--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-Q
(XXXX ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 000-26873
DIGEX, INCORPORATED
(Exact name of registrant as specified in its charter)
DELAWARE 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
ONE DIGEX PLAZA
BELTSVILLE, MD 20705
(Address of principal executive offices)
(000) 000-0000
Telephone Number
Indicate by check xxxx whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
As of July 31, 2001, there were 24,788,466 and 39,350,000 shares of the
Registrant's Class A and Class B Common Stock outstanding, respectively.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
DIGEX, INCORPORATED
INDEX
PAGE
NO.
----
PART I. FINANCIAL INFORMATION
ITEM Financial Statements (Unaudited):
1.
Consolidated Statements of Operations --
Three and six months ended June 30, 2001 and 2000....... 1
Consolidated Balance Sheets --
June 30, 2001 and December 31, 2000..................... 2
Consolidated Statements of Cash Flows --
Six months ended June 30, 2001 and 2000................. 3
Notes to Consolidated Financial Statements.................. 4
ITEM Management's Discussion and Analysis of Financial Condition
2. and Results of Operations................................. 9
ITEM Quantitative and Qualitative Disclosures about Market
3. Risk...................................................... 17
PART II. OTHER INFORMATION
ITEM Legal Proceedings........................................... 18
1.
ITEM Changes in Securities and Use of Proceeds................... 18
2.
ITEM Defaults Upon Senior Securities............................. 18
3.
ITEM Submission of Matters to a Vote of Security Holders......... 18
4.
ITEM Other Information........................................... 18
5.
ITEM Exhibits and Reports on Form 8-K............................ 18
6.
SIGNATURES............................................................ 19
PART 1: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DIGEX, INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
UNAUDITED (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -------------------------
2001 2000 2001 2000
----------- ----------- ----------- -----------
Revenues.................................. $ 53,791 $ 40,368 $ 106,843 $ 66,164
Costs and expenses:
Cost of operations................... 4,375 9,098 9,531 13,038
Cost of services..................... 26,455 16,055 51,000 26,543
Selling, general and
administrative..................... 36,606 34,195 73,786 60,770
Deferred compensation................ 734 996 1,806 1,990
Depreciation and amortization........ 32,149 17,981 61,036 30,552
----------- ----------- ----------- -----------
Total costs and expenses.................. 100,319 78,325 197,159 132,893
----------- ----------- ----------- -----------
Loss from operations...................... (46,528) (37,957) (90,316) (66,729)
Other income (expense):
Interest expense..................... (739) (429) (1,445) (872)
Interest income and other............ (56) 3,901 219 7,401
----------- ----------- ----------- -----------
Loss before cumulative effect of change in
accounting principle.................... (47,323) (34,485) (91,542) (60,200)
Cumulative effect of change in accounting
principle............................... -- -- -- (166)
----------- ----------- ----------- -----------
Net loss.................................. $ (47,323) (34,485) (91,542) (60,366)
=========== =========== =========== ===========
LOSS PER COMMON SHARE -- BASIC AND
DILUTED:
Loss before cumulative effect of change in
accounting principle.................... $ (0.74) $ (0.54) $ (1.43) $ (0.95)
Cumulative effect of change in accounting
principle............................... -- -- -- (0.01)
----------- ----------- ----------- -----------
Net loss per common share................. $ (0.74) $ (0.54) $ (1.43) $ (0.96)
=========== =========== =========== ===========
Shares used in computing basic and diluted
net loss per share...................... 64,075,828 63,503,516 64,013,802 63,062,198
=========== =========== =========== ===========
See accompanying notes to consolidated financial statements.
DIGEX, INCORPORATED
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS, EXCEPT SHARE INFORMATION)
JUNE 30, DECEMBER 31,
2001 2000
----------- ------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents................................. $ 14,730 $ 83,434
Restricted investments.................................... 3,158 2,000
Accounts receivable, net of allowance of $4,978 in 2001
and $4,741 in 2000, respectively....................... 41,068 42,201
Due from Intermedia....................................... -- 40
Deferred costs............................................ 7,685 8,627
Prepaid expenses and other current assets................. 7,122 7,452
--------- ---------
Total current assets.............................. 73,763 143,754
Property and equipment, net................................. 355,557 348,975
Intangible assets, net...................................... 21,226 23,222
Other assets................................................ 3,279 5,100
--------- ---------
Total assets...................................... $ 453,825 $ 521,051
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... $ 58,254 $ 59,455
Current portion of deferred revenue....................... 7,032 7,734
Current portion of notes payable.......................... 4,317 2,772
Current portion of capital lease obligations.............. 2,032 1,871
Due to Intermedia......................................... 5,614 --
Note payable to Intermedia................................ 12,000 --
--------- ---------
Total current liabilities......................... 89,249 71,832
Deferred revenue............................................ 2,565 4,025
Notes payable............................................... 3,236 1,435
Capital lease obligations................................... 27,343 27,131
--------- ---------
Total liabilities................................. 122,393 104,423
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 5,000,000 shares authorized; 100,000 shares
designated as Series A Convertible; 100,000 Series A Convertible shares
issued
and outstanding........................................ 1 1
Class A common stock, $.01 par value; 100,000,000 shares
authorized; 24,788,466 and 24,546,543 shares issued and
outstanding in 2001 and 2000, respectively............. 248 245
Class B common stock, $.01 par value; 50,000,000 shares
authorized; 39,350,000 issued and outstanding in 2001
and 2000, respectively................................. 394 394
Additional capital........................................ 624,479 622,036
Accumulated deficit....................................... (287,411) (195,869)
Deferred compensation..................................... (6,035) (10,141)
Accumulated other comprehensive loss...................... (244) (38)
--------- ---------
Total stockholders' equity........................ 331,432 416,628
--------- ---------
Total liabilities and stockholders' equity........ $ 453,825 $ 521,051
========= =========
See accompanying notes to consolidated financial statements.
DIGEX, INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
UNAUDITED (AMOUNTS IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
---------------------
2001 2000
--------- ---------
OPERATING ACTIVITIES:
Net loss.................................................. $ (91,542) $ (60,366)
Cumulative effect of change in accounting principle....... -- 166
--------- ---------
Loss before cumulative effect of change in accounting
principle.............................................. (91,542) (60,200)
Adjustments to reconcile net loss to cash used in
operating activities:
Depreciation and amortization.......................... 61,036 30,552
Provision for doubtful accounts........................ 7,499 2,953
Amortization of deferred compensation.................. 1,806 2,026
Loss on sale/ disposals of telecommunications
equipment............................................. 854 313
Accretion of interest on note payable and capital lease
obligations........................................... 56 312
Changes in operating assets and liabilities:
Accounts receivable.................................... (6,366) (17,284)
Deferred costs......................................... 942 (9,021)
Prepaid expenses and other current assets.............. 330 (3,867)
Other assets........................................... 1,407 (317)
Accounts payable and accrued expenses.................. (1,201) (28)
Deferred revenue....................................... (2,162) 8,928
Due to (from) Intermedia............................... 5,654 3,026
--------- ---------
Net cash used in operating activities..................... (21,687) (42,607)
INVESTING ACTIVITIES:
Purchases of property and equipment....................... (62,428) (97,078)
Proceeds from sale of telecommunication assets............ 313 --
Purchase of restricted investments........................ (1,158) --
--------- ---------
Net cash used in investing activities..................... (63,273) (97,078)
FINANCING ACTIVITIES:
Proceeds from subsequent public offering, net of costs.... -- 171,641
Proceeds from issuance of preferred stock................. -- 85,000
Proceeds from issuances of notes payable.................. 15,300 --
Proceeds from exercises of common stock options........... 2,084 775
Principal payments on note payable and capital lease
obligations............................................ (922) (397)
--------- ---------
Net cash provided by financing activities................. 16,462 257,019
Effect of exchange rate on cash and cash equivalents...... (206) --
Net (decrease) increase in cash and cash equivalents...... (68,704) 117,334
Cash and cash equivalents at beginning of the period...... 83,434 88,778
--------- ---------
Cash and cash equivalents at end of period................ $ 14,730 $ 206,112
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through capital leases.................... $ 1,285 $ --
Interest paid............................................. 1,299 872
See accompanying notes to consolidated financial statements.
DIGEX, INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared by
Digex, Incorporated, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the "SEC"). Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with generally accepted accounting principles ("GAAP") have been omitted
pursuant to such rules and regulations. The unaudited consolidated financial
statements should be read in conjunction with the consolidated financial
statements, notes thereto and other information included in the Form 10-K of
Digex for the year ended December 31, 2000.
The accompanying unaudited consolidated financial statements include the
accounts of Digex and its wholly-owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Certain prior period amounts have been reclassified to conform to the current
period presentation.
The accompanying unaudited consolidated financial statements reflect, in
the opinion of management, all adjustments, which are of a normal and recurring
nature, necessary for a fair presentation of the financial condition and results
of operations and cash flows for the periods presented. The preparation of
financial statements in accordance with GAAP requires management to make
estimates and assumptions. Such estimates and assumptions affect the reported
amounts of assets and liabilities, as well as the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates. The results of operations for the interim
periods are not necessarily indicative of the results for the entire year.
Change in Accounting Principle
Effective January 1, 2000, Digex changed its method of accounting for
revenue recognition in accordance with Staff Accounting Bulletin No. 101 ("SAB
101"), Revenue Recognition in Financial Statements. Historically, Digex has
recognized installation revenue, in accordance with industry practice, upon
completion of the managed Web hosting solution. The direct costs associated with
the installation were expensed as incurred. Under the new accounting method
adopted retroactive to January 1, 2000, Digex now recognizes installation
revenue and related direct incremental costs of performing the installation over
the contract term (generally 24 months). Accordingly, the consolidated statement
of operations for the second quarter of 2000 has been restated to reflect the
accounting change.
For the quarter ended June 30, 2001, Digex recognized revenue of $2.2
million that was recorded as deferred revenue as of December 31, 2000. With the
adoption of SAB 101, there was no economic impact to Digex's business operations
or cash flows. There was also no material effect to Digex's consolidated
financial statements.
Recent Accounting Pronouncements
In June 2000, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 138, Accounting for
Certain Derivative Instruments and Certain Hedging Activities, an amendment of
SFAS No. 133, which is effective for fiscal years beginning after June 15, 2000.
With the adoption of SFAS No. 133, as amended, effective January 1, 2001, there
is no effect on Digex's consolidated financial statements as it has not entered
into any derivative contracts.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. Currently,
Digex does not believe that the adoption of SFAS No. 141 will have any impact on
its financial statements.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests. In addition, the statement includes provisions for the reclassification
of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Goodwill and other intangibles, acquired prior to July 1, 2001, may be
amortized until the adoption of the statement.
Digex will apply the new rules on accounting for goodwill and other
intangible assets beginning in the first quarter of 2002. Digex is currently
assessing but has not yet determined the impact of SFAS No. 142 on its financial
position and results of operations.
2. INTERMEDIA -- WORLDCOM MERGER
On July 1, 2001, pursuant to the terms of the agreement and plan of merger,
dated September 1, 2000, and the amendments thereto, a wholly-owned subsidiary
of WorldCom, Inc. was merged with and into
Intermedia Communications Inc. with
Intermedia continuing as the surviving corporation and as a subsidiary of
WorldCom (the "Intermedia -- WorldCom Merger"). As a result of the Intermedia --
WorldCom Merger, WorldCom now owns all of the capital stock of Intermedia, other
than the 13 1/2% series B preferred stock, and approximately 90% of the voting
securities of Intermedia. Therefore, WorldCom has an indirect controlling
interest of Digex through Intermedia as Intermedia continues to own
approximately 61.4% of Digex's equity interests and controls 94.1% of Digex's
voting interests, calculated based on total common stock outstanding, as of July
1, 2001.
Digex and certain subsidiaries of WorldCom have entered into four
commercial agreements. The principal terms of the four commercial agreements are
generally described as follows:
-- Sales Channel Agreement. Under this agreement, effective January 1,
2001, WorldCom will purchase the Digex portfolio of managed Web hosting
products for resale to WorldCom customers. If Digex satisfies certain
service level commitments, WorldCom agrees to purchase up to a total of
$500.0 million during the period from 2001 through 2003. Digex and
WorldCom will share costs and profits generated from the WorldCom sales
channel.
-- Funding Agreement. WorldCom has agreed to provide funding for the Digex
business plans for 2001 and 2002 as approved by the Digex and WorldCom
boards of directors. To date, the Digex and WorldCom board of directors
have approved the Digex 2001 business plan. The preparation of the
Digex business plan for 2002 is currently underway and is expected to
be submitted to the WorldCom board of directors for approval no later
than December 1, 2001. Subject to terms and conditions of the note
purchase agreement dated July 31, 2001, Digex will issue and WorldCom
will purchase (or cause an affiliate to purchase) a series of senior
notes up to an aggregate principal amount sufficient to satisfy Digex's
net cash requirements under the approved business plan. Interest on the
unpaid principal balance is payable monthly at a rate equal to LIBOR
plus 300 basis points. Repayment of principal is due on December 31,
2002 and may be extended to December 31, 2006 upon the election of
Digex by written notice given by December 13, 2002. Any changes to
Digex's business plans that require increased funding would require the
WorldCom board of directors' approval before WorldCom would be
obligated to fund any such increase.
-- Facilities Agreement. Effective January 1, 2001, managed Web hosting
facilities for Digex will be built in several WorldCom data centers in
the United States and around the world. Digex will lease space from
WorldCom at these data centers based on customer demand.
-- Network Agreement. This agreement, effective January 1, 2001, provides
terms for Digex to purchase bandwidth and connectivity from WorldCom in
the United States to support its managed Web hosting activities.
3. COMPREHENSIVE LOSS
The following table reflects the calculation of comprehensive losses (in
thousands):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2001 2000 2001 2000
--------- --------- --------- ---------
Net loss applicable to common
stockholders.......................... $ (47,323) $ (34,485) $ (91,542) $ (60,366)
--------- --------- --------- ---------
Other comprehensive loss:
Foreign currency translation
adjustments........................ (121) -- (206) --
--------- --------- --------- ---------
Comprehensive loss applicable to common
stockholders.......................... $ (47,444) $ (34,485) $ (91,748) $ (60,366)
========= ========= ========= =========
4. COMMITMENTS
In January 2001, Digex received proceeds for a $3.0 million loan from the
State of Maryland Department of Business and Economic Development under the
Sunny Day Fund initiative. The loan is subject to multiple maturity dates, and
is guaranteed by Intermedia. Interest on the unpaid principal balances accrues
at 5% per annum. The principal amounts and any accrued interest will be deferred
each year through December 31, 2008 if Digex meets certain annual conditions
regarding the hiring of permanent, full time employees and the expenditures for
the development of a Web hosting facility in Prince George's County, Maryland.
At December 31, 2008, the principal amounts and any accrued interest outstanding
may convert to a grant upon the achievement of certain requirements by Digex.
In the first and second quarters of 2001, Digex entered into master lease
and financing agreements with two vendors for lines of credit to facilitate the
leasing of computer hardware and software. The initial term of the associated
schedules will range from 24 to 36 months. Digex will have an option to purchase
the equipment at the end of the initial lease term. As of June 30, 2001, Digex
had acquired $1.2 million of computer equipment under these capital lease
arrangements. Subject to the satisfaction of certain borrowing conditions, lines
of credit totaling $20.8 million are available for future capital lease
arrangements as of June 30, 2001.
In April 2001, Digex received proceeds for a $300,000 loan from Prince
George's County Economic Development Corporation. The loan matures on April 6,
2006 and is guaranteed by Intermedia. Interest on the unpaid principal balances
accrues at 5% per annum. Interest and principal are payable monthly, beginning
May 6, 2001.
In the second quarter of 2001, Digex received proceeds for a $12.0 million
loan from Intermedia. The loan is governed by the terms under the revolving
credit agreement dated as of December 22, 1999, and amendments to date, among
Intermedia, Bank of America N.A., the Bank of New York and Toronto Dominion
(
Texas), Inc. Repayment was due on demand at the earlier of: (1) the
consummation of the Intermedia -- WorldCom Merger; (2) July 3, 2001; (3) the
cancellation or termination of the credit facility; and (4) following default
which would accelerate the amounts due. Through June 30, 2001, variable interest
on the unpaid principal balance was paid monthly at an average LIBOR rate of
approximately 4.50% per annum. Intermedia has not demanded payment of the
outstanding principal amount as of August 14, 2001. On June 26, 2001, Digex
borrowed an additional $6.0 million from Intermedia as an intercompany loan.
Digex expects to refinance both loans from Intermedia with proceeds from the
issuance of notes under the note purchase agreement between WorldCom And Digex.
5. RELATED PARTY AGREEMENTS
Under the terms of the network services agreements with Intermedia, which
expired in July 2001, Intermedia provided Digex with east and west coast
Internet transit and Internet access. The charges for the Internet transit and
access services amounted to $0.2 million and $0.4 million for the three and six
months ended June 30, 2001.
6. CONTINGENCIES
On April 6, 2001, a final settlement of the consolidated derivative and
class action suits was approved by the Delaware Court of Chancery in Wilmington,
Delaware. On May 7, 2001, the appeals period for appealing the Chancery Court's
approval of the settlement expired with no appeals having been filed.
Pursuant to the settlement, WorldCom made a payment of WorldCom common
stock having a total value of $165.0 million for distribution to Digex common
stock holders following the closing of the Intermedia -- WorldCom Merger in July
2001. One half of the settlement fund net of plaintiffs' attorneys fees was
distributed to record holders of Digex common stock as of September 1, 2000. The
balance of the settlement fund net of attorneys' fees was paid to record holders
of Digex stock as of June 29, 2001. Neither Intermedia nor its affiliates was
entitled to any distribution from the settlement fund. The merger agreement
between Intermedia and WorldCom was amended, among other things, to change the
consideration to be paid to Intermedia shareholders in connection with the
merger. The fees and expenses of all plaintiffs and all counsel representing all
plaintiffs in the action was paid out of the settlement fund. In connection with
the settlement, WorldCom has agreed to reimburse Digex for certain fees and
expenses incurred by Digex associated with the merger and the consolidated
lawsuit in an amount not to exceed $15.0 million. A further provision of the
settlement makes Section 203 of the Delaware General Corporation Law
inapplicable to future transactions between WorldCom and Digex.
For every one share of WorldCom Group common stock paid into the settlement
fund, 1/25th of a share of MCI Group common stock was also paid into such fund.
The value of the WorldCom Group common stock and the MCI Group common stock was
based upon the average trading price of 10 trading days randomly selected from a
20-day trading period from May 31, 2001 through June 27, 2001. Based on a
randomly selected average trading price of $16.672 per share, WorldCom deposited
9,896,833 shares of WorldCom Group common stock and 395,873 shares of MCI Group
common stock into the settlement fund on July 2, 2001. Approximately 7.5% of the
shares deposited into the settlement fund was distributed to the legal counsel
for the plaintiffs in the litigation, approximately 46.25% of the settlement
fund was distributed to the holders of record of Digex Class A common stock as
of September 1, 2000, and the remaining 46.25% was distributed to holders of
record of Digex Class A common stock as of June 29, 2001.
On July 9, 0000, Xxxxx received $12.5 million from WorldCom for the
reimbursement of certain merger-related fees and expenses associated with the
litigation. Digex does not expect to incur any future liability from the outcome
of this litigation. Digex also does not believe that there are any pending or
threatened legal proceedings that, if adversely determined, would have a
material adverse effect on Digex's results of operations, cash flows, or
financial position.
7. SUBSEQUENT EVENTS
In the third quarter of 2001, Digex has acquired $9.3 million of computer
equipment under the master lease and financing agreement with a vendor. The
terms of the associated schedules ranges from 12 months for financing a
maintenance contract to 36 months for leasing computer equipment. Digex will
have an option to purchase the equipment at the end of the initial lease term.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements and related notes herein, and with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations and audited consolidated financial statements and related notes
included in Digex's Form 10-K, as filed with the SEC on April 2, 2001.
OVERVIEW
We are a leading provider of managed Web and application hosting services
to businesses operating mission-critical, multi-functional Web sites. We provide
the computer hardware, software, network technology, and systems management
necessary to provide our customers comprehensive, managed Web hosting and
application hosting solutions. We also offer related value-added services such
as firewall management, stress testing and consulting services, including
capacity and migration planning and database optimization. We currently provide
such services to a diversified customer base consisting of over 600 customers.
As of June 30, 2001, we managed approximately 3,764 Windows- and UNIX-based
servers in our state-of-the-art data centers which are strategically positioned
on the east and west coasts of the United States, in Europe and Asia. We believe
our singular focus on delivering mission-critical Web and application hosting
solutions has been the major contributor to our growth.
In March 2001, as part of the settlement of shareholder litigation, we
entered into certain commercial agreements with WorldCom. Through the sales
channel agreement, WorldCom has commenced reselling our portfolio of managed Web
hosting products. If we satisfy certain service level commitments, WorldCom
agrees to purchase up to a total of $500.0 million during the period from 2001
through 2003. We share costs and profits generated from the WorldCom sales
channel with WorldCom. In November 2000, WorldCom announced the immediate U.S.
availability of an expanded global Web hosting product suite to include high-
end managed hosting services through arrangements with us. We also utilize
WorldCom's sales force to enhance our global presence.
Through our facilities agreement with WorldCom, we have commenced building
managed Web hosting facilities in existing WorldCom data centers in the United
States and around the world. We will lease space from WorldCom at these data
centers based on customer demand. These hosting facilities will be patterned
after our facilities in the U.S. Our first data center completed through this
agreement is located in Ashburn, Virginia and became operational in the first
quarter of 2001. In the second quarter of 2001, we operationalized data centers
built in WorldCom facilities in New Jersey, France, Germany, and Japan.
Our network agreement with WorldCom provides us with terms to purchase
bandwidth and connectivity from WorldCom in the United States to support our
managed Web and application hosting activities. Through the arrangement, we were
able to connect our Internet data centers to the WorldCom global IP network that
runs through North America, South America, Europe, Asia, and Australia with over
2,500 points of presence. In the second quarter of 2001, we have fully
transitioned to the WorldCom global IP network as our primary network.
Revenue. Our revenues consist primarily of monthly fees from our managed
Web and application hosting services. Contracts for these services are typically
between one and three years in length. In addition to Web and application
hosting, we also offer enterprise services and consulting services and believe
that we will begin to derive increasing amounts of revenues from the sale of
these services in the future.
Costs and Expenses. Costs and expenses include:
- cost of operations;
- cost of services;
- selling, general and administrative expenses;
- deferred compensation; and
- depreciation and amortization expense.
Cost of operations consist primarily of the costs for our network
connectivity and firewall services. We expect our network connectivity
requirements to grow in conjunction with the growth of our overall business,
including the expansion of our business abroad through our wholly-owned
subsidiaries, and accordingly expect these costs to increase in the future.
Cost of services consist primarily of facilities administration expenses
including rent, maintenance and utilities to support our data centers and
salaries and related benefits for our technical operations. We expect our cost
of services to increase in dollar amount but to decline as a percentage of
revenue due to economies of scale and expected improvements in technology and
productivity.
Selling, general and administrative expenses consist primarily of salaries
and benefits for our marketing, sales and support personnel, advertising costs,
consultants' fees, provision for doubtful accounts, research and development
costs and other miscellaneous expenses. We expect selling, general and
administrative expenses to increase in dollar amount and to decline as a
percentage of revenue over time.
Deferred compensation expense relates to stock options that were granted by
Digex to certain employees at exercise prices below market value.
Depreciation and amortization expense consists primarily of depreciation of
our data centers, servers and related equipment and amortization of our
intangible assets. We expect these expenses to increase due to our plans to
invest significant capital to continue to expand our data center capacity.
PLAN OF OPERATION
We plan to expand our Web and application hosting business by focusing on
large companies which are looking to develop a presence on the Internet by both
providing e-commerce business solutions to their customers and outsourcing the
management of their Web sites and Web-enabled business applications. In the
fourth quarter of 1999, we opened our state-of-the-art data centers on the east
and west coasts of the United States. Our first international data center,
located in London, became operational in July 2000. Since December 31, 2000, we
have operationalized data centers built in WorldCom facilities in Virginia, New
Jersey, Japan, France, and Germany. We believe that the new data centers in the
United States and those we continue to develop internationally will place us in
a stronger competitive position to successfully provide outsourced solutions of
scalable managed Web and application hosting solutions. We also offer
value-added services, such as firewall management, stress testing, and
consulting services, including capacity and migration planning and database
optimization, and believe that we will derive increasing amounts of revenue from
these services in the future.
Our commercial agreements with WorldCom allow us to purchase bandwidth and
connectivity from WorldCom in the United States and around the world to support
our managed Web and application hosting activities. Through the arrangements, we
were able to connect our Internet data centers in the U.S. to the WorldCom
global IP network that runs through North America, South America, Europe, Asia,
and Australia with over 2,500 points of presence. In the second quarter of 2001,
we have fully transitioned to the WorldCom global IP network as our primary
network.
RESULTS OF OPERATIONS
The following table presents certain information derived from our
consolidated statements of operations for the three and six months ended June
30, 2001 and 2000, expressed as a percentage of revenue.
THREE MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ---------------
2001 2000 2001 2000
----- ----- ----- ------
Revenues......................................... 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of operations.......................... 8.1 22.5 8.9 19.7
Cost of services............................ 49.2 39.8 47.7 40.1
Selling, general and administrative......... 68.0 84.7 69.1 91.8
Deferred compensation....................... 1.4 2.5 1.7 3.0
Depreciation and amortization............... 59.8 44.5 57.1 46.2
----- ----- ----- ------
Total costs and expenses............... 186.5 194.0 184.5 200.9
----- ----- ----- ------
Loss from operations............................. (86.5) (94.0) (84.5) (100.9)
Other income (expense):
Interest expense............................ (1.4) (1.1) (1.4) (1.3)
Interest income and other................... (0.1) 9.7 0.2 11.2
----- ----- ----- ------
Loss before cumulative effect of change in
accounting principle........................... (88.0) (85.4) (85.7) (91.0)
Cumulative effect of change in accounting
principle...................................... -- -- -- (0.3)
----- ----- ----- ------
Net loss......................................... (88.0) (85.4) (85.7) (91.3)
===== ===== ===== ======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenue
Total revenue increased 33.3% to $53.8 million for the second quarter of
2001 compared to $40.4 million for the same period in 2000. The increase in
revenue was due to sales to new customers and additional services to existing
customers in the second quarter of 2001 compared to the same period in 2000. In
the second quarter of 2000, Digex recognized $5.0 million of one-time equipment
sales revenue to a customer in addition to revenue from managed Web and
application hosting services.
Cost of Operations
Cost of operations decreased 51.9% to $4.4 million for the second quarter
of 2001 compared to $9.1 million for the same period in 2000. The decrease was
primarily due to improved operating efficiencies and lower costs attributed to
our amended network agreement with Intermedia in the second quarter of 2001. As
a percentage of revenue, cost of operations decreased to 8.1% for the second
quarter of 2001 compared to 14.8% for the same period in 2000 (excluding third
party equipment sales and costs in the second quarter of 2000) as a result of
improved network utilization.
Cost of Services
Cost of services increased 64.8% to $26.5 million for the second quarter of
2001 compared to $16.1 million for the same period in 2000. The increase was
primarily related to the increased level of operations, the expansion of our new
data centers including costs related to the hiring of additional personnel and
consultants in customer service, engineering, and facilities administration
supporting server growth, and accruals for changes in employee benefits. As a
percentage of revenue, total cost of services increased to 49.2% in 2001
compared to 39.8% in 2000.
Selling, General and Administrative
Selling, general and administrative expenses increased 7.1% to $36.6
million for the second quarter of 2001 compared to $34.2 million for the same
period in 2000. Increases in selling, general and administrative expenses for
2001 included the costs associated with an increased employee base, advertising
campaigns, rent for additional office space, consultants' professional fees, an
increased provision for doubtful accounts receivable, research and development
costs, the addition of key executive management to support the growth of the
business, and accruals for changes in employee benefits. We expect that our
growth strategy will continue to require significant sales and marketing
activities, including an expansion of our sales force and further development of
brand name recognition. As a result, we believe that our selling, general and
administrative expenses will continue to increase in the future. As a percentage
of revenue, total selling, general and administrative expenses decreased to
68.0% in 2001 compared to 84.7% in 2000 primarily because our revenue grew while
a portion of the selling, general and administrative cost remained fixed.
Deferred Compensation
Deferred compensation expense decreased 26.3% to $0.7 million for the
second quarter of 2001 compared to $1.0 million for the same period in 2000. The
decrease was primarily due to forfeitures in stock options granted to certain
employees at exercise prices below market value since June 30, 2000. During the
year ended June 30, 2001, approximately $4.2 million of unearned compensation
was forfeited. Since June 30, 2000, we recorded approximately $0.9 million of
deferred compensation, a separate component of stockholders' equity, to be
expensed over the four-year vesting period of the options.
Depreciation and Amortization
Depreciation and amortization expenses increased 78.8% to $32.1 million for
the second quarter of 2001 compared to $18.0 million for the same period in
2000. The increase was principally due to additional servers and other
facilities and equipment placed in service since June 30, 2000. We entered into
a capital lease for our corporate headquarters facility in the third quarter of
2000 and capital leases for vehicles in the fourth quarter of 2000 and in 2001,
which also contributed to the increase in expense. We have electronics, computer
hardware, and computer software with useful lives ranging from three to five
years. We expect increases in depreciation charges though 2001 due to the
continued expansion of our new data centers and due to future increased server
installations based on customer demand.
Interest Expense
Interest expense increased 72.3% to $0.7 million for the second quarter of
2001 compared to $0.4 million for the same period in 2000. The increase resulted
from the capital lease for our new corporate headquarters facility, capital
leases for vehicles, and from issuances of $15.3 million of notes payable since
June 30, 2000.
Interest Income and Other
Interest income and other decreased 101.4% to $0.1 million for the second
quarter of 2001 compared to $3.9 million for the same period in 2000. The
decrease resulted principally from declining cash balances and falling interest
rates during the period.
EBITDA Before Certain Charges
EBITDA before certain charges, as defined below, decreased 28.1% to $(13.6)
million for the second quarter of 2001 compared to $(19.0) million for the same
period in 2000. The change is primarily attributable to increased revenue and a
slower growth rate in costs due to operational efficiencies. Costs associated
with the administration and maintenance of our expanded data centers and
increased selling, general and administrative costs will continue to represent a
large portion of expenses during our planned expansion. In addition, we expect
to continue to experience growth in marketing and selling expenses as new
customers are acquired.
EBITDA before certain charges consists of earnings (loss) before interest
expense, interest income and other, merger-related expenses, foreign exchange
gains (losses), income tax benefit, deferred compensation, and depreciation and
amortization. EBITDA before certain charges does not represent funds available
for management's discretionary use and is not intended to represent cash flow
from operations. EBITDA before certain charges should also not be construed as a
substitute for operating income or a better measure of liquidity than cash flow
from operating activities, which are determined in accordance with generally
accepted accounting principles. This caption excludes components that are
significant in understanding and assessing our results of operations and cash
flows. In addition, EBITDA before certain charges is not a term defined by
generally accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled measures used
by other companies. However, we believe that EBITDA before certain charges is
relevant and useful information which is often reported and widely used by
analysts, investors and other interested parties in the Web and application
hosting industry. Accordingly, we are disclosing this information to permit a
more comprehensive analysis of our operating performance, as an additional
meaningful measure of performance and liquidity, and to provide additional
information with respect to our ability to meet future debt service, capital
expenditure and working capital requirements. See the consolidated financial
statements and notes thereto contained elsewhere in this report for more
detailed information.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenue
Total revenue increased 61.5% to $106.8 million for the six months ended
June 30, 2001 compared to $66.2 million for the same period in 2000. The
increase in revenue was due to sales to new customers and additional services to
existing customers in the first half of 2001 compared to the same period in
2000. In the second quarter of 2000, Digex recognized $5.0 million of one-time
equipment sales revenue to a customer in addition to revenue from managed Web
and application hosting services.
Cost of Operations
Cost of operations decreased 26.9% to $9.5 million for the six months ended
June 30, 2001 compared to $13.0 million for the same period in 2000. The
decrease was primarily due to improved operating efficiencies and lower costs
attributed to our amended network agreement with Intermedia in the second
quarter of 2001. As a percentage of revenue, cost of operations decreased to
8.9% for the six months ended June 30, 2001 compared to 15.0% for the same
period in 2000 (excluding third party equipment sales and costs in the second
quarter of 2000) as a result of improved network utilization. Expenses directly
attributed to the sale of third party equipment in the second quarter of 2000 is
included in the cost of operations.
Cost of Services
Cost of services increased 92.1% to $51.0 million for the six months ended
June 30, 2001 compared to $26.5 million for the same period in 2000. The
increase was primarily related to the increased level of operations, the
expansion of our new data centers including costs related to the hiring of
additional personnel in customer service, engineering, and facilities
administration supporting server growth, and accruals for changes in employee
benefits. As a percentage of revenue, total cost of services increased to 47.7%
for the six months ended June 30, 2001 compared to 40.1% for the same period in
2000.
Selling, General and Administrative
Selling, general and administrative expenses increased 21.4% to $73.8
million for the six months ended June 30, 2001 compared to $60.8 million for the
same period in 2000. Increases in selling, general and administrative expenses
for 2001 include the costs associated with an increased employee base,
advertising campaigns, an increased provision for doubtful accounts receivable,
research and development costs, the addition of key executive management to
support the growth of the business, and accruals for changes in employee
benefits. We expect that our growth strategy will continue to require
significant sales and marketing activities, including an expansion of our sales
force and further development of brand name recognition. As a result, we believe
that our selling, general and administrative expenses will continue to increase
in the future. As a percentage of revenue, total selling, general and
administrative expenses decreased to 69.1% for the six months ended June 30,
2001 compared to 91.8% for the same period in 2000 primarily because our revenue
grew while a portion of the selling, general and administrative cost remained
fixed.
Deferred Compensation
Deferred compensation expense decreased 9.2% to $1.8 million for the six
months ended June 30, 2001 compared to $2.0 million for the same period in 2000.
The decrease was primarily due to forfeitures in stock options granted to
certain employees at exercise prices below market value since June 30, 2000.
During the year ended June 30, 2001, approximately $4.2 million of unearned
compensation was forfeited. Since June 30, 2000, we recorded approximately $0.9
million of deferred compensation, a separate component of stockholders' equity,
to be expensed over the four-year vesting period of the options.
Depreciation and Amortization
Depreciation and amortization expenses increased 99.8% to $61.0 million for
the six months ended June 30, 2001 compared to $30.6 million for the same period
in 2000. The increase was principally due to additional servers and other
facilities and equipment placed in service since June 30, 2000. We entered into
a capital lease for our corporate headquarters facility in the third quarter of
2000 and capital leases for vehicles in the fourth quarter of 2000 and in 2001,
which also contributed to the increase in expense. We have electronics, computer
hardware, and computer software with useful lives ranging from three to five
years. We expect increases in depreciation charges though 2001 due to the
continued expansion of our new data centers and due to future increased server
installations based on customer demand.
Interest Expense
Interest expense increased 65.7% to $1.4 million for the six months ended
June 30, 2001 compared to $0.9 million for the same period in 2000. The increase
resulted from the capital lease for our new corporate headquarters facility,
capital leases for vehicles, and from issuances of $15.3 million of notes
payable since June 30, 2000.
Interest Income and Other
Interest income and other decreased 97.0% to $0.2 million for the six
months ended June 30, 2001 compared to $7.4 million for the same period in 2000.
The decrease resulted principally from declining cash balances and falling
interest rates during the period.
EBITDA Before Certain Charges
EBITDA before certain charges, as defined below, decreased 19.6% to $(27.5)
million in the six months ended June 30, 2001 compared to $(34.2) million for
the same period in 2000. The change is primarily attributable to increased
revenue and a slower growth rate in costs due to operational efficiencies. Costs
associated with the administration and maintenance of our expanded data centers
and increased selling, general and administrative costs will continue to
represent a large portion of expenses during our planned expansion. In addition,
we expect to continue to experience rapid growth in marketing and selling
expenses as new customers are acquired.
EBITDA before certain charges consists of earnings (loss) before interest
expense, interest income and other, merger-related expenses, foreign exchange
gains (losses), income tax benefit, deferred compensation, and depreciation and
amortization. EBITDA before certain charges does not represent funds available
for management's discretionary use and is not intended to represent cash flow
from operations. EBITDA before certain charges should also not be construed as a
substitute for operating income or a better measure of liquidity than cash flow
from operating activities, which are determined in accordance with generally
accepted accounting principles. This caption excludes components that are
significant in understanding and assessing our results of operations and cash
flows. In addition, EBITDA before certain charges is not a term defined by
generally accepted accounting principles and as a result our measure of EBITDA
before certain charges might not be comparable to similarly titled measures used
by other companies. However, we believe that EBITDA before certain
charges is relevant and useful information which is often reported and widely
used by analysts, investors and other interested parties in the Web and
application hosting industry. Accordingly, we are disclosing this information to
permit a more comprehensive analysis of our operating performance, as an
additional meaningful measure of performance and liquidity, and to provide
additional information with respect to our ability to meet future debt service,
capital expenditure and working capital requirements. See the consolidated
financial statements and notes thereto contained elsewhere in this report for
more detailed information.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities was $21.7 million and $42.6 million
during the six months ended June 30, 2001 and 2000, respectively. Net cash used
for operating activities in each of these periods was primarily the result of
operating losses and changes in working capital.
Net cash used for investing activities during the six months ended June 30,
2001 and 2000 was $63.3 million and $97.1 million, respectively. Net cash used
for investing activities in each of these periods was primarily the result of
capital expenditures for data center infrastructure, which includes servers
purchased for customer use, as well as leasehold improvements, furniture and
fixtures, computers, and other equipment. Although we have plans to invest
significantly in property and equipment, we have no material commitments for
such items at this time.
On July 1, 2001, pursuant to the terms of the merger agreement, dated
September 1, 2000, and the amendments thereto, a wholly-owned subsidiary of
WorldCom was merged with and into Intermedia with Intermedia continuing as the
surviving corporation and as a subsidiary of WorldCom. As a result of the
merger, WorldCom beneficially owns a majority of our capital stock and has
voting control of us.
On July 31, 2001, we entered into a note purchase agreement with WorldCom
whereby WorldCom has agreed to provide funding for the Digex business plans for
2001 and 2002 as approved by the Digex and WorldCom boards of directors. To
date, the Digex and WorldCom board of directors have approved the Digex 2001
business plan. The preparation of the Digex business plan for 2002 is currently
underway and is expected to be submitted to the WorldCom board of directors for
approval no later than December 1, 2001. Subject to the terms and conditions of
the agreement, we will issue and WorldCom will purchase (or cause an affiliate
to purchase) a series of senior notes up to an aggregate principal amount
sufficient to satisfy our net cash requirements under the approved business
plan. Interest on the unpaid principal balance is payable monthly at a rate
equal to LIBOR plus 300 basis points. Repayment of principal is due on December
31, 2002 and may be extended to December 31, 2006 upon our election by written
notice. Any changes to our business plans that require increased funding would
require the WorldCom board of directors' approval before WorldCom would be
obligated to fund any such increase.
On October 31, 2000, Intermedia increased the commitments available to it
under its revolving credit facility from $100.0 million to $350.0 million. The
credit facility is fully guaranteed by WorldCom. As a subsidiary of Intermedia,
we were a limited guarantor under the credit facility to the greater of $90.0
million or the amounts borrowed by Digex. At June 30, 2001, Intermedia had
$258.0 million outstanding under its credit facility. Borrowings of $12.0
million were for Digex.
We issued a promissory note, governed by the terms of the revolving credit
facility agreement dated December 22, 1999, as amended to date, to Intermedia
for the $12.0 million borrowing in the second quarter of 2001. Repayment was due
on demand at the earlier of: (1) the consummation of the Intermedia - WorldCom
Merger; (2) July 3, 2001; (3) the cancellation or termination of the credit
facility; and (4) following default which would accelerate the amounts due.
Through June 30, 2001, variable interest on the unpaid principal balance was
paid monthly at an average LIBOR rate of approximately 4.50% per annum.
Intermedia has not demanded payment of the outstanding principal amount as of
August 14, 2001. We expect to refinance this loan with proceeds from issuance of
notes under the note purchase agreement, dated July 31, 2001, between WorldCom
and Digex.
Following the completion of the Intermedia - WorldCom Merger in July 2001,
WorldCom repaid the total amount outstanding under the credit facility and
entered into a second amendment to the revolving credit agreement on July 2,
2001 to decrease the aggregate commitments available under the credit facility
from $350.0 million to $175.0 million. The termination date was also extended to
the earlier of August 1, 2001 and the cancellation of the credit facility. There
were no amounts outstanding under the credit facility as of August 1, 2001.
On October 31, 2000, Intermedia also entered into a note purchase agreement
with WorldCom. Intermedia authorized the issue and sale of up to $225.0 million
aggregate principal amount of 14.12% Senior Subordinated Notes due 2009 and
22,500 shares of Series H Preferred Stock. Intermedia had $119.0 million
outstanding under these financings as of June 30, 2001. Borrowings of $6.0
million were for Digex and was recorded as an intercompany loan. We expect to
refinance this loan with proceeds from issuance of notes under the note purchase
agreement, dated July 31, 2001, between WorldCom and Digex.
In January 2001, we received proceeds for a $3.0 million loan from the
State of Maryland Department of Business and Economic Development under the
Sunny Day Fund initiative. The loan is subject to multiple maturity dates, and
is guaranteed by Intermedia. Interest on the unpaid principal balances accrues
at 5% per annum. The principal amounts and any accrued interest will be deferred
each year through December 31, 2008 if we meet certain annual conditions
regarding the hiring of permanent, full time employees and the expenditures for
the development of a Web hosting facility in Prince George's County, Maryland.
At December 31, 2008, the principal amounts and any accrued interest outstanding
may convert to a grant upon the achievement of certain requirements by us.
In April 2001, we received proceeds for a $300,000 loan from Prince
George's County Economic Development Corporation. The loan matures on April 6,
2006, and is guaranteed by Intermedia. Interest on the unpaid principal balances
accrues at 5% per annum. Interest and principal are payable monthly, beginning
May 6, 2001.
We will use the proceeds from these loans to finance a portion of the cost
of acquiring equipment and construction at our headquarter facilities in Laurel,
Maryland. Subject to the terms of the loan agreements and the approval by the
State of Maryland and/or Prince George's County, on or after January 1, 2005, we
may be eligible for an additional loan of $1.0 million under the Sunny Day Fund
initiative from the State of Maryland and/or $100,000 from Prince George's
County to finance a portion of the cost of acquiring equipment and constructing
facilities within Prince George's County, Maryland.
In the first and second quarters of 2001, we entered into master lease and
financing agreements with two vendors for lines of credit to facilitate the
leasing of computer hardware and software. The initial term of the associated
schedules will range from 24 to 36 months. We will have an option to purchase
the equipment at the end of the initial lease term. As of June 30, 2001, we have
acquired $1.2 million of computer equipment under these capital lease
arrangements. Subject to the satisfaction of certain borrowing conditions, lines
of credit totaling $20.8 million are available for future capital lease
arrangements as of June 30, 2001.
We expect to continue experiencing negative cash flow from operating and
investing activities due to our plans for expansion and the growth of our
business. We anticipate we will have significant cash requirements for several
years as we expand our data center capacity, increase servers under management,
acquire additional office space to support our expanding operations and invest
in our marketing organization. In addition, we expect to invest significantly in
the purchase of property and equipment and for research and development,
including funding the expenses associated with our research and development
alliance with Microsoft and a subsidiary of Compaq. We expect our capital
expenditures to increase due to the growth of servers under management and our
continuing data center expansion in the United States and abroad. If necessary,
we intend to draw on available vendor lines of credit of up to $20.8 million,
pursuant to the master lease and financing agreements and subject to the
satisfaction of certain borrowing conditions, to facilitate the leasing of
computer hardware and software in the future. We will also use the proceeds of
$3.3 million in loans from the State of Maryland and Prince George's County to
finance a portion of the cost of acquiring equipment and construction at our
headquarter facilities in Laurel, Maryland. With our existing cash resources and
financing available from Intermedia and WorldCom, we believe we have sufficient
capital to sustain our current operations and capital expenditure plans through
2001. Once the Digex business plan for 2002 is approved by the Digex and
WorldCom boards of directors, we expect to have adequate funding for our 2002
operations and capital expenditure requirements as well. Because the note
purchase agreement provides us with access to readily available cash, we plan to
maintain minimal cash balances and borrow only when required to sustain our
operations.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2000, the FASB issued SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of SFAS No.
133, which is effective for fiscal years beginning after June 15, 2000. With the
adoption of SFAS No. 133, as amended, effective January 1, 2001, there is no
effect on our consolidated financial statements as we have not entered into any
derivative contracts.
In June 2001, the FASB issued SFAS No. 141, Business Combinations, which
requires the purchase method of accounting for business combinations initiated
after June 30, 2001 and eliminates the pooling-of-interests method. Currently,
we do not believe that the adoption of SFAS No. 141 will have any impact on our
financial statements.
Also in June 2001, the FASB issued SFAS No. 142, Goodwill and Other
Intangible Assets, effective for fiscal years beginning after December 15, 2001.
Under the new rules, goodwill and intangible assets deemed to have indefinite
lives will no longer be amortized but will be subject to annual impairment
tests. In addition, the statement includes provisions for the reclassification
of certain existing recognized intangibles as goodwill, reassessment of the
useful lives of existing recognized intangibles, reclassification of certain
intangibles out of previously reported goodwill and the identification of
reporting units for purposes of assessing potential future impairments of
goodwill. Goodwill and other intangibles, acquired prior to July 1, 2001, may be
amortized until the adoption of the statement.
We will apply the new rules on accounting for goodwill and other intangible
assets beginning in the first quarter of 2002. We are currently assessing but
have not yet determined the impact of SFAS No. 142 on our financial position and
results of operations.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
The information set forth above in "Management's Discussion and Analysis of
Financial Conditions and Results of Operations" includes forward-looking
statements that involve numerous risks and uncertainties. Forward-looking
statements can be identified by the use of forward-looking terminology such as
"estimates," "projects," "anticipates," "expects," "intends," "believes," or the
negative thereof or other variations thereon or comparable terminology or by
discussions of strategy that involve risks and uncertainties. This report
includes forward-looking statements, which could differ from actual results. See
"Risk Factors" in our Form 10-K for the year ended December 31, 2000 as filed
with the SEC on April 2, 2001.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
No changes.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities
None.
Use of Proceeds from a Sale of Registered Securities
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
NUMBER EXHIBIT
------ -------
3.1 -- Certificate of Incorporation of Digex, as amended.
Incorporated herein by reference from Digex's Form 10-Q
(File No. 000-26873) filed with the SEC on September 13,
1999.
3.2 -- By-laws of Digex. Incorporated herein by reference from
Digex's Form 10-Q (File No. 000-26873) filed with the SEC
on May 12, 2000.
3.3 -- Certificate of Designation for the Series A Preferred
Stock. Incorporated herein by reference from Digex's
registration statement on Form S-1 (File No. 333-94879)
filed with the SEC on January 18, 2000.
3.4 -- Proposed Amendment to the Certificate of Incorporation.
Incorporated herein by reference from Digex's Form 8-K (File
No. 000-26873) filed with the SEC on February 15, 2001.
10.1 -- Promissory Note, dated May 29, 2001, between Digex and
Intermedia.
(b) Reports on Form 8-K
The following report on Form 8-K of Digex was filed during the second
quarter of 2001:
Digex filed a Current Report on Form 8-K, dated May 2, 2001, reporting
under Item 5 the issuance of a press release discussing Digex's first
quarter 2001 results. Digex also reported under Item 7 the filing of the
press release as an exhibit to the Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DIGEX, INCORPORATED
(Registrant)
/s/ XXXXXXX X. XXXXX
------------------------------------
Xxxxxxx X. Xxxxx
Chief Financial Officer
/s/ T. XXXXX XXXXXXXXX
------------------------------------
T. Xxxxx Xxxxxxxxx
Vice President and Controller
Dated: August 14, 2001
Exhibit 10.1
PROMISSORY NOTE
May 29, 2001
FOR VALUE RECEIVED, DIGEX, INCORPORATED, a Delaware corporation
(the "PAYOR"), hereby promises to pay to
INTERMEDIA COMMUNICATIONS INC., a
Delaware corporation (the "PAYEE"), on demand following an Event of Default
which would result in an acceleration of amounts due under the Credit Agreement
(as defined in the Credit Agreement referred to below) or upon the occurrence of
the Termination Date (as defined in the Credit Agreement referred to below), any
and all Debt (as defined in the Credit Agreement referred to below) (including
interest thereon) owed by the Payor to the Payee from time to time.
The undersigned agrees that the accounts of the Payee shall be
"prima facie" evidence of Debt (including interest thereon) owed to the Payee by
the undersigned and the amounts repaid by the undersigned to the Payee. All
advances made by the Payee to the Payor hereunder, and all payments made on
account of principal and interest hereof, shall be recorded by the Payee, and,
prior to any transfer hereof, shall be endorsed on the schedule attached hereto
which is part of this Note.
Payor also promises to pay interest on the unpaid principal
amount hereof, from the date hereof until paid in full, at the rates and at the
times on which interest payments on the outstanding loans are required to be
paid by the Payee in accordance with the provisions of the Credit Agreement.
This note evidences intercompany loans permitted by Section 9.14
of the Revolving Credit Agreement, dated as of December 22, 1999, among the
Payee, the Lenders, the Sole Lead Arranger, the Book Manager, the Syndication
Agent, the Documentation Agent, the Administrative Agent and the Arranging
Agents (said Revolving Credit Agreement, as it may be amended, restated,
supplemented or otherwise modified from time to time, being the "CREDIT
AGREEMENT"). Capitalized terms used in this Note and not otherwise defined have
the respective meanings assigned to them in the Credit Agreement.
The undersigned hereby waives presentment for payment, demands,
notice of dishonor and protest of this Note and further agrees that none of its
terms or provisions may be waived, altered, modified or amended except as the
Payee may consent in a writing duly signed for and on its behalf .
THIS NOTE AND THE RIGHTS AND OBLIGATIONS OF PAYOR AND PAYEE
HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK (INCLUDING SECTION
5-1401 OF THE GENERAL OBLIGATIONS LAW OF THE STATE OF NEW YORK), WITHOUT REGARD
TO CONFLICTS OF LAWS PRINCIPLES.
IN WITNESS WHEREOF, the Payor has caused this Note to be duly
executed and delivered by its officer thereunto duly authorized as of the date
and at the place first written above.
DIGEX, INCORPORATED
By: /s/ XXXXXXX X. XXXXX 5/31/01
--------------------- -------
Title: Chief Financial Officer
ADVANCES AND PAYMENTS OF PRINCIPAL
--------------------------------------------------------------------------------------------
Amount of
Interest Amount of Principal Paid Unpaid Principal Notation
Date Rate Loan or Prepaid Balance Made By
---- ---- ---- ---------- ------- -------
--------------------------------------------------------------------------------------------
5/21/2001 4.63% $6,000,000.00 0 $6,000,000.00 Xxxxxx Xxxxx
6/21/01 4.40% $6,000,000.00 0 $12,000,000.00 Xxxxxx Xxxxx
