<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
SCHEDULE 14D-1
Tender Offer Statement
Pursuant to Section 14(d)(1)
of the Securities Exchange Act of 1934
(Amendment No. 1)
________________________
DIGEX, INCORPORATED
(Subject Company)
________________________
INTERMEDIA COMMUNICATIONS INC.
DAYLIGHT ACQUISITION CORP.
(Bidders)
_______________________
Common Stock, Par Value $.01 Per Share
(Title of Class of Securities)
________________________
253754105
(CUSIP Number of Class of Securities)
________________________
Robert M. Manning
Senior Vice President, Chief Financial Officer
Intermedia Communications Inc.
3625 Queen Palm Drive
Tampa, Florida 33619
(813) 829-0011
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSONS AUTHORIZED TO
RECEIVE NOTICES AND COMMUNICATIONS ON BEHALF OF BIDDERS)
________________________
Copy to:
Ralph J. Sutcliffe, Esq.
Kronish, Lieb, Weiner & Hellman LLP
1114 Avenue of Americas
New York, New York 10036-7798
(212) 479-6170
Page 1 of 5 Pages
Exhibit Index is located on Page 5
<PAGE>
This Amendment No. 1 to Schedule 14D-1 amends and supplements the Tender
Offer Statement on Schedule 14D-1 filed with the Securities and Exchange
Commission on June 11, 1997 (the "Schedule 14D-1") relating to a tender offer by
Daylight Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly
owned subsidiary of Intermedia Communications Inc., a Delaware corporation
("Parent"), to purchase all outstanding shares of Common Stock, par value $.01
per share (the "Shares"), of DIGEX, Corporation, a Delaware corporation (the
"Company"), at $13.00 per Share, net to the seller in cash, upon the terms and
subject to the conditions set forth in the Offer to Purchase dated June 11, 1997
(the "Offer to Purchase"), and the related Letter of Transmittal (which,
together with any amendments or supplements thereto, collectively constitute the
"Offer"), copies of which were filed as Exhibits to the Schedule 14D-1.
Capitalized terms used herein and not defined herein have the meanings specified
in the Offer to Purchase.
ITEM 10. ADDITIONAL INFORMATION
On June 20, 1997, two purported class action complaints were filed in the
Court of Chancery of the State of Delaware in and for New Castle County
respectively by TAAM Associates, Inc. and David and Chaile Steinberg (the
"Complaints"), stockholders of the Company, on behalf of all non-affiliated
common stockholders of the Company, against Parent, the Company and the
Directors of the Company (the "Company Directors"). The Complaints allege that
the Company Directors violated their fiduciary duties to the public stockholders
of the Company by agreeing to vote in favor of the Merger and that Parent
knowingly aided and abetted such violation by offering to retain Company
management in their present positions and consenting to stock option grants to
certain executive officers of the Company. The Complaints seek a preliminary and
permanent injunction enjoining the Merger and cash damages from the Company
Directors. No application has been made for a preliminary injunction.
These cases are in their very early stages and no assurance can be given as
to their ultimate outcome. Parent, after consultation with its counsel,
believes that it is unlikely that an injunction will be issued against the
Merger; and, there are meritorious factual and legal defenses to the claims in
the complaints. Parent intends to defend vigorously the claims in the
complaints.
Items 10(b) and 10(c) are hereby amended and supplemented as follows:
On June 24, 1997, the FTC notified Parent that early termination of the
waiting period under the HSR Act with respect to the Offer and the Stock
Purchase
Page 2 of 5 Pages
<PAGE>
Agreement has been granted effective June 24, 1997. A copy of Parent's
press release relating to the foregoing is attached as Exhibit 11(a)(10) and
incorporated herein by reference.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
11(a)(10) Text of Press Release issued on June 25, 1997
11(g)(1) Complaint of TAAM Associates, Inc. dated June 20,1997
11(g)(2) Complaint of David J. Steinberg and Chaile B. Steinberg
dated June 20, 1997
Page 3 of 5 Pages
<PAGE>
SIGNATURES
After due inquiry and to the best of its knowledge and belief, each of the
undersigned certifies that the information set forth in this statement is true,
complete and correct.
INTERMEDIA COMMUNICATIONS INC.
By: /s/ Robert M. Manning
--------------------------
Name: Robert M. Manning
Title: Senior Vice President, Chief
Financial Officer and Secretary
DAYLIGHT ACQUISITION CORP.
By: /s/ Robert M. Manning
--------------------------
Name: Robert M. Manning
Title: President, Secretary and
Treasurer
Dated: June 27, 1997
Page 4 of 5 Pages
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE NO.
- ----------- --------------------------------------- --------
11(a)(10) Text of Press Release issued on June
25, 1997
11(g)(1) Complaint of TAAM Associates, Inc.
dated June 20, 1997
11(g)(2) Complaint of David J. Steinberg
and Chaile B. Steinberg dated
June 20, 1997
Page 5 of 5 Pages
<PAGE>
EXHIBIT 11(a)(10)
GEORGESON
& COMPANY INC.
--------------
- --------------------------------------------------------------------------------
N E W S R E L E A S E
--------------
Wall Street Plaza
--------------
New York, N.Y. 10005
--------------
212-440-9800
--------------
FAX 212-440-9009
INTERMEDIA COMMUNICATIONS INC. For Release: IMMEDIATELY
From: 3625 QUEEN PALM DRIVE
TAMPA, FLORIDA 33619 Chris Brown
Contact: Sr. Vice President
Investor Relations
(813) 829-2408
INTERMEDIA COMMUNICATIONS INC. RECEIVES EARLY TERMINATION
UNDER HART-SCOTT-RODINO ACT IN CONNECTION WITH ITS
OFFER FOR DIGEX, INCORPORATED
Tampa, Florida (June 25, 1997)--Intermedia Communications Inc. announced today
that in connection with its tender offer for DIGEX, Incorporated, on June 24,
1997, the Federal Trade Commission granted early termination of the waiting
period required under the Hart-Scott-Rodino Anti-Trust Improvements Act.
The tender offer is scheduled to expire at 12:00 Midnight, New York City time,
on Wednesday, July 9, 1997.
Intermedia Communications is one of the nation's fastest growing
telecommunications companies, offering an integrated package of local, long
distance, voice, data, and Internet services to business and government
customers in the eastern U.S. Intermedia is headquartered in Tampa, Florida,
with sales offices in over 20 cities throughout the east. Intermedia stock is
traded on the NASDAQ National Markets under the symbol "ICIX". For information
about Intermedia's services, or other corporate data, visit Intermedia on the
World Wide Web at http://www.icix.net.
<PAGE>
EXHIBIT 11(g)(1)
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
TAAM ASSOCIATES, INC., )
)
Plaintiff, )
)
v. )
) C.A. No. 15748NC
CHRISTOPHER R. McCLEARY, DOUGLAS )
E. HUMPHREY, FRANK A. ADAMS, THOMAS ) CLASS ACTION
H. CATO, WILLIAM F. EARTHMAN, III, ) COMPLAINT
RAY A. ROTHROCK, ROBERT M. ) ---------
STEWART, JOHN H. WYANT, DIGEX, )
INCORPORATED, and INTERMEDIA )
COMMUNICATIONS, INC., )
)
Defendants. )
Plaintiff TAAM Associates, Inc., on its own behalf and on behalf of
all others similarly situated, alleges on information and belief, except for
paragraph 1, which is alleged on knowledge, as follows:
PARTIES
-------
1. Plaintiff is the owner of common stock of DIGEX, Incorporated
("DIGEX" or the "Company"), and has owned such stock at all relevant times.
2. Defendant DIGEX, a Delaware corporation located in Beltsville,
Maryland, is a leading independent national Internet service provider that
focuses exclusively on businesses, governmental agencies and other
institutional customers. The Company has approximately 20,600,954 shares of
common stock outstanding.
<PAGE>
3. Defendant Intermedia Communications, Inc. ("Intermedia") is a
Delaware corporation headquartered in Tampa, Florida. Intermedia is a
telecommunications company primarily serving business customers.
4. (a) Defendant Christopher R. McCleary is and was at all relevant
times Chairman of the Board, President, Chief Executive Officer and a director
of DIGEX; (b) Defendants Douglas E. Humprey, Frank A. Adams, Thomas H. Cato,
William F. Earthman, III, Ray A. Rothrock, Robert M. Stewart and John H. Wyant
are and were at all relevant times directors of DIGEX.
5. By virtue of the Individual Defendants' positions as directors of
DIGEX, said defendants were and are in a fiduciary relationship with plaintiff
and the other public stockholders of the Company, and owe to plaintiff and the
other members of the class the highest obligations of due care, good faith,
fair dealing, and complete candor.
CLASS ACTION ALLEGATIONS
------------------------
6. Plaintiff brings this action for injunctive and other relief on
its own behalf and as a class action, pursuant to Rule 23 of the Rules of the
Court of Chancery and on behalf of all common stockholders of DIGEX (except
defendants herein and any person, firm, trust, corporation or other entity
related to or affiliated with any of the defendants) or their successors in
interest, who are being damaged by the wrongful acts of the defendants as
described herein (the "Class").
-2-
<PAGE>
7. This action is properly maintainable as a class action for the
following reasons:
(a) The Class is so numerous that joinder of all Class
members is impracticable. There are approximately 20,600,954 million common
shares of DIGEX outstanding, owned by hundreds of stockholders of record.
Members of the Class are scattered throughout the United States.
(b) There are questions of law and fact which are common to
members of the Class and which predominate over all questions affecting only
individual members. The common questions include, inter alia, the following:
----- ----
i. Whether the Individual Defendants have breached their fiduciary
duties owed by them to plaintiff and members of the Class; and
ii. Whether plaintiff and the other members of the Class will be
irreparably damaged by the wrongs complained of herein.
(c) The claims of plaintiff are typical of the claims of the other
members of the Class and plaintiff has no interests that are adverse or
antagonistic to the interests of the Class.
(d) Plaintiff is committed to the vigorous prosecution of this
action and has retained competent counsel experienced in litigation of this
nature. Accordingly, plaintiff is an adequate representative of the Class and
will fairly and adequately protect the interests of the Class.
-3-
<PAGE>
(e) The prosecution of separate actions by individual members of
the Class would create a risk of inconsistent or varying adjudications with
respect to individual members of the Class and establish incompatible standards
of conduct for the party opposing the Class.
(f) Defendants have acted and are about to act on grounds
generally applicable to the Class, thereby making appropriate final injunctive
relief with respect to the Class as a whole.
SUBSTANTIVE ALLEGATIONS
----------- -----------
8. In October 1996, DIGEX sold 4,500,000 shares of common stock to
the public at $10.125 per share in an initial public offering (the "IPO"). The
lead underwriter of the IPO was Friedman Billings Ramsey & Co., Inc. ("Friedman
Billings"). Friedman Billings earned fees in excess of $2.5 million in
connection with the IPO.
9. The 4,500,000 shares sold to the public represented approximately
42.44% of DIGEX's 10,600,964 shares outstanding. Approximately 53.9% of the
balance continued to be owned by insiders and their affiliates who are
represented on the Board of Directors. All of the owners of DIGEX common
stock prior to the IPO obtained their shares at prices far below the $10.125
per share IPO offering price and which averaged $2.10 per share.
10. In the Prospectus for the IPO, DIGEX said it intended to use
the net proceeds of $41.2 million from the IPO as follows: The Company would
repay a $1.5 million bridge loan owed to Blue Chip Capital Fund Limited
-4-
<PAGE>
Partnership of which defendant Wyant is the general partner. The Company would
also use up to $15 million to acquire equipment for continued expansion of its
network and Web server hosting facilities and the balance to fund operating
losses and working capital requirements associated with the expansion of the
Company's customer base.
11. The Prospectus portrayed DIGEX as a company poised for rapid
expansion and growth. The Prospectus stated:
DIGEX's nationwide network infrastructure provides Internet
connectivity to business customers in 33 U.S. metropolitan areas
through 40 points of presence ("POPs"). Leveraging off a strong
and well-established presence in the eastern United States, the
Company has embarked on a major expansion program which will
result in a total of 55 POPs (serving 48 U.S. metropolitan areas) by
the end of 1996.
The Prospectus also stated:
After receiving its first major infusion of institutional equity
capital in March 1995, the Company reoriented its strategy to focus
exclusively on business customers, who generally require high
bandwidth connectivity, and also began to develop its Web server
hosting business. Additionally, the Company brought in an experienced
management team in the first quarter of 1996 and completed a DS-3
backbone ring around the continental United States in the first half
of 1996. As a result, the Company's leased line and server customers
----------------------------------------------------------
have qrown from approximately 65 accounts at April 30, 1995 to
---------------------------------------------------------------
approximately 1050 accounts at August 31, 1996. (Emphasis added)
----------------------------------------------
The Prospectus continued:
The Company recently entered into its first multi-year private
network agreements with LCI, WinStar and Orion. Through its private
network agreement with the Company, Orion will resell the Company's
connectivity services to its customers in Europe. The
-5-
<PAGE>
Company expects that its ability to attract additional private
network customers will be significantly enhanced by the announcement
of these agreements.
12. The Prospectus also indicated to prospective investors that their
investment should be considered long term by apprising them of the fact that
short term operating results could be adversely affected due to the heavy
capital expenditures necessitated by the phenomenal growth that the Company was
experiencing. The Prospectus specifically stated "[the Company's short term
focus is on building and expanding its customer base, which will require it to
make significant investments in its network infrastructure, personnel,
marketing and the development of new products and services, and which may
adversely impact short term operating results." Accordingly, the prospect of
any significant short term appreciation in the stock price was severely
limited.
13. The Prospectus also specifically stated that "the Company does not
currently pay dividends on its Common Stock and does not anticipate paying
dividends in the foreseeable future. It is the present policy of the Company's
Board of Directors to retain earnings, if any, to finance the expansion of the
Company's business." Thus, the Prospectus was unambiguous in its implications
that if shareholders were to realize a return on their investment, it would be
through long term appreciation in the price of the Company's common stock.
-6-
<PAGE>
14. The Prospectus also implied that the outlook for the Company was
very favorable because the Company's business model required lower capital
expenditures than those of its competitors. The Prospectus stated that:
DIGEX, on the other hand, has found that it can maintain its focus on
business customers and build a network infrastructure that can serve
a substantial majority of the business marketplace with fewer POPs
than its competitors. In addition, the Company's Web server hosting
business, while offering additional Internet solutions to its
business customers, generates a substantial portion of its traffic
after business hours, and thus balances the usage of the Company's
network. Thus, given its more focused business strategy and more
efficient use of capital, DIGEX can offer a comprehensive range of
business Internet solutions on a cost-effective basis.
15. Notwithstanding DIGEX's announced business strategy of expansion
and long-term growth set forth in the IPO Prospectus, on June 5, 1997, DIGEX
and Intermedia announced that they had entered into a merger agreement (the
"Merger"). Pursuant to the terms of the merger agreement, shareholders of
DIGEX are to receive $13 per share in cash for each share of DIGEX common
stock.
16. In violation of their fiduciary duties to plaintiff and the
public stockholders of DIGEX, the Individual Defendants have agreed to vote in
favor of the Merger. This was done by the Individual Defendants primarily to
protect their compensation and positions with the Company, for as reported by
the Dow Jones News Service on June 5, 1997, Intermedia said that "DIGEX
----------------------
Chairman, President and Chief Executive Chris McCleary, and his management
team, will continue to manage the DIGEX operation."
-7-
<PAGE>
17. Additionally, the Company's Schedule 14D-9 disclosed that "[o]n
June 4, 1997, Intermedia consented to the grant by the Company of options to
purchase up to 200,000 Shares at an exercise price of $3.00 per share to
certain senior officers of the Company." The 14D-9 also disclosed that "on
April 11, 1997 and June 3, 1997, Mr. Christopher R. McCleary, the Company's
President, Chairman and Chief Executive Officer, exercised employee stock
options previously granted to Mr. McCleary under the Company's employee stock
option plan to purchase 100,781 shares and 79,375 Shares, respectively, at an
exercise price of $0.25 and $3.73 per Share, respectively." The 14D-9 further
disclosed "that in connection with the Annual Meeting, the compensation
committee of the Board of Directors awarded two executive officers of the
Company options to purchase a total of 180,000 Shares at an exercise price of
$8.625 per Share."
18. In the 14D-9, the Company describes the events leading up to the
Merger. The 14D-9 states that "[o]ver the last several months, the Company has
been approached by a variety of other companies about possible business
transactions ranging from strategic partnerships and teaming arrangements to
equity transactions....Several were presented by investment banking firms
--------------------------------------------------
acting on behalf of the Company." (emphasis added). The 14D-9 also disclosed
-------------------------------
that defendant McCleary initially met with David C. Ruberg, Chairman, President
and Chief Executive Officer of Intermedia on February 18, 1997 to begin
negotiating the Merger. Thus, it is clear that either prior to the
-8-
<PAGE>
closing or within one month of the closing of the IPO, the defendants were
actively attempting to sell the Company and to eliminate the public shareholders
of DIGEX who were induced to make their investment in the Company based on the
long term prospects of the Company as touted in the Prospectus.
19. Furthermore, the Company has retained Friedman Billings to act as
its financial advisor in the Merger, for which services Friedman Billings will
receive approximately $1.2 million. Friedman Billings, in its capacity as
financial advisor to the Company, has rendered an opinion that the Merger is
fair to the public shareholders of the Company. Friedman Billings will have
earned in excess of $3.7 million in less than nine months for its part in
inducing the public to invest in DIGEX and then freezing out those who
succumbed.
20. The Individual Defendants, in violation of their fiduciary
obligations to maximize stockholder value and protect the interests of DIGEX
stockholders, have not acted reasonably and in compliance with their fiduciary
duties to DIGEX's shareholders, in a manner designed to obtain the highest
possible price for DIGEX's public stockholders.
21. The Merger, if consummated, will transfer control of DIGEX and its
valuable assets and businesses from its stockholders to Intermedia. The
Individual Defendants did not appoint or retain any truly independent person or
entity to negotiate for or on behalf of the DIGEX's public shareholders to
promote their best interests in the Merger. The Individual Defendants have
failed to implement procedures for the maximization of shareholder value and are
-9-
<PAGE>
permitting the transfer of control of DIGEX and its assets at a value which
fails to reflect the enhanced long-term value of its stock given the positive
trends DIGEX has consistently shown in revenues and the rapid expansion of its
customer base.
22. If consummated, the merger agreement will deny Class members their
right to share proportionately in the true value of DIGEX's valuable assets and
future growth. Indeed, the Individual Defendants, recognizing that the cash
consideration for the Merger is inadequate, have secured additional protections
for themselves, for as the Dow Jones News Service reported on June 5, 1997, the
----------------------
Merger is structured so that "Digex management and other Digex option holders
will receive Intermedia stock options in exchange for their stock options in
Digex, in lieu of receiving cash."
23. In addition to continued employment for DIGEX's present management
and the granting of valuable options to certain executive officers and/or
directors of DIGEX, the Company's Board, dominated and controlled by individuals
and entities whose ownership interests predated the IPO, have agreed to the
proposed merger because their desire is to liquidate their DIGEX investment at
this time, at a substantial premium over their cost, notwithstanding that class
-----
members were induced to purchase their DIGEX securities based upon the long-term
value of the investment as touted in the Prospectus.
24. The Merger serves no legitimate business purpose of the Company.
Rather, Class members' funds were used to make DIGEX more
- 10 -
<PAGE>
attractive as an acquisition candidate and thereby allow the Individual
Defendants and their related entities a greater profit from their DIGEX
investment.
25. By reason of the foregoing, the Individual Defendants have
participated in unfair dealing toward plaintiff and the other members of the
Class in breach of fiduciary duties owed by them to the Class. As a result,
plaintiff and the Class will not receive the fair value of DIGEX's assets and
businesses.
26. Intermedia knowingly aided and abetted the breaches of fiduciary
duty committed by the Individual Defendants complained of herein by offering to
retain DIGEX management in their present positions and consenting to the grant
of stock options to certain executive officers of DIGEX. Furthermore, the
proposed merger between DIGEX and Intermedia could not take place without the
knowing participation of Intermedia.
27. Plaintiff and the other members of the Class have suffered and will
suffer irreparable injury as a result of the improper transactions complained of
herein. Plaintiff and the Class have no adequate remedy at law.
WHEREFORE, plaintiff demands judgment for declaratory, injunctive,
monetary and other relief against all defendants as follows:
(a) Declaring that this action may be maintained as a class action and
designating plaintiff as Class representative;
(b) Preliminarily and permanently enjoining the proposed Merger
complained of herein;
- 11 -
<PAGE>
(c) In the event the Merger is consummated before judgment, rescinding
the Merger or awarding rescissory damages to the Class;
(d) Directing the Individual Defendants, jointly and severally, to
account to plaintiff and the members of the Class for all losses and damages
suffered and/or to be suffered by them as a result of the acts and transactions
complained of herein;
(e) Directing the Individual Defendants to account for all profits and
any special benefits obtained as a result of their unlawful conduct;
(f) Awarding plaintiff the costs and disbursements of this action,
including reasonable attorneys' and experts'fees; and
(g) Granting such other and further relief as this Court may deem just
and proper.
ROSENTHAL, MONHAIT, GROSS
& GODDESS
/s/
_______________________________________
P.O. Box 1070
Suite 1401, Mellon Bank Center
Wilmington, Delaware 19899
Attorneys for Plaintiff
OF COUNSEL:
BERNSTEIN LIEBHARD & LIFSHITZ
274 Madison Avenue
New York, NY 10016
(212) 779-1414
- 12 -
<PAGE>
EXHIBIT 11(g)(2)
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
DAVID J. STEINBERG and )
CHAILE B. STEINBERG, )
)
Plaintiffs, )
) C.A. No.
v. )
)
CHRISTOPHER R. McCLEARY, DOUGLAS ) CLASS ACTION
E. HUMPHREY, FRANK A. ADAMS, THOMAS ) COMPLAINT
H. CATO, WILLIAM F. EARTHMAN, III, ) ---------
RAY A. ROTHROCK, ROBERT M. ) 15750NC
STEWART, JOHN H. WYANT, DIGEX, )
INCORPORATED, and INTERMEDIA )
COMMUNICATIONS, INC., )
)
Defendants. )
Plaintiffs, on their own behalf and on behalf of all others similarly
situated, allege on information and belief, except for paragraph 1, which is
alleged on knowledge, as follows:
PARTIES
1. Plaintiffs are the owners of common stock of DIGEX, Incorporated
("DIGEX" or the "Company"), and have owned such stock at all relevant times.
2. Defendant DIGEX, a Delaware corporation located in Beltsville,
Maryland, is a leading independent national Internet service provider that
focuses exclusively on businesses, governmental agencies and other
<PAGE>
institutional customers. The Company has approximately 20,600,954 shares of
common stock outstanding.
3. Defendant Intermedia Communications, Inc. ("Intermedia") is a
Delaware corporation headquartered in Tampa, Florida. Intermedia is a
telecommunications company primarily serving business customers.
4. (a) Defendant Christopher R. McCleary is and was at all
relevant times Chairman of the Board, President, Chief Executive Officer and a
director of DIGEX; (b) Defendants Douglas E. Humprey, Frank A. Adams, Thomas H.
Cato, William F. Earthman, III, Ray A. Rothrock, Robert M. Stewart and John H.
Wyant are and were at all relevant times directors of DIGEX.
5. By virtue of the Individual Defendants' positions as directors
of DIGEX, said defendants were and are in a fiduciary relationship with
plaintiffs and the other public stockholders of the Company, and owe to
plaintiffs and the other members of the class the highest obligations of due
care, good faith, fair dealing, and complete candor.
CLASS ACTION ALLEGATIONS
------------------------
6. Plaintiffs bring this action for injunctive and other relief on
their own behalf and as a class action, pursuant to Rule 23 of the Rules of the
Court of Chancery and on behalf of all common stockholders of DIGEX (except
defendants herein and any person, firm, trust, corporation or other entity
related to or affiliated with any of the defendants) or their successors in
interest, who are
-2-
<PAGE>
being damaged by the wrongful acts of the defendants as described herein (the
"Class").
7. This action is properly maintainable as a class action for the
following reasons:
(a) The Class is so numerous that joinder of all Class members
is impracticable. There are approximately 20,600,954 million common shares of
DIGEX outstanding, owned by hundreds of stockholders of record. Members of the
Class are scattered throughout the United States.
(b) There are questions of law and fact which are common to
members of the Class and which predominate over all questions affecting only
individual members. The Common Questions include, inter alia the following:
----------
i. Whether the Individual Defendants have breached their
fiduciary duties owed by them to plaintiffs and members of the Class;
and
ii. Whether plaintiffs and the other members of the Class
will be irreparably damaged by the wrongs complained of herein.
(c) The claims of plaintiffs are typical of the claims of the
other members of the Class and plaintiffs have no interests that are adverse or
antagonistic to the interests of the Class.
(d) Plaintiffs are committed to the vigorous prosecution of this
action and have retained competent counsel experienced in litigations of this
-3-
<PAGE>
nature. Accordingly, plaintiffs are adequate representatives of the Class and
will fairly and adequately protect the interests of the Class.
(e) The prosecution of separate actions by individual members
of the Class would create a risk of inconsistent or varying adjudications with
respect to individual members of the Class and establish incompatible standards
of conduct for the party opposing the Class.
(f) Defendants have acted and are about to act on grounds
generally applicable to the Class, thereby making appropriate final injunctive
relief with respect to the Class as a whole.
SUBSTANTIVE ALLEGATIONS
-----------------------
8. In October 1996, DIGEX sold 4,500,000 shares of common stock to the
public at $10.125 per share in an initial public offering (the "IPO"). The lead
underwriter of the IPO was Friedman Billings Ramsey & Co., INc. ("Friedman
Billings"). Friedman Billings earned fees in excess of $2.5 million in
connection with the IPO.
9. The 4,500,000 shares sold to the public represented approximately
42.44% of DIGEX's 10,600,964 shares outstanding. Approximately 53.9% of the
balance continued to be owned by insiders and their affiliates who are
represented on the Board of Directors. All of the owners of DIGEX common stock
prior to the IPO obtained their shares at prices far below the $10.125 per share
IPO offering price and which averaged $2.10 per share.
- 4 -
<PAGE>
10. In the Prospectus for the IPO, DIGEX said it intended to use the
net proceeds of $41.2 million from the IPO as follows: The Company would repay
a $1.5 million bridge loan owed to Blue Chip Capital Fund Limited Partnership of
which defendant Wyant is the general partner. The Company would also use up to
$15 million to acquire equipment for continued expansion of its network and Web
server hosting facilities and the balance to fund operating losses and working
capital requirements associated with the expansion of the Company's customer
base.
11. The Prospectus portrayed DIGEX as a company poised for rapid
expansion and growth. The Prospectus stated:
DIGEX's nationwide network infrastructure provides Internet connectivity
to business customers in 33 U.S. metropolitan areas through 40 points of
presence ("POPs"). Leveraging off a strong and well-established
presence in the eastern United States, the Company has embarked on a
major expansion program which will result in a total of 55 POPs (serving
48 U.S. metropolitan areas) by the end of 1996.
The Prospectus also stated:
After receiving its first major infusion of institutional equity capital
in March 1995, the Company reoriented its strategy to focus exclusively
on business customers, who generally require high bandwidth
connectivity, and also began to develop its Web server hosting business.
Additionally, the Company brought in an experienced management team in
the first quarter of 1996 and completed a DS-3 backbone ring around the
continental United States in the first half of 1996. As a result, the
----------------
Company's leased line and server customers have grown from approximately
------------------------------------------------------------------------
65 accounts at April 30, 1995 to approximately 1050 accounts at August
----------------------------------------------------------------------
31, 1996. (Emphasis added)
---------
* * *
- 5 -
<PAGE>
The Prospectus continued:
The Company recently entered into its first multi-year private network
agreements with LCI, WinStar and Orion. Through its private network
agreement with the Company, Orion will resell the Company's connectivity
services to its customers in Europe. The Company expects that its
ability to attract additional private network customers will be
significantly enhanced by the announcement of these agreements.
12. The Prospectus also indicated to prospective investors that their
investment should be considered long term by apprising them of the fact that
short term operating results could be adversely affected due to the heavy
capital expenditures necessitated by the phenomenal growth that the Company was
experiencing. The Prospectus specifically stated "[the Company's short term
focus is on building and expanding its customer base, which will require it to
make significant investments in its network infrastructure, personnel, marketing
and the development of new products and services, and which may adversely impact
short term operating results." Accordingly, the prospect of any significant
short term appreciation in the stock price was severely limited.
13. The Prospectus also specifically stated that "the Company does not
currently pay dividends on its Common Stock and does not anticipate paying
dividends in the foreseeable future. It is the present policy of the Company's
Board of Directors to retain earnings, if any, to finance the expansion of the
Company's business." Thus, the Prospectus was unambiguous in its implications
that if shareholders were to realize a return on their investment, it
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would be through long term appreciation in the price of the Company's common
stock.
14. The Prospectus also implied that the outlook for the Company was
very favorable because the Company's business model required lower capital
expenditures than those of its competitors. The Prospectus stated that:
DIGEX, on the other hand, has found that it can maintain its focus on
business customers and build a network infrastructure that can serve a
substantial majority of the business marketplace with fewer POPs than
its competitors. In addition, the Company's Web server hosting business,
while offering additional Internet solutions to its business customers,
generates a substantial portion of its traffic after business hours, and
thus balances the usage of the Company's network. Thus, given its more
focused business strategy and more efficient use of capital, DIGEX can
offer a comprehensive range of business Internet solutions on a cost-
effective basis.
15. Notwithstanding DIGEX's announced business strategy of expansion
and long-term growth set forth in the IPO Prospectus, on June 5, 1997. DIGEX
and Intermedia announced that they had entered into a merger agreement (the
"Merger"). Pursuant to the terms of the merger agreement, shareholders of DIGEX
are to receive $13 per share in cash for each share of DIGEX common stock.
16. In violation of their fiduciary duties to plaintiffs and the
public stockholders of DIGEX, the Individual Defendants have agreed to vote
in favor of the Merger. This was done by the Individual Defendants primarily to
protect their compensation and positions with the Company, for as reported by
the Dow Jones News Service on June 5, 1997, Intermedia said that "DIGEX
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Chairman, President
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and Chief Executive Chris McCleary, and his management team, will continue to
manage the DIGEX operation."
17. Additionally, the Company's Schedule 14D-9 disclosed that "[o]n June
4, 1997, Intermedia consented to the grant by the Company of options to purchase
up to 200,000 Shares at an exercise price of $3.00 per share to certain senior
officers of the Company." The 14D-9 also disclosed that "on April 11, 1997 and
June 3, 1997, Mr. Christopher R. McCleary, the Company's President, Chairman and
Chief Executive Officer, exercised employee stock options previously granted to
Mr. McCleary under the Company's employee stock option plan to purchase 100,781
shares and 79,375 Shares, respectively, at an exercise price of $0.25 and $3.73
per Share, respectively." The 14D-9 further disclosed that "in connection with
the Annual Meeting, the compensation committee of the Board of Directors awarded
two executive officers of the Company options to purchase a total of 180,000
Shares at an exercise price of $8.625 per Share."
18. In the 14D-9, the Company describes the events leading up to the
Merger. The 14D-9 states that "[o]ver the last several months, the Company has
been approached by a variety of other companies about possible business
transactions ranging from strategic partnerships and teaming arrangements to
equity transactions....Several were presented by investment banking firms acting
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on behalf of the Company" (emphasis added). The 14D-9 also disclosed that
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defendant McCleary initially met with David C. Ruberg,
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Chairman, President and Chief Executive Officer of Intermedia on February 18,
1997 to begin negotiating the Merger. Thus, it is clear that either prior to
the closing or within one month of the closing of the IPO, the defendants were
actively attempting to sell the Company and to eliminate the public shareholders
of DIGEX who were induced to make their investment in the Company based on the
long term prospects of the Company as touted in the Prospectus.
19. Furthermore, the Company has retained Friedman Billings to act as
its financial advisor in the Merger, for which services Friedman Billings will
receive approximately $1.2 million. Friedman Billings, in its capacity as
financial advisor to the Company, has rendered an opinion that the Merger is
fair to the public shareholders of the Company. Friedman Billings will have
earned in excess of $3.7 million in less than nine months for its part in
inducing the public to invest in DIGEX and then freezing out those who
succumbed.
20. The Individual Defendants, in violation of their fiduciary
obligations to maximize stockholder value and protect the interests of DIGEX
stockholders, have not acted reasonably and in compliance with their fiduciary
duties to DIGEX's shareholders, in a manner designed to obtain the highest
possible price for DIGEX's public stockholders.
21. The Merger, if consummated, will transfer control of DIGEX and its
valuable assets and businesses from its stockholders to Intermedia. The
Individual Defendants did not appoint or retain any truly independent person or
entity to negotiate for or on behalf of the DIGEX's public shareholders to
promote
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their best interests in the Merger. The Individual Defendants have failed to
implement procedures for the maximization of shareholder value and are
permitting the transfer of control of DIGEX and its assets at a value which
fails to reflect the enhanced long-term value of its stock given the positive
trends DIGEX has consistently shown in revenues and the rapid expansion of its
customer base.
22. If consummated, the merger agreement will deny Class members their
right to share proportionately in the true value of DIGEX's valuable assets and
future growth. Indeed, the Individual Defendants, recognizing that the cash
consideration for the Merger is inadequate, have secured additional protections
for themselves, for as the Dow Jones News Service reported on June 5, 1997, the
----------------------
Merger is structured so that "Digex management and other Digex option holders
will receive Intermedia stock options in exchange for their stock options in
Digex, in lieu of receiving cash."
23. In addition to continued employment for DIGEX's present management
and the granting of valuable options to certain executive officers and/or
directors of DIGEX, the Company's Board, dominated and controlled by individuals
and entities whose ownership interests predated the IPO, have agreed to the
proposed merger because their desire is to liquidate their DIGEX investment at
this time, at a substantial premium over their cost, notwithstanding that class
-----
members were induced to purchase their DIGEX securities based upon the long-term
value of the investment as touted in the Prospectus.
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24. The Merger serves no legitimate business purpose of the Company.
Rather, Class members' funds were used to make DIGEX more attractive as an
acquisition candidate and thereby allow the Individual Defendants and their
related entities a greater profit from their DIGEX investment.
25. By reason of the foregoing, the Individual Defendants have
participated in unfair dealing toward plaintiffs and the other members of the
Class in breach of fiduciary duties owed by them to the Class. As a result,
plaintiffs and the Class will not receive the fair value of DIGEX's assets and
businesses.
26. Intermedia knowingly aided and abetted the breaches of fiduciary
duty committed by the Individual Defendants complained of herein by offering to
retain DIGEX management in their present positions and consenting to the grant
of stock options to certain executive officers of DIGEX. Furthermore, the
proposed merger between DIGEX and Intermedia could not take place without the
knowing participation of Intermedia.
27. Plaintiffs and the other members of the Class have suffered and
will suffer irreparable injury as a result of the improper transactions
complained of herein. Plaintiffs and the Class have no adequate remedy at law.
WHEREFORE, plaintiffs demand judgment for declaratory, injunctive,
monetary and other relief against all defendants as follows:
(a) Declaring that this action may be maintained as a class action and
designating plaintiffs as Class representatives;
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(b) Preliminarily and permanently enjoining the proposed Merger
complained of herein;
(c) In the event the Merger is consummated before judgment, rescinding
the Merger or awarding rescissory damages to the Class;
(d) Directing the Individual Defendants, jointly and severally, to
account to plaintiffs and the members of the Class for all losses and damages
suffered and/or to be suffered by them as a result of the acts and transactions
complained of herein;
(e) Directing the Individual Defendants to accounts for all profits and
any special benefits obtained as a result of their unlawful conduct;
(f) Awarding plaintiffs the costs and disbursements of this action,
including reasonable attorneys' and experts' fees; and
(g) Granting such other and further relief as this Court may deem just
and proper.
ROSENTHAL, MONHAIT, GROSS & GODDESS
/s/ Joseph A. Rosenthal
-----------------------------------
Suite 1401, Mellon Bank Center
P.O. Box 1070
Wilmington, DE 19899
Attorneys for Plaintiffs
OF COUNSEL:
SAVETT FRUTKIN PODELL & RYAN, P.C.
Suite 508
320 Walnut Street
Philadelphia, PA 19106
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