<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1996
REGISTRATION NO. 333-05871
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 4
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
DIGEX, INCORPORATED
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
MARYLAND 4813 52-1672337
(STATE OR OTHER (PRIMARY STANDARD (IRS EMPLOYER
JURISDICTION OF INDUSTRIAL IDENTIFICATION NUMBER)
INCORPORATION OR CLASSIFICATION CODE
ORGANIZATION) NUMBER)
----------------
6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(ADDRESS AND TELEPHONE NUMBER
OF PRINCIPAL EXECUTIVE OFFICES AND PRINCIPAL PLACE OF BUSINESS)
----------------
CHRISTOPHER R. MCCLEARY, CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
6800 VIRGINIA MANOR ROAD
BELTSVILLE, MARYLAND 20705
(301) 847-5000
(NAME, ADDRESS, AND TELEPHONE NUMBER
OF AGENT FOR SERVICE)
----------------
Copies to:
JOHN D. WATSON, JR., ESQ. J. WARREN GORRELL, JR.
LATHAM & WATKINS DAVID B. H. MARTIN, JR.
1001 PENNSYLVANIA AVENUE, N.W. HOGAN & HARTSON L.L.P.
SUITE 1300 555 THIRTEENTH STREET, N.W.
WASHINGTON, D.C. 20004-2505 WASHINGTON, D.C. 20004-1109
(202) 637-2200 (202) 637-5600
----------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION
STATEMENT.
----------------
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please 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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
----------------
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 OF 1933 OR UNTIL THIS REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SECTION 8(A), MAY DETERMINE.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED OCTOBER 8, 1996
PROSPECTUS
[LOGO OF DIGEX BUSINESS INTERNET APPEARS HERE]
3,750,000 SHARES OF COMMON STOCK
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Shares") are being sold by DIGEX, Incorporated
(the "Company"). Prior to this offering (the "Offering"), there has been no
public market for the Common Stock. It is currently anticipated that the
initial public offering price will be between $9.00 and $11.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for quotation on the Nasdaq National
Market under the symbol "DIGX."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SHARES.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT COMPANY (1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total (2)..................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Before deducting expenses payable by the Company estimated at $1,200,000.
(2) The Company has granted the Underwriters a 30-day option to purchase up to
an aggregate of 562,500 additional shares of Common Stock at the Price to
Public, less the Underwriting Discount, solely to cover over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
Public, Underwriting Discount and Proceeds to Company will be $ , $
and $ , respectively. See "Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters,
to prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Friedman, Billings,
Ramsey & Co., Inc., Arlington, Virginia, or through the facilities of The
Depository Trust Company, on or about October , 1996.
-----------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
The date of this Prospectus is October , 1996.
<PAGE>
[LOGO OF DIGEX BUSINESS INTERNET APPEARS HERE]
[MAP OF THE UNITED STATES APPEARS HERE]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK
OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED IN THE OVER-THE-COUNTER MARKET
(INCLUDING THE NASDAQ NATIONAL MARKET) OR OTHERWISE. SUCH STABILIZING, IF
COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 under the Securities Act
with respect to the Common Stock offered hereby (the "Registration
Statement"). This Prospectus, which constitutes a part of the Registration
Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. For further
information with respect to the Company and the shares of Common Stock offered
hereby, reference is hereby made to the Registration Statement, including the
exhibits, financial statements and schedules thereto. Statements contained in
this Prospectus regarding the contents of any contract or other document are
not necessarily complete; with respect to each such contract or document filed
as an exhibit to the Registration Statement, reference is made to the exhibit
for a more complete description of the matter involved, and each such
statement shall be deemed qualified in its entirety by such reference.
As a result of this Offering, the Company will be subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and, in accordance therewith, will file reports and
other information with the Commission. A copy of the Registration Statement,
including the exhibits, financial statements and schedules thereto, may be
inspected without charge at the principal office of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and
at its regional offices located at Seven World Trade Center, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Chicago, Illinois
60661, and copies of such material may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room
1024, Washington, D.C. 20549 upon payment of the fees prescribed by the
Commission. The Commission also maintains a "web site' that contains
registration statements, reports, proxy and information statements and other
materials that are filed through the Commission's Electronic Data Gathering,
Analysis, and Retrieval system. This web site can be accessed at
http://www.sec.gov.
REPORTS TO STOCKHOLDERS
The Company intends to furnish to its stockholders annual reports containing
consolidated financial statements audited by its independent certified public
accountants and quarterly reports containing unaudited summary financial
information for the first three quarters of each fiscal year.
3
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under "Risk Factors." Unless otherwise indicated, all
information in this Prospectus assumes (i) no exercise of the Underwriters'
over-allotment option, (ii) the issuance of 2,680,336 shares of common stock,
$.01 par value (the "Common Stock"), upon the conversion (the "Preferred Stock
Conversion") of all outstanding shares of the Company's Series A and Series B
convertible preferred stock, $1.00 par value (collectively, the "Preferred
Stock"), at or prior to the offering of Common Stock made hereby (the
"Offering"), (iii) the exercise of warrants to purchase 1,868,408 shares of
Common Stock concurrently with the Preferred Stock Conversion (the "Warrant
Exercise") and (iv) reincorporation of the Company as a Delaware corporation.
All share totals stated herein reflect the Company's 505.26-for-1 stock split
of March 1995, the 10-for-1 stock split of August 1995 and a 1-for-2.5 reverse
stock split which will occur in connection with the Offering. See "Glossary"
for the definitions of certain terms and acronyms used herein.
THE COMPANY
DIGEX, Incorporated ("DIGEX" or the "Company") is a leading independent
national Internet service provider ("ISP") that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting and
security and other network products. 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, in the first half of 1996, the Company brought in an
experienced management team and completed a DS-3 backbone ring around the
continental United States. 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.
The Company believes that Internet solutions are increasingly achieving
"mission critical" status for business customers as the role of the Internet
and corporate intranets grows. International Data Corporation ("IDC") has
estimated that the number of Internet users was approximately 56 million in
1995, approximately 71% of which (or 40 million) were business users, and that
the aggregate number of users will grow to approximately 200 million by 1999.
In addition, according to Netcraft, Ltd., the number of corporate Internet
sites, defined as domain names ending in ".com," has increased from 4,912 in
August 1995 to 171,738 in June 1996.
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 Company's network infrastructure is designed to provide business
customers with a high degree of reliability, enhanced performance and scalable
bandwidth. It uses Cisco Systems 7513 routers and a redundant clear channel DS-
3 loop architecture which provides 90 Mbps of coast-to-coast capacity,
monitored by a 24x7x365 network operations center ("NOC"). Unlike the network
infrastructure of regional ISPs, which typically connect at only one peering
point, the Company's network connects with the networks of other national ISPs
at the three major peering points across the U.S.
4
<PAGE>
The Company's objective is to be a single-source provider of reliable high-
performance INDUSTRIAL STRENGTH Internet solutions that serve the needs of
business customers. To achieve this objective, the Company will focus
exclusively on business customers, expand and optimize its nationwide network,
provide a comprehensive range of Internet solutions, implement multiple
distribution channels for its solutions and focus on customer acquisition and
retention.
As part of its distribution strategy, the Company is targeting
telecommunications service providers who wish to provide private label Internet
services to their customers without building their own facilities. The Company
recently entered into its first such multi-year private network agreements with
LCI International, Inc. ("LCI"), WinStar Communications, Inc. ("WinStar") and
Orion Atlantic, L.P. ("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.
In June 1996, the Company entered into an agreement with Microsoft
Corporation ("Microsoft"), pursuant to which Microsoft's Consulting Services
Group built a "Server Farm" for the Company with servers running Microsoft's
Windows NT 4.0 operating system. Under this agreement, the Company introduced
the world's first Windows NT 4.0 hosted server product line on September 3,
1996. The Company is currently engaged in discussions with Microsoft to include
DIGEX in Microsoft's Solution Provider Program, which would result in the
Company being designated a preferred vendor for Microsoft's corporate
customers. There can be no assurance, however, that these discussions will
culminate in an agreement with Microsoft.
The Company was founded in 1990 by a group of Internet pioneers as a Maryland
corporation under the name "Digital Express Group, Inc." The Company, which is
now named "DIGEX, Incorporated," is reincorporating as a Delaware corporation
in connection with the Offering. The Company's principal executive offices are
located at 6800 Virginia Manor Road, Beltsville, Maryland 20705, and the
Company's telephone number is (301) 847-5000. The Company's Web site is located
at http://www.digex.net.
5
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered......................... 3,750,000 shares (1)
Common Stock Outstanding after the Offering.. 9,863,991 shares (1)(2)
Use of Proceeds.............................. The Company intends to use $1.5 million
of the net proceeds of the Offering to
repay the Bridge Loan (as defined) and
the balance to fund operating losses
associated with the expansion of the
Company's business. Such operating
losses are expected to be incurred in
connection with, among other things,
payments for circuit leasing and
collocation facilities, sales and
marketing efforts, and the development
of customer service and administrative
infrastructure. The Company may also use
a portion of the net proceeds to acquire
business-focused regional ISPs or to
purchase their subscriber bases,
although no agreements have been reached
regarding any such acquisition and no
discussions or negotiations are
presently ongoing with respect thereto.
See "Risk Factors--Possible Use of a
Portion of Net Proceeds for
Acquisitions" and "Use of Proceeds."
Nasdaq National Market Symbol................ DIGX
</TABLE>
- --------
(1) Excludes shares of Common Stock subject to the Underwriters' over-allotment
option granted by the Company.
(2) Based on the number of shares outstanding as of June 30, 1996 (assuming the
Preferred Stock Conversion and the Warrant Exercise, both of which will
occur at or prior to the consummation of the Offering). Does not include
2,283,300 shares issuable upon the exercise of options at a weighted
average exercise price of $2.79 per share presently outstanding under the
Company's Incentive Stock Option Plan (the "1995 Stock Option Plan") and
the Company's Equity Participation Plan (the "Equity Plan" and, together
with the 1995 Stock Option Plan, the "Stock Option Plans"), as well as
202,280 shares issuable upon the exercise of options authorized but not
granted under the Equity Plan. See "Management--Incentive Stock Option
Plans." Also does not include warrants to purchase 240,000 shares of Common
Stock at an exercise price of $3.75 per share granted to WinStar in
connection with the Company's private network agreement with WinStar (the
"WinStar Warrants").
The Company has applied for federal registration of the following
servicemark: INDUSTRIAL STRENGTH Internet/SM/. This Prospectus also includes
product names and other trade names of the Company and of other organizations.
6
<PAGE>
SUMMARY FINANCIAL DATA
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $1,665,432 $ 5,235,204
Costs and expenses:
Cost of revenue........ 216,656 1,002,503 4,471,500 1,321,663 5,246,961
Sales and marketing.... 18,326 263,075 1,710,234 561,093 2,587,472
General and administra-
tive.................. 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ---------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ---------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other in-
come.................. -- -- 72,002 17,453 47,746
Interest expense....... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ---------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ---------- -----------
Income (loss) before in-
come taxes............. 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ---------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ---------- -----------
Net income (loss) at-
tributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== ========== ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.47) $ (0.69)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 8,254,069 8,689,950
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
------------------------
PRO FORMA
AS
ACTUAL ADJUSTED(2)
----------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 6,269,000 $39,944,000
Working capital (deficit).............................. (6,018,179) 27,656,821
Total assets........................................... 18,841,779 52,516,779
Total indebtedness, less current portion............... 1,714,283 1,714,283
Mandatorily redeemable preferred stock................. 10,518,159 --
Total stockholders' equity (deficit)................... (7,939,558) 36,253,601
</TABLE>
- --------
(1) Pro forma net loss per common share adjusts historical earnings per share
for the assumed conversion of convertible securities which are not included
in the historical computations. These convertible securities will
automatically convert into shares of Common Stock upon the consummation of
the Offering. Historical net loss was reduced by $450,871 for the year
ended December 31, 1995 and $1,311,347 for the six months ended June 30,
1996 to adjust for interest expense and preferred stock accretion related
to the convertible securities. See Note 2 to Financial Statements.
(2) The pro forma as adjusted data give effect to (i) the Preferred Stock
Conversion and the Warrant Exercise, both of which will occur upon
consummation of the Offering and (ii) the issuance and sale by the Company
of the shares of Common Stock offered hereby (at an assumed offering price
of $10.00 per share, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company).
7
<PAGE>
RISK FACTORS
Investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should carefully consider the factors set forth
below, together with the other information contained in this Prospectus,
before making a decision to purchase the Common Stock offered hereby.
ACCUMULATED DEFICIT; NET LOSSES; LIMITED OPERATING HISTORY
At June 30, 1996, the Company had an accumulated deficit of approximately
$11.8 million. The Company experienced net losses of approximately $4.0
million and $7.1 million in the year ended December 31, 1995 and in the six
months ended June 30, 1996, respectively. The Company is currently making
significant capital expenditures intended to expand the Company's network and
organizational infrastructure, and expects to incur operating and net losses
in 1996 and 1997. The Company expects that its operating and net losses during
the last two quarters of 1996 will increase significantly compared to its
operating and net losses for the first two quarters of 1996. The grant of
options through June 30, 1996 will result in a $2.7 million non-cash
compensation charge during the period July 1, 1996 through December 31, 1999.
There can be no assurance that the Company will achieve or sustain
profitability in the future.
Although the Company has been in existence since 1990, it reoriented its
strategy in March 1995 to focus exclusively on business customers. As a
result, prospective investors have limited relevant operating and financial
data upon which to base an evaluation of the Company and an investment in the
Common Stock offered hereby.
INTENSE COMPETITION
The market for Internet connectivity services is extremely competitive.
There are no substantial barriers to entry, and the Company expects that
competition will intensify in the future.
Currently, the Company's primary competitors are other ISPs focused on
business customers, including UUNET Technologies, Inc. ("UUNET"), BBN
Corporation ("BBN") and PSINet Inc. ("PSI"). UUNET, BBN and PSI, in
particular, all have significantly greater market presence and financial,
technological and personnel resources than the Company and have more extensive
network infrastructures than the Company. To a lesser extent, the Company
competes with other national and regional ISPs, of which there are currently
more than 1500, including NETCOM On-Line Communications Services, Inc.
("NETCOM"). The Company also currently competes with AT&T Corp. ("AT&T"), MCI
Communications Corporation ("MCI") and Sprint Corporation ("Sprint"). The
Telecommunications Act of 1996 is removing a number of regulatory obstacles to
the entry of other telecommunications companies into the Internet connectivity
market. Accordingly, the Company expects all of the other major
telecommunications service providers, including the Regional Bell Operating
Companies ("RBOCs"), to compete fully in the Internet connectivity market.
Deregulation of the telecommunications industry has already led to significant
horizontal integration through acquisitions and joint ventures, and the
Company expects these trends to continue.
The telecommunications companies with which the Company competes have access
to significantly greater financial, technological and personnel resources than
the Company and also have large existing business customer bases. In addition,
interexchange carriers ("IXCs"), including AT&T, MCI and Sprint, possess
existing nationwide telecommunications networks and generally face lower
infrastructure costs in providing Internet connectivity than the Company.
Although its WorldNet offering targets the consumer market, AT&T is party to
an agreement with BBN pursuant to which it can market BBN's business
connectivity services to AT&T's business customer base or, in the alternative,
provide its own Internet connectivity. In addition, MCI and British
Telecommunications P.L.C. have announced that they intend to merge their
international high-speed data networks and their Internet backbones, thus
offering their customers international Internet connectivity services. GTE
Corp. ("GTE") and UUNET have also recently announced a strategic alliance
whereby GTE's customers may obtain access to the Internet through UUNET's
network.
8
<PAGE>
Although most local exchange carriers ("LECs"), such as the RBOCs, and
competitive access providers ("CAPs") do not currently possess nationwide
networks, they generally have lower communications costs than the Company in
providing leased lines to businesses in the areas in which they operate.
Moreover, significant consolidation among RBOCs, including SBC Communications
Inc.'s recently-announced proposal to acquire Pacific Telesis Group ("PacTel")
and the proposed merger of NYNEX Corp. and Bell Atlantic Corporation ("Bell
Atlantic"), could result in the expansion of networks which can compete for
Internet connectivity customers. In addition, MFS Communications Company, Inc.
("MFS") has acquired UUNET and can now offer its customers expanded Internet
connectivity, and World Com, Inc. has recently announced an agreement to
acquire MFS. PacTel has also announced an offering of consumer connectivity to
customers in California.
Certain companies are also exploring the possibility of providing high-speed
data services using alternative delivery methods. For example, @Home, a joint
venture between Tele-Communications, Inc. and Kleiner Perkins Caufield &
Byers, has stated its intent to provide high-speed data services over cable
television plant, and Hughes Network Systems, Inc. ("HNS") has launched
DirecPC, which will deliver high-speed data through direct broadcast satellite
technology. If these technologies gain commercial acceptance, operators of
cable television and direct broadcast satellite systems could become
competitors of the Company. CAI Wireless Systems, Inc., a wireless cable
television service, also has announced that it has begun testing the first
Internet connectivity product delivered by wireless cable.
The Company also competes, to a lesser extent, with certain on-line service
providers which offer Internet connectivity in conjunction with their primary
products or services. For example, Microsoft provides Internet connectivity
through its Microsoft Network, which was built by UUNET (in which Microsoft
holds a significant minority stake) and which is a standard integrated feature
of its Windows 95 operating system, and International Business Machines
Corporation ("IBM") offers its OS/2 WARP operating system preconfigured to
provide Internet connectivity through the Advantis network, which is
controlled by IBM. Microsoft has also recently announced strategic marketing
alliances for Internet access with MCI, AT&T and NETCOM. In addition, America
Online, Inc. ("AOL"), CompuServe, Inc. ("CompuServe") and Prodigy Services
Company ("Prodigy"), currently provide Internet connectivity and have
announced plans to offer expanded Internet connectivity capabilities.
The market for Web server hosting services is highly fragmented and
extremely competitive. There are no substantial barriers to entry and the
Company expects that competition will intensify in the future. Currently the
Company's primary competitors are other ISPs, including BBN, UUNET and PSI,
and companies whose primary business is developing and operating "Server
Farms," such as Internet Direct, Inc. ("Internet Direct"). In addition, many
organizations currently host Web servers at their own facilities.
As a result of an increase in the number of competitors, and vertical and
horizontal integration in the industry, the Company currently encounters and
expects to encounter significant pricing pressure and other competition in the
future. Advances in technology as well as changes in the marketplace and the
regulatory environment are constantly occurring, and the Company cannot
predict the effect that ongoing or future developments may have on the
Internet connectivity and Web server hosting markets generally or on the
Company specifically. See "Risk Factors--Dependence Upon Product Development;
Risks of Changing Technology and Industry Standards" and "--Potential
Liability for Information Disseminated Over Network; Regulation."
DIFFICULTIES IN MANAGING GROWTH; PAST DEFICIENCIES IN INTERNAL CONTROL
STRUCTURE; NEW MANAGEMENT; NEED TO HIRE ADDITIONAL PERSONNEL
The rapid growth of the Company's business and its product and service
offerings has placed, and is expected to continue to place, a significant
strain on the Company's managerial, operational and accounting resources.
9
<PAGE>
Demands on the Company's operational and accounting information systems and
controls, including its billing, accounts receivable and payable tracking and
other accounting systems, have grown rapidly with the Company's expanding
customer base and its new focus on business customers. In the past, the
Company has experienced difficulties in billing its customers, pursuing
delinquent accounts receivable balances, recording payables in the proper
period, performing timely reconciliations of financial statement data on a
monthly basis and maintaining adequate accounting controls. These difficulties
were considered by the Company's independent auditors to be evidence of
material weaknesses in the internal control structure, as communicated to
management and the Board of Directors at the completion of the audit of the
Company's financial statements for the year ended December 31, 1995. The
Company has taken actions to upgrade and improve its accounting systems and
controls and to increase the number of qualified accounting personnel during
the six months ended June 30, 1996, and the Company's auditors, in connection
with their audit of the Company's financial statements for the six months
ended June 30, 1996, communicated to management and the Board of Directors
that they noted no material weaknesses involving the Company's internal
control structure and operations. Notwithstanding these upgrades and
improvements, additional actions with respect to the Company's accounting
systems and controls may be required, particularly if the Company should
experience significant additional growth.
Increasing demands for the Company's Internet solutions and related customer
support services have also created additional demands on the Company's network
infrastructure and technical support and customer services personnel. The
Company has in the past experienced difficulties making installations on a
timely basis and providing adequate customer support. Although the Company has
hired additional support and customer service personnel and has established a
24x7x365 NOC, it is possible that such difficulties will continue in the
future.
The Company has a new management team and a substantial number of new
employees. At December 31, 1994, the Company had 32 employees, and at
September 24, 1996, the Company had 263 employees. In addition, key members of
the Company's current management team, including Christopher R. McCleary, the
Company's Chairman, President and Chief Executive Officer; Thomas M. Brandt,
Jr., the Company's Senior Vice President, Finance and Administration, and
Chief Financial Officer; Brian M. Deobald, the Company's Vice President,
Telecommute Products Group; Earl P. Galleher, the Company's Vice President,
Internet Server Products Group; and Nicholas J. Magliato, the Company's Vice
President, Private Networks Group, have joined the Company since February
1996.
To manage its growth, the Company must continue to improve its operational
and accounting information systems and controls and must attract and retain
additional highly qualified management, financial, technical, sales and
marketing and customer service personnel. Any failure of the Company to manage
its growth effectively could have a material adverse effect on the Company's
business, financial condition and results of operations.
FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FINANCING; RISKS ASSOCIATED
WITH CURRENT FINANCING ARRANGEMENTS
The Company currently anticipates that funds advanced by WinStar under the
terms of its private network agreement and the net proceeds of the 1996
Venture Financing (as defined) and the Offering, together with existing and
anticipated financing arrangements and funds from operations, will be
sufficient to meet the Company's anticipated working capital, lease
commitments and capital expenditure requirements in 1996 and 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." In this regard, the Company
currently anticipates that it will be required to arrange approximately $15.0
million in equipment financing in order to fund planned expansion of its
network through the end of 1997. There can be no assurance that the Company
will be able to arrange such equipment financing on acceptable terms or at
all. Moreover, the Company may need to raise additional funds through public
or private debt or equity financing in the event that the Company's estimates
of operating losses and capital requirements change or prove inaccurate or in
order for the Company to respond to unanticipated competitive pressures or to
take advantage of unanticipated opportunities. Such opportunities could
include the acquisition of
10
<PAGE>
business-focused regional ISPs or the purchase of their subscriber bases,
international expansion, acquisitions of complementary businesses or
technologies and the development of new products. There can be no assurance
that additional financing will be available on terms favorable to the Company,
or at all. If adequate funds are not available or are not available on
acceptable terms, the Company may not be able to continue its network
expansion, to take advantage of market opportunities, to develop new products
or otherwise to respond to competitive pressures. Such inability could have a
material adverse effect on the Company's business, financial condition and
results of operations.
In addition, the Company's financing arrangements are secured by
substantially all of the Company's assets, require the Company to satisfy
certain financial covenants and restrict the payment of dividends. Such
collateral security arrangements entitle the Company's secured lenders to
foreclose upon the Company's assets in the event of a default under the
Company's financing arrangements and may adversely affect the Company's
ability to obtain additional financing.
The Company's obligations under its private network agreement with WinStar
are also secured by substantially all of the Company's assets. This security
interest will terminate by its terms upon the consummation of the Offering.
DEPENDENCE ON NETWORK INFRASTRUCTURE; MAINTENANCE OF PEERING RELATIONSHIPS
The Company's success will depend upon the geographic reach, capacity,
reliability and security of its network infrastructure. The Internet is
comprised of many ISPs who operate their own networks and interconnect with
other ISPs at various peering points. The establishment and maintenance of
peering relationships with other ISPs is necessary in order to exchange
traffic with other ISPs without having to pay retail rates. The Company
expects the industry's current practice regarding peering to evolve by the end
of 1996 to require an ISP to have (i) a coast-to-coast DS-3 backbone, (ii) 45
Mbps connections to three U.S. peering points and (iii) a 24x7x365 NOC in
order to qualify for peering with the major national ISPs. Although the
Company currently meets these requirements, there is no assurance that other
national ISPs will maintain peering relationships with the Company. In
addition, there may develop increasing requirements associated with
maintaining peering with the major national ISPs with which the Company may
have to comply. The Company also expects to be required to expand and adapt
its network infrastructure in order to respond to its growing number of
customers, demands to transmit increasing amounts of data and changes to its
customers' product and service requirements. The expansion and adaptation of
the Company's network infrastructure will require substantial financial,
operational and managerial resources. There can be no assurance that the
Company will be able to expand or adapt its network infrastructure to meet the
industry's evolving standards or its customers' growing demand and changing
requirements on a timely basis, at a commercially reasonable cost, or at all,
or that the Company will be able to deploy successfully any expanded and
adapted network infrastructure.
RISKS TO PHYSICAL NETWORK; RISKS TO INTEGRITY OF DATA ON NETWORK
The Company's operations are dependent upon its ability to protect its
network infrastructure against damage from fire, earthquakes, severe flooding,
mudslides, power loss, telecommunications failures and similar events or to
construct networks which are not vulnerable to the effects of these events. A
significant portion of the Company's computer equipment, including components
critical to the operation of its Internet backbone, is located at the
Company's facilities in Beltsville, Maryland. The Company experienced a four-
hour service interruption due to severe flooding in Pennsylvania in 1996. The
Company believes that this type of service interruption is not abnormal in the
industry. However the occurrence of a natural disaster or other unanticipated
problems at the Company's NOC, its hubs (sites at which the Company has
located routers, switches and other computer equipment which make up the
backbone of the Company's network infrastructure) or at a number of the
Company's POPs in the future could cause additional major interruptions in the
services provided by the Company. Furthermore, the failure of an individual
POP would result in interruption of service to the customers served by such
POP until necessary repairs were effected or replacement equipment was
installed.
In addition, some ISPs have in the past experienced interruptions in service
as a result of the accidental or intentional actions of Internet users,
current and former employees or others, and the Company has experienced
11
<PAGE>
interruptions in service as a result of accidental or intentional actions of
Internet users. Further interruptions of service may occur in the future. In
the past, there have been break-ins to computers connected to the Internet at
General Electric Company, Sprint and IBM, as well as the computer systems of
NETCOM and the San Diego Supercomputer Center, and there have also been
incidents involving hackers bypassing firewalls and stealing sensitive
information. Unauthorized use of the Company's network could jeopardize the
security of confidential information stored in the computer systems of the
Company and its customers, which may result in liability of the Company to its
customers or deter potential subscribers. The industry-standard network
security measures in use by the Company have been circumvented at other
companies' facilities and educational facilities in the past but not at the
Company's facilities. However, there can be no assurance that such measures
will not be circumvented in the future at the Company.
The failure of the Company to adequately manage service disruptions
resulting from physical damage to its network or breaches of the network's
integrity, could have a material adverse effect on the Company's business,
financial condition and results of operations.
DEPENDENCE UPON SUPPLIERS; LIMITED SOURCES OF SUPPLY
The Company relies on other companies to supply certain key components of
its network infrastructure, including telecommunications services and
networking equipment which, in the quantities and quality demanded by the
Company, are available only from limited sources. For example, the Company
currently relies on Cisco Systems, Inc. ("Cisco") to supply routers critical
to the Company's network, and the Company could be adversely affected if
routers from Cisco were to become unavailable on commercially reasonable
terms. MCI, which is a competitor of the Company, and Cable & Wireless, Inc.
("Cable & Wireless") are the Company's primary providers of data
communications facilities and network capacity and lease physical space to the
Company for routers, modems and other equipment. The Company is also dependent
upon LECs and CAPs to provide telecommunications services to the Company and
its customers. The Company expects these telecommunications companies to
become competitors of the Company as well. The Company has from time to time
experienced delays in receiving telecommunications services, and there can be
no assurance that the Company will be able to obtain such services on the
scale and within the time frames required by the Company at a commercially
reasonable cost, or at all.
Certain of the Company's suppliers, including the RBOCs and certain other
LECs, are currently subject to tariff controls and other price constraints
which in the future could be changed. In addition, regulations under the
Telecommunications Act of 1996 will affect the prices charged to the Company
by the RBOCs and certain other LECs. Such regulatory changes could result in
increased prices of services and products to the Company. See "--Potential
Liability for Information Disseminated Over Network; Regulation."
DEPENDENCE UPON KEY PERSONNEL
The Company's success will depend upon the continued service of its senior
management team and its technical, marketing and sales personnel. The
Company's employees, including members of its management team, may voluntarily
terminate their employment with the Company at any time, and competition for
qualified employees in the Internet industry is intense. Six senior executives
do, however, have employment agreements with the Company which run through
March or May 1997 (or, in the case of Christopher McCleary, the Company's
Chairman, President and Chief Executive Officer, through December 1999).
Although most of these employment agreements contain non-competition and non-
disclosure agreements, there can be no assurance that these provisions will be
enforceable in whole or in part. Except for key-person insurance the Company
maintains on Douglas E. Humphrey, its Senior Vice President, Chief Technology
Officer and co-founder, the Company does not maintain key-person insurance on
any executive officer of the Company. The loss of the services of key
personnel could have a material adverse effect upon the Company's business,
financial condition, and results of operations.
DEPENDENCE UPON CONTINUED DEVELOPMENT OF BUSINESS MARKET
A substantial portion of the Company's revenues to date have been, and
substantially all of the Company's revenues for the foreseeable future will
be, derived from the sale of its Internet solutions to business customers.
12
<PAGE>
The Company's success will depend upon the continued development and expansion
of the business market for Internet solutions and the networks which comprise
the Internet, as well as the extent to which Internet connectivity becomes
critical to achievement of the objectives of the Company's business customers.
Certain key issues concerning the extensive use of the Internet by business
customers, including data security, network reliability, ease and cost of
access and quality of service remain unresolved and may impact the growth of
Internet use by business customers. In particular, numerous published reports
have indicated that a perceived lack of security of commercial data, such as
credit card numbers, has significantly impeded commercial exploitation of the
Internet to date, and there can be no assurance that encryption or other
technologies will be developed that satisfactorily addresses these security
concerns. Published reports have also indicated that capacity constraints
caused by growth in the use of the Internet may, unless resolved, impede
further development of the Internet to the extent that users experience
delays, transmission errors and other difficulties. The failure of the market
for business-related Internet solutions to continue to develop would adversely
impact the Company's business, financial condition and results of operations.
DEPENDENCE UPON PRODUCT DEVELOPMENT; RISKS OF CHANGING TECHNOLOGY AND INDUSTRY
STANDARDS
The Company's success will depend upon its ability to respond to the rapidly
changing requirements of its business customers for Internet solutions. The
Internet industry is characterized by rapidly changing technology and evolving
industry standards, emerging competition and frequent new product and service
introductions. There can be no assurance that the Company can successfully
identify new product opportunities or develop and bring new products and
services to market in a timely manner. The Company is also at risk from
fundamental technological changes in the way Internet solutions are marketed
and delivered. Integrating technological advances may require substantial time
and expense, and there can be no assurance that the Company will succeed in
adapting its network infrastructure.
In addition, new technologies or industry standards have the potential to
replace or provide lower cost alternatives to the Company's existing products
and services. The adoption of such new technologies or industry standards
could render the Company's existing products and services obsolete and
unmarketable. For example, the Company's services rely on the continued
widespread commercial use of Transmission Control Protocol/Internet Protocol
("TCP/IP"). Alternative open and proprietary protocol standards that compete
with TCP/IP, including proprietary protocols developed by IBM and Novell,
Inc., have been or are being developed.
Failure of the Company to adapt to changes in technology and industry
standards would have a material adverse effect on the Company's business,
financial condition and results of operations.
POSSIBLE USE OF A PORTION OF NET PROCEEDS FOR ACQUISITIONS
The Company has the discretion to use a portion of the net proceeds of the
Offering to acquire business-focused regional ISPs or to purchase their
subscriber bases, although the Company has no plans, commitments or agreements
with respect to any such acquisitions and no discussions or negotiations are
presently ongoing with respect thereto. To the extent that any acquisition
candidates are identified and acquisitions are consummated (and the Company is
unable to predict with certainty whether such acquisitions will occur),
acquisitions may present significant business risks, including difficulties in
the integration of operations and systems and the diversion of management's
attention from other business concerns. There can be no assurance that any
acquisition that may be undertaken by the Company will benefit the Company.
POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED OVER NETWORK; REGULATION
The law relating to the liability of on-line service providers and ISPs for
information carried on or disseminated through the facilities of their
networks is currently unsettled. Several lawsuits seeking a judgment of such
liability are currently pending. In one case brought against an ISP, Religious
Technology Center v. Netcom On-Line Communication Services, Inc., the United
States District Court for the Northern District of
13
<PAGE>
California ruled in a preliminary phase that under certain circumstances ISPs
could be held liable for copyright infringement. The case has not reached
final judgment. The Telecommunications Act of 1996 prohibits and imposes
criminal penalties and civil liability for using an interactive computer
service for transmitting certain types of information and content, such as
indecent or obscene communications. This provision has been declared
unconstitutional by the United States District Court for the Eastern District
of Pennsylvania, which has issued a preliminary injunction against its
enforcement. The United States Department of Justice has asked the United
States Supreme Court to review the decision. Numerous states have adopted or
are currently considering similar types of legislation. The imposition upon
ISPs or Web server hosts of potential liability for materials carried on or
disseminated through their systems could require the Company to implement
measures to reduce its exposure to such liability, which may require the
expenditure of substantial resources or the discontinuation of certain product
or service offerings. The Company believes that it is currently unsettled
whether the Telecommunications Act of 1996 prohibits and imposes liability for
any services provided by the Company should the content of information
transmitted be subject to the statute.
Although the Company is not currently subject to direct regulation by the
Federal Communications Commission (the "FCC") or any other federal or state
agency, changes in the regulatory environment relating to the Internet
connectivity market, including regulatory changes which directly or indirectly
affect telecommunications costs or increase the likelihood or scope of
competition from the RBOCs or other telecommunications companies, could affect
the prices at which the Company may sell its services. For example, proposed
regulations at the FCC would require discounted Internet connectivity rates
for schools and libraries. In addition, certain localities have imposed a tax
on companies that connect customers to the Internet, and other localities may
impose similar taxes. The Company cannot predict the impact, if any, that
future regulation or regulatory changes may have on its business.
POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS
The Company's quarterly operating results have in the past and may in the
future vary significantly depending upon a number of factors, such as the
pricing and mix of services and products sold by the Company, terminations of
service, new product introductions by the Company and its competitors, the
timing of the expansion of the Company's network infrastructure, market
acceptance of new and enhanced versions of the Company's products and
services, changes in pricing policies by its competitors, the Company's
ability to obtain sufficient supplies of limited source components and the
lengthening of the Company's sales cycle. Many of these factors are beyond the
Company's control. In addition, the timing of the installation of significant
orders by the Company's suppliers in the past has been, and in the future may
be, delayed by lags in the installations of lines and equipment by the
Company's telecommunications subcontractors. For example, the severe winter
weather which struck the eastern United States in January 1996 resulted in
significant installation delays for new customers and consequent delays in the
recognition of revenue from these new customers. In addition, in response to
competitive pressures, the Company could be forced to take certain pricing or
marketing actions that would have a material effect on the amount of revenues
in the short term. The Company's expense levels are relatively fixed in the
short term; as a result, variations in the timing and amounts of revenues
recognized could have a material adverse effect on the Company's quarterly
operating results.
SHARES ELIGIBLE FOR FUTURE SALE; POTENTIAL ADVERSE EFFECT ON STOCK PRICE
Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock. The Shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction, except to the extent that such shares are purchased by
"affiliates" of the Company. The holders of Common Stock, and certain holders
of warrants to purchase Common Stock, of the Company, including officers and
directors of the Company, have entered into contractual agreements with the
Underwriters (the "Lock-Up Agreements")
14
<PAGE>
providing that they will not offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, any shares of Common Stock of the Company
beneficially owned by them or any securities convertible into, or exchangeable
for, Common Stock for a period of 180 days after the date of the Underwriting
Agreement without the prior written consent of the Underwriters, other than
shares of stock disposed of as bona fide gifts. As a result, notwithstanding
possible earlier eligibility for sale under the provisions of Rules 144 and
144(k) under the Securities Act of 1933, as amended (the "Act"), shares
subject to the Lock-Up Agreements will not be saleable until the Lock-Up
Agreements expire or their terms are waived by the Underwriters. Assuming the
Underwriters do not release stockholders from the Lock-Up Agreements, the
following shares will be eligible for sale in the public market at the
following times: beginning on the effective date of the Registration Statement
(the "Effective Date"), only the shares sold in the Offering to non-affiliates
will be immediately available for sale in the public market; and beginning 180
days after the date of the Underwriting Agreement, 1,617,907 shares will be
eligible for sale pursuant to Rule 144, all of which are held by affiliates of
the Company. An additional 4,548,744 shares will become eligible for sale
pursuant to Rule 144 at various times during the two-year period following the
Effective Date (although such shares will continue to be subject to the Lock-
Up Agreements until the expiration of the terms thereof). The holders of
approximately 4,266,660 shares of the Common Stock are entitled to certain
rights with respect to the registration of such shares under the Act beginning
six months after the Effective Date. In addition, the Company may register
certain shares of Common Stock issuable under the Stock Option Plans, and such
registration shall be effective upon filing with the Commission. As of August
31, 1996, there were outstanding options under the Stock Option Plans to
purchase 2,055,500 shares, of which options for 313,266 shares were fully
vested and exercisable. No shares have been issued to date under the Stock
Option Plans. See "Shares Eligible for Future Sale."
CONTROL BY CERTAIN STOCKHOLDERS; ANTI-TAKEOVER MEASURES
Following the Offering, the Company's executive officers, directors and
principal stockholders will beneficially own or control approximately 57.7% of
the outstanding shares of Common Stock, assuming exercise of vested options,
the Preferred Stock Conversion and the Warrant Exercise. As a result, these
stockholders will have the ability to control the election of the Company's
Board of Directors and the outcome of corporate actions requiring stockholder
approval. See "Principal Stockholders."
Certain provisions of the Company's Certificate of Incorporation and Bylaws
could make it more difficult for a third party to acquire, and could
discourage a third party from attempting to acquire, control of the Company.
Certain of these provisions allow the Company to issue Preferred Stock with
rights senior to those of the Common Stock without any further vote or action
by the stockholders, eliminate the right of stockholders to act by written
consent, provide for a classified board of directors and impose various
procedural and other requirements which could make it more difficult for
stockholders to effect certain corporate actions. The provisions of the
Company's Certificate of Incorporation which permit the Board of Directors to
authorize the issuance of one or more classes of Preferred Stock, as well as
certain other charter provisions and certain provisions of Delaware law, could
limit the price that certain investors might be willing to pay in the future
for shares of Common Stock and may have the effect of delaying or preventing
transactions involving a change in control of the Company, including
transactions in which stockholders might receive a substantial premium for
their shares over then-current market prices. The issuance of Preferred Stock
also could decrease the amount of earnings and assets available for
distribution to the holders of Common Stock or could adversely affect the
rights and powers, including voting rights, of the holders of the Common
Stock. See "Description of Capital Stock--Common Stock" "--Preferred Stock,"
and "--Delaware Law and Limitations on Change in Control."
ABSENCE OF PUBLIC MARKET; DETERMINATION OF PUBLIC OFFERING PRICE; POSSIBLE
VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common Stock,
and there can be no assurance that an active public market will develop or be
sustained after the Offering. The initial public offering price will be
determined by negotiations between the Company and the Underwriters'
representative. See "Underwriting" for a discussion of the factors to be
considered in determining the initial public offering price. The stock market
has from time to time experienced significant price and volume fluctuations
which have particularly affected the market prices of the stocks of ISPs and
other technology companies and which may be unrelated to the operating
15
<PAGE>
performance of particular companies. Factors such as quarterly variations in
actual or anticipated operating results, changes in earnings estimated by
analysts, market conditions in the industry, announcements by competitors,
regulatory actions and general economic conditions may have a significant
effect on the market price of the Common Stock.
DILUTION
Purchasers of the Common Stock offered hereby will suffer an immediate and
substantial dilution, in the amount of $6.32 per share, in the pro forma net
tangible book value per share of the Common Stock as of June 30, 1996, from
the initial public offering price. See "Dilution."
USE OF PROCEEDS
The net proceeds to the Company of the Offering, at an assumed offering
price of $10.00 per share, after deducting estimated underwriting discount and
expenses of the Offering payable by the Company, will be approximately $33.7
million (approximately $38.9 million if the Underwriters' over-allotment
option is exercised in full). The Company intends to use $1.5 million of the
net proceeds of the Offering to repay a bridge loan (the "Bridge Loan") in the
amount of $1.5 million extended to the Company on October 7, 1996 by Blue Chip
Capital Fund Limited Partnership ("Blue Chip"). Mr. John H. Wyant, the
president of the general partner of Blue Chip, is a director of the Company.
The Bridge Loan bears interest at 9.0% per annum, compounded monthly, and is
due on the earlier of the consummation by the Company of certain specified
types of financing (including the Offering) or April 7, 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and "Certain Transactions." The
Company intends to use the balance of the net proceeds to fund operating
losses associated with the expansion of the Company's business. Such operating
losses are expected to be incurred in connection with, among other things,
payments for circuit leasing and collocation facilities, sales and marketing
efforts, and the development of customer service and administrative
infrastructure. The Company may also use a portion of the net proceeds to
acquire business-focused regional ISPs or to purchase their subscriber bases
although the Company has no current specific plans, commitments or agreements
with respect to any such potential acquisitions and no discussions or
negotiations are ongoing with respect thereto. Pending such uses, the net
proceeds to the Company will be invested in U.S. government securities and
other short term, investment grade, interest-bearing securities.
DILUTION
The net tangible book value of the Company at June 30, 1996 (after giving
effect to the 1996 Venture Financing, the Warrant Exercise and the Preferred
Stock Conversion) was $2,578,601, or approximately $0.42 per share of Common
Stock. Net tangible book value per share is determined by dividing the
Company's tangible net worth (tangible assets less total liabilities) by the
number of shares of Common Stock outstanding. After giving effect to the sale
of 3,750,000 shares of Common Stock offered hereby and the receipt of the
estimated net proceeds therefrom (at the assumed public offering price of
$10.00 per share and after deducting estimated underwriting discount and
expenses of the Offering payable by the Company), the pro forma net tangible
book value of the Company at June 30, 1996 would have been $36.3 million, or
$3.68 per share. This represents an immediate dilution of $6.32 per share to
purchasers of Common Stock in the Offering. Dilution is determined by
subtracting the pro forma net tangible book value per share after the Offering
from the initial offering price per share. The following table illustrates
this per share dilution:
<TABLE>
<S> <C> <C>
Initial offering price per share.................................. $10.00
Pro forma net tangible book value per share before the Offering. $0.42
Increase in net tangible book value per share attributable to
new investors ................................................. 3.26
-----
Pro forma net tangible book value per share after the Offering.... 3.68
------
Dilution per share to new investors............................... $ 6.32
======
</TABLE>
16
<PAGE>
The following table summarizes, as of June 30, 1996, on a pro forma basis
and after giving effect to the Offering, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and
the average price per share paid by the existing stockholders and by new
investors purchasing Common Stock in the Offering. Based on an assumed initial
public offering price of $10.00 per share before deducting estimated
underwriting discount and expenses of the Offering payable by the Company, the
number of shares of Common Stock purchased from the Company is 3,750,000, the
total consideration paid to the Company is $37,500,000, the average price per
share paid by the existing stockholders is $1.98 and the price per share paid
by new investors is $10.00.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 6,113,991 62% $12,126,391 24% $ 1.98
New investors............. 3,750,000 38% $37,500,000 76% 10.00
--------- --- ----------- ---
Total................... 9,863,991 100% $49,626,391 100%
========= === =========== ===
</TABLE>
17
<PAGE>
CAPITALIZATION
The following table sets forth, as of June 30, 1996, (i) the Company's
actual capitalization, (ii) the pro forma capitalization after giving effect
to the Preferred Stock Conversion and the Warrant Exercise, and (iii) the pro
forma capitalization, as adjusted for the issuance and sale by the Company of
the 3,750,000 shares of Common Stock offered hereby, after deducting estimated
underwriting discount and expenses of the Offering payable by the Company (at
the assumed public offering price of $10.00 per share). This table should be
read in conjunction with the Company's financial statements and the notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
--------------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
----------- ----------- ------------
<S> <C> <C> <C>
Current portion of capital lease
obligations............................ $ 1,497,563 $ 1,497,563 $ 1,497,563
----------- ----------- -----------
Total current indebtedness.......... $ 1,497,563 $ 1,497,563 $ 1,497,563
=========== =========== ===========
Capital lease obligations, less current
portion................................ $ 1,714,283 $ 1,714,283 $ 1,714,283
Series A mandatorily redeemable
preferred stock, $1.00 par value(1):
Authorized shares--70,000 actual and
pro forma; none pro forma as adjusted
Issued and outstanding shares--45,455
actual; none pro forma and pro forma
as adjusted.......................... 2,391,770 -- --
Series B mandatorily redeemable
preferred stock, $1.00 par value(1):
Authorized shares--130,000 actual and
pro forma; none pro forma as adjusted
Issued and outstanding shares--81,264
actual; none pro forma and pro forma
as adjusted.......................... 8,126,389 -- --
Stockholders' equity (deficit):
Common stock, $.01 par value:
Authorized shares--49,800,000 actual
and pro forma; 47,000,000 pro forma
as adjusted
Issued and outstanding shares--
1,617,907 actual; 6,113,991 pro
forma; 9,863,991 pro forma as
adjusted(2)......................... 16,179 61,140 98,640
Additional paid-in capital............ 3,824,636 14,297,834 47,935,334
Accumulated deficit................... (11,780,373) (11,780,373) (11,780,373)
----------- ----------- -----------
Total stockholders' equity
(deficit).......................... (7,939,558) 2,578,601 36,253,601
----------- ----------- -----------
Total capitalization.............. $ 4,292,884 $ 4,292,884 $37,967,884
=========== =========== ===========
</TABLE>
- --------
(1) Preferred Stock is not presented in this table as a part of stockholders'
equity of the Company because it is mandatorily redeemable at the option
of the holders thereof. Each outstanding share of the Company's Preferred
Stock will convert into shares of Common Stock upon the closing of this
Offering and will be cancelled, retired and returned to the shares which
the Company is authorized to issue. See "Description of Capital Stock" and
Notes 8, 9 and 18 of Notes to Financial Statements.
(2) Excludes 2,500,480 shares of Common Stock reserved for issuance to
employees under the Stock Option Plans (of which options to purchase
2,283,300 shares are outstanding). See "Management--Incentive Stock Option
Plans," "Shares Eligible for Future Sale" and Note 13 of Notes to the
Company's Financial Statements. Also excludes 240,000 shares of Common
Stock reserved for issuance to WinStar pursuant to the WinStar Warrants.
18
<PAGE>
DIVIDEND POLICY
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. The payment of dividends in
the future will depend on the results of operations, financial condition,
capital expenditure plans and other cash obligations of the Company and will
be at the sole discretion of the Board of Directors. In addition, the
Company's line of credit with Silicon Valley Bank prohibits the Company from
declaring dividends while borrowings are outstanding, and provisions of future
financing arrangements of the Company may also prohibit or limit the Company's
ability to pay dividends. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
19
<PAGE>
SELECTED FINANCIAL AND PRO FORMA FINANCIAL DATA
The selected financial data for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and June 30,
1996 have been derived from the Company's audited financial statements which
are included elsewhere in this Prospectus. The selected financial data should
be read in conjunction with and is qualified in its entirety by reference to
the financial statements of the Company and the related notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- ------------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue................. $431,098 $1,577,609 $ 5,075,316 $ 1,665,432 $ 5,235,204
Costs and expenses:
Cost of revenue....... 216,656 1,002,503 4,471,500 1,321,663 5,246,961
Sales and marketing... 18,326 263,075 1,710,234 561,093 2,587,472
General and adminis-
trative.............. 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ----------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ----------- -----------
Income (loss) from oper-
ations................. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other in-
come................. -- -- 72,002 17,453 47,746
Interest expense...... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ----------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ----------- -----------
Income (loss) before
income taxes........... 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ----------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ----------- -----------
Net income (loss)
attributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== =========== ===========
Pro forma net income
(loss) per common
share(1)............... $ (0.47) $ (0.69)
=========== ===========
Pro forma average common
and common equivalent
shares outstanding(1).. 8,254,069 8,689,950
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
DECEMBER 31, PRO FORMA
1995 ACTUAL AS ADJUSTED (2)
------------ ----------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents............ $ 832,582 $ 6,269,000 $ 39,944,000
Working capital (deficit)............ (1,820,464) (6,018,179) 27,656,821
Total assets......................... 5,051,786 18,841,779 52,516,779
Total indebtedness, less current por-
tion................................ 821,709 1,714,283 1,714,283
Mandatorily redeemable preferred
stock............................... 2,138,889 10,518,159 --
Total stockholders' equity (deficit). (1,527,742) (7,939,558) 36,253,601
</TABLE>
- --------
(1) Pro forma net loss per common share adjusts historical earnings per share
for the assumed conversion of convertible securities which are not
included in the historical computations. These convertible securities will
automatically convert into shares of Common Stock upon the consummation of
the Offering. Historical net loss was reduced by $450,871 for the year
ended December 31, 1995 and $1,311,347 for the six months ended June 30,
1996 to adjust for interest expense and preferred stock accretion related
to the convertible securities. See Note 2 to Financial Statements.
(2) The pro forma as adjusted data give effect to (i) the Preferred Stock
Conversion and the Warrant Exercise, both of which will occur upon
consummation of the Offering and (ii) the issuance and sale by the Company
of the shares of Common Stock offered hereby (at the assumed public
offering price of $10.00 per share, after deducting estimated underwriting
discount and expenses of the Offering payable by the Company).
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
DIGEX is a leading national ISP that focuses exclusively on business
customers. The Company was founded in 1990 by a group of Internet pioneers as
a local provider of dial-up Internet connectivity. 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. The Company brought in an experienced management
team in the first quarter of 1996. In the second quarter of 1996, the Company
completed a DS-3 backbone ring around the continental United States, enabling
the Company to provide its solutions to business customers nationwide.
The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting and security and other network products. Business connectivity
and Web server hosting customers are typically signed to contracts with
minimum terms of one year. Revenues generated from these customers are
typically in the form of recurring monthly fees, installation and start-up
charges and sales of related equipment, applications and services.
The Company has made significant investments in developing and expanding its
network infrastructure and its customer service and sales and marketing
efforts. The substantial costs incurred in connection with this expansion
contributed heavily to the Company's operating losses in 1995 and the six
months ended June 30, 1996. In anticipation of future growth, the Company
expects to continue to make significant investments in its network
infrastructure, to be funded from equipment financing, to the extent that the
Company is able to arrange such financing on favorable terms, throughout the
remainder of 1996 and in 1997. The Company's leased line and server customers
have expanded from approximately 65 accounts at April 30, 1995 to
approximately 1050 accounts at August 31, 1996.
The Company's quarterly operating results have fluctuated and will continue
to fluctuate from period to period depending upon factors such as the timing
and installation of significant orders, the pricing and mix of services and
products sold by the Company, terminations of service, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products and services, changes in pricing
policies by its competitors, the Company's ability to obtain sufficient
supplies of limited source components, the lengthening of the Company's sales
cycle and the timing of the expansion of the Company's network infrastructure.
In view of the significant growth of the Company's operations, the Company
believes that period-to-period comparisons of its financial results should not
be relied upon as an indication of future performance and that the Company may
experience future period-to-period fluctuation in operating results. 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. The
Company expects to incur operating and net losses in 1996 and 1997. The
Company expects that its operating and net losses during the last two quarters
of 1996 will increase significantly compared to its operating and net losses
for the first two quarters of 1996. There can be no assurance that the Company
will achieve or sustain profitability in the future.
RESULTS OF OPERATIONS
The following table sets forth the percentage of the Company's revenue and
total expenses represented by certain line items from the Company's statement
of operations.
21
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------- -------------
1993 1994 1995 1995 1996
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue..................... 100% 100% 100% 100% 100%
Costs and expenses:
Cost of revenue........... 50 63 88 79 100
Sales and marketing....... 4 17 34 34 49
General and administra-
tive..................... 32 23 53 35 65
--- --- --- ---- -----
Total expenses.............. 86 103 175 148 214
--- --- --- ---- -----
Income (loss) from opera-
tions...................... 14 (3) (75) (48) (114)
Interest expense, net....... -- (2) (3) (2) (21)
--- --- --- ---- -----
Income (loss) before income
taxes...................... 14 (5) (78) (50) (135)
Income taxes ............... 6 0 -- -- --
--- --- --- ---- -----
Net income (loss)....... 8% (5)% (78)% (50)% (135)%
=== === === ==== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1996 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1995
REVENUE
The Company derives its revenue from providing a comprehensive range of
INDUSTRIAL STRENGTH Internet solutions, including business connectivity, Web
server hosting and security and other network products. Revenue grew 214% from
$1.7 million in the six months ended June 30, 1995 to $5.2 million in the six
months ended June 30, 1996, the majority of which was due to the change in the
Company's strategy to focus exclusively on business customers, who generally
require high bandwidth connectivity, and the associated expansion of its sales
and marketing efforts, including the creation of a direct sales force, and to
a lesser extent the development of the Company's Web server hosting business.
COST OF REVENUE
Cost of revenue consists primarily of local access costs, network
infrastructure, leased network backbone circuit costs and network operations
and support costs. Network operations and support costs consist primarily of
personnel expenses relating to the operation of the network infrastructure,
including monitoring network traffic and quality, and costs of providing
technical support to customers. Cost of revenue increased 297% from $1.3
million in the six months ended June 30, 1995 to $5.2 million in the same
period in 1996. Cost of revenue increased as a percentage of revenues from 79%
in the 1995 period to 100% in the 1996 period. The increase in cost of revenue
was primarily due to costs associated with the Company's change in strategy to
focus exclusively on business customers. These costs include the hiring of
additional personnel to support the Company's expanding customer base and the
higher support requirements of business customers as well as the expansion of
the network backbone, the establishment of a 24x7x365 NOC, and the building of
redundant facilities. For example, the Company's customer support and network
operations personnel increased from 42 at June 30, 1995 to 69 at June 30,
1996. The Company plans to continue to expand its network through 1996 and
1997, which in turn will continue to increase cost of revenue. As the costs
associated with this expansion have been and will be incurred by the Company
in anticipation of growth in its customer base, the Company believes that,
over time, cost of revenue as a percentage of revenues will decline as its
customer base expands.
SALES AND MARKETING
Sales and marketing costs consist primarily of salaries and expenses of
sales and marketing personnel, advertising and promotion and marketing
materials. Sales and marketing costs rose 361% from $0.6 million in the six
months ended June 30, 1995 to $2.6 million in the same period in 1996. Sales
and marketing costs increased as a percentage of revenues from 34% in the 1995
period to 49% in the 1996 period. The increase in
22
<PAGE>
sales and marketing costs was primarily due to the Company's change in
strategy to focus exclusively on business customers. The Company's prior
business strategy required minimal sales and marketing. The change in strategy
required the hiring of additional sales and marketing personnel (from 27 at
June 30, 1995 to 85 at June 30, 1996) and the expansion of advertising and
promotional activities and product development efforts. The Company expects to
continue to invest heavily in sales and marketing in 1996 and 1997.
GENERAL AND ADMINISTRATIVE
General and administrative costs consist primarily of expenses associated
with the Company's management, accounting, finance and administrative
functions. General and administrative costs increased 474% from $0.6 million
in the six months ended June 30, 1995 to $3.4 million in the same period in
1996. These costs increased as a percentage of revenues from 35% in the six
months ended June 30, 1995 to 65% in the same period in 1996. This increase in
general and administrative expenses was due primarily to the hiring of 28
additional senior management, finance, accounting and administrative personnel
to support the Company's expanding operations. The Company expects to hire
additional personnel in anticipation of continued expansion of its operations.
General and administrative costs were also affected by a $400,000 non-cash
compensation charge in the six months ended June 30, 1996 related to the grant
of stock options. In addition, based on options granted through June 30, 1996,
additional compensation charges of $2.7 million will be reported as general
and administrative costs during the period July 1, 1996 through December 31,
1999. See Note 13 to the financial statements for additional information with
respect to compensation expense related to stock option grants. The increase
in the general and administrative costs resulted principally from the increase
in the Company's general and administrative staff from 13 at June 30, 1995 to
41 at June 30, 1996. The Company expects to hire additional personnel in
anticipation of continued expansion of its operations.
INTEREST EXPENSE
Interest expense increased from $45,249 in the six months ended June 30,
1995 to $1,167,149 in the same period in 1996. The increase in interest
expense during the 1996 period was primarily due to the Company's issuance of
subordinated debentures in November 1995 and February 1996 and increased
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.
YEAR ENDED DECEMBER 31, 1995 COMPARED WITH YEAR ENDED DECEMBER 31, 1994
REVENUE
Revenue grew 222% from $1.6 million in 1994 to $5.1 million in 1995, the
majority of which was due to the change in the Company's strategy to focus
exclusively on business customers, who generally require high bandwidth
connectivity, and to a lesser extent the development of the Company's Web
server hosting business. In addition, the equity financing in March 1995
contributed to this increase by allowing the Company to greatly expand its
customer acquisition effort by building a direct sales force. The Company's
leased line and server customers expanded from approximately 16 accounts at
December 31, 1994 to approximately 360 accounts at December 31, 1995.
COST OF REVENUE
Cost of revenue increased 346% from $1.0 million in 1994 to $4.5 million in
1995. Cost of revenue increased as a percentage of revenues from 63% in 1994
to 88% in 1995. The increase in cost of revenue was primarily due to costs
associated with the Company's change in strategy to focus exclusively on
business customers. These costs included the hiring of additional personnel to
support the Company's expanding customer base as well as the expansion of the
network backbone, the establishment of a 24x7x365 NOC, and the building of
redundant facilities. The Company's customer support and network operations
personnel increased from 21 at December 31, 1994 to 53 at December 31, 1995.
The increased use of the network and the increase in capital expenditures to
expand the network infrastructure created an increase in depreciation and
amortization expense during 1995.
23
<PAGE>
SALES AND MARKETING
Sales and marketing costs rose 550% from $0.3 million in 1994 to $1.7
million in 1995. Sales and marketing costs increased as a percentage of
revenues from 17% in 1994 to 34% in 1995. The increase in sales and marketing
costs was primarily due to the Company's change in strategy to focus
exclusively on business customers. The Company's prior business strategy
required minimal sales and marketing. The Company's change in focus required
the hiring of additional sales and marketing personnel (from 8 at December 31,
1994 to 36 at December 31, 1995), expanding advertising and promotional
activities and product development efforts. The Company expects to continue to
invest heavily in sales and marketing in 1996.
GENERAL AND ADMINISTRATIVE
General and administrative costs increased 650% from $0.4 million in 1994 to
$2.7 million in 1995. These costs increased as a percentage of revenues from
23% in 1994 to 53% in 1995. This increase in general and administrative
expenses was due primarily to the hiring of 12 additional senior management,
finance, accounting and administrative personnel to support the Company's
expanding operations. The Company expects to hire additional personnel in
anticipation of continued expansion of its operations. General and
administrative costs were also affected by a $475,000 non-cash compensation
charge in 1995 related to the grant of stock options and a $310,000 write-off
of accounts receivable in 1995 compared to a $15,000 write-off during 1994.
See Note 13 to the financial statements for additional information with
respect to compensation expense related to stock options. The Company's
general and administrative staff increased from 5 at December 31, 1994 to 17
at December 31, 1995. The Company expects to hire additional personnel in
anticipation of continued expansion of its operation.
INTEREST EXPENSE
Interest expense increased from $24,000 in 1994 to $227,000 in 1995. The
increase in interest expense during 1995 was primarily due to interest of
$124,000 on $2.0 million of subordinated debentures and an increase in
equipment financing and capital lease obligations incurred to finance network
expansion and to fund working capital requirements.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEAR ENDED DECEMBER 31, 1993.
REVENUE
Revenue grew 266% from $0.4 million in 1993 to $1.6 million in 1994, as a
result of increases in the number of the Company's customers due to the
commercialization of the Internet and significant growth in its usage. The
customer base in 1993 and 1994 was comprised primarily of individual dial-up
customers.
COST OF REVENUE
Cost of revenue increased 363% from $0.2 million in 1993 to $1.0 million in
1994. Cost of revenue increased as a percentage of revenues from 50% in 1993
to 63% in 1994. The increase in cost of revenue was primarily due to an
increase in the hiring of additional personnel to support the Company's
expanding customer base, relocation of the Company's headquarters to larger
facilities and the increase in capital expenditures to expand the network
infrastructure, which created an increase in depreciation and amortization
expense during 1994.
SALES AND MARKETING
Sales and marketing costs rose from $18,000 in 1993 to $263,000 in 1994.
Sales and marketing costs increased as a percentage of revenues from 4% in
1993 to 17% in 1994. The increase in sales and marketing costs was due to
expansion of the advertising and promotional activities and the hiring of
dedicated sales representatives.
24
<PAGE>
GENERAL AND ADMINISTRATIVE
General and administrative costs increased 171% from $0.1 million in 1993 to
$0.4 million in 1994. These costs decreased as a percentage of revenues from
32% in 1993 to 23% in 1994. This increase in general and administrative costs
was due primarily to the hiring of additional management, finance, accounting
and administrative personnel to support the Company's expanding customer base.
INTEREST EXPENSE
Interest expense was $24,000 in 1994. There was no interest expense in 1993.
The interest expense incurred during 1994 was primarily due to equipment
financing and capital lease obligations incurred to finance network expansion
and to fund working capital requirements.
INCOME TAXES
Income tax expense decreased from $26,000 in 1993 to $3,000 in 1994 due to
the operating loss.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly revenue for the six
quarters ended June 30, 1996. In the opinion of management, the unaudited
information set forth below has been prepared in accordance with generally
accepted accounting principles for interim financial information and Item
310(b) of Regulation S-B.
<TABLE>
<CAPTION>
1995 1996
THREE MONTHS ENDED THREE MONTHS ENDED
------------------------------------------ ---------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 MARCH 31 JUNE 30
-------- -------- ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Revenue................. $739,700 $925,300 $1,318,200 $2,092,100 $2,232,500 $3,002,700
</TABLE>
The Company's quarterly results may in the future vary significantly
depending on a variety of factors. See "Risk Factors--Potential Fluctuations
in Quarterly Operating Results." In view of the significant historic growth of
the Company's operations, the Company believes that period-to-period
comparisons of revenue should not be relied upon to estimate future revenue.
LIQUIDITY AND CAPITAL RESOURCES
The Company satisfied its cash requirements in 1995 and in the first six
months of 1996 principally through a combination of sales of equity and debt
securities to venture capital investors. The Company received $6.0 million in
1995 from the sale of equity and debt securities to venture capital investors.
In February 1996, the Company sold additional debt securities to venture
capital investors, together with warrants to purchase shares of Common Stock,
for gross proceeds of $1.0 million. Proceeds from these financings were used
to fund the rapid expansion of the Company's network infrastructure and
internal operations, including purchases of capital equipment and the hiring
of additional personnel. See "Certain Transactions."
In April 1996, to provide additional liquidity, the Company entered into a
Loan and Security Agreement with Silicon Valley Bank that provides a revolving
credit line secured by accounts receivable. The credit line allows the Company
to borrow a maximum amount equal to the lesser of $1.5 million or 80% of the
Company's eligible accounts receivable, at the rate announced from time to
time by Silicon Valley Bank as its "prime rate" plus 1% per annum, which was
9.25% at June 30, 1996. The Company is currently unable to draw under the
credit line due to non-compliance with certain financial covenants; however,
the Company is actively engaged in negotiations with an asset-based lender
regarding the establishment of a secured credit line which would replace the
Loan and Security Agreement with Silicon Valley Bank and under which the
Company would be permitted to draw up to $3.0 million for working capital and
equipment purchases. However, to date no agreement has been reached with the
fixed asset lender, and there can be no assurance that any such agreement will
be reached on acceptable terms or at all.
In April 1996, the Company obtained a commitment for an equipment lease line
under which the Company may lease equipment with a total cost of up to $2.0
million through December 31, 1996. The lease terms will
25
<PAGE>
range from 42 months to 50 months and will be accounted for as capital leases
with annual effective interest rates approximating 14% per annum. The
Company's capital lease obligations as of June 30, 1996 were $3.2 million and
its future minimum lease payments through 2000 under certain operating leases
were $2.0 million. Since June 30, 1996, the Company has entered into
approximately $4.0 million of additional lease financing arrangements in order
to fund network expansion.
In May 1996, the Company entered into agreements with venture capital
investors pursuant to which the Company issued shares of Series B Preferred
Stock in exchange for total cash consideration of $5.0 million. Proceeds from
this transaction, are being used to finance the Company's network
infrastructure expansion. In October 1996 the Company obtained $1.5 million in
interim financing pursuant to the Bridge Loan from Blue Chip, which the
Company will repay using a portion of the net proceeds of the Offering. See
"Use of Proceeds." In connection with the Bridge Loan, the Company agreed to
issue to Blue Chip warrants to purchase 150,000 shares of Common Stock at an
exercise price of $1.75 per share if, but only if, the Company's initial
public offering of Common Stock is not consummated on or before October 31,
1996. The Company presently expects that this Offering will be consummated
prior to October 31, 1996 and, accordingly, that no warrants will be issued in
connection with the Bridge Loan. The Company also has received, in addition to
the Bridge Loan, a standby commitment from certain of its current venture
capital investors to purchase up to $5.0 million of convertible subordinated
debentures and warrants to purchase shares of Common Stock in the event that
the Company requires additional liquidity prior to completion of the Offering.
The Company does not presently expect that it will be required to make any
draws pursuant to the $5.0 million standby commitment. See "Certain
Transactions."
In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar advanced $5.0
million in cash for connectivity services to be provided under such agreement
and received warrants to purchase 240,000 shares of Common Stock. The
estimated value of the WinStar Warrants, $228,000, was recorded as additional
paid-in capital and deferred revenue associated with such agreement was
recorded in the amount of $4,772,000. See Note 11 to the Financial Statements.
The Company's obligations to WinStar under such agreement are secured by
substantially all of the Company's assets, which security interest will
terminate by its terms upon the consummation of the Offering.
The Company generated positive cash flow from operating activities of
$124,000 in 1993 and $133,000 in 1994, compared to a negative cash flow from
operating activities of $2.5 million in 1995. The change in operating cash
flows from 1994 to 1995 was due primarily to increased costs relating to
expansion of the Company's network and organizational infrastructure,
including the hiring of additional management, marketing and sales, finance,
accounting and administrative personnel. In addition, purchases of fixed
assets increased from $98,000 in 1993, to $350,000 in 1994, and to $1.2
million in 1995, primarily to support the expansion of the Company's network
infrastructure.
The Company currently anticipates that funds advanced by WinStar under the
terms of its private network agreement, and the net proceeds of the 1996
Venture Financing and the Offering, together with existing and anticipated
financing arrangements and funds from operations, will be sufficient to meet
the Company's anticipated working capital, lease commitments and capital
expenditure requirements through the end of 1997. In this regard, the Company
currently anticipates that it will be required to arrange approximately $15.0
million in equipment financing in order to fund planned expansion of its
network through the end of 1997. There can be no assurance that the Company
will be able to arrange such equipment financing on acceptable terms or at
all. Moreover, the Company may need to raise additional funds through public
or private debt or equity financings in order to take advantage of
unanticipated opportunities, including international expansion, acquisitions
of complementary businesses or technologies, development of new products or
otherwise responding to unanticipated competitive pressures. In addition, the
Company may need to raise additional funds in the event that the Company's
estimates of operating losses and capital requirements change or prove
inaccurate. There can be no assurance that the Company will be able to raise
such capital on favorable terms or at all. See "Risk Factors--Future Capital
Needs; Uncertainty of Additional Financing; Risks Associated With Current
Financing Arrangements" and "Use of Proceeds."
26
<PAGE>
BUSINESS
DIGEX is a leading independent national ISP that focuses exclusively on
businesses, government agencies and other institutional customers ("business
customers"). The Company offers a comprehensive range of INDUSTRIAL STRENGTH
Internet solutions, including business connectivity, Web server hosting and
security and other network products. 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.
The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units. The Business Connectivity Group
offers Internet connectivity solutions and other value-added solutions to
business customers, while the Telecommute Products Group focuses on the home-
office connectivity requirements of small businesses and high-end
professionals employed by companies that are served by the Business
Connectivity Group. The Internet Server Products Group provides Web server
hosting solutions enabling customers to deploy highly reliable Web servers
that are connected directly to the Internet backbone and are monitored on a
24x7x365 basis at the Company's network operations center ("NOC"). The Private
Networks Group seeks to create customized solutions for businesses looking to
provide private label Internet services without building their own facilities.
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.
In June 1996, the Company entered into an agreement with Microsoft, pursuant
to which Microsoft's Consulting Services Group built a "Server Farm" for the
Company with servers running Microsoft's Windows NT 4.0 operating system.
Under such agreement, the Company introduced the world's first Windows NT 4.0
hosted server product line on September 3, 1996. The Company is currently
engaged in discussions with Microsoft to include DIGEX in Microsoft's Solution
Provider Program, which would result in the Company being designated a
preferred vendor for Microsoft's corporate customers. There can be no
assurance, however, that these discussions will culminate in an agreement with
Microsoft.
INDUSTRY BACKGROUND
The Internet is a global collection of computer networks that enables
businesses, government agencies, other institutional customers and individuals
to communicate, access and share information and conduct business remotely.
Use of the Internet has grown rapidly since the early 1990s, due in large part
to increasing personal computer and modem penetration, the development of the
World Wide Web, the introduction of easy-to-use navigational tools and
utilities for the Web and the availability of informational, entertainment and
commercial applications. Technological advances relating to the Internet have
occurred and continue to occur rapidly, resulting in a more robust, lower-cost
infrastructure, improved security and increased value-added services and
content. IDC has estimated that the number of Internet users will reach
approximately 200 million in 1999, from approximately 56 million in 1995.
While there has been significant media interest in the use of the Internet
by consumers, business customers currently account for a more significant
percentage of Internet use. According to IDC, approximately 71%, or 40
million, of the approximately 56 million Internet users in 1995 were business-
related users. Internet capabilities, including corporate Internet sites, are
becoming an increasingly important part of doing business. According to
Netcraft, Ltd., the number of corporate Internet sites, defined as domain
names ending in ".com", has increased from 4,912 in August 1995 to 171,738 in
June 1996.
27
<PAGE>
Because Internet and corporate intranet solutions are increasingly achieving
"mission critical" status, business customers are demanding advanced, highly
reliable solutions designed specifically for the needs of business.
Furthermore, as the use of the Internet expands, business customers are
requiring that providers offer a comprehensive range of services, including
connectivity, Web server hosting and security and other network products.
Finally, business customers often require knowledgeable and highly responsive
sales and customer service representatives in order to determine their optimal
Internet strategy quickly and to resolve any problems with their current
solutions.
THE DIGEX SOLUTION
The Company provides a comprehensive range of INDUSTRIAL STRENGTH Internet
solutions that serves the needs of business customers, who often desire a
responsive, single-source provider of reliable, high-performance Internet
connectivity and Web server hosting products and services.
Connectivity. DIGEX offers a complete product line of Internet connectivity
solutions to its business customers with a variety of service and pricing
programs based on bandwidth requirements. To complement its connectivity
offerings, the Company also sells customer-premise routers, firewall security
options and assigns and manages IP and E-mail addresses.
Web Server Hosting. The Company also offers a complete range of Web server
hosting solutions. The Company's business customers are able to locate highly
reliable Web sites on dedicated servers at the Company's "Server Farm," which
enables users to gain high speed access to the Web server given the server's
direct connection to the Internet backbone. In addition, the Company provides
24x7x365 monitoring of the server and Internet connection by the Company's
highly experienced technical staff, as well as easy server upgradability as
the customer's speed and capacity requirements grow.
The Company's Internet solutions are supported by its state-of-the-art
network infrastructure, including the Company's NOC and Server Farm located in
suburban Washington, D.C. The Company has built a redundant nationwide DS-3
backbone connecting to the three major Internet peering points at 45 Mbps and
has established peering relationships with other national ISPs, allowing DIGEX
to route its customers' traffic to the desired Internet address. The Company
believes that its combination of a nationwide network and peering
relationships significantly differentiates the Company from regional ISPs who,
without peering relationships, may have to pay retail rates to national
providers in order to exchange network traffic.
THE DIGEX STRATEGY
After receiving its first major infusion of institutional equity capital in
March 1995, the Company reoriented its strategy to focus on becoming the ISP
of choice for business customers. DIGEX's strategy focuses on five key
elements:
Focus on Businesses Customers. The Company believes that business customers
offer the greatest potential market for the Company's solutions due to this
market's low customer turnover and need for the higher value-added Internet
solutions which the Company provides. By focusing on these customers, the
Company believes it will be able to develop innovative, specialized products
and services that address the constantly evolving needs of business customers
at competitive prices. In addition, the Company believes that its less-focused
competition will have difficulty fulfilling the demanding needs of these
customers.
Provide Comprehensive Range of Internet Solutions. The Company provides a
comprehensive range of Internet solutions, enabling it to satisfy the needs of
business customers, who often seek a sole provider for all their Internet
requirements. The Company's sales forces for each of its business units are
incentivized to cross-market all of DIGEX's products and services.
Expand and Optimize Its Nationwide Network. The Company aims to expand its
highly reliable, nationwide DS-3 network, which the Company has designed to
specifically address the growing reliability and
28
<PAGE>
bandwidth requirements of business customers, so as to offer a comprehensive
range of connectivity solutions to such customers across the United States.
The Company believes that as it expands its network to more cities, it can
offer its solutions to additional business customers more cost-effectively
than its consumer-focused competitors, because fewer POPs are required to
reach business customers, who are largely concentrated in urban centers. In
addition, the Company attempts to optimize its network efficiency by
counterbalancing business connectivity, which makes greater use of the
Company's network during business hours, with Web server hosting, which makes
greater use of the network during non-business hours.
Implement Multiple Distribution Channels. The Company aims to reach its
customers through the Company's own direct sales force as well as through
other innovative methods of distribution. These methods currently include
agent relationships with advertising agencies and Web site developers who
resell the Company's Web server hosting solutions and the efforts of the
Company's Private Networks Group, which enters into long-term agreements with
telecommunications service providers to resell the Company's connectivity
solutions under their own brand names.
Focus on Customer Acquisition and Retention. In addition to acquiring
customers through its existing distribution channels, the Company believes
that as consolidation of the industry continues and it becomes more difficult
for regional ISPs to compete, the Company may be able to acquire
opportunistically business-focused regional ISPs or purchase their subscriber
bases. The Company also believes that customer responsiveness is becoming a
key ingredient of success for ISPs and has formed four focused business units
to better serve and retain customers. To aid in this effort, the Company has
developed a highly trained direct sales force with extensive Internet
expertise which, based on customer feedback, the Company believes
significantly differentiates the Company from its competitors.
NETWORK INFRASTRUCTURE
DIGEX's current network infrastructure is based upon a DS-3 ring around the
continental United States which provides two 45 Mbps paths between the east
and west coasts, allowing for a combined bandwidth of 90 Mbps when fully
operational. As shown on the map on the following page, customers can connect
to the Company's network from major cities across the United States. Clear
channel DS-3 circuits in the ring connect core routers in DIGEX POPs located
in cities on the ring. In the event of single points of failure, traffic can
be routed around the loop, providing for a minimum of 45 Mbps even in the
event of such a failure. Other network circuits connect routers in DIGEX POPs
in cities not located along the ring to nearby DIGEX routers residing on the
ring. The network backbone uses state-of-the-art routing platforms, including
Cisco Systems, Inc. ("Cisco") 7513 routers.
DIGEX customers are connected via high-speed leased lines, frame relay, SMDS
or other technologies to the local DIGEX POP, where data enters the DIGEX
backbone. If the destination of the data is on the DIGEX network, then the
data is delivered without ever leaving DIGEX's facilities. If the data is
destined for an Internet customer connected via another national ISP which has
a peering relationship with DIGEX, then the data is routed to the nearest
peering location where the data is passed from the DIGEX router to the router
of the other ISP, who then carries that traffic to the final destination. If
the destination is an ISP which does not have a peering relationship, then the
data is delivered to the national ISP from whom such ISP purchases its
Internet connectivity.
Currently, DIGEX's comprehensive range of connectivity solutions are
available in 33 U.S. metropolitan areas through 40 POPs, and the Company
expects to make its connectivity solutions available in a total of 48 U.S.
metropolitan areas through 55 POPs by the end of 1996. DIGEX currently leases
the majority of its intercity backbone DS-3 circuits from MCI and Cable &
Wireless, as well as collocation space at their facilities for DIGEX
equipment. The Company has a five-year agreement with MCI as well as three-
year commitments from Cable & Wireless for the lease of such circuits and the
use of collocation space to house DIGEX equipment. Management believes that it
will be able to renew or replace such contracts at comparable rates. Other
DIGEX network segments and customer connections are provided through LECs and
CAPs.
29
<PAGE>
DIGEX's POPs and Nationwide Network Backbone
[MAP OF UNITED STATES APPEARS HERE]
DIGEX's network is monitored on a 24x7x365 basis by its NOC. Trouble calls
are serviced by the technical staff of either the Business Connectivity Group,
in the case of backbone or customer leased line difficulties, or the Internet
Server Products Group, in the case of problems with customer servers. MCI and
Cable & Wireless provide installation and maintenance services to assist DIGEX
at all locations where the Company collocates equipment. For equipment for its
remote POPs, DIGEX purchases routers from Cisco, CSU/DSUs from Digital Link
Corporation, IDSUs and DSUs from Kentrox Industries Inc. and modems and ISDN
from Cisco. Protected AC or DC power is used at all sites to protect against
power outages affecting the network.
In addition to these backbone facilities, DIGEX presently operates a Server
Farm at its suburban Washington, D.C. headquarters and intends to construct an
additional Server Farm and a back-up NOC on the west coast by the end of 1997.
The Company may decide to build additional Server Farms in the future to
better serve customer needs. Multiple Server Farms allow Internet users to
access the server closest to them and thus provide a better level of service,
and would allow DIGEX to minimize the amount of server-related traffic which
it must carry long distances over its network. Geographic distribution of
customer data also provides for redundancy in case of hardware, software or
network failure, contributing to increased uptime and service reliability.
30
<PAGE>
PRODUCTS AND SERVICES
The Company offers its INDUSTRIAL STRENGTH Internet solutions through four
separate and highly focused business units.
Business Connectivity Group
DIGEX provides complete connectivity solutions to its business customers,
including frame relay, leased lines and SMDS, with availability limited only
by the capabilities of the in-market LECs. See"--Network Infrastructure." The
majority of the revenue generated by the Business Connectivity Group is
derived from its frame relay and leased line products. The Company offers
several configurations and monthly pricing plans, each based on the bandwidth
supplied and thus on the speed and capacity of the facility. In addition,
customers are strongly encouraged to enter into long-term contracts. The
Company's products are highly scalable and are designed to facilitate ease of
upgrade as the customer's needs evolve. The following chart describes the
Company's Business Connectivity options:
<TABLE>
<CAPTION>
SERVICE TYPE SUMMARY DESCRIPTION
----------------------------------------- -----------------------------------
<C> <S>
Frame Relay Flat rate, scalable 32 Kbps to 1.54
Mbps connectivity solutions based
on frame relay technology for small
to medium size business customers,
running all standard Internet
applications.
Leased Line A complete range (56 Kbps to 45
Mbps) of dedicated, clear channel
circuits for local-area/wide-area
networks and enterprises running
all standard and high-bandwidth
Internet applications.
Ethernet Plus 2 Mbps to 16 Mbps connectivity
solutions for small to large
business customers; provides an
easy "plug and play" solution for
Ethernet-based networks running all
Internet applications.
Switched Multimegabit Data Service (SMDS) A wide range of scalable solutions
(1.17 Mbps to 34 Mbps); designed
for metropolitan-central business
customers seeking a cost-effective
way to support all Internet
applications.
</TABLE>
In addition to basic connectivity service, DIGEX sells and configures
customer-premise routers, firewall security options and other value-added
services. DIGEX is an authorized reseller of the Eagle firewall product family
from Raptor Systems, Inc., and Firewall-1 from Check Point Software
Technologies Ltd. The Company also offers Secure Computing Corporation's
Sidewinder Internet firewall software. In addition, the Company helps
customers with initial use of their particular DIGEX solution. The Company
began providing business connectivity solutions in 1994 and plans to introduce
new products on a controlled basis, to ensure that the quality of delivery,
from both a sales and a support perspective, is in place, thus solidifying the
Company's reputation and building on its promise for delivering INDUSTRIAL
STRENGTH Internet solutions.
Internet Server Products Group
The Company has offered a complete range of Web server hosting solutions
since 1994. The Company's business customers are able to locate highly
reliable Web sites on dedicated servers at the Company's "Server Farm," which
enables users to gain high speed access to the Web server given the server's
direct connection to the Internet backbone. In addition, the Company provides
24x7x365 monitoring of the server and Internet connection by the Company's
highly experienced technical staff as well as easy server upgradability as the
customer's speed and capacity requirements grow. As Web server needs evolve,
DIGEX's goal is to continue to meet the market with the most advanced server
solutions available. In September 1996, the Company introduced the world's
first Windows NT 4.0 hosted server product line.
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<PAGE>
Private Networks Group
The Private Networks Group creates customized solutions for
telecommunications service providers looking to offer highly reliable private
label Internet connectivity solutions without incurring the lead time and
costs associated with building their own facilities. In turn, these providers
absorb customer-acquisition costs that would otherwise be borne by the
Company. When an individual contract is secured, a customized implementation
and service organization will be created to provide a premium level of support
for the private network customer. The Company expects that the operations of
the private network customer and the DIGEX support team will be integrated to
enhance customer support.
The Company began offering private network solutions in 1996 and recently
entered into multi-year private network agreements with LCI, WinStar, Orion
and World Reservation Systems, Inc. Through its private network agreement with
the Company, Orion will resell the Company's connectivity services to its
customers in Europe. The Private Network Group seeks to enter into multi-year
agreements having either take-or-pay commitments or bulk discounts based on
the aggregate amount of Internet solutions purchased. The Company's private
network agreement with LCI provides for a large-scale, multi-year commitment
by LCI to purchase Internet products and services from DIGEX. Similarly, under
WinStar's private network agreement with the Company, WinStar will purchase
during the next six years a minimum of $5.0 million of Internet connectivity
solutions with the right to purchase additional amounts, in each case on a
discounted basis. DIGEX's agreement with Orion provides for bulk discounts
over a 36-month period based on the aggregate amount of Internet services
purchased, while World Reservation Systems, Inc.'s private network agreement
with the Company includes a $1.3 million take-or-pay commitment to purchase
telecommute connectivity solutions.
Telecommute Products Group
The Telecommute Products Group began offering its solutions in 1990 and
offers a variety of high-end, dial-up options to business professionals,
telecommuters and small businesses. The group's products range from lower-
cost, limited-access capability products to premium-priced, high-speed, low-
latency products. This group focuses on two distinct customer groups: (i)
professionals who require reliable at-home Internet connectivity and whose
usage is frequently paid for as part of an integrated, total-solution
connectivity package procured on a large scale by their employers and (ii)
small businesses that are likely to broaden and upgrade their solutions,
eventually becoming Business Connectivity Group and Internet Server Products
Group customers. The Company is currently engaged in discussions with
Microsoft to include DIGEX in Microsoft's Solution Provider Program, which
would result in the Company's being designated a preferred vendor for
Microsoft's corporate customers. There can be no assurance, however, that
these discussions will culminate in an agreement with Microsoft. The Company
believes that the Telecommute Products Group complements the Business
Connectivity Group by providing high-end solutions to professionals employed
by Business Connectivity customers.
CUSTOMERS
The Company's leased line and server customers have expanded to
approximately 1050 accounts at August 31, 1996. In 1995, no customer accounted
for more than five percent of the Company's total revenues. In addition to its
leased line and server customers, the Company had approximately 5,000 dial-up
customers at August 31, 1996. The following are lists of selected DIGEX
customers:
32
<PAGE>
BUSINESS CONNECTIVITY INTERNET SERVERS
ALCOA AMTRAK
COMSAT Corporation ASPLUNDH
Credit Suisse Campmor, Inc.
Disclosure, Inc. CIGNA Corp.
Freeloader, Inc. Emmy Awards
ITT Avionics Federal Reserve Bank of Richmond
Litton Systems, Incorporated Grand Heritage Hotel Company
Lucent Technologies Inc. Maryland Dept. of Agriculture
Merrill Lynch & Co., Inc. Graduate School
National Basketball Association National Association of Investors
Oracle Corporation Orbit Questal Inc. Philadelphia
Piper & Marbury, LLP Federal Credit Union
PointCast, Inc. PointCast, Inc.
SAIC TeeVee Toons, Inc.
Southwestern Bell Corp. 20/20 Software, Inc.
TRW The World Bank
University of Maryland
U.S. Dept. of Commerce/NOAA
Westinghouse Electric Corp.
Wheat First Butcher Singer, Inc.
The World Bank
SALES AND MARKETING
As of September 24, 1996, the Company employed 135 people in sales and
marketing. To date, the Company has sold its Internet solutions primarily
through its direct telephone sales force. Call activity is generated both by
"cold calling" and in response to customer referrals, E-mail correspondence
through the Company's Web site and a variety of promotional programs,
including advertising in general business and specialty periodicals,
participation in industry trade shows and press relations. In addition, the
Company engages in local promotional programs to support newly opened service
locations. In order to better serve the needs of its customers, the Company
has developed a specialized marketing approach for each business unit.
The sales force for the Company's Business Connectivity Group continues to
grow to meet the demands of customers along DIGEX's growing nationwide
network. The Company plans to add sales representatives who will focus on the
cities where the Company is opening new POPs along the network and to support
them with marketing programs to generate quality sales leads. In addition, the
Company purchases prequalified sales leads, solicits customers through direct
mail advertising, conducts sales seminars, advertises in national trade
publications and to participate in industry trade shows. The Company believes
that active marketing and lead generation efforts will allow the sales force
to become even more productive and efficient.
In addition to using the Business Connectivity Group's sales force for
marketing its products and services, the Internet Server Products Group has
created an Alliance Partner program, which is a national network of agents
selling its products. In connection with the Alliance Partner program, DIGEX
has entered into agent agreements with organizations in select cities
nationwide, such as advertising agencies, graphic design firms and development
companies whose primary business is the creation of Web sites. In addition,
DIGEX has deployed regional account executives to support these organizations
and to develop and maintain relationships with targeted end users.
The Private Networks Group has a dedicated business development team which
targets a number of types of potential customers, including IXCs, LECs, cable
operators, large private network providers, and CAPs. The Company seeks to
enter into long-term, non-exclusive arrangements with these potential
resellers.
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<PAGE>
The Telecommute Products Group sells its services through the Company's
direct sales force, through private network providers and through direct
marketing to the group's target markets. The Company's targeted businesses
include telecommuters who may purchase connectivity through a customer of the
Business Connectivity Group and small or home office users who are likely to
upgrade their services in the future.
COMPETITION
The market for all types of Internet connectivity services is extremely
competitive. There are no substantial barriers to entry, and the Company
expects that competition will intensify in the future. As a result of an
increase in the number of competitors, and vertical and horizontal integration
in the industry, the Company expects to encounter significant pricing pressure
and other competition in the future. Advances in technology as well as changes
in the marketplace and the regulatory environment are constantly occurring,
and the Company cannot predict the effect that ongoing or future developments
may have on the Internet industry generally or on the Company specifically.
See "Risk Factors--Competition," "--Dependence Upon Product Development; Risks
of Changing Technology and Industry Standards" and "--Potential Liability for
Information Disseminated Over Network; Regulation."
Connectivity
ISPs. Currently, the Company's primary competitors are other ISPs focused on
business customers including UUNET, BBN and PSI. UUNET, BBN and PSI in
particular have significantly greater market presence and financial,
technological and personnel resources than the Company and have extensive
coast-to-coast Internet backbones.
A number of these competitors, however, including UUNET and PSI, have chosen
to pursue individual connectivity customers in an effort to balance the use of
their networks, since business customers tend to use the Internet during
business hours, while individual customers tend to use the Internet after
business hours. As a result, these ISPs have been forced to build out their
networks beyond what would be necessary to serve business customers. 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.
To a lesser extent, the Company competes with other national and regional
ISPs, of which there are currently over 1500. Many of these competitors,
however, including NETCOM, do not share DIGEX's business focus. In addition,
due to the substantial increase in the amount of data traffic carried by the
networks of certain national ISPs, the Company expects the industry's current
practice regarding peering to evolve by the end of 1996 to require an ISP to
possess (i) a coast-to-coast DS-3 backbone, (ii) 45 Mbps connections to three
U.S. peering points and (iii) a 24x7x365 NOC in order to qualify for peering
with the major national ISPs. The Company expects ISPs which do not satisfy
these requirements by the end of 1996 either to be acquired by the large
national ISPs or to be forced to become resellers of Internet connectivity
services, purchasing their network bandwidth at retail rates from national
ISPs.
Telecommunications Companies. The Company currently competes with AT&T, MCI
and Sprint. In addition, a number of regulatory obstacles to the entry of
other telecommunications companies into the Internet connectivity market are
being removed. Accordingly, the Company expects competition to increase with
other major telecommunications companies, including MFS and the RBOCs. In
addition, deregulation of the telecommunications industry has already led to
significant horizontal integration through acquisitions and joint ventures,
and the Company expects these trends to continue.
The telecommunications companies the Company competes with have access to
significantly greater financial, technological and personnel resources than
the Company and large existing commercial customer
34
<PAGE>
bases. In addition, IXCs, including AT&T, MCI and Sprint, possess existing
nationwide telecommunications networks and generally face lower network
infrastructure costs in providing Internet connectivity than the Company.
Although its WorldNet offering targets the consumer market, AT&T is party to
an agreement with BBN pursuant to which it can market BBN's business
connectivity services to AT&T's commercial customer base or, in the
alternative, provide its own Internet connectivity. GTE Corp. ("GTE") and
UUNET have also recently announced a strategic alliance whereby GTE's
customers may obtain access to the Internet through UUNET's network. While
these telecommunications companies have little experience with TCP/IP
networking in general, and Internet connectivity in particular, they now may
employ their larger sales organizations to sell Internet connectivity to their
existing telephony customers, both commercial and consumer. However, the
Company believes that its sales and marketing personnel, which have
backgrounds in data-oriented services, particularly TCP/IP will be able to
sell Internet connectivity more effectively than the sales forces of most
telecommunications companies, which possess backgrounds largely in voice-
oriented services.
Most LECs, such as the RBOCs, and CAPs, on the other hand, do not currently
possess nationwide networks. In order to address the Internet connectivity
requirements of their current business customer bases, these companies must
either buy connectivity to an Internet network infrastructure or build such a
network. For example, MFS has acquired UUNET and can now offer expanded
Internet connectivity along with its traditional telecommunications services,
and World Com, Inc. has recently announced its agreement to acquire MFS. The
Company seeks to capitalize on the market opportunity created by
telecommunications companies that have chosen to buy, not build, Internet
connectivity for resale through its Private Networks Group, which sells
DIGEX's Internet connectivity services to telecommunications companies to be
remarketed under their own brands.
Cable Television and Direct Broadcast Satellite. Certain companies are
exploring the possibility of providing high-speed data services using
alternative delivery methods. For example, @Home, a joint venture between
Tele-Communications, Inc. and Kleiner Perkins Caufield & Byers, has stated its
intent to provide high-speed data services over cable television plant, and
HNS has lauched DirecPC, which will deliver high-speed data through direct
broadcast satellite technology. CAI Wireless Systems, Inc., a wireless cable
television service, also has announced that it has begun testing the first
Internet connectivity product delivered by wireless cable. However, since they
do not currently possess nationwide networks, these companies, in order to
provide Internet access, must either buy access to an Internet network
infrastructure or build such a network.
On-Line Service Providers. The Company also competes, to a lesser extent,
with certain on-line service providers who offer Internet connectivity in
conjunction with their primary products or services. For example, Microsoft
provides connectivity to the Internet through the Microsoft Network, which was
built by UUNET (in which Microsoft holds a significant minority stake), as a
standard integrated feature of its Windows 95 operating system, and IBM's OS/2
WARP operating system is preconfigured to provide Internet connectivity
through the Advantis network, which is controlled by IBM. Microsoft has also
recently announced strategic marketing alliances for Internet access with MCI,
AT&T and NETCOM. In addition, AOL, CompuServe and Prodigy currently provide
connectivity to the Internet, and many have announced plans to offer expanded
Internet connectivity capabilities. Currently, on-line service providers are
primarily focused on the consumer marketplace.
Web Server Hosting
The market for Web server hosting is highly fragmented and extremely
competitive. There are no substantial barriers to entry and the Company
expects the competition will intensify in the future. Currently, the Company's
primary competitors are other ISPs, including BBN, UUNET and PSI, and
companies whose primary business is developing and operating "Server Farms"
such as Internet Direct. In addition, many organizations currently host Web
servers at their own facilities. The Company believes, however, that as
bandwidth requirements increase, it will become more economical for these
organizations to outsource their needs. The Company believes that it
significantly differentiates itself from its competitors by offering flat-rate
billing, dedicated servers, 24x7x365 monitoring, upgradability and other
value-added services demanded by high-end business customers.
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<PAGE>
PROPERTIES
The Company's administrative offices, as well as its NOC and Server Farm,
are located in Beltsville, Maryland, where the Company currently leases
approximately 73,000 square feet under leases that expire in 1998 and 2000.
The Company believes that this facility will meet its needs through at least
the remainder of 1996. The Company intends to lease space on the west coast of
the United States to house its second Server Farm, which the Company expects
to construct in 1997. The Company also leases space (typically less than 200
square feet) in various geographic locations to house the telecommunications
equipment for each of its POPs. See "Network Infrastructure" for a description
of the components of the Company's nationwide network, the Company's NOC and
the current Server Farm.
EMPLOYEES
As of September 24, 1996, the Company employed 263 persons full-time,
including 135 in sales and marketing, 86 in network operations (including
eight in technical support) and 42 in general and administrative functions.
None of the Company's employees is represented by a labor union, and the
Company considers its employee relations to be good.
LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
36
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers, directors and other key employees, and
their ages as of June 1, 1996, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Christopher R. McCleary(1) 43 Chairman of the Board, President,
Chief Executive Officer
Clyde A. Heintzelman 57 Senior Vice President, Chief Operating
Officer, General Manager--Business
Connectivity Group
Thomas M. Brandt, Jr. 44 Senior Vice President, Chief Financial
Officer, Secretary
Earl P. Galleher 36 Vice President, General Manager--
Internet Server Products Group
Nicholas J. Magliato 30 Vice President, General Manager--
Private Networks Group
Brian M. Deobald 34 Vice President, General Manager--
Telecommute Products Group
William A. Pendley 32 Vice President, Assistant General
Manager--Business Connectivity Group
John C. Welling 31 Vice President, Controller
Douglas E. Humphrey 36 Senior Vice President, Chief
Technology Officer, Director
Sheryl R. Richeson 40 Vice President, Customer Service--
Business Connectivity Group
Edward J. Kern 27 Vice President, Network--Business
Connectivity Group
William F. Webb, Jr. 30 Vice President, Internet Server
Technical Operations
Michael T. Doughney 37 Vice President, Director
Frank A. Adams(1)(2) 50 Director
Thomas H. Cato(3) 53 Director
William F. Earthman III(1)(2) 44 Director
Ray A. Rothrock(1)(3) 41 Director
Robert M. Stewart(2) 41 Director
John H. Wyant(3) 50 Director
</TABLE>
- --------
(1) Member of the Executive Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
37
<PAGE>
Christopher R. McCleary joined DIGEX as President and Chief Executive
Officer in February 1996. Mr. McCleary has served as a director since joining
the Company and was elected Chairman of the Board of Directors in June 1996,
succeeding Frank A. Adams, who remains a director. Mr. McCleary was one of the
founding management team members at American Mobile Satellite Corporation
("AMSC"), where he served as a Vice President and General Manager, Satellite
Telephone Service from 1990 until joining DIGEX in 1996. Prior to joining
AMSC, Mr. McCleary was founder and President of the Satellite Network Antenna
Division of Radiation Systems, Inc. Mr. McCleary received his Bachelor's
degree from the University of Kentucky.
Clyde A. Heintzelman has served as Senior Vice President and Chief Operating
Officer since May 1995. From 1992 to 1994, Mr. Heintzelman was Vice President
of Sales and Marketing for Connective Strategies, Inc. ("CSI"), an ISDN
startup company. Mr. Heintzelman spent 28 years with Bell Atlantic prior to
joining CSI, serving as General Manager of Marketing and Sales for Bell
Atlantic Directory Services from 1990 until 1992 and as Vice President of
Sales and Marketing for the Business Market at C&P Telephone from 1985 to
1990. Mr. Heintzelman was President and CEO of Bell Atlanticom from 1983 to
1985 and, prior to that, was the general manager who established Bell
Atlantic's Federal Systems Division. Mr. Heintzelman received his Bachelor's
degree from the University of Delaware and has also done graduate work at the
Wharton School, the University of Pittsburgh and the University of Michigan.
Thomas M. Brandt, Jr. joined DIGEX as Senior Vice President and Chief
Financial Officer in June 1996. Mr. Brandt was named Secretary in late June
1996. Mr. Brandt was a director at Price Waterhouse LLP from 1993 until he
joined DIGEX. From 1987 through 1992, Mr. Brandt served as Vice President and
Chief Financial Officer for U.S. Metalsource Corporation, a metals
distribution business. Mr. Brandt received his M.B.A. degree from the Wharton
School of the University of Pennsylvania and his Bachelor's degree from Duke
University.
Earl P. Galleher joined DIGEX as Vice President and General Manager--
Internet Server Products in March 1996. Prior to joining DIGEX, Mr. Galleher
was Director of Marketing at AMSC, which he joined in November 1991. Mr.
Galleher led the development of AMSC's product positioning, branding strategy
and subscriber acquisition investment plan. Prior to AMSC, Mr. Galleher was
Manager of Market Development at Southwestern Bell Mobile Systems Washington-
Baltimore system, which he joined in April 1990. Mr. Galleher received his
Bachelor of Arts degree from Denison University.
Nicholas J. Magliato joined DIGEX as Vice President and General Manager--
Private Networks in March 1996. Prior to joining DIGEX, Mr. Magliato was the
Director of Land Mobile Sales and Distribution at AMSC, which he joined in
April 1993. His responsibilities at AMSC included creating product plans for
wireless voice and data services and developing and implementing a nationwide
sales and distribution strategy. Prior to AMSC, Mr. Magliato was a
telecommunications consulting manager at Andersen Consulting LLP, which he
joined in August 1987. Mr. Magliato received a Bachelor's degree,
concentrating in Computer and Information Services, from Syracuse University.
Brian M. Deobald joined DIGEX as Vice President and General Manager--
Telecommute Products in March 1996. Prior to joining DIGEX, Mr. Deobald was
the Director of Product Management at AMSC, which he joined in November 1991.
At AMSC, Mr. Deobald created the company's business plan and developed and
introduced services, subscriber hardware, and pricing. Mr. Deobald joined AMSC
from AT&T International Communications Services where he managed strategic and
business planning since July 1989. Mr. Deobald received an M.B.A. from the
Wharton School and holds a Master's degree from Johns Hopkins University and a
Bachelor's degree from Georgetown University.
William A. Pendley joined DIGEX in December 1994 as Chief Financial Officer
and currently serves as Vice President and Assistant General Manager--Business
Connectivity. In 1995, Mr. Pendley was responsible for developing DIGEX's
financial business plan and securing the first-level financing with venture
capital investors. Prior to joining DIGEX, Mr. Pendley was Chief Financial
Officer for Intrafed, Inc., a software developer and system integrator, from
1994 and prior to that, served in a financial management position for IBM
Federal Systems from 1989. Mr. Pendley holds an M.B.A. in finance from New
York University and a Bachelor's degree from Georgetown University.
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John C. Welling joined DIGEX as a Vice President and Controller in April
1996. Prior to joining DIGEX, Mr. Welling was a senior manager at KPMG Peat
Marwick LLP, focusing on publicly-held companies, from 1987 until 1996. Mr.
Welling received a Bachelor's degree, with a concentration in accounting, from
Loyola College in Baltimore, Maryland.
Douglas E. Humphrey is the Senior Vice President, Chief Technology Officer
and co-founder of DIGEX. Mr. Humphrey has also served as a director of the
Company since 1990 and served as the Chief Executive Officer from the
Company's inception until Mr. McCleary joined DIGEX in February 1996. Mr.
Humphrey was a senior TCP/IP networking and computer security specialist for
Tandem Computers, Inc. from September 1987 to March 1993. From 1983 to 1987,
Mr. Humphrey was President and CEO of Computer Time Share Corporation.
Mr. Humphrey attended the University of Maryland at College Park.
Sheryl R. Richeson is Vice President, Customer Service--Business
Connectivity. Ms. Richeson joined DIGEX as Director of Customer Service in
October 1995. Ms. Richeson is an experienced telecommunications executive with
more than 14 years of management experience with Bell Atlantic, which she
joined in 1981. Ms. Richeson served as Director of Large Business Services and
as regional manager for Field Sales Support for Bell Atlantic. Ms. Richeson
holds a Master's degree from Johns Hopkins University and a Bachelor of
Science degree from the University of Colorado.
Edward J. Kern joined DIGEX in 1992 as Manager of Systems and was promoted
to Vice President, Network--Business Connectivity in May 1996. Prior to
joining DIGEX, Mr. Kern spent seven years building and managing TCP/IP
networks as a consultant for various companies. Mr. Kern is an active member
of the Internet Engineering Task Force.
William F. Webb, Jr. joined DIGEX as Vice President, Internet Server
Technical Operations in May 1996. Prior to joining DIGEX, Mr. Webb was a
manager at Andersen Consulting LLP beginning in June 1990. At Andersen
Consulting, Mr. Webb worked in the Telecommunications Industry Market Unit,
focusing on service activation systems for major telecommunications clients.
Mr. Webb holds an M.B.A. degree from Virginia Polytechnic Institute and State
University and a Bachelor of Science degree in Computer Science and
Mathematics from Eastern Nazarene College.
Michael T. Doughney is a Vice President and co-founder of DIGEX and has
served as a director of the Company since 1990. Mr. Doughney majored in
computer science and electrical engineering at the University of Maryland.
Frank A. Adams has been a director of the Company since April 1995. Mr.
Adams served as Chairman of the Board from April 1995 until June 1996, when
Mr. McCleary was elected Chairman. Mr. Adams is currently President and CEO of
Grotech Capital Group which he co-founded in 1984. Mr. Adams has held
positions with public companies, including PHH Corporation, RLC/Matlack and
Westinghouse. Mr. Adams is also a director of several private companies. Mr.
Adams received his Bachelor's and Juris Doctor degrees from the University of
Baltimore and has completed advanced management programs at Stanford
University and Harvard University.
Thomas H. Cato joined DIGEX in July 1996 as a director. Mr. Cato is a
business consultant in information systems and health care. From 1985 until
founding his consulting business in June 1995, Mr. Cato was president of HCA
Information Services, a wholly-owned subsidiary of Hospital Corporation of
America. Mr. Cato was a co-founder of ENDATA, a public information services
company. Mr. Cato, a retired colonel from the United States Army Reserves,
received his B.B.A. from Tulane University.
William F. Earthman III has been a director of the Company since April 1995.
Mr. Earthman is a general partner of Southern Venture Fund II, L.P. and a
Partner of Massey Burch Capital Corporation. Before joining Massey Burch
Capital Corporation as Vice President in 1989, he served at the firms of J.C.
Bradford & Co., Prudential-Bache Securities and, most recently, First
Nashville Corporation. Mr. Earthman is also a director of Ensys Environmental
Products Inc. Mr. Earthman received his Bachelor's degree from the University
of Virginia.
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<PAGE>
Ray A. Rothrock has been a director of the Company since April 1995. Mr.
Rothrock is a general partner of Venrock Associates and Venrock Associates II,
L.P. and has been with the firm since 1988. Mr. Rothrock was with Sun
Microsystems Inc. for four years prior to joining Venrock. Mr. Rothrock
received his M.B.A. degree from Harvard Business School, an MS in Nuclear
Engineering from Massachusetts Institute of Technology, and a Bachelor of
Science in Nuclear Engineering from Texas A&M University. He serves as a
director of Spyglass, Inc. and Check Point Software Technologies, Ltd. of Tel
Aviv, Israel and several private companies.
Robert M. Stewart has been a director of the Company since December 1995.
Mr. Stewart has been a Managing Director of the Anchor Financial Group LLC
since November 1995, a private investment banking firm in Washington, D.C.
Prior to joining Anchor Financial Group, Mr. Stewart was a Principal with
Armata Partners L.P. from April 1993 and, prior to that, a Vice President of
Legg Mason Wood Walker, Inc., which he joined in February 1989. Mr. Stewart
holds an M.B.A. from the Babcock Graduate School of Management of Wake Forest
University and a B.A. from Hampden-Sydney College.
John H. Wyant began serving as a director of the Company in June 1996. Mr.
Wyant is the president of Blue Chip Venture Company, which he founded in 1990.
Mr. Wyant is also a director of Zaring Homes Inc. and several private
companies. Mr. Wyant received his B.A. degree from Denison University and his
J.D. degree from Chase College of Law.
Each officer serves at the discretion of the Board of Directors. There are
no family relationships among any of the directors and executive officers of
the Company.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has established an Executive Committee, an Audit
Committee and a Compensation Committee.
The Executive Committee consists of Mr. Adams (Chairman), Mr. Earthman, Mr.
McCleary and Mr. Rothrock. The Executive Committee reviews, evaluates and
makes decisions and recommendations with respect to specific matters delegated
to the Executive Committee by the Board of Directors.
The Audit Committee consists of Mr. Rothrock (Chairman), Mr. Wyant and Mr.
Cato. 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 the Company's independent
auditors, and reviews and evaluates the Company's audit and control functions.
The Compensation Committee consists of Mr. Earthman (Chairman), Mr. Adams
and Mr. Stewart. The Compensation Committee administers the Company's Stock
Option Plans and makes decisions concerning salaries and incentive
compensation for employees and consultants of the Company.
DIRECTORS' COMPENSATION
Non-employee directors are reimbursed for reasonable expenses incurred by
them in attending Board meetings. Pursuant to the terms of the Securities
Purchase Agreement by and among the Company, Mr. Humphrey, Mr. Doughney,
Grotech Capital Partners IV, L.P. ("Grotech IV"), Venrock Associates
("Venrock"), and Southern Venture Fund II, L.P. ("Southern"), dated as of
March 24, 1995 (the "Securities Purchase Agreement"), the Company pays to each
of Grotech IV, Venrock and Southern an annual director's fee of $10,000 for
the respective directors designated by such entities. Under that certain
Purchase and Exchange Agreement (as defined), the Company also pays Blue Chip
an annual director's fee of $10,000 for the director designated by such
entity. Upon consummation of the Offering, the non-employee directors shall
cease to be entitled to receive such fees but shall continue to receive
reimbursement for reasonable expenses incurred in their capacity as directors.
In addition, non-employee directors are eligible for the grant of stock
options under the Company's Equity Plan. Each director who is not an employee
of the Company has been granted options to
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purchase 8,000 shares of Common Stock. In addition, each non-employee director
will be granted options to purchase 8,000 shares of Common Stock at each
annual meeting at which such director is re-elected as a director. See "--
Incentive Stock Option Plans--Equity Plan."
BOARD COMPOSITION
In connection with the reincorporation of the Company as a Delaware
corporation, the Company will amend and restate its Certificate of
Incorporation and Bylaws. The Certificate of Incorporation and Bylaws of the
Company will provide that the directors of the Company are divided into three
classes. A class of directors will be elected by plurality vote, with no
cumulative voting, at each annual meeting of stockholders. Messrs. Adams,
Humphrey and McCleary will be designated Class I directors and will serve
until the meeting of stockholders in 1997. Messrs. Doughney, Stewart and Wyant
have been designated Class II directors and will serve until the meeting of
stockholders in 1998. Messrs. Cato, Earthman and Rothrock will be designated
Class III directors and will serve until the meeting of stockholders in 1999.
Thereafter, each class of directors will have a term of three years, with a
term of one class expiring each year.
Under the Securities Purchase, Conversion and Exchange Agreement (the
"Purchase and Exchange Agreement"), dated as of May 30, 1996, by and among the
Company, Grotech IV, Grotech Partners III, L.P. ("Grotech Partners"), Grotech
III Companion Fund, L.P. ("Grotech Companion"), Grotech III Pennsylvania Fund,
L.P. ("Grotech Pennsylvania"), Venrock, Venrock Associates II, L.P. ("Venrock
II"), Southern, Blue Chip, Crisler Capital Company, Limited Partnership
("Crisler," and together with Grotech IV, Grotech Partners, Grotech Companion,
Grotech Pennsylvania, Venrock, Venrock II, Southern, and Blue Chip, the "1996
Venture Investors"), Mr. Humphrey and Mr. Doughney, the 1996 Venture Investors
and Messrs. Humphrey and Doughney have agreed to vote their shares of voting
stock of the Company for the election of: (i) four directors designated by
Messrs. Humphrey and Doughney (Mr. Humphrey, Mr. Doughney, Mr. Stewart and Mr.
McCleary), (ii) one director designated by Grotech IV (Mr. Adams), (iii) one
director designated by Venrock (Mr. Rothrock), (iv) one director designated by
Southern (Mr. Earthman), (v) one director designated by Blue Chip (Mr. Wyant)
and (vi) one director to be jointly designated by the 1996 Venture Investors
and Mr. Humphrey (Mr. Cato). This agreement superseded provisions of the
Securities Purchase Agreement concerning the election of directors. The
provisions of the Purchase and Exchange Agreement concerning election of
directors terminate effective immediately prior to consummation of the
Offering. Accordingly, no stockholder shall be obligated to vote in favor of
election of any person nominated for election of the Board of Directors by any
other stockholder following consummation of the Offering.
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EXECUTIVE COMPENSATION
The following table summarizes all compensation earned by Douglas E.
Humphrey (the "Named Executive Officer"), who served as the Company's Chief
Executive Officer during the fiscal year ended December 31, 1995. No other
executive officers of the Company earned in excess of $100,000 of salary and
bonus during the fiscal year ended December 31, 1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND ALL OTHER
PRINCIPAL FISCAL SALARY BONUS COMPENSATION
POSITION YEAR ($) ($) ($)(2)
- --------- ------ ---------- --------- ------------
<S> <C> <C> <C> <C>
Douglas E. Humphrey(1)................ 1995 $ 100,000 $ 20,000 $6,600
Chief Executive Officer
</TABLE>
- --------
(1) Mr. Humphrey was Chief Executive Officer of the Company until February
1996, when Mr. McCleary succeeded him. Mr. Humphrey is currently a Senior
Vice President and Chief Technology Officer of the Company.
(2) This amount represents a car allowance.
OPTION GRANTS IN 1995
No options were granted for the fiscal year ended December 31, 1995 to the
Named Executive Officer and no stock appreciation rights have been granted to
date. In addition, the Named Executive Officer currently holds no options for
the Common Stock and did not exercise any options during the fiscal year ended
December 31, 1995.
INCENTIVE STOCK OPTION PLANS
1995 STOCK OPTION PLAN
The Board of Directors has adopted an Incentive Stock Option Plan (the "1995
Stock Option Plan"). Under the 1995 Stock Option Plan, employees are entitled
to purchase Common Stock of the Company by cash payment or by delivery of
existing shares of Common Stock held by such employee. The purpose of the 1995
Stock Option Plan and of granting options to specified employees of the
Company pursuant thereto is to further the growth, development and financial
success of the Company by providing additional incentives to such persons by
assisting them to acquire shares of Common Stock of the Company and to benefit
directly from the Company's growth, development and financial success. Options
granted under the 1995 Stock Option Plan vest in accordance with one of the
following schedules or in accordance with an alternative schedule approved by
the Board of Directors: (i) 25% of the aggregate amount of options granted to
a particular employee upon the first anniversary of the date of hire of such
employee and the remaining 75% of the aggregate amount of options on a
quarterly basis, evenly spread out over the three-year period following the
first anniversary of the date of hire or (ii) 33% of the aggregate amount of
options granted to a particular employee upon the first anniversary of the
date of hire of such employee and the remaining 67% of the aggregate amount of
options on a quarterly basis, evenly spread out over the two-year period
following the first anniversary of the date of hire. Options granted under the
1995 Stock Option Plan expire on the tenth anniversary of the date of grant.
The Company has reserved 1,099,054 shares of Common Stock for issuance under
the 1995 Stock Option Plan, none of which have been issued to date. As of July
19, 1996, options for the purchase of 1,099,054 shares of Common Stock are
outstanding under the 1995 Stock Option Plan. The exercise price for all of
such outstanding options is $0.25 per share. No new options will be granted
under the 1995 Stock Option Plan.
EQUITY PLAN
The Company adopted the DIGEX, Incorporated 1996 Equity Participation Plan
(the "Equity Plan") effective as of May 31, 1996. The principal purposes of
the Equity Plan are to provide incentives for officers,
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employees and consultants of the Company through granting of options,
restricted stock and other awards ("Awards"), thereby stimulating their
personal and active interest in the Company's development and financial
success, and inducing them to remain in the Company's employ. In addition to
Awards made to officers, employees or consultants, the Equity Plan provides
for the granting of options ("Director Options") to the Company's independent
non-employee directors pursuant to a formula, as described in further detail
below.
Under the Equity Plan, not more than 1,401,426 shares of Common Stock (or
the equivalent in other equity securities) are authorized for issuance upon
exercise of options, stock appreciation rights ("SARs") and other Awards, or
upon vesting of restricted or deferred stock Awards; provided however, that
Awards with respect to additional shares may be granted to the extent that
options expire or are otherwise terminated unexercised under the 1995 Stock
Option Plan. In the aggregate, no more than 2,500,480 shares may be
outstanding under the 1995 Stock Option Plan and the Equity Plan. As of the
date hereof, 1,136,246 nonqualified stock options to purchase Common Stock
have been granted to employees under the Equity Plan and 1,136,246 are
outstanding and Director Options to purchase 48,000 shares of Common Stock
have been granted to non-employee directors under the Equity Plan. No other
Awards have been made under the Equity Plan. The exercise price for all such
outstanding options ranges from $3.73 to $10.00 per share.
The shares available under the Equity Plan upon exercise of stock options,
SARs and other Awards, and for issuance as restricted or deferred stock
Awards, may be either previously unissued shares or treasury shares, and may
be equity securities of the Company other than Common Stock. The Compensation
Committee or a subcommittee thereof (the "Compensation Committee") (the Board
with respect to Director Options) has the discretion to make appropriate
adjustments in the number and kind of securities subject to the Equity Plan
and to outstanding Awards thereunder to reflect dividends or other
distributions; a recapitalization, reclassification, stock split, reverse
stock split, or reorganization, merger or consolidation of the Company; the
split-up, spin-off, combination, liquidation or dissolution of the Company; or
disposition of all or substantially all of the assets of the Company or
exchange of Common Stock or other securities of the Company; or other similar
corporate transaction or event.
If any portion of a stock option, SAR or other Award terminates or lapses
unexercised, or is cancelled upon grant of a new option, SAR or other Award
(which may be at a higher or lower exercise price than the option, SAR or
other Award so cancelled), the shares which were subject to the unexercised
portion of such option, SAR or other Award, will continue to be available for
issuance under the Equity Plan.
The principal features of the Equity Plan are summarized below, but the
summary is qualified in its entirety by reference to the Equity Plan itself.
Administration
Prior to the Offering, the Board of Directors of the Company will administer
the Equity Plan; following the closing of the Offering, the Compensation
Committee will administer the Equity Plan with respect to awards and the full
Board will administer the Equity Plan with respect to Director Options. The
Compensation Committee will consist of at least two members of the Board,
neither of whom is an employee of the Company and if the Board so determines,
each of whom will be a "non-employee director" for purposes of Rule 16b-3
under the Securities Exchange Act of 1934, as amended ("Rule 16b-3"). Subject
to the terms and conditions of the Equity Plan, the Compensation Committee has
the authority to select the persons to whom Awards are to be made, to
determine the number of shares to be subject thereto and the terms and
conditions thereof, and to make all other determinations and to take all other
actions necessary or advisable for the administration of the Equity Plan.
Similarly, the Board has discretion to determine the terms and conditions of
grants of Director Options and to interpret and administer the Equity Plan
with respect to Director Options, consistent with the specific formula terms
described in more detail below. The Compensation Committee (and the Board) are
also authorized to adopt, amend and rescind rules relating to the
administration of the Equity Plan.
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Amendment and Termination
Amendments of the Equity Plan to increase the number of shares as to which
Awards may be made (except for adjustments resulting from stock splits and the
like, and mergers, consolidations and other corporate transactions) require
the approval of the Company's stockholders. In all other respects the Equity
Plan can be amended, modified, suspended or terminated by the Compensation
Committee or the Board, unless such action would otherwise require stockholder
approval as a matter of applicable law, regulation or rule. Amendments of the
Equity Plan will not, without the consent of the participant, affect such
person's rights under an Award previously awarded, unless the Award Agreement
governing such Award itself otherwise expressly so provides. Unless sooner
terminated by the Board or the Compensation Committee, the Equity Plan will
expire on May 31, 2006. Such termination will not affect the validity of any
Award outstanding under the Equity Plan on the date of termination.
Eligibility
Options, SARs, restricted stock and other Awards under the Equity Plan may
be granted to individuals who are then officers or other employees of the
Company or any of its present or future subsidiaries. Such Awards also may be
granted to consultants of the Company selected by the Compensation Committee
for participation in the Equity Plan. Approximately 263 employees are eligible
to be granted Awards under the Equity Plan. More than one option, SAR,
restricted stock Award or other Award may be granted to an employee or
consultant, but the aggregate fair market value (determined at the time of
grant) of shares with respect to which an Incentive Stock Option is first
exercisable by an optionee (i.e. "vests") during any calendar year cannot
exceed $100,000. Non-employee directors may only be granted Director Options.
Payment for Shares
The exercise or purchase price for all options, Director Options, SARs,
restricted stock and other Awards that provide a right to acquire Common
Stock, together with any applicable tax required to be withheld, must be paid
in full in cash at the time of exercise or purchase or may, with the approval
of the Compensation Committee (or Board for Director Options) be paid in whole
or in part in Common Stock valued at their fair market value on the date of
exercise (which may, except with respect to incentive stock options, include
an assignment of the right to receive the cash proceeds from the sale of
Common Stock subject to an option or other right pursuant to a "cashless
exercise" procedure) or by delivery of other property, or by a recourse
promissory note payable to the Company, or by a combination of the foregoing.
Awards under the Equity Plan
The Equity Plan provides that the Compensation Committee may grant or issue
stock options, SARs, restricted stock, deferred stock, dividend equivalents,
performance awards, stock payments and other stock related benefits, or any
combination thereof. Each Award will be set forth in a separate agreement with
the person receiving the Award and will indicate the type, terms and
conditions of the Award.
Nonqualified Stock Options ("NQSOs") will provide for the right to purchase
Common Stock at a specified price which, except with respect to NQSOs intended
to qualify as performance-based compensation under Section 162(m) of the
Internal Revenue Code of 1986, as amended (the "Code"), may be less than fair
market value on the date of grant (but not less than par value), and usually
will become exercisable (in the discretion of the Compensation Committee) in
one or more installments after the grant date, subject to the participant's
continued employment with the Company and/or subject to the satisfaction of
individual or Company performance targets established by the Compensation
Committee. NQSOs may be granted for any term specified by the Compensation
Committee.
Incentive Stock Options ("ISOs") will be designed to comply with the
provisions of the Code, and will be subject to certain restrictions contained
in the Code. Among such restrictions, ISOs must have an exercise price not
less than the fair market value of a share of Common Stock on the date of
grant, may only be granted to
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employees, must expire within a specified period of time following the
Optionee's termination of employment, and must be exercised within the ten
years after the date of grant; but may be subsequently modified to disqualify
them from treatment as ISOs. In the case of an ISO granted to an individual
who owns (or is deemed to own) at least 10% of the total combined voting power
of all classes of stock of the Company, the Equity Plan provides that the
exercise price must be at least 110% of the fair market value of a share of
Common Stock on the date of grant and the ISO must expire upon the fifth
anniversary of the date of its grant.
Restricted Stock may be sold to participants at various prices (but not
below par value) and made subject to such restrictions as may be determined by
the Compensation Committee. Restricted stock, typically, may be repurchased by
the Company at the original purchase price if the conditions or restrictions
are not met. In general, restricted stock may not be sold, or otherwise
transferred or hypothecated, until restrictions are removed or expire.
Purchasers of restricted stock, unlike recipients of options, will have voting
rights and will receive dividends prior to the time when the restrictions
lapse.
Deferred Stock may be awarded to participants, typically without payment of
consideration, but subject to vesting conditions based on continued employment
or on performance criteria established by the Committee. Like restricted
stock, deferred stock may not be sold, or otherwise transferred or
hypothecated, until vesting conditions are removed or expire. Unlike
restricted stock, deferred stock will not be issued until the deferred stock
award has vested, and recipients of deferred stock generally will have no
voting or dividend rights prior to the time when vesting conditions are
satisfied.
SARs may be granted in connection with stock options or other Awards, or
separately. SARs granted by the Compensation Committee in connection with
stock options or other awards typically will provide for payments to the
holder based upon increases in the price of the Common Stock over the exercise
price of the related option or other Awards, but alternatively may be based
upon criteria such as book value. Except as required by Section 162(m) of the
Code with respect to an SAR intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code, there are no
restrictions specified in the Equity Plan on the exercise of SARs or the
amount of gain realizable therefrom, although restrictions may be imposed by
the Compensation Committee in the SAR agreements. The Compensation Committee
may elect to pay SARs in cash or in Common Stock or in a combination of both.
Dividend Equivalents represent the value of the dividends per share paid by
the Company, calculated with reference to the number of shares covered by the
stock options, SARs or other Awards held by the participant.
Performance Awards may be granted by the Compensation Committee on an
individual or group basis. Generally, these Awards will be based upon specific
performance targets and may be paid in cash or in Common Stock or in a
combination of both. Performance Awards may include "phantom" stock Awards
that provide for payments based upon increases in the price of the Common
Stock over a predetermined period. Performance Awards may also include bonuses
which may be granted by the Compensation Committee on an individual or group
basis and which may be payable in cash or in Common Stock or in a combination
of both.
Stock Payments may be authorized by the Compensation Committee in the form
of shares of Common Stock or an option or other right to purchase Common Stock
as part of a deferred compensation arrangement in lieu of all or any part of
compensation, including bonuses, that would otherwise be payable in cash to
the employee or consultant.
Director Options
Director Options are NQSOs granted to non-employee directors of the Company
pursuant to a formula. Under the formula in the Equity Plan, following the
closing of the Offering, when a director is initially elected to the Board and
is at that time a non-employee director, he or she automatically shall be
granted an NQSO to purchase 8,000 shares of Common Stock. During the term of
the Plan, each then current non-employee director shall automatically be
granted an NQSO to purchase 8,000 shares of Common Stock at each subsequent
annual
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meeting at which he or she is reelected to the Board. Members of the Board who
are employees who subsequently terminate employment with the Company and
remain on the Board will not receive an initial NQSO grant as a non-employee
director, but, to the extent they are otherwise eligible, will receive NQSOs
as described in the preceding sentence after such termination of employment.
The exercise price of the Director Options shall be the fair market value of a
share of Common Stock on the date of grant. Each Director Option shall become
exercisable in cumulative annual installments of one-third on each of the
first, second and third annual meeting of shareholders that are subsequent to
the date of grant and at which directors are elected, subject to the
director's continued service as a director; provided, however, to the extent
permitted by Rule 16b-3, the Board may accelerate the exercisability of
Director Options upon the occurrence of certain specified extraordinary
corporate transactions or events and provided further, that in any event, upon
the occurrence of a "Change in Control" of the Company (as defined in the
Equity Plan) all outstanding Director Options shall become immediately
exercisable. No portion of a Director Option shall be exercisable after the
tenth anniversary of the date of grant and no portion of a Director Option
shall be exercisable upon the expiration of one year following the Director's
termination of services as a director of the Company.
Miscellaneous Provisions
The Compensation Committee (or Board with respect to Director Options) has
discretion under the Equity Plan to provide that options and other rights to
acquire Common Stock will expire at specified times following, or become
exercisable in full upon, the occurrence of certain specified "extraordinary
corporate events;" but in such event the Compensation Committee may also give
optionees and other grantees the right to exercise their outstanding options
or rights in full during some period prior to such event, even though the
options or other Awards have not yet become fully exercisable, and the
Compensation Committee may also provide that all restrictions imposed on some
or all shares of restricted stock and/or deferred stock shall lapse, and some
or all shares of restricted stock may cease to be subject to the Company's
right to repurchase after such event.
The Equity Plan specifies that the Company may make loans to participants to
enable them to exercise options, purchase shares or realize the benefits of
other Awards granted under the Equity Plan. The terms and conditions of such
loans, if any are made, are to be set by the Compensation Committee (or the
Board with respect to Director Options).
The dates on which options or other Awards under the Equity Plan first
become exercisable and on which they expire will be set forth in individual
Award agreements setting forth the terms of the Awards. Such agreements
generally will provide that options and other Awards expire upon termination
of the participant's status as an employee, consultant or director, although
the Compensation Committee may provide that options or other Awards granted to
employees or consultants continue to be exercisable following a termination
without Cause (as defined in the Equity Plan), or following a Change in
Control of the Company (as defined in the Equity Plan), or because of the
grantee's retirement, death, disability or otherwise. Similarly, restricted
stock granted under the Equity Plan which has not vested generally will be
subject to repurchase by the Company in the event of the grantee's termination
of employment or consultancy, although the Compensation Committee may make
exceptions, based on the reason for termination or on other factors.
No option, SAR, Director Option or other Award granted under the Equity Plan
may be assigned or transferred by the grantee, except by will or the laws of
descent and distributions, although the shares underlying such Awards may be
transferred if all applicable restrictions have lapsed. During the lifetime of
the holder of any option or right, the option or right may be exercised only
by the holder.
As a condition to the issuance or delivery of stock or payment of other
compensation pursuant to the exercise or lapse of restrictions of any option
or other Award granted under the Equity Plan, the Company requires
participants to discharge applicable withholding tax obligations. Shares held
by or to be issued to a participant may also be used to discharge tax
withholding obligations related to exercise of options or receipt of other
Awards, subject to the discretion of the Compensation Committee to disapprove
such use. In addition, the Compensation Committee may grant to employees a
cash bonus in the amount of any tax related to awards.
46
<PAGE>
In May and June of 1996, the Company granted NQSOs. The value of options
granted under the Equity Plan depends on the future market value of a share of
Common Stock on the date of exercise and such value is not presently
determinable.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES WITH RESPECT TO THE EQUITY PLAN
The tax consequences of the Equity Plan under current federal law are
summarized in the following discussion which deals with the general tax
principles applicable to the Equity Plan, and is intended for general
information only. Alternative minimum tax and state and local income taxes are
not discussed. Tax laws are complex and subject to change and may vary
depending on individual circumstances and from locality to locality. The tax
information summarized is not tax advice.
Nonqualified Stock Options. For federal income tax purposes, an optionee
generally will not recognize taxable income on the grant of an NQSO under the
Equity Plan, but will recognize ordinary income, and the Company generally
will be entitled to a deduction, upon the exercise of an NQSO. The amount of
income recognized (and the amount generally deductible by the Company)
generally will be equal to the excess, if any, of the fair market value of the
shares at the time of exercise over the aggregate exercise price paid for the
shares, regardless of whether the exercise price is paid in cash or in shares
or other property. An optionee's basis for the stock for purposes of
determining his or her gain or loss upon a subsequent disposition of the
shares generally will be the fair market value of the stock on the date of
exercise of the NQSO, and any subsequent gain or loss will generally be
taxable as capital gains or losses.
Incentive Stock Options. An optionee generally will not recognize taxable
income upon either the grant or exercise of an ISO; however, the amount by
which the fair market value of the shares at the time of exercise exceeds the
exercise price will be an "item of tax preference" for the optionee.
Generally, upon the sale or other taxable disposition of the shares of the
Common Stock acquired upon exercise of an ISO, the optionee will recognize
income taxable as capital gains in an amount equal to the excess, if any, of
the amount realized in such disposition over the option exercise price,
provided that no disposition of the shares has taken place within either (a)
two years from the date of grant of the ISO or (b) one year from the date of
exercise. If the shares of Common Stock are sold or otherwise disposed of
before the end of the one-year and two-year periods specified above, the
difference between the ISO exercise price and the fair market value of the
shares on the date of exercise generally will be taxable as ordinary income;
the balance of the amount realized from such disposition, if any, generally
will be taxed as capital gain. If the shares of Common Stock are disposed of
before the expiration of the one-year and two-year periods and the amount
realized is less than the fair market value of the shares at the date of
exercise, the optionee's ordinary income generally is limited to excess, if
any, of the amount realized in such disposition over the option exercise price
paid. The Company (or other employer corporation) generally will be entitled
to a tax deduction with respect to an ISO only to the extent the optionee has
ordinary income upon sale or other disposition of the shares of Common Stock.
SARs. No taxable income is generally recognized upon the receipt of an SAR,
but upon exercise of the SAR the fair market value of the shares (or cash in
lieu of shares) received generally will be taxable as ordinary income to the
recipient in the year of such exercise. The Company generally will be entitled
to a compensation deduction for the same amount which the recipient recognizes
as ordinary income.
Restricted Stock and Deferred Stock. An employee to whom restricted or
deferred stock is issued generally will not recognize taxable income upon such
issuance and the Company generally will not then be entitled to a deduction,
unless, in the case of restricted stock, an election is made under Section
83(b) of the Code. However, when restrictions on shares of restricted stock
lapse, such that the shares are no longer subject to a substantial risk of
forfeiture, the employee generally will recognize ordinary income and the
Company generally will be entitled to a deduction for an amount equal to the
excess of the fair market value of the shares at the date such restrictions
lapse over the purchase price therefor. Similarly, when deferred stock vests
and is issued to the employee, the employee generally will recognize ordinary
income and the Company generally will be entitled to a deduction for the
amount equal to the fair market value of the shares at the date of issuance.
If an election is
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<PAGE>
made under Section 83(b) with respect to qualifying restricted stock, the
employee generally will recognize ordinary income at the date of issuance
equal to the excess, if any, of the fair market value of the shares at that
date over the purchase price therefor and the Company will be entitled to a
deduction for the same amount. The Code does not permit a Section 83(b)
election to be made with respect to deferred stock.
Dividend Equivalents. A recipient of a dividend equivalent award generally
will not recognize taxable income at the time of grant, and the Company will
not be entitled to a deduction at that time. When a dividend equivalent is
paid, the participant generally will recognize ordinary income, and the
Company will be entitled to a corresponding deduction.
Performance Awards. A participant who has been granted a performance award
generally will not recognize taxable income at the time of grant, and the
Company will not be entitled to a deduction at that time. When an award is
paid, whether in cash or Common Stock, the participant generally will
recognize ordinary income, and the Company will be entitled to a corresponding
deduction.
Stock Payments. A participant who receives a stock payment in lieu of a cash
payment that would otherwise have been made will generally be taxed as if the
cash payment has been received, and the Company generally will be entitled to
a deduction for the same amount.
Deferred Compensation. Participants who defer compensation generally will
recognize no income, gain or loss for federal income tax purposes when NQSOs
are granted in lieu of amounts otherwise payable, and the Company will not be
entitled to a deduction at that time. When and to the extent such NQSOs are
exercised, the rules regarding NQSOs outlined above will generally apply.
EMPLOYMENT CONTRACTS
In May 1995, the Company entered into an employment agreement with Mr.
Heintzelman. Pursuant to the terms of the agreement, Mr. Heintzelman's base
salary is $125,000 per year, plus a bonus, which was $20,000 in 1995. In
addition, Mr. Heintzelman also receives a $12,000 per year auto allowance
pursuant to the agreement. Mr. Heintzelman was granted options to purchase
200,000 shares of Common Stock of the Company at an exercise price of $0.25
per share at the time of entering into the agreement and additional options to
purchase 10,800 shares of Common Stock of the Company at an exercise price of
$0.25 per share in January 1996. Grants were made pursuant to the 1995 Stock
Option Plan and vest as follows: 40,000 options vested 90 days after the date
of the agreement, one-third of the remaining aggregate options vested on the
first anniversary of the date of hire and the remainder will vest ratably on a
quarterly basis during the two years following the first anniversary. In May
1996, options to purchase 149,200 shares of Common Stock of the Company at an
exercise price of $3.73 per share were granted to Mr. Heintzelman pursuant to
the Stock Option Plans. These options vest as follows: one-third of the
options will vest on the first anniversary of the date of grant and the
remaining two-thirds of the options will vest ratably on a quarterly basis
during the two years following the first anniversary of the date of grant.
In February 1996, the Company entered into an employment agreement with Mr.
McCleary. Pursuant to the terms of the agreement, Mr. McCleary's base salary
is $175,000 per year ($25,000 of which is conditioned upon the completion of
the Offering), plus a bonus to be awarded annually as part of the Company's
bonus program for its management. Under the agreement, Mr. McCleary is also
entitled to participate in any Company incentive compensation plans, savings
plans, retirement plans, and other employee benefit plans as well as to
receive an auto and expenses allowance. Mr. McCleary was also granted options
to purchase 241,874 shares of Common Stock of the Company at an exercise price
of $0.25 per share at the time of entering into the agreement. The grant was
made pursuant to the 1995 Stock Option Plan and vests as follows: one-third of
the options vest on the first anniversary of the date of hire and the
remaining two-thirds of the options vest ratably on a quarterly basis during
the two years following the first anniversary. In May 1996, options to
purchase an additional 237,326 shares of Common Stock of the Company at an
exercise price of $3.73 per share were granted to Mr. McCleary pursuant to the
Stock Option Plans. These options vest as follows: one-third of the options
vest
48
<PAGE>
on the first anniversary of the date of grant and the remaining two-thirds of
the options vest ratably on a quarterly basis during the two years following
the first anniversary of the date of grant. The initial term of the agreement
expires on December 31, 1999, but the agreement is subject to automatic
renewal terms of one year each.
In March 1996, the Company entered into employment agreements with Messrs.
Deobald, Galleher, and Magliato. Pursuant to the terms of these agreements,
these officers' base salaries are $120,000 per year, plus a bonus to be
awarded annually as part of the Company's bonus program for management. These
officers are also entitled to participate in any Company incentive
compensation plans, retirement plans, and other employee benefit plans as well
as to receive a $6,600 per year auto allowance. Messrs. Deobald, Galleher, and
Magliato were each granted options to purchase 40,000 shares of Common Stock
of the Company at an exercise price of $0.25 per share at the time of entering
into their respective employment agreements. Grants were made pursuant to the
1995 Stock Option Plan and vest as follows: one-third of the options vest on
the first anniversary of the date of hire and the remaining two-thirds of the
options vest on a quarterly basis during the two years following the first
anniversary. In addition, each was granted options to purchase 16,000 shares
of Common Stock of the Company at an exercise price of $3.73 per share,
effective as of May 31, 1996, and 64,000 shares of Common Stock of the Company
at an exercise price of $10.00 per share, effective as of July 19, 1996.
Grants were made pursuant to the Stock Option Plans and vest as follows: one-
third of the options vest on the first anniversary of the date of grant and
the remaining two-thirds of the options vest on a quarterly basis during the
two years following the first anniversary. The initial terms of the agreements
expire in March 1997, but the agreements are subject to automatic renewal
terms of one year each.
In April 1996, the Company entered into an employment agreement with Mr.
Pendley. Pursuant to the terms of the agreement, Mr. Pendley's base salary is
$89,000 per year, plus a bonus to be awarded annually each December as part of
the Company's bonus program for its management. Under the agreement, Mr.
Pendley is also entitled to participate in any Company incentive compensation
plans, savings plans, retirement plans, and other employee benefit plans as
well as to receive an auto and expenses allowance. Mr. Pendley was also
granted options to purchase 120,000 shares of Common Stock of the Company at
an exercise price of $0.25 per share in September 1995 and options to purchase
an additional 6,400 shares of Common Stock of the Company at an exercise price
of $0.25 per share in January 1996. Grants were made pursuant to the 1995
Stock Option Plan and vest as follows: one-third of the aggregate options
vested on December 15, 1995, the first anniversary of the date of hire, and
the remaining two-thirds of the aggregate options vest ratably on a quarterly
basis during the two years following the first anniversary, a portion of which
have already vested. In May 1996, options to purchase an additional 89,600
shares of Common Stock of the Company at an exercise price of $3.73 per share
were granted to Mr. Pendley pursuant to the Stock Option Plans. These options
vest as follows: one-third of the options will vest on the first anniversary
of the dates of grant and the remaining two-thirds of the options will vest
ratably on a quarterly basis during the two years following the first
anniversary of the date of grant. The initial term of the agreement expires on
March 31, 1997, but the agreement is subject to automatic renewal terms of one
year each.
In June 1996, the Company entered into an employment agreement with Mr.
Brandt. Pursuant to the terms of the agreement, Mr. Brandt's base salary is
$125,000 per year, plus a bonus to be awarded annually each December as part
of the Company's bonus program for its management. Under the agreement, Mr.
Brandt is also entitled to participate in any Company incentive compensation
plans, savings plans, retirement plans, and other employee benefit plans as
well as to receive an auto and expenses allowance. Mr. Brandt was also granted
options to purchase 40,000 shares of Common Stock of the Company, at an
exercise price of $3.73 per share in May 1996, and 40,000 shares of Common
Stock of the Company, at an exercise price of $10.00 per share in June 1996.
Grants were made pursuant to the Stock Option Plans and vest as follows: one-
third of the options vest on the first anniversary of the date of grant and
the remaining two-thirds of the options vest on a quarterly basis during the
two years following the first anniversary. The grant was made pursuant to the
Stock Option Plan and the options vest in accordance with the four-year
schedule contained therein. The initial term of the agreement expires on May
31, 1997, but the agreement is subject to automatic renewal terms of one year
each.
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<PAGE>
CERTAIN TRANSACTIONS
The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 970,744 shares of Common Stock, and Mr.
Doughney contributed certain computer software to the Company in exchange for
647,163 shares of Common Stock.
In July 1994, Robert M. Stewart, a director of the Company, and six other
individuals who are not affiliated with the Company loaned the Company
$300,000 in cash. In consideration for their loan, the Company issued to these
individuals (i) 8% promissory notes (the "Bridge Notes") in aggregate
principal amount of $300,000 and (ii) warrants to purchase 190,883 shares of
the Common Stock (the "Bridge Warrants"). The Bridge Notes, as subsequently
amended in connection with the execution of the Securities Purchase Agreement,
were to mature on the earlier of July 12, 1995 and the date on which certain
payments were made under the Securities Purchase Agreement. Mr. Stewart loaned
the Company $25,000 and was issued Bridge Notes in like amount and Bridge
Warrants representing the right to purchase 15,906 shares of Common Stock at
an exercise price of $1.57 per share in this transaction.
On March 24, 1995, the Company entered into the Securities Purchase
Agreement with the Founders and Grotech IV, Venrock and Southern, pursuant to
which the Company issued a total of 45,454.54 shares of convertible preferred
stock (since redesignated Series A Convertible Preferred Stock), par value
$1.00 per share, together with warrants to purchase 1,120,000 shares of Common
Stock of the Company, for an aggregate cash investment of $4,000,000. The
Bridge Notes were repaid at their face amount with a portion of the proceeds
of this investment. Grotech IV was issued 18,181.82 shares of Series A
Preferred Stock and warrants to purchase 448,000 shares of Common Stock in
consideration of its investment of $1.6 million in cash, Venrock was issued
15,909.09 shares of Series A Preferred Stock (4,925.83 shares of which were
assigned to Venrock II) and warrants to purchase 392,000 shares of Common
Stock (121,348 of which were assigned to Venrock II) in consideration of its
investment of $1.4 million in cash and Southern was issued 11,363.63 shares of
Series A Preferred Stock and warrants to purchase 280,000 shares of Common
Stock in consideration of its investment of $1.0 million in cash.
Representatives of each of Grotech IV, Venrock and Southern were elected to
the Company's Board of Directors pursuant to the Securities Purchase
Agreement.
As a fee for arranging the above investment, the Company made a cash payment
of $200,000 to Armata Partners, L.P., the employer of Mr. Stewart at the time,
and issued warrants to purchase 91,200 shares of Common Stock to Mr. Stewart
and nine other individuals (the "Fee Warrants" and, together with the Bridge
Warrants, the "Initial Warrants"). These individuals (other than Mr. Stewart)
are not affiliated with the Company. Mr. Stewart received Fee Warrants
representing the right to purchase 23,566 shares of Common Stock at an
exercise price of $2.63 per share in this transaction.
Pursuant to a Stockholders Agreement (the "Stockholders Agreement"), dated
March 24, 1995, by and among the Company, Grotech IV, Venrock, Southern, Mr.
Humphrey and Mr. Doughney, the parties thereto agreed to grant rights of first
refusal to the other parties to such agreement in the event of the death,
disability or termination of employment of either Mr. Humphrey or Mr. Doughney
or in the event that either Mr. Humphrey or Mr. Doughney wishes to transfer
any of their shares of Common Stock of the Company. The provisions of the
Stockholders Agreement will terminate effective immediately prior to
consummation of the Offering.
In connection with the issuance of the Initial Warrants, the Company and the
holders of the Initial Warrants also entered into a stockholders agreement
dated March 24, 1995 pursuant to which, among other things, the holders of the
Initial Warrants guaranteed to the Other Holders and the Company a right of
first refusal with respect to the Initial Warrants and the shares of Common
Stock issuable upon exercise of the Initial Warrants. The provisions of such
agreement will terminate effective immediately prior to consummation of the
Offering.
On November 28, 1995, Grotech IV, Venrock, Southern and Venrock Associates
II, L.P. ("Venrock II" and, together with Grotech IV, Venrock and Southern,
the "Investors") loaned to the Company $800,000,
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<PAGE>
$483,307, $500,000 and $216,693 in cash, respectively. In consideration of
these loans, the Company issued 10% promissory notes due June 1, 1996 in the
principal amount of $2,000,000 (the "November 1995 Notes") and warrants to
purchase 299,946 shares of Common Stock to Grotech IV, Venrock, Venrock II and
Southern as follows: Grotech IV purchased promissory notes in the principal
amount of $800,000 and warrants to purchase 119,978 shares of Common Stock;
Venrock purchased promissory notes in the amount of $483,307 and warrants to
purchase 72,483 shares of Common Stock; Venrock II purchased promissory notes
in the principal amount of $216,693 and warrants to purchase 32,498 shares of
Common Stock; and Southern purchased promissory notes in the principal amount
of $500,000 and warrants to purchase 74,987 shares of Common Stock.
On February 23, 1996, the Company issued additional 10% promissory notes due
June 1, 1996 in the principal amount of $1,000,000 (the "February 1996 Notes")
and additional warrants to purchase 166,378 shares of Common Stock to the
Investors as follows: Grotech IV purchased promissory notes in the principal
amount of $400,000 and warrants to purchase 66,551 shares of Common Stock for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 and warrants to purchase 36,104 shares of Common
Stock for a cash purchase price of $217,000; Venrock II purchased promissory
notes in the principal amount of $133,000 and warrants to purchase 22,128
shares of Common Stock for a cash purchase price at $133,000; and Southern
purchased promissory notes in the principal amount of $250,000 and warrants to
purchase 41,595 shares of Common Stock for a cash purchase price of $250,000.
On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000 for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 for a cash purchase price of $217,000; Venrock II
purchased promissory notes in the principal amount of $133,000 for a cash
purchase price of $133,000; and Southern purchased promissory notes in the
principal amount of $250,000 for a cash purchase price of $250,000.
On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital
Company, Limited Partnership (together with the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania and Blue Chip, the "Purchasers")
entered into the Purchase and Exchange Agreement, whereby the Investors
exchanged $2.0 million principal amount of November 1995 Notes and $1.0
million principal amount February 1996 Notes (together with the right to
receive $126,389 in accrued interest thereon from the date of issuance) for
31,263.89 shares of Series B Convertible Preferred Stock of the Company, par
value $1.00 per share (the "Series B Preferred Stock"), and converted $1.0
million principal amount of Convertible Notes, in accordance with their terms,
into 10,000 shares of Series B Preferred Stock. In addition, the Purchasers
paid $4,000,000 in cash in exchange for a further 40,000 shares of Series B
Preferred Stock. The above-referenced exchange, conversion, and purchase
resulted in the following acquisitions of Series B Preferred Stock: Grotech IV
acquired 22,505.56 shares of Series B Preferred Stock; Grotech Partners
acquired 8,537 shares of Series B Preferred Stock; Grotech Companion acquired
930 shares of Series B Preferred Stock; Grotech Pennsylvania acquired 533
shares of Series B Preferred Stock; Venrock acquired 10,914.77 shares of
Series B Preferred Stock; Venrock II acquired 5,860.92 shares of Series B
Preferred Stock. Southern acquired 11,982.64 shares of Series B Preferred
Stock; Blue Chip acquired 16,000 shares of Series B Preferred Stock; and
Crisler acquired 4,000 shares of Series B Preferred Stock.
The transactions of May 21 and May 30, 1996 are collectively referred to
herein as the "1996 Venture Financing." A representative of Blue Chip holds a
seat on the Company's Board of Directors pursuant to the terms of the Purchase
and Exchange Agreement. The rights of representatives of each of Grotech IV,
Venrock and Southern, as well as each of the Founders, to have seats on the
Company's Board of Directors, granted pursuant to the Securities Purchase
Agreement, were restated in the Purchase and Exchange Agreement. In addition,
pursuant to the Purchase and Exchange Agreement, Crisler obtained the right to
designate a representative (R. Dean Meiszer) to act as an observer at meetings
of the Company's Board of Directors. Such stockholders' rights to designate
directors or representatives to attend board meetings under the Purchase and
Exchange Agreement will terminate effective immediately prior to consummation
of the Offering. See "Management--Board Composition."
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<PAGE>
The holders of all outstanding shares of Series A Preferred Stock and Series
B Preferred Stock have agreed to convert their outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, in accordance with their
respective terms, into 2,680,336 shares of Common Stock at or prior to the
consummation of the Offering (the "Preferred Stock Conversion"). As of the
date hereof, each share of Series A Preferred Stock is convertible into
approximately 11.0 shares of Common Stock and each share of Series B Preferred
Stock is convertible into approximately 26.83 shares of Common Stock. In
addition, all holders of warrants to purchase Common Stock (other than WinStar
and one holder of Initial Warrants) will exercise such warrants to purchase
1,868,408 shares of Common Stock upon consummation at or prior to the Offering
(the "Warrant Exercise"). See "Capital Stock of the Company--Warrants."
In October 1996 the Company obtained $1.5 million in interim financing
pursuant to the Bridge Loan from Blue Chip, which the Company will repay using
a portion of the net proceeds of the Offering. See "Use of Proceeds." In
connection with the Bridge Loan, the Company agreed to issue to Blue Chip
warrants to purchase 150,000 shares of Common Stock at an exercise price of
$1.75 per share if, but only if, the Company's initial public offering of
Common Stock is not consummated on or before October 31, 1996. The Company
presently expects that this Offering will be consummated prior to October 31,
1996 and, accordingly, that no warrants will be issued in connection with the
Bridge Loan. The Company also has received, in addition to the Bridge Loan, a
standby funding commitment from certain of its current venture capital
investors to purchase up to $5.0 million of convertible subordinated
debentures and warrants to purchase shares of Common Stock in the event that
the Company requires additional liquidity prior to completion of the Offering.
The Company does not presently expect that it will be required to make any
draws pursuant to the $5.0 million standby commitment.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth, as of August 31, 1996 and as adjusted to
reflect the Preferred Stock Conversion and the Warrant Exercise, certain
information with respect to the beneficial ownership of the Company's Common
Stock by: (i) each person (or group of affiliated persons) of the Company
known by the Company to own beneficially more than five percent of the
outstanding Common Stock; (ii) each director of the Company; (iii) the Named
Executive Officer and (iv) all directors and executive officers as a group.
Information is set forth on both a pre-Offering and a post-Offering basis.
Except as indicated in the footnotes to this table, the persons named in the
table, based on information provided by such persons, have sole voting and
investment power with respect to all shares of Common Stock shown as
beneficially owned by them.
<TABLE>
<CAPTION>
PERCENTAGE OF
TOTAL SHARES(1)
SHARES OF -----------------
STOCK BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
---- ------------------ -------- --------
<S> <C> <C> <C>
Grotech Investors(2)...................... 1,706,664 26.2% 16.6%
Venrock Investors(3)...................... 1,180,311 18.1 11.5
Douglas E. Humphrey....................... 970,744 14.9 9.4
Southern Venture Fund II, L.P.(4)......... 843,079 12.9 8.2
Michael T. Doughney....................... 647,163 9.9 6.3
Blue Chip Capital Fund Limited Partner-
ship(5).................................. 429,285 6.6 4.2
Robert M. Stewart......................... 39,472 * *
Frank A. Adams(2)......................... 1,706,664 26.2 16.6
Ray A. Rothrock(3)........................ 1,180,311 18.1 11.5
William F. Earthman III(4)................ 843,079 12.9 8.2
John H. Wyant(5).......................... 429,285 6.6 4.2
Christopher R. McCleary(6)................ -- -- --
Thomas H. Cato............................ -- -- --
All directors and executive officers as a
group
(14 persons)(7).......................... 5,988,066 91.0 57.8
</TABLE>
- --------
*Less than one percent.
(1) Assumes no exercise of the Underwriters' over-allotment option. The
Company has granted the Underwriters an over-allotment option to purchase
up to 562,500 shares of Common Stock.
(2) The Grotech Investors consist of Grotech IV, Grotech Partners, Grotech
Companion, and Grotech Pennsylvania. The address of the Grotech Investors
is 9690 Deereco Road, Timonium, MD 21093. The shares represent 1,438,361,
229,050, 24,952, and 14,228 shares owned by Grotech IV, Grotech Partners,
Grotech Companion, and Grotech Pennsylvania respectively. Mr. Adams, a
director of the Company, is also the general partner of Grotech Partners,
Grotech Capital Group IV, Inc. (the general partner of Grotech IV), and
Grotech Capital Group, Inc. (the general partner of Grotech Companion and
Grotech Pennsylvania). Mr. Adams disclaims beneficial ownership of the
shares held by the Grotech Investors, except to the extent of his economic
interest in the shares held by the Grotech Investors.
(3) The Venrock Investors consist of Venrock and Venrock II. The address of
the Venrock Investors is 30 Rockefeller Plaza, Suite 5508, New York, New
York 10112. The shares represent 797,014 shares held by Venrock and
383,296 shares held by Venrock II. Mr. Rothrock, a director of the
Company, is also a general partner of Venrock and Venrock II. Mr. Rothrock
disclaims beneficial ownership of the shares held by the Venrock
Investors, except to the extent of his economic interest in the shares
held by the Venrock Investors.
(4) The address of Southern Venture Fund II, L.P. is 310 25th Avenue, North,
Suite 103, Nashville, TN 37203. Mr. Earthman, a director of the Company,
is also the general partner of Southern. Mr. Earthman disclaims beneficial
ownership of the shares held by Southern, except to the extent of his
economic interest in the shares held by Southern.
(5) Blue Chip Capital Fund Limited Partnership's address is 2000 PNC Center,
201 East Fifth Street, Cincinnati, OH 45202. Mr. Wyant is the president of
Blue Chip Venture Company, the general partner of Blue Chip. Mr. Wyant
disclaims beneficial ownership of the shares held by Blue Chip, except to
the extent of his economic interest in the shares held by Blue Chip.
(6) Mr. McCleary, the Chairman, President and Chief Executive Officer of the
Company holds options to purchase 480,000 shares of Common Stock, none of
which are exercisable within 60 days of August 31, 1996.
(7) Includes 124,599 options held by Mr. Heintzelman that are presently
exercisable or that will become exercisable within 60 days of August 31,
1996. See Notes 2, 3, 4, and 5 above.
53
<PAGE>
CAPITAL STOCK OF THE COMPANY
The following description of the Company's capital stock does not purport to
be complete and is subject in all respects to applicable Delaware law and to
the provisions of the Company's Certificate of Incorporation and Bylaws,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
The authorized capital stock of the Company currently consists of 19,920,000
shares of Common Stock, $0.01 par value, and 200,000 shares of Preferred
Stock, $1.00 par value. As of August 31, 1996 there were 1,617,907 shares of
Common Stock issued and outstanding, 45,454.54 shares of Series A Preferred
Stock issued and outstanding, and 81,263.89 shares of Series B Preferred Stock
issued and outstanding. For a description of the terms of the currently
outstanding Series A Preferred Stock and Series B Preferred Stock, see Note 8
and Note 9 to the Company's Financial Statements. Upon consummation of the
Offering, the Preferred Stock Conversion and the Warrant Exercise and assuming
no exercise of the Underwriters' over-allotment option, there will be
9,863,991 shares of Common Stock issued and outstanding and no shares of
Preferred Stock issued and outstanding. An additional 2,055,500 shares of
Common Stock will be issuable upon exercise of outstanding options granted
under the Stock Option Plans, and 240,000 shares of Common Stock will be
issuable upon exercise of warrants held by WinStar.
In connection with the reincorporation of the Company as a Delaware
corporation, the Company will amend and restate its Certificate of
Incorporation. Thereafter, the authorized capital stock of the Company shall
consist of 47,000,000 shares of Common Stock and 3,000,000 shares of Preferred
Stock.
COMMON STOCK
Each holder of Common Stock is entitled to one vote per share of record on
all matters to be voted upon by the shareholders. Holders will not have
cumulative voting rights in connection with the election of directors (or any
other matter). Subject to the preferential rights of any preferred stock that
may at the time be outstanding, each share of Common Stock will have an equal
and ratable right to receive dividends when, if and as declared from time to
time by the Board of Directors out of funds legally available therefor. The
Company has been, and may in the future be, subject to certain agreements
which restrict the payment of dividends. The Company does not anticipate
paying cash dividends in the foreseeable future. See "Dividend Policy."
In the event of liquidation, dissolution or winding up of the Company,
holders of Common Stock are entitled to share ratably in all assets remaining
after payments to creditors and after satisfaction of the liquidation
preference, if any, of any preferred stock that may at the time be
outstanding. Holders of Common Stock have no preemptive or redemption rights
and are not subject to further calls or assessments by the Company.
Immediately upon consummation of the Offering, all of the then outstanding
shares of Common Stock will be validly issued, fully paid and nonassessable.
As of August 31, 1996, there were two record holders of the Common Stock.
After giving effect to the Preferred Stock Conversion and the Warrant
Exercise, but before giving effect to the consummation of the Offering, there
will be approximately 21 record holders of the Common Stock.
PREFERRED STOCK
The holders of all outstanding shares of Preferred Stock have agreed to
convert all of such shares into a total of 2,680,335 shares of Common Stock
upon consummation of the Offering. Thereafter, the Board of Directors will
have the authority to issue up to 3,000,000 shares of Preferred Stock in one
or more series, to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. The Board of
Directors, without stockholder approval, will be able to issue Preferred Stock
with voting and conversion rights which could adversely affect the voting
power of the holders of Common Stock. The Company has no present plans to
issue any Preferred Stock. As of August 31, 1996, there were nine holders of
the Preferred Stock of the Company.
54
<PAGE>
WARRANTS
The Company has issued warrants to purchase an aggregate of 2,108,408 shares
of Common Stock. Upon consummation of the Offering and the Warrant Exercise,
the warrants held by WinStar to purchase 240,000 shares of Common Stock (the
"WinStar Warrants") will remain outstanding. The exercise price of the WinStar
Warrants is $3.75 per share, and the WinStar Warrants expire on June 10, 2001.
All other holders of warrants to purchase Common Stock have agreed to exercise
such warrants at or prior to the consummation of the Offering, with the
exception of one holder of Initial Warrants to purchase 15,200 shares of
Common Stock, who has not yet made such an election.
DELAWARE LAW AND LIMITATIONS ON CHANGES IN CONTROL
Section 203 of the Delaware General Corporation Law (the "DGCL") prevents an
"interested stockholder" (defined in Section 203, generally, as a person
owning 15% or more of a corporation's outstanding voting stock) from engaging
in a "business combination" (as defined in Section 203) with a publicly-held
Delaware corporation for three years following the date such person became an
interested stockholder unless (i) before such person became an interested
stockholder, the board of directors of the corporation approved the
transaction in which the interested stockholder became an interested
stockholder or approved the business combination; (ii) upon consummation of
the transaction that resulted in the interested stockholder's becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced (excluding stock held by directors who are also officers of the
corporation and by employee stock plans that do not provide employees with the
right to determine confidentially whether shares held subject to the plan will
be tendered in a tender or exchange offer); or (iii) following the transaction
in which such person became an interested stockholder, the business
combination is approved by the board of directors of the corporation and
authorized at a meeting of stockholders by the affirmative vote of the holders
of 66 2/3% of the outstanding voting stock of the corporation not owned by the
interested stockholder.
The Company's Bylaws will generally require 50 days advance notice of any
action to be proposed at any meeting of stockholders and set forth other
specific procedures that a stockholder must follow. There will also be
specific procedures, including advance notice, for the nomination of a person
to the Board of Directors when such person is nominated other than at the
direction of the Board. In addition, the Certificate of Incorporation will
provide that a special meeting of the Company's stockholders may only be
called by the Board of Directors; no such meeting may be called by the
stockholders. Further, the Certificate of Incorporation will eliminate the
ability of stockholders to act by written consent and consequently
stockholders may only act at meetings thereof. Any amendment of certain
provisions of the Certificate of Incorporation and Bylaws by stockholders will
require the affirmative vote of the holders of at least 75% of the shares of
the Common Stock then outstanding.
In addition, the directors of the Company will be divided into three class,
with the term of one class expiring each year. Directors may be removed, with
or without cause, only with affirmative vote of holders of at least 75% of the
shares of Common Stock than outstanding. This provision could delay the
replacement of a majority of the directors and have the effect of making
changes in the Board of Directors more difficult than if such provision were
not in place.
These Certificate of Incorporation and Bylaw provisions, including the
provisions authorizing the Board of Directors to issue preferred stock without
stockholder approval, and the provisions of Section 203 of the DGCL could have
the effect of delaying, deferring or preventing a transaction involving a
change in control of the Company or the removal of existing management,
including transactions in which stockholders might receive a substantial
premium for their shares over then-current market prices. See "Risk Factors--
Control by Certain Stockholders; Anti-Takeover Measures."
LIMITATION ON DIRECTORS' AND OFFICERS' LIABILITY
The Certificate of Incorporation will provide that a director of the Company
will not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except in
55
<PAGE>
certain cases where liability is mandated by the DGCL. The provision will have
no effect on any non-monetary remedies that may be available to the Company or
its stockholders, nor will it relieve the Company or its directors from
compliance with federal or state securities laws. The Bylaws of the Company
will generally provide that the Company shall indemnify, to the fullest extent
permitted by law, any person who was or is a party or is threatened to be made
a party to any threatened, pending or completed action, suit, investigation,
administrative hearing or any other proceeding (each, a "Proceeding") by
reason of the fact that he is or was a director or officer of the Company, or
is or was serving at the request of the Company as a director, officer,
employee or agent of another entity, against expenses (including attorneys'
fees) and losses, claims, liabilities, judgments, fines and amounts paid in
settlement actually incurred by him in connection with such Proceeding.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
Upon consummation of the Offering, there will be 37,136,009 shares of Common
Stock and 3,000,000 shares of Preferred Stock available for future issuance
without stockholder approval (assuming no exercise of the Underwriters' over-
allotment option), subject to compliance with rules applicable to companies
whose securities are traded on the Nasdaq National Market. These additional
shares may be utilized for a variety of corporate purposes, including future
public offerings to raise additional capital or to facilitate corporate
acquisitions. The Company does not currently have plans to issue additional
shares of capital stock, other than shares of Common Stock which may be issued
upon the exercise of employee options or the WinStar Warrants. See "Shares
Eligible for Future Sale."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
GENERAL
Future sales of substantial amounts of the Company's Common Stock could
adversely affect the market price of the Common Stock. Several of the
Company's principal stockholders hold a significant portion of the Company's
outstanding Common Stock, and a decision by one or more of these stockholders
to sell their shares could adversely affect the market price of the Common
Stock. The Shares offered hereby (plus any shares issued upon exercise of the
Underwriters' over-allotment option) will be freely tradeable without
restriction, except to the extent that such shares are purchased by
"affiliates" of the Company. The holders of Common Stock and certain holders
of warrants to purchase Common Stock, including officers and directors of the
Company that hold shares of Common Stock, have entered into contractual
agreements with the Underwriters (the "Lock-Up Agreements") providing that
they will not offer, sell or contract to sell, or otherwise dispose of,
directly or indirectly, or announce an offering of, any shares of Common Stock
of the Company beneficially owned by them or any securities convertible into,
or exchangeable for, the Common Stock for a period of 180 days after the date
of the Underwriting Agreement without the prior written consent of the
Underwriters' representative, other than shares of stock disposed of as bona
fide gifts. As a result, notwithstanding possible earlier eligibility for sale
under the provisions of Rules 144 and 144(k) under the Act, shares subject to
the Lock-Up Agreements will not be saleable until the Lock-Up Agreements
expire or their terms are waived by the Underwriters' representative. Assuming
the Underwriters do not release stockholders from the Lock-Up Agreements, the
following shares will be eligible for sale in the public market at the
following times: beginning on the Effective Date, only the shares sold in the
Offering to non-affiliates will be immediately available for sale in the
public market; beginning 180 days after the date of the Underwriting
Agreement, 1,617,907 shares will be eligible for sale pursuant to Rule 144,
all of which are held by affiliates of the Company. An additional 4,548,744
shares will become eligible for sale pursuant to Rule 144 at various times
during the two-year period following the Effective Date (although such shares
will continue to be subject to the Lock-Up Agreements until the expiration of
the terms thereof). The holders of approximately 4,266,660 shares of the
Common Stock are entitled to certain rights with respect to the registration
of such shares under the Act beginning six months after the Effective Date. In
addition, the
56
<PAGE>
Company may register certain shares of Common Stock issuable under the Stock
Option Plans, and such registration shall be effective upon filing with the
Commission. As of August 31, 1996, there were outstanding options under the
Stock Option Plans to purchase 2,055,500 shares, of which options for 299,833
shares were fully vested and exercisable. No shares have been issued to date
under the Stock Option Plans.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an affiliate of the Company, who has
beneficially owned shares for at least two years (including holding periods of
prior owners other than affiliates) is entitled to sell, within any three-
month period commencing 90 days after the closing of this Offering, a number
of shares that does not exceed the greater of (i) 1% of the then outstanding
shares of Common Stock (98,640 shares immediately after the Offering) or (ii)
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding such sale, subject to the filing of a Form 144 with respect to
such sale and certain other limitations and restrictions. In addition, a
person who is not deemed to have been an affiliate of the Company at any time
during 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least three years (including holding periods of
prior owners other than affiliates), would be entitled to sell such shares
under Rule 144(k) without regard to the requirements described above.
REGISTRATION RIGHTS
Pursuant to the Securities Purchase Agreement, as amended by the Purchase
and Exchange Agreement, Grotech IV, Grotech Partners, Grotech Companion,
Grotech Pennsylvania, Venrock, Venrock II, Southern, Blue Chip and Crisler are
entitled to certain rights with respect to the registration of their shares of
Registrable Securities (as defined therein) under the Act. Subject to certain
limitations, on the first two occasions that the Company registers any of its
securities under the Act, either for its own account or the account of other
security holders, such holders are entitled to written notice of the
registration and are entitled to include (at the Company's expense) such
holder's shares therein; provided, among other conditions, that the
underwriters of any such offering have the right to limit the number of such
shares included in the registration. Pursuant to the warrant certificates
evidencing the Initial Warrants, the individuals to whom the Initial Warrants
were issued hold the rights described above. In addition, pursuant to the
warrant certificate evidencing the WinStar Warrants, WinStar also holds
registration rights identical to those described above, except that WinStar's
rights are not limited to the first two registrations. Moreover, holders of at
least a majority of the shares of Registrable Securities can require the
Company, at any time after six months from the effective date of the initial
offering of shares of its Common Stock pursuant to a registration statement
under the Act, but on only one occasion, to file a registration statement
under the Act with respect to such shares, and the Company is required to
effect such registration and maintain the effectiveness of such registration
for a period of three months, subject to certain conditions and limitations.
All fees, costs and expenses of such registration of securities (other than
underwriting discounts in the case of the first type of registrations
described above, and other than legal and accounting expenses of such holders)
will be borne by the Company. However, Grotech IV, Grotech Partners, Grotech
Companion, Grotech Pennsylvania, Venrock, Venrock II, Southern, Blue Chip,
Crisler and Mr. Stewart have agreed to waive any and all rights to cause the
Company to register any securities held by the holder under the Act, or the
securities laws of any state in connection with a Qualifying IPO. For the
purposes thereof, a "Qualifying IPO" means an underwritten public offering of
the Company of shares of Common Stock which is consummated on or before
December 31, 1996, the net proceeds of which exceed $25,000,000.
57
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the underwriting agreement
between the Company and the Underwriters (the "Underwriting Agreement"), the
Company has agreed to sell to each of the Underwriters named below, and the
Underwriters, for whom Friedman, Billings, Ramsey & Co., Inc. is acting as
representative (the "Representative"), have severally agreed to purchase from
the Company, the respective number of shares of Common Stock set forth below
opposite their respective name. Under the Underwriting Agreement, the
Underwriters are obligated to purchase all of the 3,750,000 shares of Common
Stock offered hereby if any are purchased.
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
------------ ----------------
<S> <C>
Friedman, Billings, Ramsey & Co., Inc....................
---------
Total................................................ 3,750,000
=========
</TABLE>
The Underwriters have advised the Company that the Underwriters propose to
initially offer the shares of Common Stock to the public at the initial public
offering price set forth on the cover page of this Prospectus and to certain
dealers at such price less a concession not in excess of $ per share. After
the shares of Common Stock have been released for sale to the public, the
price to public and such concessions may be changed.
The Company has granted the Underwriters an option, exercisable for 30 days
after the date of this Prospectus, to purchase up to 562,500 additional shares
of Common Stock solely to cover over-allotments, if any, at the public
offering price, less the underwriting discount, shown on the cover page of
this Prospectus.
The Underwriters have reserved up to shares of the Common Stock offered
hereby for sale at the initial public offering price to directors, officers,
and employees of the Company and their business affiliates and related parties
who have expressed an interest in purchasing such shares. Such purchases will
be made on the same terms and conditions as will be initially offered by the
Underwriters to others in the Offering, and affiliated purchasers will, prior
to acquiring any shares, be required to represent to the Underwriters and the
Company that they are purchasing such shares for investment purposes only with
no present intention to resell the shares.
The Representative has informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
The Company, its directors, officers and holders of its Common Stock, and
certain holders of warrants to purchase its Common Stock, have each agreed,
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock, or any security convertible into or exercisable for shares of
Common Stock, for a period of 180 days after the date of this Prospectus
without the prior written consent of the Representative.
In the Underwriting Agreement, the Company has agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under
the Act. Each of the Underwriters may be deemed to be an "underwriter" for
purposes of the Act in connection with the Offering. The Company will
reimburse the Underwriters for their reasonable out-of-pocket expenses
(including legal fees and expenses) incurred in connection with the Offering.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price will be determined by negotiation between
the Company and the Representative. In determining such price, consideration
will be given to, among other things, the financial and operating history and
trends of the Company, the experience of its management, the position of the
Company in its industry, the Company's prospects and the Company's financial
results. Additionally, consideration will be given to the status of the
securities markets, market conditions for new offerings of securities and the
prices of similar securities of comparable companies.
58
<PAGE>
The Common Stock has been authorized for inclusion in the Nasdaq National
Market under the symbol "DIGX". In order to meet one of the requirements for
including the Common Stock on the Nasdaq National Market, the Underwriters
have undertaken to sell shares of Common Stock to a minimum of 400 beneficial
holders. There can be no assurance, however, that the Company will be able to
maintain the inclusion of the Common Stock in the Nasdaq National Market or
that an active trading market will develop.
LEGAL MATTERS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Latham & Watkins, Washington, D.C. Certain legal matters will be
passed upon for the Underwriter by Hogan & Hartson L.L.P., Washington, D.C.
EXPERTS
The financial statements of the Company at December 31, 1994, December 31,
1995 and June 30, 1996, and for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and 1996,
appearing in this Prospectus have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing elsewhere
herein, and are included in reliance upon such report given upon the authority
of such firm as experts in accounting and auditing.
59
<PAGE>
GLOSSARY
<TABLE>
<S> <C>
56 Kbps........................ Equivalent to a single high-speed telephone
service line; capable of transmitting one voice
call or 56 Kbps of data. Currently in widespread
use by medium and large businesses primarily for
entry level high-speed data and very low-speed
video applications.
ATM............................ Asynchronous Transfer Mode. An information
transfer standard for routing traffic based on
an address contained within the first five bytes
of a fifty-three byte-long, fixed-length packet
or cell.
Backbone....................... A centralized high-speed network that
interconnects smaller, independent networks.
Bandwidth...................... The number of bits of information which can move
through a communications medium in a given
amount of time; the capacity of a
telecommunications circuit/network to carry
voice, data and video information. Typically
measured in Kbps and Mbps. Bandwidth from public
networks is typically available to business and
residential end-users in increments from 56 Kbps
to T-3.
CAP............................ Competitive Access Provider. A
telecommunications company that provides an
alternative to a LEC for local transport of
private line and special access
telecommunications services.
CSU/DSU (also IDSU, SMDSU)..... Channel Service Unit/Digital Service Unit. A
device used to terminate telephone company
equipment and prepare data for router interface.
DS-1 or T-1.................... A data communications circuit capable of
transmitting data at 1.5 Mbps; can transmit
compressed full motion video. Currently in
widespread use by medium and large businesses
for video, voice, and data applications.
DS-3 or T-3.................... A data communications circuit capable of
transmitting data at 45 Mbps. Equivalent to 28
T-1's of data capacity. Can also transmit
uncompressed, TV broadcast quality, full motion
video. Currently used only by
businesses/institutions and carriers for high
end applications.
Ethernet....................... A common method of networking computers in a
LAN. Ethernet will handle about 10 Mbps and can
be used with almost any kind of computer.
FDDI........................... Fiber Distributed Data Interface. A standard for
transmitting data on optical-fiber cables at a
rate of around 100 Mbps (10 times as fast as
Ethernet, about twice as fast as T-3).
Firewall....................... A system placed between networks that filters
data passing through it and prevents
unauthorized traffic, thereby enhancing the
security of the network.
</TABLE>
60
<PAGE>
<TABLE>
<S> <C>
Frame Relay................... An information transfer standard for relaying
traffic based on an address contained in the six
byte header of a variable length packet that is
up to 2,106 bytes long. Frame Relay has less
overhead than ATM but may be difficult to
implement at speeds greater than 45 Mbps.
Internet...................... A global collection of interconnected computer
networks which use TCP/IP, a common
communication protocol.
ISDN.......................... Integrated Services Digital Network. An
information transfer standard for transmitting
digital voice and data over telephone lines at
speeds up to 128 Kbps.
IXC........................... Interexchange Carrier. A telecommunications
company that provides telecommunications
services between local exchanges on an
interstate or intrastate basis.
Kbps.......................... Kilobits per second. A transmission rate. One
kilobit equals 1,024 bits of information.
LAN........................... Local Area Network. A data communications
network designed to interconnect personal
computers, workstations, minicomputers, file
servers and other communications and computing
devices within a localized environment.
Leased line................... Telecommunications line dedicated to a
particular customer along a predetermined
routes.
LEC........................... Local Exchange Carrier. A telecommunications
company that provides telecommunications
services in a geographic area in which calls
generally are transmitted without toll charges.
MAE-East...................... A major peering point (exchange point for
traffic) among ISPs, located in Falls Church,
Virginia.
MAE-West...................... A major peering point (exchange point for
traffic) among ISPs, located in Santa Clara,
California.
Mbps.......................... Megabits per second. A transmission rate. One
megabit equals 1,024 kilobits.
Modem......................... A device for transmitting digital information
over an analog telephone line.
NAP........................... Network Access Point. A location at which ISPs
exchange each other's traffic.
On-line service............... Commercial information services that offer a
computer user access to a specified slate of
information, entertainment, and communications
menus on what appears to be a single system.
Peering....................... The commercial practice under which nationwide
ISPs exchange each other's traffic without the
payment of settlement charges.
POP........................... Point of Presence. Telecommunications facility
through which the Company provides local
connectivity to its customers.
</TABLE>
61
<PAGE>
<TABLE>
<S> <C>
Router......................... A system placed between networks that relays
data to those networks based upon a destination
address contained in the data packets being
routed.
SLIP........................... Serial Line Internet Protocol. An information
transfer standard for transmitting Internet
Protocol packets over asynchronous data
connections between two points.
TCP/IP......................... Transmission Control Protocol/Internet Protocol.
A suite of network protocols that allow
computers with different architectures and
operating system software to communicate with
other computers on the Internet.
UNIX........................... A computer operating system for workstations and
PCs and noted for its portability and
communications functionality.
Web Site....................... A server connected to the Internet from which
Internet users can obtain information.
World Wide Web or Web.......... A collection of computer systems supporting a
communications protocol that permits multi-media
presentation of information over the Internet.
</TABLE>
62
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Auditors............................................. F-2
Financial Statements
Balance Sheets............................................................. F-3
Statements of Operations................................................... F-4
Statements of Stockholders' Equity (Deficit)............................... F-5
Statements of Cash Flows................................................... F-6
Notes to Financial Statements.............................................. F-7
</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 as of
December 31, 1994, December 31, 1995 and June 30, 1996, and the related
statements of operations, stockholders' equity (deficit), and cash flows for
each of the three years in the period ended December 31, 1995 and the six-
month periods ended June 30, 1995 and 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DIGEX, Incorporated at
December 31, 1994, December 31, 1995 and June 30, 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 and the six-month periods ended June 30, 1995 and 1996 in
conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
July 17, 1996
F-2
<PAGE>
DIGEX, INCORPORATED
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- PRO FORMA
1994 1995 JUNE 30, 1996 JUNE 30, 1996
-------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents... $ 2,441 $ 832,582 $ 6,269,000 $ 6,269,000
Accounts receivable, less
allowance of $0 in 1994,
$50,000 in 1995 and
$126,579 in 1996........... 141,488 908,572 1,416,891 1,416,891
Due from officers and
employees.................. 24,124 -- 11,972 11,972
Inventory and prepaid
expenses................... 41,926 49,631 825,172 825,172
Deferred income taxes....... 14,679 7,681 7,681 7,681
-------- ---------- ----------- -----------
Total current assets..... 224,658 1,798,466 8,530,716 8,530,716
Property and equipment:
Computer equipment and
software................... 431,415 3,439,014 10,959,400 10,959,400
Office furniture and
equipment.................. 20,630 152,805 203,908 203,908
Leasehold improvements...... 8,871 163,811 287,705 287,705
-------- ---------- ----------- -----------
460,916 3,755,630 11,451,013 11,451,013
Accumulated depreciation and
amortization............... 109,789 764,966 1,689,779 1,689,779
-------- ---------- ----------- -----------
351,127 2,990,664 9,761,234 9,761,234
Deferred financing costs.... 77,857 -- 245,218 245,218
Other assets................ 1,500 262,656 304,611 304,611
-------- ---------- ----------- -----------
Total assets................ $655,142 $5,051,786 $18,841,779 $18,841,779
======== ========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued
expenses................... $208,329 $ 959,528 $ 7,974,939 $ 7,974,939
Notes payable, net of
discount of $13,734........ 286,266 -- -- --
Deferred revenue............ 153,049 389,472 5,076,393 5,076,393
Income taxes payable........ 20,910 -- -- --
Current portion of capital
lease obligations.......... -- 858,765 1,497,563 1,497,563
10% Convertible Debentures,
net of discount of $588,835
in 1995.................... -- 1,411,165 -- --
-------- ---------- ----------- -----------
Total current
liabilities............. 668,554 3,618,930 14,548,895 14,548,895
Deferred income taxes....... 6,998 -- -- --
Capital lease obligations,
less current portion....... -- 821,709 1,714,283 1,714,283
Series A Mandatorily
Redeemable Convertible
Preferred Stock, $1 par
value; 70,000 shares
authorized; 45,455 shares
issued and outstanding (pro
forma: none); redemption
price and liquidation
preference of $100 per
share, aggregating
$4,545,500................. -- 2,138,889 2,391,770 --
Series B Mandatorily
Redeemable Convertible
Preferred Stock, $1 par
value; 130,000 shares
authorized; 81,263.89
shares issued and
outstanding (pro forma:
none); redemption price and
liquidation preference $100
per share, aggregating
$8,126,389................. -- -- 8,126,389 --
Stockholders' equity
(deficit):
Common stock, $.01 par
value:
Authorized shares 1,000
shares in 1994 and
49,800,000 in 1995 and
1996....................
Issued and outstanding
shares 1,717,907 in
1994; 1,617,907 in 1995
and 1996 (pro forma:
6,113,991).............. 17,179 16,179 16,179 61,140
Additional paid-in
capital................... 25,393 2,834,672 3,824,636 14,297,834
Accumulated deficit........ (62,982) (4,378,593) (11,780,373) (11,780,373)
-------- ---------- ----------- -----------
Total stockholders' equity
(deficit).................. (20,410) (1,527,742) (7,939,558) 2,578,601
-------- ---------- ----------- -----------
Total liabilities and
stockholders' equity
(deficit).................. $655,142 $5,051,786 $18,841,779 $18,841,779
======== ========== =========== ===========
</TABLE>
See notes to financial statements.
F-3
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Net Revenue:
Online services....... $431,098 $1,577,609 $ 4,425,172 $1,594,440 $ 4,659,586
Equipment sales....... -- -- 650,144 70,992 575,618
-------- ---------- ----------- ---------- -----------
431,098 1,577,609 5,075,316 1,665,432 5,235,204
Costs and Expenses:
Data communications
and operations....... 216,656 1,002,503 4,013,377 1,264,635 4,734,327
Cost of equipment
sales................ -- -- 458,123 57,028 512,634
Sales and marketing... 18,326 263,075 1,710,234 561,093 2,587,472
General and
administrative....... 135,238 366,392 2,715,752 588,116 3,376,091
-------- ---------- ----------- ---------- -----------
Total expenses.......... 370,220 1,631,970 8,897,486 2,470,872 11,210,524
-------- ---------- ----------- ---------- -----------
Income (loss) from
operations............. 60,878 (54,361) (3,822,170) (805,440) (5,975,320)
Other income (expense):
Interest and other
income............... -- -- 72,002 17,453 47,746
Interest expense...... -- (23,693) (226,745) (45,249) (1,167,149)
-------- ---------- ----------- ---------- -----------
-- (23,693) (154,743) (27,796) (1,119,403)
-------- ---------- ----------- ---------- -----------
Income (loss) before
income taxes........... 60,878 (78,054) (3,976,913) (833,236) (7,094,723)
Income taxes............ (25,540) (3,470) -- -- --
-------- ---------- ----------- ---------- -----------
Net income (loss)....... 35,338 (81,524) (3,976,913) (833,236) (7,094,723)
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred
Stock to redemption
value.................. -- -- (338,698) (109,163) (252,881)
-------- ---------- ----------- ---------- -----------
Net income (loss)
attributable to common
stockholders........... $ 35,338 $ (81,524) $(4,315,611) $ (942,399) $(7,347,604)
======== ========== =========== ========== ===========
Net income (loss) per
common share
attributable to common
stockholders........... $ -- $ (0.01) $ (0.63) $ (0.14) $ (0.98)
======== ========== =========== ========== ===========
Pro forma net loss per
common share
attributable to common
stockholders........... $ (0.47) $ (0.69)
=========== ===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------- ---------- ------------ -----------
<S> <C> <C> <C> <C>
Balance at January 1, 1993...... $17,179 $ -- $ (16,796) $ 383
Net income for 1993............. -- -- 35,338 35,338
------- ---------- ------------ -----------
Balance at December 31, 1993.... 17,179 -- 18,542 35,721
Issuance of 190,883 warrants to
purchase common stock.......... -- 25,393 -- 25,393
Net loss for 1994............... -- -- (81,524) (81,524)
------- ---------- ------------ -----------
Balance at December 31, 1994.... 17,179 25,393 (62,982) (20,410)
Issuance of warrants to purchase
1,120,000 shares of common
stock, net of expenses of
$262,756....................... -- 1,650,459 -- 1,650,459
Issuance of warrants to purchase
299,946 shares of common stock. -- 682,378 -- 682,378
Value of vested common stock
options granted to employees... -- 475,442 -- 475,442
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred Stock to
redemption value............... -- -- (338,698) (338,698)
Retirement of 100,000 shares of
common stock................... (1,000) 1,000 -- --
Net loss for 1995............... -- -- (3,976,913) (3,976,913)
------- ---------- ------------ -----------
Balance at December 31, 1995.... 16,179 2,834,672 (4,378,593) (1,527,742)
Issuance of warrants to purchase
166,378 shares of common stock. -- 361,872 -- 361,872
Issuance of warrants to purchase
240,000 shares of common stock. -- 228,000 -- 228,000
Value of vested common stock
options granted to employees... -- 400,092 -- 400,092
Accretion of Series A
Mandatorily Redeemable
Convertible Preferred Stock to
redemption value............... -- -- (252,881) (252,881)
Dividends accrued on Series B
Mandatorily Redeemable
Convertible Preferred Stock.... -- -- (54,176) (54,176)
Net loss for six months ended
June 30, 1996.................. -- -- (7,094,723) (7,094,723)
------- ---------- ------------ -----------
Balance at June 30, 1996........ $16,179 $3,824,636 $(11,780,373) $(7,939,558)
======= ========== ============ ===========
</TABLE>
See notes to financial statements.
F-5
<PAGE>
DIGEX, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE SIX MONTHS
FOR THE YEAR ENDED DECEMBER 31, ENDED JUNE 30,
--------------------------------- -----------------------
1993 1994 1995 1995 1996
--------- --------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Operating activities:
Net income (loss)....... $ 35,338 $ (81,524) $(3,976,913) $ (833,236) $(7,094,723)
Adjustments to reconcile
net income (loss) to
net cash provided by
(used in) operating
activities:
Depreciation and
amortization.......... 22,158 83,948 655,177 154,707 924,813
Amortization of debt
discount charged to
interest expense...... -- 11,659 107,277 13,734 950,707
Non-cash compensation
recorded for vested
stock option grants... -- -- 475,442 -- 400,093
Deferred income taxes.. 17,859 (25,540) -- -- --
Changes in operating
assets and liabilities:
Accounts receivable... (72,352) (65,868) (767,084) (207,965) (508,319)
Inventory and prepaid
expenses............. -- (41,926) (7,705) 39,915 (775,541)
Cash overdraft........ 4,347 (4,347) -- -- --
Accounts payable and
accrued expenses..... 43,873 163,461 751,199 168,843 7,087,624
Deferred revenue...... 64,901 79,976 236,423 95,060 4,686,921
Income taxes payable.. 7,681 13,229 (20,910) (20,910) --
--------- --------- ----------- ---------- -----------
Net cash provided by
(used in) operating
activities............. 123,805 133,068 (2,547,094) (589,852) 5,671,575
Investing activities:
Due from officers and
employees.............. (22,670) (6,222) 24,124 (1,500) (11,972)
Purchase of property and
equipment.............. (98,273) (350,132) (1,199,160) (447,450) (5,576,515)
Decrease (increase) in
other assets........... (5,084) 3,584 (261,156) (143,338) (41,955)
--------- --------- ----------- ---------- -----------
Net cash used in
investing activities... (126,027) (352,770) (1,436,192) (592,288) (5,630,442)
Financing activities:
Proceeds from issuance
of (repayment of)
notes notes payable and
detachable stock
warrants............... -- 300,000 (300,000) (300,000) --
Borrowings under
revolving line of
credit................. -- -- -- -- 1,166,745
Repayments under
revolving line of
credit................. -- -- -- -- (1,166,745)
Repayment of capital
leases................. -- -- (415,080) (77,235) (587,497)
Proceeds from issuance
of 10% Subordinated
Debentures and
detachable stock
warrants............... -- -- 2,000,000 -- 1,000,000
Proceeds from issuance
of Series A Mandatorily
Redeemable Convertible
Preferred Stock and
detachable stock
warrants, net of
expenses of issuance... -- -- 3,528,507 3,528,507 --
Proceeds from issuance
of Series B Mandatorily
Redeemable Convertible
Preferred Stock........ -- -- -- -- 5,000,000
Proceeds from issuance
of warrants to purchase
common stock to
customer............... -- -- -- -- 228,000
Increase in deferred
financing costs........ -- (77,857) -- -- (245,218)
--------- --------- ----------- ---------- -----------
Net cash provided by
financing activities... -- 222,143 4,813,427 3,151,272 5,395,285
--------- --------- ----------- ---------- -----------
Net increase (decrease)
in cash and cash
equivalents............ (2,222) 2,441 830,141 1,969,132 5,436,418
Cash and cash
equivalents at
beginning of period.... 2,222 -- 2,441 2,441 832,582
--------- --------- ----------- ---------- -----------
Cash and cash
equivalents at end of
period................. $ -- $ 2,441 $ 832,582 $1,971,573 $ 6,269,000
========= ========= =========== ========== ===========
</TABLE>
See notes to financial statements.
F-6
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1996
1. SIGNIFICANT ACCOUNTING POLICIES
Description of Business
DIGEX, Incorporated (the "Company"), is a national Internet service
provider. The Company's principal customers are businesses, government
agencies and other institutional customers. The services provided by the
Company include business connectivity, Web server hosting, individual dial-up
network access, education services, and security and other network products.
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.
Cash Equivalents
The Company considers all short-term, highly liquid investments with
maturities of three months or less when purchased to be cash equivalents.
Inventory
Inventory, consisting primarily of computer equipment, is stated at the
lower of the first-in, first-out cost, or market.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed for owned
assets using the straight-line method over estimated useful lives of five
years. Assets capitalized under capital leases are amortized using the
straight-line method over the lesser of the lease term or the useful life of
the asset.
Deferred Financing Costs
Deferred financing costs at December 31, 1994 consist of costs incurred in
1994 to obtain equity financing. These costs were capitalized in 1994 and
accounted for as a reduction of Series A Mandatorily Redeemable Convertible
Preferred Stock in 1995 upon the closing of the transaction (see Note 8).
Deferred financing costs at June 30, 1996 consist of direct costs incurred
related to the initial filing of a registration statement for the sale of
common stock with the Securities and Exchange Commission.
Other Assets
Other assets consist primarily of security deposits on leased computer
equipment and office furniture and equipment. The deposits will be applied
against the final months lease payments.
Revenue Recognition & Accounts Receivable
The Company offers annual subscriptions to its customers for Internet access
and also may arrange for advance payments under contracts to deliver business
connectivity services. Advance payments for these services are deferred and
recognized in the periods in which the services are performed. Equipment sales
are recognized upon commencement of the related service. Receivables generally
are due within 30 days. The Company does not generally require collateral from
its customers.
F-7
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense
totaled approximately $3,100, $24,600 and $488,900 in 1993, 1994 and 1995,
respectively.
Stock Options Granted to Employees
The Company records compensation expense for all stock-based compensation
plans using the intrinsic value method prescribed by APB Opinion 25,
Accounting for Stock Issued to Employees. In October 1995, the Financial
Accounting Standards Board issued FASB Statement No. 123, Accounting for
Stock-Based Compensation, which encourages companies to recognize expense for
stock-based awards based on their estimated value on the date of grant.
Statement 123, effective for 1996, does not require companies to change their
existing accounting for stock-based awards, but if the new fair value method
is not adopted, pro forma income and earnings per share data should be
provided in the notes to the financial statements. The Company intends to
continue to account for stock-based compensation plans using the intrinsic
value method, and will supplementally disclose in its 1996 annual financial
statements the required pro forma information as if the fair value method had
been adopted.
Income Taxes
The Company uses the liability method in accounting for income taxes. 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.
Interim Financial Data
The financial statements of the Company for the six months ended June 30,
1995 and 1996 have been prepared on the same basis as the annual financial
statements and, in the opinion of management, include all adjustments
(consisting only of normal recurring adjustments) necessary to state fairly
the financial information set forth therein, in accordance with generally
accepted accounting principles.
The results of operations for the six months ended June 30, 1996 are not
necessarily indicative of results expected for the full fiscal year.
F-8
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. EARNINGS PER SHARE
The following table summarizes the computations of share amounts used in the
computation of historical earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
----------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ------- -------
<S> <C> <C> <C> <C> <C>
Weighted average number of shares of common
stock outstanding during the period......... 1,718 1,718 1,708 1,618 1,618
Options and warrants to purchase common stock
issued within one year of registration
statement................................... 2,990 2,990 2,990 2,990 2,990
Convertible debentures and preferred stock
issued within one year of registration
statement................................... 2,180 2,180 2,180 2,180 2,180
----- ----- ----- ------- -------
Total common and common equivalent shares of
stock considered outstanding during the
year........................................ 6,888 6,888 6,878 6,788 6,788
===== ===== ===== ======= =======
</TABLE>
Earnings (loss) per share is based upon the average number of shares of
common stock outstanding during each period. As required by the Securities and
Exchange Commission, all common stock warrants, options, convertible
debentures, and convertible preferred stock issued by the Company at exercise
prices or conversion rates below the expected public offering price during the
twelve-month period prior to the anticipated offering date have been included
in the computations as if they were outstanding for all periods presented. As
the Company expects the initial public offering price to exceed the exercise
prices or conversion rates for all securities issued after June 1995, all of
the securities issued between July 1, 1995 and the latest filing date have
been included in the computation of historical net income (loss) per common
share attributable to common shareholders.
The assumed conversion of all other potentially dilutive securities (issued
prior to July 1995) is anti-dilutive for all years presented, and therefore is
not considered in the computations.
Net loss per common share attributable to common shareholders for the six
months ended June 30, 1996 was reduced by $670,871 of interest expense
attributable to debentures converted into Series B Preferred Stock during the
period.
Pro forma net loss per share is presented to disclose the additional effect
on loss per share for the year ended December 31, 1995 and for the six months
ended June 30, 1996 assuming that the antidilutive convertible securities
which are not included in the historical calculations and which will convert
into common stock upon the closing of the proposed initial public offering
were converted into common stock on January 1, 1995, or their issuance date,
whichever date is later. Historical net loss was reduced by $450,871 for the
year ended December 31, 1995 and $1,311,347 for the six months ended June 30,
1996 to adjust for interest expense and preferred stock accretion.
F-9
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the computations of share amounts used in the
computation of pro forma earnings (loss) per share presented in the
accompanying statements of operations (in thousands of shares):
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
DECEMBER 31, JUNE 30,
1995 1996
------------ ---------
(UNAUDITED)
<S> <C> <C>
Weighted average number of shares of common stock
outstanding during the period.......................... 1,708 1,618
Options and warrants to purchase common stock issued
within one year of registration statement.............. 2,990 2,990
Convertible debentures and preferred stock issued within
one year of registration statement..................... 2,180 2,180
Pro forma conversion of preferred stock and warrants.... 1,376 1,902
----- -----
Total common and common equivalent shares of stock
considered outstanding during the year................. 8,254 8,690
===== =====
</TABLE>
3. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------- ---------------------
1993 1994 1995 1995 1996
------- ------------------ ---------- ----------
<S> <C> <C> <C> <C> <C>
Cash paid during the period
for:
Interest...................... $ -- $ -- $ 105,100 $ 45,200 $ 118,700
Taxes......................... $ 7,700 $ -- $ -- $ -- $ --
Non-cash investing and
financing activities:
Equipment acquired under
capital lease................ $ -- $ -- $ 2,095,600 $1,048,300 $2,118,900
Conversion of 10% Convertible
Debentures and accrued
interest into Series B
Mandatorily Redeemable
Convertible Preferred Stock.. $ -- $ -- $ -- $ -- $3,126,400
</TABLE>
4. NOTES PAYABLE
In July 1994, the Company received $300,000 in connection with the issuance
of notes with a face value of $300,000 and detachable stock warrants to
purchase 190,883 shares of common stock for $1.58 per share. The portion of
the proceeds allocable to the warrants of $25,393, as estimated by the
Company, was accounted for as additional paid-in capital. The notes were
repaid in conjunction with the issuance of the Series A Mandatorily Redeemable
Convertible Preferred Stock in March 1995.
5. BORROWINGS UNDER LINE OF CREDIT
In April 1996, the Company entered into a loan agreement with a bank that
provides a revolving line of credit secured by accounts receivable. The credit
line allows the Company to borrow a maximum of $1.5 million, subject to
restrictions based on the available collateral, and expires on February 28,
1997. The credit line bears interest at a floating rate equal to the bank's
prime rate plus 1% per annum. In connection with this credit line, the Company
is required to comply with certain financial ratios and covenants. At June 30,
1996, the Company did not have any borrowings outstanding under this facility.
F-10
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITAL LEASE OBLIGATIONS
The Company leases equipment under capital leases. Property and equipment
includes the following amounts for leases that have been capitalized at June
30, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Computer equipment.............................. $1,985,436 $4,033,066
Office furniture and equipment.................. 110,118 110,118
---------- ----------
2,095,554 4,143,184
Less accumulated amortization................... 444,683 940,616
---------- ----------
$1,650,871 $3,202,568
========== ==========
</TABLE>
Amortization of leased assets is included in depreciation and amortization
expense.
Future minimum payments under capital lease obligations consist of the
following at June 30, 1996:
<TABLE>
<S> <C>
Through December 31, 1996........................................... $ 885,376
1997................................................................ 1,508,220
1998................................................................ 903,432
1999................................................................ 293,147
2000................................................................ 1,333
----------
Total minimum lease payments........................................ 3,591,508
Amounts representing interest....................................... 379,662
----------
Present value of net minimum lease payments (including current por-
tion of $1,497,563)................................................ $3,211,846
==========
</TABLE>
7. 10% CONVERTIBLE DEBENTURES AND DETACHABLE STOCK WARRANTS
On November 28, 1995, the Company issued $2,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $2,000,000. The
debentures were due on June 1, 1996. As discussed more fully in Note 9, in May
1996 the holders of the 10% Convertible Debentures converted their debentures
into shares of Series B Preferred Stock.
The detachable stock warrants entitle the holders to purchase 299,946 shares
of common stock at an exercise price of $0.25 per share and expire in November
2001. The exercise price is payable either in cash or through the retirement
of stock warrants. The warrants were valued at $682,378, or $2.28 per share,
based on an independent valuation of the Company's common stock and the use of
a generally accepted warrant valuation methodology. The estimated value of the
warrants was recorded as additional paid-in capital and the 10% Convertible
Debentures have been recorded net of a discount of $682,378. The Company
recognized interest expense of $93,543 and $588,835 for the year ended
December 31, 1995 and the six months ended June 30, 1996, respectively,
related to the amortization of this discount.
On February 15, 1996, the Company issued $1,000,000 of 10% Convertible
Debentures with detachable stock warrants for cash proceeds of $1,000,000. The
debentures have terms identical to those issued in November 1995, and were
also converted into Series B Preferred Stock in May 1996. The detachable stock
warrants entitle the holders to purchase 166,378 shares of common stock at an
exercise price of $0.25 per share and expire in February 2002. The exercise
price is payable either in cash or through the retirement of stock warrants.
The warrants were valued at $361,872, or $2.17 per share, based on an
independent valuation of the Company's common stock and the use of a generally
accepted warrant valuation methodology. The estimated value of the
F-11
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
warrants was recorded as additional paid-in capital and the 10% Convertible
Debentures have been recorded net of a discount of $361,872. The Company
recognized interest expense of $361,872 the period from February 15, 1996
through June 30, 1996 related to the amortization of this discount.
8. SERIES A MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK AND DETACHABLE
STOCK WARRANTS
The Company has authorized the issuance of 200,000 shares of Series A
Mandatorily Redeemable Convertible Preferred Stock ("Series A"). In March and
April 1995, the Company issued 45,455 shares of Series A with detachable stock
warrants for cash proceeds of $4,000,000. Dividends on the Series A are
cumulative at an annual rate of $6 per share beginning March 15, 1997 and $10
per share beginning March 15, 1999.
The detachable stock warrants entitle the holders to purchase 1,120,000
shares of common stock for an aggregate exercise price of $100 and expire six
years from the date of the final redemption of the Series A. The warrants were
valued at $1,913,215, or $1.71 per share, based on an estimate at the date of
the transaction of the relative values of the Series A and the warrants. The
costs of the issuance of $549,350 have been deducted proportionately from the
proceeds allocated to the warrants and the Series A.
The Series A was recorded at estimated fair value on the date of issuance,
less issue costs. The excess of the redemption value over the carrying value
is being accreted by periodic charges to retained earnings over the life of
the issue using the interest method.
The Company must redeem the Series A in 24 equal monthly installments of
1,894 shares commencing January 1, 2000 at a redemption price of $100 per
share plus any accrued and unpaid dividends. The Company may, at its option,
redeem at any time all, but not less than all, of the Series A for $100 per
share plus any accrued and unpaid dividends. If the Company redeems the Series
A prior to March 15, 1997, the redemption price will be reduced, but in no
event will the redemption price be less than $88 per share. The Series A is
also convertible at any time into 500,000 shares of common stock based on a
conversion rate defined in the Amended and Restated Articles of Incorporation.
The Series A will automatically convert into 500,000 shares of common stock
immediately prior to the closing of an initial public offering consummated on
or before December 31, 1996 generating net proceeds to the Company of at least
$25 million.
Each share of Series A has substantially the same voting rights as the
number of shares of common stock into which it can be converted, as provided
for in the Amended and Restated Articles of Incorporation. The holders of the
Series A (in conjunction with the holders of the Series B Preferred Stock
issued in May 1996 as discussed in Note 9) independently appoint three
directors to the Board of Directors. In the event the Company fails to meet
its obligations to the holders of the Series A under the aforementioned
redemption provisions or upon certain other events, the holders of the
preferred stock are entitled to elect a majority of the directors of the Board
of Directors.
In connection with the issuance of the Series A, the Company also issued
warrants to purchase 91,200 shares of common stock with an exercise price of
$2.63 per share to investment bankers. These warrants expire in March 2002.
9. SERIES B MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED STOCK
In May 1996, the Company amended its Articles of Incorporation to authorize
the issuance of 130,000 shares of Series B Preferred Stock ("Series B") with a
par value of $1. Cumulative annual cash dividends on the Series B at the rate
of $8 per share become payable monthly commencing on the first date
outstanding through March 15, 1999, and after March 15, 1999, at the rate of
$12 per share per annum.
F-12
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Company must redeem the Series B in monthly installments of 3,387 shares
beginning January 1, 2001 at $100 per share plus any unpaid dividends or,
immediately, if certain events specified in the Articles of Incorporation
occur and holders of 63% of the shares of Series B vote for redemption. In
addition, at any time after the earlier of May 24, 1999 or the date on which
all shares of Series A Preferred Stock have been redeemed, the holders of the
Series B may require the Company to redeem their shares at the greater of $200
per share or fair market value, as determined by an independent investment
banking firm. Each share of Series B is convertible at the option of the
holder at any time after issuance into 33.54 shares of common stock. The
Series B holders have the same voting rights as the holders of common stock,
assuming conversion.
On May 30, 1996, the Company issued 50,000 shares of Series B for $5
million. The Series B will automatically convert into 1,341,515 shares of
common stock immediately prior to the closing of an initial public offering
consummated on or before December 31, 1996 generating net proceeds to the
Company of at least $25 million.
In connection with the issuance of the Series B, the holders of the 10%
Convertible Debentures (face value of $3 million, plus accrued interest of
$126,000) converted the debentures into 31,264 shares of Series B.
10. COMMON STOCK
In March 1995, the Company amended and restated the Articles of
Incorporation to authorize the issuance of 49,800,000 shares of $.01 par value
common stock and 200,000 shares of $1 par value Series A Mandatorily
Redeemable Convertible Preferred Stock with a redemption price and liquidation
value of $100 per share. In conjunction with the amendment, the Board of
Directors approved a 505.26-for-1 stock split, effected in the form of a stock
dividend. In August 1995, the Board of Directors approved a 10-for-1 stock
split, also effected in the form of a stock dividend. And finally, in July
1996, the Board of Directors approved a 1-for-2.5 reverse stock split pursuant
to the Company's initial public offering of common stock. All share and per
share amounts in the accompanying financial statements have been restated to
retroactively reflect all splits.
11. AGREEMENT WITH CUSTOMER
In June 1996, the Company entered into a six-year private network agreement
with WinStar Communications, Inc. As part of the agreement, WinStar will
purchase $5 million of connectivity services which was paid in advance in June
1996. WinStar also received warrants to purchase 240,000 shares of common
stock for $3.75 per share. The warrants were valued at $228,000, or $0.95 per
share, based on independent valuation of the Company's common stock and the
use of a generally accepted warrant valuation methodology. The estimated value
of the warrants was recorded as additional paid-in capital of $228,000 and
deferred revenue associated with the contract was recorded in the amount of
$4,772,000.
12. SHARES RESERVED FOR FUTURE ISSUANCE
The Company as of June 30, 1996 has reserved 6,844,244 shares of common
stock for future issuance upon the conversion of the Series A and Series B
Mandatorily Redeemable Convertible Preferred Stock, the exercise of all
outstanding stock purchase warrants, and the exercise of all outstanding stock
options.
13. STOCK OPTION PLAN
In 1995, the Company approved and adopted its 1995 Stock Option Plan (the
"Plan"). In 1996, the Company approved and adopted its 1996 Equity
Participation Plan. The Plans are administered by the Board of Directors. The
Plans provides for the granting of either qualified or non-qualified options
to purchase an
F-13
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
aggregate of up to 2,500,480 shares of common stock to eligible employees,
officers, directors and consultants of the Company. The 1996 Equity
Participation also provides for the granting of other equity participation
instruments.
The following table summarizes the stock option activity of the Company:
<TABLE>
<CAPTION>
SHARES EXERCISE PRICE
OUTSTANDING EXERCISABLE PER SHARE
----------- ----------- --------------
<S> <C> <C> <C>
Balances at January 1, 1995............. -- -- --
Granted................................ 632,280 -- $0.25
Became exercisable..................... -- 188,280 $0.25
Exercised/Surrendered
Canceled............................... (2,050) -- $0.25
--------- ------- --------------
Balances at December 31, 1995........... 630,230 188,280 $0.25
Granted................................ 1,438,120 -- $0.25 - $10.00
Became exercisable..................... -- 111,553 $0.25
Exercised/Surrendered
Canceled............................... (12,850) -- $0.25
--------- ------- --------------
Balances at June 30, 1996............... 2,055,500 299,833 $0.25 - $10.00
========= ======= ==============
</TABLE>
All of the options granted through June 30, 1996 are non-qualified stock
options and vest over 3 or 4 years. At the dates of grant, the estimated fair
value of a share of the Company's common stock ranged from $2.28 to $10.00.
The Company will record compensation expense of $2,659,221 over the vesting
period of the options. For the year ended December 31, 1995 and the six months
ended June 30, 1996, the Company recorded $475,442 and $400,092 of
compensation expense, respectively. The Company will record additional
compensation expense related to option grants through June 30, 1996 as
follows:
<TABLE>
<S> <C>
Six months ended December 31, 1996.................................. $ 389,423
Year ended December 31, 1997........................................ 747,161
1998................................................................ 527,628
1999................................................................ 119,475
----------
Total............................................................. $1,783,687
==========
</TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS
The Series A and Series B Mandatorily Redeemable Convertible Preferred Stock
will automatically convert into common stock upon the expected closing of an
initial public offering in August 1996. Upon conversion, the securities will
not be considered financial instruments.
F-14
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. INCOME TAXES
The tax provisions for the six months ended June 30, 1995 and 1996 are based
on the estimated annual effective tax rate applicable for the full years.
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1994 1995
-------- -----------
<S> <C> <C>
Deferred tax liability:
Tax over book depreciation.............................. $ 6,998 $ 49,581
Deferred tax assets:
Net operating loss carryforward......................... 32,402 1,382,447
Allowance for doubtful accounts......................... -- 19,310
Stock option compensation expense....................... -- 183,615
Accrued bonuses......................................... -- 23,172
-------- -----------
Total deferred tax assets................................ 32,402 1,608,544
-------- -----------
Net future income tax benefit............................ 25,404 1,558,963
Valuation allowance for net deferred tax assets.......... (17,723) (1,551,282)
-------- -----------
Net deferred tax assets.................................. $ 7,681 $ 7,681
======== ===========
</TABLE>
As of December 31, 1995, the Company had net operating loss carryforwards of
$3.6 million. These carryforwards expire in 2009 and 2010. The amount
available to be used in any given year will be limited by operation of certain
provisions of the Internal Revenue Code.
Income tax expense (benefit) consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1993 1994 1995
-------- -------- -------
<S> <C> <C> <C>
Current:
Federal.............................................. $ 5,237 $ 22,250 $ --
State................................................ 2,444 6,760 --
-------- -------- -----
7,681 29,010 --
Deferred (benefit):
Federal.............................................. 14,622 (20,911) --
State................................................ 3,237 (4,629) --
-------- -------- -----
17,859 (25,540) --
-------- -------- -----
$ 25,540 $ 3,470 $ --
======== ======== =====
</TABLE>
The Company's provision for income taxes resulted in effective tax rates
that varied from the statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
1993 1994 1995
------- -------- -----------
<S> <C> <C> <C>
Expected federal income tax (benefit) at 34%..... $20,699 $(26,538) $(1,352,150)
State income taxes, net of federal benefit....... 2,813 (3,606) (183,733)
Expenses not deductible for tax purposes......... 2,028 4,357 3,602
Effect of valuation allowance.................... -- 17,723 1,533,559
Other............................................ -- 11,534 (1,278)
------- -------- -----------
Total............................................ $25,540 $ 3,470 $ --
======= ======== ===========
</TABLE>
F-15
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
16. OPERATING LEASES
The Company leases certain office space and equipment under noncancelable
operating leases that expire in various years through 2000. Future minimum
payments under noncancelable operating leases with initial terms of one year
or more consisted of the following at December 31, 1995:
<TABLE>
<S> <C>
1996........................................................... $ 531,665
1997........................................................... 504,723
1998........................................................... 485,930
1999........................................................... 314,931
2000........................................................... 205,184
----------
Total minimum lease payments................................... $2,042,433
==========
</TABLE>
Rental expense consisted of the following:
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- --------
<S> <C> <C> <C>
Office and storage.................................... $18,882 $19,200 $123,749
Furniture and equipment............................... 4,037 28,915 133,889
------- ------- --------
$22,919 $48,115 $257,638
======= ======= ========
</TABLE>
17. EMPLOYEE BENEFIT PLAN
The Company established a defined contribution benefit plan effective July
1, 1995. The plan covers substantially all employees who have three months of
service with the Company or who were employed by the Company on July 1, 1995.
Participants may contribute from 1% to 15% of their annual compensation to the
plan. In addition, the Company may make discretionary profit-sharing
contributions to the plan. No contributions were made by the Company during
1995.
18. PRO FORMA BALANCE SHEET
In connection with the issuance of the Series B, the holders of warrants to
purchase 1,868,408 shares of common stock agreed to exercise their warrants
immediately prior to the closing of an initial public offering consummated on
or before December 31, 1996 that generates net proceeds to the Company of at
least $25 million.
In June 1996 the Board of Directors approved the filing of a registration
statement for the sale of common stock with the Securities and Exchange
Commission that, upon closing, would meet the criteria for the automatic
exercise of warrants to purchase 1,868,408 shares of common stock, and the
conversion of the outstanding Series A Preferred Stock and Series B Preferred
Stock, all into common stock.
F-16
<PAGE>
DIGEX, INCORPORATED
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the components of the pro forma balance sheet
(in thousands):
<TABLE>
<CAPTION>
ASSUMED
HISTORICAL CONVERSION TOTAL
JUNE 30, OF SECURITIES PRO
1996 UPON IPO FORMA
---------- ------------- --------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................... $ 6,269 $ -- $ 6,269
Other current assets........................ 2,262 -- 2,262
-------- ------- --------
Total current assets......................... 8,531 -- 8,531
Property and equipment, net.................. 9,761 -- 9,761
Other noncurrent assets...................... 550 -- 550
-------- ------- --------
Total assets................................. $ 18,842 $ -- $ 18,842
======== ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses....... $ 7,975 $ -- $ 7,975
Other current liabilities................... 6,574 -- 6,574
-------- ------- --------
Total current liabilities.................... 14,549 -- 14,549
Capital lease obligations.................... 1,714 -- 1,714
Series A Preferred Stock..................... 2,392 (2,392) --
Series B Preferred Stock..................... 8,126 (8,126) --
Stockholders' equity:
Common stock................................ 16 45 61
Additional paid-in capital.................. 3,825 10,473 14,298
Accumulated deficit......................... (11,780) -- (11,780)
-------- ------- --------
Total stockholders' equity................... (7,939) 10,518 2,579
-------- ------- --------
Total liabilities and stockholders' equity... $ 18,842 $ -- $ 18,842
======== ======= ========
</TABLE>
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION
NOT CONTAINED IN THIS PROSPECTUS, AND ANY INFORMATION OR REPRESENTATIONS NOT
CONTAINED HEREIN MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COM-
PANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE
DATE HEREOF.
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGE
<S> <C>
Additional Information.................................................... 3
Reports to Stockholders................................................... 3
Prospectus Summary........................................................ 4
Risk Factors.............................................................. 8
Use of Proceeds........................................................... 16
Dilution.................................................................. 16
Capitalization............................................................ 17
Dividend Policy........................................................... 18
Selected Financial and Pro Forma
Financial Data........................................................... 19
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 21
Business.................................................................. 27
Management................................................................ 37
Certain Transactions...................................................... 50
Principal Stockholders.................................................... 53
Capital Stock of the Company.............................................. 54
Shares Eligible for Future Sale........................................... 56
Underwriting.............................................................. 58
Legal Matters............................................................. 59
Experts................................................................... 59
Glossary.................................................................. 60
Index to Financial Statements............................................. F-1
</TABLE>
UNTIL NOVEMBER, 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS
EFFECTING TRANSACTIONS IN THE SHARES OF COMMON STOCK, WHETHER OR NOT PARTICI-
PATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3,750,000 SHARES
[LOGO OF DIGEX BUSINESS INTERNET APPEARS HERE]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
FRIEDMAN, BILLINGS,
RAMSEY & CO., INC.
OCTOBER , 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Amended and Restated Certificate of Incorporation of DIGEX, Incorporated
(the "Registrant" or "Company"), as amended (the "Amended and Restated
Certificate of Incorporation"), provides that the Registrant shall indemnify
to the fullest extent permitted by Section 145 of the General Corporation Law
of the State of Delaware (the "Delaware Law") any person whom it may indemnify
thereunder. The By-laws of the Registrant provide that indemnification shall
be made by the Registrant only upon a determination that indemnification is
proper in the circumstances because the individual met the applicable standard
of conduct. Advances for such indemnification may be made pending such
determination upon receipt of an undertaking by the director or officer to
repay all amounts so advanced in the event that it shall ultimately be
determined that such director or officer is not entitled to be indemnified by
the Registrant. In addition, the Amended and Restated Certificate of
Incorporation provides for the limitation to the extent permitted by the
Delaware Law of personal liability of directors to the Registrant and its
stockholders for monetary damages for breach of fiduciary duty as directors of
the Registrant.
The Company is obtaining a directors' and officers' insurance and company
reimbursement policy in the amount of $5,000,000. The policy insures directors
and officers against unindemnified loss arising from certain wrongful acts in
their capacities and reimburses the Registrant for such loss for which the
Registrant has lawfully indemnified its directors and officers. The policy
contains various exclusions, none of which will relate to the offering
hereunder.
ITEM 25. OTHER EXPENSES OF ISSUANCES AND DISTRIBUTION.
The following table sets forth the fees and expenses in connection with the
issuance and distribution of the securities being registered hereunder. Except
for the SEC registration fee and the NASD fee, all amounts are estimates.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 18,965.52
NASD Filing Fee............................................... 6,000.00
Printing and Engraving Expenses............................... 300,000.00
Legal Fees and Expenses....................................... 400,000.00
Accounting Fees and Expenses.................................. 250,000.00
Blue Sky Fees and Expenses.................................... 19,125.00
Directors' and Officers' Insurance............................ 200,000.00
Miscellaneous Expenses........................................ 5,909.48
-------------
Total...................................................... $1,200,000.00
=============
</TABLE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The Company was incorporated on January 8, 1990 by Mr. Humphrey and Mr.
Doughney (the "Founders"). Mr. Humphrey contributed certain computer hardware
to the Company in exchange for 970,744 shares of Common Stock, and Mr.
Doughney contributed certain computer software to the Company in exchange for
647,163 shares of Common Stock.
On July 1, 1994, Robert M. Stewart, a director of the Company, and six other
individuals who are not affiliated with the Company loaned the Company
$300,000 in cash. In consideration for their loan, the Company issued to these
individuals (i) 8% promissory notes (the "Bridge Notes") in aggregate
principal amount of $300,000 and (ii) warrants to purchase 190,883 shares of
the Common Stock (the "Bridge Warrants"). The Bridge Notes were to mature on
the earlier of July 12, 1995 and the date on which certain payments were made
under the Securities Purchase Agreement.
II-1
<PAGE>
On March 24, 1995, the Company entered into the Securities Purchase
Agreement with the Founders and Grotech IV, Venrock and Southern, pursuant to
which the Company issued a total of 45,454.54 shares of convertible preferred
stock (since redesignated Series A Convertible Preferred Stock), par value
$1.00 per share, together with warrants to purchase 1,120,000 shares of Common
Stock of the Company, for an aggregate cash investment of $4,000,000. The
Bridge Notes were repaid at their face amount with a portion of the proceeds
of this investment. Grotech IV was issued 18,181.82 shares of Series A
Preferred Stock and warrants to purchase 448,000 shares of Common Stock in
consideration of its investment of $1.6 million in cash, Venrock was issued
15,909.09 shares of Series A Preferred Stock (4,925.83 shares of which were
assigned to Venrock II) and warrants to purchase 392,000 shares of Common
Stock (121,348 of which were assigned to Venrock II) in consideration of its
investment of $1.4 million in cash and Southern was issued 11,363.63 shares of
Series A Preferred Stock and warrants to purchase 280,000 shares of Common
Stock in consideration of its investment of $1.0 million in cash.
Representatives of each of Grotech IV, Venrock and Southern were elected to
the Company's Board of Directors pursuant to the Securities Purchase
Agreement.
As a fee for arranging the above investment, the Company made a cash payment
of $200,000 and issued warrants to purchase 91,200 shares of Common Stock to
Mr. Stewart and nine other individuals (the "Fee Warrants" and, together with
the Bridge Warrants, the "Initial Warrants"). These individuals (other than
Mr. Stewart) are not affiliated with the Company.
Pursuant to a Stockholders Agreement (the "Stockholders Agreement"), dated
March 24, 1995, by and among the Company, Grotech IV, Venrock, Southern, Mr.
Humphrey and Mr. Doughney, the parties thereto agreed to grant rights of first
refusal to the other parties to such agreement in the event of the death,
disability or termination of employment of either Mr. Humphrey or Mr. Doughney
or in the event that either Mr. Humphrey or Mr. Doughney wishes to transfer
any of their shares of Common Stock of the Company. The provisions of the
Stockholders Agreement will terminate effective immediately prior to
consummation of the Offering.
On November 28, 1995, Grotech IV, Venrock, Southern and Venrock Associates
II, L.P. ("Venrock II" and, together with Grotech IV, Venrock and Southern,
the "Investors") loaned to the Company $800,000, $483,307, $500,000 and
$216,693 in cash, respectively. In consideration of these loans, the Company
issued 10% promissory notes due June 1, 1996 in the principal amount of
$2,000,000 (the "November 1995 Notes") and warrants to purchase 299,946 shares
of Common Stock to Grotech IV, Venrock, Venrock II and Southern as follows:
Grotech IV purchased promissory notes in the principal amount of $800,000 and
warrants to purchase 119,978 shares of Common Stock; Venrock purchased
promissory notes in the amount of $483,307 and warrants to purchase 72,483
shares of Common Stock; Venrock II purchased promissory notes in the principal
amount of $216,693 and warrants to purchase 32,498 shares of Common Stock; and
Southern purchased promissory notes in the principal amount of $500,000 and
warrants to purchase 74,987 shares of Common Stock.
On February 23, 1996, the Company issued additional 10% promissory notes due
June 1, 1996 in the principal amount of $1,000,000 (the "February 1996 Notes")
and additional warrants to purchase 166,378 shares of Common Stock to the
Investors as follows: Grotech IV purchased promissory notes in the principal
amount of $400,000 and warrants to purchase 66,551 shares of Common Stock for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 and warrants to purchase 36,104 shares of Common
Stock for a cash purchase price of $217,000; Venrock II purchased promissory
notes in the principal amount of $133,000 and warrants to purchase 22,128
shares of Common Stock for a cash purchase price at $133,000; and Southern
purchased promissory notes in the principal amount of $250,000 and warrants to
purchase 41,595 shares of Common Stock for a cash purchase price of $250,000.
On May 21, 1996, the Company issued additional promissory notes in the
principal amount of $1,000,000 (the "Convertible Notes") convertible into
shares of Series B Preferred Stock of the Company to the Investors as follows:
Grotech IV purchased promissory notes in the principal amount of $400,000 for
a cash purchase price of $400,000; Venrock purchased promissory notes in the
principal amount of $217,000 for a cash purchase price of $217,000; Venrock II
purchased promissory notes in the principal amount of $133,000 for a cash
purchase price of $133,000; and Southern purchased promissory notes in the
principal amount of $250,000 for a cash purchase price of $250,000.
II-2
<PAGE>
On May 30, 1996, the Company, the Founders, the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania, Blue Chip and Crisler Capital
Company, Limited Partnership (together with the Investors, Grotech Partners,
Grotech Companion, Grotech Pennsylvania and Blue Chip, the "Purchasers")
entered into the Purchase and Exchange Agreement, whereby the Investors
exchanged $2.0 million principal amount of November 1995 Notes and $1.0
million principal amount February 1996 Notes (together with the right to
receive $126,389 in accrued interest thereon from the date of issuance) for
31,263.89 shares of Series B Convertible Preferred Stock of the Company, par
value $1.00 per share (the "Series B Preferred Stock"), and converted $1.0
million principal amount of Convertible Notes, in accordance with their terms,
into 10,000 shares of Series B Preferred Stock. In addition, the Purchasers
paid $4,000,000 in cash in exchange for a further 40,000 shares of Series B
Preferred Stock. The above-referenced exchange, conversion, and purchase
resulted in the following acquisitions of Series B Preferred Stock: Grotech IV
acquired 22,505.56 shares of Series B Preferred Stock; Grotech Partners
acquired 8,537 shares of Series B Preferred Stock; Grotech Companion acquired
930 shares of Series B Preferred Stock; Grotech Pennsylvania acquired 533
shares of Series B Preferred Stock; Venrock acquired 10,914.77 shares of
Series B Preferred Stock; Venrock II acquired 5,860.92 shares of Series B
Preferred Stock. Southern acquired 11,982.64 shares of Series B Preferred
Stock; Blue Chip acquired 16,000 shares of Series B Preferred Stock; and
Crisler acquired 4,000 shares of Series B Preferred Stock.
The transactions of May 21 and May 30, 1996 are collectively referred to
herein as the "1996 Venture Financing." A representative of Blue Chip holds a
seat on the Company's Board of Directors pursuant to the terms of the Purchase
and Exchange Agreement. The rights of representatives of each of Grotech IV,
Venrock and Southern, as well as each of the Founders, to have seats on the
Company's Board of Directors, granted pursuant to the Securities Purchase
Agreement, were restated in the Purchase and Exchange Agreement. In addition,
pursuant to the Purchase and Exchange Agreement, Crisler obtained the right to
designate a representative (R. Dean Meiszer) to act as an observer at meetings
of the Company's Board of Directors. Such stockholders' rights to designate
Directors or representatives to attend board meetings under the Purchase and
Exchange Agreement will terminate effective immediately prior to consummation
of the Offering. See "Management--Board Composition."
The holders of all outstanding shares of Series A Preferred Stock and Series
B Preferred Stock have agreed to convert their outstanding shares of Series A
Preferred Stock and Series B Preferred Stock, in accordance with their
respective terms, into 2,680,336 shares of Common Stock at or prior to the
consummation of the Offering (the "Preferred Stock Conversion"). As of the
date hereof, each share of Series A Preferred Stock is convertible into
approximately 11.0 shares of Common Stock and each share of Series B Preferred
Stock is convertible into approximately 26.83 shares of Common Stock. In
addition, all holders of warrants to purchase Common Stock (other than WinStar
and one holder of Initial Warrants) will exercise such warrants to purchase
1,868,408 shares of Common Stock upon consummation at or prior to the Offering
(the "Warrant Exercise").
In June 1996, the Company entered into a multi-year private network
agreement with WinStar. As part of the agreement, WinStar advanced $5,000,000
to the Company for connectivity services and received warrants to purchase
240,000 shares of Common Stock.
In October 1996 the Company obtained $1.5 million in interim financing
pursuant to the Bridge Loan from Blue Chip Capital Fund Limited Partnership
("Blue Chip"), which the Company will repay using a portion of the net
proceeds of the Offering. See "Use of Proceeds." In connection with the Bridge
Loan, the Company agreed to issue to Blue Chip warrants to purchase 150,000
shares of Common Stock at an exercise price of $1.75 per share if, but only
if, the Company's initial public offering of Common Stock is not consummated
by October 31, 1996. The Company presently expects that this Offering will be
consummated prior to October 31, 1996 and, accordingly, that no warrants will
be issued in connection with the Bridge Loan. The Company also has received,
in addition to the Bridge Loan, a standby funding commitment from certain of
its current venture capital investors to purchase up to $5.0 million of
convertible subordinated debentures and warrants to purchase shares of Common
Stock in the event that the Company requires additional liquidity prior to
completion of the Offering. The Company does not presently expect that it will
be required to make any draws pursuant to the $5.0 million standby commitment.
II-3
<PAGE>
No underwriters were involved in any of the foregoing transactions. The
sales of all such securities were deemed to be exempt from registration under
the Act, in reliance on Section 4(2) thereunder, as transactions by an issuer
not involving any public offering.
Since September 18, 1995, the Company at various times has granted options
to purchase shares of Common Stock of the Company to certain Company
employees. Options to purchase 2,298,200 shares of Common Stock have been
granted in the aggregate, at exercise prices ranging from $0.25 to $10.00 per
share. These grants were exempt from registration pursuant to Section 4(2) of
the Act, Rule 701 thereunder or other applicable exemptions.
II-4
<PAGE>
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement.(4)
3.1 Certificate of Incorporation of the Registrant.(2) (in force as of
date of filing)
3.2 By-Laws of the Registrant (in force as of date of filing)
(a) Amended and Restated By-laws of the Registrant.(2)
(b) Amendment No. 1 to Amended and Restated By-laws.(2)
3.3 Amended and Restated Certificate of Incorporation of the
Registrant (in force as of date of effectiveness)(4)
3.4 By-Laws of the Registrant (in force as of date of
effectiveness)(4)
4.1 Form of Common Stock certificate.(2)
5.1* Opinion of Latham & Watkins with respect to the legality of the
securities being registered.
10.1 MCI Special Customer Arrangement between MCI Telecommunications
Corporation and Digital Express Group, Inc. dated March 28,
1996.(2)**
10.2 Customer contract with LCI International, Inc. dated May 29,
1996.(2)**
10.3 Customer contract with WinStar Communications, Inc. dated June 6,
1996.(2)
10.4 Warrant agreement with WinStar Communications, Inc. dated June 6,
1996.(2)
10.5 Peering agreements
(a) Agreement for T1 Gateway Attachment Services, as amended, with
ANS CO+RE Systems Inc. dated February 1, 1994.(2)**
(b)Bilateral Interconnection Agreement with PSINet Inc. dated
February 7, 1996.(2)
(c) Peering Agreement with MCI Telecommunications Corporation
dated April 21, 1995.(2)
10.6 Microsoft consulting services master services agreement, dated
August 13, 1996.(4)**
10.7 Lease agreement with Banbury Associates Limited Partnership dated
November 17, 1994.(2)
10.8 Lease Agreement with George Christancos, dated December 4,
1995.(2)
10.9 Lease Agreement with Executive Office Network, Ltd.(1)
10.10 Sublease Agreement with A.S. McGaughaan.(2)
10.11 Employment and consulting agreements
(a)Clyde A. Heintzelman, dated March 19, 1995.(1)
(b)Christopher R. McCleary, dated February 1, 1996.(1)
(c)Brian M. Deobald, dated March 25, 1996.(3)
(d)Earl P. Galleher, dated March 25, 1996.(3)
(e)Nicholas J. Magliato, dated March 25, 1996.(3)
(f)William A. Pendley, dated July 15, 1996.(3)
(g)Thomas M. Brandt, Jr., dated June 1, 1996.(1)
10.12 Stock option plans
(a)Incentive Stock Option Plan.*
(b)1996 Equity Participation Plan.(4)
10.13 Securities Purchase Agreement with Grotech Partners IV, L.P.,
Venrock Associates, Southern Venture Fund II, L.P., Douglas E.
Humphery and Michael T. Doughney dated March 24, 1995.(1)
10.14 Stockholders Agreement with Grotech Partners IV, L.P., Venrock
Associates, Southern Ventures II, L.P. Douglas E. Humphery and
Michael T. Doughney dated March 24, 1995.(1)
10.15 (a)Warrant Agreement with Grotech Partners IV, L.P. dated March
24, 1995.(1)
(b)Warrant Agreement with Venrock Associates dated March 24,
1995.(1)
(c)Warrant Agreement with Southern Venture Fund II, L.P. dated
March 24, 1995.(1)
10.16 Loan and Security Agreement with Silicon Valley Bank dated April
11, 1996.(1)
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
10.17 First Amendment to Loan and Security Agreement with Silicon Valley
Bank dated May , 1996.(1)
10.18 Revolving Promissory Note with Silicon Valley Bank dated April 11,
1996.(1)
10.19 Securities Purchase, Conversion and Exchange Agreement with
Grotech Partners IV, L.P., Grotech Partners III, L.P., Grotech III
Companion Fund, L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern Venture Fund II,
L.P., Blue Chip Capital Fund Limited Partnership, Crisler Capital
Company, Limited Partnership dated May 30, 1996.(1)
10.20 Series C Subordinated Convertible Debentures Agreement of
September 27, 1996(4)
10.21 Promissory Note with Blue Chip Capital Fund Limited Partnership,
dated October 7, 1996(4)
10.22 Form of warrant agreement with Blue Chip Capital Fund Limited
Partnership(4)
23.1 Consent of Ernst & Young LLP(4)
23.2* Consent of Latham & Watkins (to be included in Exhibit 5.1).
27 Financial Data Schedule(3)
</TABLE>
- --------
(1) Previously filed with the Company's Registration Statement on Form SB-2,
File No. 333-05871, filed June 12, 1996.
(2) Previously filed with Amendment No. 1 to the Registration Statement on
Form SB-2, filed July 5, 1996.
(3) Previously filed with Amendment No. 2 to the Registration Statement on
Form SB-2, filed July 23, 1996.
(4) Filed herewith.
* To be filed by amendment.
** Subject to a request for confidential treatment; the entirety of this
exhibit has been filed separately with the Commission.
ITEM 28. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling persons of the small business issuer pursuant to the
foregoing provisions, or otherwise, the small business issuer has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the small business issuer of expenses incurred
or paid by a director, officer or controlling person of the small business
issuer 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, the small business issuer 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 Act and will be governed by the final adjudication of such issue.
(2) For determining any liability under the Act, treat the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in the form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4),
or 497(h) under the Act as part of this registration statement as of the
time the Commission declared it effective.
(3) For determining any liability under the Act, treat each post-
effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of the securities at that time as the initial
bona fide offering of those securities.
(4) It will provide to the Underwriters at the closing specified in the
Underwriting Agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-6
<PAGE>
SIGNATURES
IN ACCORDANCE WITH THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE
REGISTRANT CERTIFIES THAT IT HAS REASONABLE GROUNDS TO BELIEVE THAT IT MEETS
ALL OF THE REQUIREMENTS FOR FILING ON FORM SB-2 AND AUTHORIZED THIS AMENDMENT
NO. 4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, IN THE CITY OF
BELTSVILLE, STATE OF MARYLAND, ON OCTOBER 8, 1996.
DIGEX, Incorporated
/s/ Christopher R. McCleary
By: _________________________________
Christopher R. McCleary
Chief Executive Officer, President
and Chairman of the Board
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 4 has been signed below by the following persons in the capacities and on
the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
* Director
- ------------------------------------- October 8, 1996
FRANK A. ADAMS
Chief Executive
/s/ Christopher R. McCleary Officer, President October 8, 1996
- ------------------------------------- and Chairman of the
CHRISTOPHER R. MCCLEARY Board (principal
executive officer)
* Senior Vice
- ------------------------------------- President, Chief October 8, 1996
THOMAS M. BRANDT, JR. Financial Officer
(principal
financial officer)
* Vice President,
- ------------------------------------- Controller October 8, 1996
JOHN C. WELLING (principal
accounting officer)
II-7
<PAGE>
SIGNATURE TITLE DATE
* Senior Vice
- ------------------------------------- President, Director October 8, 1996
DOUGLAS E. HUMPHREY
* Vice President,
- ------------------------------------- Director October 8, 1996
MICHAEL T. DOUGHNEY
Director
- ------------------------------------- October 8, 1996
THOMAS H. CATO
* Director
- ------------------------------------- October 8, 1996
WILLIAM F. EARTHMAN, III
* Director
- ------------------------------------- October 8, 1996
RAY A. ROTHROCK
* Director
- ------------------------------------- October 8, 1996
ROBERT M. STEWART
* Director
- ------------------------------------- October 8, 1996
JOHN H. WYANT
/s/ Christopher R. McCleary
*By: ___________________________
ATTORNEY-IN-FACT
II-8
<PAGE>
EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
1.1 Form of Underwriting Agreement.(4)
3.1 Certificate of Incorporation of the Registrant.(2)
(in force as of date of filing)
3.2 By-Laws of the Registrant (in force as of date of
filing)
(a) Amended and Restated By-laws of the
Registrant.(2)
(b) Amendment No. 1 to Amended and Restated By-
laws.(2)
3.3 Amended and Restated Certificate of Incorporation of
the Registrant (in force as of date of
effectiveness)(4)
3.4 By-Laws of the Registrant (in force as of date of
effectiveness)(4)
4.1 Form of Common Stock certificate.(2)
5.1* Opinion of Latham & Watkins with respect to the
legality of the securities being registered.
10.1 MCI Special Customer Arrangement between MCI
Telecommunications Corporation and Digital Express
Group, Inc. dated March 28, 1996.(2)**
10.2 Customer contract with LCI International, Inc. dated
May 29, 1996.(2)**
10.3 Customer contract with WinStar Communications, Inc.
dated June 6, 1996.(2)
10.4 Warrant agreement with WinStar Communications, Inc.
dated June 6, 1996.(2)
10.5 Peering Agreements
(a) Agreement for T1 Gateway Attachment Services, as
amended, with ANS CO+RE Systems Inc. dated
February 1, 1994.(2)**
(b) Bilateral Interconnection Agreement with PSINet
Inc. dated February 7, 1996.(2)
(c) Peering Agreement with MCI Telecommunications
Corporation dated April 21, 1995.(2)
10.6 Microsoft consulting master services agreement, dated
August 13, 1996.(4)**
10.7 Lease agreement with Banbury Associates Limited
Partnership dated November 17, 1994.(2)
10.8 Lease Agreement with George Christancos, dated
December 4, 1995.(2)
10.9 Lease Agreement with Executive Office Network,
Ltd.(1)
10.10 Sublease Agreement with A.S. McGaughaan.(2)
10.11 Employment and consulting agreements
(a) Clyde A. Heintzelman, dated March 19, 1995.(1)
(b) Christopher R. McCleary, dated February 1,
1996.(1)
(c) Brian M. Deobald, dated March 25, 1996.(3)
(d) Earl P. Galleher, dated March 25, 1996.(3)
(e) Nicholas J. Magliato, dated March 25, 1996.(3)
(f) William A. Pendley, dated July 15, 1996.(3)
(g) Thomas M. Brandt, Jr., dated June 1, 1996.(1)
10.12 Stock option plans
(a) Incentive Stock Option Plan.*
(b) 1996 Equity Participation Plan.(4)
10.13 Securities Purchase Agreement with Grotech Partners
IV, L.P., Venrock Associates, Southern Venture Fund
II, L.P., Douglas E. Humphery and Michael T.
Doughney dated March 24, 1995.(1)
10.14 Stockholders Agreement with Grotech Partners IV,
L.P., Venrock Associates, Southern Ventures II, L.P.
Douglas E. Humphery and Michael T. Doughney dated
March 24, 1995.(1)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SEQUENTIAL
PAGE
EXHIBIT NO. DESCRIPTION OF EXHIBIT NUMBER
----------- ---------------------- ----------
<C> <S> <C>
10.15 (a) Warrant Agreement with Grotech Partners IV, L.P.
dated March 24, 1995.(1)
(b) Warrant Agreement with Venrock Associates dated
March 24, 1995.(1)
(c) Warrant Agreement with Southern Venture Fund II,
L.P. dated March 24, 1995.(1)
10.16 Loan and Security Agreement with Silicon Valley Bank
dated April 11, 1996.(1)
10.17 First Amendment to Loan and Security Agreement with
Silicon Valley Bank dated May , 1996.(1)
10.18 Revolving Promissory Note with Silicon Valley Bank
dated April 11, 1996.(1)
10.19 Securities Purchase, Conversion and Exchange
Agreement with Grotech Partners IV, L.P., Grotech
Partners III, L.P., Grotech III Companion Fund,
L.P., Grotech III Pennsylvania Fund, L.P., Venrock
Associates, Venrock Associates II, L.P., Southern
Venture Fund II, L.P., Blue Chip Capital Fund
Limited Partnership, Crisler Capital Company,
Limited Partnership dated May 30, 1996.(1)
10.20 Series C Subordinated Convertible Debentures
Agreement of September 27, 1996(4)
10.21 Promissory Note with Blue Chip Capital Fund Limited
Partnership, dated October 7, 1996(4)
10.22 Form of warrant agreement with Blue Chip Capital Fund
Limited Partnership(4)
23.1 Consent of Ernst & Young LLP(4)
23.2* Consent of Latham & Watkins (to be included in
Exhibit 5.1).
27 Financial Data Schedule(3)
</TABLE>
- --------
(1) Previously filed with the Company's Registration Statement on Form SB-2,
File No. 333-05871, filed June 12, 1996.
(2) Previously filed with Amendment No. 1 to the Registration Statement on Form
SB-2, filed July 5, 1996.
(3) Previously filed with Amendment No. 2 to the Registration Statement on Form
SB-2, filed July 23, 1996.
(4) Filed herewith.
* To be filed by amendment.
** Subject to a request for confidential treatment; the entirety of this
exhibit has been filed separately with the commission.
<PAGE>
DIGEX, INCORPORATED
3,750,000 Shares of Common Stock
($.01 par value per share)
PURCHASE AGREEMENT
------------------
[DATE]
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Towers
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
DIGEX, Incorporated (the "Company"), a Delaware corporation, confirms
its agreement with you and the other Underwriters named in Schedule A annexed
hereto (the "Underwriters", which term shall also include any Underwriters
substituted as hereinafter in Section 8 provided), for whom you are acting as
Representative, with respect to the sale by the Company, and the purchase by the
Underwriters, of 3,750,000 shares (the "Firm Shares") of the Company's common
stock, $.01 par value per share (the "Common Stock"). In addition, for the sole
purpose of covering over-allotments in connection with the sale of the Common
Stock, the Company proposes to grant to the Underwriters an option to purchase
up to an additional 562,500 Shares (the "Option Shares"). The Firm Shares and
any Option Shares purchased pursuant to this Underwriting Agreement are herein
referred to as the "Common Shares."
Prior to the purchase and public offering of the Common Shares by the
Underwriters (the "Offering"), the Company and the Underwriters shall enter into
an agreement substantially in the form of Exhibit A hereto (the "Pricing
Agreement"). The Pricing Agreement may take the form of an exchange of any
standard form of written telecommunication between the Company and the
Underwriters and shall specify such applicable information as is indicated in
Exhibit A hereto. The offering of the Common Shares will be governed by this
Agreement, as supplemented by the Pricing Agreement. From and after the date of
the execution and delivery of the Pricing Agreement, this Agreement shall be
deemed to incorporate the Pricing Agreement.
The Company has prepared and filed with the Securities and Exchange
Commission (the "SEC") a registration statement on Form SB-2 (Commission File
No. 333-5871) and related prospectus for the registration of the
<PAGE>
Common Shares pursuant to, and in conformity in all material respects with, the
Securities Act of 1933, as amended (the "Act"), and any other applicable rules
and regulations of the SEC (the "Rules and Regulations"), has prepared and filed
with the SEC such amendments thereto, if any, and such amended preliminary
prospectus as may have been required to the date hereof and will file such
additional amendments thereto and such additional amended prospectus as may
hereafter be required. The Company will promptly prepare and file a prospectus
which includes the information (the "Pricing Information") excluded from the
preliminary prospectus in reliance upon the Rules and Regulations. Each
prospectus used before the time such prospectus is declared effective by the SEC
and prior to the date hereof is herein called a "Preliminary Prospectus." Such
registration statement and the prospectus constituting a part thereof, as
amended at the time the prospectus becomes effective under the Rules and
Regulations (and including the Pricing Information), are hereinafter referred to
as the "Registration Statement" and the "Prospectus", respectively, except that
if any amended or supplemented prospectus shall be provided to the Underwriters
by the Company for use in connection with the offering of the Common Shares
which differs from the Prospectus at the time it becomes effective (whether or
not such revised prospectus is required to be filed by the Company pursuant to
the Rules and Regulations), the term "Prospectus" shall refer to such newly
amended or supplemented prospectus from and after the time it is first provided
to the Underwriters for such use. The Company understands that the Underwriters
propose to make a public offering of the Common Shares on the terms set forth in
the Prospectus as soon as the Underwriters deem such offering advisable after
the Registration Statement becomes effective and the Pricing Agreement has been
executed and delivered.
SECTION 1. Representations and Warranties.
------------------------------
(a) The Company represents and warrants to, and agrees with, the
Underwriters that as of the date hereof and as of the date of the Pricing
Agreement (such latter date hereinafter referred to as the "Representation
Date"):
(i) No order preventing or suspending the use of any Preliminary
Prospectus or the Prospectus has been issued by the SEC, nor has the
SEC, to the knowledge of the Company, threatened to issue such an
order or instituted proceedings for that purpose. Each Preliminary
Prospectus authorized by the Company for public distribution by the
Underwriters, as of the date thereof (A) complied in all material
respects with the requirements of the Rules and Regulations and (B)
did not contain an 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; provided however, that this
----------------
representation and warranty does not apply to statements or omissions
made in reliance upon and in conformity with information furnished in
writing to the Company by or on behalf of the Underwriters regarding
the Underwriters
-2-
<PAGE>
or expressly for inclusion in the Prospectus (such information
referred to herein as "Underwriters' Information").
(ii) The Registration Statement and the Prospectus, at the
time the Registration Statement becomes effective, at the
Representation Date and at all times subsequent thereto up to each
Closing Time referred to in Section 2 hereof, complies and will comply
in all material respects with the requirements of the Rules and
Regulations. The Registration Statement, at the date hereof, at the
time the Registration Statement becomes effective and at the
Representation Date does not and 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, not
misleading. The Prospectus at the time the Registration Statement
becomes effective, at the Representation Date, at each Closing Time
referred to in Section 2 hereof and at all times subsequent thereto
when a Prospectus is required to be delivered in connection with
offers and sales of the Common Shares, does not and will not include
an untrue statement of a material fact or omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided however, that the representations
----------------
and warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the Prospectus made in
reliance upon and in conformity with Underwriters' Information.
(iii) At the Closing Time, the Company will have conducted the
Offering in all material respects in accordance with all applicable
laws, regulations, decisions and orders, and all material terms,
conditions, requirements and provisions precedent to the Offering (as
defined in the Prospectus) will have been satisfied.
(iv) There are no contracts, or other documents required to be
filed as exhibits to, or to be described in, the Registration
Statement by the Rules and Regulations which have not been or will not
be so filed or described at the time the Registration Statement
becomes effective. The contracts so described in the Prospectus are
in full force and effect on the date hereof; the descriptions thereof
or references thereto are correct in all material respects; and except
as to defaults that individually or in the aggregate would not have a
material adverse effect on the condition (financial or otherwise),
earnings, business affairs or business prospects of the Company,
neither the Company nor, to the knowledge of the Company, any other
party is in breach of or default under any of such contracts.
(v) Ernst & Young LLP, the accountants who have certified the
financial statements included in the Registration Statement and the
Prospectus, are and were at all relevant times, with respect to the
Company,
-3-
<PAGE>
independent public accountants within the meaning of Rule 101
of the Code of Professional Conduct of the American Institute of
Certified Public Accountants and as required by the Rules and
Regulations.
(vi) The financial statements and the related notes thereto
included in the Registration Statement, any Preliminary Prospectus and
the Prospectus comply in all material respects with the requirements
of the Rules and Regulations and present fairly the financial position
of the Company as of the dates of such financial statements, and the
results of operations of the Company for the respective periods
covered thereby. Such statements and related notes have been prepared
in accordance with generally accepted accounting principles applied on
a consistent basis throughout the periods involved. The other
financial, statistical and pro forma information and related notes
included in the Registration Statement and Prospectus present fairly
the information purported to be shown thereby at the respective dates
thereof and for the respective periods covered thereby and conform in
all material respects with the Rules and Regulations.
(vii) Since the latest respective dates as of which information
is given in the Registration Statement and Prospectus, except as
otherwise stated in the Registration Statement and Prospectus, (A)
there has been no material adverse change or development in the
condition (financial or otherwise) of the Company, or in the earnings,
business affairs or business prospects of the Company, whether or not
arising in the ordinary course of business, (B) there have been no
transactions entered into by the Company which are material to the
Company, other than those in the ordinary course of business, (C)
there has been no dividend or distribution of any kind declared, paid
or made by the Company on any class of its capital stock nor has the
Company become delinquent in the payment of principal or interest on
any outstanding borrowing, and (D) there has not been any change in
the capital stock, long-term debt, obligations under capital leases
or, other than in the ordinary course of business, short-term
borrowings of the Company.
(viii) The Company has been duly organized and is validly
existing and in good standing as a Delaware corporation, and the
Company has full corporate power and authority to own, lease and
operate its properties and to conduct its businesses as described in
the Prospectus. The Company is duly qualified and in good standing as
a foreign corporation (or has filed an application to qualify to do
business as a foreign corporation and as of each Closing Time will be
so qualified and in good standing) in each jurisdiction in which the
character of its properties or the nature of its businesses makes such
qualification necessary, except where the failure to qualify would not
have a material adverse effect on the business of the Company. The
Company has obtained and is operating in compliance with all licenses,
permits and other governmental authorizations material to the conduct
of is
-4-
<PAGE>
businesses, and all such licenses, permits and other governmental
authorizations are in full force and effect and the Company has not
received notice of proceedings relating to the revocation or
modification of any such license, permit or other governmental
authorization.
(ix) The authorized, issued and outstanding capital stock and
any outstanding short-term debt, long-term debt and capital lease
obligations of the Company are as set forth in the Prospectus under
the caption "Capitalization", and any subsequent borrowings and
issuances have been made in the ordinary course of business. All of
the outstanding shares of Common Stock have been duly authorized and
validly issued, are fully paid and nonassessable, are owned as
indicated in the Prospectus, and, as to the Company, are subject only
to such pledges, liens, security interests, charges, claims, equities
and encumbrances of any kind to the extent set forth in the
Prospectus. Except as disclosed in or contemplated by the Prospectus,
the Company does not have outstanding any options to purchase, or any
preemptive rights or other rights to subscribe for or to purchase, any
securities or obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital stock or any such
options, rights, convertible securities or obligations. The
description of the Company's stock option, stock bonus and other stock
plans or arrangements, and the options or other rights granted and
exercised thereunder, set forth in the Prospectus is accurate.
(x) This Agreement and the Pricing Agreement have each been duly
authorized by the Company and when duly executed and delivered by the
Company will constitute the legal, valid and binding obligation of the
Company enforceable against the Company in accordance with their
terms, except as enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium, fraudulent conveyance,
receivership, conservatorship or other similar laws, regulations or
procedures of general applicability relating to or affecting
enforcement of the rights of creditors of savings or by general equity
principles and the discretion of the court before which any proceeding
is brought (regardless of whether enforceability is considered in a
proceeding in equity or at law) and except as the obligations of the
Company under the indemnification and contribution provisions hereof
may be limited by public policy under certain circumstances, including
applicable federal or state securities laws.
(xi) The Common Shares have been duly and validly authorized and
reserved for issuance by all necessary corporate action on the part of
the Company and, when issued upon payment of the consideration
therefor, will be duly and validly issued and will be fully paid and
non-assessable and will conform in all material respects with the
description thereof contained in the
-5-
<PAGE>
Prospectus. The issuance of the Common Shares will not be subject to
preemptive rights.
(xii) The forms of certificates used to evidence the Common
Shares are each in due and proper form.
(xiii) The Company is not in violation of its certificate of
incorporation or bylaws; nor is the Company in default in the
performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other agreement or instrument to which the
Company is a party or by which it or any of its properties may be
bound, except for such defaults which would not, in the aggregate,
have a material adverse effect on the condition (financial or
otherwise), earnings, business affairs or business prospects of the
Company; the execution and delivery of this Agreement and the Pricing
Agreement, the incurrence of the obligations therein set forth and the
consummation of the transactions therein contemplated have been duly
authorized by all necessary corporate action of the Company and will
not result in any violation of the certificate of incorporation or by-
laws of the Company, and do not and will not contravene or conflict
with, or constitute a default under, or, except as contemplated
therein, result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company under, (A) any
contract, indenture, mortgage, loan agreement, note, lease or other
agreement or instrument to which the Company is a party or by which it
or any of its properties may be bound, except for breaches or defaults
which would not, in the aggregate, have a material adverse effect on
the condition (financial or otherwise), earnings, business affairs or
business prospects of the Company, (B) any existing applicable law,
rule or regulation or (C) any judgment, order or decree of, or
agreement with, any government or governmental instrumentality or
court, domestic or foreign having jurisdiction over the Company or any
of its properties.
(xiv) No approval, authorization, consent or other order,
registration or qualification of or with any government, governmental
instrumentality or court, domestic or foreign, is required to be
obtained at or prior to each Closing Time in connection with the
execution and delivery of this Agreement and the Pricing Agreement, or
the issuance of the Common Shares in accordance with the terms hereof
or thereof, or the use of proceeds thereof, except for (A) the
registration of the Common Shares pursuant to the Act and the Rules
and Regulations, (B) such approvals, authorizations, consents,
registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters, (C) such
approvals, authorizations, consents, registrations or qualifications
as may be required to be obtained by the Underwriters, and (D) the
clearance of the offering of the
-6-
<PAGE>
Common Shares with the National Association of Securities Dealers,
Inc. (the "NASD").
(xv) The Company has good and marketable title to all real and
personal properties and assets described in the Prospectus as owned by
it and material to its businesses, free and clear of all liens,
charges, encumbrances, defects or restrictions, except (A) such as do
not materially adversely affect the value of such properties and
assets and do not interfere with the use made or proposed to be made
of such properties and assets by the Company and (B) such as are
described in the Prospectus; and the real and personal property held
by the Company under lease or sublease is held by it under valid,
subsisting and enforceable leases or subleases, and the Company has
the peaceful and undisturbed right to use and possession of the real
or personal property held by it under lease or sublease.
(xvi) The Company is conducting its businesses in compliance in
all material respects with all laws, rules, regulations, decisions,
directives and orders (including, without limitation, all regulations
of the SEC) applicable to it. There is no action, suit, investigation
or proceeding before or by any government, governmental
instrumentality, arbitrator or court, domestic or foreign, now pending
or, to the knowledge of the Company, threatened against or affecting
the Company (A) that is required to be disclosed in the Prospectus and
not disclosed therein, (B) that could result in any material adverse
change in the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company, (C) that could
materially and adversely affect the properties, assets or leasehold
interests thereof or (D) that could adversely affect the consummation
of the transactions contemplated in this Agreement. All pending legal
or governmental proceedings to which the Company is a party or of
which any of its property is the subject, which are not described in
the Prospectus, including ordinary routine litigation incidental to
its respective businesses, would not have a material adverse effect on
the condition (financial or otherwise), earnings, business affairs or
business prospects of the Company. Except as disclosed in the
Prospectus, neither the Company nor any of its officers, employees or
directors is a party or subject to the provisions of any regulatory
action, injunction, judgment, decree or order of any court, regulatory
body, administrative agency or other governmental body affecting the
business of the Company.
(xvii) All United States federal income tax returns of the
Company and its predecessors required by law to be filed have been
filed and all taxes shown by such returns or otherwise assessed which
are due and payable have been paid, except assessments against which
appeals have been or will be promptly taken. The United States
federal income tax returns of the Company and its predecessors through
the period ended December 31, 1995
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<PAGE>
have been closed without audit and all assessments, if any, in
connection therewith have been paid by the Company or its
predecessors. The Company and its predecessors have filed all other
tax returns which are required to be filed by them pursuant to
applicable state, local or other law, except insofar as the failure to
file such returns would not in the aggregate materially adversely
affect the financial condition or the business of the Company, and
have paid all taxes due pursuant to such returns or pursuant to any
assessment received by the Company or its predecessors except such
taxes, if any, as are being contested in good faith and as to which
adequate reserves have been provided. The charges, accruals and
reserves on the consolidated books of the Company in respect to any
income and corporate tax liability for any years not finally
determined are adequate to meet any assessments or re-assessments for
additional income tax for any years not finally determined, except to
the extent of any inadequacy which would not have a material adverse
effect on the condition (financial or otherwise), earnings, business
affairs or business prospects of the Company.
(xviii) The Company maintains a system of internal accounting
controls in accordance with the Rules and Regulations that are
sufficient to provide reasonable assurances that (A) transactions are
executed in accordance with management's general or specific
authorization, (B) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets, (C) access to assets is permitted only in accordance with
management's general or specific authorization and (D) the recorded
accountability for assets is compared with the existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(xix) Except as described in the Prospectus, there are no
holders of securities of the Company who by reason of the filing or
effectiveness of the Registration Statement with the SEC have the
right to request the Company to register under the Act and the Rules
and Regulations securities held by them. Except as provided herein
there are no claims or agreements for brokerage commissions, finders'
fees or similar compensation in connection with the transactions
contemplated by this Agreement payable by the Company.
(xx) The Company owns, or possesses rights to use, all patents,
copyrights, trademarks, service marks, trade names and other rights
necessary to conduct the businesses now conducted by it or as
described in the Prospectus, and the Company has not received any
notice of infringement or conflict with asserted rights of others with
respect to any patents, copyrights, trademarks, service marks, trade
names or other rights which, individually or in the aggregate, if the
subject of an unfavorable decision,
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<PAGE>
ruling or finding, would have a material adverse effect on the
condition (financial or otherwise), earnings, business affairs or
business prospects of the Company, and the Company does not know of
any basis for any such infringement or conflict.
(xxi) No labor dispute involving the Company exists or, to the
knowledge of the Company, is imminent which might be expected to have
a material adverse effect on the condition (financial or otherwise)
earnings, business affairs or business prospects of the Company or
which is required to be disclosed in the Prospectus.
(xxii) Except as described in the Prospectus, there are no
contractual encumbrances or material restrictions on the ability of
the Company (A) to pay dividends or make any other distributions on
its capital stock or to pay any indebtedness owed, (B) to make any
loans or advances to, or investments in, any entity or (C) to transfer
any of its property or assets to any entity.
(xxiii) All the documents purporting to be final, definitive
documents (and not drafts) delivered or to be delivered by the Company
or its representatives in connection with the issuance and sale of the
Common Shares, or in connection with the Underwriter's due diligence,
were on the dates on which they were delivered, true, complete and
correct.
(xxiv) The Company has not distributed and will not distribute
prior to the latest Closing Time any offering material in connection
with the offering, other than a Preliminary Prospectus, the
Prospectus, the Registration Statement and the other materials
permitted by the Rules and Regulations and approved by the
Underwriters.
(xxv) The Company has not taken, directly or indirectly, any
action designed to cause or result in, or which has constituted or
which might reasonably be expected to constitute, the stabilization or
manipulation of the price of the Common Shares to facilitate the sale
or resale of the Common Shares.
(xxvi) The Company is not an "investment company" or a company
controlled by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
(xxvii) Since the respective dates as of which information is
given in the Registration Statement and Prospectus, and except as
described in or specifically contemplated by the Prospectus: (A) the
Company has not incurred any material liabilities or obligations,
indirect, direct or contingent, or entered into any material verbal or
written agreement or other transaction whether or not arising in the
ordinary course of business or which could
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<PAGE>
result in a material reduction in the future earnings of the Company;
(B) there has not been any material increase in the long-term debt of
the Company or in the aggregate dollar or principal amount of the
Company's assets which are classified by the Company as substandard,
doubtful or loss or loans which are 90 days or more past due; (C)
there has not been any material adverse change in the aggregate dollar
amount of the Company's assets or its consolidated net worth; (D)
there has been no material adverse change in the Company's
relationship with its insurance carriers, including, without
limitation, cancellation or other termination of any type of insurance
coverage; (E) except as disclosed in the Prospectus there has been no
material change in management of the Company; (F) the Company has not
sustained any material loss or interference with its respective
business or properties from fire, flood, windstorm, earthquake,
accident or other calamity, whether or not covered by insurance; (G)
the Company has not paid or declared any dividends or other
distributions with respect to its capital stock and the Company is not
in default in the payment of principal or interest on any outstanding
debt obligations; (H) there has not been any change in the capital
stock (other than upon the sale of the Common Shares hereunder); and
(I) there has not been any material adverse change in the condition
(financial or otherwise), business, properties, results of operations
or prospects of the Company other than changes resulting from changes
in the economy or the Company's industry generally.
(xxviii) The Company has not been advised, and has no reason to
believe, that the Company is not conducting its business in compliance
with all applicable laws, rules and regulations; except as disclosed
in the Prospectus or where failure to be so in compliance would not
have a material adverse change in the condition (financial or
otherwise), business, properties, results of operations or prospects
of the Company, where it is already in the process of complying.
(xxix) The Company maintains insurance of the types and in the
amounts generally deemed adequate for its business, including, but not
limited to, insurance covering real and personal property owned or
leased by the Company against theft, forgery, damage, destruction,
acts of vandalism and all other risks customarily insured against, all
of which insurance is in full force and effect.
(xxx) The Company has not at any time during the last five
years (i) made any unlawful contribution to any candidate for foreign
office, or failed to disclose fully any contribution in violation of
law, or (ii) made any payment to any federal or state governmental
officer or official, or other person charged with similar public or
quasi-public duties, other than payments required or permitted by the
laws of the United States or any jurisdiction
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<PAGE>
thereof, the effect of which would have a material adverse effect on
the Company.
(xxxi) All material transactions between the Company, and the
officers and directors of the Company and their affiliates have been
accurately disclosed in the Prospectus. Except as disclosed in the
Prospectus, no relationship, direct or indirect, exists between the
Company or its directors or officers, which is required to be
described in the Prospectus. Except as disclosed in the Prospectus,
no relationship, direct or indirect, exists between or among the
Company, on the one hand, and the directors, officers, stockholders,
customers or suppliers of the Company, on the other hand, which is
required to be described in the Registration Statement and the
Prospectus.
(xxxii) Except as disclosed in the Prospectus, the Company has
no subsidiaries.
(xxxiii) Except as disclosed in the Prospectus, the Company has
not: (i) placed any securities within the last 18 months; (ii) had any
material dealings with any member of the NASD or any person related to
or associated with such member, other than discussions and meetings
relating to the proposed Offering and routine purchases and sales of
U.S. Government and agency securities and other assets; (iii) entered
into a financial or management consulting agreement except as
contemplated hereunder and except for the engagement letter with the
Representative, dated __________, 1996 and the engagement letter with
Salomon Brothers Inc dated August 12, 1996; or (iv) engaged any
intermediary between the Representative and the Company in connection
with the Offering, and no person is being compensated in any manner
for such service. The Company has complied or will comply in all
material respects with each and every undertaking or commitment made
by it under the Blue Sky Laws, including, without limitation, each and
every undertaking or commitment made in connection with the Offering.
(xxxiv) The Company has not relied upon the Representative or
legal counsel for the Representative for any legal, tax or accounting
advice in connection with the Offering (except with respect to the
qualification of the Common Stock for offering and sale under the
securities laws of certain states).
(b) Any certificate signed by any officer of the Company and delivered
to you or to your counsel shall be deemed a representation and warranty by the
Company to you as to the matters covered thereby. Any certificate delivered by
the Company to its counsel for purposes of enabling such counsel to render the
opinions referred to in Section 5(c) will also be furnished to the Underwriters
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<PAGE>
and its counsel and shall be deemed to be additional representations and
warranties by the Company (as appropriate) to the Underwriters as to the matters
covered thereby and the Underwriters and its counsel are entitled to rely
thereon.
SECTION 2. Sale and Delivery to Underwriters; Closing.
------------------------------------------
(a) On the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
agrees to sell to the Underwriters, and the Underwriters agree to purchase from
the Company, the Common Shares at the prices set forth in the Pricing Agreement.
If the Underwriters and the Company have elected to enter into the Pricing
Agreement after the Registration Statement is effective, the purchase price to
be paid by the Underwriters for the Common Shares shall be an amount equal to
the initial public offering price, less an amount to be determined by agreement
between the Underwriters and the Company. If such price shall not have been
agreed upon and the Pricing Agreement shall not have been executed and delivered
by all parties thereto by 11:59 p.m. on the fourteenth business day following
the date of this Agreement, this Agreement shall terminate forthwith, without
liability of any party to any other party, unless otherwise agreed to by the
Company and the Underwriters and except as otherwise provided in Sections 4, 6,
and 7 hereof. If the Underwriters and the Company have elected to enter into
the Pricing Agreement prior to the Registration Statement becoming effective,
the initial public offering price and the price to be paid by the Underwriters
for the Common Shares shall have been determined and set forth in the Pricing
Agreement, dated the date hereof, and an amendment to the registration statement
and the prospectus will be filed by the Company before the Registration
Statement becomes effective.
(b) The Company hereby grants to the Underwriters an option to
purchase from the Company, solely for the purpose of covering over-allotments in
connection with the distribution and sale of the Firm Shares, all or any portion
of the Option Shares for a period of thirty (30) days from the date hereof at
the purchase price per share of Common Stock set forth in the Pricing Agreement.
No Option Shares shall be sold and delivered unless the Firm Shares previously
have been, or simultaneously are, sold and delivered.
(c) Payment of the purchase price for the Firm Shares shall be made at
the office of Friedman, Billings, Ramsey & Co., Inc., or at such other place as
shall be agreed upon by the Underwriters and the Company, at 10:00 a.m. on the
third business day after the date of the Pricing Agreement or, if the Purchase
Agreement is executed after 4:30 p.m. Washington, D.C. time, the fourth business
day after the date of the Pricing Agreement (such time and date of payment and
delivery being herein called the "First Closing Time"). Payment shall be made
to the Company by certified or official Company check or checks in New York
Clearing House or similar next day funds payable to the account of the Company
against delivery to the Underwriters of the Common Shares to be purchased by
them,
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<PAGE>
provided, however, that if the Prospectus is at any time prior to the First
Closing Time recirculated to the public, the First Closing Time shall occur upon
the later of the third full business day following the first date that any of
the Common Shares are released by you for sale to the public or the date that is
48 hours after the date that the Prospectus has been so recirculated.
(d) The option to purchase Option Shares granted in this Section 2 may
be exercised during the term thereof by written notice to the Company from the
Underwriters. Such notice shall set forth the aggregate number of Option Shares
as to which the option is being exercised and the time and date, not earlier
than either the First Closing Time or the third business day after the date on
which the option shall have been exercised nor later than the fifth business day
after the date of such exercise, as determined by the Underwriters, when the
Option Shares are to be delivered and the payment of the purchase price therefor
paid (the "Option Closing Time") as set forth above for delivery and payment of
the Firm Shares. (The First Closing Time and the Option Closing Time are herein
individually referred to as the "Closing Time" and collectively referred to as
the "Closing Times.")
(e) Certificates for the Firm Shares and certificates for the Option
Shares, if the option to purchase the same is exercised on or before the third
business day prior to the First Closing Time, shall be in fully registered form
in such authorized denominations and registered in the name of Cede & Co., as
nominee of The Depository Trust Company, and/or such other names as the
Underwriters may request in writing at least two full business days before the
applicable Closing Time. The certificates for the Common Shares will be made
available for examination by the Underwriters not later than 10:00 A.M., two
business days prior to the applicable Closing Time.
SECTION 3. Covenants of the Company. The Company covenants with the
------------------------
Underwriters as follows:
(a) The Company shall cause the Registration Statement and any
amendments thereto, if not effective at the time of execution of this Agreement,
to become effective under the Rules and Regulations as promptly as possible.
(b) The Company will notify the Underwriters immediately, and confirm
the notice in writing, (i) of the effectiveness of the Registration Statement
and any amendment thereto, (ii) of the receipt by the Company or its counsel of
any comments from the SEC with respect to the offering of the Common Shares,
(iii) of any request to the Company or its counsel by the SEC for any amendment
or supplement to the Prospectus or for additional information and (iv) of the
issuance or initiation by the SEC or by any other state securities regulatory
authority of any stop order or cease-and-desist proceeding to suspend the
effectiveness of the Registration Statement or interfering with the offering of
the Common Shares, or of
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<PAGE>
the suspension of the qualification of the Common Shares for offering or sale in
any jurisdiction, or the initiation or threat of any other orders or proceedings
for any of such purposes. The Company will make every reasonable effort to
prevent the issuance or initiation of any such stop orders or cease-and-desist
proceedings and, if any such stop orders or cease-and-desist proceedings are
issued or initiated, to obtain the lifting or dismissal thereof at the earliest
possible moment.
(c) The Company will advise the Underwriters promptly of any proposal
to amend or supplement the Prospectus through the filing of a post-effective
amendment to the Registration Statement and will not file any amendment or
supplement to the Prospectus (or to any preliminary prospectus, as the case may
be) which shall not have been previously submitted to the Underwriters and their
counsel a reasonable time prior to the proposed filing thereof and to which the
Underwriters or their counsel shall object.
(d) The Company will deliver to the Underwriters two signed and as
many conformed copies of the Registration Statement as originally filed and of
each amendment or supplement thereto (including exhibits filed therewith), as
the Underwriters may reasonably request.
(e) The Company will furnish to the Underwriters, without charge, from
time to time during the period when the Prospectus is required to be delivered
under the Rules and Regulations, such number of copies of the Prospectus (as
amended or supplemented) as such Underwriters may reasonably request for the
purposes contemplated by the Rules and Regulations.
(f) If any event shall occur as a result of which it is necessary, in
the reasonable judgment of the Underwriters, to amend or supplement the
Prospectus in order to make the Prospectus not misleading in the light of the
circumstances existing at the time it is delivered to a purchaser, the Company
will forthwith amend or supplement the Prospectus by preparing and furnishing to
the Underwriters a reasonable number of copies of an amendment or amendments of,
or a supplement or supplements to, the Prospectus (in form and substance
reasonably satisfactory to such counsel) so that, as so amended or supplemented,
the Prospectus will not 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 existing at the time the Prospectus is delivered
to a purchaser, not misleading, and the Company will furnish to the Underwriters
such number of copies of such amendment or supplement as the Underwriters shall
reasonably request. For the purposes of this subsection, the Company shall
furnish such information with respect to itself to the Underwriters, counsel for
the Underwriters and counsel for the Company, as may be necessary for counsel
for the Underwriters and counsel for the Company to be aware of and to consult
with the Underwriters and the Company with respect to the need to amend or
supplement the Prospectus
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<PAGE>
and shall furnish such further information as may from time to time be
reasonably requested.
(g) The Company will endeavor, in cooperation with the Underwriters,
to qualify the Common Shares for offering and sale under the applicable
securities laws of such states and other jurisdictions of the United States as
the Underwriters may reasonably designate and will maintain such qualifications
in effect for a period of not less than one year from the effective date of the
Prospectus. The Company shall not, however, be obligated to file any general
consent to service or process or to qualify as a foreign corporation or as a
dealer in securities in any jurisdiction in which it is not so qualified. The
Company will file such statements and reports as may be required by the laws of
each jurisdiction in which the Common Shares have been qualified as above
provided.
(h) The Company will obtain all approvals, authorizations, consents or
other orders, registrations or qualifications of or with, and shall make all
filings with, any government, governmental instrumentality or court, domestic or
foreign, required to be obtained or to be made in connection with the execution
and delivery of this Agreement, or the issuance of the Common Shares in
accordance with the terms hereof or thereof, or the use of proceeds thereof,
except for such consents, approvals, authorizations, registrations,
qualifications or filings as have been obtained or made at or prior to the
Closing Time.
(i) The Company will make generally available to its security holders
as soon as practicable, but no later than 45 days after the close of the period
covered thereby, an earnings statement (in form complying with the provisions of
the Rules and Regulations, and which may, but which need not be certified by
independent public accountants) covering a twelve-month period beginning not
later than the first day of the Company's fiscal quarter next following the
effective date of the Prospectus.
(j) During the period of five years hereafter, (A) the Company will
furnish to holders of Common Shares and to the Underwriters as soon as
practicable after the end of each fiscal year, copies of the Annual Report to
Stockholders of the Company containing the balance sheet of the Company as of
the close of such fiscal year and statements of income, stockholder's equity and
cash flows for the year then ended and the report thereon of the Company's
independent public accountants and as soon as practicable after the end of each
fiscal quarter a statement (which need not be audited) of the results of
operations of the Company for such period and (B) the Company will furnish to
the Underwriters as soon as practicable after the filing thereof, paper copies
of each definitive proxy or information statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q or Current Report on Form 8-K filed by the Company
with the SEC, the NASD or any securities exchange and following any public
offering of its Common Stock, as
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<PAGE>
soon as available, copies of any report or communication of the Company mailed
generally to holders of such Common Stock.
(k) The Company will apply the proceeds received from the offering of
the Common Shares in the manner set forth in the Prospectus under the caption
"Use of Proceeds" and will file such reports with the SEC with respect to the
sale of the Common Shares and the application of proceeds therefrom as may be
required under the Rules and Regulations.
(l) During the period of 180 days after the first date that any of the
Common Shares are released by the Underwriters for sale to the public, without
the prior written consent of the Underwriters (which consent may be withheld at
the sole discretion of the Underwriters), the Company will not issue, offer,
sell, grant options to purchase or otherwise dispose of any shares of the Common
Stock or any other securities convertible into or exchangeable with the Common
Stock (provided that the Company may issue or grant options to purchase shares
of Common Stock pursuant to any option plan existing on the date hereof and will
cause each officer and director of the Company, and each of Grotech IV, Grotech
Partners, Grotech Companion, Grotech Pennsylvania, Venrock, Venrock II,
Southern, Blue Chip and Crisler (as each of those terms is defined in the
Prospectus), on or prior to the date of this Agreement, to furnish to the
Underwriters a letter or letters in form and substance satisfactory to counsel
to the Underwriters, pursuant to which each such person shall agree not to
offer, sell, grant options to purchase or otherwise dispose of any shares of the
Common Stock or any other securities convertible into or exchangeable with the
Common Stock.
SECTION 4. Payment of Expenses. The Company will pay and bear all costs
-------------------
and expenses incident to the performance of its obligations under this
Agreement, including (a) the preparation, printing and filing of the
Registration Statement (including the exhibits thereto), any Prospectus
(including the financial statements thereto) and any amendments and supplements
thereto, and the cost of furnishing copies thereof to the Underwriters, (b) the
preparation, printing or duplication and distribution of this Agreement, the
Common Shares and the Blue Sky survey, (c) the issuance and delivery of the
Common Shares to the Underwriters and to any depository therefor, (d) the fees
and disbursements of the Company's counsel and accountants, (e) the
qualification of the Common Shares under the applicable securities laws in
accordance with Section 3(f) hereof and any filing for review of the offering
with the NASD, including filing fees and fees and disbursements of counsel for
the Underwriters in connection therewith and in connection with such
qualification and the Blue Sky survey and may supplement thereto, (f) reasonable
out-of-pocket expenses of the Underwriters including fees and disbursements of
its counsel and (g) all other fees, costs and expenses referred to in Item 25 of
Registration Statement.
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<PAGE>
If this Agreement is terminated by the Underwriters in accordance with
the provisions of Section 11 hereof or does not become effective in accordance
with Section 5 hereof, the Company shall reimburse the Underwriters for all of
their out-of-pocket expenses, including the fees and disbursements of counsel
for the Underwriters.
SECTION 5. Conditions of Underwriter's Obligations. The obligation of the
---------------------------------------
Underwriters to purchase and pay for the Common Shares that they have agreed to
purchase hereunder is subject to the accuracy of the representations and
warranties of the Company contained herein at and as of the date hereof, at and
as of the time of effectiveness of the Registration Statement and at and as of
each Closing Time or contained in certificates of any authorized officer of the
Company pursuant to the provisions hereof, to the performance by the Company of
its obligations hereunder, and to the following further conditions:
(a) The Registration Statement shall have become effective not later
than 5:30 p.m. on the date of this Agreement, or at such later time as shall
have been consented to in writing by the Underwriters. No stop order or cease-
and-desist proceeding suspending the effectiveness of the Prospectus or
interfering with the offering of the Common Shares shall have been issued and no
proceedings for purposes of issuing a stop order or cease-and-desist proceedings
shall have been instituted or shall be pending or, to the knowledge of the
Company or you, shall be contemplated by the SEC or by any other state
securities regulatory authority. Any request of the SEC for additional
information or for inclusion of additional information in the Registration
Statement shall have been complied with to your satisfaction and the
satisfaction of counsel for the Underwriters.
(b) At each Closing Time, the Underwriters shall have received the
favorable opinion of Latham & Watkins, counsel for the Company dated as of such
Closing Time in form and substance satisfactory to counsel for the Underwriters
to the effect that:
(i) The Company has been duly organized and is and, after
giving effect to the Offering, will be validly existing as a
corporation in good standing under the laws of the State of Delaware.
The Company is duly qualified and in good standing as a foreign
corporation in each jurisdiction in which the character and location
of its properties (owned, leased or licensed) or the nature of its
businesses makes such qualification necessary, except where the
failure to qualify would not have a material adverse effect on the
condition (financial or otherwise), earnings, business affairs or
business prospects of the Company. The Company has obtained and is
operating in compliance with all licenses, permits and other
governmental authorizations material to the conduct of its businesses,
and all such licenses, permits and other governmental authorizations
are in full force and effect and the Company has not received notice
of proceedings relating to the revocation or
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<PAGE>
modification of any such license, permit or other governmental
authorization The Company has all requisite corporate authority to
own, lease and license its properties and conduct its business as not
being conducted and as described in the Registration Statement and
Prospectus;
(ii) All of the outstanding shares of capital stock of the
Company have been duly issued and are fully paid and non-assessable
and, to such counsel's knowledge, free and clear of all liens, claims
or encumbrances. No action has been taken, or to the best of such
counsel's knowledge, pending or threatened to revoke the distribution
of such shares by the Company to its stockholders or sale or exchange
of such shares of capital stock;
(iii) As of the date hereof, the authorized capital stock of the
Company consists of _________ shares of Common Stock, $.01 par value
per share and _______ shares of preferred stock, _______ par value per
share. Immediately prior to consummation of the sale of Common Shares
contemplated by this Agreement, there were _________ shares of Common
Stock issued and outstanding, ______ shares of Class A Convertible
Preferred Stock, and _______ shares of Class B Convertible Preferred
Stock. The capital stock of the Company conforms in all material
respects to the description thereof contained under the caption
"Capital Stock of the Company" in the Prospectus. The Company has the
corporate power and corporate authority to issue, sell and deliver the
Common Shares in accordance with and upon the terms and conditions set
forth in this Agreement and in the Registration Statement and
Prospectus and the Company has duly authorized the issuance, sale and
delivery of the Common Shares. All of the issued and outstanding
shares of Common Stock, Class A Convertible Preferred Stock and Class
B Convertible Preferred Stock of the Company are (and the Common
Shares, upon issuance, delivery and receipt of payment therefor as
described herein, will be) duly authorized, and assuming receipt of
the consideration therefor as described in the resolutions of the
board of directors of the Company authorizing issuance thereof,
validly issued, fully paid and non-assessable and there are no
preemptive or, to such counsel's knowledge, other rights to subscribe
for or purchase any shares of Common Stock. Upon payment by the
Underwriters, the Underwriters will acquire all rights with respect to
the Common Shares free and clear of any pledge, lien, security
interest, encumbrance, claim or equity and any restrictions on
transfer imposed by the Company;
(iv) The Company owns, or possesses rights to use, all patents,
copyrights, trademarks, service marks, trade names and other rights
necessary to conduct the businesses now conducted by it or as
described in the Prospectus, and to such counsel's knowledge the
Company has not received any notice of infringement or conflict with
asserted rights of others with respect to any patents, copyrights,
trademarks, service marks, trade
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<PAGE>
names or other rights which, individually or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would have a
material adverse effect on the condition (financial or otherwise),
earnings, business affairs or business prospects of the Company, and
such counsel does not know of any basis for any such infringement or
conflict;
(v) To such counsel's knowledge, the Company is not in
default in the observance of any provision of its certificate of
incorporation or bylaws, or to such counsel's knowledge in default in
the performance or observance of any obligation, agreement, covenant
or condition contained in any contract, indenture, mortgage, loan
agreement, note, lease or other instrument known to such counsel to
which it is a party or by which it or any of its properties may be
bound, the effect of which could be materially adverse on the
condition (financial or otherwise), earnings, business affairs or
business prospects of the Company;
(vi) The Company has the power and authority to enter into this
Agreement and the Pricing Agreement. Each of this Agreement and the
Pricing Agreement has been duly authorized, executed and delivered by
the Company and constitute a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms,
except as may be limited by bankruptcy, reorganization, insolvency,
moratorium or other laws affecting creditor's rights, and except as
may be limited by the exercise of judicial discretion and general
principles of equity it being understood, however, that the foregoing
shall mean only that if there is a default in performance of an
obligation (i) if a failure to pay or other damage can be shown and
(ii) if the defaulting party can be brought into a court which will
hear the case and apply the governing law, then, subject to the
availability of defenses and the aforesaid exceptions, the court will
provide a money damage (or perhaps injunctive relief or specific
performance) remedy;
(vii) Except for the consents, approvals, authorizations,
registrations, or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Common Shares by the Underwriters, no further
consent, approval, authorizations, registrations or qualifications of
or with any court or any federal or state governmental or regulatory
authority having jurisdiction over the Company or any of its
properties or assets is required in connection with the execution or
delivery by the Company of this Agreement, the Pricing Agreement, the
consummation of the transactions contemplated hereby or thereby, and
the issuance, sale and delivery of the Common Shares. The execution
and delivery of this Agreement, the Pricing Agreement and the sale of
the Common Shares to the Underwriters as therein contemplated and the
consummation of the transactions contemplated thereby do not and will
not (A) conflict with or result in a breach of any of the terms and
provisions of, or
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<PAGE>
constitute a default (or an event which with notice or lapse of time,
or both, would constitute a default) under, or result in the creation
or imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to, any agreement, instrument,
franchise, license or permit known to such counsel to which the
Company is a party or by which it or its properties or assets may be
bound or (B) violate or conflict with any provision of the certificate
of incorporation or by-laws of the Company, or, to the best knowledge
of such counsel, any judgment, decree, order, statute, rule or
regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets;
(viii) There are no material contracts, agreements or other
documents of a character required to be described or referred to in
the Registration Statement or the Prospectus or to be filed as
exhibits to the Registration Statement other than those described or
referred to therein or filed as exhibits thereto, and the description
in the Prospectus of all contracts, agreements and other documents
therein described fairly present in all material respects the
information required to be shown;
(ix) Such counsel does not know of any statutes or regulations
required to be described in the Prospectus which are not so described.
Except as disclosed in the Prospectus, there are no legal or
governmental proceedings pending to which the Company is a party or of
which any property of the Company is the subject which, if determined
adversely to the Company, would individually or in the aggregate have
a material adverse effect on the condition (financial or otherwise),
earnings, business affairs or business prospects of the Company; and,
except as disclosed in the Prospectus no such proceedings are
threatened or contemplated by governmental authorities or threatened
by others;
(x) The information in the Prospectus, to the extent that such
information constitutes matters of law or legal conclusions, has been
reviewed by such counsel and is correct in all material respects;
(xi) The Registration Statement has become effective under the
Act and the Rules and Regulations and the Prospectus has been filed as
required under the Rules and Regulations; and, to such counsel's
knowledge, no stop order suspending the effectiveness of the
Registration Statement or preventing the use of the Prospectus has
been issued and no proceedings for purposes of issuing a stop order or
cease-and-desist proceedings have been instituted by, or are pending
before, the SEC or any other state securities regulatory authority;
(xii) The Registration Statement, the Prospectus and each
amendment or supplement thereto, if any (except for the financial
statements
-20-
<PAGE>
and supporting schedules included therein, as to which such counsel
need express no opinion), comply as to form in all material respects
with the requirements of the Act and of the Rules and Regulations;
(xiii) Except as described in the Prospectus, there are no
outstanding options, warrants or other rights under which the Company
is or may become obligated to issue any shares of its capital stock or
any security convertible into or exchangeable for shares of its
capital stock;
(xiv) The Company's Common Stock, including the Common Shares,
have been approved for quotation on the National Association of
Securities Dealers National Market System upon notice of issuance;
(xv) The form of share certificate evidencing the Common Shares,
is in due and proper form under the laws of the State of Delaware;
(xvi) The Company is not an "investment company" as such term is
defined in the Investment Company Act; and
(xvii) No transfer taxes are required to be paid by the
Underwriters in connection with the sale and delivery of the Common
Shares by the Company to the Underwriters pursuant to the Underwriting
Agreement.
In rendering such opinions, such counsel may set forth the scope of
the factual investigation conducted (which may be reasonably limited to the
extent acceptable to counsel to the Underwriters) and may state as to matters of
fact that such counsel is relying exclusively, without independent investigation
or review, on one or more certificates of public officials, governmental
agencies or departments or officers of the Company provided that counsel shall
state that it knows of no reason why such reliance is not reasonable. In
addition, as to matters of law, counsel for the Company may limit such opinion
to the laws of the District of Columbia, the State of Delaware, the federal laws
of the United States, and related regulations (but not including any laws,
statutes, ordinances, administrative decisions, rules or regulations or any
political subdivision thereof).
In giving the opinion required by this Section 5(b), Latham & Watkins
shall additionally state they have participated in the preparation of the
Registration Statement and the Prospectus, and in conferences with officers and
other representatives of the Company, and representatives of the independent
public accountants for the Company, and that, while they have not undertaken to
determine independently, and do not assume any responsibility for, the accuracy,
completeness, or fairness of the statements in the Registration Statement or
Prospectus, on the basis of the foregoing no facts have come to their attention
which causes them to believe that (i) the Registration Statement (except for the
financial statements and schedules thereto and other financial and statistical
information
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<PAGE>
and data included therein or omitted therefrom, as to which such counsel need
express no opinion), at the time the Registration Statement became effective,
contained an untrue statement of a material fact or omitted 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, or
that the Prospectus, as of the date of such opinion (except as aforesaid),
contained an untrue statement of a material fact or omits to state a material
fact necessary in order to make, not misleading, (ii) there are any legal or
governmental proceedings pending or threatened against the Company that are
required to be disclosed in the Registration Statement or the Prospectus (except
for the financial statements and schedules thereto, as to which such counsel
need express no opinion), other than those disclosed therein or (iii) there are
any contracts or documents of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement that are not described or referred to therein or so
filled.
In basing their opinion and other matters set forth therein on
"knowledge" or other words to that effect, such phrase shall mean the actual
knowledge (i.e., the conscious awareness of facts or other information) of
lawyers in the firm who have given substantive legal attention to representing
the Company or its affiliates in connection with this Agreement and the
transactions contemplated thereunder.
(c) Hogan & Hartson L.L.P., counsel for the Underwriters, shall have
furnished to the Underwriters its favorable opinion dated as of each Closing
Time, to the effect that each of the opinions and the letter delivered pursuant
to Section 5(b) appears on its face to be appropriately responsive to the
requirements of this Agreement except, specifying the same, to the extent waived
by the Underwriters, and with respect to the legal existence of the Company, the
validity of the Common Shares and this Agreement, the Registration Statement,
the Prospectus and such other related matters as the Underwriters may require.
In giving such opinion such counsel may rely, as to all matters governed by the
laws of jurisdictions other than the law of the District of Columbia and the
federal law of the United States, upon the opinions of counsel satisfactory to
the Underwriters.
(d) At each Closing Time, (i) no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been instituted or, to the Company's
knowledge, threatened, (ii) the Registration Statement and the Prospectus, as
they may then be amended or supplemented, shall contain all statements that are
required to be stated therein under the Rules and Regulations and applicable law
in all material respects shall conform to the requirements of the Rules and
Regulations and neither the Registration Statement nor the Prospectus, as they
may then be amended or supplemented, shall contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
-22-
<PAGE>
necessary to make the statements therein in the light of the circumstances under
which they were made, not misleading, (iii) there shall not have been since the
latest respective dates as of which information is given in the Registration
Statement and the Prospectus, any material adverse change or development
involving a prospective material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company,
whether or not arising in the ordinary course of business, (iv) no action suit
or proceeding shall be pending or, to the knowledge of the Company, threatened
against the Company that would be required to be set forth in the Prospectus
other than as set forth therein and no proceedings shall be pending or, to the
knowledge of the Company, threatened against the Company before or by any
government, governmental instrumentality or court, domestic or foreign, that
could result in any material adverse change in the condition (financial or
otherwise), earnings, business affairs or business prospects of the Company,
other than as set forth in the Prospectus, (v) the Company shall have complied
with all agreements and satisfied all conditions on its part to be performed or
satisfied, in each case in connection with the sale of the Common Shares
hereunder, at or prior to each Closing Time, (vi) no event of default shall
exist under any contract, indenture, mortgage, loan agreement, note, lease or
other agreement or instrument of indebtedness of the Company, and (vii) the
other representations and warranties of the Company set forth in Section 1(a)
shall be accurate as though expressly made at and as of each Closing Time. At
each Closing Time, the Underwriters shall have received a certificate of the
Chairman or the President of the Company, and the Chief Financial Officer of the
Company, dated as of such Closing Time, to such effect.
(e) At the time of the execution of this Agreement, the Underwriters
shall have received from Ernst & Young LLP a letter, dated the date of this
Agreement, in form and substance satisfactory to the Underwriters, to the effect
that (i) they are independent public accountants with respect to the Company
within the meaning of the Rules and Regulations; (ii) in their opinion the
financial statements and supporting schedules included in the Registration
Statement and the Prospectus and covered by their opinion therein comply as to
form in all material respects with the applicable accounting requirements of the
Act and the Rules and Regulations; (iii) based upon procedures set forth in
detail in such letter, nothing has come to their attention which causes them to
believe that (A) any unaudited financial statements of the Company included in
the Registration Statement and the Prospectus do not comply as to form in all
material respects with the applicable accounting requirements of the Rules and
Regulations, or are not fairly presented in conformity with generally accepted
accounting principles applied on a basis consistent in all material respects
with the audited financial statements included in the Registration Statement and
the Prospectus, (B) at a specified date not more than five days prior to the
date of this Agreement, there has been any change in the capital stock of the
Company or any increase in the long term debt of the Company or any decrease in
net assets as compared with the amounts shown in the June 30, 1996 balance sheet
included in the Registration Statement and the
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<PAGE>
Prospectus, or during the period from June 30, 1996 to October __, 1996, or (C)
there were any decreases, as compared with the corresponding period in the
preceding year, in income and net income of the Company, except in all instances
for changes, increases or decreases which the Registration Statement and the
Prospectus discloses have occurred or may occur; and (iv) in addition to the
examination referred to in their opinion and the procedures referred to in
clause (iii) above, they have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information which are included in the Registration Statement and the
Prospectus and which are specified by the Underwriters, and have found such
amounts, percentages and financial information to be in agreement with the
relevant accounting, financial and other records of the Company identified in
such letter.
(f) At each Closing Time, the Underwriters shall have received from
Ernst & Young LLP a letter, dated as of such Closing Time, to the effect that
they reaffirm the statements made in the letter furnished pursuant to subsection
(e) of this Section 5, except that the specified date referred to shall be a
date not more than five days prior to such Closing Time.
(g) At each Closing Time, counsel for the Underwriters shall have been
furnished with all such documents, certificates and opinions as they may
reasonably request for the purpose of enabling them to pass upon the issuance
and sale of the Common Shares as herein contemplated and the matters referred to
in Section 5(c) and in order to evidence the accuracy and completeness of any of
the representations, warranties or statements of the Company, the performance of
any of the covenants of the Company or the fulfillment of any of the conditions
herein contained; and all actions taken by the Company at or prior to each
Closing Time in connection with the authorization, issuance and sale of the
Common Shares as herein contemplated shall be satisfactory in form and substance
to the Underwriters and counsel for the Underwriters.
If any condition to the Underwriters' obligations specified in this
Section 5 shall not have been fulfilled when and as required to be fulfilled by
this Agreement, this Agreement may be terminated by the Underwriters by notice
to the Company at any time at or prior to the First Closing Time, and such
termination shall be without liability of any part to any other party except as
provided in Section 4 hereof. Notwithstanding any such termination, the
provisions of Sections 6, 7 and 9 hereof shall remain in effect.
SECTION 6. Indemnification.
---------------
(a) The Company agrees to indemnify and hold harmless the Underwriters
and each person if any, who controls the Underwriters within the meaning of
Section 15 of the Act or Section 20 of the Securities and Exchange Act of 1934,
as amended (the "Exchange Act"), as follows:
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<PAGE>
(i) against-any and all loss, liability, claim, damage and
expense whatsoever, as incurred, arising out of (A) any untrue
statement or alleged untrue statement made by the Company in Section 1
hereof, or (B) any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement (or any
amendment thereto) or in any blue sky application or other document
executed by the Company specifically for that purpose or based upon
written information furnished by the Company filed in any state or
other jurisdiction in order to qualify any or all of the Common Shares
under the securities laws thereof (any such application, document or
information filing hereinafter called a "Blue Sky Application"), or
the omission or alleged omission therefrom of 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 arising out of an untrue statement or alleged untrue
statement of a material fact contained in any Preliminary Prospectus
or the Prospectus (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of 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;
(ii) against any and all loss, liability, claim, damage and
expense whatsoever, as incurred, to the extent of the aggregate amount
paid in settlement of any litigation, or investigation or proceeding
by any governmental agency or body, commenced or threatened, or any
claim whatsoever based upon any such untrue statement or omission, or
any such alleged untrue statement or omission, if such settlement is
effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred,
(including, subject to Section 6(c) below, fees and disbursements of
counsel chosen by the Underwriters) reasonably incurred in
investigating, preparing or defending against any litigation, or
investigation or proceeding by any governmental agency or body,
commenced or threatened, or any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
subparagraph (i) or (ii) above;
Provided however, that the indemnification provided hereunder does not apply to
- ----------------
any loss, liability, claim, damage or expense to the extent arising out of (i)
any untrue statement or omission or alleged untrue statement or omission made in
reliance upon and in conformity with Underwriters' Information, or (ii) any
untrue statement or omission or alleged untrue statement or omission contained
in any Preliminary Prospectus and corrected in the Prospectus and (A) such loss,
liability, claim, damage or expense suffered by the Underwriters (or person
controlling the Underwriters) resulted from an action, claim or suit by a person
who purchased the
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<PAGE>
Common Shares from the Underwriters in the Offering and (B) the Underwriters
failed to deliver a copy of the Prospectus (as then amended, if the Company
shall have amended the Prospectus) to such person at or prior to the
confirmation of the sale of such Common Shares in any case where such delivery
is required by the Act or by the Rules and Regulations, unless such failure was
due to failure by the Company to provide copies of the Prospectus (as so
amended) to the Underwriters as required by this Agreement. The indemnification
obligations of the Company hereunder shall be in addition to any liability which
the Company may otherwise have.
(b) The Underwriters agree to indemnify and hold harmless the Company,
its directors, each of its officers who signed the Registration Statement and
each person, if any, who controls the Company within the meaning of Section 15
of the Act or Section 20 of the Exchange Act, against any and all loss,
liability, claim, damage and expense described in the indemnity contained in
Section 6(a) hereof but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in any Preliminary Prospectus or
Prospectus (or any amendment or supplement thereto) in reliance upon and in
conformity with Underwriters' Information.
(c) Each indemnified party shall give notice as promptly as reasonably
practicable to each indemnifying party of any action commenced or threatened
against it in respect of which indemnity may be sought hereunder, but failure to
so notify an indemnifying party shall not relieve such indemnifying party from
any liability which it may have otherwise than on account of this indemnity
agreement. An indemnifying party may participate at its own expense in the
defense of any such action. If it so elects within a reasonable time after
receipt of such notice, an indemnifying party, jointly with any other
indemnifying parties receiving such notice, may assume the defense of such
action with counsel chosen by it and approved by the indemnified parties
defendant in such action, unless such indemnified parties reasonably object to
such assumption on the ground that there may be legal defenses available to them
which are different from or in addition to those available to such indemnifying
party. If an indemnifying party assumes the defense of such action, the
indemnifying parties shall not be liable for any fees and expenses of counsel
for the indemnified parties incurred thereafter in connection with such action.
In no event shall the indemnifying party or parties be liable for fees and
expenses of more than one counsel (in addition to local counsel) separate from
counsel for the indemnifying party or parties for all indemnified parties in
connection with any one action or separate but similar or related actions in the
same jurisdiction arising out of the same general allegations or circumstances.
SECTION 7. Contribution. In order to provide for just and equitable
------------
contribution in circumstances under which the indemnity provided for in Section
6 hereof is for any reason held to be unenforceable by the indemnified parties
although applicable in accordance with its terms, the Company and the
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<PAGE>
Underwriters shall contribute to the aggregate losses, liabilities, claims,
damages and expenses of the nature contemplated by such indemnity incurred by
the Company and the Underwriters, as incurred, in such proportions that (a) the
Underwriters is responsible for that portion represented by the percentage that
the underwriting discount appearing on the cover page of the Prospectus bears to
the initial public offering price appearing thereon and (b) the Company is
responsible for the balance; provided however, that 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, each person if any,
who controls the Underwriters within the meaning of Section 15 of the Act or
Section 20 of the Exchange Act shall have the same rights to contribution as the
Underwriters, and each director of the Company, each officer of the Company who
signed the Registration Statement and each person, if any, who controls the
Company within the meaning of Section 15 of the Act or Section 20 of the
Exchange Act shall have the same rights to contribution as the Company.
SECTION 8. Default of Underwriters. It shall be a condition to this
-----------------------
Agreement and the obligation of the Company to sell and deliver the Common
Shares hereunder, and a condition of your obligations or the obligation of each
Underwriter, as the case may be, to purchase the Common Shares in the manner as
described herein, that, except as hereinafter in this paragraph provided, each
of you or the Underwriters, as the case may be, shall purchase and pay for all
the Common Shares agreed to be purchased by you or such Underwriter hereunder
upon tender to you individually or as the Representative of the Underwriters, of
all such shares in accordance with the terms hereof. If any Underwriter or
Underwriters default in their obligations to purchase Common Shares hereunder on
either the First or Option Closing Time and the aggregate number of Common
Shares which such defaulting Underwriter or Underwriters agreed but failed to
purchase at such Closing Time does not exceed 10% of the total number of Common
Shares which the Underwriters are obligated to purchase at such Closing Time,
the non-defaulting Underwriters shall be obligated severally, in proportion to
their respective commitments hereunder, to purchase the Common Shares which such
defaulting Underwriters agreed but failed to purchase at such Closing Time. If
any Underwriter or Underwriters so default and the aggregate number of Common
Shares with respect to which such default occurs is more than the above
percentage and arrangements satisfactory to the Representative and the Company
for the purchase of such Common Shares by other persons are not made within 48
hours after such default, this Agreement will terminate without liability on the
part of any non-defaulting Underwriter or the Company except for the expenses to
be paid by the Company pursuant to Section 4 hereof and except to the extent
provided in Sections 6 and 7 hereof.
If applicable, in the event that Common Shares to which a default
relates are to be purchased by the nondefaulting entities or by another party or
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<PAGE>
parties, you or the Company shall have the right to postpone the First or Option
Closing Time, as the case may be, for not more than five business days in order
that the necessary changes in the Registration Statement, Prospectus and any
other documents, as well as any other arrangements, may be effected. As used in
this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
SECTION 9. Representations, Warranties and Agreements to Survive Delivery.
--------------------------------------------------------------
All representations, warranties, indemnities, agreements and other statements of
the Company or its officers and the Underwriters set forth in or made pursuant
to this Agreement shall remain operative and in full force and effect regardless
of any investigation made by or on behalf of the Company or the Underwriters or
controlling person of the Underwriters and shall survive delivery of the Common
Shares to the Underwriters and payment therefor.
SECTION 10. Effective Date. This Agreement shall become effective upon
--------------
the later of (a) the execution of the Pricing Agreement and (b) release by the
SEC of the notification of effectiveness of the Registration Statement. Should
this Agreement not become effective at or prior to 11:59 p.m. on the fourth
business day following the date hereof, such Agreement shall be of no further
effect between the parties thereto, without liability of any party to any other
party, except to the extent provided in Sections 4, 6 and 7 hereof.
SECTION 11. Termination of Agreement.
------------------------
(a) The Underwriters may terminate this Agreement, by notice to the
Company, at any time at or prior to the Closing Time (i) if there shall have
been, since the date of this Agreement or since the latest respective dates as
of which information is given in the Prospectus, any material adverse change in
the condition (financial or otherwise), earnings, business affairs or business
prospects of the Company, whether or not arising in the ordinary course of
business or (ii) if there shall have occurred any material adverse change in the
financial markets in the United States or any outbreak of hostilities or
escalation thereof or other calamity or crisis or material adverse change in
financial or economic conditions, in each case the effect of which on the
financial markets of the United States is such as to make it, in the
Underwriters' judgment, impracticable to market the Common Shares or to enforce
contracts for the sale of the Common Shares or (iii) if trading in any Common
Shares of the Company has been suspended by the Securities and Exchange
Commission (the "Commission"), SEC or the NASD, or if trading generally on the
New York Stock Exchange or the American Stock Exchange or in the over-the-
counter market has been suspended, or minimum or maximum prices for trading
shall have been filed, or maximum ranges for prices for Common Shares have been
required, by any such exchange or by order of the SEC, the NASD or any
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<PAGE>
other governmental authority or (iv) if a banking moratorium has been declared
by any one of authorized federal banking authorities.
(b) If this Agreement is terminated pursuant to this Section, such
termination shall be without liability of any party to any other party, except
to the extent provided in Section 4 hereof. Notwithstanding any such
termination, the provisions of Sections 6, 7 and 8 hereof shall remain in
effect.
SECTION 12. Notices. All notices and other communications under this
-------
Agreement and the Pricing Agreement shall be in writing and shall be deemed to
have been duly given if delivered, mailed or transmitted by any standard form of
telecommunication. Notices to the Underwriters shall be directed to Friedman,
Billings, Ramsey & Co., Inc., Potomac Towers, 1001 Nineteenth Street North,
Arlington, Virginia 22209, attention of Suzanne Richardson, Managing Director
(with a copy to J. Warren Gorrell, Jr., Hogan & Hartson L.L.P., 555 Thirteenth
Street, NW, Washington, DC 20004); and notices to the Company shall be directed
to it at 6800 Virginia Manor Road, Beltsville, Maryland 20705, attention of
________________.
SECTION 13. Successors. This Agreement will inure to the benefit of and
----------
be binding upon the parties hereto, and to the benefit of the officers and
directors and controlling persons referred to in Section 6, and in each case
their respective successors, personal representatives and assigns, and no other
person will have any right or obligation hereunder. Notwithstanding the
foregoing, this Agreement shall not be assignable by the parties. The term
"successors" shall not include any purchaser of the Common Shares as such from
the Underwriters merely by reason of such purchase.
SECTION 14. Partial Unenforceability. The invalidity or unenforceability
------------------------
of any Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision hereof.
If any Section, paragraph or provision of this Agreement is for any reason
determined to be invalid or unenforceable, there shall be deemed to be made such
minor changes (and only such minor changes) as are necessary to make it valid
and enforceable.
SECTION 15. Governing Law and Time. This Agreement and the Pricing
----------------------
Agreement shall be governed by and construed in accordance with the law of the
Commonwealth of Virginia without regard to principles of conflicts of laws.
Except as otherwise set forth herein, specified times of day refer to
Washington, D.C. time.
SECTION 16. General. This Agreement constitutes the entire agreement of
-------
the parties to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with respect to
the subject matter hereof. This Agreement may be executed in several
counterparts, each one of which shall be an original, and all of which shall
constitute one and the same document.
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<PAGE>
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in this
Agreement are for the convenience of the parties only and will not affect the
construction or interpretation of this Agreement. This Agreement may be amended
or modified, and the observance of any term of this Agreement may be waived,
only by a writing signed by the Company and Friedman, Billings, Ramsey & Co.,
Inc.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the several Underwriters and the Company in accordance with its terms.
Very truly yours,
DIGEX, INCORPORATED
By:
----------------------------------
Name:
--------------------------------
Title:
-------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
-----------------------------------
Name:
---------------------------------
Authorized Signatory
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<PAGE>
EXHIBIT A
DIGEX, INCORPORATED
3,750,000 Shares of Common Stock
($.01 par value per share)
PRICING AGREEMENT
-----------------
, 1996
-------------------
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
Potomac Towers
1001 Nineteenth Street North
Arlington, Virginia 22209
Ladies and Gentlemen:
Reference is made to the Purchase Agreement, dated ___________, 1996
(the "Purchase Agreement"), relating to the purchase by the Underwriters, with
Friedman, Billings, Ramsey & Co., Inc., as their representative (the
"Underwriters") of the above Shares of DIGEX, Incorporated (the "Company").
Pursuant to Section 2 of the Purchase Agreement, the Company agrees
with the Underwriters as follows:
1. The initial public offering prices for the Shares, determined as
provided in said Section 2, shall be $_________ per Share.
2. The purchase prices for the Shares to be paid by the Underwriters
shall be $___________ per Share (the "Purchase Price"), being an amount equal to
the initial public offering price set forth above less $___________ per Share.
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof, whereupon
this instrument, along with all counterparts, will become a binding agreement
between the Underwriters and the Company in accordance with its terms.
Very truly yours,
DIGEX, INCORPORATED
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
FRIEDMAN, BILLINGS, RAMSEY & CO., INC.
By:
-----------------------------------
Name:
---------------------------------
Suzanne Richardson
Title: Managing Director
-2-
<PAGE>
SCHEDULE A
==============================================================================
<TABLE>
<CAPTION>
Number of Firm
Common Shares
Name of Underwriter To Be Purchased
- --------------------- ---------------
<S> <C> <C>
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
- --------------------- ---------------------
---------
Total................ 3,750,000
---------
==============================================================================
</TABLE>
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGEX, INCORPORATED
DIGEX, INCORPORATED, a corporation organized and existing under the laws of
the State of Delaware (the "Corporation), hereby certifies as follows:
1. The name of the Corporation is DIGEX, INCORPORATED.
2. This Amended and Restated Certificate of Incorporation amends and
restates the Certificate of Incorporation of the Corporation dated June 4, 1996.
3. This Amended and Restated Certificate of Incorporation was duly adopted
by the sole stockholder of the Corporation in accordance with the applicable
provisions of Sections 228, 242 and 245 of the General Corporation Law of the
State of Delaware. Written notice of the adoption of this Amended and Restated
Certificate of Incorporation has been given as required by Section 228 thereof.
4. The text of the Certificate of Incorporation of the Corporation is
hereby amended and restated as herein set forth in full:
FIRST: The name of the corporation (hereinafter referred to as the
"Corporation") is:
DIGEX, INCORPORATED
SECOND: The address of the registered office of the Corporation in the
State of Delaware is 1209 Orange Street, New Castle County, Wilmington, Delaware
19801. The name of its registered agent at such address is The Corporation
Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware.
FOURTH: The total number of shares of all classes of capital stock which
the Corporation shall have authority to is 50,000,000 shares, consisting of
47,000,000 shares of common stock, par value $0.01 per share (the "Common
Stock"), and 3,000,000 shares of preferred stock, par value $0.01 per share (the
"Preferred Stock").
No holder of shares of the Corporation of any class, now or hereafter
authorized, shall have any preferential or preemptive right to subscribe for,
purchase or receive any share of the
<PAGE>
Corporation of any class, now or hereafter authorized, or any options or
warrants for such shares, or any rights to subscribe to or purchase such shares,
or any securities convertible into or exchangeable for such shares, which may at
any time or from time to time be issued, sold or offered for sale by the
Corporation; provided, however, that in connection with the issuance or sale of
any such shares or securities, the Board of Directors of the Corporation may, in
its sole discretion, offer such shares or securities, or any part thereof, for
purchase or subscription by the holders of shares of the Corporation, except as
may otherwise be provided by this Certificate of Incorporation as from time to
time amended.
At all times, each holder of common stock of the Corporation shall be
entitled to one vote for each share of Common Stock held by such stockholder
standing in the name of such stockholder on the books of the Corporation.
The Board of Directors is authorized to provide for the issuance of the
shares of Preferred Stock from time to time in one or more series and, by filing
a certificate pursuant to the applicable law of the State of Delaware, to
establish the number of shares to be included in each series, and to fix the
designation, powers, preferences and rights of the shares of each such series
and the qualifications, limitations, or restrictions thereof.
The authority of the Board of Directors with respect to each such series of
Preferred Stock shall include, but not be limited to, determination of the
following:
(1) The number of shares constituting that series and the distinctive
designation of that series;
(2) The dividend rate on the shares of that series, whether dividends shall
be cumulative, and, if so, from which date or dates, and the relative rights of
priority, if any, of payment of dividends on shares of that series;
(3) Whether that series shall have voting rights, in addition to the voting
rights provided by law, and, if so, the terms of such voting rights;
(4) Whether that series shall have conversion privileges, and, if so, the
terms and conditions of such conversion, including provision for adjustment of
the conversion rate in such events as the Board of Directors shall determine;
(5) Whether the shares of that series shall be redeemable, and, if so, the
terms and conditions of such redemption, including the date or dates upon or
after which they shall be
2
<PAGE>
redeemable, and the amount per share payable in case of redemption, which amount
may vary under different conditions and at different redemption dates;
(6) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(7) The right of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution, or winding up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series; and
(8) Any other relative rights, preferences, and limitations of that series.
FIFTH: The number of the directors of the Corporation shall be fixed from
time to time by or pursuant to the By-Laws of the Corporation. The directors
shall be classified, with respect to the time for which they severally hold
office, into three classes, as nearly equal in number as possible, as shall be
provided in the manner specified in the By-Laws of the Corporation, one class to
be originally elected for a term expiring at the annual meeting of stockholders
to be held in 1997, another class to be originally elected for a term expiring
at the annual meeting of stockholders to be held in 1998, and another class to
be originally elected for a term expiring at the annual meeting of stockholders
to be held in 1999, with each class to hold office until its successor is
elected and qualified. At each annual meeting of the stockholders of the
Corporation, the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election.
Advance notice of stockholder nominations for the election of directors and
advanced notice of business to be brought by stockholders before an annual or
special meeting shall be given in the manner provided in the By-Laws of the
Corporation.
Newly created directorships resulting from any increase in the number of
directors and any vacancies on the board of directors resulting from death,
resignation, disqualification, removal or other cause shall be filled by the
affirmative vote of a majority of the remaining directors then in office, even
though less than a quorum of the board of directors. Any directors elected in
accordance with the preceding sentence shall hold office for the remainder of
the full term of the class of directors in which the new directorship was
created or the vacancy occurred and until such director's successor shall have
been elected and qualified. No decrease in the number of directors constituting
the board of directors
3
<PAGE>
shall shorten the term of any incumbent director.
Any director may be removed from office, with or without cause, and only by
the affirmative vote of the holders of at least 75% of the voting power of all
the shares of the Corporation entitled to vote generally in the election of
directors, voting together as a single class.
Notwithstanding anything contained in this Certificate of Incorporation to
the contrary, the affirmative vote of the holders of at least 75% of the voting
power of all the shares of the Corporation entitled to vote generally in the
election of directors, voting together as a single class, shall be required to
alter, amend or adopt any provision inconsistent with or repeal this Article
FIFTH.
SIXTH: Notwithstanding any other provision of this Certificate of
Incorporation, any action required or permitted to be taken by the stockholders
of the Corporation must be effected at a duly called annual or special meeting
of such holders and may not be effected by any consent in writing by such
holders. Special meetings of stockholders of the Corporation may be called only
by the board of directors pursuant to a resolution approved by a majority of the
entire board of directors. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 75% of the voting power of all the shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class, shall be required to alter, amend or adopt any provision
inconsistent with or repeal this Article SIXTH.
SEVENTH: The board of directors shall have power to make, alter, amend and
repeal the By-Laws of the Corporation (except insofar as the By-Laws of the
Corporation adopted by the stockholders shall otherwise provide). Any By-Laws
made by the directors under the powers conferred hereby may be altered, amended
or repealed by the directors or by the stockholders. Notwithstanding the
foregoing and anything contained in this Certificate of Incorporation to the
contrary, Section 6, Section 7, Section 9, Section 10 and Section 11 of Article
II of the By-Laws of the Corporation and Section 1 and Section 2 of Article III
of the By-Laws of the Corporation shall not be altered, amended or repealed and
no provision inconsistent therewith shall be adopted without the affirmative
vote of the holders of at least 75% of the voting power of all the shares of the
Corporation entitled to vote generally in the election of directors, voting
together as a single class. Notwithstanding anything contained in this
Certificate of Incorporation to the contrary, the affirmative vote of the
holders of at least 75% of the voting power of all the shares of the Corporation
entitled to vote generally in
4
<PAGE>
the election of directors, voting together as a single class, shall be required
to alter, amend or adopt any provision inconsistent with or repeal this Article
SEVENTH.
EIGHTH: The stockholders and directors shall have power to hold their
meetings and keep the books, documents and papers of the Corporation outside the
State of Delaware, at such places as may be from time to time designated by the
By-Laws or by resolution of the stockholders or directors.
NINTH: Election of directors need not be by written ballot unless the By-
Laws of the Corporation shall so provide.
TENTH: No director of the Corporation shall be liable to the Corporation
or its stockholders for monetary damages for the breach of fiduciary duty as a
director, except for liability (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 involved intentional misconduct or a knowing violation of
law, (iii) under Section 174 of the Delaware General Corporation Law, or (iv)
for any transaction from which the director derived an improper personal
benefit.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provisions contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by the law of the State of Delaware and this
Certificate of Incorporation. All rights conferred upon stockholders herein are
granted subject to this reservation.
5
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed by its Chief Executive Officer as of this day of October, 1996.
---
DIGEX, INCORPORATED
/s/ Christopher R. McCleary
--------------------------------
Christopher R. McCleary
Chief Executive Officer
ATTEST:
/s/ William A. Pendley
- ---------------------------
William A. Pendley
Secretary
<PAGE>
BY-LAWS
OF
DIGEX, INCORPORATED
ARTICLE I
OFFICES
-------
Section 1. The registered office shall be in the City of Wilmington,
County of New Castle, State of Delaware.
Section 2. The corporation may also have offices at such other places both
within and without the State of Delaware as the Board of Directors may from time
to time determine or the business of the corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
------------------------
Section 1. Meetings of stockholders shall be held at any place within or
outside the State of Delaware designated by the Board of Directors. In the
absence of any such designation, stockholders' meetings shall be held at the
principal executive office of the corporation.
Section 2. The annual meeting of stockholders shall be held each year on a
date and a time designated by the Board of Directors. At each annual meeting
directors shall be elected and any other proper business may be transacted.
Section 3. A majority of the stock issued and outstanding and entitled to
vote at any meeting of stockholders, the holders of which are present in person
or represented by proxy, shall constitute a quorum for the transaction of
business except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws. A quorum, once established, shall not be
broken by the withdrawal of enough votes to leave less than a quorum and the
votes present may continue to transact business until adjournment. If, however,
such quorum shall not be present or represented at any meeting of the
stockholders, a majority of the voting stock represented in person or by proxy
may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally notified. If the adjournment is for more than thirty days, or if
after the adjournment a new
<PAGE>
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote thereat.
Section 4. When a quorum is present at any meeting, the vote of the
holders of a majority of the stock having voting power present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which by express provision of the statutes, or
the Certificate of Incorporation, or these By-Laws, a different vote is required
in which case such express provision shall govern and control the decision of
such question.
Section 5. At each meeting of the stockholders, each stockholder having
the right to vote may vote in person or may authorize another person or persons
to act for him by proxy appointed by an instrument in writing subscribed by such
stockholder and bearing a date not more than three years prior to said meeting,
unless said instrument provides for a longer period. All proxies must be filed
with the Secretary of the corporation at the beginning of each meeting in order
to be counted in any vote at the meeting. Each stockholder shall have such
number of votes for each share of stock as designated in the Certificate of
Incorporation, registered in his name on the books of the corporation on the
record date set by the Board of Directors as provided in Article V, Section 6
hereof. All elections shall be had and all questions decided by a plurality
vote.
Section 6. Special meetings of the stockholders, for any purpose, or
purposes, unless otherwise prescribed by statute or by the Certificate of
Incorporation, may be called only by the Chairman of the Board of Directors
pursuant to a resolution approved by a majority of the Board of Directors.
Section 7. Whenever stockholders are required or permitted to take any
action at a meeting, a written notice of the meeting shall be given which notice
shall state the place, date and hour of the meeting, and, in the case of a
special meeting, the purpose or purposes for which the meeting is called. The
written notice of any meeting shall be given to each stockholder entitled to
vote at such meeting not less than ten nor more than sixty days before the date
of the meeting. If mailed, notice is given when deposited in the United States
mail, postage prepaid, directed to the stockholder at his address as it appears
on the records of the corporation. Business transacted at any meeting of
stockholders shall be limited to the purposes stated in the notice.
Section 8. The officer who has charge of the stock ledger of the
corporation shall
2
<PAGE>
prepare and make, at least ten days before every meeting of stockholders, a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder. Such list shall be open to
the examination of any stockholder, for any purpose germane to the meeting,
during ordinary business hours, for a period of at least ten days prior to the
meeting, either at a place within the city where the meeting is to be held,
which place shall be specified in the notice of the meeting, or, if not so
specified, at the place where the meeting is to be held. The list shall also be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
Section 9. Any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of such holders and may not be effected by any consent in
writing by such holders.
Section 10. At any annual meeting of the stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To
be properly brought before an annual meeting, business must be specified in the
notice of meeting (or any supplement thereto) given by or at the direction of
the board, otherwise properly brought before the meeting by a stockholder.
In addition to any other applicable requirements, for business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered to or mailed and received at
the principal executive offices of the Corporation, not less than 50 days nor
more than 60 days prior to the annual meeting; provided, however, that in the
event that less than 50 days' notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the stockholder to be
timely must be so received not later than the close of business on the 10th day
following the day on which such notice of the date of the annual meeting was
mailed or such public disclosure was made. A stockholder's notice to the
Secretary shall set forth as to each matter the stockholder proposes to bring
before the annual meeting: (i) a brief description of the business desired to be
brought before the annual meeting and the reasons for conducting such business
at the annual meeting, (ii) the name and record address of the stockholder of
record proposing such business, (iii) the class and number of shares of the
Corporation which are beneficially owned by the stockholder, and
3
<PAGE>
(iv) any material interest of the stockholder in such business.
Notwithstanding anything in the By-laws to the contrary, no business shall
be conducted at any annual meeting except in accordance with the procedures set
forth in this Section 10 of this Article II provided, however, that nothing in
this Section 10 of this Article II shall be deemed to preclude discussion by any
stockholder of any business properly brought before the annual meeting in
accordance with said procedure.
The chairman of an annual meeting shall, if the facts warrant, determine
and declare to the meeting that business was not properly brought before the
meeting in accordance with the provisions of this Section 10 of this Article II,
and if he should so determine, he shall so declare to the meeting and any such
business not properly brought before the meeting shall not be transacted.
Section 11. Only persons who are nominated in accordance with the
following procedures shall be eligible for election as Directors. Nominations
of persons for election to the board of the Corporation may be made at a meeting
of stockholders by or at the direction of the Board of Directors, by any
nominating committee or person appointed by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of Directors at
the meeting who complies with the notice procedures set forth in this Section 11
of this Article II. Such nominations, other than those made by or at the
direction of the Board of Directors, shall be made pursuant to timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered to or mailed and received at the principal executive
offices of the Corporation not less than 50 days nor more than 60 days prior to
the meeting; provided, however, that in the event that less than 50 days' notice
or prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the 10th day following the day on which such
notice of the date of the meeting was mailed or such public disclosure was made.
Such stockholder's notice to the Secretary shall set forth: (a) as to each
person whom the stockholder proposes to nominate for election or re-election as
a Director, (i) the name, age, business address and residence address of the
person, (ii) the principal occupation or employment of the person, (iii) the
class and number of shares of capital stock of the Corporation which are
beneficially owned by the person, (iv) any other information relating to the
person that is required to be disclosed in solicitations of proxies for election
of Directors pursuant to Regulation 14A under the Securities
4
<PAGE>
Exchange Act of 1934, as amended, and (v) any other information relating to the
person that is required pursuant to any statute, or any rule or regulation of
any governmental authority; and (b) as to the stockholder giving the notice (i)
the name and record address of the stockholder, and (ii) the class and number of
shares of capital stock of the Corporation which are beneficially owned by the
stockholder. The Corporation may require any proposed nominee to furnish such
other information as may reasonably be required by the Corporation to determine
the eligibility of such proposed nominee to serve as a Director of the
Corporation. No person shall be eligible for election as a Director of the
Corporation unless nominated in accordance with the procedures set forth herein.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
ARTICLE III
DIRECTORS
---------
Section 1. The number of directors which shall constitute the whole Board
shall be fixed from time to time by the Board of Directors. The directors shall
be classified, with respect to the time for which they severally hold office,
into three classes, as nearly equal in number as possible, as determined by the
Board of Directors of the Corporation, one class to be originally elected for a
term expiring at the annual meeting of stockholders to be held in 1997, another
class to be originally elected for a term expiring at the annual meeting of
stockholders to be held in 1998, and another class to be originally elected for
a term expiring at the annual meeting of stockholders to be held in 1999, with
each class to hold office until its successor is elected and qualified. At each
annual meeting of the stockholders of the Corporation, the successors of the
class of directors whose term expires at that meeting shall be elected to hold
office for a term expiring at the annual meeting of stockholders held in the
third year following the year of their election. Any director may be removed
from office, with or without cause and only by the affirmative vote of the
holders of at least 75% of the voting power of all the shares of the Corporation
entitled to vote generally in the election of directors, voting together as a
single class.
Section 2. Newly created directorships resulting from any increase in the
number of directors or any vacancies on the board of directors resulting from
death, resignation, disqualification,
5
<PAGE>
removal or other cause shall be filled by the affirmative vote of a majority of
the remaining directors then in office, even though less than a quorum of the
board of directors. Any directors elected in accordance with the preceding
sentence shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified. No
decrease in the number of directors constituting the board of directors shall
shorten the term of any incumbent director.
Section 3. The property and business of the corporation shall be managed
by or under the direction of its Board of Directors. In addition to the powers
and authorities by these By-Laws expressly conferred upon them, the Board may
exercise all such powers of the corporation and do all such lawful acts and
things as are not by statute or by the Certificate of Incorporation or by these
By-Laws directed or required to be exercised or done by the stockholders.
MEETINGS OF THE BOARD OF DIRECTORS
----------------------------------
Section 4. The directors may hold their meetings and have one or more
offices, and keep the books of the corporation outside of the State of Delaware.
Section 5. Regular meetings of the Board of Directors may be held without
notice at such time and place as shall from time to time be determined by the
Board.
Section 6. Special meetings of the Board of Directors may be called by the
President on forty-eight hours' notice to each director, either personally or by
mail or by telegram; special meetings shall be called by the President or the
Secretary in like manner and on like notice on the written request of two
directors unless the Board consists of only one director; in which case special
meetings shall be called by the President or Secretary in like manner or on like
notice on the written request of the sole director.
Section 7. At all meetings of the Board of Directors a majority of the
authorized number of directors shall be necessary and sufficient to constitute a
quorum for the transaction of business, and the vote of a majority of the
directors present at any meeting at which there is a quorum, shall be the act of
the Board of Directors, except as may be otherwise specifically provided by
statute, by the Certificate of Incorporation or by these By-Laws. If a quorum
shall not be present at any meeting of the Board of Directors the directors
present thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present. If only
6
<PAGE>
one director is authorized, such sole director shall constitute a quorum.
Section 8. Unless otherwise restricted by the Certificate of Incorporation
or these By-Laws, any action required or permitted to be taken at any meeting of
the Board of Directors or of any committee thereof may be taken without a
meeting, if all members of the Board or committee, as the case may be, consent
thereto in writing, and the writing or writings are filed with the minutes of
proceedings of the Board or committee.
Section 9. Unless otherwise restricted by the Certificate of Incorporation
or these By-Laws, members of the Board of Directors, or any committee designated
by the Board of Directors, may participate in a meeting of the Board of
Directors, or any committee, by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and such participation in a meeting shall
constitute presence in person at such meeting.
COMMITTEES OF DIRECTORS
-----------------------
Section 10. The Board of Directors may, by resolution passed by a majority
of the whole Board, designate one or more committees, each such committee to
consist of one or more of the directors of the corporation. The Board may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members thereof present at any meeting and not disqualified from voting, whether
or not he or they constitute a quorum, may unanimously appoint another member of
the Board of Directors to act at the meeting in the place of any such absent or
disqualified member. Any such committee, to the extent provided in the
resolution of the Board of Directors, shall have and may exercise all the powers
and authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the corporation to be
affixed to all papers which may require it; but no such committee shall have the
power or authority in reference to amending the Certificate of Incorporation,
adopting an agreement of merger or consolidation, recommending to the
stockholders the sale, lease or exchange of all or substantially all of the
corporation's property and assets, recommending to the stockholders a
dissolution of the corporation or a revocation of a dissolution, or amending the
By-Laws of the corporation; and, unless the resolution or the Certificate of
Incorporation expressly so provide, no such
7
<PAGE>
committee shall have the power or authority to declare a dividend or to
authorize the issuance of stock.
Section 11. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors when required.
COMPENSATION OF DIRECTORS
-------------------------
Section 12. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, the Board of Directors shall have the authority
to fix the compensation of directors. The directors may be paid their expenses,
if any, of attendance at each meeting of the Board of Directors and may be paid
a fixed sum for attendance at each meeting of the Board of Directors or a stated
salary as director. No such payment shall preclude any director from serving
the corporation in any other capacity and receiving compensation therefor.
Members of special or standing committees may be allowed like compensation for
attending committee meetings.
INDEMNIFICATION
---------------
Section 13.(a) The corporation shall indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
(b) The corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the
8
<PAGE>
corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the corporation and except that no such
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery of Delaware or the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which such Court of Chancery or such other court shall deem proper.
(c) To the extent that a director, officer, employee or agent of the
corporation shall be successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in paragraphs (a) and (b), or in defense
of any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
(d) Any indemnification under paragraphs (a) and (b) (unless ordered by a
court) shall be made by the corporation only as authorized in the specific case
upon a determination that indemnification of the director, officer, employee or
agent is proper in the circumstances because he has met the applicable standard
of conduct set forth in paragraphs (a) and (b). Such determination shall be
made (1) by the Board of Directors by a majority vote of a quorum consisting of
directors who were not parties to such action, suit or proceeding, or (2) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (3) by the stockholders.
(e) Expenses incurred by an officer or director in defending a civil or
criminal action, suit or proceeding may be paid by the corporation in advance of
the final disposition of such action, suit or proceeding upon receipt of an
undertaking by or on behalf of such director or officer to repay such amount if
it shall ultimately be determined that he is not entitled to be indemnified by
the
9
<PAGE>
corporation as authorized in this Section 13. Such expenses incurred by other
employees and agents may be so paid upon such terms and conditions, if any, as
the Board of Directors deems appropriate.
(f) The indemnification and advancement of expenses provided by, or granted
pursuant to, the other paragraphs of this Section 13 shall not be deemed
exclusive of any other rights to which those seeking indemnification or
advancement of expenses may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office.
(g) The Board of Directors may authorize, by a vote of a majority of a
quorum of the Board of Directors, the corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Section 13.
(h) For the purposes of this Section 13, references to "the corporation"
shall include, in addition to the resulting corporation, any constituent
corporation (including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued, would
have had power and authority to indemnify its directors, officers, and employees
or agents, so that any person who is or was a director, officer, employee or
agent of such constituent corporation, or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
shall stand in the same position under the provisions of this Section with
respect to the resulting or surviving corporation as he would have with respect
to such constituent corporation if its separate existence had continued.
(i) For purposes of this section, references to "other enterprises" shall
include employee benefit plans; references to "fines" shall include any excise
taxes assessed on a person with respect to an employee benefit plan; and
references to "serving at the request of the corporation" shall include service
as a director, officer, employee or agent of the corporation which imposes
duties on, or involves services by, such director, officer, employee or agent
with respect to an employee benefit plan, its participants or beneficiaries; and
a person who acted in good faith and in a manner he
10
<PAGE>
reasonably believed to be in the interest of the participants and beneficiaries
of an employee benefit plan shall be deemed to have acted in a manner "not
opposed to the best interests of the corporation" as referred to in this
section.
(j) The indemnification and advancement of expenses provided by, or granted
pursuant to, this Section 13 shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
ARTICLE IV
OFFICERS
--------
Section 1. The officers of this corporation shall be chosen by the Board
of Directors and shall include a President, a Secretary, and a Treasurer. The
corporation may also have at the discretion of the Board of Directors such other
officers as are desired, including a Chairman of the Board, a Chief Operating
Officer, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be appointed in accordance
with the provisions of Section 3 hereof. In the event there are two or more
Vice Presidents, then one or more may be designated as Executive Vice President,
Senior Vice President, or other similar or dissimilar title. At the time of the
election of officers, the directors may by resolution determine the order of
their rank. Any number of offices may be held by the same person, unless the
Certificate of Incorporation or these By-Laws otherwise provide.
Section 2. The Board of Directors, at its first meeting after each annual
meeting of stockholders, shall choose the officers of the corporation.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the Board.
Section 4. The salaries of all officers and agents of the corporation shall
be fixed by the Board of Directors.
Section 5. The officers of the corporation shall hold office until their
successors are chosen and qualify in their stead. Any officer elected or
appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. If the office of
11
<PAGE>
any officer or officers becomes vacant for any reason, the vacancy shall be
filled by the Board of Directors.
CHAIRMAN OF THE BOARD
---------------------
Section 6. The Chairman of the Board, if such an officer be elected, shall,
if present, preside at all meetings of the Board of Directors and exercise and
perform such other powers and duties as may be from time to time assigned to him
by the Board of Directors or prescribed by these By-Laws. If there is no
President, the Chairman of the Board shall in addition be the Chief Executive
Officer of the corporation and shall have the powers and duties prescribed in
Section 7 of this Article IV.
PRESIDENT
---------
Section 7. Subject to such supervisory powers, if any, as may be given by
the Board of Directors to the Chairman of the Board, if there be such an
officer, the President shall be the Chief Executive Officer of the corporation
and shall, subject to the control of the Board of Directors, have general
supervision, direction and control of the business and officers of the
corporation. He shall preside at all meetings of the stockholders and, in the
absence of the Chairman of the Board, or if there be none, at all meetings of
the Board of Directors. He shall be an ex-officio member of all committees and
shall have the general powers and duties of management usually vested in the
office of President and Chief Executive Officer of corporations, and shall have
such other powers and duties as may be prescribed by the Board of Directors or
these By-Laws.
CHIEF OPERATING OFFICER
-----------------------
Section 8. The Chief Operating Officer shall have the day to day
responsibility for the business operations of the Corporation, reporting to the
President and subject to the control of the Board of Directors.
VICE PRESIDENTS
---------------
Section 9. In the absence or disability of the President, the Vice
Presidents in order of their rank as fixed by the Board of Directors, or if not
ranked, the Vice President designated by the Board of Directors, shall perform
all the duties of the President, and when so acting shall have all the powers of
and be subject to all the restrictions upon the President. The Vice Presidents
shall have such other duties as from time to time may be prescribed for them,
respectively, by the Board of Directors.
12
<PAGE>
SECRETARY AND ASSISTANT SECRETARY
---------------------------------
Section 10. The Secretary shall attend all sessions of the Board of
Directors and all meetings of the stockholders and record all votes and the
minutes of all proceedings in a book to be kept for that purpose; and shall
perform like duties for the standing committees when required by the Board of
Directors. He shall give, or cause to be given, notice of all meetings of the
stockholders and of the Board of Directors, and shall perform such other duties
as may be prescribed by the Board of Directors or these By-Laws. He shall keep
in safe custody the seal of the corporation, and when authorized by the Board,
affix the same to any instrument requiring it, and when so affixed it shall be
attested by his signature or by the signature of an Assistant Secretary. The
Board of Directors may give general authority to any other officer to affix the
seal of the corporation and to attest the affixing by his signature.
Section 11. The Assistant Secretary, or if there be more than one, the
Assistant Secretaries in the order determined by the Board of Directors, or if
there be no such determination, the Assistant Secretary designated by the Board
of Directors, shall, in the absence or disability of the Secretary, perform the
duties and exercise the powers of the Secretary and shall perform such other
duties and have such other powers as the Board of Directors may from time to
time prescribe.
TREASURER AND ASSISTANT TREASURER
---------------------------------
Section 12. The Treasurer shall serve as Chief Financial Officer of the
corporation. He shall have the custody of the corporate funds and securities and
shall keep full and accurate accounts of receipts and disbursements in books
belonging to the corporation and shall deposit all moneys, and other valuable
effects in the name and to the credit of the corporation, in such depositories
as may be designated by the Board of Directors. He shall disburse the funds of
the corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the Board of Directors, at
its regular meetings, or when the Board of Directors so requires, an account of
all his transactions as Treasurer and of the financial condition of the
corporation. If required by the Board of Directors, he shall give the
corporation a bond, in such sum and with such surety or sureties as shall be
satisfactory to the Board of Directors, for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of his
death, resignation, retirement or removal from office, of all books, papers,
vouchers, money and other property of
13
<PAGE>
whatever kind in his possession or under his control belonging to the
corporation.
Section 13. The Assistant Treasurer, or if there shall be more than one,
the Assistant Treasurers in the order determined by the Board of Directors, or
if there be no such determination, the Assistant Treasurer designated by the
Board of Directors, shall, in the absence or disability of the Treasurer,
perform the duties and exercise the powers of the Treasurer and shall perform
such other duties and have such other powers as the Board of Directors may from
time to time prescribe.
ARTICLE V
CERTIFICATES OF STOCK
---------------------
Section 1. Every holder of stock of the corporation shall be entitled to
have a certificate signed by, or in the name of the corporation by, the Chairman
or Vice Chairman of the Board of Directors, or the President or a Vice
President, and by the Secretary or an Assistant Secretary, or the Treasurer or
an Assistant Treasurer of the corporation, certifying the number of shares
represented by the certificate owned by such stockholder in the corporation.
Section 2. Any or all of the signatures on the certificate may be a
facsimile. In case any officer, transfer agent, or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent, or registrar before such certificate is
issued, it may be issued by the corporation with the same effect as if he were
such officer, transfer agent, or registrar at the date of issue.
Section 3. If the corporation shall be authorized to issue more than one
class of stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualification, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in section 202 of the General Corporation Law of Delaware, in
lieu of the foregoing requirements, there may be set forth on the face or back
of the certificate which the corporation shall issue to represent such class or
series of stock, a statement that the corporation will furnish without charge to
each stockholder who so requests the powers, designations, preferences and
relative, participating, optional or other special rights of each class of stock
or series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
14
<PAGE>
LOST, STOLEN OR DESTROYED CERTIFICATES
--------------------------------------
Section 4. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing such
issue of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
TRANSFERS OF STOCK
------------------
Section 5. Upon surrender to the corporation, or the transfer agent of the
corporation, of a certificate for shares duly endorsed or accompanied by proper
evidence of succession, assignation or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
FIXING RECORD DATE
------------------
Section 6. In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of the stockholders, or any
adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date which shall
not be more than sixty nor less than ten days before the date of such meeting,
nor more than sixty days prior to any other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting; provided, however,
that the Board of Directors may fix a new record date for the adjourned meeting.
REGISTERED STOCKHOLDERS
-----------------------
Section 7. The corporation shall be entitled to treat the holder of record
of any share
15
<PAGE>
or shares of stock as the holder in fact thereof and accordingly shall not be
bound to recognize any equitable or other claim or interest in such share on the
part of any other person, whether or not it shall have express or other notice
thereof, save as expressly provided by the laws of the State of Delaware.
ARTICLE VI
GENERAL PROVISIONS
------------------
DIVIDENDS
---------
Section 1. Dividends upon the capital stock of the corporation, subject to
the provisions of the Certificate of Incorporation, if any, may be declared by
the Board of Directors at any regular or special meeting, pursuant to law.
Dividends may be paid in cash, in property, or in shares of the capital stock,
subject to the provisions of the Certificate of Incorporation.
Section 2. Before payment of any dividend there may be set aside out of any
funds of the corporation available for dividends such sum or sums as the
directors from time to time, in their absolute discretion, think proper as a
reserve fund to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interests of the
corporation, and the directors may abolish any such reserve.
CHECKS
------
Section 3. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers as the Board of Directors may from
time to time designate.
FISCAL YEAR
-----------
Section 4. The fiscal year of the corporation shall be fixed by resolution
of the Board of Directors.
SEAL
----
Section 5. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware". Said seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
NOTICES
-------
Section 6. Whenever, under the provisions of the statutes or of the
Certificate of Incorporation or of these By-Laws, notice is required to be given
to any director or stockholder, it shall
16
<PAGE>
not be construed to mean personal notice, but such notice may be given in
writing, by mail, addressed to such director or stockholder, at his address as
it appears on the records of the corporation, with postage thereon prepaid, and
such notice shall be deemed to be given at the time when the same shall be
deposited in the United States mail. Notice to directors may also be given by
telegram.
Section 7. Whenever any notice is required to be given under the provisions
of the statutes or of the Certificate of Incorporation or of these By-Laws, a
waiver thereof in writing, signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ANNUAL STATEMENT
----------------
Section 8. The Board of Directors shall present at each annual meeting, and
at any special meeting of the stockholders when called for by vote of the
stockholders, a full and clear statement of the business and condition of the
corporation.
ARTICLE VII
AMENDMENTS
----------
Section 1. These By-Laws may be altered, amended or repealed or new By-Laws
may be adopted by the stockholders or by the Board of Directors, when such power
is conferred upon the Board of Directors by the Certificate of Incorporation, at
any regular meeting of the stockholders or of the Board of Directors or at any
special meeting of the stockholders or of the Board of Directors if notice of
such alteration, amendment, repeal or adoption of new By-Laws be contained in
the notice of such special meeting. If the power to adopt, amend or repeal By-
Laws is conferred upon the Board of Directors by the Certificate of
Incorporation it shall not divest or limit the power of the stockholders to
adopt, amend or repeal By-Laws. Notwithstanding any provision of these By-Laws
to the contrary, Section 6, Section 7, Section 9, Section 10 and Section 11 of
Article II of these By-Laws and Section 1 and Section 2 of Article III of these
By-Laws shall not be altered, amended or repealed, and no provision inconsistent
therewith may be adopted, without the affirmative vote of the holders of at
least 75% of the voting power of all the shares of the Corporation entitled to
vote generally in the election of directors, voting together as a class.
17
<PAGE>
CERTIFICATE OF SECRETARY
------------------------
I, the undersigned, do hereby certify:
(1) That I am the duly elected and acting Secretary of DIGEX, Incorporated,
a Delaware corporation; and
(2) That the foregoing Restated By-Laws, comprising twenty (20) pages,
constitute the By-Laws of said corporation as duly approved and adopted by the
Board of Directors of said corporation as of October __ 1996.
IN WITNESS WHEREOF, I have here unto subscribed my name this _______ day of
October 1996.
-----------------------------------
Secretary
<PAGE>
Exhibit 10.2
DIGEX, INC with offices at 6800 Virginia Manor Road, Beltsville, Maryland 20705,
hereinafter referred to as "DIGEX", and LCI International Telecom Corp. with
offices at 8180 Greensboro Drive, Suite 800 McLean, Virginia 22102 hereinafter
referred to as "LCI", agree that the following terms and conditions shall govern
the sale and discounting of Products as herein defined.
1. Definitions.
-----------
1.1 Parties, Party. "Parties" means DIGEX and LCI, collectively. "Party"
--------------
means either DIGEX or LCI.
1.2 Agreement. "Agreement" means this Authorized LCI Agreement.
---------
1.3 Territory. "Territory" is designated as Continental United States.
---------
1.4 Service(s). The term "Service" or "Services" as used herein shall
---------
mean one or more of the items listed on EXHIBIT "1" hereto, as
changed from time to time in accordance with the provisions of this
Agreement.
1.5 * . The term * refers to the *
the Effective Date of the Agreement *
.
1.6 * . The term * is defined as the
cumulative time the * (as defined below) is
* (as defined in EXHIBIT "1")
1.7 Network Backbone. The term "Network Backbone" is defined as any
----------------
network interconnection that exists between a DIGEX Internet gateway
interconnection or Network Access Point ("NAP") and any DIGEX
interconnection device(s).
2. Appointment and Territory.
-------------------------
2.1 Authorization. DIGEX hereby authorizes LCI to purchase wholesale
-------------
nationwide Internet access and market, distribute and solicit orders*
for Services to LCI Customers (defined as customers of LCI
* ) subject to the terms and conditions of this Agreement.
2.2 Public Release of Information. No news releases, articles, brochures,
-----------------------------
advertisements, speeches or other informational releases concerning
this Agreement, the terms contained herein, or the relationship of
the Parties shall be made without written approval of LCI. DIGEX
agrees to give LCI reasonable advance time for review of any material
submitted to LCI for approval.
2.3 Non-Assignability. The Parties' rights under this Agreement are
-----------------
non-transferable, and may not be assigned or sub-licensed without
the prior written authorization of the other party, provided,
* (as defined below)
during the term of the Agreement, *
. For purposes of this provision,
*
.
2.4 No Authority to Make Agreements. Except as expressly permitted
-------------------------------
herein, neither Party shall have the authority to make any agreement
or incur any liability on behalf of the other party.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-1-
<PAGE>
2.5 Reserved Rights. DIGEX reserves the right to market the Services in
---------------
any manner and without limitation both within and outside of the
Territory.
3. Effective Date and Term.
-----------------------
3.1 Effective Date. This Agreement shall be effective, after execution
--------------
by both Parties, on the commencement date specified herein.
3.2 Term. The * term of this Agreement shall be for * months from the
----
commencement date specified herein.
3.3 * . LCI has option, exercisable in its sole discretion, to *
----
giving DIGEX written notice of its election to
* . Any *
will not be * .
4. Port Acquisition and Revenue.
----------------------------
4.1 * . DIGEX shall deliver to LCI * at *
-------------
of the Term setting forth: a) *
or as appropriate, * , to the most * and;
b) the applicable * set forth in EXHIBIT 2 for * . For
purposes of this Agreement, *
as of such date *
at the request of LCI and any other *
by LCI in DIGEX under the Agreement.
5. Commitment
----------
5.1 Total Commitment. LCI hereby commits to purchase from DIGEX
----------------
* of Services at the *
received by LCI from DIGEX *
during the Term.
5.2 LCI's satisfaction * will vary depending *
remaining as follows:
a. Inclusive of * , LCI shall use *
Services during * of the
Agreement * , LCI
shall *
of the Services and an *
. LCI will *
.
b. During * , LCI shall *
Services * .
If LCI * , LCI *
.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-2-
<PAGE>
c. Finally, during * , LCI shall
*
Services described *
. If LCI *
. LCI shall *
.
6. Responsibilities of LCI.
------------------------
6.1 LCI agrees to provide to DIGEX, * , a *
(" * " is defined *
. This * will initially be *
conjunction with * ;
subsequently the *
during the Term of this Agreement *
the DIGEX's netowrk *, *
.
6.2 LCI shall not use in its marketing effort any materials or make any
warranties or representations to LCI Customers regarding the Services
or DIGEX that are misleading or inaccurate, or otherwise not in
accordance with DIGEX's specifications, unless approved in advance in
writing by DIGEX.
6.3 LCI will *
for LCI Customers.
6.4 LCI will * and
will be * for * marketing, sales and
* .
7. Responsiblities of DIGEX.
-------------------------
DIGEX's responsibilities under this Agreement shall, in addition to
any others contained herein, be as follows:
7.1 Provision of Service. DIGEX will provide the Service for *
---------------------
and other areas within the coverage of
DIGEX's network. The Service will be available following the
successful placement into revenue service of a POP, completion,
integration, and testing of the POP, and receipt by DIGEX of all
necessary regulatory approvals, permits, licenses and certifications
for the POP.
7.2 * . DIGEX will provide LCI on * with
the * in reasonable detail sufficient *
. DIGEX will provide
* to LCI * and in *
; provided, however
* reserves the right to charge *
be made to * in the event that LCI requests that *
. DIGEX will advise LCI
and obtain LCI approval in writing of any such costs * .
7.3 Deactivation of Internet Services. DIGEX shall, upon receipt of
----------------------------------
written notice from LCI requesting deactivation of Internet Services,
promptly arrange for such deactivation, but LCI shall be liable for
all charges for port fees for LCI, activated at LCI's request, until
the end of the business day immediately following the date on which
DIGEX receives notice from LCI to deactivate such Services.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-3-
<PAGE>
7.4 DIGEX will provide to LCI upon LCI's request product training and
technical assistance to LCI as required *
. DIGEX will provide, at a
reasonable price, the necessary marketing and technical materials
required to effectively market the DIGEX Service offerings.
7.5 DIGEX will provide the Services to LCI Customers comparable to or
better than the services provided to other DIGEX customers.
7.6 DIGEX will *
.
7.7 DIGEX will *
.
7.8 DIGEX will *
. LCI will have the right, but not the
legal obligation, *
.
7.9 DIGEX will be responsible for and shall pay the costs associated with
carrying the access of Services, including the DS3 backhaul costs,
for the following:
a. The DIGEX POP to the internet Network Access Point ("NAP"); *
b. *
7.10 DIGEX agrees to schedule any downtime maintenance at times which will
minimize LCI Customer interruption. DIGEX will notify LCI of its
downtime maintenance schedule, and upon reasonable request from LCI,
DIGEX will re-schedule such maintenance at the convenience of LCI.
7.11 * . DIGEX agrees to *
.
7.12 DIGEX shall not be responsible for the performance, maintenance, or
ongoing support of customer premises equipment.
8. Service integration.
--------------------
8.1 * . The Parties shall *
the date of this Agreement, *
. The *
, at a minimum, the following:
a. The *
.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-4-
<PAGE>
b. *
;
c. *
;
d. *
;
e. *
,subject to the provisions of this
Agreement;
f. Plans and procedures *
.
g. Such other procedures, policies, and matters as the Parties may
agree upon in writing.
8.2 Subject to terms and conditions of the Agreement, including such
charges as may be agreed upon by the Parties, the *
may include provisions for LCI to *
.
9. Fraud prevention.
------------------
9.1 The Services are provided subject to the condition that there will be
no abuse or fraudulent use thereof. Abuse and fraudulent use include,
but are not limited to, the following:
a. Obtaining, interrupting, accessing, altering, or destroying, or
attempting to obtain, interrupt, access, alter, or destroy, any
files, programs, information and/or use of the Services of or by
another DIGEX customer or user by rearranging, tampering with, or
making connection to any facilities of DIGEX by any trick,
scheme, false representation, or through any other fraudulent
means or devices; or
b. Assisting another to perform any of the acts prohibited in
subparagraph a of this section 9.1.
9.2 LCI and DIGEX shall cooperate to prevent abuse or fraudulent usage of
the Services, and LCI shall promptly terminate any LCI Customers, or
participation in or access to the Services by its vendors after
receipt of notice from DIGEX.
10. Rates.
-----
10.1 Rates and charges for the Services shall be as set forth in EXHIBIT
"2", which is attached to and made a part of this Agreement.
10.2 * : DIGEX will *
---------------------
.
10.3 * : * , and upon not less than
----------------
fifteen (15) days written notice to the other party, *
DIGEX, as it deems desirable to conduct an audit of all books and
records of DIGEX directly related to the status of LCI as a Most
Favored Customer hereunder. LCI may cause any person or firm retained
for this purpose to execute a non-disclosure agreement in favor of
DIGEX. Such audit shall be conducted during regular business hours at
the offices of the audited Party where such books and records are
regularly maintained and shall be paid for by LCI.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-5-
<PAGE>
10.4 *
.
10.5 *
.
11 Billing of charges.
-------------------
LCI shall pay all charges for access to and use of the Services as set
forth in this SECTION 11.
11.1 Monthly billing.
---------------
Port and installation charges will be billed in arrears in the month
following the month in which they are incurred. |For purposes of
computing partial month charges for Port charges, each day is considered
to be 1/30 (one-thirtieth) of a month for past charges. A first invoice
may contain charges from a previous billing period for service provided
from the date of installation through the current invoice period.
12. Taxes.
------
All rates set forth in this Agreement are exclusive of Applicable Taxes.
For purposes of this Agreement, "Applicable Taxes" are taxes,
assessments, surcharges, levies, or similar items assessed by a
governmental body. LCI is liable for, and shall indemnify DIGEX from and
against, all Applicable Taxes which may be passed directly through to
LCI or LCI Customers, and all Applicable Taxes properly chargeable to
LCI or LCI Customers with respect to DIGEX's provision of Service to LCI
or relating to LCI's use, resale, or lease of the Service to LCI
Customers or others, and/or any penalty and interest theron if assessed
by the applicable governmental body. DIGEX will invoice LCI for such
penalties and interest, and LCI shall pay such invoices in accordance
with the provisions of SECTION 13 of this Agreement.
13. Terms of payment.
-----------------
13.1 Payment due date. LCI shall pay to DIBEX all invoiced charges,
-----------------
including Applicable Taxes and any penalties and interest thereon,
whether or not such charges have been paid to LCI by LCI Customers,
within thirty (30) days of the date of invoice, without deduction or
setoff. Payments received will be applied to the earliest outstanding
amounts due under this Agreement.
13.2 Disputed amounts. LCI shall notify DIGEX in writing within sixty (60)
-----------------
days after the date of invoice of any dispute or disagreement with
invoiced charges. All disputed amounts resolved in LCI's favor will be
credited against amounts owing on subsequent invoices.
14. Record keeping and Audit.
-------------------------
14.1 Maintenance of records. As required by law, each party shall, directly
-----------------------
or through a third party service bureau, create and maintain full,
complete and accurate records of business conducted pursuant to this
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-6-
<PAGE>
Agreement, including but not limited to data relating to customer
activations, deposits, port charges, invoices, payments, and Service
credits.
15. Service Credits
---------------
15.1 In the event of a service outage (as defined in Exhibit "1"), DIGEX
will grant to LCI service credit(s) (as set forth in Exhibit "1")
16. Termination by DIGEX.
--------------------
DIGEX may suspend or terminate the provision of the Service hereunder
to LCI and/or terminate this Agreement without any liability to LCI
or any third party in the event of a default by LCI. LCI shall be
deemed to be in default under any of the following circumstances:
16.1 LCI fails to pay all charges hereunder, including, without
limitation, all charges based on the Port Acquisition and Revenue
Rates, within sixty (60) days after receipt of notice from DIGEX that
the same are overdue; and
16.2 LCI fails, upon written notice from DIGEX, to terminate, as required
under SECTION 16 of this Agreement, a customer or vendor that has
made fraudulent use of or access to the Service or any other DIGEX
facility; provided, however, such termination shall not violate any
laws, statutes and regulations.
17. Termination by LCI of the Agreement With or Without Cause.
---------------------------------------------------------
17.1 *
*
*
*
17.2 With Cause: In addition to LCI's right to terminate for DIGEX's
----------
breach of the terms and conditions of this Agreement including
EXHIBIT 1, LCI may also terminate this Agreement, as expressly
provided in EXHIBIT 1, without penalty or liability to DIGEX or any
third party, if the following occurs: a) DIGEX breaches
*
DIGEX
provides any information to, or makes any representations or
warranties to, LCI in connection with the Service, or otherwise in
connection with any information required to be provided by it
hereunder, which proves to haver been false or misleading in any
material respect as of the date provided or made.
18. Termination by either party.
---------------------------
Either DIGEX or LCI (the "Terminating Party") may terminate this
Agreement and the use of the Services hereunder if the other party
(the "Defaulting Party") is in default of the provisions of this
Agreement including but not limited to the following:
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
- 7 -
<PAGE>
18.1 Either party makes an unauthorized assignment of its rights, duties
and/or obligations under this Agreement;
18.2 The Defaulting Party dissolves or liquidates;
18.3 The Defaulting Party becomes the subject of voluntary or involuntary
bankruptcy, insolvency, reorganization or liquidation proceedings,
makes an assignment for the benefit of creditors, or admits in
writing its inability to pay its debts as they mature, or a receiver
is appointed for any of its assets or properties, and the same is not
dismissed, vacated, or stayed within thirty (30) days, or the party
seeking to terminate has reason to believe that the commencement of
any such proceeding or assignment for the benefit of creditors is
imminent; or
18.4 Termination under this SECTION 18 shall be effective immediately upon
receipt by the Defaulting Party of written notice of default, or at
the end of such period as the Terminating Party may grant for the
cure of the default; and the non-defaulting Party may pursue any
remedies available to it in law or equity. If LCI terminates DIGEX
under this Section, LCI will not have any financial obligations to
DIGEX, including the payment of the Commitment.
19. Termination Rights.
-------------------
19.1 Upon any termination of the Service, DIGEX promptly shall refund or
return to LCI, as appropriate, any payments and/or all deposits,
letters of credit and other forms of security provided by LCI, less
only such amounts as are due for use of the Service before
termination and such other amounts as DIGEX reasonably shall
determine are due and owing, or will become due and owing, from LCI.
DIGEX shall pay LCI simple interest on the amount of any cash deposit
so refunded from the date of its deposit with DIGEX to the date
refunded at a per annum rate equal to the prime lending rate
published in the "Money Rates" column of The Wall Street Journal as
-----------------------
of the date of the termination of the Service.
19.2 Upon termination of this Agreement, DIGEX shall, at its expense,
promptly return to LCI, including but not limited to, all copies of
LCI Confidential Information, any marketing or other materials
relating to LCI and any information regarding the internet protocol
addresses for LCI customers.
.
19.3 Upon termination of this Agreement by LCI, with or without cause,
DIGEX shall cooperate and assist LCI with the conversion of LCI
Customers to the new Internet service provider.
19.4 *
20. Delay in Commencement Date.
---------------------------
If the Commencement Date is delayed beyond June 15, 1996, due to LCI,
as determined by DIGEX in its reasonable discretion, either party may
terminate its obligations under this Agreement on thirty (30) days'
notice to the other party without liability hereunder.
21. Non-Solicitation or Employees.
------------------------------
In order to protect DIGEX's trade secrets and confidential
information and to prevent the disclosure of important competitive
information, LCI agrees that, during the term of this Agreement and
for a period of six (6) months after its termination or expiration,
it shall not, directly solicit employment of any person employed by
DIGEX within the six-month period prior to the offer of employment.
LCI agrees that this restriction is reasonable and necessary to
protect proprietary information of DIGEX and, thus, a material term
of this Agreement.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
- 8 -
<PAGE>
22. Warranty Limitations.
---------------------
a. DIGEX warrants that the Service furnished under the Agreement
will be free from defects and delivered pursuant to the highest
standards in the industry; and
b. DIGEX had obtained and shall maintain full authority to grant
the rights herein without the consent of any other person or
entity.
THE EXPRESS WARRANTIES IN THIS AGREEMENT ARE IN LIEU OF ALL
OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT
LIMITED TO, THOSE OF MERCHANTABILITY AND FITNESS FOR A
PARTICULAR PURPOSE. IN ADDITION TO ALL OTHER REMEDIES AT LAW
AND IN EQUITY AVAILABLE TO IT. LCI SHALL HAVE THE RIGHT TO SEEK
REPLACEMENT OF THE DEFECTIVE MATERIALS OR A REFUND OF THE
PAYMENTS MADE BY LCI TO DIGEX FOR THE AFFECTED SERVICES AFTER
LCI HAS PROVIDED DIGEX WITH A THIRTY (30) DAY PERIOD TO CURE.
23. Indemnification and Limitation of Damages.
-----------------------------------------
In light of the rapidly changing regulatory environment applicable to
Services and the technological limitations involved in the provision
of Services, DIGEX will NOT be responsible for the following,
provided, however, DIGEX is in full compliance with all applicable
laws and fully satisfying industry standards required of other
Internet Service providers: (a) protecting from unauthorized access
LCI Customers' transmissions facilities or LCI Customer-owned premise
equipment, or for alteration, theft or destruction of LCI or LCI
Customers' data files, programs, or information through any means; or
(b) claims or damages caused by a LCI Customer (including relating to
the transmissions or storage of defamatory content), to a third party
through fault or negligence to perform LCI Customers'
responsibilities; claims against a LCI Customer by any other party,
or any act of omission of any third party furnishing services or
products to LCI Customers.
Subject to the limitations of the previous paragraph, DIGEX shall
agree to indemnify and hold LCI harmless from and against claims,
damages and liabilities (including reasonable attorney's fees and
costs) asserted by a third-party which result directly from any
Agreement or any of its representations, covenants or obligations as
provided for in this Agreement, or from any act or omission of that
party, its employees and agents.
Notwithstanding anything to the contrary in this Agreement or the
EXHIBITS or Appendices hereto, in no event will either party be
liable to the other party for special, indirect or consequential
damages, under any theory of recovery, unless such damages are part
of an award to a third party for which indemnification is properly
due hereunder.
24. Compliance with Law.
--------------------
LCI and DIGEX shall comply with all applicable laws, statutes, and
regulations relating to the performance of their respective duties
and obligations under this Agreement.
25. *
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
- 9 -
<PAGE>
authority, information and assistance (at DIGEX's expense) for the
defense of such a suit or proceeding, and DIGEX will pay all damages and
costs awarded against LCI. LCI will have the right to participate in the
selection of counsel and any settlement negotiations. If a claim of
infringement occurs and the use of the Services is enjoined. DIGEX, at
its expense, shall either (a) promptly replace and/or modify the
Service(s) so that they become non-infringing; or (b) promptly contain
the right for LCI to continue using the Service(s). In the event that
DIGEX cannot satisfy (a) or (b) above, in addition to all other legal
rights in law and equity available to LCI, DIGEX agrees to assist LCI in
finding an alternative Internet service provider and to compensate LCI
and its customers for the expenses associated in migrating the affected
Service(s) to such new Internet services provider.
EXCEPT AS EXPRESSLY SET FORTH HEREIN, DIGEX SHALL HAVE NO OTHER LIABILITY
OR OBLIGATION TO LCI WITH RESPECT TO PATENT OR COPYRIGHT INFRINGEMENT
MATTERS.
26. General
-------
26.1 Confidential Information. Should confidential or proprietary information
------------------------
of either LCI or DIGEX be disclosed to the other party in the performance
of this Agreement, the Party receiving such confidential or proprietary
information (hereinafter "Recipient") hereby agrees to receive such
information in confidence, and take such precautions as may be necessary
to protect same from disclosure to others during the Term of this
Agreement and for three (3) years following termination of this Agreement.
Precautions taken shall be at least equivalent to Recipient's
precautions with respect to its own confidential and proprietary
information, but in no event less than a reasonable standard of care.
("Confidential Information" shall mean the proprietary and confidential
data or information of a Party which is of tangible or intangible value
to that Party and is not public information or is not generally known or
available to that Party's competitors but is known only to that Party and
those of its employees, independent contractors, consultants, customers or
agents to whom it must be confidential in order to apply it to the uses
intended, including, without limitation, information regarding that
party's customers or prospective customers, marketing methods and business
plans gained by the other Party.) Confidential Information shall not
include information which (i) at the time of disclosure to Recipient is in
the public domain through no acts or omission of Recipient, (ii) as shown
by written records, as already known by Recipient, (iii) is revealed to
Recipient by a third party who does not thereby breach any obligation of
confidentiality and who discloses such information in good faith; or (iv)
is disclosed pursuant to a legal obligation to disclose same to any
governmental entity or pursuant to judicial or quasi judicial action (so
long as Recipient gives disclosing Party prompt written notice sufficient
to allow disclosing Party to seek a protective order or other appropriate
remedy.) Recipient agrees to disclose only such confidential information
as is legally required and will use its best efforts to obtain
confidential treatment for any confidential or proprietary information so
disclosed.
26.2 Each party acknowledges that the disclosing Party's information is
proprietary, and agrees, that in the event of an unauthorized disclosure,
the disclosing Party is entitled to seek equitable relief, including
without limitation, specific performance and injunctions, in addition to
any other remedies at law or equity.
26.3 Arbitration. All disputes concerning the terms and conditions of this
Agreement shall be subject to binding arbitration of the American
Arbitration Association ("AAA") subject to the rules of the AAA then in
effect. The AAA shall decide, as required, on the number and identity of
the arbitrators and the place of the arbitration. Judgement upon the award
rendered in any arbitration may be entered in any court having
jurisdiction of the matter.
26.4 Attorney's Fees. If any arbitration, litigation, or other legal proceeding
occur between the Parties relating to this Agreement, the prevailing Party
shall be entitled to recover (in addition to any other relief
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
-10-
<PAGE>
awarded or granted) its reasonable costs and expenses, including
attorneys' fees, incurred in the proceeding.
26.5 Notices. Unless otherwise expressly provided for, all notices, requests,
-------
demands, consents or other communications required or pertaining to this
Agreement must be in writing and must be delivered personally or sent by
certified or registered mail (postage prepaid and return receipt
requested) to the other Party at the address set forth below (or to any
other address given by either Party to the other Party in writing):
TO: DIGEX-Private Network Group
6800 Virginia Manor Road
Beltsville, Maryland 20705
Attention: DIGEX/LCI PNC Senior Account Manager
TO: LCI International Telecom Corp.
8180 Greensboro Drive, Suite 800
McLean, Virginia 22102
Attention: General Counsel
In case of mailing, the effective date of delivery of any notice, demand,
or consent shall be considered to be five (5) days after proper mailing.
26.6 Waiver and Amendment. No waiver, amendment, or modification of this
--------------------
Agreement shall be effective unless in writing and signed by the Party
against whom the waiver, amendment, or modification is sought to be
enforced. No failure or delay by either Party in exercising any right,
power or remedy under this Agreement shall operate as a waiver of the
right, power or remedy.
26.7 Benefit. Subject to the restrictions in this Agreement on the assignment
-------
by LCI, this Agreement is binding upon and insures to the benefit of the
successors and assigns of the Parties.
26.8 No Third Parties' Rights. This Agreement is not for the benefit of any
------------------------
third party and shall not be deemed to grant any right or remedy to any
third party, whether or not referred to in this Agreement.
26.9 Headings. The SECTION and paragraph headings of this Agreement are
--------
intended as a convenience only, and shall not affect the interpretation of
its provisions.
26.10 Singular and Plural Terms. Where the context of this Agreement requires,
-------------------------
singular terms shall be considered plural and plural terms shall be
considered singular.
26.11 Severablility. If any provision(s) of this Agreement is finally held by a
-------------
court or arbitration panel of competent jurisdiction to be unlawful, the
remaining provisions of this Agreement shall remain in full force and
effect to the extent that the intent of the Parties can be enforced.
26.12 Governing Law and Forum. The validity construction, and performance of
-----------------------
this Agreement is governed by the laws of New York. LCI agrees that this
Agreement is considered to be entered into New York, and that all
obligations of DIGEX under this Agreement are incurred in and are to be
performed in New York. The Parties consent to personal jurisdiction in New
York with respect to any arbitration or suit brought relating to this
Agreement. The Parties waive all objections to venue to the extent
permitted by law.
26.13 Relationship of the Parties. This Agreement does not constitute a
---------------------------
partnership agreement, nor does it create a joint venture or agency
relationship between the Parties.
-11-
<PAGE>
26.14 Survivorship. All obligations and duties hereunder which shall by their
------------
nature extend beyond the expiration or termination of this Agreement,
including 21,22,23,24,25, and 26 shall survive and remain in effect
beyond any expiration or termination hereof.
26.15 Force Majeure. Neither Party shall be responsible for any delay or
-------------
failure in performance of any part of this Agreement to the extent that
such delay or failure is caused by fire, flood, explosion, war, strike,
embargo, government requirement, action of civil or military authority,
or act of God. In the event of any such delay, the time of performance
that was delayed for such causes will be extended for a period equal to
the time lost by reason of the delay.
26.16 Conflicting Terms. The Parties agree that the terms and conditions of
-----------------
this Agreement shall prevail, notwithstanding the contrary or additional
terms, in any purchase order, sales acknowledgement, confirmation or any
other document issued by either Party effecting the purchase and/or sale
of Services.
26.17 Entire Agreement. This Agreement, including all appendices, constitutes
----------------
the complete and final Agreement between the Parties, and supercedes all
prior negotiations and agreements between the Parties concerning its
subject matter. This Agreement may be executed in counterparts, all of
which, when taken together, shall constitute one original Agreement.
26.18 Escalation Procedures. Any customer service or operational system
---------------------
problems will be handled by DIGEX in accordance with EXHIBIT "3".
IN WITNESS WHEREOF, the Parties have duly executed this Agreement this 29th day
----
of May, 1996.
---
Digital Express Group, Inc. LCI International Telecom Corp.
By: /s/ ANTHONY D. ALBERICO, JR. By: /s/ LAWRENCE J. BOWMAN
----------------------------- -----------------------------
Anthony D. Alberico, Jr.
Title: Director of Sales Title: SVP Technology
-------------------------- --------------------------
Date: May 29 / 96 Date: 5/29/96
--------------------------- ----------------------------
-12-
<PAGE>
Exhibit I
- --------------------------------------------------------------------------------
PERFORMANCE SPECIFICATIONS
--------------------------
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Exhibit I
- --------------------------------------------------------------------------------
*
-----------------
*
.
Definitions
The following terms as used in the Agreement have the following meaning:
A. Month - A month is equivalent to a calendar month of the Term.
B. * .
C. * The ability * .
D. Customer * .
E. customer * .
F. * .
G. * .
I. Provisioning
A.1. DIGEX will provide to LCI the services identified in Exhibit "2" (the
"Services") at the corresponding rates (the "Rates") attached thereto.
A.2 *
*
.
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Exhibit 1
- -------------------------------------------------------------------------------
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Exhibit 1
- --------------------------------------------------------------------------------
b) All LCI Customers *
.
II. Maintenance
The Parties shall perform the following maintenance:
B.1 Customer Service Support Trouble Resolution
a) *
.
1. *
2. *
3. *
4. *
5. *
b) *
1. *
2. *
3. *
4. *
c) *
B.2 Time to Repair Standards
a) *
1. *
2. *
3. *
b) *
1. *
2. *
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Exhibit 1
- --------------------------------------------------------------------------------
3. All other Service Repair: two (2) hours.
c). *
d). DIGEX shall *
.
III. Service Performance Guarantees.
Network-Level Measurements.
C.1. *
.
C.2. *
.
C.3. *
.
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
(Exhibit 2 Page 1 of 5)
DIGEX's LCI Price - Schedule II-A
DIGEX Port & Installation Fees
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
DIGEX
(Exhibit 2 Page 2 of 5)
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Appendix B (Exhibit 2 Page 3 of 5)
DIGEX's LCI Price - Schedule III - A
DIGEX Part & Installation Fees
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Appendix B
Exhibit 2 Page 4 of 5
*
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
DIGEX's LCI Price - Schedule 1-C
DIGEX's Firewall/Software Services
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
(Exhibit 3 Page 1 of 2)
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
(Exhibit 3 page 2 0f 2)
DIGEX PNC Escalation Procedures
- --------------------------------------------------------------------------------
- ----------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
Exhibit 10.6
MICROSOFT CONSULTING SERVICES
MASTER SERVICE AGREEMENT
This Agreement is by and between Microsoft Corporation, a Washington corporation
("MS") acting through its Microsoft Consulting Services division ("MCS"), and
Digex, Incorporated a Maryland corporation ("Company") effective as of the later
of the two dates on the signature page.
1. Consulting Services and Fees.
----------------------------
a. MCS shall perform the services for Company specified on one or more Work
Orders in the form attached hereto as Exhibit A that are agreed upon by the
parties in writing from time to time. Nothing in this Agreement shall obligate
either party to enter into any Work Order. MCS consultants will be required to
attend MS events and various training programs from time to time, and Company
services shall be scheduled accordingly.
b. Company agrees to pay MCS the hourly rates identified on each Work Order
for services rendered pursuant to the Work Order, and the reasonable
out-of-pocket travel and living expenses incurred by MCS consultants during
performance of a Work Order. MCS shall not change its hourly rates during the
term of a Work Order, but may adjust rates prior to entering any new Work Order
by giving Company advance notice. Rates do not include taxes, levies, duties,
governmental charges or expenses. If MS is required to pay any of the foregoing
based on services provided under this Agreement, such taxes, levies, duties,
governmental charges and expenses will be billed and paid by Company, excluding
taxes based on MS' income.
2. Rights in Programs and Data. The rights in programs and data shall be
---------------------------
specified on each Work Order.
3. Confidentiality/Non-Solicitation.
--------------------------------
a. MS and Company agree that any and all information identified by the other
as "Confidential" and/or "Proprietary", or which, under all of the
circumstances, ought reasonably to be treated as Confidential and/or
Proprietary, will not be disclosed to any third person without the express
consent of the other party for a period of five (5) years following the
disclosure of the Confidential Information. The terms and conditions of this
Agreement are confidential. These confidentiality obligations shall not apply to
any information or development which: (i) is or subsequently becomes available
to the general public other than through a breach by the receiving party; (ii)
is already known to the receiving party before disclosure by the disclosing
party; (iii) is developed through the independent efforts of the receiving
party; or (iv) the receiving party rightfully receives from a third party
without restriction as to confidentiality or use.
b. The terms of confidentiality under this Agreement shall not be construed to
limit either party's right to independently develop or acquire products without
use of the other party's Confidential Information. Further, either party shall
be free to use for any purpose the residuals resulting from access to or work
with such Confidential Information, provided that such party shall maintain the
confidentiality of the Confidential Information as provided herein. The term
"residuals" means technical information related to computer software technology
in non-tangible form, which may be retained by persons who have had access to
the Confidential Information, including ideas, concepts, know-how or techniques
contained therein. Neither party shall have any obligation to limit or restrict
the assignment of such persons or to pay royalties for any work resulting from
the use of residuals. However, the foregoing shall not be deemed to grant to
either party a license under the other party's copyrights or patents.
c. During the term of this Agreement and for a period of one (1) year
following the Expiration Date of a Work Order, neither MS nor Company shall
directly solicit employment of any employee of the other who is directly
involved in the performance of such Work Order.
4. Warranty. MS warrants that during the term of any Work Order hereunder, the
--------
services performed under the Work Order will be performed using generally
accepted industry standards and practices.
5. Limitation of Warranty. THE WARRANTY ABOVE IS EXCLUSIVE AND IS IN LIEU OF
----------------------
ALL OTHER WARRANTIES, EXPRESS, IMPLIED, STATUTORY OR OTHERWISE WITH RESPECT TO
THE SERVICES OR PRODUCTS PROVIDED UNDER THIS AGREEMENT, THE PERFORMANCE OF
MATERIALS OR PROCESSES DEVELOPED OR PROVIDED UNDER THIS AGREEMENT, OR AS TO THE
RESULTS WHICH MAY BE OBTAINED THEREFROM, AND ALL IMPLIED WARRANTIES OF
MERCHANT-
1
<PAGE>
ABILITY OR FITNESS FOR A PARTICULAR PURPOSE. MS SHALL NOT BE LIABLE FOR ANY
SERVICES OR PRODUCTS PROVIDED BY THIRD PARTY VENDORS, DEVELOPERS OR CONSULTANTS
IDENTIFIED OR REFERRED TO COMPANY BY MS DURING ANY ASPECT OF A PROJECT UNDER ANY
WORK ORDER, OR OTHERWISE, EXCEPT IF SUCH THIRD PARTY SERVICES ARE PROVIDED UNDER
WRITTEN AGREEMENT WITH MS.
6. Limitation of Liability.
-----------------------
a. MS' liability to Company under this Agreement and with respect to any
services contemplated by this Agreement shall be limited to the amount actually
paid by Company to MS.
b. IN NO EVENT SHALL EITHER PARTY BE LIABLE TO THE OTHER PARTY FOR ANY
INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR PUNITIVE DAMAGES (INCLUDING BUT NOT
LIMITED TO LOST PROFITS) REGARDLESS OF WHETHER SUCH LIABILITY IS BASED ON BREACH
OF CONTRACT, TORT, STRICT LIABILITY, BREACH OF WARRANTIES, FAILURE OF ESSENTIAL
PURPOSE OR OTHERWISE AND EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.
7. Term and Termination.
--------------------
a. This Agreement shall remain in effect until terminated as provided
hereunder. Company may terminate this Agreement or any Work Order without cause
at any time upon thirty (30) days prior written notice to MS.
b. Either party may terminate this Agreement or any Work Order if the other
party is in material breach or default of any obligation hereunder, which breach
or default is not cured within thirty (30) days of written notice from the other
party.
c. The terms of Sections 2, 3, 6, 7(c), 7(d), 9 and 10 shall survive the
termination or expiration of this Agreement.
d. Upon termination of this Agreement or any Work Order, each party shall
return or destroy all Confidential Information obtained from the other party and
copies thereof; and Company shall pay all of MS' fees, expenses and other costs
payable by Company pursuant to Section 1(b) which have accrued through the date
of termination.
8. Insurance.
---------
a. At all times when MS will be performing services at the premises of Company
pursuant to the terms of this Agreement, MS agrees to procure and maintain the
following insurance coverage:
(i) Commercial General Liability covering bodily injury and property
damage liability with a limit of not less than $1,000,000 each occurrence;
(ii) Workers' Compensation insurance (or maintenance of a legally permitted
and governmentally approved program of self-insurance) covering MS employees
pursuant to applicable state workers' compensation laws for work related
injuries suffered by employees of MS; and
(iii) Employer's Liability insurance with limits of not less than $1,000,000
each accident.
b. Upon request, MS will provide Company with certificates of insurance
evidencing that the above coverage is in full force and effect.
9. Notices. All notices, authorizations, and requests in connection with this
-------
Agreement shall be deemed given on the day they are (i) deposited in the mails,
postage prepaid, certified or registered, return receipt requested; or (ii) sent
by air express courier (e.g., DHL, Federal Express or Airborne), charges
prepaid, return receipt requested; and addressed as set forth below:
For MS:
Paul Nasto, Managing Consultant
- -------------------------------------------------
5335 Wisconsin Avenue, NW
- -------------------------------------------------
Washington, DC 20015
- -------------------------------------------------
Phone: (202) 895-2171
------------------------------------------
Fax: (202) 363-9183
------------------------------------------
CC: Law & Corporate Affairs
One Microsoft Way
Redmond, WA 98052-6399
For Company:
Earl Galleher, Vice President - General Manager
- -------------------------------------------------
6800 Virginia Manor Road
- -------------------------------------------------
Beltsville, MD 20705
- -------------------------------------------------
Phone: (301) 847-6250
------------------------------------------
Fax: (301) 847-5017
------------------------------------------
10. Miscellaneous
-------------
a. Assignment. Neither party may assign this Agreement, in whole or in part,
----------
without the express written consent of the other party.
2
<PAGE>
b. Applicable Law/Attorney Fees. This Agreement shall be governed by the laws
----------------------------
of the State of Washington, U.S.A. If either party employs attorneys to enforce
any rights arising out of or relating to this Agreement, the prevailing party
shall be entitled to recover its reasonable attorneys' fees, costs and other
expenses.
c. Entire Agreement. This Agreement and any Work Orders constitute the entire
----------------
agreement between MS and Company, and merge all prior and contemporaneous
communications with respect to the subject matter hereof. The terms on any
purchase order or other form submitted by Company shall not apply to this
Agreement. This Agreement shall not be modified except by later written
agreement signed by both parties. In the event of a conflict between the terms
of this Agreement and any Work Order hereunder, the terms of this Agreement
shall control.
d. Compliance with Laws. Each party shall comply with all applicable laws and
--------------------
regulations. Company acknowledges that the Developments, services and materials
acquired hereunder are subject to the export control laws and regulations of the
United States, and any amendments thereof. Company confirms that with respect to
such Developments, services and materials, it will not export or re-export them,
directly or indirectly, either to (i) any countries that are subject to U.S.
export restrictions (including, but not limited to, Cuba, the Federal Republic
of Yugoslavia (Serbia and Montenegro), Iran, Iraq, Libya, North Korea, and
Syria; or (ii) any end-user whom Company knows or has reason to know will
utilize them in the design, development or production of nuclear, chemical or
biological weapons.
e. Severability/Waiver. If any provision of this Agreement shall be held by a
-------------------
court of competent jurisdiction to be illegal, invalid or unenforceable, the
remaining provisions shall remain in full force and effect. No waiver of any
breach of any provision of this Agreement shall constitute a waiver of any
other breach of the same or any other provision hereof, and no waiver shall be
effective unless made in writing and signed by an authorized representative of
the waiving party.
f. Independent Contractor. MS shall act at all times as an independent
----------------------
contractor, and shall be responsible for any and all social security,
unemployment, Workers' Compensation and other withholding taxes for any and all
of its employees. MS may use subcontractors to perform services under this
Agreement.
8. Cost or Pricing Data. MS will not, under any circumstances, accept work that
--------------------
would require the submission of cost or pricing data or be obligated to provide
such data, including without limitation, any modifications to any Work Order or
this Agreement.
IN WITNESS WHEREOF, the parties have executed this Agreement in duplicate
originals.
MICROSOFT CORPORATION
One Microsoft Way
Redmond, WA 98052-6399, U.S.A.
/s/ Paul Nasto
- ----------------------------------------
Signature
Paul Nasto
- ----------------------------------------
(Print Name)
Managing Consultant
- ----------------------------------------
Title
8/13/96
- ----------------------------------------
Date
DIGEX, INC.
6800 Virginia Manor Road
Beltsville, MD 20705
/s/ Earl Galleher
- ----------------------------------------
Earl Galleher
- ----------------------------------------
(Print Name)
VP GM Internet Server Products
- ----------------------------------------
Title
8/4/96
- ----------------------------------------
Date
3
<PAGE>
EXHIBIT A
MICROSOFT CONSULTING SERVICES
MASTER SERVICE AGREEMENT
WORK ORDER 001 (MCSDC 12913)
This Work Order is made pursuant to the Microsoft Consulting Services Master
Service Agreement (the "Agreement") effective on August 13, 1996 by and between
Digex, Incorporated ("Company") and Microsoft Corporation ("MS") and is
incorporated therein by reference.
1. Services. MCS shall perform the services identified below for Company. Dates
--------
provided herein are estimates only.
MCS will provide to assist Company architect,
design, and implement Microsoft technologies. In that, the EPM will be the
primary contact to Company for all Microsoft related needs. In conjunction with
this, the EPM will:
. Assist Company with strategic and tactical planning for implementing
Microsoft technologies in development of a "Web Farm"
. Assist Company to establish a Microsoft Windows NT Server architecture to
support the needs of Company in architecting a Microsoft Internet
Information Server hosting solution.
. Assist Company to identify various staffing needs to support the "Web
Farm".
. Assist Company with the installation and configuration of Microsoft
Internet Information Server.
. Provide technology transfer to company employees.
. Assist Company to identify various courses in which Company employees
should enroll.
.
. Provide a mechanism to contact Microsoft corporate resources which should
be involved in the project(s).
Most of this work will be done on-site at Company's facilities while some of the
work will require some off-site activities. During this time, all consultants
(both MCS and SP) will have access to Company facilities.
MCS will provide, *
EPM and Company in the above activities. Specifically, the SP resources will be
tasked with providing hands-on support for designing, installing, configuring,
and, initially, operating the Microsoft Windows NT Server "Web Farm"
established. As the "Web Farm" construction and configuration proceeds, these SP
resources will be assigned appropriate activities to support that environment.
* . If Company has that need and requests that MCS provide that
service, Company and MCS will work to provide a "profile" of that service and
enter into a separate work order for that service.
The resource to be assigned to this engagement from MCS is Mr. Dennis Mabrey,
Senior Consultant, MCPSE, MCPSD.
*
.
It should be noted that this is a beginning effort. There may be instances where
more resources are needed, depending on demand for the services provided by
Company. As those needs arise, MCS and Company will discuss the providing of
resources to meet those needs and MCS will develop good faith estimates for
providing additional resources.
- -------------
*Confidential treatment
Material omitted and filed separately with the Commission.
<PAGE>
PAGE>
2. Rates. The hourly rates shown below shall be applicable to this Work Order.
-----
Any total fee stated herein is an estimate only.
*
plus all travel
and expenses. As is traditional in consulting services, all project-related
travel (including mileage and tolls), and miscellaneous expenses are to be
reimbursed by the client company. This cost represents a ten percent (10%)
discount from MCS standard rates for MCS personnel. This cost estimate is based
on the following staffing matrix:
*
MS shall invoice company monthly for services performed and expenses incurred
during the previous period. All invoices shall be net thirty (30) days. MS
invoices for payment should be directed to Company's representative for payment
at the address shown below:
Mr. Earl Galleher
Vice President - General Manager
Digex, Incorporated
6800 Virginia Manor Road
Beltsville, MD 10705
Telephone: 301-847-6250
FAX: 301-847-5017
3. *
- -----------
*Confidential treatment
Material omitted and filed separately with the Commission.
1
<PAGE>
4. Ownership and License.
----------------------
a. Any commercial off-the-shelf product of MS or a third party ("Commercial
Product") which is provided pursuant to this Work Order shall be licensed to
Company according to the terms of the end user license agreement packaged with
such product. All rights in any computer code or materials developed by or for
MS or Company independently of this Agreement that are provided pursuant to this
Work Order ("Pre-Existing Work") shall remain the sole property of the party
providing the Pre-Existing Work. All rights in any computer code or materials
(other than a Commercial Product or Pre-Existing Work) developed by MS and
provided to Company in the course of performance of this Work Order
("Developments") shall be jointly owned by Company and MS.
b. MS hereby grants Company a non-exclusive, perpetual, fully paid-up license
to use, reproduce and modify MS Pre-Existing Work for its internal business
operations. Company hereby grants MS a non-exclusive, perpetual fully paid-up
license to use, reproduce and modify any Pre-Existing Work of Company in the
performance of this Work Order. Each party shall be free to use, reproduce and
modify the Developments for any purpose whatsoever, without any obligation of
accounting or payment of royalties, provided that Company agrees to limit its
use, reproduction and modification of Developments for its internal business
operations. Company may sublicense the rights granted hereunder to its
affiliates (i.e., any entity controlling, controlled by, or under common
control with, Company). All rights not expressly granted, are reserved.
4. Miscellaneous.
--------------
a. Company agrees to provide private work space for all consultants (such as
office space, conference rooms, cubicles, etc.) which may be required - such
work space to include normal facilities.
b. Company agrees to provide telephone service for all consultants. This would
include: i) Normal telephone service for in-coming and out-going calls for all
consultants and ii) Analog telephone service (for modem use) for selected
consultants.
c. Company agrees to provide proper access to Company facilities (such as
access cards/key) to the appropriate areas of Company to which consultants will
need entry.
d. Company agrees to provide computer equipment (such as standard desktop Intel
based workstations) connected to Company's network - to access file/print
capabilities and perform normal job related computer activities.
THEREFORE, the parties have executed this Work Order in duplicate originals.
MICROSOFT CORPORATION DIGEX INCORPORATED
One Microsoft Way 6800 Virginia Manor Road
Redmond, WA 98052-6399 Beltsville, MD 10705
/s/ Brian J. Campbell /s/ Earl Galleher
- -------------------------- -------------------------------
Signature Signature
Brian J. Campbell Earl Galleher
- -------------------------- -------------------------------
Name (Print) Name (Print)
General Manager VP GM Internet Server Products
- -------------------------- -------------------------------
Title Title
8/26/96 8/22/96
- -------------------------- -------------------------------
Date Date
<PAGE>
THE DIGEX, INCORPORATED 1996 EQUITY PARTICIPATION PLAN
DIGEX, Incorporated, a Maryland corporation, has adopted the DIGEX,
Incorporated 1996 Equity Participation Plan (the "Plan"), effective May 31,
1996, for the benefit of its eligible employees, consultants and directors. The
Plan consists of two plans, one for the benefit of Employees (as such term is
defined below) and consultants and one for the benefit of Independent Directors
(as such term is defined below).
The purposes of this Plan are as follows:
(1) To provide an additional incentive for directors, Employees and
consultants to further the growth, development and financial success of the
Company by personally benefiting through the ownership of Company stock and/or
rights which recognize such growth, development and financial success.
(2) To enable the Company to obtain and retain the services of
directors, Employees and consultants considered essential to the long range
success of the Company by offering them an opportunity to own stock in the
Company and/or rights which will reflect the growth, development and financial
success of the Company.
ARTICLE I
DEFINITIONS
1.1 General. Wherever the following terms are used in this Plan
-------
they shall have the meaning specified below, unless the context clearly
indicates otherwise.
1.2 Award Limit. "Award Limit" shall mean 60,000 shares of Common
-----------
Stock.
1.3 Board. "Board" shall mean the Board of Directors of the
-----
Company.
1.4 Change in Control. "Change in Control" shall mean any of the
-----------------
following stockholder-approved transactions to which the Company is a party:
(a) the sale, transfer, exchange or other disposition of all or
substantially all of the assets of the Company, in complete liquidation or
dissolution of the Company; or
(b) any merger or consolidation immediately after which securities
possessing more than fifty percent (50%) of the total voting power of the
outstanding voting securities of the entity that survives the merger or
consolidation are owned by persons different from those who held more than
fifty percent (50%) of the total outstanding voting securities of the
Company immediately prior to such merger or consolidation.
1.5 Code. "Code" shall mean the Internal Revenue Code of 1986, as
----
amended.
<PAGE>
1.6 Committee. "Committee" shall mean the Compensation Committee
---------
of the Board, or another committee, or a subcommittee of the Board, appointed as
provided in Section 9.1.
1.7 Common Stock. "Common Stock" shall mean the common stock of
------------
the Company, par value $0.01 per share, and any equity security of the Company
issued or authorized to be issued in the future, but excluding any preferred
stock and any warrants, options or other rights to purchase Common Stock. Debt
securities of the Company convertible into Common Stock shall be deemed equity
securities of the Company.
1.8 Company. "Company" shall mean DIGEX, Incorporated, a Maryland
-------
corporation.
1.9 Deferred Stock. "Deferred Stock" shall mean Common Stock
--------------
awarded under Article VII of this Plan.
1.10 Director. "Director" shall mean a member of the Board.
--------
1.11 Dividend Equivalent. "Dividend Equivalent" shall mean a right
-------------------
to receive the equivalent value (in cash or Common Stock) of dividends paid on
Common Stock, awarded under Article VII of this Plan.
1.12 DRO. "DRO" shall mean a "domestic relations order" as defined
---
by the Code or Title I of the Employee Retirement Income Security Act of 1974,
as amended, or the rules thereunder.
1.13 Employee. "Employee" shall mean any officer or other employee
--------
(as defined in accordance with Section 3401(c) of the Code) of the Company, or
of any corporation which is a Subsidiary.
1.14 Exchange Act. "Exchange Act" shall mean the Securities
------------
Exchange Act of 1934, as amended.
1.15 Fair Market Value. "Fair Market Value" of any Plan Share
-----------------
shall mean, as of any date of determination, the fair market value as determined
in good faith by the Committee; provided, however, that as of any date of
determination from and after an underwritten initial public offering of Common
Stock pursuant to a registration statement under the Securities Act, Fair Market
Value shall mean the average of the closing prices of the sales of such Common
Stock as of such date on all national securities exchanges on which such
securities may at the time be listed, or, if there have been no sales on any
such exchange on such date, the average of the highest bid and lowest asked
prices on all such exchanges at the close of business of such date, or, if on
any date no such shares of Common Stock are so listed, the average of the
representative bid and asked prices quoted in the NASDAQ System as of 4:00 P.M.,
New York time, or, if on any date such securities are not quoted in the NASDAQ
System, the average of the highest bid and lowest asked prices on such date in
the domestic over-the-counter market as reported by the National Quotation
Bureau Incorporated, or any similar successor organization, in each such case
averaged over the period of the 20 consecutive business days prior to the date
of determination.
2
<PAGE>
1.16 Grantee. "Grantee" shall mean an Employee or consultant
-------
granted a Performance Award, Dividend Equivalent, Stock Payment or Stock
Appreciation Right, or an award of Deferred Stock, under this Plan.
1.17 Incentive Stock Option. "Incentive Stock Option" shall mean
----------------------
an option which conforms to the applicable provisions of Section 422 of the Code
and which is designated as an Incentive Stock Option by the Committee.
1.18 Independent Director. "Independent Director" shall mean a
--------------------
member of the Board who is not an Employee of the Company.
1.19 Non-Qualified Stock Option. "Non-Qualified Stock Option"
--------------------------
shall mean an Option which is not designated as an Incentive Stock Option by the
Committee.
1.20 Option. "Option" shall mean a stock option granted under
------
Article III of this Plan. An Option granted under this Plan shall, as
determined by the Committee, be either a Non-Qualified Stock Option or an
Incentive Stock Option; provided, however, that Options granted to Independent
-------- -------
Directors and consultants shall be Non-Qualified Stock Options.
1.21 Optionee. "Optionee" shall mean an Employee, consultant or
--------
Independent Director granted an Option under this Plan.
1.22 Performance Award. "Performance Award" shall mean a cash
-----------------
bonus, stock bonus or other performance or incentive award that is paid in cash,
Common Stock or a combination of both, awarded under Article VII of this Plan.
1.23 Plan. "Plan" shall mean this DIGEX, Incorporated 1996 Equity
----
Participation Plan.
1.24 Restricted Stock. "Restricted Stock" shall mean Common Stock
----------------
awarded under Article VI of this Plan.
1.25 Restricted Stockholder. "Restricted Stockholder" shall mean
----------------------
an Employee or consultant granted an award of Restricted Stock under Article VI
of this Plan.
1.26 Rule 16b-3. "Rule 16b-3" shall mean that certain Rule 16b-3
----------
under the Exchange Act, as such Rule may be amended from time to time.
1.27 Stock Appreciation Right. "Stock Appreciation Right" shall
------------------------
mean a stock appreciation right granted under Article VIII of this Plan.
1.28 Stock Payment. "Stock Payment" shall mean (i) a payment in
-------------
the form of shares of Common Stock, or (ii) an option or other right to purchase
shares of Common Stock, as part of a deferred compensation arrangement, made in
lieu of all or any portion of the compensation, including without limitation,
salary, bonuses and commissions, that would otherwise become payable to an
Employee or consultant in cash, awarded under Article VII of this Plan.
1.29 Subsidiary. "Subsidiary" shall mean any corporation in an
----------
unbroken chain of corporations beginning with the Company if each of the
corporations other than the last corporation
3
<PAGE>
in the unbroken chain then owns stock possessing 50 percent or more of the total
combined voting power of all classes of stock in one of the other corporations
in such chain.
1.30 Termination of Consultancy. "Termination of Consultancy"
--------------------------
shall mean the time when the engagement of an Optionee, Grantee or Restricted
Stockholder as a consultant to the Company or a Subsidiary is terminated for any
reason, with or without cause, including, but not by way of limitation, by
resignation, discharge, death or retirement; but excluding terminations where
there is a simultaneous commencement of employment with the Company or any
Subsidiary. The Committee, in its sole discretion, shall determine the effect
of all matters and questions relating to Termination of Consultancy, including,
but not by way of limitation, the question of whether a Termination of
Consultancy resulted from a discharge for good cause, and all questions of
whether a particular leave of absence constitutes a Termination of Consultancy.
Notwithstanding any other provision of this Plan, the Company or any Subsidiary
has an absolute and unrestricted right to terminate a consultant's service at
any time for any reason whatsoever, with or without cause, except to the extent
expressly provided otherwise in writing.
1.31 Termination of Directorship. "Termination of Directorship"
---------------------------
shall mean the time when an Optionee who is an Independent Director ceases to be
a Director for any reason, including, but not by way of limitation, a
termination by resignation, failure to be elected, removal, death or retirement.
The Board, in its sole discretion, shall determine the effect of all matters and
questions relating to Termination of Directorship with respect to Independent
Directors.
1.32 Termination of Employment. "Termination of Employment" shall
-------------------------
mean the time when the employee-employer relationship between an Optionee,
Grantee or Restricted Stockholder and the Company or any Subsidiary is
terminated for any reason, with or without cause, including, but not by way of
limitation, a termination by resignation, discharge, death, disability or
retirement; but excluding (i) terminations where there is a simultaneous
reemployment or continuing employment of an Optionee, Grantee or Restricted
Stockholder by the Company or any Subsidiary, (ii) at the sole discretion of the
Committee, terminations which result in a temporary severance of the employee-
employer relationship, and (iii) at the sole discretion of the Committee,
terminations which are followed by the simultaneous establishment of a
consulting relationship by the Company or a Subsidiary with the former employee.
The Committee, in its sole discretion, shall determine the effect of all matters
and questions relating to Termination of Employment, including, but not by way
of limitation, the question of whether a Termination of Employment resulted from
a discharge for good cause, and all questions of whether a particular leave of
absence constitutes a Termination of Employment; provided, however, that, with
-------- -------
respect to Incentive Stock Options, a leave of absence, change in status from an
employee to an independent contractor or other change in the employee-employer
relationship shall constitute a Termination of Employment if, and to the extent
that, such leave of absence, change in status or other change interrupts
employment for the purposes of Section 422(a)(2) of the Code and the then
applicable regulations and revenue rulings under said Section. Notwithstanding
any other provision of this Plan, the Company or any Subsidiary has an absolute
and unrestricted right to terminate an Employee's employment at any time for any
reason whatsoever, with or without cause, except to the extent expressly
provided otherwise in writing.
4
<PAGE>
ARTICLE II
SHARES SUBJECT TO PLAN
2.1 Shares Subject to Plan.
----------------------
(a) The shares of stock subject to Options, awards of Restricted
Stock, Performance Awards, Dividend Equivalents, awards of Deferred Stock, Stock
Payments or Stock Appreciation Rights shall be Common Stock. The aggregate
number of such shares which may be issued upon exercise of such Options or
rights or upon any such awards under the Plan shall not exceed two million five
hundred thousand four hundred eighty (2,500,480); provided however, that shares
in excess of one million four hundred one thousand four hundred twenty-six
(1,401,426) may only be issued to the extent of the number of shares for which
options granted under the Company's Incentive Stock Option Plan and outstanding
as of May 31, 1996 expire unexercised or are otherwise cancelled during the term
of this Plan. The shares of Common Stock issuable upon exercise of such options
or rights or upon any such awards may be either previously authorized but
unissued shares or treasury shares.
(b) The maximum number of shares which may be subject to Options or
Stock Appreciation Rights granted under the Plan to any individual in any
calendar year shall not exceed the Award Limit. To the extent required by
Section 162(m) of the Code, shares subject to Options which are canceled
continue to be counted against the Award Limit and if, after grant of an Option,
the price of shares subject to such Option is reduced, the transaction is
treated as a cancellation of the Option and a grant of a new Option and both the
Option deemed to be canceled and the Option deemed to be granted are counted
against the Award Limit. Furthermore, to the extent required by Section 162(m)
of the Code, if, after grant of a Stock Appreciation Right, the base amount on
which stock appreciation is calculated is reduced to reflect a reduction in the
Fair Market Value of the Company's Common Stock, the transaction is treated as a
cancellation of the Stock Appreciation Right and a grant of a new Stock
Appreciation Right and both the Stock Appreciation Right deemed to be canceled
and the Stock Appreciation Right deemed to be granted are counted against the
Award Limit.
2.2 Add-back of Options and Other Rights. If any Option, or other
------------------------------------
right to acquire shares of Common Stock under any other award under this Plan,
expires or is canceled without having been fully exercised, or is exercised in
whole or in part for cash as permitted by this Plan, the number of shares
subject to such Option or other right but as to which such Option or other right
was not exercised prior to its expiration, cancellation or exercise may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Furthermore, any shares subject to Options or other awards which are
adjusted pursuant to Section 10.3 and become exercisable with respect to shares
of stock of another corporation shall be considered cancelled and may again be
optioned, granted or awarded hereunder, subject to the limitations of Section
2.1. Shares of Common Stock which are delivered by the Optionee or Grantee or
withheld by the Company upon the exercise of any Option or other award under
this Plan, in payment of the exercise price thereof, may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1. If any
share of Restricted Stock is forfeited by the Grantee or repurchased by the
Company pursuant to Section 6.6 hereof, such share may again be optioned,
granted or awarded hereunder, subject to the limitations of Section 2.1.
Notwithstanding the provisions of this Section 2.2, no shares of Common Stock
may again be optioned, granted or awarded if such action would cause an
Incentive Stock Option to fail to qualify as an incentive stock option under
Section 422 of the Code.
5
<PAGE>
ARTICLE III
GRANTING OF OPTIONS
3.1 Eligibility. Any Employee or consultant selected by the
------------
Committee pursuant to Section 3.4(a)(i) shall be eligible to be granted an
Option. Each Independent Director of the Company shall be eligible to be
granted Options at the times and in the manner set forth in Section 3.4(d).
3.2 Qualification of Incentive Stock Options. No Incentive Stock
----------------------------------------
Option shall be granted unless such Option, when granted, qualifies as an
"incentive stock option" under Section 422 of the Code. No Incentive Stock
Option shall be granted to any person who is not an Employee.
3.3 Granting of Options
-------------------
(a) The Committee shall from time to time, in its sole discretion,
and subject to applicable limitations of this Plan:
(i) Select from among the Employees or consultants (including
Employees or consultants who have previously received Options or other
awards under this Plan) such of them as in its opinion should be
granted Options;
(ii) Subject to the Award Limit, determine the number of
shares to be subject to such Options granted to the selected Employees
or consultants;
(iii) Determine whether such Options are to be Incentive Stock
Options or Non-Qualified Stock Options and whether such Options are to
qualify as performance-based compensation as described in Section
162(m)(4)(C) of the Code; and
(iv) Determine the terms and conditions of such Options,
consistent with this Plan; provided, however, that the terms and
-------- --------
conditions of Options intended to qualify as performance-based
compensation as described in Section 162(m)(4)(C) of the Code shall
include, but not be limited to, such terms and conditions as may be
necessary to meet the applicable provisions of Section 162(m) of the
Code.
(b) Upon the selection of an Employee or consultant to be granted an
Option, the Committee shall instruct the Secretary of the Company to issue the
Option and may impose such conditions on the grant of the Option as it deems
appropriate. Without limiting the generality of the preceding sentence, the
Committee may, in its sole discretion and on such terms as it deems appropriate,
require as a condition on the grant of an Option to an Employee or consultant
that the Employee or consultant surrender for cancellation some or all of the
unexercised Options, awards of Restricted Stock or Deferred Stock, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents or Stock Payments or
other rights which have been previously granted to him or her under this Plan or
otherwise. An Option, the grant of which is conditioned upon such surrender,
may have an option price lower (or higher) than the exercise price of such
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
6
<PAGE>
(c) Any Incentive Stock Option granted under this Plan may be
modified by the Committee to disqualify such option from treatment as an
"incentive stock option" under Section 422 of the Code.
(d) (i) During the term of the Plan following the Company's
initial registration of Common Stock under Section 12 of the Exchange Act, each
person who is then an Independent Director automatically shall be granted (A) an
Option to purchase eight thousand (8,000) shares of Common Stock (subject to
adjustment as provided in Section 10.3) on the date of his or her initial
election to the Board and (B) an Option to purchase eight thousand (8,000)
shares of Common Stock (subject to adjustment as provided in Section 10.3) on
the date of each annual meeting of stockholders after such initial election at
which the Independent Director is reelected to the Board (such Options
collectively, the "Formula Options").
(ii) During the term of the Plan prior to the Company's initial
registration of Common Stock under Section 12 of the Exchange Act, the
Board shall from time to time, in its discretion and subject to the
applicable limitations of this Plan,
(A) Select from among the Independent Directors (including
Independent Directors who have previously received Options or other
awards under this Plan) such of them as in its opinion should be
granted Options;
(B) Determine the number of shares to be subject to such
Options; and
(C) Determine the terms and conditions of such Options,
consistent with this Plan.
ARTICLE IV
TERMS OF OPTIONS
4.1 Option Agreement. Each Option shall be evidenced by a written
----------------
Option Agreement, which shall be executed by the Optionee and an authorized
officer of the Company and which shall contain such terms and conditions as the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall determine, consistent with this Plan. Option Agreements
evidencing Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall contain such terms and
conditions as may be necessary to meet the applicable provisions of Section
162(m) of the Code. Option Agreements evidencing Incentive Stock Options shall
contain such terms and conditions as may be necessary to meet the applicable
provisions of Section 422 of the Code.
4.2 Option Price. The price per share of the shares subject to
------------
each Option shall be set by the Committee; provided, however, that such price
-------- -------
shall be no less than the par value of a share of Common Stock, unless otherwise
permitted by applicable state law, and (i) in the case of Incentive Stock
Options and Options intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, such price shall not be less than
100% of the Fair Market Value of a share of Common Stock on the date the Option
is granted; (ii) in the case of Incentive Stock Options granted to an individual
then owning (within the meaning of Section 424(d) of the Code) more than 10% of
the total combined voting power of all classes of stock of the Company or
7
<PAGE>
any Subsidiary or parent corporation thereof (within the meaning of Section 422
of the Code) such price shall not be less than 110% of the Fair Market Value of
a share of Common Stock on the date the Option is granted; and (iii) in the case
of Formula Options granted to Independent Directors, such price shall equal 100%
of the Fair Market Value of a share of Common Stock on the date the Formula
Option is granted.
4.3 Option Term. The term of an Option shall be set by the
-----------
Committee in its sole discretion; provided, however, that, (i) in the case of
-------- -------
Formula Options granted to Independent Directors, the term shall be ten (10)
years from the date the Formula Option is granted, subject to Section 5.7 and
subject to variation or acceleration only as determined by the Board, and (ii)
in the case of Incentive Stock Options, the term shall not be more than ten (10)
years from the date the Incentive Stock Option is granted, or five (5) years
from such date if the Incentive Stock Option is granted to an individual then
owning (within the meaning of Section 424(d) of the Code) more than 10% of the
total combined voting power of all classes of stock of the Company or any
Subsidiary or parent corporation thereof (within the meaning of Section 422 of
the Code). Except as limited by requirements of Section 422 of the Code and
regulations and rulings thereunder applicable to Incentive Stock Options, the
Committee may extend the term of any outstanding Option in connection with any
Termination of Employment or Termination of Consultancy of the Optionee, or
amend any other term or condition of such Option relating to such a termination.
4.4 Option Vesting
--------------
(a) The period during which the right to exercise an Option in whole
or in part vests in the Optionee shall be set by the Committee and the Committee
may determine that an Option may not be exercised in whole or in part for a
specified period after it is granted; provided, however, that Formula Options
-------- -------
granted to Independent Directors shall become exercisable in cumulative annual
installments of one third each on each of the first, second and third annual
meetings of the Company's stockholders following the date of grant, without
variation or acceleration hereunder except as provided in Section 10.3(b). At
any time after grant of an Option, the Committee may, in its sole discretion and
subject to whatever terms and conditions it selects, accelerate the period
during which an Option (except a Formula Option granted to an Independent
Director) vests.
(b) No portion of an Option which is unexercisable at Termination of
Employment, Termination of Directorship or Termination of Consultancy, as
applicable, shall thereafter become exercisable, except as may be otherwise
provided by the Committee in the case of Options granted to Employees or
consultants either in the Option Agreement or by action of the Committee
following the grant of the Option.
(c) To the extent that the aggregate Fair Market Value of stock with
respect to which "incentive stock options" (within the meaning of Section 422 of
the Code, but without regard to Section 422(d) of the Code) are exercisable for
the first time by an Optionee during any calendar year (under the Plan and all
other incentive stock option plans of the Company and any Subsidiary) exceeds
$100,000, such Options shall be treated as Non-Qualified Options to the extent
required by Section 422 of the Code. The rule set forth in the preceding
sentence shall be applied by taking Options into account in the order in which
they were granted. For purposes of this Section 4.4(c), the Fair Market Value
of stock shall be determined as of the time the Option with respect to such
stock is granted.
4.5 Consideration. In consideration of the granting of an Option,
-------------
the Optionee shall agree, in the written Option Agreement, to render faithful
and efficient services to the Company
8
<PAGE>
or a Subsidiary, with such duties and responsibilities as the Company or the
Subsidiary shall from time to time prescribe. Nothing in this Plan or in any
Option Agreement hereunder shall confer upon any Optionee any right to continue
in the employ of, or as a consultant for, the Company or any Subsidiary, or as a
director of the Company, or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Optionee at any time for any reason whatsoever, with or without
cause.
ARTICLE V
EXERCISE OF OPTIONS
5.1 Partial Exercise. An exercisable Option may be exercised in
----------------
whole or in part. However, an Option shall not be exercisable with respect to
fractional shares and the Committee (or the Board, in the case of Options
granted to Independent Directors) may require that, by the terms of the Option,
a partial exercise be with respect to a minimum number of shares.
5.2 Manner of Exercise. All or a portion of an exercisable Option
------------------
shall be deemed exercised upon delivery of all of the following to the Secretary
of the Company or his office:
(a) A written notice complying with the applicable rules established
by the Committee (or the Board, in the case of Options granted to Independent
Directors) stating that the Option, or a portion thereof, is exercised. The
notice shall be signed by the Optionee or other person then entitled to exercise
the Option or such portion;
(b) Such representations and documents as the Committee (or the
Board, in the case of Options granted to Independent Directors), in its sole
discretion, deems necessary or advisable to effect compliance with all
applicable provisions of the Securities Act of 1933, as amended, and any other
federal or state securities laws or regulations. The Committee or Board may, in
its sole discretion, also take whatever additional actions it deems appropriate
to effect such compliance including, without limitation, placing legends on
share certificates and issuing stop-transfer notices to agents and registrars;
(c) In the event that the Option shall be exercised pursuant to
Section 10.1 by any person or persons other than the Optionee, appropriate proof
of the right of such person or persons to exercise the Option; and
(d) Full cash payment to the Secretary of the Company for the shares
with respect to which the Option, or portion thereof, is exercised. However, the
Committee (or the Board, in the case of Options granted to Independent
Directors), may in its sole discretion (i) allow a delay in payment up to
thirty (30) days from the date the Option, or portion thereof, is exercised;
(ii) allow payment, in whole or in part, through the delivery of shares of
Common Stock owned by the Optionee, duly endorsed for transfer to the Company
with a Fair Market Value on the date of delivery equal to the aggregate
exercise price of the Option or exercised portion thereof; (iii) allow payment,
in whole or in part, through the surrender of shares of Common Stock then
issuable upon exercise of the Option having a Fair Market Value on the date
of Option exercise equal to the aggregate exercise price of the Option or
exercised portion thereof; (iv) allow payment, in whole or in part, through the
delivery of property of any kind which constitutes good and valuable
consideration; (v) allow payment, in whole or in part, through the delivery of a
full recourse promissory note bearing interest (at no less than such rate as
shall then preclude the imputation of interest under the Code) and payable upon
such terms as
9
<PAGE>
may be prescribed by the Committee or the Board, (vi) allow payment, in whole or
in part, through the delivery of a notice that the Optionee has placed a market
sell order with a broker with respect to shares of Common Stock then issuable
upon exercise of the Option, and that the broker has been directed to pay a
sufficient portion of the net proceeds of the sale to the Company in
satisfaction of the Option exercise price; or (vii) allow payment through any
combination of the consideration provided in the foregoing subparagraphs (ii),
(iii), (iv), (v) and (vi). In the case of a promissory note, the Committee (or
the Board, in the case of Options granted to Independent Directors) may also
prescribe the form of such note and the security to be given for such note. The
Option may not be exercised, however, by delivery of a promissory note or by a
loan from the Company when or where such loan or other extension of credit is
prohibited by law.
5.3 Conditions to Issuance of Stock Certificates. The Company
--------------------------------------------
shall not be required to issue or deliver any certificate or certificates for
shares of stock purchased upon the exercise of any Option or portion thereof
prior to fulfillment of all of the following conditions:
(a) The admission of such shares to listing on all stock exchanges
on which such class of stock is then listed;
(b) The completion of any registration or other qualification of
such shares under any state or federal law, or under the rulings or regulations
of the Securities and Exchange Commission or any other governmental regulatory
body which the Committee or Board shall, in its sole discretion, deem necessary
or advisable;
(c) The obtaining of any approval or other clearance from any state
or federal governmental agency which the Committee (or Board, in the case of
Options granted to Independent Directors) shall, in its sole discretion,
determine to be necessary or advisable;
(d) The lapse of such reasonable period of time following the
exercise of the Option as the Committee (or Board, in the case of Options
granted to Independent Directors) may establish from time to time for reasons of
administrative convenience; and
(e) The receipt by the Company of full payment for such shares,
including payment of any applicable withholding tax.
5.4 Rights as Stockholders. The holders of Options shall not be,
----------------------
nor have any of the rights or privileges of, stockholders of the Company in
respect of any shares purchasable upon the exercise of any part of an Option
unless and until certificates representing such shares have been issued by the
Company to such holders.
5.5 Ownership and Transfer Restrictions. The Committee (or Board,
-----------------------------------
in the case of Options granted to Independent Directors), in its sole
discretion, may impose such restrictions on the ownership and transferability of
the shares purchasable upon the exercise of an Option as it deems appropriate.
Any such restriction shall be set forth in the respective Option Agreement and
may be referred to on the certificates evidencing such shares. The Committee
may require the Employee to give the Company prompt notice of any disposition of
shares of Common Stock acquired by exercise of an Incentive Stock Option within
(i) two years from the date of granting such Option to such Employee or (ii) one
year after the transfer of such shares to such Employee. The Committee may
direct that the certificates evidencing shares acquired by exercise of an Option
refer to such requirement to give prompt notice of disposition.
10
<PAGE>
5.6 Limitations on Exercise of Formula Options Granted to
-----------------------------------------------------
Independent Directors. No Formula Option granted to an Independent Director
- ---------------------
may be exercised to any extent by anyone after the first to occur of the
following events:
(a) the expiration of twelve (12) months from the date of the
Optionee's death;
(b) the expiration of twelve (12) months from the date of the
Optionee's Termination of Directorship by reason of his or her permanent and
total disability (within the meaning of Section 22(e)(3) of the Code);
(c) the expiration of thirty (30) days from the date of the
Optionee's Termination of Directorship by reason of removal for cause, as
determined by the Board;
(d) the expiration of three (3) months from the date of the
Optionee's Termination of Directorship for any reason other than removal for
cause or the Optionee's death or his or her permanent and total disability,
unless the Optionee dies within said three-month period; or
(e) The expiration of ten years from the date the Option was
granted.
ARTICLE VI
AWARD OF RESTRICTED STOCK
6.1 Award of Restricted Stock
-------------------------
(a) The Committee may from time to time, in its sole discretion:
(i) Select from among the Employees or consultants (including
Employees or consultants who have previously received other awards
under this Plan) such of them as in its opinion should be awarded
Restricted Stock; and
(ii) Determine the purchase price, if any, and other terms and
conditions applicable to such Restricted Stock, consistent with this
Plan.
(b) The Committee shall establish the purchase price, if any, and
form of payment for Restricted Stock; provided, however, that such purchase
-------- -------
price shall be no less than the par value of the Common Stock to be purchased,
unless otherwise permitted by applicable state law. In all cases, legal
consideration shall be required for each issuance of Restricted Stock.
(c) Upon the selection of an Employee or consultant to be awarded
Restricted Stock, the Committee shall instruct the Secretary of the Company to
issue such Restricted Stock and may impose such conditions on the issuance of
such Restricted Stock as it deems appropriate.
6.2 Restricted Stock Agreement. Restricted Stock shall be issued
--------------------------
only pursuant to a written Restricted Stock Agreement, which shall be executed
by the selected Employee or consultant and an authorized officer of the Company
and which shall contain such terms and conditions as the Committee shall
determine, consistent with this Plan.
11
<PAGE>
6.3 Consideration. As consideration for the issuance of Restricted
-------------
Stock, in addition to payment of any purchase price, the Restricted Stockholder
shall agree, in the written Restricted Stock Agreement, to render faithful and
efficient services to the Company or a Subsidiary, with such duties and
responsibilities as the Company or the Subsidiary shall from time to time
prescribe. Nothing in this Plan or in any Restricted Stock Agreement hereunder
shall confer on any Restricted Stockholder any right to continue in the employ
of, or as a consultant for, the Company or any Subsidiary or shall interfere
with or restrict in any way the rights of the Company and any Subsidiary, which
are hereby expressly reserved, to discharge any Restricted Stockholder at any
time for any reason whatsoever, with or without good cause.
6.4 Rights as Stockholders. Upon delivery of the shares of
----------------------
Restricted Stock to the escrow holder pursuant to Section 6.7, the Restricted
Stockholder shall have, unless otherwise provided by the Committee, all the
rights of a stockholder with respect to said shares, subject to the restrictions
in his Restricted Stock Agreement, including the right to receive all dividends
and other distributions paid or made with respect to the shares; provided,
--------
however, that in the sole discretion of the Committee, any extraordinary
- -------
distributions with respect to the Common Stock shall be subject to the
restrictions set forth in Section 6.5.
6.5 Restriction. All shares of Restricted Stock issued under this
-----------
Plan (including any shares received by holders thereof with respect to shares of
Restricted Stock as a result of stock dividends, stock splits or any other form
of recapitalization) shall, in the terms of each individual Restricted Stock
Agreement, be subject to such restrictions as the Committee shall provide, which
restrictions may include, without limitation, restrictions concerning voting
rights and transferability and restrictions based on duration of employment with
the Company, Company performance and individual performance; provided, however,
-------- -------
that by action taken after the Restricted Stock is issued, the Committee may, on
such terms and conditions as it may determine to be appropriate, remove any or
all of the restrictions imposed by the terms of the Restricted Stock Agreement.
Restricted Stock may not be sold or encumbered until all restrictions are
terminated or expire. Unless provided otherwise by the Committee, if no
consideration was paid by the Restricted Stockholder upon issuance, a Restricted
Stockholder's rights in unvested Restricted Stock shall lapse upon Termination
of Employment or, if applicable, upon Termination of Consultancy with the
Company.
6.6 Repurchase of Restricted Stock. The Committee shall provide in
------------------------------
the terms of each individual Restricted Stock Agreement that the Company shall
have the right to repurchase from the Restricted Stockholder the Restricted
Stock then subject to restrictions under the Restricted Stock Agreement
immediately upon a Termination of Employment or, if applicable, upon a
Termination of Consultancy between the Restricted Stockholder and the Company,
at a cash price per share equal to the price paid by the Restricted Stockholder
for such Restricted Stock; provided, however, that provision may be made that no
-------- -------
such right of repurchase shall exist in the event of a Termination of Employment
or Termination of Consultancy without cause, or following a change in control of
the Company or because of the Restricted Stockholder's retirement, death or
disability, or otherwise.
6.7 Escrow. The Secretary of the Company or such other escrow
------
holder as the Committee may appoint shall retain physical custody of each
certificate representing Restricted Stock until all of the restrictions imposed
under the Restricted Stock Agreement with respect to the shares evidenced by
such certificate expire or shall have been removed.
6.8 Legend. In order to enforce the restrictions imposed upon
------
shares of Restricted Stock hereunder, the Committee shall cause a legend or
legends to be placed on certificates
12
<PAGE>
representing all shares of Restricted Stock that are still subject to
restrictions under Restricted Stock Agreements, which legend or legends shall
make appropriate reference to the conditions imposed thereby.
ARTICLE VII
PERFORMANCE AWARDS, DIVIDEND EQUIVALENTS,
DEFERRED STOCK, STOCK PAYMENTS
7.1 Performance Awards. Any Employee or consultant selected by the
------------------
Committee may be granted one or more Performance Awards. The value of such
Performance Awards may be linked to the market value, book value, net profits or
other measure of the value of Common Stock or other specific performance
criteria determined appropriate by the Committee, in each case on a specified
date or dates or over any period or periods determined by the Committee, or may
be based upon the appreciation in the market value, book value, net profits or
other measure of the value of a specified number of shares of Common Stock over
a fixed period or periods determined by the Committee. In making such
determinations, the Committee shall consider (among such other factors as it
deems relevant in light of the specific type of award) the contributions,
responsibilities and other compensation of the particular key Employee or
consultant.
7.2 Dividend Equivalents. Any Employee or consultant selected by
--------------------
the Committee may be granted Dividend Equivalents based on the dividends
declared on Common Stock, to be credited as of dividend payment dates, during
the period between the date an Option, Stock Appreciation Right, Deferred Stock
or Performance Award is granted, and the date such Option, Stock Appreciation
Right, Deferred Stock or Performance Award is exercised, vests or expires, as
determined by the Committee. Such Dividend Equivalents shall be converted to
cash or additional shares of Common Stock by such formula and at such time and
subject to such limitations as may be determined by the Committee. With respect
to Dividend Equivalents granted with respect to Options intended to be qualified
performance-based compensation for purposes of Section 162(m), such Dividend
Equivalents shall be payable regardless of whether such Option is exercised.
7.3 Stock Payments. Any Employee or consultant selected by the
--------------
Committee may receive Stock Payments in the manner determined from time to time
by the Committee. The number of shares shall be determined by the Committee and
may be based upon the Fair Market Value, book value, net profits or other
measure of the value of Common Stock or other specific performance criteria
determined appropriate by the Committee, determined on the date such Stock
Payment is made or on any date thereafter.
7.4 Deferred Stock. Any Employee or consultant selected by the
--------------
Committee may be granted an award of Deferred Stock in the manner determined
from time to time by the Committee. The number of shares of Deferred Stock
shall be determined by the Committee and may be linked to the market value, book
value, net profits or other measure of the value of Common Stock or other
specific performance criteria determined to be appropriate by the Committee, in
each case on a specified date or dates or over any period or periods determined
by the Committee. Common Stock underlying a Deferred Stock award will not be
issued until the Deferred Stock award has vested, pursuant to a vesting schedule
or performance criteria set by the Committee. Unless otherwise provided by the
Committee, a Grantee of Deferred Stock shall have no rights as a Company
stockholder with respect to such Deferred Stock until such time as the award has
vested and the Common Stock underlying the award has been issued.
13
<PAGE>
7.5 Performance Award Agreement, Dividend Equivalent Agreement,
----------------------------------------------------------
Deferred Stock Agreement, Stock Payment Agreement. Each Performance Award,
- -------------------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment shall be
evidenced by a written agreement, which shall be executed by the Grantee and an
authorized Officer of the Company and which shall contain such terms and
conditions as the Committee shall determine, consistent with this Plan.
7.6 Term. The term of a Performance Award, Dividend Equivalent,
----
award of Deferred Stock and/or Stock Payment shall be set by the Committee in
its sole discretion.
7.7 Exercise Upon Termination of Employment. A Performance Award,
---------------------------------------
Dividend Equivalent, award of Deferred Stock and/or Stock Payment is exercisable
or payable only while the Grantee is an Employee or consultant; provided that
the Committee may determine that the Performance Award, Dividend Equivalent,
award of Deferred Stock and/or Stock Payment may be exercised or paid subsequent
to Termination of Employment or Termination of Consultancy without cause, or
following a change in control of the Company, or because of the Grantee's
retirement, death or disability, or otherwise.
7.8 Payment on Exercise. Payment of the amount determined under
-------------------
Section 7.1 or 7.2 above shall be in cash, in Common Stock or a combination of
both, as determined by the Committee. To the extent any payment under this
Article VII is effected in Common Stock, it shall be made subject to
satisfaction of all provisions of Section 5.3.
7.9 Consideration. In consideration of the granting of a
-------------
Performance Award, Dividend Equivalent, award of Deferred Stock and/or Stock
Payment, the Grantee shall agree, in a written agreement, to render faithful and
efficient services to the Company or a Subsidiary, with such duties and
responsibilities as the Company or the Subsidiary shall from time to time
prescribe. Nothing in this Plan or in any agreement hereunder shall confer on
any Grantee any right to continue in the employ of, or as a consultant for, the
Company or any Subsidiary or shall interfere with or restrict in any way the
rights of the Company and any Subsidiary, which are hereby expressly reserved,
to discharge any Grantee at any time for any reason whatsoever, with or without
good cause.
ARTICLE VIII
STOCK APPRECIATION RIGHTS
8.1 Grant of Stock Appreciation Rights. A Stock Appreciation Right
----------------------------------
may be granted to any Employee or consultant selected by the Committee. A Stock
Appreciation Right may be granted (i) in connection and simultaneously with the
grant of an Option, (ii) with respect to a previously granted Option, or (iii)
independent of an Option. A Stock Appreciation Right shall be subject to such
terms and conditions not inconsistent with this Plan as the Committee shall
impose and shall be evidenced by a written Stock Appreciation Right Agreement,
which shall be executed by the Grantee and an authorized officer of the Company.
The Committee, in its sole discretion, may determine whether a Stock
Appreciation Right is to qualify as performance-based compensation as described
in Section 162(m)(4)(C) of the Code and Stock Appreciation Right Agreements
evidencing Stock Appreciation Rights intended to so qualify shall contain such
terms and conditions as may be necessary to meet the applicable provisions of
section 162(m) of the Code. Without limiting the generality of the foregoing,
the Committee may, in its sole discretion and on such terms as it deems
appropriate, require as a condition of the grant of a Stock Appreciation Right
to an Employee or consultant that the Employee or consultant surrender for
cancellation some or all of the unexercised
14
<PAGE>
Options, awards of Restricted Stock or Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments, or other rights
which have been previously granted to him or her under this Plan or otherwise. A
Stock Appreciation Right, the grant of which is conditioned upon such surrender,
may have an exercise price lower (or higher) than the exercise price of the
surrendered Option or other award, may cover the same (or a lesser or greater)
number of shares as such surrendered Option or other award, may contain such
other terms as the Committee deems appropriate, and shall be exercisable in
accordance with its terms, without regard to the number of shares, price,
exercise period or any other term or condition of such surrendered Option or
other award.
8.2 Coupled Stock Appreciation Rights
---------------------------------
(a) A Coupled Stock Appreciation Right ("CSAR") shall be related
to a particular Option and shall be exercisable only when and to the extent the
related Option is exercisable.
(b) A CSAR may be granted to the Grantee for no more than the number
of shares subject to the simultaneously or previously granted Option to which it
is coupled.
(c) A CSAR shall entitle the Grantee (or other person entitled to
exercise the Option pursuant to this Plan) to surrender to the Company
unexercised a portion of the Option to which the CSAR relates (to the extent
then exercisable pursuant to its terms) and to receive from the Company in
exchange therefor an amount determined by multiplying the difference obtained by
subtracting the Option exercise price from the Fair Market Value of a share of
Common Stock on the date of exercise of the CSAR by the number of shares of
Common Stock with respect to which the CSAR shall have been exercised, subject
to any limitations the Committee may impose.
8.3 Independent Stock Appreciation Rights
-------------------------------------
(a) An Independent Stock Appreciation Right ("ISAR") shall be
unrelated to any Option and shall have a term set by the Committee. An ISAR
shall be exercisable in such installments as the Committee may determine. An
ISAR shall cover such number of shares of Common Stock as the Committee may
determine. The exercise price per share of Common Stock subject to each ISAR
shall be set by the Committee. An ISAR is exercisable only while the Grantee is
an Employee or consultant; provided that the Committee may determine that the
ISAR may be exercised subsequent to Termination of Employment or Termination of
Consultancy without cause, or following a change in control of the Company, or
because of the Grantee's retirement, death or disability, or otherwise.
(b) An ISAR shall entitle the Grantee (or other person entitled to
exercise the ISAR pursuant to this Plan) to exercise all or a specified portion
of the ISAR (to the extent then exercisable pursuant to its terms) and to
receive from the Company an amount determined by multiplying the difference
obtained by subtracting the exercise price per share of the ISAR from the Fair
Market Value of a share of Common Stock on the date of exercise of the ISAR by
the number of shares of Common Stock with respect to which the ISAR shall have
been exercised, subject to any limitations the Committee may impose.
8.4 Payment and Limitations on Exercise
-----------------------------------
(a) Payment of the amount determined under Section 8.2(c) and 8.3(b)
above shall be in cash, in Common Stock (based on its Fair Market Value as of
the date the Stock
15
<PAGE>
Appreciation Right is exercised) or a combination of both, as determined by the
Committee. To the extent such payment is effected in Common Stock it shall be
made subject to satisfaction of all provisions of Section 5.3 above pertaining
to Options.
(b) Grantees of Stock Appreciation Rights may be required to comply
with any timing or other restrictions with respect to the settlement or exercise
of a Stock Appreciation Right, including a window-period limitation, as may be
imposed in the discretion of the Board or Committee.
8.5 Consideration. In consideration of the granting of a Stock
-------------
Appreciation Right, the Grantee shall agree, in the written Stock Appreciation
Right Agreement, to render faithful and efficient services to the Company or a
Subsidiary, with such duties and responsibilities as the Company or the
Subsidiary shall from time to time prescribe. Nothing in this Plan or in any
Stock Appreciation Right Agreement hereunder shall confer on any Grantee any
right to continue in the employ of, or as a consultant for, the Company or any
Subsidiary or shall interfere with or restrict in any way the rights of the
Company and any Subsidiary, which are hereby expressly reserved, to discharge
any Grantee at any time for any reason whatsoever, with or without good cause.
ARTICLE IX
ADMINISTRATION
9.1 Compensation Committee. Prior to the Company's initial
----------------------
registration of Common Stock under Section 12 of the Exchange Act, the
Compensation Committee shall consist of the Board (or any committee or
subcommittee thereof). Following such registration, the Compensation Committee
(or another committee or a subcommittee of the Board assuming the functions of
the Committee under this Plan) shall consist of two or more Independent
Directors appointed by and holding office at the pleasure of the Board, each of
whom, if the Board in its sole discretion so provides, is both a "non-employee
director" as defined by Rule 16b-3 and an "outside director" for purposes of
Section 162(m) of the Code. Appointment of Committee members shall be effective
upon acceptance of appointment. Committee members may resign at any time by
delivering written notice to the Board. Vacancies in the Committee may be
filled by the Board.
9.2 Duties and Powers of Committee. It shall be the duty of the
------------------------------
Committee to conduct the general administration of this Plan in accordance with
its provisions. The Committee shall have the power to interpret this Plan and
the agreements pursuant to which Options, awards of Restricted Stock or Deferred
Stock, Performance Awards, Stock Appreciation Rights, Dividend Equivalents or
Stock Payments are granted or awarded, and to adopt such rules for the
administration, interpretation, and application of this Plan as are consistent
therewith and to interpret, amend or revoke any such rules. Notwithstanding the
foregoing, the full Board, acting by a majority of its members in office, shall
conduct the general administration of the Plan with respect to Options granted
to Independent Directors. Any such grant or award under this Plan need not be
the same with respect to each Optionee, Grantee or Restricted Stockholder. Any
such interpretations and rules with respect to Incentive Stock Options shall be
consistent with the provisions of Section 422 of the Code. In its sole
discretion, the Board may at any time and from time to time exercise any and all
rights and duties of the Committee under this Plan except with respect to
matters which under Rule 16b-3 or Section 162(m) of the Code, or any regulations
or rules issued thereunder, are required to be determined in the sole discretion
of the Committee.
16
<PAGE>
9.3 Majority Rule; Unanimous Written Consent. The Committee shall
----------------------------------------
act by a majority of its members in attendance at a meeting at which a quorum is
present or by a memorandum or other written instrument signed by all members of
the Committee.
9.4 Compensation; Professional Assistance; Good Faith Actions.
---------------------------------------------------------
Members of the Committee shall receive such compensation for their services as
members as may be determined by the Board. All expenses and liabilities which
members of the Committee incur in connection with the administration of this
Plan shall be borne by the Company. The Committee may, with the approval of the
Board, employ attorneys, consultants, accountants, appraisers, brokers, or other
persons. The Committee, the Company and the Company's officers and Directors
shall be entitled to rely upon the advice, opinions or valuations of any such
persons. All actions taken and all interpretations and determinations made by
the Committee or the Board in good faith shall be final and binding upon all
Optionees, Grantees, Restricted Stockholders, the Company and all other
interested persons. No members of the Committee or Board shall be personally
liable for any action, determination or interpretation made in good faith with
respect to this Plan, Options, awards of Restricted Stock or Deferred Stock,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, and all members of the Committee and the Board shall be fully
protected by the Company in respect of any such action, determination or
interpretation.
ARTICLE X
MISCELLANEOUS PROVISIONS
10.1 Not Transferable.
----------------
(a) Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments under this Plan may not be sold, pledged, assigned, or transferred in
any manner other than (i) a transfer made in compliance with the federal
securities laws to a trust or custodianship the beneficiaries of which, a
partnership (general or limited) the partners of which, or a limited liability
company the members of which, may include only the Grantee, Optionee or
Restricted Stockholder his or her spouse or his or her lineal descendants by
blood or adoption; provided that such transfer is made expressly subject to this
Plan and that the transferee agrees in writing to be bound by the terms and
conditions of this Plan as if such transferee were the Optionee, Restricted
Stockholder or Grantee; (ii) by will or the laws of descent and distribution; or
(iii) pursuant to a DRO, unless and until such rights or awards have been
exercised, or the shares underlying such rights or awards have been issued, and
all restrictions applicable to such shares have lapsed. No Option, Restricted
Stock award, Deferred Stock award, Performance Award, Stock Appreciation Right,
Dividend Equivalent or Stock Payment or interest or right therein shall be
liable for the debts, contracts or engagements of the Optionee, Grantee or
Restricted Stockholder or his successors in interest or shall be subject to
disposition by transfer, alienation, anticipation, pledge, encumbrance,
assignment or any other means whether such disposition be voluntary or
involuntary or by operation of law by judgment, levy, attachment, garnishment or
any other legal or equitable proceedings (including bankruptcy), and any
attempted disposition thereof shall be null and void and of no effect, except to
the extent that such disposition is permitted by the preceding sentence.
(b) During the lifetime of the Optionee or Grantee, only he or she
may exercise an Option or other right or award (or any portion thereof) granted
to him or her under the Plan, unless it has been disposed of pursuant to the
provisions of this Section 10.1. After the death of the Optionee or Grantee or
permitted transferee, any exercisable portion of an Option or other right or
award may,
17
<PAGE>
prior to the time when such portion becomes unexercisable under the
Plan or the applicable Option Agreement or other agreement, be exercised by his
or her personal representative or by any person empowered to do so under the
deceased's will or under the then applicable laws of descent and distribution.
10.2 Amendment, Suspension or Termination of this Plan. Except as
-------------------------------------------------
otherwise provided in this Section 10.2, this Plan may be wholly or partially
amended or otherwise modified, suspended or terminated at any time or from time
to time by the Board or the Committee. However, without approval of the
Company's stockholders given within twelve months before or after the action by
the Board or the Committee, no action of the Board or the Committee may, except
as provided in Section 10.3, increase the limits imposed in Section 2.1 on the
maximum number of shares which may be issued under this Plan or modify the Award
Limit, and no action of the Committee may be taken that would otherwise require
stockholder approval as a matter of applicable law, regulation or rule. No
amendment, suspension or termination of this Plan shall, without the consent of
the holder of Options, Restricted Stock awards, Deferred Stock awards,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments, alter or impair any rights or obligations under any Options,
Restricted Stock awards, Deferred Stock awards, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments theretofore granted
or awarded, unless the award itself otherwise expressly so provides. No
Options, Restricted Stock, Deferred Stock, Performance Awards, Stock
Appreciation Rights, Dividend Equivalents or Stock Payments may be granted or
awarded during any period of suspension or after termination of this Plan, and
in no event may any Incentive Stock Option be granted under this Plan after the
first to occur of the following events:
(a) The expiration of ten years from the date the Plan is adopted by
the Board; or
(b) The expiration of ten years from the date the Plan is approved
by the Company's stockholders under Section 10.4.
10.3 Changes in Common Stock or Assets of the Company , Acquisition
--------------------------------------------------------------
or Liquidation of the Company and Other Corporate Events.
- --------------------------------------------------------
(a) Subject to Section 10.3(d), in the event that the Committee (or
the Board, in the case of Options granted to Independent Directors) determines
that any dividend or other distribution (whether in the form of cash, Common
Stock, other securities, or other property), recapitalization, reclassification,
stock split, reverse stock split, reorganization, merger, consolidation, split-
up, spin-off, combination, repurchase, liquidation, dissolution, or sale,
transfer, exchange or other disposition of all or substantially all of the
assets of the Company (including, but not limited to, a Change in Control), or
exchange of Common Stock or other securities of the Company, issuance of
warrants or other rights to purchase Common Stock or other securities of the
Company, or other similar corporate transaction or event, in the Committee's
sole discretion (or in the case of Options granted to Independent Directors, the
Board's sole discretion), affects the Common Stock such that an adjustment is
determined by the Committee to be appropriate in order to prevent dilution or
enlargement of the benefits or potential benefits intended to be made available
under the Plan or with respect to an Option, Restricted Stock award, Performance
Award, Stock Appreciation Right, Dividend Equivalent, Deferred Stock award or
Stock Payment, then the Committee (or the Board, in the case of Options granted
to Independent Directors) shall, in such manner as it may deem equitable, adjust
any or all of
(i) the number and kind of shares of Common Stock (or other
securities or property) with respect to which Options, Performance
Awards, Stock Appreciation Rights,
18
<PAGE>
Dividend Equivalents or Stock Payments may be granted under the Plan,
or which may be granted as Restricted Stock or Deferred Stock
(including, but not limited to, adjustments of the limitations in
Section 2.1 on the maximum number and kind of shares which may be
issued and adjustments of the Award Limit),
(ii) the number and kind of shares of Common Stock (or other
securities or property) subject to outstanding Options, Performance
Awards, Stock Appreciation Rights, Dividend Equivalents, or Stock
Payments, and in the number and kind of shares of outstanding
Restricted Stock or Deferred Stock, and
(iii) the grant or exercise price with respect to any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment.
(b) Subject to Section 10.3(d), in the event of any Change in
Control or other transaction or event described in Section 10.3(a) or any
unusual or nonrecurring transactions or events affecting the Company, any
affiliate of the Company, or the financial statements of the Company or any
affiliate, or of changes in applicable laws, regulations, or accounting
principles, the Committee (or the Board, in the case of Options granted to
Independent Directors) in its sole discretion is hereby authorized to take any
one or more of the following actions whenever the Committee (or the Board, in
the case of Options granted to Independent Directors) determines that such
action is appropriate in order to prevent dilution or enlargement of the
benefits or potential benefits intended to be made available under the Plan or
with respect to any option, right or other award under this Plan, to facilitate
such transactions or events or to give effect to such changes in laws,
regulations or principles:
(i) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of the agreement or by action taken prior to the occurrence of
such transaction or event and either automatically or upon the
optionee's request, for either the purchase of any such Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or
Stock Payment, or any Restricted Stock or Deferred Stock for an amount
of cash equal to the amount that could have been attained upon the
exercise of such option, right or award or realization of the
optionee's rights had such option, right or award been currently
exercisable or payable or fully vested or the replacement of such
option, right or award with other rights or property selected by the
Committee (or the Board, in the case of Options granted to Independent
Directors) in its sole discretion;
(ii) In its sole discretion, the Committee (or the Board, in
the case of Options granted to Independent Directors) may provide,
either by the terms of such Option, Performance Award, Stock
Appreciation Right, Dividend Equivalent, or Stock Payment, or
Restricted Stock or Deferred Stock or by action taken prior to the
occurrence of such transaction or event that it cannot be exercised
after such event;
(iii) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction
or event, that for a specified period of time prior to such
transaction or event, such Option or right or award shall be
exercisable as to all shares covered thereby, notwithstanding anything
to the contrary
19
<PAGE>
in (i) Section 4.4 or (ii) the provisions of such Option, Performance
Award, Stock Appreciation Right, Dividend Equivalent or Stock Payment,
Restricted Stock or Deferred Stock;
(iv) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may provide, either by the
terms of such Option, Performance Award, Stock Appreciation Right,
Dividend Equivalent, or Stock Payment, Restricted Stock or Deferred
Stock or by action taken prior to the occurrence of such transaction
or event, that upon such event, such Option, right or award be assumed
by the successor or survivor corporation, or a parent or subsidiary
thereof, or shall be substituted for by similar options, rights or
awards covering the stock of the successor or survivor corporation, or
a parent or subsidiary thereof, with appropriate adjustments as to the
number and kind of shares and prices;
(v) In its sole discretion, and on such terms and conditions
as it deems appropriate, the Committee (or the Board, in the case of
Options granted to Independent Directors) may make adjustments in the
number and type of shares of Common Stock (or other securities or
property) subject to outstanding Options, Performance Award, Stock
Appreciation Rights, Dividend Equivalents, or Stock Payments and in
the number and kind of outstanding Restricted Stock or Deferred Stock
and/or in the terms and conditions of (including the grant or exercise
price), and the criteria included in, outstanding Options, rights and
awards, and Options, rights and awards which may be granted in the
future.
(c) Subject to Section 10.3(d) and 10.8, the Committee (or the
Board, in the case of Options granted to Independent Directors) may, in its sole
discretion, include such further provisions and limitations in any Option,
Performance Award, Stock Appreciation Right, Dividend Equivalent, or Stock
Payment, or Restricted Stock or Deferred Stock agreement or certificate, as it
may deem equitable and in the best interests of the Company.
(d) With respect to Incentive Stock Options and Options and Stock
Appreciation Rights intended to qualify as performance-based compensation under
Section 162(m), no adjustment or action described in this Section 10.3 or in any
other provision of the Plan shall be authorized to the extent that such
adjustment or action would cause the Plan to violate Section 422(b)(1) of the
Code or would cause such option or stock appreciation right to fail to so
qualify under Section 162(m), as the case may be, or any successor provisions
thereto. Furthermore, no such adjustment or action shall be authorized to the
extent such adjustment or action would result in short-swing profits liability
under Section 16 of the Exchange Act or violate the exemptive conditions of Rule
16b-3 unless the Committee (or the Board, in the case of Options granted to
Independent Directors) determines that the option or other award is not to
comply with such exemptive conditions. The number of shares of Common Stock
subject to any option, right or award shall always be rounded to the next whole
number.
10.4 Approval of Plan by Stockholders. This Plan will be submitted
--------------------------------
for the approval of the Company's stockholders within twelve months after the
date of the Board's initial adoption of this Plan. Options, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments may be granted
and Restricted Stock or Deferred Stock may be awarded prior to such stockholder
approval, provided that such Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments shall not be exercisable and such
Restricted Stock or Deferred Stock shall not vest prior to the time when this
Plan is approved by the stockholders, and provided further that if such approval
has not been obtained at the end of said twelve-month period, all Options,
Performance Awards, Stock Appreciation Rights, Dividend Equivalents or Stock
Payments
20
<PAGE>
previously granted and all Restricted Stock or Deferred Stock previously awarded
under this Plan shall thereupon be canceled and become null and void.
10.5 Tax Withholding. The Company shall be entitled to require
---------------
payment in cash or deduction from other compensation payable to each Optionee,
Grantee or Restricted Stockholder of any sums required by federal, state or
local tax law to be withheld with respect to the issuance, vesting or exercise
of any Option, Restricted Stock, Deferred Stock, Performance Award, Stock
Appreciation Right, Dividend Equivalent or Stock Payment. The Committee (or the
Board, in the case of Options granted to Independent Directors) may in its
discretion and in satisfaction of the foregoing requirement allow such Optionee,
Grantee or Restricted Stockholder to elect to have the Company withhold shares
of Common Stock otherwise issuable under such Option or other award (or allow
the return of shares of Common Stock) having a Fair Market Value equal to the
sums required to be withheld.
10.6 Loans. The Committee may, in its sole discretion, extend one
-----
or more loans to Employees in connection with the exercise or receipt of an
Option, Performance Award, Stock Appreciation Right, Dividend Equivalent or
Stock Payment granted under this Plan, or the issuance of Restricted Stock or
Deferred Stock awarded under this Plan. The terms and conditions of any such
loan shall be set by the Committee.
10.7 Forfeiture Provisions. Pursuant to its general authority to
---------------------
determine the terms and conditions applicable to awards under the Plan, the
Committee (or the Board, in the case of Options granted to Independent
Directors) shall have the right (to the extent consistent with the applicable
exemptive conditions of Rule 16b-3) to provide, in the terms of Options or other
awards made under the Plan, or to require the recipient to agree by separate
written instrument, that (i) any proceeds, gains or other economic benefit
actually or constructively received by the recipient upon any receipt or
exercise of the award, or upon the receipt or resale of any Common Stock
underlying such award, must be paid to the Company, and (ii) the award shall
terminate and any unexercised portion of such award (whether or not vested)
shall be forfeited, if (a) a Termination of Employment, Termination of
Consultancy or Termination of Directorship occurs prior to a specified date, or
within a specified time period following receipt or exercise of the award, or
(b) the recipient at any time, or during a specified time period, engages in any
activity in competition with the Company, or which is inimical, contrary or
harmful to the interests of the Company, as further defined by the Committee (or
the Board, as applicable).
10.8 Limitations Applicable to Section 16 Persons and Performance-
-------------------------------------------------------------
Based Compensation. Notwithstanding any other provision of this Plan, this
- ------------------
Plan, and any Option, Performance Award, Stock Appreciation Right, Dividend
Equivalent or Stock Payment granted, or Restricted Stock or Deferred Stock
awarded, to any individual who is then subject to Section 16 of the Exchange
Act, shall be subject to any additional limitations set forth in any applicable
exemptive rule under Section 16 of the Exchange Act (including any amendment to
Rule 16b-3 of the Exchange Act) that are requirements for the application of
such exemptive rule. To the extent permitted by applicable law, the Plan,
Options, Performance Awards, Stock Appreciation Rights, Dividend Equivalents,
Stock Payments, Restricted Stock and Deferred Stock granted or awarded hereunder
shall be deemed amended to the extent necessary to conform to such applicable
exemptive rule. Furthermore,
21
<PAGE>
notwithstanding any other provision of this Plan, any Option or Stock
Appreciation Right intended to qualify as performance-based compensation as
described in Section 162(m)(4)(C) of the Code shall be subject to any additional
limitations set forth in Section 162(m) of the Code (including any amendment to
Section 162(m) of the Code) or any regulations or rulings issued thereunder that
are requirements for qualification as performance-based compensation as
described in Section 162(m)(4)(C) of the Code, and this Plan shall be deemed
amended to the extent necessary to conform to such requirements.
10.9 Effect of Plan Upon Options and Compensation Plans. The
--------------------------------------------------
adoption of this Plan shall not affect any other compensation or incentive plans
in effect for the Company or any Subsidiary. Nothing in this Plan shall be
construed to limit the right of the Company (i) to establish any other forms of
incentives or compensation for Employees, Directors or Consultants of the
Company or any Subsidiary or (ii) to grant or assume options or other rights
otherwise than under this Plan in connection with any proper corporate purpose
including but not by way of limitation, the grant or assumption of options in
connection with the acquisition by purchase, lease, merger, consolidation or
otherwise, of the business, stock or assets of any corporation, partnership,
firm or association.
10.10 Compliance with Laws. This Plan, the granting and vesting of
--------------------
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments under this
Plan and the issuance and delivery of shares of Common Stock and the payment of
money under this Plan or under Options, Performance Awards, Stock Appreciation
Rights, Dividend Equivalents or Stock Payments granted or Restricted Stock or
Deferred Stock awarded hereunder are subject to compliance with all applicable
federal and state laws, rules and regulations (including but not limited to
state and federal securities law and federal margin requirements) and to such
approvals by any listing, regulatory or governmental authority as may, in the
opinion of counsel for the Company, be necessary or advisable in connection
therewith. Any securities delivered under this Plan shall be subject to such
restrictions, and the person acquiring such securities shall, if requested by
the Company, provide such assurances and representations to the Company as the
Company may deem necessary or desirable to assure compliance with all applicable
legal requirements. To the extent permitted by applicable law, the Plan,
Options, Restricted Stock awards, Deferred Stock awards, Performance Awards,
Stock Appreciation Rights, Dividend Equivalents or Stock Payments granted or
awarded hereunder shall be deemed amended to the extent necessary to conform to
such laws, rules and regulations.
10.11 Titles. Titles are provided herein for convenience only and
------
are not to serve as a basis for interpretation or construction of this Plan.
10.12 Governing Law. This Plan and any agreements hereunder shall be
-------------
administered, interpreted and enforced under the internal laws of the State of
Maryland without regard to conflicts of laws thereof.
* * *
22
<PAGE>
I hereby certify that the foregoing Plan was duly adopted by the Board
of Directors of DIGEX, Incorporated on , 1996.
------------ ---
I hereby certify that the foregoing Plan was duly approved by the
stockholders of DIGEX, Incorporated on , 1996.
---------- ---
Executed on this day of , 199 .
---- --------------- -
----------------------------------------
Secretary
23
<PAGE>
September 27, 1996
Mr. Christopher R. McCleary
President
DIGEX, Incorporated
6800 Virginia Manor Road
Beltsville, MD 20705
RE: (A) Series C Subordinated Convertible Debentures
Dear Chris:
The undersigned party (hereinafter referred to as "Purchaser") is happy to
inform you that we have committed to purchase 21% of a $5,000,000.00 Series C
Subordinated Convertible Debenture in accordance with the terms described in the
attached and initialled term sheet dated September 27, 1996.
The obligations of the Purchaser to purchase the Series C Subordinated
Convertible Debenture are conditioned upon acceptable definitive written
documentation including requisite representations and warrants to the Purchaser
from DIGEX, Incorporated (the "Company"). However, no further approvals are
required by the Purchaser's investment or executive committees.
/s/ Blue Chip Capital Fund L.P.
- ----------------------------------
Limited Partnership Name
By: /s/ Blue Chip Venture Company
------------------------------
General Partner
By: /s/ John A. Wyant
------------------------------
Name: John A. Wyant
----------------------------
Title: President
---------------------------
Date: 9/27/96
---------------------------
<PAGE>
DIGEX, INCORPORATED
MEMORANDUM OF PRIVATE PLACEMENT
SERIES C SUBORDINATED CONVERTIBLE DEBENTURE OFFERING
SEPTEMBER 27, 1996
Issuer: DIGEX, Incorporated
Purchasers: Grotech Partners
Venrock Associates II
Blue Chip Capital Fund
Southern Venture Fund
Security Offered: Series C Subordinated Convertible Debentures
Interest Rate: 10% per annum compounded monthly
Interest Payments: Accrued and converted to (a) Common at
conversion date or, (b) accrued and paid at
redemption date.
Term: 6 months from issue date
Principal Amount: $5,000,000.00 (which may be drawn in
$1,000,000.00 increments)
Purchasers' Allocation: Grotech Partners 41%
---
Venrock Associates II 28%
---
Blue Chip Capital Fund 21%
---
Southern Venture Fund 10%
---
Redemption Option: Issuer may redeem at any time during the term.
Purchasers may redeem at face value upon a
merger or sale of at least 51% of the fully
diluted voting shares of the company.
Conversion Events: Purchasers must convert into DIGEX Common
conterminous with (a) an initial public
offering, (b) an equity private placement of
DIGEX Common Stock over $20,000,000.00 or (c) at
maturity.
Conversion Price: The conversion price shall be at 80% of the
price per share of the (a) initial public
offering or (b) an equity private placement of
at least $20,000,000.00. In the event of (c) at
maturity date, the conversion price will be
$3.73.
Warrants: The debenture has attached warrants to purchase
500,000 shares of DIGEX Common at $1.50 per
share, exercisable on or before 12/31/98. The
warrants shall be issued on a 10:1 basis dollars
to warrants pro-rata with the dollars as drawn
by the Company. If Conversion Event (a) or (b)
has not occurred by 12/31/96, the strike price
of Purchasers' warrants shall be reduced from
$1.50 per share to $0.75 per share. The
debenture warrant grant will increase by 150,000
shares per month on the last day of months four,
five and six of the term until mandatory
conversion or redemption occurs. The strike
price of the additional debenture warrant grant
shall be $0.75 per share.
Voting Rights: Vote on an as-converted basis.
Current Shares Outstanding: 6,113,911 excluding 240,000 outstanding
warrants, 2,283,300 options issued and granted,
and 202,280 options issued and ungranted
pursuant to the employee stock option plan.
Above reflects reverse split totals as reflected in the
DIGEX, Incorporated Preliminary Prospectus dated July 23, 1996.
<PAGE>
PROMISSORY NOTE
$1,500,000 October 7, 1996
FOR VALUE RECEIVED, DIGEX, Incorporated, a Maryland corporation (the
"Maker"), promises to pay to the order of Blue Chip Capital Fund Limited
Partnership or assigns ("Blue Chip" or the "Holder"), at 2000 FNC Center, 201
East Fifth Street, Cincinnati, Ohio 45202, or at such other place as the Holder
of this Note may from time to time designate, on the Maturity Date (as
hereinafter defined), the principal amount of ONE MILLION FIVE HUNDRED THOUSAND
DOLLARS ($1,500,000), together with interest on the unpaid principal amount
hereof from the date hereof, until paid in full, said interest to be due and
payable monthly in arrears on the last of each month or (at the option of the
Maker) such interest shall accrue and be payable on the Maturity Date, at a rate
per annum (computed on the basis of a 360 day year and applied to the actual
number of days elapsed in each interest calculation period) equal to nine
percent (9%), compounded monthly. All payments hereunder shall be made in
lawful money of the United States of America, without offset. The indebtedness
represented by this Note shall be senior indebtedness of the Maker and shall
rank on a parity with all other senior indebtedness of the Maker.
For purposes of this Note, "Maturity Date" means the earlier to occur
of (a) the closing date of any transaction involving the incurrence of any
indebtedness by the Maker or the issuance of any debt or equity securities of
the Maker (including without limitation an initial public offering of securities
by the Maker) pursuant to which the Maker receives gross proceeds of $5,000,000
or more, or (b) April 7, 1997.
Notwithstanding the foregoing and in addition to the provisions herein
providing for the grants of Warrants, the Holder shall have the right,
exercisable in its sole discretion, to require the Maker to prepay the unpaid
principal amount of this Note, together with all accrued and unpaid interest
thereon, upon (or at any time after) the announcement of, or execution of an
agreement relating to, a transaction by the Maker that would result in (a) a
person who is not currently a holder of shares of Common Stock (as hereinafter
defined) or securities convertible into or exchangeable for Common Stock
acquiring 51% or more of the Common Stock of the Maker on a fully diluted basis;
(b) the sale of all or substantially all of the assets of the Maker; or (c) any
other transaction, including a merger, consolidation, or transfer of assets,
subject to Section 3-105 of the Maryland General Corporation Law other than (i)
any transaction of the type described in Section 3-106(a) of the Maryland
General Corporation Law or (ii) any such transaction effected solely to change
the jurisdiction of incorporation of the Maker.
In addition to the foregoing, the Maker may prepay this Note in whole
or in part at any time or times without premium or penalty. In the event of a
partial prepayment, the proceeds thereof shall be applied, first, to the accrued
and unpaid interest hereunder, and thereafter to the unpaid principal amount
hereof.
<PAGE>
WARRANTS
(A) The Maker hereby agrees to grant to Blue Chip, or any subsidiary or
affiliate designated by Blue Chip, warrants to purchase shares of common stock,
$.01 par value per share, of the Maker (the "Common Stock"), substantially in
the form set forth in Appendix A hereto ("Warrants"), in the amount specified in
subparagraph (C) below, the exercise price of which will be $1.00 per share,
upon the occurrence of either of the following:
1. An underwritten public offering of the Common Stock has not been
consummated on or before October 31, 1996; or
2. The principal amount of this Note, and all accrued and unpaid
interest thereon, shall not have been paid in full on or before October 31, 1996
with the proceeds of a financing provided by some or all of the existing
stockholders of the Maker.
(B) The Maker hereby agrees to grant to Blue Chip, or any subsidiary or
affiliate designated by Blue Chip, additional Warrants, in the amount specified
in subparagraph (C) hereof, on April 7, 1997, the exercise price of which will
be $0.75 per share, provided however, that the obligation to issue Warrants
pursuant to this subparagraph (B) shall only exist if as of April 7, 1997, the
Maker shall have failed to repay this Note in full.
(C) The number of shares of Common Stock that Blue Chip will be entitled to
purchase pursuant to the Warrants granted pursuant to subparagraph (A) above is
375,000 and the number of shares of Common Stock that Blue Chip will be entitled
to purchase pursuant to the Warrants granted pursuant to subparagraph (B) above
is 375,000. The Maker and Blue Chip (the "Parties") acknowledge that the Maker
intends to effect a 1 for 2.5 Reserve Stock Split (the "Reverse Stock Split"),
and that such Reverse Stock Split will be effective upon the filing of an
appropriate amendment to the Articles of Incorporation of Maker, which is
expected to occur shortly after the issuance of this Note. The Parties
acknowledge that the number of shares of Common Stock issuable upon exercise of
the Warrants, as set forth above, has been computed before giving effect to the
Reverse Stock Split. Accordingly, after the Reverse Stock Split becomes
effective, (i) the number of shares of Common Stock that Blue Chip will be
entitled to purchase pursuant to the Warrants granted pursuant to subparagraph
(A) above will be 150,000, and (ii) the number of shares of Common Stock that
Blue Chip will be entitled to purchase pursuant to the Warrants granted pursuant
to subparagraph (B) above will be 150,000.
(D) In the event this Note is assigned or otherwise transferred to any
person, any Warrants granted to Blue Chip, or any Subsidiary or affiliate
designated by Blue Chip, prior to the time of such assignment or transfer will
remain the sole property and right of Blue Chip or such subsidiary or affiliate,
and the successors and assigns thereof.
EVENTS OF DEFAULT
The occurrence of any one or more of the following shall constitute an
event of default ("Event of Default") hereunder:
<PAGE>
(1) Failure to pay, when due, the principal, any interest, or any
other sum payable hereunder (whether upon the Maturity Date, upon any prepayment
date, upon acceleration, or otherwise);
(2) The occurrence of any other default under this Note;
(3) The occurrence of any default in the performance of any
obligations of Maker under the Warrants;
(4) The failure of the Maker to seek and obtain the consent of the
Holder for the incurrence by the Maker of any additional indebtedness in excess
of an aggregate principal amount of $5,000,000;
(5) The failure of the Maker generally to pay its debts as such debts
become due, the admission by the Maker in writing of its inability to pay its
debts as such debts become due, or the making by the Maker of any general
assignment for the benefit of creditors;
(6) The commencement by the Maker of any case, proceeding, or other
action seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of its or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for it
or for all or any substantial part of its property; or
(7) The commencement of any case, proceeding, or other action against
the Maker seeking to have any order for relief entered against the Maker as
debtor, or seeking reorganization, arrangement, adjustment, liquidation,
dissolution, or composition of the Maker or its debts under any law relating to
bankruptcy, insolvency, reorganization, or relief of debtors, or seeking
appointment of a receiver, trustee, custodian, or other similar official for the
Maker or for all or any substantial part of the property of the Maker, and (i)
such Maker shall, by any act or omission, indicate its consent to, approval of,
or acquiescence in such case, proceeding, or action, or (ii) such case,
proceeding, or action results in the entry of an order for relief, or (iii) such
case, proceeding, or action, remains undismissed for a period of fifteen (15)
days or more.
Upon the occurrence of any such Event of Default hereunder, the entire
principal amount hereof, and all accrued and unpaid interest thereon, shall be
accelerated, and shall be immediately due and payable, at the option of the
Holder, without demand or notice, and in addition thereto, and not in
substitution therefor, the Holder shall be entitled to exercise any one or more
of the rights and remedies provided by applicable law. Failure to exercise said
option or to pursue such other remedies shall not constitute a waiver of such
option or such other remedies or of the right to exercise any of the same in the
event of any subsequent Event of Default hereunder.
<PAGE>
MISCELLANEOUS
The Maker agrees to pay out of the proceeds hereof all reasonable
costs and expenses of Holder (including without limitation reasonable attorneys'
fees and disbursements) incurred in the transaction memorialized by this Note.
The Maker promises to pay all reasonable costs and expenses (including without
limitation reasonable attorneys' fees and disbursements) incurred in connection
with the collection hereof, and to perform each and every covenant or agreement
to be performed by the Maker under this Note, the Warrants and any other
instrument evidencing or securing the obligation represented by this Note.
Each Obligor (which term shall include the Maker and all makers,
sureties, guarantors, endorsers, and other persons assuming obligations pursuant
to this Note) under this Note hereby waives presentment, protest, demand, notice
of dishonor, and all other notices, and all defenses and pleas on the grounds of
any extension or extensions of the time of payments or the due dates of this
Note, in whole or in part, before or after maturity, with or without notice. No
renewal or extension of this Note, no release or surrender of any collateral
given as security for this Note, no release of any Obligor, and no delay in
enforcement of this Note or in exercising any right or power hereunder, shall
affect the liability of any Obligor. The pleading of any statute of limitations
as a defense to any demand against any Obligor is expressly waived.
No single or partial exercise by the Holder of any right hereunder,
under the Warrants, or under any other agreement given as security for this Note
or pertaining hereto, shall preclude any other or further exercise thereof or
the exercise of any rights. No delay or omission on the part of the Holder in
exercising any right hereunder shall operate as a waiver of such right or of any
other right under this Note.
Whenever used herein, the words "Maker," "Holder" and "Obligor" shall
be deemed to include their respective successors and assigns.
This Note shall be governed by and construed under and in accordance
with the laws of the State of Maryland (but not including the choice of law
rules thereof).
IN WITNESS WHEREOF, the undersigned has caused this Note to be duly
executed on its behalf, as of the day and year first hereinabove set forth.
ATTEST: DIGEX, Incorporated
/s/ Debbie Gingrich By: /s/ Thomas Brandt, Jr.
- -------------------------- ---------------------------
[SEAL]
<PAGE>
APPENDIX A
----------
FORM OF WARRANT
THE WARRANT AND THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"),
OR THE SECURITIES LAWS OF ANY STATE. THESE SECURITIES HAVE BEEN ISSUED OR SOLD
IN RELIANCE ON AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND THE SECURITIES LAWS OF VARIOUS STATES AND MAY NOT BE SOLD OR TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACTS OR IN A
TRANSACTION WHICH IS EXEMPT FROM THE REGISTRATION REQUIREMENTS OF SUCH ACTS.
DIGEX, INCORPORATED
WARRANT
TO PURCHASE SHARES OF COMMON STOCK
This Warrant evidences the right of Blue Chip Capital Fund Limited
Partnership (the "Holder"), to purchase the number of shares of common stock,
par value $0.01 per share (the "Common Stock"), of DIGEX, Incorporated, a
Maryland corporation (the "Company"), as provided in Section 2 hereof.
Section 1. Grant.
-----
The Holder is hereby granted the right (collectively, the "Purchase
Rights"), in accordance with the terms and conditions of this Warrant, during
the Exercise Period (as defined in Section 3), to purchase from the Company that
number of fully paid and non-assessable shares of Common Stock set forth in
Section 2 hereof, at the Exercise Price (as defined in Section 5), upon delivery
of this Warrant to the Company with the subscription form described in Section 4
hereof, duly executed, and upon tender of the Exercise Price for the shares of
Common Stock to be purchased.
Section 2. Number of Shares of Common Stock Purchasable.
---------------------------------------------
Section 2.1. Subject to the provisions of this Section 2,
this Warrant entitles the Holder to purchase from time to time __________ shares
of Common Stock (the "Warrant Shares").
<PAGE>
Section 2.2. If prior to the expiration of these Purchase
Rights by exercise or by the terms of this Warrant, the Company shall undertake
any reclassification, stock split, reverse stock split, stock dividend or any
similar proportionately-applied change (collectively, a "Reclassification") of
outstanding shares of Common Stock (other than a change in, of, or from par
value), the Holder shall thereafter be entitled, upon exercise of this Warrant,
to purchase the kind and amount of shares of stock and other securities and
property receivable upon such Reclassification by a holder of the number of
shares of Common Stock which this Warrant entitles the Holder hereof to purchase
immediately prior to such Reclassification.
Section 2.3. In case, prior to the expiration of these
Purchase Rights by exercise or by the terms of this Warrant, the Company shall
consolidate or merge with, or convey all, or substantially all, of its property
or assets to, any other corporation or corporations, then, as a condition
precedent to such consolidation, merger, or conveyance, lawful and adequate
provision shall be made whereby the Holder shall thereafter have the right to
receive from the Company or the successor corporation, as the case may be, upon
the basis and upon the terms and conditions specified in this Warrant, in lieu
of the shares of Common Stock of the Company theretofore purchasable upon the
exercise of the Purchase Rights, such shares of stock, securities, or assets as
the holder hereof would have been entitled to receive had this Warrant been
exercised in full immediately prior to such event. It shall be a condition of
such consolidation, merger, or conveyance that the Company and/or each successor
corporation, as the case may be, shall assume in manner and form reasonably
satisfactory to the Holder the obligation to deliver to the Holder, upon the
exercise of the Purchase Rights, such shares of stock, securities, or assets as,
in accordance with the provisions of this Warrant, shall have been provided for
that purpose.
Section 3. Exercise Period; Registration Statement Notice
----------------------------------------------
Section 3.1. The Purchase Rights represented hereby shall be
exercisable in whole or in part from time to time at any time on or prior to
October 31, 2002, (the "Exercise Period").
Section 3.2. The Company shall give the Holder written
notice, at the address of the Holder set forth on the Company's books, not less
than thirty (30) days prior to the filing of any registration statement with
respect to a public offering of the Common Stock of the Company.
Section 4. Method of Exercise.
-------------------
The Purchase Rights represented by this Warrant are exercisable upon
the terms and conditions set forth herein at the option of the Holder in whole
at any time and in part from time to time during the Exercise Period, upon the
delivery of a notice to the Company's principal office, in the form attached
hereto and made a part hereof as Exhibit 1, to the Company with such notice duly
---------
executed and upon payment of the Exercise Price by the Holder either (i) in cash
or bank cashier's or certified check or (ii) by the Company issuing
2
<PAGE>
shares of Common Stock on a "net issuance" basis (i.e., a number of shares
issuable upon such exercise shall be reduced by the number of shares of Common
Stock equal to (x) the aggregate Exercise Price required to be paid by the
holder for the issuance of such shares, divided by (y) the fair market value of
----------
one share of Common Stock as of such date (determined by the Board of Directors
of the Company in good faith)). The Purchase Rights shall be deemed to have been
exercised, and the Holder shall be deemed to have become a stockholder of record
of the Company for the purposes of receiving dividends and for all other
purposes whatsoever with respect to the shares of Common Stock so purchased, as
of the date of delivery of such notice accompanied by tender of the Exercise
Price.
Section 5. Exercise Price.
---------------
The Exercise Price for the shares of Common Stock issuable to the
Holder hereunder is $__________ per share of Common Stock (the "Exercise
Price").
Section 6. Company's Warranties and Covenants as to Capital Stock.
-------------------------------------------------------
The Company has taken all action necessary and appropriate to properly
authorize and issue those shares of Common Stock issuable to the Holder pursuant
to this Warrant including an authorization of issuance and setting of price.
The Common Stock deliverable on the exercise of the Purchase Rights represented
hereby shall, when issued, be duly and validly issued, fully paid and
nonassessable. The Company shall at all times reserve and hold available
sufficient shares of Common Stock to satisfy all dividend, conversion and
purchase rights of all outstanding convertible securities and warrants.
Section 7. Transfer.
---------
The Purchase Rights shall be registered on the books of the Company,
which shall be kept by it at its principal office for that purpose. The
Purchase Rights shall be transferable on said books, in whole or in part, by the
Holder in person or by duly authorized attorney upon surrender of this Warrant
properly endorsed. The Company agrees that, while the Purchase Rights remain
valid and outstanding its stock transfer books shall not be closed for any
purpose whatsoever except under arrangements which shall ensure to persons
exercising warrants or applying for transfer of stock all rights and privileges
which they might have had or received if the stock transfer books had not been
closed and they had exercised their Purchase Rights at any time during which
such transfer book shall have been opened.
Section 8. Charges, Taxes and Expenses.
----------------------------
Issuance of certificates for shares of Common Stock issuable upon the
exercise of this Warrant or any portion thereof shall be made without charge to
the Holder hereof for any issue taxes or any other incidental expenses in
respect of the issuance of such certificates to and in the name of the
registered Holder of this Warrant, all of which taxes and expenses shall be paid
by the Company, and such certificates shall be issued in the name of the Holder
of this Warrant. Certificates will be issued in a name other than that of the
Holder upon the
3
<PAGE>
request of a Holder and payment by the Holder of any applicable transfer taxes
and compliance with all applicable securities laws.
Section 9. Exchange For Other Denominations.
---------------------------------
This Warrant is exchangeable for new certificates of like tenor and
date representing in the aggregate the right to purchase the number of shares
purchasable hereunder in denominations designated by the Holder at the time of
surrender. In the event of the purchase, at any time prior to the expiration of
the Exercise Period, of less than all of the shares of Common Stock purchasable
hereunder, the Company will cancel this Warrant upon surrender thereof, and will
forthwith execute and deliver to the Holder hereof a new warrant of like tenor
and date for the balance of the shares purchasable hereunder.
Section 10. Loss, Theft, Destruction or Mutilation of Warrant.
-------------------------------------------------
Upon receipt by the Company of evidence reasonably satisfactory to it
of the loss, theft, destruction or mutilation of this Warrant, and, in case of
loss, theft or destruction, of indemnity or security reasonably satisfactory to
it, and upon reimbursement to the Company of all reasonable expenses incidental
thereto, and upon surrender and cancellation of this Warrant, if mutilated, the
Company will make and deliver a new warrant of like tenor and date, in lieu of
this Warrant.
Section 11. Remedies.
--------
The Company acknowledges and agrees that the remedies at law of the
Holder in the event of any default or threatened default by the Company in the
performance of or compliance with any of the terms of this Warrant are not and
will not be adequate, and that such terms may be specifically enforced by a
decree for the specific performance of any agreement contained herein or by an
injunction against a violation of any of the terms hereof or otherwise.
Section 12. Miscellaneous.
-------------
This Warrant shall be binding upon the Company's successors. This
Warrant shall be governed, construed and enforced in accordance with the laws of
the State of Maryland. In case any provision of this Warrant shall be invalid,
illegal or unenforceable, or partially invalid, illegal or unenforceable, the
provision shall be enforced to the extent, if any, that it may legally be
enforced and the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby. This Warrant
and any term hereof may be changed, waived, discharged or terminated only by a
statement in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. The headings in this
Warrant are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof.
4
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Warrant to be duly
executed, under seal and delivered on its behalf this ____ day of October, 1996.
ATTEST: DIGEX, INCORPORATED
By: By:
------------------------------ -----------------------------
Name: Name:
Title: Title:
5
<PAGE>
EXHIBIT I
---------
EXERCISE OF OPTION TO PURCHASE PURSUANT TO
ATTACHED STOCK WARRANT
________________, 19____
To ________________________:
The undersigned, the Holder of record of the attached Warrant of
DIGEX, INCORPORATED, hereby exercises the Purchase Rights evidenced by the
attached Warrant to purchase upon the terms set forth in such Warrant shares of
Common Stock, which constitutes all [or a portion] of the shares of Common Stock
issuable pursuant to the Purchase Rights represented by such Warrant of DIGEX,
INCORPORATED, and hereby tenders payment of the Exercise Price as determined by
the Warrant.
By:_______________________________________
Name:
Title:
<PAGE>
Exhibit 23.1
Consent Of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated July 17, 1996, in the Registration Statement (Amendment
No. 4 to Form SB-2 No. 333-05871) and related Prospectus of DIGEX, Incorporated
for the registration of 3,750,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Baltimore, Maryland
October 8, 1996
