment by Digex.
DIGEX INCORPORATED
By: /s/ David C. Ruberg
-------------------------------
David C. Ruberg, Chairman
Agreement with terms
of letter confirmed:
/s/ Mark Shull
- -----------------------
Mark Shull
3625 Queen Palm Drive, Tampa, Florida 33619 Main Line 813 829.0011
Toll Free 800 940.0011 www.intermedia.com
<PAGE>
Exhibit 10.14
[LOGO]
intermedia
COMMUNICATIONS
December 14, 1998
Ms. Nancy Faigen
35 Wicks End
Wilton, Connecticut 06897
Dear Nancy:
It is with great pleasure that I offer you the position of President and
General Manager, WebSite Management Division with Intermedia
Communications Inc., located in Beltsville, Maryland. We anticipate that
you will accept this offer immediately, and officially assume this
position on December 14, 1998.
This is an important officer position within the Company, which reports
directly to Jim Geiger, Senior Vice President, Chief Marketing Officer.
The annual base salary is $225,000 (based on 52 weeks service). We
recognize that by accepting this position and starting with us
immediately, you will forego a substantial amount of compensation and
other benefits from your former employer. In order to offset the
financial impact to you and in recognition of your commitment to us, we
are pleased to offer you a signing bonus to be dispensed as follows:
. A $125,000 signing bonus will be provided in two installment: $50,000
on January 2, 1999 and $75,000 on August 1, 1999. This amount is
guaranteed without restrictions or requirements.
. An additional $150,000 signing bonus will be provided in two
installments: $50 000 on the date you accept this offer and the
remaining $100,000 will paid on April 1, 1999 provided you are still
employed with us on that date.
In recognition of our commitment to you, we do ask that you warrant, by
your acceptance of this position and the associated bonus, that you are
not subject to or a party to any agreement with your former employer
that would restrict or otherwise prohibit you from accepting this
position with Intermedia.
In addition, this position has an annual management incentive
compensation target opportunity of 45% of base salary ($101,250). For
1999, you will be eligible for this entire bonus opportunity, based on
performance. This bonus opportunity is contingent upon the achievement
of revenue, server units in service, EBITDA, capital expenditure, and
headcount. You will be eligible for a performance and salary review on
January 1, 2000.
This offer includes a stock option grant covering 100,000 shares of
common stock subject to approval by the Compensation Commitee of the
Board of Directors. This grant will vest in equal installments over the
60-month period commencing with the date of your employment by the
Company, subject to customary terms contained in the standard incentive
stock options issued by the Company under the Plan. For pricing
purposes, the date of the grant will be deemed to be the date upon which
the option has bean approved by the Compensation Committee of the Board
of Directors. This grant will immediately vest upon a change in control
of the Company, if followed by termination of your employment with the
Company under certain conditions within twelve months thereafter.
As an employee of Intermedia, you will be entitled to all employee
benefits: Medical insurance, medical and prescription drug card, dental
insurance, short-term and long-term disability, life insurance, 401(k)
Plan, educational reimbursement, holidays, sick leave, military leave,
bereavement leave, voting time off and jury duty leave, and supplemental
executive life insurance. Assuming you start on December 14, 1998 your
medical benefits will be effective January 1, 1999. You will be eligible
for 3 weeks of paid vacation per year, including your first year of
employment.
<PAGE>
Page Two
December 14, 1998
This offer includes a relocation allowance of up to $125,000. Subject to
this limit, you will be reimbursed for relocation expenses (documented
by receipts) in accordance with Intermedia's Relocation Policy, a copy
of which is attached. Reimbursable expenses include items such as
transportation of you and you family, movement of household goods, real
estate commission for the sale of the old home, closing costs associated
with the purchase of the new home, incidental expenses and house hunting
trips. The Company will "gross up" the taxable elements of this
reimbursement. The "gross up" is not considered part of the relocation
allowance.
In order that we demonstrate our sensitivity to individual needs during
the relocation period, you will note in the description of the
relocation policy that the Company may also provide temporary housing
expenses for a period of up to six months, separate from the relocation
allowance itself. This is subject to advance agreement with your
supervisor and normally includes the provision of a furnished apartment
facility in Maryland and reimbursement of up to two trips per month
during the relocation period between Maryland and your former residence.
Individual needs vary greatly, so please discuss your specific needs
with Jim Geiger.
This relocation allowance and temporary housing expenses wi1l be
forgiven over a 12-month period at a rate of 1/12 per month, commencing
on the date of your last relocation reimbursement. If you voluntarily
terminate your employment with Intermedia prior to the end of this
12-month period, the relocation balance that exceeds the forgiven amount
must be repaid to the Company.
Please contact Lois Durham, Human Resources, (813) 829-4518, to commence
the administration of your relocation.
Nancy, we sincerely believe that Intermedia has an exciting future,
filled with substantial opportunity for business growth and success. We
also feel that you are a very talented person with significant potential
to help us grow and succeed. We are excited about the prospect of you
joining the Intermidia team.
Sincerely.
/s/ David C. Ruberg
David C. Ruberg
President and CEO
Attachments
By signing below I accept this offer.
/s/ Nancy G. Faigen 12/14/98
---------------------- --------
Signature Date
Please return the signed offer 1etter and relocation agreement to Trevor
Dignall, Senior Vice President, Human Resources, in the enclosed, pre-
addressed envelope.
<PAGE>
Digex keeps e-business in business(SM) [LOGO] digex(SM)
One Digex Plaza
Beltsville, MD 20705
www.digex.com
301.847.5000
Fax 301.847.5215
July 9, 1999
Ms. Nancy G. Faigen
One Digex Plaza
Beltsville, Maryland 20705
Dear Nancy:
This will confirm the changes we have agreed upon in your
employment arrangement with Digex as follows:
(a) Your base salary is $225,000 per year and your annual bonus
opportunity is 50% of your base salary.
(b) If the pending initial public offering of Digex common stock
becomes effective, you will be granted Digex stock options covering an
aggregate of 300,000 shares of common stock. The options will be exercisable
as to 50% of the shares at an exercise price equal to $5.00 per share and as
to the balance of the shares, at an exercise price equal to the initial
public offering price. Options covering 25% of the shares will vest one year
following the date of grant and the balance will vest in equal quarterly
installments over the next three years so long as you continue to be employed
by Digex. Following the occurrence of a change of control, all unvested
installments of the options will vest if your employment is terminated by
Digex (other than for cause as defined herein) or, if earlier, one year
following the date of occurrence of the change of control if you continue to
be employed by Digex at that time.
(c) Your title will be President, Sales and Service Delivery Group
of Digex.
(d) Your existing Intermedia stock options shall continue in full
force and effect following consummation of the initial public offering of
Digex common stock.
For purposes of this letter:
"Change of Control" means: the sale, exchange or transfer of common
stock of Intermedia or of Digex, whether in one transaction or a
series of related transactions occurring within one year, which
results in an accumulation of 50% or more of the outstanding shares
of common stock (on a fully diluted basis) of
<PAGE>
Digex keeps e-business in business(SM) [LOGO] digex
One Digex Plaza
Beltsville, MD 20705
www.digex.com
301.847.5000
Fax 301.847.5215
Intermedia or of Digex in one holder or several affiliated holders
(or any such transaction(s) occurring within six months that result
in an accumulation of at least 35% of such shares of common stock
(on a fully diluted basis)) or an event involving the sale or
merger of Intermedia or of Digex or their respective assets which
results in the holders of shares of common stock immediately prior
to the occurrence of such sale or merger holding less than a
majority of the outstanding shares of common stock immediately
thereafter.
"Cause" means: (i) any conduct or behavior by you that would
reasonably be expected to have a material adverse affect on
Intermedia's or Digex's business or reputation, (ii) commission by
you of an act involving moral turpitude or dishonesty, including
fraud, (iii) your material failure to reasonably perform your
duties for Digex or (iv) your willful failure to perform or abide
by any lawful directions or instructions of Digex consistent with
your capacity as a senior executive of Digex.
Except as amended hereby, the terms of your original offer letter
continue in full force and effect. If the foregoing is acceptable to you,
please sign in the space provided below and return to me one fully executed
copy of this letter. Nothing in this letter will be deemed to affect the at
will status of your continued employment by Digex.
DIGEX, INCORPORATED
By:/S/ Mark Shull
----------------------------------
Mark Shull, President and Chief
Executive Officer
Agreement with terms
of letter confirmed:
/S/ Nancy Faigen
----------------------------------
Nancy G. Faigen
<PAGE>
EXHIBIT 10.15
[LOGO] digex
An Intermedia
Communications Company
July 9, 1999
Ms. Rebecca Ward
259 Bridge Street,
South Hamilton,
MA 01982-1405
Dear Rebecca:
On behalf of Digex Incorporated, I am pleased to offer you the position
President, Product Management, Engineering and Marketing Group of
Digex, reporting to me, Chief Executive Officer. In this role you will
also be an Officer of Digex, Inc. This position is based in our
facility in the Beltsville, Maryland Campus.
COMPENSATION
In this position, your annual base salary will be $200,000. (Based on
52 weeks of service). You will also be entitled to participate in the
Digex Management Incentive Plan as a Tier II participant, (50% of Base
Pay Bonus at 100% Corporate Target achievement). The Incentive would be
prorated on the base pay received during the current fiscal calendar
year. Future salary increases will be in accordance with Digex Company
Policy.
SIGN ON BONUS
To facilitate your transition to Digex, we are pleased to offer you in
addition to the relocation assistance, a Start-Up Bonus of $100,000.
50% of this bonus will be paid upon starting and 50% after six months
of employment.
STOCKS
This offer includes a stock option grant of 50,000 shares of Intermedia
contingent upon approval by the Compensation Committee of the Board of
Directors. Vesting of the award will begin with the approval of the
grant and will continue in monthly increments of 1/60th over a five-
year period. (Vesting of this option award will commence on the day the
option is granted and vest over a five-year period at 1/60th per
month.) The option price of the award will be the closing market price
of Intermedia Communications Inc. common stock on the date that the
grant is approved. Details will be provided in your Grant Agreement
upon approval by the Board of Directors.
If and when Digex becomes a public company, you will be granted Digex
Stock Options equal to 125,000 shares at $5.00 and 125,000 shares at
the initial public offering price of those shares. Details will be
provided in attached Grant Agreement.
Page 1 of 3
One Digex Plaza, Beltsville, MD 20705 Phone 301.847.5000 800.969.9090
www.digex.net
<PAGE>
[LOGO] digex
An Intermedia
Communications Company
July 9, 1999
Ms. Rebecca Ward
SEVERANCE
Upon termination of employment for reason other than for cause you will
be entitled to receive the equivalent amount of your base pay for the
period remaining to January 1, 2001 or a 12 months period whichever is
longer.
RELOCATION
To facilitate your transition to Digex, we are pleased to offer you
relocation assistance. The attached appendix Relocation Handbook - Plan
1-H will outline the relocation assistance provided by Digex. This will
include up to six months of temporary living assistance.
All relocation and temporary housing expense payments will be forgiven
over a 12-month period, at a rate of 1/12 per month, commencing on the
date of transfer. Voluntary separation prior to the completion of this
12-month period will create a debt to the Company for expenses incurred
that exceed the forgiven amount. Please contact Jamie Starr, Human
Resources, at (301) 847-2491 to discuss the administration of your
relocation program through Prudential Relocation.
BENEFITS
As an employee of Digex you will be entitled to all employee benefits:
Medical insurance, medical and prescription drug card, dental insurance,
short and long-term disability, life insurance, 401(k) plan, educational
reimbursement, holidays, sick leave, vacation time, military leave,
bereavement leave, voting time off and jury duty leave. Your medical
benefits will be effective the first day of the month following your
start of employment. An outline of these benefits is attached. Should
you have any benefit questions, please contact Ms. Jamie Starr, HR
Generalist, (301) 847-2491.
This offer is contingent on the following:
. Your acknowledgement and execution of our "Employee Agreement
Regarding Intellectual Property and Proprietary Information", which
will be reviewed and authorized by you and a company representative.
. This offer is contingent upon proof that you are legally authorized
to work in the United States per Immigration Reform Act of 1986 (see
attachment A).
Kindly acknowledge your acceptance of this offer by signing and dating
the enclosed copy of this letter and returning it to me by July 12th
1999. If we do not receive your acceptance of this offer by the close of
business on the above date, this offer will be withdrawn without further
liability of either party to the other.
July 9, 1999
Ms. Rebecca Ward
Page 2 of 3
One Digex Plaza, Beltsville, MD 20705 Phone 301.847.5000 800.969.9090
www.digex.net
<PAGE>
[LOGO] digex
An Intermedia
Communications Company
If you have any questions or need additional information, please feel free to
call me at (301) 847-2455 or home (301) 581-2480. I am looking forward to
your joining the Digex Executive Management Team and feel it will be a
mutually beneficial relationship. I wish you success in the continuation of
your career with Digex.
Sincerely yours,
Mark Shull
Chief Executive Officer, Digex
cc: D. Ruberg
Encl.
/s/ Rebecca Ward 7/9/99
--------------------------- -------------
Accepted: Rebecca Ward Date:
Page 3 of 3
One Digex Plaza, Beltsville, MD 20705 Phone 301.847.5000 800.969.9090
www.digex.net
<PAGE>
[LOGO] digex
An Intermedia
Communications Company
July 9, 1999
Ms. Rebecca Ward
One Digex Plaza
Beltsville, Maryland 20705
Dear Rebecca:
This will confirm the changes we have agreed upon in your
employment arrangement with Digex as follows:
(a) Your title is President, Product Management, Engineering
and Marketing Group of Digex.
(b) Your Intermedia stock options will continue in full force
and effect following consummation of the initial public offering of Digex
common stock.
(c) The "severance" section of your offer letter relates only
to a termination of your employment by Digex and does not affect the
"Change of Control" clause below.
(d) Your Digex stock options will be granted on the effective
date of the offering and will be subject to pro rata adjustment to the
extent that the number of shares of Digex common stock outstanding
immediately prior to consummation of the initial public offering are more
or less than 40 million. The options will be exercisable as to 50% of the
shares at an exercise price equal to $5.00 per share and as to the
balance of the shares, at an exercise price equal to the initial public
offering price. Options covering 25% of the shares will vest one year
following the date of grant and the balance will vest in equal quarterly
installments over the next three years so long as you continue to be
employed by Digex.
(e) Following the occurrence of a change of control, all
unvested installments of the options will vest if your employment is
terminated by Digex (other than for cause as defined herein) or, if
earlier, one year following the date of occurrence of the change of
control if you continue to be employed by Digex at that time.
One Digex Plaza, Beltsville, MD 20705 Phone 301.847.5000 800.969.9090
www.digex.net
<PAGE>
[LOGO] digex
An Intermedia
Communications Company
For purposes of this letter:
"Change of Control" means: the sale, exchange or transfer of common
stock of Intermedia or of Digex, whether in one transaction or a
series of related transactions occurring within one year, which
results in an accumulation of 50% or more of the outstanding shares of
common stock (on a fully diluted basis) of Intermedia or of Digex in
one holder or several affiliated holders (or any such transaction(s)
occurring within six months that result in an accumulation of at least
35% of such shares of common stock (on a fully diluted basis)) or an
event involving the sale or merger of Intermedia or of Digex or their
respective assets which results in the holders of shares of common
stock immediately prior to the occurrence of such sale or merger
holding less than a majority of the outstanding shares of common stock
immediately thereafter.
"Cause" means: (i) any conduct or behavior by you that would
reasonably be expected to have a material adverse affect on
Intermedia's or Digex's business or reputation, (ii) commission by you
of an act involving moral turpitude or dishonesty, including fraud,
(iii) your material failure to reasonably perform your duties for
Digex or (iv) your willful failure to perform or abide by any lawful
directions or instructions of Digex consistent with your capacity as a
senior executive of Digex.
Except as amended hereby, the terms of your original offer letter
continue in full force and effect. If the foregoing is acceptable to you, please
sign in the space provided below and return to me one fully executed copy of
this letter. Nothing in this letter will be deemed to affect the at will status
of your continued employment by Digex.
DIGEX, INCORPORATED
By: /s/ Mark Shull
------------------------------------
Mark Shull, President and Chief
Executive Officer
Agreement with terms
of letter confirmed:
/s/ Rebecca Ward
- -------------------------
Rebecca Ward
One Digex Plaza, Beltsville, MD 20705 Phone 301.847.5000 800.969.9090
www.digex.net
<PAGE>
EXHIBIT 10.16
[LETTERHEAD OF DIGEX, INCORPORATED APPEARS HERE]
July 9, 1999
Mr. Bryan T. Gernert
One Digex Plaza
Beltsville, Maryland 20705
Dear Bryan:
This will confirm the changes we have agreed upon in your employment
arrangement with Digex as follows:
(a) Your base salary is $200,000 per year and your annual bonus
opportunity is 60% of your base salary.
(b) If the Digex initial public offering of common stock becomes
effective, you will receive an options to purchase 300,000 shares of Digex
common stock at an exercise price equal to $5.00 per share and an option to
purchase 100,000 common shares at exercise price equal to the initial public
offering price. Options covering 25% of the shares will vest one year following
the date of grant and the balance will vest in equal quarterly installments over
the next three years so long as you continue to be employed by Digex.
(c) Following the occurrence of a change of control, all unvested
installments of the options will vest if your employment is terminated by Digex
(other than for cause as defined herein) or, if earlier, one year following the
date of occurrence of the change of control if you continue to be employed by
Digex at that time. In addition, in the event your employment is terminated by
Digex for any reason other than for cause within two years of the date of this
letter, your option[s] will be deemed to be vested for an aggregate of 200,000
shares (including any installment previously vested in accordance with the terms
of the option).
For purposes of this letter:
"Change of Control" means: the sale, exchange or transfer of common
stock of Intermedia or of Digex, whether in one transaction or a series
of related transactions occurring within one year, which results in an
accumulation of 50% or more of the outstanding shares of common stock
(on a fully diluted basis) of
<PAGE>
[LETTERHEAD OF DIGEX, INCORPORATED APPEARS HERE]
Intermedia or of Digex in one holder or several affiliated holders (or
any such transaction(s) occurring within six months that result in an
accumulation of at least 35% of such shares of common stock (on a fully
diluted basis)) or an event involving the sale or merger of Intermedia
or of Digex or their respective assets which results in the holders of
shares of common stock immediately prior to the occurrence of such sale
or merger holding less than a majority of the outstanding shares of
common stock immediately thereafter.
"Cause" means: (i) any conduct or behavior by you that would reasonably
be expected to have a material adverse affect on Intermedia's or Digex's
business or reputation, (ii) commission by you of an act involving moral
turpitude or dishonesty, including fraud, (iii) your material failure to
reasonably perform your duties for Digex or (iv) your willful failure to
perform or abide by any lawful directions or instructions of Digex
consistent with your capacity as a senior executive of Digex.
(d) Your existing Intermedia stock options shall continue in full force
and effect following consummation of the initial public offering of Digex common
stock.
Except as amended hereby, the terms of your employment continue in full
force and effect. If the foregoing is acceptable to you, please sign in the
space provided below and return to me one fully executed copy of this letter.
Nothing in this letter will be deemed to affect the at will status of your
continued employment by Digex.
DIGEX, INCORPORATED
By: /s/ Mark Shull
--------------------------
Mark Shull, President and
Chief Executive Officer
Agreement with terms
of letter confirmed:
/s/ Bryan T. Gernert
- --------------------
Bryan T. Gernert
<PAGE>
Exhibit 10.17
[LETTERHEAD OF DIGEX, INCORPORATED]
December 15, 1999
Mr. Timothy Adams
130 Wilsondale
Westwood, MA 02090
Dear Mr. Adams:
On behalf of Digex Incorporated, I am pleased to offer you the position of Chief
Financial Officer, reporting to Mr. Mark Shull, Chief Executive Officer.
Compensation
In this position, your annual base salary will be $210,000. (Based on 52 weeks
of service.) Your base compensation will be reviewed early spring 2000. You will
also be entitled to participate in the Digex Management Incentive Plan as a Tier
II participant. (50% of Base Pay Bonus at 100% Corporate Target achievement.)
The Incentive will be prorated on the base pay received during the current
fiscal calendar year.
Sign-On Bonus
To facilitate your transition to Digex, we are pleased to offer you a Signing
Bonus of $75,000 in two installments: 50% of this bonus will be paid shortly
after starting and 50% six months after your start date, provided you are still
employed with us on that date.
Location of Performance
It is understood that you will perform your duties as Chief Financial Officer
from offices maintained in Beltsville, MD and Boston, MA. However, you
understand that you will be present at Digex's corporate offices in Beltsville
as may be necessary to effectively perform your duties as Chief Financial
Officer. In turn, Digex agrees that it will pay your reasonable costs of travel
to and from Boston to Beltsville during the course of your employment.
Stock
Digex
- -----
This offer includes a stock option grant covering an aggregate of 250,000 shares
of Digex common stock contingent upon approval by the Compensation Committee of
the Board of Directors, which such approval occurred on December 1, 1999. Such
shares are exercisable as follows: the first 50,000 shares will be exercisable
at a price equal to $10.00 per share, and the
<PAGE>
Timothy Adams
December 15, 1999
Page Two
200,000 balance of the shares will be exercisable at the December 1, 1999 market
price of $34.00, as agreed to on December 1, 1999.
Vesting of the award will begin with the approval of the grant and will continue
over a four-year period commencing upon the date of approval by the Compensation
Committee of the Board of Directors, 25% of the shares covered by the option, in
equal proportion to the multiple exercise prices, will vest one year following
the date of grant. The balance of the shares will vest in equal quarterly
installments over the next three years so long as you continue to be employed by
Digex, subject to the change of control provisions of the Stock Option
Agreement.
Additionally, upon a change in control as defined in the Stock Option Agreement
(attached), this grant will fully vest one year following such change. You will
be provided details of your Grant Agreement. The option will be issued pursuant
to the Company's long-term Incentive Plan and will be subject to all the terms
and conditions of their plan.
Intermedia
- ----------
This offer also includes a stock option grant covering 25,000 shares of
Intermedia common stock, subject to approval by the Compensation Committee of
the Board of Directors.
Vesting of the award will begin with the approval of the grant and will continue
in monthly increments of 1/60th over a five-year period. (Vesting of this
option award will commence on the day the option is granted and vest over a
five-year period at 1/60th per month.) The option price of the award will be
the closing market price of Intermedia Communications Inc. common stock on the
date that the grant is approved. Details will be provided in your Grant
Agreement upon approval by the Board of Directors.
Severance
Upon termination of employment for reason other than "cause," you will be
entitled to receive the equivalent amount of your base pay and medical and
dental benefits for a 12-month period. Cause shall be defined as your (i)
willful and continued failure to substantially perform duties assigned
consistent with your position as Chief Financial Officer (other than any
failures resulting from physical or mental illness or death); (ii) continuing
failure to perform or discharge the duties of Chief Financial Officer assigned
to you by the Chief Executive Officer, if such failure to perform or discharge
your duties continues for a period of thirty (30) days after written notice to
you detailing such failure; or (iii) conviction of a felony that adversely
affects the business and/or reputation of Digex. It is understood that this
definition of Cause shall be applicable to any "change of control" provisions as
contained in the Stock Option Agreement.
<PAGE>
Timothy Adams
December 15, 1999
Page Three
Benefits
As an employee of Digex you will be entitled to all employee benefits: Medical
insurance, medical and prescription drug card, dental insurance, short and
long-term disability, life insurance, 401(k) plan, educational reimbursement,
holidays, sick leave, vacation time, military leave, bereavement leave, voting
time off and jury duty leave. Your medical benefits will be effective the first
day of the month following your start of employment. An outline of these
benefits is attached. Should you have any benefit questions, please contact Ms.
Jamie Starr, HR Generalist, 240 264-2491.
This offer is contingent on the following:
. Your acknowledgement and execution of our "Employee Agreement Regarding
Intellectual Property and Proprietary Information", which will be reviewed
and authorized by you and a company representative.
. This offer is contingent upon proof that you are legally authorized to work in
the United States, per Immigration Reform Act of 1986 (see attachment A).
As you know, in the ordinary course of business, pay and benefits plans evolve
as laws, employee, and/or business need change. If, in the future, it becomes
necessary to change any of the benefit or compensation plans currently in
effect, these changes will apply to you as they do to other eligible employees.
Furthermore, while this letter is our commitment to employ you in the previously
mentioned position, it does not constitute a contract for a specific length of
employment.
Disputes
In the event of any dispute regarding the parties compliance with the terms and
conditions of this offer, your employment or termination of employment, then
either party may file a demand for arbitration with the American Arbitration
Association ("AAA") in Washington, DC, pursuant to its rules for commercial
arbitration, except that a single arbitrator shall be chosen by the parties. In
the event of such arbitration proceeding, the parties shall either agree on a
single arbitration or request from the AAA as many lists of arbitrators as may
be necessary for the parties to agree on an arbitrator, subject to a maximum of
three (3) lists. The AAA striking procedure shall not be used. The fees
associated with the filing and processing of such arbitration, including any
filing fees, the fees and costs of the mutually agreed arbitrator, and any
transcripts, shall be borne equally by the parties. The prevailing party shall
pay any other costs, including attorney's fees.
Kindly acknowledge your acceptance of this offer by signing and dating the
enclosed copy of this letter and returning it to me by December 20th, 1999. If
we do not receive your acceptance of
<PAGE>
Timothy Adams
December 15, 1999
Page Four
this offer by the close of business on the above date, this offer will be
withdrawn without further liability of either party to the other.
If you have any questions or need additional information, please feel free to
call me or Marthe Lattinville-Pace, VP HR at 240 264-2455. I am looking forward
to your joining the Digex Executive Management Team and feel it will be a
mutually beneficial relationship. I wish you success in the continuation of your
career with Digex.
Sincerely yours,
/s/ Mark Shull
Mark Shull
President & CEO
cc: D. Ruberg
Enc. /s/ Timothy M Adams 12/15/99
------------------- --------
Accepted: Date:
<PAGE>
EXHIBIT 10.18
[LOGO] DIGEX(SM)
BUSINESS INTERNET
- ---------------------------------------------
DIGEX Incorporated 800.99DIGEX
6800 Virginia Manor Road 301.847.5000
Beltsville, Maryland 20705 Fax 301.847.5017
www.digex.net
September 11, 1996
Mr. Bobby Patrick
7726 Old Ox Road
Fairfax Station, Virginia 22039
Dear Bobby,
On behalf of DIGEX, Inc., I am pleased to offer you the position of Manager, NT
Server Operations, reporting to Bill Webb, in the Server Product business unit.
Your start date is September 9, 1996. Key components of this offer are as
follows:
Base Salary: $65,000 Annually
Benefits: All aspects of the employee benefits program are
covered in separate benefit policies describing various
programs available at DIGEX.
Bonus: 20% bonus paid annually. The bonus will be based upon
metrics to be determined by Bill Webb.
Department: Server
Employment Verification: On your first day you will need to provide Human
Resources with two forms of identification, proving
that you are eligible to work in the United States.
Employment and Payroll begins on the date of full
compliance. Please refer to the attached federal list
of acceptable identification.
Stock: Subject to Board of Directors approval you will be
granted 10,000 options at market price.
We are sincerely excited about you filling the position of Manager, NT Server
Operations and look forward to you becoming a part of the DIGEX family.
Sincerely,
/s/ Robert Patrick
----------------------------
/s/ William F. Webb Accepted: Bobby Patrick
Bill Webb 9/30/96
VP, Technical Operations ----------------------------
Date
cc: Dave Mann
Director of Human Resources
<PAGE>
Digex keeps e-business in business(SM) [LOGO] digex(SM)
One Digex Plaza
Beltsville, MD 20705
www.digex.com
301.847.5000
Fax 301.847.5215
July 9, 1999
Mr. Robert B. Patrick
One Digex Plaza
Beltsville, Maryland 20705
Dear Bobby:
This will confirm the changes we have agreed upon in your employment
arrangement with Digex as follows:
(a) Your base salary is $150,000 per year and your annual bonus
opportunity is 40% of your base salary.
(b) If the Digex initial public offering of common stock becomes
effective, you will receive options to purchase an aggregate of 100,000 shares
of Digex common stock, of which 50% will be exercisable at a price equal to
$5.00 per share and the balance will be exercisable at a price equal to the
initial public offering price. Options covering 25% of the shares will vest one
year following the date of grant and the balance will vest in equal quarterly
installments thereafter.
(c) Following the occurrence of a change of control of Digex, all
unvested installments of the options will vest if your employment is terminated
by Digex (other than for cause as defined herein) or, if earlier, one year
following the date of occurrence of the change of control if you continue to be
employed by Digex at that time. In addition, if your employment is terminated by
Digex for any reason other than for cause prior to one year from the date of
this letter, 25% of the shares covered by your option[s] will immediately vest
upon the date of termination.
(d) Your existing Intermedia stock options shall continue in full
force and effect following consummation of the initial public offering of Digex
common stock.
For purposes of this letter:
"Change of Control" means: the sale, exchange or transfer of common
stock of
<PAGE>
Digex keeps e-business in business(SM) [LOGO] digex(SM)
One Digex Plaza
Beltsville, MD 20705
www.digex.com
301.847.5000
Fax 301.847.5215
Intermedia or of Digex, whether in one transaction or a series of
related transactions occurring within one year, which results in an
accumulation of 50% or more of the outstanding shares of common
stock (on a fully diluted basis) of Intermedia or of Digex in one
holder or several affiliated holders (or any such transaction(s)
occurring within six months that result in an accumulation of at
least 35% of such shares of common stock (on a fully diluted
basis)) or an event involving the sale or merger of Intermedia or
of Digex or their respective assets which results in the holders of
shares of common stock immediately prior to the occurrence of such
sale or merger holding less than a majority of the outstanding
shares of common stock immediately thereafter.
"Cause" means: (i) any conduct or behavior by you that would
reasonably be expected to have a material adverse affect on
Intermedia's or Digex's business or reputation, (ii) commission by
you of an act involving moral turpitude or dishonesty, including
fraud, (iii) your material failure to reasonably perform your
duties for Digex or (iv) your willful failure to perform or abide
by any lawful directions or instructions of Digex consistent with
your capacity as a senior executive of Digex.
Except as amended hereby, the terms of your employment continue in
full force and effect. If the foregoing is acceptable to you, please sign in
the space provided below and return to me one fully executed copy of this
letter. Nothing in this letter will be deemed to affect the at will status of
your continued employment by Digex.
DIGEX, INCORPORATED
By: /s/ Mark Shull
----------------------------------
Mark Shull, President and Chief
Executive Officer
Agreement with terms
of letter confirmed:
/s/ Robert Patrick
- -------------------------
Robert B. Patrick
<PAGE>
EXHIBIT 10.19
DIGEX, INCORPORATED
LONG-TERM INCENTIVE PLAN
I. Purpose
The purpose of the Digex, Incorporated Long-Term Incentive Plan (the
"Plan") is to attract and retain and provide incentives to employees, officers,
directors and consultants of the Corporation, and to thereby increase overall
shareholder value. The Plan generally provides for the granting of stock, stock
options, stock appreciation rights, restricted shares and other stock-based
awards to the eligible participants.
II. Definitions
(a) "Award" includes, without limitation, stock options (including
incentive stock options within the meaning of Section 422(b) of the Code) with
or without stock appreciation rights, dividend equivalent rights, stock awards,
restricted share awards, or other awards that are valued in whole or in part by
reference to, or are otherwise based on, the Common Stock ("other Common Stock-
based Awards"), all on a stand alone, combination or tandem basis, as described
in or granted under this Plan.
(b) "Award Agreement" means a written agreement setting forth the terms and
conditions of each Award made under this Plan.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Cause" means (i) any continued failure by the Participant to obey the
reasonable instructions of the person to whom he reports, (ii) continued neglect
by the Participant of his duties and obligations as an employee of his employer,
or a failure to perform such duties and obligations to the reasonable
satisfaction of the person to whom he reports, (iii) willful misconduct of the
Participant or other actions in bad faith by the Participant which are to the
detriment of the Corporation, the Parent or a Subsidiary including without
limitation conviction of a felony, embezzlement or misappropriation of funds and
conviction of any act of fraud or (iv) a breach of any material provision of any
employment agreement not cured within 10 days after written notice thereof.
(e) "Change of Control" means the sale, exchange or transfer of Common
Stock or common stock of the then Parent Company whether in one transaction or a
series of related transactions occurring within one year, which results in an
accumulation of 50% or more of the voting power of the outstanding Common Stock
or common stock of the then Parent Company (on a fully diluted basis) in one
holder or several affiliated holders (or any such transaction or
1
<PAGE>
transactions occurring within six months that result in an accumulation of at
least 35% of the voting power of such Common Stock or common stock of the then
Parent Company (on a fully diluted basis)) or an event involving the sale or
merger of the Corporation or the then Parent Company or their assets which
results in the holders of Common Stock or common stock of the then Parent
Company immediately prior to the occurrence of such sale or merger holding less
than a majority of the voting power of the outstanding Common Stock or common
stock of the then Parent Company immediately thereafter.
(f) "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
(g) "Committee" means the Compensation Committee of the Board or such other
committee of the Board as may be designated by the Board from time to time to
administer this Plan the members of which shall consist solely of two or more
members of the Board who are "Non-Employee Directors" within the meaning of Rule
16b-3 of the Exchange Act and are "outside directors" for purposes of Code
Section 162(m)(4)(C) of the Code.
(h) "Common Stock" means the Class A Common Stock, $.01 par value, of the
Corporation.
(i) "Corporation" means Digex, Incorporated, a Delaware corporation.
(j) "Employee" means an employee of the Corporation, a Subsidiary or the
Parent Company.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means (i) in the case of the date upon which the
Corporation's initial public offering of Common Stock is declared effective, the
public offering price of such shares as set forth in the cover page of the
prospectus for such offering, and (ii) in all other cases the closing price for
the Common Stock as officially reported on the relevant date (or if there were
no sales on such date, on the next preceding date on which such closing price
was recorded) by the principal national securities exchange on which the Common
Stock is listed or admitted to trading, or, if the Common Stock is not listed or
admitted to trading on any such national securities exchange, the closing price
as furnished by the National Association of Securities Dealers through NASDAQ or
a similar organization if NASDAQ is no longer reporting such information, or, if
the Common Stock is not quoted on NASDAQ, as determined in good faith by
resolution of the Board (whose determination shall be conclusive), based on the
best information available to it.
(m) "Parent Company" means any person that owns over 50% of the voting
power of the Corporation's authorized and outstanding voting shares.
(n) "Participant" means an Employee, officer, director or consultant who
has been granted an Award under the Plan.
2
<PAGE>
(o) "Person" means an individual, a corporation, a partnership, an
association, a joint-stock company, a trust, any unincorporated organization, or
a government or political subdivision.
(p) "Plan Year" means a twelve-month period beginning with January 1 of
each year.
(q) "Subsidiary" means any corporation or other entity, whether domestic or
foreign, in which the Corporation has or obtains, directly or indirectly, a
proprietary interest of more than 50% by reason of stock ownership or otherwise.
III. Eligibility
Any Employee, officer, director or consultant of the Corporation, a
Subsidiary or Parent Company of the Corporation, selected by the Committee is
eligible to receive an Award under Section VI.
IV. Plan Administration
(a) Except as otherwise determined by the Board, the Plan shall be
administered by the Committee. The Board, or the Committee to the extent
determined by the Board, shall periodically make determinations with respect to
the participation of Employees, officers, directors and consultants in the Plan
and, except as otherwise required by law or this Plan, the grant terms of
Awards, including vesting schedules, price, restriction or option period,
dividend rights, post-retirement and termination rights, payment alternatives
such as cash, stock, contingent awards or other means of payment consistent with
the purposes of this Plan, and such other terms and conditions as the Board or
the Committee deems appropriate which shall be contained in an Award Agreement
with respect to a Participant.
(b) The Committee shall have authority to interpret and construe the
provisions of the Plan and any Award Agreement and make determinations pursuant
to any Plan provision or Award Agreement which shall be final and binding on all
persons. No member of the Committee shall be liable for any action or
determination made in good faith, and the members shall be entitled to
indemnification and reimbursement in the manner provided in the Corporation's
Certificate of Incorporation, as it may be amended from time to time.
(c) The Committee shall have the authority at any time to provide for the
conditions and circumstances under which Awards shall be forfeited. The
Committee shall have the authority to accelerate the vesting of any Award and
the times at which any Award becomes exercisable. The Committee shall have the
authority to modify the term of any Award provided that any such modification
that adversely affects a Participant shall require the consent of the
Participant.
3
<PAGE>
V. Capital Stock Subject to the Provisions of this Plan
(a) The capital stock subject to the provisions of this Plan shall be
shares of authorized but unissued Class A Common Stock and shares of Class A
Common Stock held as treasury stock (the "Common Stock"). Subject to adjustment
in accordance with the provisions of Section XI, and subject to Section V(c)
below, the total number of shares of Common Stock available for grants of Awards
shall not exceed 9,000,000.
(b) The grant of a restricted share Award shall be deemed to be equal to
the maximum number of shares which may be issued under the Award. Awards
payable only in cash will not reduce the number of shares available for Awards
granted under the Plan.
(c) There shall be carried forward and be available for Awards under the
Plan all of the following: (i) any unused portion of the limit set forth in
paragraph (a) of this Section V; (ii) shares represented by Awards which are
cancelled, forfeited, surrendered, terminated, paid in cash or expire
unexercised; and (iii) the excess amount of variable Awards which become fixed
at less than their maximum limitations.
VI. Awards Under This Plan
(a) Discretionary Awards. As the Board or Committee may determine, the
---------------------
following types of Awards and other Common Stock-based Awards may be granted
under this Plan on a stand alone, combination or tandem basis:
(i) Stock Option. A right to buy a specified number of shares of
Common Stock at a fixed exercise price during a specified time, all as the
Committee may determine.
(ii) Incentive Stock Option. An Award in the form of a stock option
which shall comply with the requirements of Section 422 of the Code or any
successor section as it may be amended from time to time. Subject to
adjustment in accordance with the provisions of Section XI, the aggregate
number of shares which may be subject to incentive stock option Awards
under this Plan shall not exceed 9,000,000 shares, subject to Section V
above. To the extent that Section 422 of the Code requires certain
provisions to be set forth in a written plan, said provisions are
incorporated herein by this reference.
(iii) Stock Appreciation Right. A right, which may or may not be
contained in the grant of a stock option or incentive stock option, to
receive in cash (or its equivalent value in Common Stock) the excess of the
Fair Market Value of a share of Common
4
<PAGE>
Stock on the date the right is surrendered over the option exercise price
or other price specified in the Award Agreement.
(iv) Restricted Shares. The issuance of Common Stock to a Participant
subject to forfeiture until such restrictions, terms and conditions as the
Committee may determine are fulfilled.
(v) Dividend or Equivalent. A right to receive dividends or their
equivalent in value in Common Stock, cash or in a combination of both with
respect to any new or previously existing Award.
(vi) Stock Award. The issuance of Common Stock, which may be on a
contingent basis, to a Participant.
(vii) Other Stock-Based Awards. Other Common Stock-based Awards
which are related to or serve a similar function to those Awards set forth
in this Section VI(a).
(b) Formula Awards. In addition to any Awards granted under Section VI(a),
--------------
each member of the Board who is not, on the date on which any option is to be
granted pursuant to this paragraph (b) to such member, an employee of the
Corporation, a Subsidiary or a Parent Company (a "Non-Employee Director") shall
be granted stock options (which shall not comply with the requirements of
Section 422 of the Code) in accordance with the following formula: (i) a stock
option to acquire 25,000 shares of Common Stock shall be granted on the Grant
Date (defined below) at the Exercise Price (defined below) which option shall
become exercisable, so long as the Non-Employee Director continues to be a
member of the Board, as to 8,334 shares on the January 1 next following the
Grant Date and as to an additional 8,333 shares on January 1 of each of the two
years thereafter and (ii) a stock option to acquire 5,000 shares of Common Stock
shall be granted on the Grant Date and on each anniversary thereof at the
Exercise Price which options shall be immediately exercisable upon grant.
Notwithstanding the foregoing, in the event a Non-Employee Director fails to
attend at least 75% of the Board meetings in any calendar year, commencing with
calendar year 1999, such person shall automatically forfeit his right to
exercise that portion of the option provided for in clause (i) above that would
have otherwise become exercisable on the next following January 1 which portion
shall cease to be of any force or effect. For purposes of this Section VI(b),
"Grant Date" shall mean (x) the date on which the initial public offering of the
Corporation's Common Stock becomes effective, with respect to each Non-Employee
Director serving in such capacity on such date and (y) the date of his election
to the Board, with respect to each Non-Employee Director who was not serving in
such capacity on the date referred to in the preceding clause (x), and "Exercise
Price" shall mean (A) the Fair Market Value of the Common Stock on the
respective Grant Dates with respect to each option granted pursuant to clause
(i) above and (B) the Fair Market Value of the Common Stock on each date of
grant with respect to options granted pursuant to clause (ii) above. Options
granted pursuant to this Section VI(b) shall expire and cease to be of any force
or effect on the earlier of the fifth anniversary of the date any such option
was granted or the first anniversary of the date on which a Participant ceases
to be a member of the Board.
5
<PAGE>
VII. Change of Control
Notwithstanding anything in this Plan to the contrary, unless otherwise
specifically provided in a Participant's employment agreement or stock option
agreement with the Corporation, a Subsidiary or a Parent Company of the
Corporation, upon a Change of Control, the option (i) if granted to a Non-
Employee Director, shall become fully vested and immediately exercisable and
will continue to be exercisable in whole or in part through the expiration date,
(ii) if granted to any other Participant will become fully vested on the earlier
of one year following the occurrence of a Change of Control if the Participant
continues to be employed by the Corporation on such date or the date upon which
Participant's employment is terminated by the Corporation (other than for Cause)
and will be exercisable in accordance with the provisions of such Participant's
stock option agreement.
VIII. Award Agreements
Each Award under the Plan shall be evidenced by an Award Agreement setting
forth the terms and conditions of the Award. Unless required by the Committee,
a Participant shall not be required to execute the Participant's Award
Agreement.
IX. Other Terms and Conditions
(a) Assignability. Unless provided to the contrary in any Award, no Award
shall be assignable or transferable except by will or by the laws of descent and
distribution and during the lifetime of a Participant, the Award shall be
exercisable only by such Participant.
(b) Termination of Employment or Other Relationship. Unless otherwise
determined by the Committee in connection with the grant of an Award, the
following provision shall apply:
(i) If employment of the Participant with the Corporation, or a
Subsidiary or Parent Company shall be terminated for Cause or voluntarily
by the Participant without the consent of the Corporation, or a Subsidiary
or Parent Company, as the case may be, the Award to the extent not
theretofore exercised shall expire forthwith.
(ii) If the Participant's employment with the Corporation, or a
Subsidiary or Parent Company shall terminate other than by reason of death
or for Cause or voluntarily by the Participant without the consent of the
Corporation, or a Subsidiary or Parent Company, as the case may be, and
immediately after such termination the Participant shall not then be
employed by the Corporation, or a Subsidiary or Parent Company, the Award
may be exercised at any time within three months after such termination,
subject to the provisions of clause (iv) of this subparagraph (b). The
Award, to the extent
6
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unexercised, shall expire on the day three months after the termination of
the Participant's employment with his employer.
(iii) If the Participant dies (A) while employed by the Corporation, or
Subsidiary or Parent Company or (B) within three months after the
termination of his employment other than for Cause or voluntarily by the
Participant without the consent of the Corporation, or a Subsidiary or
Parent Company, as the case may be, the Award may be exercised at any time
within six months after the Participant's death, subject to the provisions
of clause (iv) of this subparagraph (b). The Award, to the extent
unexercised, shall expire on the day six months after the Participant's
death.
(iv) The Award may not be exercised pursuant to this subparagraph
(b) except to the extent that the Participant was entitled to exercise the
Award at the time of the termination of his employment, or at the time of
his death, and in any event may not be exercised on and after the tenth
anniversary of the date of the Award.
(c) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to shares covered by an Award until the date the
Participant is the holder of record. No adjustment will be made for dividends
or other rights for which the record date is prior to such date.
(d) No obligation to Exercise. The grant of an Award shall impose no
obligation upon the Participant to exercise the Award.
(e) Payments by Participants. The Committee may determine that Awards for
which a payment is due from a Participant may be payable: (i) in U.S. dollars by
personal check, bank draft or money order payable to the order of the
Corporation, by money transfers or direct account debits; (ii) through the
delivery or deemed delivery based on attestation to the ownership of shares of
Common Stock with a Fair Market Value equal to the total payment due from the
Participant; (iii) pursuant to a broker-assisted "cashless exercise" program if
established by the Corporation; (iv) by a combination of the methods described
in (i) through (iii) above; or (v) by such other methods as the Committee may
deem appropriate.
(f) Withholding. Except as otherwise provided by the Committee, (i) the
deduction of withholding and any other taxes required by law will be made from
all amounts paid in cash and (ii) in the case of payments of Awards in shares of
Common Stock, the Participant shall be required to pay the amount of any taxes
required to be withheld prior to receipt of such stock, or alternatively, a
number of shares the Fair Market Value of which equals the amount required to be
withheld may be deducted from the payment.
(g) Restrictions on Sale and Exercise. With respect to officers and
directors for purposes of Section 16 of the Exchange Act, and if required to
comply with rules promulgated thereunder, (i) no Award providing for exercise, a
vesting period, a restriction period or the attainment of performance standards
shall permit unrestricted ownership of Common Stock by
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<PAGE>
the Participant for at least six months from the date of grant, and (ii) Common
Stock acquired pursuant to this Plan (other than Common Stock acquired as a
result of the granting of a "derivative security") may not be sold for at least
six months after acquisition.
(h) Maximum Awards. The maximum number of shares of Common Stock with
respect to which options or stock appreciation rights may be granted to any
single Participant under this Plan in any single Plan Year is 1,000,000.
X. Termination, Modification and Amendments.
(a) The Plan may from time to time be terminated, modified or amended by
the affirmative vote of the holders of a majority of the votes of the
outstanding shares of the capital stock of the Corporation present or
represented and entitled to vote at a duly held stockholders meeting.
(b) The Board may at any time terminate the Plan or from time to time make
such modifications or amendments of the Plan as it may deem advisable; provided,
however, that the Board shall not make any amendment to the Plan increasing the
number of shares of Common Stock covered by the Plan without the approval of at
least the affirmative vote of the holders of a majority of the votes of the
outstanding shares of the capital stock of the Corporation present or
represented and entitled to vote at a duly held stockholders meeting.
(c) No termination, modification or amendment of the Plan may adversely
affect the rights conferred by an Award without the consent of the recipient
thereof.
XI. Recapitalization
The aggregate number of shares of Common Stock as to which Awards may be
granted to Participants, the number of shares thereof covered by each
outstanding Award and by each option award granted or to be granted in
accordance with the formula set forth in paragraph (b) of Section VI hereof, and
the price per share thereof in each such Award, shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares or other capital
adjustment, or the payment of a stock dividend or other increase or decrease in
such shares, effected without receipt of consideration by the Corporation, or
other change in corporate or capital structure; provided, however, that any
fractional shares resulting from any such adjustment shall be eliminated. The
Committee may also make the foregoing changes and any other changes, including
changes in the classes of securities available, to the extent it is deemed
necessary or desirable to preserve the intended benefits of the Plan for the
Corporation and the Participants in the event of any other reorganization,
recapitalization, merger, consolidation, spin-off, extraordinary dividend or
other distribution or similar transaction.
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<PAGE>
XII. No Right to Employment
Except as provided in Section VI (b) with respect to options granted to Non-
Employee Directors, no person shall have any claim or right to be granted an
Award, and the grant of an Award shall not be construed as giving a Participant
the right to be retained in the employ of, or in many other relationship with,
the Corporation, a Subsidiary or the Parent Company. Further, the Corporation,
each Subsidiary and the Parent Company expressly reserve the right at any time
to dismiss a Participant free from any liability, or any claim under the Plan,
except as provided herein or in any Award Agreement issued hereunder.
XIII. Governing Law
To the extent federal laws do not otherwise control, the Plan shall be construed
in accordance with and governed by the laws of the State of Delaware.
XIV. Savings Clause
This Plan is intended to comply in all aspects with applicable laws and
regulations, including, with respect to those Employees who are officers or
directors for purposes of Section 16 of the Exchange Act, Rule 16b-3 under the
Exchange Act. In case any one or more of the provisions of this Plan shall be
held invalid, illegal or unenforceable in any respect under applicable law and
regulation (including Rule 16b-3), the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby
and the invalid, illegal or unenforceable provision shall be deemed null and
void; however, to the extent permissible by law, any provision which could be
deemed null and void shall first be construed, interpreted or revised
retroactively to permit this Plan to be construed in compliance with all
applicable laws (including Rule 16b-3) so as to foster the intent of this Plan.
XV. Effective Date and Term
The Plan shall become effective upon adoption by the Board, subject to
approval of the Plan by the affirmative vote of the holders of a majority of the
votes of the outstanding shares of the capital stock of the Company entitled to
vote thereon within one year following adoption of the Plan by the Board. All
Awards granted prior to such approval by the stockholders shall be subject to
such approval and shall not be exercisable and/or transferable prior thereto.
In the event such approval is not obtained within such one-year period, the Plan
and all Awards granted
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thereunder shall be null and void. The Plan shall terminate on the tenth
anniversary of the date on which it becomes effective. No Award shall be granted
after the termination of the Plan.
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<PAGE>
Exhibit 10.20
As Approved by
the Stockholders
on May 24, 1996
INTERMEDIA COMMUNICATIONS OF FLORIDA, INC.
LONG-TERM INCENTIVE PLAN
I. Purpose
The purpose of the Intermedia Communications of Florida, Inc. Long-Term
Incentive Plan (the "Plan") is to attract and retain and provide incentives to
employees, officers, directors and consultants of the Corporation, and to
thereby increase overall shareholder value. The Plan generally provides for the
granting of stock, stock options, stock appreciation rights, restricted shares
or any combination of the foregoing to the eligible participants.
11. Definitions
(a) "Award" includes, without limitation, stock options (including
incentive stock options within the meaning of Section 422(b) of the Code) with
or without stock appreciation rights, dividend equivalent rights, stock awards,
restricted share awards, or other awards that are valued in whole or in part by
reference to, or are otherwise based on, the Common Stock ("other Common Stock-
based Awards"), all on a stand alone, combination or tandem basis, as described
in or granted under this Plan.
(b) "Award Agreement" means a written agreement setting forth the terms
and conditions of each Award made under this Plan.
(c) "Board" means the Board of Directors of the Corporation.
(d) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(e) "Committee" means the Compensation Committee of the Board or such
other committee of the Board as may be designated by the Board from time to time
to administer this Plan the members of which shall consist solely of members of
the Board who are "disinterested persons" within the meaning of Rule 16b-3 of
the Exchange Act and are "outside directors" for purposes of Code Section
162(m)(4)(C) of the Code.
(f) "Common Stock" means the common stock, $.01 par value, of the
Corporation.
(g) "Corporation" means Intermedia Communications of Florida, Inc., a
Delaware corporation.
<PAGE>
(h) "Employee" means an employee of the Corporation or a Subsidiary.
(i) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(j) "Fair Market Value" means the closing price for the Common Stock as
officially reported on the relevant date (or if there were no sales on such
date, on the next preceding date on which such closing price was recorded) by
the principal national securities exchange on which the Common Stock is listed
or admitted to trading, or, if the Common Stock is not listed or admitted to
trading on any such national securities exchange, the closing price as furnished
by the National Association of Securities Dealers through Nasdaq or a similar
organization if Nasdaq is no longer reporting such information, or, if the
Common Stock is not quoted on Nasdaq, as determined in good faith by resolution
of the Board (whose determination shall be conclusive), based on the best
information available to it.
(k) "Participant" means an Employee, officer, director or consultant who
has been granted an Award under the Plan.
(1) "Plan Year" means a twelve-month period beginning with January 1 of
each year.
(m) "Subsidiary" means any corporation or other entity, whether domestic
or foreign, in which the Corporation has or obtains, directly or indirectly, a
proprietary interest of more than 50% by reason of stock ownership or otherwise.
III. Eligibility
Any Employee, officer, director or consultant of the Corporation or
Subsidiary selected by the Committee is eligible to receive an Award, except
that members of the Committee shall only be eligible for formula awards granted
pursuant to Section VI(b).
IV. Plan Administration
(a) Except as otherwise determined by the Board, the Plan shall be
administered by the Committee. The Board, or the Committee to the extent
determined by the Board, shall periodically make determinations with respect to
the participation of Employees, officers, directors and consultants in the Plan
and, except as otherwise required by law or this Plan, the grant terms of
Awards, including vesting schedules, price, restriction or option period,
dividend rights, post-retirement and termination rights, payment alternatives
such as cash, stock, contingent awards or other means of payment consistent with
the purposes of this Plan, and such other terms and conditions as the Board or
the Committee deems
<PAGE>
appropriate which shall be contained in an Award Agreement with respect to a
Participant.
(b) The Committee shall have authority to interpret and construe the
provisions of the Plan and any Award Agreement and make determinations pursuant
to any Plan provision or Award Agreement which shall be final and binding on all
persons. No member of the Committee shall be liable for any action or
determination made in good faith, and the members shall be entitled to
indemnification and reimbursement in the manner provided in the Corporation's
Certificate of Incorporation, as it may be amended from time to time.
(c) The Committee shall have the authority at any time to provide for the
conditions and circumstances under which Awards shall be forfeited. The
Committee shall have the authority to accelerate the vesting of any Award and
the times at which any Award becomes exercisable.
V. Capital Stock Subject to the Provisions of this Plan
(a) The capital stock subject to the provisions of this Plan shall be
shares of authorized but unissued Common Stock and shares of Common Stock held
as treasury stock. Subject to adjustment in accordance with the provisions of
Section X, and subject to Section V(c) below, the total number of shares of
Common Stock available for grants of Awards shall not exceed 1,500,000.
(b) The grant of a restricted share Award shall be deemed to be equal to
the maximum number of shares which may be issued under the Award. Awards payable
only in cash will not reduce the number of shares available for Awards granted
under the Plan.
(c) There shall be carried forward and be available for Awards under the
Plan, in addition to shares available for grant under paragraph (a) of this
Section V, all of the following: (i) any unused portion of the limit set forth
in paragraph (a) of this Section V; (ii) shares represented by Awards which are
cancelled, forfeited, surrendered, terminated, paid in cash or expire
unexercised; and (iii) the excess amount of variable Awards which become fixed
at less than their maximum limitations.
VI. Awards Under This Plan
(a) Discretionary Awards. As the Board or Committee may determine, the
--------------------
following types of Awards and other Common Stock-based Awards may be granted
under this Plan on a stand alone, combination or tandem basis:
3
<PAGE>
(i) Stock option. A right to buy a specified number of shares of
Common Stock at a fixed exercise price during a specified time, all as the
Committee may determine; provided that the exercise price of any option shall
not be less than 100% of the Fair Market Value of the Common Stock on the date
of grant of the Award.
(ii) Incentive Stock Option. An Award in the form of a stock
option which shall comply with the requirements of Section 422 of the Code or
any successor section as it may be amended from time to time. Subject to
adjustment in accordance with the provisions of Section X, the aggregate number
of shares which may be subject to incentive stock option Awards under this Plan
shall not exceed 1,500,000 shares, subject to Section V above. To the extent
that Section 422 of the Code requires certain provisions to be set forth in a
written plan, said provisions are incorporated herein by this reference.
(iii) Stock Appreciation Right. A right, which may or may not be
contained in the grant of a stock option or incentive stock option, to receive
in cash (or its equivalent value in Common Stock) the excess of the Fair Market
Value of a share of Common Stock on the date the right is surrendered over the
option exercise price or other price specified in the Award Agreement.
(iv) Restricted Shares. The issuance of Common Stock to a
Participant subject to forfeiture until such restrictions, terms and conditions
as the Committee may determine are fulfilled.
(v) Dividend or Equivalent. A right to receive dividends or their
equivalent in value in Common Stock, cash or in a combination of both with
respect to any new or previously existing Award.
(vi) Stock Award. The issuance of Common Stock, which may be on a
contingent basis, to a Participant.
(vii) Other Stock-Based Awards. Other Common Stock-based Awards
which are related to or serve a similar function to those Awards set forth in
this Section VI(a).
(b) Formula Awards. Each member of the Board who is not, on the date on
--------------
which any option is to be granted pursuant to this paragraph (b) to such member,
an employee (a "Non-Employee Director") shall be granted stock options (which
shall not comply with the requirements of Section 422 of the Code) in accordance
with the following formula: (i) a stock option to acquire 10,000 shares of
Common Stock shall be granted on the Grant Date (defined below) at the Exercise
Price (defined below) which option shall become exercisable, so long as the Non-
Employee Director continues
4
<PAGE>
to be a member of the Board, as to 3,334 shares on the January 1 next following
the Grant Date and as to an additional 3,333 shares on January 1 of each of the
two years thereafter and (ii) a stock option to acquire 1,000 shares of Common
Stock shall be granted on the Grant Date and on each anniversary thereof at the
Exercise Price which options shall be immediately exercisable upon grant.
Notwithstanding the foregoing, in the event a Non-Employee Director fails to
attend at least 75% of the Board meetings in any calendar year, commencing with
calendar year 1996, such person shall automatically forfeit his right to
exercise that portion of the option provided for in clause (i) above that would
have otherwise become exercisable on the next following January 1 which portion
shall cease to be of any force or effect. For purposes of this Section VI(b),
"Grant Date" shall mean (x) the date on which the Plan is approved by both the
Board and the shareholders of the Company, with respect to each Non-Employee
Director serving in such capacity on such date and (y) the date of his election
to the Board, with respect to each Non-Employee Director who was not serving in
such capacity on the date referred to in the preceding clause (x), and "Exercise
Price" shall mean (A) the Fair Market Value of the Common Stock on the
respective Grant Dates with respect to each option granted pursuant to clause
(i) above and (B) the Fair Market Value of the Common Stock on each date of
grant with respect to options granted pursuant to clause (ii) above.
Options granted pursuant to this Section VI(b) shall expire and cease to be of
any force or effect on the earlier of the fifth anniversary of the date any such
option was granted or the first anniversary of the date on which an optionee
ceases to be a member of the Board.
VII. Award Agreements
Each Award under the Plan shall be evidenced by an Award Agreement setting
forth the terms and conditions of the Award and executed by the Corporation and
Participant.
VIII. Other Terms and Conditions
(a) Assignability. Unless provided to the contrary in any Award, no Award
shall be assignable or transferable except by will or by the laws of descent and
distribution and during the lifetime of a Participant, the Award shall be
exercisable only by such Participant.
(b) Termination of Employment or Other Relationship. The Committee shall
determine the disposition of the grant of each Award in the event of the
retirement, disability, death or other termination of a Participant's employment
or other relationship with the Corporation or a Subsidiary.
5
<PAGE>
(c) Rights as a Stockholder. A Participant shall have no rights as a
stockholder with respect to shares covered by an Award until the date the
Participant is the holder of record. No adjustment will be made for dividends or
other rights for which the record date is prior to such date.
(d) No Obligation to Exercise. The grant of an Award shall impose no
obligation upon the Participant to exercise the Award.
(e) Payments by Participants. The Committee may determine that Awards for
which a payment is due from a Participant may be payable: (i) in U.S. dollars by
personal check, bank draft or money order payable to the order of the
Corporation, by money transfers or direct account debits; (ii) through the
delivery or deemed delivery based on attestation to the ownership of shares of
Common Stock with a Fair Market Value equal to the total payment due from the
Participant; (iii) pursuant to a broker-assisted "cashless exercise" program if
established by the Corporation; (iv) by a combination of the methods described
in (i) through (iii) above; or (v) by such other methods as the Committee may
deem appropriate.
(f) Withholding. Except as otherwise provided by the Committee, (i) the
deduction of withholding and any other taxes required by law will be made from
all amounts paid in cash and (ii) in the case of payments of Awards in shares of
Common Stock, the Participant shall be required to pay the amount of any taxes
required to be withheld prior to receipt of such stock, or alternatively, a
number of shares the Fair Market Value of which equals the amount required to be
withheld may be deducted from the payment.
(g) Restrictions on Sale and Exercise. With respect to officers and
directors for purposes of Section 16 of the Exchange Act, and if required to
comply with rules promulgated thereunder, (i) no Award providing for exercise, a
vesting period, a restriction period or the attainment of performance standards
shall permit unrestricted ownership of Common Stock by the Participant for at
least six months from the date of grant, and (ii) Common Stock acquired pursuant
to this Plan (other than Common Stock acquired as a result of the granting of a
"derivative security") may not be sold for at least six months after
acquisition.
(h) Maximum Awards. The maximum number of shares of Common Stock that may
be issued to any single Participant pursuant to options under this Plan or in
any single Plan Year is 400,000.
IX. Termination, Modification and Amendments
6
<PAGE>
(a) The Plan may from time to time be terminated, modified or amended by
the affirmative vote of the holders of a majority of the outstanding shares of
the capital stock of the Corporation present or represented and entitled to vote
at a duly held stockholders meeting.
(b) The Board may at any time terminate the Plan or from time to time make
such modifications or amendments of the Plan as it may deem advisable; provided,
however, that the Board shall not make any material amendments to the Plan
without the approval of at least the affirmative vote of the holders of a
majority of the outstanding shares of the capital stock of the Corporation
present or represented and entitled to vote at a duly held stockholders meeting.
(c) No termination, modification or amendment of the Plan may adversely
affect the rights conferred by an Award without the consent of the recipient
thereof.
(d) Notwithstanding anything to the contrary contained herein, the
provisions of Section VI(b) may not be amended more than once every six months
other than to comport with changes in the Code, the Employee Retirement Income
Security Act, or the rules thereunder.
X. Recapitalization
The aggregate number of shares of Common Stock as to which Awards may be
granted to Participants, the number of shares thereof covered by each
outstanding Award and by each option award granted or to be granted in
accordance with the formula set forth in paragraph (b) of Section VI hereof, and
the price per share thereof in each such Award, shall all be proportionately
adjusted for any increase or decrease in the number of issued shares of Common
Stock resulting from a subdivision or consolidation of shares or other capital
adjustment, or the payment of a stock dividend or other increase or decrease in
such shares, effected without receipt of consideration by the Corporation, or
other change in corporate or capital structure; provided, however, that any
fractional shares resulting from any such adjustment shall be eliminated. The
Committee may also make the foregoing changes and any other changes, including
changes in the classes of securities available, to the extent it is deemed
necessary or desirable to preserve the intended benefits of the Plan for the
Corporation and the Participants in the event of any other reorganization,
recapitalization, merger, consolidation, spin-off, extraordinary dividend or
other distribution or similar transaction.
X1. No Right to Employment
7
<PAGE>
Except as provided in Section VI(b) with respect to options granted to
Non-Employee Directors, no person shall have any claim or right to be granted an
Award, and the grant of an Award shall not be construed as giving a Participant
the right to be retained in the employ of, or in the other relationship with,
the Corporation or a Subsidiary. Further, the Corporation and each Subsidiary
expressly reserve the right at any time to dismiss a Participant free from any
liability, or any claim under the Plan, except as provided herein or in any
Award Agreement issued hereunder.
XII. Governing Law
To the extent that federal laws do not otherwise control, the Plan shall
be construed in accordance with and governed by the laws of the State of
Delaware.
XIII. Savings Clause
This Plan is intended to comply in all aspects with applicable laws and
regulations, including, with respect to those Employees who are officers or
directors for purposes of Section 16 of the Exchange Act, Rule 16b-3 under the
Exchange Act. In case any one more of the provisions of this Plan shall be held
invalid, illegal or unenforceable in any respect under applicable law and
regulation (including Rule 16b-3), the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby
and the invalid, illegal or unenforceable provision shall be deemed null and
void; however, to the extent permissible by law, any provision which could be
deemed null and void shall first be construed, interpreted or revised
retroactively to permit this Plan to be construed in compliance with all
applicable laws (including Rule 16b-3) so as to foster the intent of this Plan.
8
<PAGE>
XIV. Effective Date and Term
The effective date of this Plan is May 24, 1996. The Plan shall terminate
on May 24, 2006. No awards shall be granted after the termination of the Plan.
9
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Summary
Financial Data", "Selected Financial Data", and "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 10,000,000
shares of its Class A common stock.
/s/ Ernst & Young LLP
----------------------------------
Tampa, Florida
January 12, 2000
1
